Income Tax

Books Don’t Decide Taxes: ITAT Hands Reliance Jio a ₹11,003 Crore Win — and Clears Its Overseas Telecom Payments of Royalty/FTS Tax Too

Published 28 Aug 2026· Updated 28 Aug 2026· 7 min read

The Story

Here’s a question every accountant has quietly wrestled with at some point: if you capitalise an expense in your books for accounting-standard reasons, does that decision follow you into your tax return whether you like it or not?

Reliance Jio said no. The Income Tax Department said, in effect, of course it does — you can’t have it both ways. The ITAT Mumbai Bench just sided decisively with Jio, on a scale that makes the question worth understanding properly.

For Assessment Year 2019-20, Reliance Jio Infocomm claimed a deduction of ₹11,003.18 crore — an eye-watering INR 1,10,03,17,60,701, to be exact — describing it in its return as “expenses capitalised in books, allowable as revenue for tax purposes.” The spend covered the unglamorous, recurring cost of running a pan-India 4G network: interconnect charges, employee costs, professional fees, power and fuel, repairs, maintenance, and general network operating expenses. In Jio’s accounts, this had gone into capital work-in-progress — CWIP, the bucket companies use for spending on assets not yet ready for use. In its tax computation, Jio claimed the same spending as ordinary revenue expenditure, deductible in full.

The Assessing Officer wasn’t having it. An expense, the AO reasoned, is either capital or revenue — it can’t wear two different hats depending on which document you’re filling out. If Jio’s own accountants thought this spending belonged in CWIP, that should settle the tax question too.

The Commissioner of Income Tax (Appeals) disagreed, and reached for a decade-old precedent to explain why: Reliance Fresh Ltd. v. ACIT (2016), where routine expenditure incurred in expanding an already-existing retail business was allowed as a deduction — notwithstanding that the company had capitalised it in its own books. The CIT(A) wasn’t persuaded that spending aimed at getting an existing network up to its intended operating standard automatically counted as capital improvement, just because the accountants had filed it that way.

Jio’s counsel added a detail worth noting carefully: the actual hardware — antennas, fibre, routers, batteries, generators, the physical network assets — had genuinely been capitalised for tax purposes too, and wasn’t part of this dispute at all. What was being fought over was the softer, recurring operational spend layered on top of that hardware: the cost of keeping an already-built network running, not building it in the first place.

Sidebar: the ITAT’s actual holding is narrower and more useful than “book entries don’t matter.” The Bench said accounting treatment is relevant — it’s just not conclusive. A company’s own bookkeeping choices can be evidence of how it views an expense, but they don’t override the substantive test of whether the spending created or improved a capital asset, or merely maintained one that already existed.

Bundled into the same set of appeals — ITA Nos. 3540 and 3541/Mum/2026 — sat a second, entirely different question: could the Revenue tax payments Jio made to non-resident telecom operators, for voice termination, bandwidth, and operation-and-maintenance services, as royalty or fees for technical services under Section 40(a)(i), on the theory that Jio should have deducted TDS and hadn’t? The disallowance here ran to ₹66.65 crore.

The Bench — Judicial Member Amit Shukla and Accountant Member Arun Khopdia — said no to this too, and for a reason with real staying power: these payments simply don’t meet the definition of royalty or FTS/FIS under India’s applicable Double Taxation Avoidance Agreements. A non-resident telecom operator terminating your voice calls or renting you bandwidth capacity is providing a service, in the ordinary commercial sense — not licensing you a secret process or handing over technical know-how.

The Revenue’s two appeals were dismissed in full. Both the capitalisation question and the DTAA question went Jio’s way.

Why It Matters

The capitalisation question is the one every practitioner should sit up for — it directly touches any client running a capital-intensive business (telecom, infrastructure, manufacturing, real estate) where accounting standards push recurring operational spend into a capitalised bucket while the underlying economic character of the expense remains ordinary and recurring. This ruling gives those clients a concrete, tribunal-level precedent that the tax return doesn’t have to mirror the balance sheet — provided the substance of the spending genuinely supports a revenue characterisation. The DTAA point, meanwhile, reinforces a settled and useful position for any business paying overseas partners for genuine services rather than licensing arrangements: characterisation turns on what was actually purchased, not on where the invoice came from.

Key Takeaways

Accounting treatment (capitalisation under Ind AS/AS or otherwise) is relevant evidence of how a company views an expense, but is not conclusive for its tax characterisation — the substantive test of whether spending created or improved a capital asset, versus merely maintaining an existing one, still governs.
Recurring operational costs incurred to keep an already-operational network or asset running at its intended standard — even where capitalised in the books for accounting purposes — can still qualify as deductible revenue expenditure for tax purposes.
Payments to non-resident telecom operators for voice termination, bandwidth, and operation-and-maintenance services are not automatically royalty or fees for technical services/fees for included services under India’s DTAAs — genuine service payments require TDS analysis on their actual character, not a reflexive Section 40(a)(i)/195 disallowance.
The Tribunal’s reasoning builds on, and is consistent with, the CIT(A)’s reliance on Reliance Fresh Ltd. v. ACIT (2016) — a decade-old precedent on expansion-related revenue expenditure that remains good law for this fact pattern.
Where actual capital hardware (network equipment, infrastructure assets) is genuinely capitalised for tax purposes as well as accounting purposes, that treatment is not disturbed — this ruling addresses the softer, recurring operational layer around such assets, not the hardware itself.

Practical Implications

CA firms advising capital-intensive clients — telecom, infrastructure, power, manufacturing with major network or plant build-outs — should use this ruling to revisit how recurring operational spend layered on top of capitalised assets is being characterised in tax computations. Where a client’s accounting policy capitalises certain operating costs (for Ind AS compliance, lender covenants, or conservative accounting practice) but the underlying spend is genuinely about running an existing asset rather than building or improving it, this ruling supports a revenue-expenditure claim in the tax computation notwithstanding the books. On the DTAA side, any business making regular payments to overseas service providers — telecom, cloud infrastructure, technical support — should re-examine whether TDS is being over-deducted on payments that are genuinely for services rather than royalty/FTS.

Action Checklist

For clients with significant CWIP or other capitalised-but-operational spending, map which components are genuinely capital (new asset creation/improvement) versus operational (maintaining an existing, already-functional asset) — the latter has a real precedent for revenue-expenditure treatment even where capitalised in the books.
Do not assume books-to-tax alignment is mandatory — document the substantive economic character of disputed expenditure independently of the accounting entries, since that substance, not the bookkeeping choice, is what the Tribunal actually tested.
Cite Dy. Commissioner of Income Tax, Circle 3(3)(1) v. Reliance Jio Infocomm Limited (ITAT Mumbai, 2026 TAXSCAN (ITAT) 1266, 21 August 2026) alongside Reliance Fresh Ltd. v. ACIT (2016) when defending a client’s capital-versus-revenue characterisation on similar facts.
For clients paying non-resident telecom, cloud, or technical service providers, review whether TDS under Section 195/40(a)(i) is being applied on payments that are properly characterised as business income/services under the applicable DTAA rather than royalty or FTS/FIS.
Where a Section 40(a)(i) disallowance already exists on similar overseas telecom-service payments, evaluate whether this ruling (and the related Reliance Jio Singapore/USA subsidiary rulings on the same theme) supports a rectification or appeal.

Relevant Sections / Rules / Notifications

Section 37(1), Income-tax Act, 1961 (general deductibility of revenue expenditure)
Section 40(a)(i), Income-tax Act, 1961 (disallowance for non-deduction of TDS on payments to non-residents)
Section 195, Income-tax Act, 1961 (TDS on payments to non-residents)
Relevant DTAA provisions on royalty and fees for technical services/fees for included services (treaty-specific — to be verified against the specific counterparty jurisdiction’s DTAA with India)
Referenced: Reliance Fresh Ltd. v. ACIT (2016) — relied upon by the CIT(A) and affirmed in substance by the Tribunal
ITAT Mumbai ruling: Dy. Commissioner of Income Tax, Circle 3(3)(1) v. Reliance Jio Infocomm Limited, 2026 TAXSCAN (ITAT) 1266, ITA No. 3540/Mum/2026 & 3541/Mum/2026, 21 August 2026

FAQs

Q: Does this ruling mean a company can always claim a capitalised expense as a revenue deduction for tax purposes?
A: No. The Tribunal did not hold that accounting treatment is irrelevant — only that it is not conclusive. The underlying spend must still genuinely be recurring, operational expenditure on an already-functional asset, rather than expenditure that creates or improves a capital asset. Each case turns on its own facts.

Q: Were Reliance Jio’s actual network hardware purchases treated as revenue expenditure too?
A: No — the assessee’s own counsel clarified that genuine capital hardware (antennas, fibre, routers, batteries, generators, and similar network assets) had been capitalised for tax purposes as well, and was not part of the disputed claim. The dispute was confined to recurring operational spend layered on top of that hardware.

Q: Does the DTAA finding in this ruling apply to all cross-border service payments?
A: Not automatically — the finding is specific to payments for voice termination, bandwidth, and O&M services to non-resident telecom operators, assessed against the applicable DTAAs. Whether a different category of cross-border payment qualifies as royalty/FTS still depends on the specific service, the applicable treaty’s definitions, and the facts of that arrangement.

Internal Links

Today’s Intelligence — 28 August 2026 (this cycle’s Today’s Intelligence, Section 8 below)
Income Tax / Case Laws hub — /category/income-tax/

None this cycle — first Finoscape coverage of this ruling. (Related but distinct: Reliance Jio’s Singapore and USA subsidiaries obtained a separate, earlier ITAT ruling on the royalty/FTS characterisation of related telecom payments — not yet covered on Finoscape; flagged as a candidate for a future cross-reference piece.)