OM PRAKASH KANT

1. This appeal by the Revenue is directed against order dated 06/09/2022 passed by the Ld. Commissioner of Incometax(Appeals)-National Faceless Appeal Centre(NFAC), Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2018-19, which arose from the assessment order dated 30/09/2021 passed by the Addl./Joint CIT/DCIT/ACIT/ITO, National Faceless Assessment Centre ( in short the Assessing Officer), raising following grounds:

1. (1). "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the appeal of the assessee ignoring the fact that the assessee had treated the same expenditure as revenue for IT. purposes whereas for all other purposes and laws it has treated the expenditure as_ capital expenditure”.

2. (2). Whether on the facts and in the circumstance of the case and in law, the Ld. CIT(A) has erred in allowing the appeal of the assessee in respect to expenses treating it as revenue in nature, which were incurred towards upgradation of assets and are therefore, capital in nature and therefore not allowable as expenses us 37 of the IT. Act".

3. (3). Whether on the facts and in the circumstance of the case and in law, the Ld. CIT(A) has erred in allowing the appeal of the assessee ignoring the fact that the expenses incurred towards expansion of business with enduring benefit and thus capital in nature and therefore not allowable as expense u/s 37 of the IT. Act".

2. Briefly stated facts of the case are that the assessee company is engaged in the business of providing telecommunication and wireless telecommunication services within India. For the year under consideration, the assessee filed its original return of income under section 139(1) of the Income-tax Act, 1961 ( in short ‘the Act) on 30/11/2018 declaring current year loss at %30077,92,19,721/- and book profit under’ section 115JB of the Act at =1120,41,83,998/-. The return of income was subsequently revised on 26/03/2019 for claiming credit of additional tax deducted at source (TDS). The return of income by the assessee was selected for a scrutiny any statutory notices under the Act were issued and complied with.

2.1 During the scrutiny proceedings with Assessing Officer observed from the Income computation and disclosure standards (ICDS) statement for the year under consideration that the assessee claimed an amount of ~14927,99,00,396/- as “expenses capitalized in books- allowable as revenue for tax purpose”. The assessee explained that those are operating expenses (viz., salaries, rent, professional fees, marketing expenses, power and fuel, travelling etc.) incurred during the year under assessment but had not been debited to the profit and loss account as same formed part of ‘Project Development’ expenditure and accounted as capital work in progress in the books of accounts. It was further submitted that telecom assets/network of the company had already been put to use on 01/09/2016 for business purposes pursuant to launch of digital services by the company to its subscribers/customers. These expenses had not resulted in acquisition of the assets and incurred for business operation purpose only. It was further submitted that as per the accounting policy followed by the company while preparing its financial statement, the company capitalises the assets only when they are available for use and are working in accordance with the quality of service (QOS) standard intended by the management. Till the quality of services standards are not met, even if the assets have been put to use, the company continues to classify those expenses, under ‘project development’ expenditure /capital work in progress in the books of accounts in accordance with para 55 of Indian accounting standard (Ind-As)-16-‘Property, Plant and Equipment’. The company has continued to improve its network connectivity and capitalises the expenditure incurred including the operational expenses to the project development expenditure/work in progress in the books till the quality of services standards intended by the management are achieved.

3. According to the Assessing Officer the contradictory treatment of capitalising the expenditure in the books of accounts and yet claiming revenue expenditure for the purpose of Income-tax, was not permissible because the expenditure can either be revenue or capital in nature and it cannot be same time be capital as far as books are concerned and revenue as far as claim of the admissibility of the same for income tax purposes. There has to be uniformity of treatment of the expenditure in the books as well as for the income tax purpose. Further, the Ld. Assessing Officer held that those expenses are towards upgradation of the assets and therefore, capital in nature. The relevant finding of the Assessing Officer is reproduced as under:

“14.7.2 Thus the distinguishing factor between expenses claimed in P&L a/c under the same heads-employee cost,rent, professional expenses, forex loss, interest, etc and these expenses which are not claimed in P&L alc but capitalised in books and yet claimed as revenue expenses in Income Computation is that these are expenses incurred in connection with tower/fibre network infrastructure facilities, which are not yet meeting with the Quality of Service (QoS) standards. Thus these are expenses towards upgradation of assets and are therefore capital in nature, and also treated as such in the books and as _ per applicable accounting policies. In this case, the treatment in books and as per accounting policy reflects the true nature of the expenditure and thus even for Income tax purposes there is no reason or rationale to deviate from the same.”

3.1 Accordingly, in assessment order passed under section 143(3) of the Act on 30/09/2021, the Assessing Officer disallowed the claim of the assessee of expenditure of %14927,99,00,396/- as revenue expenditure.

4. On further appeal, the assessee explained before the Ld. CIT(A) that assessee was a new entrant in the telecom sector and therefore it was required to continuously invest in the stabilising its network connectivity as well as to set up additional tower, fibre and other infrastructural facilities to strengthen in its network connectivity for handling huge demand for data, video and voice services. After considering the submission of the assessee, the Ld. CIT(A) deleted the disallowance made by the Assessing Officer observing as under:

“11.3 On perusal of the accounting policies, annual report and other material placed on record, it is observed that, the appellant capitalizes the assets as and when they are available for use and are working in accordance with the Quality of Service (QoS) standards intended by the management. Consequently, the indirect / operational expenses relating to period prior to the stage of meeting the Quality of Service (QoS) standards as intended by the management, is considered as "project development expenditure" and disclosed under "Capital Work-inProgress", irrespective of the fact that the asset had already been put to use. This was done in accordance with relevant Paras 20 and 55 of Ind-AS 16 - Property, Plant and Equipment, followed by the appellant, is noted to read as follows:

"Para 20: Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management.

For example, the following costs are not included in the carrying amount of an item of property, plant and equipment.

(a) costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capcity;

(b) inttial operating losses, such as those incurred while demand for the item's output builds up; and

(c) costs of relocating or reorganising part or all of an entity's operations.

55. Depreciation of an asset begins when it is available for use, 1.e. when it ts in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with Ind AS 105 and the date that the asset is derecognised. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production"

11.4 Having regard to the nature of business of the appellant, I find merit in the submission of the appellant that, the company was required to undertake continuous efforts to improve its network / connectivity, as its subscribers were not able to get adequate experience of seamless connectivity across networks due to congestion in Point of interconnect (POL) and Mobile number portability (MP) issue. From the facts on record, it is noted that since the Quality-of-Service Standards, set by the management for some of its installed assets, were not met, although it had been put to use, entries were passed in books of accounts classifying these expenses under _ ‘project development expenditure’ and disclosing it as ‘capital work-in-progress’. This was done in accordance with the above IndAS-16 which was mandatorily to be followed by the appellant for preparing the books of accounts in accordance with Companies Act, 2013. The said Accounting Standards is however not binding while computing income under the provisions of the Act. Instead, what is relevant is to examine the nature of expenditure to ascertain whether it is capital or revenue in nature. In view of the above, it is first considered necessary to examine the nature of expenditure which was capitalized and is claimed as deduction from the business profits. On perusal of the details of expenses, it is noted as follows:

1. Interconnect Expenses of Rs.2,036 crs: It is noted that these were usage-based charges paid to the other telecom operators in whose network the call / message of the Jio subscribers get terminated. This fee was paid as per the TRAI regulations. It therefore cannot be said to be incurred for creation of new asset or upgradation of asset.

1. Employee cost of Rs.1,380 crores’ and Professional Fees of Rs.2085 crores - These costs are not to comprises of Salary and related costs of employees, outsourced Manpower cost, legal and other professional cost relating to those installed tower/ fibre network infrastructure facilities whose QOS was yet to be met. It neither resulted in creation of new asset or upgradation of the existing asset.

1. Rent of Rs.2,895 crores and Rates & Taxes of Rs. 28 crores - This is noted to comprise of rent towards network towers and facilities (like AG1, AG2, AG3) and annual taxes paid to local authorities/ Government, which are recurring in nature and therefore cannot be said to capital in nature.

1. Power and Fuel of Rs.1,496 crores - It comprises of cost towards Electricity and Fuel for network towers and facilities (like AG1, AG2, AG3) relating to those installed tower/fibre network infrastructure facilities whose QOS was yet to be met. It neither resulted in creation of new asset or upgradation of the existing asset.

1. Repairs and Maintenance of Rs.558 crores - It is noted to comprise of routine Operational and Maintenance cost for Tower Infrastructure, Fibre Infrastructure and other Facilities (like AG1, AG2, AG3) which did not result in creation of any new asset.

1. Other Network Cost of Rs.29 crores - This comprises of Bandwidth Charges, GSAT charges, network co-location expenses. By its nature, it is not in capital field.

1. Foreign Exchange Difference Loss of Rs.465 crores - This loss pertains to foreign currency borrowings for acquisition of indigenous assets and it pertains to the period after the assets are put to use. Accordingly, the said loss in noted to be revenue in nature.

1. Interest of Rs.2,967 crores and Bank Charges of Rs.81 crores: The comprises of interest in respect of capital borrowed for acquisition of assets and relating to the period after the assets are put to use. It is therefore evidently revenue in nature.

1. Selling & Distribution Expenses of Rs.329 crores - It comprises of marketing expenses as well as commission charges paid to the distributors against the new activations and recharge vouchers, which has been apportioned to these installed assets as well whose QOS parameters are yet to be met.

1. Licence Fee / Spectrum Usage Charges of Rs.23 crores - This is noted to be usage-based license / spectrum fees which is recurring in nature and therefore revenue expenditure.

1. Other Expenses of Rs.557 crores - The appellant has pointed out that these expenses include administration costs, meeting and _ conference charges, membership fees, books and periodicals, warehouse charges, office rent, vehicle hiring charges, travelling fees, customer service expenses which has been apportioned to the installed assets whose QOS parameters are yet to be met. These indirect expenses cannot be said to result in creation of any new asset or benefit of enduring nature. Accordingly, it is noted to be in revenue field.

11.5 In view of the above, I find merit in the contention of the appellant that, the indirect/ operational expenses incurred to meet the QOS parameters set by the company in relation to its installed assets did not result in creation of any new asset of enduring nature, but it resulted in improving the efficiency and capability of the already installed and put to use assets. It was in the nature of regular operational expenses incurred in the course and for the purposes of business. On these facts therefore, I am of the view that the findings recorded by the AO that, the operational expenditure were incurred towards upgradation and improvement of assets, is erroneous and unjustified.

11.6 In the assessment order the AO is found to have laid emphasis on the fact that the assessee had debited same items of expenses in Profit & Loss Account and the same item of expenses were classified as project development expenditure" and disclosed under "Capital Work-inProgress", which according to him showed the contradiction in the approach of the assessee. The AO accordingly held that, when the appellant itself had capitalized these expenses in books of accounts, then it could not be permitted to take a contradictory stand and claim the same expenditure as revenue in nature for income-tax purposes. Having examined the submissions of the assessee, this reasoning given by the AO is found to be untenable. On the given facts, it is noted that, although the items of expenses debited in P&L Alc and capitalized under ‘project development expenditure were the same, but the appellant had provided cogent reasoning for such classification. It was brought to notice that, (a) where the operational expenses were continued to be incurred in relation to the installed tower/fibre network infrastructure facilities, which have already met the quality of service parameters as intended by the management, the same was debited to the Profit & Loss Alc in the books of account, but (b) where the operational expenses were incurred in relation to those installed tower/ fibre network infrastructure facilities, which were yet to achieve the Quality of Service (QoS) standards as intended by the management, the same were classified as_ project development expenditure and disclosed under Capital Work-in-Progress. It is thus noted that the appellant had indeed explained the reasons for difference in classification in the books, which according to me, was not correctly appreciated by the AO.”

4.1 In support of the finding, the Ld. CIT(A) relied on the decision of the Hon’ble Supreme Court in the case of Empire Jute Co. Ltd Vs CIT ( 124 ITR 1 [LQ/SC/1980/265] );Kedarnath Jute Mfg Co. Ltd Vs CIT (82 ITR 363) [LQ/SC/1971/403] and Taparia Tools Limited Vs JCIT (55 taxmann.com 361). The Ld. CIT(A) further relied on the decisions of the Tribunal Mumbai Bench in the case of (i) Reliance Footprint Limited Vs ACIT (41 taxmann.com 553), which has been further upheld by the Hon’ble Bombay High Court in ITA No. 948 of 2014 dated 05/07/2017. (ii) Reliance Fresh Ltd. Vs ACIT (72 taxmann.co. 170), which has been further upheld by the Hon’ble Bombay High Court in ITA No. 985 of 2017. The Ld. CIT(A) also justified his finding in view of the rule of consistency as in the immediately preceding assessment year no disallowance was made by the Assessing Officer in respect of the identical expenses claimed.

5. Aggrieved with the finding of the Ld. CIT(A), the revenue is before the Tribunal by way of raising grounds as reproduced above. In the grounds raised, the revenue has challenged deletion of the disallowance mainly on the basis that expenses were incurred towards upgradation of the assets and same were for enduring benefit to the assessee and therefore capital in nature, hence not allowable expense under section 37 of the Act.

6. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record including the detailed financial statements filed on behalf of the assessee. The issue in dispute is regarding character of the expenses of %14927,99,00,396/- which inter alia consist of Interconnect charges (Rs.2,036 Crores); Employee Cost (Rs.1,380 Crores); Professional Fees including call centre expenses (Rs. 2,085 Crores) ;Rent (Rs. 2,895/- Crores);Power and Fuel (Rs. 1496 Crores);Repair and Maintainence (Rs. 558 Crores); Other network Cost (Rs. 29 Crores) ;Interest (Rs. 2,967/-) Rs. Selling and Distribution Expenses (Rs. 329 Crores) ;Other expenses (Rs. 376 Crores) ; License fee/ spectrum uses charges (Rs. 23 crores) ; exchange loss (Rs. 465 Crores); Customer Service Expenses (Rs. 59 Crores), Bank Charges (Rs. 81 Crores), Rates and Taxes (Rs. 28 Crores) ; ILD expesnes (Rs. 62 Crores) and Travelling expenses(Rs. 62 Crores).

6.1 We find that Assessing Officer has nowhere denied that expenditure in question has been incurred for the purpose of the business. He has also not denied that those expenses are routine in nature and same would generally be classified as revenue Expenditure as per the provisions of the Act. The business of the assessee has already been set up and assessee has commenced providing digital services to its customers. The revenue from the same as also been recognised in books of accounts and offered for the tax. In such circumstances, the expenses which are incurred for running the business are revenue expenditure for the purpose of income tax irrespective of the treatment of the same by the assessee in its books of accounts. Before us the Ld. Departmental Representative could not substantiate as how the expenses incurred for day-to-day business are for upgradation of the asset and of enduring benefit. Though the assessee has treated those expenses in its books of accounts as capital expenditure following the Indian accounting standard, but these expenses, list of which has been reproduced above have been incurred in relation to services provided to existing customers, and therefore same being incurred wholly and exclusively for the purpose of the business, deserve to be allowed in terms of section 37(1) of the Act. We find that identical nature of expenses have been allowed by the Tribunal in the case of another two companies namely Reliance Footprint Limited (supra) and Reliance Fresh Ltd (supra), which have been further upheld by the Hon’ble Bombay High Court. The finding up the Tribunal in the case of Reliance Footprint Limited (supra) has already been reproduced by the Ld. CIT(A) in para 11.2 of the impugned order and therefore we are not repeating the same. The relevant finding of the Hon’ble Bombay High Court in the case of Reliance Foot Print Limited (supra) in ITA No. 948 of 2014 is reproduced as under:

“6. We have considered the submissions canvassed by the learned counsel for the respective parties.

7. It is not relevant as to how the Assessee shows a particular income or expenditure in the books of account. In the present case, the Commissioner (Appeals) and the Tribunal has specifically on appreciation of factual matrix arrived at a conclusion that the expenditure are directly identifiable with the operations and maintenance of the existing stocks t.e. with regard to the payment of salary, travelling and conveyance allowance, telephone expenses, professional fees paid, audit fee and other miscellaneous expenses.

8. In view of the specific finding of fact arrived at by the Commissioner (Appeals) and the Tribunal, the Tribunal have held the expenditure to be revenue expenditure. In case of Kothari Auto Parts Manufacturers Pvt. Ltd. (supra), this Court had_ specifically observed that separate computation of income and expenditure would be justified only when several distinct business are carried on, and not when the separate business activities were carried out by some person and when one set of account is maintained for all set of activities.

9. In the present case also, one set of account is maintained for the business activity by the Assessee. The Assessee had incurred expenditure on account of expansion of business and the Assessee had commenced the business as per the findings of the Commissioner (Appeals) and the Tribunal. The said findings are findings of the fact.

10. In view of the above, no substantial question of law arises. These Appeals, as such, stand dismissed. No costs.”

6.2 The identical question raised in the case of the another company namely Reliance Fresh Ltd (supra) has also been allowed in favour of the assessee by the jurisdictional Bombay High Court in ITA No.985 of 2017, observing as under:

“4, In its return of income, the expenditure incurred for setting up new stores has been claimed as revenue expenditure to the extent the expenditure was revenue in nature and where capital expenditure was incurred, the same was not claimed as revenue expenditure. However, the Respondent in its books of accounts showed the entire expenditure t.e. even the expenditure which is claimed in the income tax return as revenue expenditure as capital expenditure. It was only on the above basis, the Assessing Officer and the Commissioner of Income Tax (Appeals) held that the revenue expenditure claimed by the Respondent in its return of income could not be allowed.

5. On further appeal, the Tribunal allowed the Respondent's appeal, inter alia, pointing out that the treatment given in the books of account by the assessee would not be conclusive in income tax proceedings to decide whether the expenditure was revenue or capital. In support of its view, the Tribunal relied upon the decision of the Supreme Court in the case of Taparia Tools Ltd. v. JCIT'. The Tribunal also relied upon upon the judgment of its Coordinate Bench in the case of Reliance Footprint Ltd. v. ACIT in ITA No.5997/Mum/ 2011 decided on 23 October 2013 for the assessment year 2008-09, on identical facts, holding that the revenue expenditure as claimed is allowable.

6. Mr.Suresh Kumar very fairly points out that the Revenue being aggrieved by the above order dated 23 October 2013 of the Tribunal in the case of Reliance Footprint Ltd. (supra) filed an appeal in this Court being Income Tax Appeal No.948/2014. This Court vide order dated 5 July 2017 dismissed the above appeal filed by the Revenue against the order dated 23 October 2013 of the Tribunal on identical question as framed herein. Moreover, it is an agreed position between the parties before us that the decision of this Court in Reliance Footprint Ltd. tLe. Income Tax Appeal No.948/2014 (supra) would cover the issue arising herein.”

6.3 Respectfully, following the binding precedent of the jurisdictional High Court (supra), we do not find any infirmity in the order of the Ld. CIT(A) on the issue in dispute, and accordingly we uphold the same. The ground Nos. 1 to 3 raised by the Revenue are accordingly dismissed.

7. Inthe result, the appeal of the Revenue is dismissed.