Employees' provident fund and ESI deductions were outside section 43B for earlier assessment years, with later income-treatment rules inapplicable.

Employees' contributions to provident fund and ESI deducted from salary were not covered by section 43B in the relevant year, because that provision then applied only to the employer's statutory liabilities. The Finance Act, 1987 provisions treating employees' contributions as income and allowing deduction only on timely deposit, namely section 2(24)(x) and section 36(1)(v), operated only from assessment year 1988-89 and did not apply to assessment year 1986-87. Accordingly, for years before that insertion, such employee deductions were neither disallowable under section 43B nor treated as income under the Act, and the disallowance was deleted.

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Issues: Whether employees' contribution to provident fund and ESI deducted from salary in the relevant assessment year could be disallowed under section 43B of the Income-tax Act, 1961, and whether such sums were chargeable as income or deductible under the provisions then in force.

Analysis: Section 43B, as applicable to the relevant previous year, covered only the employer's liability for specified statutory payments and did not extend to deductions made from employees' salaries towards provident fund or ESI. The provisions inserted by the Finance Act, 1987, namely section 2(24)(x) and section 36(1)(v), which treated employees' contributions as income and permitted deduction only on timely credit to the relevant fund, were applicable from assessment year 1988-89 and not to assessment year 1986-87.

Conclusion: The disallowance was rightly deleted and the revenue's challenge failed.

Ratio Decidendi: For assessment years prior to the insertion of section 2(24)(x) and section 36(1)(v), employees' contributions deducted from salary towards provident fund or ESI are neither governed by section 43B nor treated as income under the Act.

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