ITAT Mumbai Allows Deduction Of ₹80 Crore Paid By Mumbai Port Authority To SBI Life For Leave Encashment

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that Mumbai Port Authority's ₹80 crore contribution to SBI Life Insurance Co. Ltd. under a leave encashment scheme is deductible, finding that the payment represented an actual outflow of funds rather than a mere provision for a future liability.

A Bench of Judicial Member Anikesh Banerjee and Accountant Member Makarand Vasant Mahadeokar observed:

“The amount of Rs.80,00,00,000/- stands actually paid to SBI Life Insurance Co. Ltd. (Receipt of which is place at page No. 60 of paper book) under a leave encashment scheme formulated for meeting employee benefit obligations. The payment has resulted in actual outflow of funds and the assessee has ceased to have control or dominion over the amount so contributed.”

The appeal arose from Assessment Year 2009-10.

During reassessment proceedings, the Assessing Officer noticed that Mumbai Port Authority had claimed deduction of ₹80 crore towards contribution to a Leave Encashment Fund. Mumbai Port Authority explained that the amount had been paid to SBI Life Insurance Co. Ltd. towards leave encashment liability and therefore qualified for deduction.

The Assessing Officer rejected the explanation. The assessment order recorded that payment made to SBI Life Insurance Co. Ltd. towards funding leave encashment liability did not satisfy the requirements of Section 43B(f) and that the liability sought to be funded represented a future or contingent liability. The Assessing Officer consequently disallowed the claim and added ₹80 crore to the Authority's income.

The Commissioner of Income Tax (Appeals) upheld the disallowance. The appellate authority held that leave encashment liability is specifically governed by Section 43B(f) and that the deduction claim had to be tested strictly under that provision. The Commissioner of Income Tax (Appeals) also noted that the constitutional validity of Section 43B(f) had been upheld by the Supreme Court in Exide Industries Ltd.

Before the Tribunal, Mumbai Port Authority contended that the contribution was not a provision retained in its books of account. It argued that the amount had been actually paid to SBI Life Insurance Co. Ltd. under a leave encashment scheme framed for meeting employee benefit obligations and that, once paid, the Authority no longer exercised control over the funds.

The Tribunal accepted that contention. It recorded that the claim was not based on a provision created in the books of account but on an amount actually paid to the insurer.

The bench relied on the Kerala High Court's decision in CIT v. Hindustan Latex Ltd., which examined payments made to an insurer under a group leave encashment scheme.

Referring to that precedent, the tribunal held that where an amount is actually paid to an insurer under such a scheme and the liability is assumed by the insurer, the payment constitutes actual business expenditure and cannot be equated with a mere provision.

The tribunal further observed, “The claim relates to an actual contribution of Rs.80,00,00,000/- made to SBI Life Insurance Co. Ltd. towards a leave encashment scheme. Therefore, applying the ratio laid down by the Hon'ble Kerala High Court, we are unable to accept the contention of the Revenue that the claim is liable to be disallowed merely by invoking section 43B(f) of the Act.”

Holding that the contribution represented actual business expenditure incurred for meeting employee leave encashment obligations, the tribunal set aside the order of the Commissioner of Income Tax (Appeals) on this issue and directed the Assessing Officer to delete the ₹80 crore disallowance.

For Assessee: Madhur Agarwal and Mani Jain

For Revenue: R.A. Dhyani and V.S. Mahajani