2023 (6) TMI 204 - AT - Income Tax

Expense treatment as capital deemed revenue; Tribunal dismisses Revenue's appeal.

Asstt. CIT, Circle-3 (3) (1), Mumbai Versus Reliance Jio Infocomm Ltd.

Asstt. CIT, Circle-3 (3) (1), Mumbai Versus Reliance Jio Infocomm Ltd. - TMI Issues Involved:1. Whether the Ld. CIT(A) erred in allowing the appeal of the assessee by treating certain expenditures as revenue in nature.2. Whether the expenses incurred towards upgradation of assets should be treated as capital in nature and therefore not allowable as expenses under section 37 of the IT Act.3. Whether the expenses incurred towards the expansion of business with enduring benefit are capital in nature and thus not allowable as expenses under section 37 of the IT Act.Issue-wise Detailed Analysis:1. Treatment of Expenditures as Revenue in Nature:The Revenue challenged the decision of the Ld. CIT(A) for allowing the appeal of the assessee by treating certain expenditures as revenue in nature. The assessee, engaged in providing telecommunication services, had classified certain operational expenses (salaries, rent, professional fees, etc.) as 'expenses capitalized in books-allowable as revenue for tax purposes.' These expenses were not debited to the profit and loss account but were accounted for as 'Project Development' expenditure and capital work in progress in the books of accounts. The Assessing Officer (AO) disallowed this treatment, arguing that the same expenditure cannot be treated as capital in the books and revenue for tax purposes. The Ld. CIT(A), however, deleted the disallowance, noting that the expenses did not result in the acquisition or upgradation of assets but were incurred for business operation purposes.2. Upgradation of Assets:The AO contended that the expenses were towards the upgradation of assets and thus capital in nature. The AO emphasized that the expenses were incurred in connection with tower/fibre network infrastructure facilities that were not yet meeting the Quality of Service (QoS) standards. Therefore, these expenses were treated as capital in the books and should also be treated as capital for income tax purposes. The Ld. CIT(A) disagreed, stating that the expenses were necessary for improving network connectivity and did not result in the creation of new assets. The Ld. CIT(A) highlighted that the expenses were operational in nature, incurred to meet the QoS standards, and were therefore revenue expenses.3. Expansion of Business with Enduring Benefit:The AO argued that the expenses incurred towards the expansion of business provided an enduring benefit and should be treated as capital in nature. The Ld. CIT(A) examined the nature of the expenses and concluded that they were operational and did not result in the creation of new assets or enduring benefits. The Ld. CIT(A) relied on various judicial precedents, including decisions from the Hon'ble Supreme Court and the Tribunal, to support the view that such expenses should be treated as revenue in nature. The Ld. CIT(A) also noted that similar expenses were allowed in the previous assessment year without disallowance by the AO.Conclusion:The Tribunal upheld the decision of the Ld. CIT(A), dismissing the appeal of the Revenue. The Tribunal found that the AO had not denied the business purpose of the expenses and that they were routine in nature. The Tribunal emphasized that the treatment of expenses in the books of accounts as capital expenditure, following Indian accounting standards, does not affect their classification as revenue expenses for income tax purposes. The Tribunal also noted that identical expenses had been allowed in other cases by the Tribunal and upheld by the Hon'ble Bombay High Court. Consequently, the Tribunal concluded that the expenses were revenue in nature and allowable under section 37(1) of the IT Act.Order:The appeal of the Revenue was dismissed, and the order of the Ld. CIT(A) was upheld. The Tribunal pronounced the order on 01/02/2023.