SBI Staff Welfare Expenditure allowed as Business Expense

Leave Encashment, Medical Reimbursement, and other employee benefits have been under scrutiny in recent tax disputes, with the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, allowing deductions claimed by State Bank of India (SBI) for provisions made towards employee benefits such as leave travel concession, sick leave, and casual leave. The Tribunal’s decision in State Bank of India vs The Assistant Commissioner of Income-tax, with the citation 2026 TAXSCAN (ITAT) 457, has significant implications for businesses, as it clarifies the allowability of deductions under Section 37(1) of the Income Tax Act for provisions made towards employee benefits that are deemed to be ascertained liabilities rather than contingent liabilities.

Key Facts

• The ITAT, Mumbai Bench, allowed SBI’s deduction claim for provisions made towards employee benefits such as leave travel concession, sick leave, and casual leave.
• The Tribunal held that these liabilities, accrued from services already rendered by employees, represented an "ascertained liability" and not a "contingent liability," warranting a deduction under Section 37(1) of the Income Tax Act.
• The Revenue had disallowed the claim of ₹47.04 crores, contending that the actual outflow was dependent on future events like employees availing leave, making it contingent.
• The Department also objected that the claim was made by a "note" and not in the return of income.
• The Tribunal distinguished these provisions from leave encashment, stating that leave travel concession represents actual reimbursement of travel costs and that sick/casual leave provisions compensate for the loss of services during the leave period.
• The case number is I.T.A. No. 3680/Mum/2017, and the date of judgment is 21 April 2026.
• The Coram consists of Beena Pillai (Judicial Member) and Jagadish (Accountant Member).
• The Counsel of Appellant is Ketan Ved, Ninad Patade, and the Counsel Of Respondent is P.C. Chhotaray.

Statutory Context & Tax Analysis

Section 37(1) of the Income Tax Act allows deductions for any expenditure incurred by an assessee for the purposes of business or profession, provided that the expenditure is not prohibited by law. The key issue in this case is whether the provisions made by SBI towards employee benefits such as leave travel concession, sick leave, and casual leave constitute an ascertained liability or a contingent liability. The Tribunal relied on the decision of the Coordinate Bench in the assessee’s own case for A.Y. 2008-09, State Bank of India vs. ACIT, which had held that such provisions are not hit by Section 43B(f) and are allowable as business expenditure under Section 37(1). The Tribunal observed that the determinative test for allowability is whether the liability has accrued with reasonable certainty, not when it is discharged. This decision has significant implications for businesses, as it clarifies the allowability of deductions for provisions made towards employee benefits that are deemed to be ascertained liabilities rather than contingent liabilities. The Accounting Standard-15 (Employee Benefits) also plays a crucial role in this context, as it provides guidelines for the recognition and measurement of employee benefits. The standard requires that employee benefits be recognized as an expense when they are incurred, and that the expense be measured at the amount required to settle the obligation.

Client Impact & Compliance Procedure

The ITAT’s decision in this case has significant implications for businesses, as it clarifies the allowability of deductions for provisions made towards employee benefits that are deemed to be ascertained liabilities rather than contingent liabilities. To avail of this deduction, businesses must ensure that they have made provisions for employee benefits such as leave travel concession, sick leave, and casual leave, and that these provisions are computed on a scientific basis in accordance with Accounting Standard-15 (Employee Benefits). Businesses must also maintain proper records and documentation to support their claim, including details of the provisions made, the method of computation, and the amount of the provision. The claim must be made in the return of income, and not just by a "note". The following steps can be taken to ensure compliance:

1. Review the company’s accounting policies and procedures to ensure that provisions for employee benefits are made in accordance with Accounting Standard-15 (Employee Benefits).
2. Compute the provisions for employee benefits on a scientific basis, taking into account the number of employees, their salary levels, and the leave entitlements.
3. Maintain proper records and documentation to support the claim, including details of the provisions made, the method of computation, and the amount of the provision.
4. Make the claim in the return of income, and not just by a "note".
5. Ensure that the provisions are made for the purposes of business or profession, and that the expenditure is not prohibited by law.
   By following these steps, businesses can ensure that they are compliant with the ITAT’s decision and can avail of the deduction for provisions made towards employee benefits. The necessary forms to file include the income-tax return (Form ITR-6), and the audit report (Form 3CB and 3CD). The records to maintain include the accounting records, the computation of provisions, and the supporting documentation.

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