ITAT Grants Mumbai Port Authority ₹80 Crore Tax Relief on Leave Encashment Fund Contribution, Dismisses Revenue’s Appeals

June 15, 2026 : In a significant ruling on the tax treatment of employee benefit liabilities, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that Mumbai Port Authority is entitled to claim deduction of ₹80 crore contributed to SBI Life Insurance Co. Ltd. towards a Leave Encashment Fund, observing that the payment constituted an actual business expenditure and not a mere provision for future liability. The Tribunal consequently directed deletion of the disallowance made by the Income Tax Department for Assessment Year 2009-10.

The decision was delivered by the “C” Bench comprising Judicial Member Anikesh Banerjee and Accountant Member Makarand Vasant Mahadeokar while deciding cross appeals filed by Mumbai Port Authority, formerly known as Mumbai Port Trust, and the Revenue concerning Assessment Years 2009-10 and 2012-13. The Tribunal pronounced its order on June 15, 2026.

The dispute arose after the Assessing Officer reopened the assessment for AY 2009-10 and made several additions, including a disallowance of ₹80 crore claimed by the Port Authority as contribution towards a Leave Encashment Fund maintained with SBI Life Insurance. The Department took the view that Section 43B(f) of the Income Tax Act, 1961 permits deduction only when leave encashment liability is actually discharged and that contributions to a fund created for future liabilities could not qualify for deduction. The Commissioner of Income Tax (Appeals) had also upheld the disallowance.

Before the Tribunal, Mumbai Port Authority argued that the amount was not a mere accounting provision but an actual payment irrevocably transferred to SBI Life Insurance under a structured scheme for meeting employee leave encashment obligations. It contended that once the funds were transferred to the insurer, the Port Authority ceased to have any control over the money and the payment assumed the character of a genuine business expenditure incurred wholly and exclusively for business purposes.

The Tribunal accepted this argument and drew a distinction between a provision for a future liability and an actual payment made to an insurer under an employee benefit scheme. Referring extensively to the Kerala High Court’s judgment in CIT v. Hindustan Latex Ltd., the Bench observed that where an employer insures itself against leave encashment liabilities and pays the premium or contribution to an insurer, the payment cannot be treated as a contingent liability. Instead, it becomes an actual expenditure incurred in the course of business.

Explaining its reasoning, the Tribunal observed that the Port Authority had not claimed deduction on the basis of a book entry or provision. Rather, the amount had actually been paid to SBI Life Insurance and had resulted in a genuine outflow of funds. The Bench noted that “the assessee has ceased to have control or dominion over the amount so contributed” and that such payment represented real expenditure incurred for meeting employee benefit obligations.

The Tribunal further clarified that Section 43B(f), which governs leave encashment deductions, was intended to prevent deductions based on unascertained or merely anticipated liabilities. It held that the provision could not be invoked to deny deduction where an employer had already discharged its obligation through an actual payment to an insurer. The Bench stated that treating such contributions as non-deductible would create an anomalous situation in which the employer would never receive a deduction despite having incurred a real expenditure.

As a result, the ITAT set aside the findings of the CIT(A) and directed the Assessing Officer to delete the entire disallowance of ₹80 crore.

The Tribunal also dealt with multiple other issues arising from the assessments, including estate rentals, depreciation claims, corporate social responsibility expenditure, interest on inter-port loans and TDS-related disallowances. On the issue of unrecovered estate rentals, the Tribunal upheld the relief granted by the CIT(A) and endorsed the application of the “real income” doctrine. It agreed that income cannot be taxed merely because rent bills were raised when substantial disputes regarding recoverability remained pending before judicial and adjudicatory forums. Relying on principles laid down by the Supreme Court in CIT v. Shoorji Vallabhdas & Co. and Godhra Electricity Co. Ltd. v. CIT, the Tribunal held that only real and reasonably certain income can be subjected to taxation.

The ruling is particularly relevant for government bodies, public sector undertakings and large employers that fund employee benefit obligations through insurance-backed schemes. The decision reinforces the principle that genuine contributions made to insurers for employee welfare liabilities may qualify as deductible business expenditure where they involve actual payment and transfer of liability.

In its final order, the ITAT partly allowed the appeals filed by Mumbai Port Authority for Assessment Years 2009-10 and 2012-13, while dismissing both appeals filed by the Revenue.

Case Reference : Mumbai Port Authority (Formerly Mumbai Port Trust) v. ACIT (Exemption) Circle-2(1), Mumbai & ACIT (Exemption) Circle-2(1), Mumbai v. Mumbai Port Authority, ITA Nos. 2598/Mum/2025, 2604/Mum/2025, 2834/Mum/2025 & 2835/Mum/2025