ITAT Mumbai allows deduction of ₹14,927.99 crore telecom operating costs despite book capitalisation

1. Background of the dispute

The appeal before the Mumbai Bench of the Income Tax Appellate Tribunal in ACIT Vs Reliance Jio Infocomm Ltd. concerned Assessment Year 2018-19. The Revenue contested an order dated 06/09/2022 passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi, which had allowed the assessee’s claim for deduction of ₹14,927.99 crore as revenue expenditure.

Reliance Jio Infocomm Ltd. is engaged in the business of providing telecommunication and wireless telecommunication services in India. For AY 2018-19:

  • The assessee filed its original return of income under Section 139(1) on 30/11/2018, declaring:
    • Current year loss of ₹30,077.92 crore, and
    • Book profit under Section 115JB of ₹11,204.18 crore.
  • A revised return was filed on 26/03/2019 to claim additional TDS credit.
  • The case was selected for scrutiny and statutory notices were issued and complied with.

During the scrutiny assessment under Section 143(3), the Assessing Officer noticed in the ICDS statement that an amount of ₹14,927.99 crore was described as “expenses capitalized in books – allowable as revenue for tax purpose”. This description became the core of the controversy.

2. Nature and accounting treatment of the disputed expenditure

The assessee explained that the impugned amount represented ongoing operating expenses such as:

  • Salaries and employee-related expenditure
  • Rent
  • Professional and call-centre fees
  • Marketing and selling outlays
  • Power and fuel
  • Travelling and other routine network-related costs

According to the assessee:

  • Its telecom network and related assets had already been put to use on 01/09/2016, when digital services were launched for customers.
  • The expenditure did not lead to acquisition of any new asset; rather, it was incurred wholly and exclusively for running day-to-day business operations.
  • In its books, however, the assessee followed an accounting policy aligned with Ind-AS 16 (Property, Plant and Equipment), under which:
    • Assets are capitalised only when they are “available for use” and functioning in line with Quality of Service (QoS) standards set by management.
    • Until the relevant QoS benchmarks are met, even if assets are physically in use, operational expenditure related to those assets is grouped under “Project Development” and carried as capital work-in-progress (CWIP).

The assessee asserted that this accounting-led capitalisation had no bearing on the income-tax character of the expenditure, which should be assessed independently under the Income Tax Act, 1961.

3. Findings of the Assessing Officer

The Assessing Officer took the view that the assessee’s approach was inconsistent and impermissible. His core reasoning was:

  • An item of expenditure cannot be both capital (for accounting purposes) and revenue (for tax purposes) at the same time.
  • There should be uniform treatment of expenditure in the books of account and for income-tax computation.
  • The expenses were described as being connected with tower and fibre network infrastructure whose QoS was yet to be attained. In his view, this implied that:
    • Such costs were incurred to upgrade the assets so they could achieve the desired QoS standards; and
    • The expenditure therefore fell in the capital field.

He concluded that the capitalisation in the books “reflected the true nature” of the expenses and should also govern their treatment under the Act. Consequently:

  • In the assessment order dated 30/09/2021 passed under Section 143(3), the Assessing Officer disallowed the entire amount of ₹14,927.99 crore claimed as revenue expenditure under Section 37.

4. Assessee’s submissions before CIT(A)

In appeal, the assessee elaborated on the nature of its business and the commercial context:

  • As a new entrant in the telecom industry, it had to carry out continuous efforts to:
    • Stabilise and strengthen its network connectivity;
    • Deploy and augment towers, fibre and related infrastructure; and
    • Handle substantial traffic for data, video and voice services.
  • Even after the network was put to commercial use, consistent optimisation and enhancement of connectivity quality were required to align with management’s QoS norms and regulatory expectations.

The assessee submitted that:

  • Accounting treatment under Ind-AS 16 was compelled by the Companies Act, 2013 and related accounting standards.
  • However, for the purpose of computing taxable income under the Income Tax Act 1961, the classification in the books is not determinative.
  • Each category of expense capitalised under “project development”/CWIP should be examined on its own merits to decide whether it is capital or revenue in nature.

5. CIT(A)’s detailed analysis of the expenses

5.1 Distinction between book treatment and tax character

The CIT(A) examined:

  • The assessee’s accounting policies;
  • The annual report; and
  • The supporting documentation regarding the capitalised expenditure.

He noted:

  • The assessee capitalised assets only when they were in the condition necessary to operate in the manner intended by management, satisfying QoS standards.
  • Ind-AS 16 (particularly paragraphs 20 and 55) permits separation between:
    • Costs required to bring an asset to its intended operating condition; and
    • Subsequent operational or initial loss-related costs, which are not included in the asset’s carrying amount.

Although Ind-AS 16 governed financial reporting, the CIT(A) emphasised that: