₹22.41 Lakh Cash Salary Disallowance Remanded for Genuineness Verification: ITAT Surat

Bharti Enterprise Vs ITO (ITAT Surat)

Summary: The assessee filed an appeal before the ITAT Surat against the order of the National Faceless Appeal Centre, Delhi, dated 22.07.2025 for Assessment Year 2018-19. The dispute concerned a disallowance of business expenditure of Rs.22,41,000/- made by the Assessing Officer under Section 40A(3) of the Income Tax Act, 1961 in respect of salary payments, which was confirmed by the CIT(A).

The assessee was a commission agent of Gujarat Gas Limited and operated a CNG Filling Station. It filed its original return on 06.10.2018 declaring total income of Rs.6,54,710/-. The return was processed under Section 143(1) and subsequently selected for scrutiny under CASS. Notices under Sections 143(2) and 142(1) were issued and the assessee furnished details through the e-filing portal under the faceless assessment scheme.

During assessment, the Assessing Officer asked for party-wise expense details, including names, addresses, PANs, payments made during the year, outstanding balances, payment modes and supporting documents. The assessee furnished ledger extracts. On examination, the Assessing Officer found two ledger accounts for supervisor salary expenses for the same financial year and noted cash payments of Rs.3,45,600/- to supervisors and Rs.35,28,000/- to fillers.

The Assessing Officer also noted differences between details furnished on different dates concerning the names and monthly payments of supervisors. The Assessing Officer observed that monthly salary amounts appeared identical and considered it difficult to accept the salary statements as genuine without supporting documents. The Assessing Officer consequently made an addition of Rs.22,41,000/- under Section 40A(3).

The CIT(A) confirmed the addition, observing that the assessee had not filed an explanation substantiating the expenditure despite several notices. Before the Tribunal, the assessee filed detailed written submissions together with ledger extracts, a copy of the cash book and other material, claiming that the expenditure was genuine.

The Tribunal considered the material on record and noted that the assessee had submitted voluminous details of the expenses and claimed that the expenditure was duly reflected in its books of account. Instead of deciding the genuineness of the expenditure conclusively, the Tribunal considered it appropriate to restore the matter to the Assessing Officer for examination.

The Assessing Officer was directed to examine the expense details after providing the assessee adequate opportunity of being heard. The assessee was also directed to appear before the Assessing Officer with all details submitted before the Tribunal and substantiate the genuineness of the expenses.

Accordingly, the appeal was allowed for statistical purposes only.

Background of the Assessment

Business and Return of Income

The assessee was a commission agent of Gujarat Gas Limited and was running a CNG Filling Station.

For Assessment Year 2018-19, the assessee filed its original return of income on 06.10.2018 declaring total income of Rs.6,54,710/-. The return was processed under Section 143(1) of the Income Tax Act, 1961 and subsequently selected for scrutiny under CASS.

Scrutiny Proceedings

Notices under Sections 143(2) and 142(1) were issued from time to time. In response, the assessee submitted the details called for through the e-filing portal under the faceless assessment scheme.

The Assessing Officer required party-wise details of expenses, including the name and address of the payee, PAN, total payment during the year, outstanding balance, mode of payment and supporting documents.

The assessee responded by furnishing ledger extracts of the expenses.

Salary Expense Details Examined by the Assessing Officer

During verification of the material submitted by the assessee, the Assessing Officer found two ledger accounts relating to supervisor salary expenses for the same period, namely Financial Year 2017-18.

The assessment order recorded cash payments of Rs.3,45,600/-, at Rs.28,800/- per month, to supervisors and Rs.35,28,000/-, at Rs.2,94,000/- per month, to fillers.

The Assessing Officer noted that the ledger accounts reflected the same amounts as salary expenses every month, generally on the last date of the month.

Differences in Supervisor Details

The Assessing Officer noted that the first supervisor salary ledger submitted on 05.03.2021 contained the names of three supervisors, Karan Shah, Sanjay Vaniwala and Sagar Gandhi, with monthly payments of Rs.9,500/-, Rs.9,800/- and Rs.9,500/- respectively, shown as paid in cash.

The second supervisor salary ledger submitted on 06.03.2021 contained the names of two supervisors, Hasmukh Budhiyabhai Patel and Sanjay Vaniwala, with monthly payments of Rs.21,300/- and Rs.7,500/- respectively, also shown as paid in cash.

The Assessing Officer also noted that the covering letter submitted on 05.03.2021 mentioned total payments of Rs.2,55,600/- to Hasmukh Budhiyabhai Patel and Rs.90,000/- to Sanjay Vaniwala.

On the basis of these differences, the Assessing Officer observed that there was a mismatch in the details submitted by the assessee on different dates and stated that it appeared that different details had been submitted during the assessment proceedings.

Payments to Fillers

The Assessing Officer further noted that monthly salary exceeding Rs.10,000/- was shown to eight fillers and that payments were made in cash.

The Assessing Officer observed that the salary expenses of supervisors and fillers were similar for each month and considered it difficult to believe that the statements were genuine because salary expenses for each month could vary on account of leave, employees quitting employment and addition of new employees.

The Assessing Officer also observed that the assessee had failed to produce supporting documents explaining the salary payments and considered the ledger accounts submitted by the assessee to be not genuine and fabricated.

Disallowance Under Section 40A(3)

Based on the above observations, the Assessing Officer made an addition of Rs.22,41,000/- under Section 40A(3) of the Income Tax Act.

TaxGuru has also discussed the exceptions and conditions applicable to cash expenditure under Section 40A(3) and Rule 6DD, including specific situations involving salary payments.

The assessee challenged the disallowance before the CIT(A), NFAC, Delhi.

The CIT(A) dismissed the appeal and confirmed the addition. The CIT(A) recorded that the assessee had not filed an explanation to substantiate the expenditure despite several notices and held that the assessee had not shown the Assessing Officer’s decision to be arbitrary, biased, irrational, vindictive or capricious without basis.

Assessee’s Appeal Before ITAT Surat

The assessee challenged the CIT(A)’s order before the Tribunal. One of its grounds specifically challenged the Rs.22,41,000/- disallowance of salary expenditure under Section 40A(3).

The assessee also contended that the CIT(A) had passed an ex-parte order without providing a proper opportunity of hearing through video conferencing despite a specific request and alleged violation of the principles of natural justice.

During the appellate proceedings before the Tribunal, the assessee filed detailed written submissions along with ledger extracts, a copy of the cash book and other material. It claimed that the expenses incurred were genuine.

Tribunal’s Findings and Directions

Voluminous Expense Details Required Fresh Examination

The Tribunal considered the facts of the case, the material available on record and the submissions made by the assessee’s counsel.

The Tribunal noted that the assessee had submitted voluminous details concerning the expenses and claimed that those expenses were duly reflected in its books of account.

In view of the material submitted before it, the Tribunal considered it appropriate to restore the matter to the file of the Assessing Officer for examination.

Opportunity to Substantiate Genuineness

The Tribunal directed the Assessing Officer to examine the expense details after affording the assessee adequate opportunity of being heard.

The assessee was also directed to appear before the Assessing Officer with all the details that had been submitted before the Tribunal and substantiate the genuineness of the expenses.

The Tribunal thus did not finally determine the genuineness of the disputed salary expenses or finally adjudicate the Section 40A(3) issue on the material before it. Instead, the matter was restored for examination by the Assessing Officer.

Final Decision

The ITAT Surat restored the disputed salary expenditure issue to the Assessing Officer for fresh examination.

The Assessing Officer was directed to examine the details after providing adequate opportunity of hearing to the assessee. The assessee was required to appear before the Assessing Officer with all material submitted before the Tribunal and substantiate the genuineness of the expenses.

Accordingly, the appeal filed by the assessee was allowed for statistical purposes only.

The order was pronounced under Rule 34 of the IT(AT) Rules, 1963 on 18.06.2026.

FULL TEXT OF THE ORDER OF ITAT SURAT

1. This is an appeal filed by the assessee against the order of the National Faceless Appeal Centre (NFAC), Delhi [In short, the ld. CIT(A)1 dated 22/07/2025 for the assessment year (AY) 2018-19 wherein the assessee has raised following grounds of appeal:

“1. On the facts and in the circumstances of the case as well in law, the learned CIT (Appeals), NFAC, New Delhi has erred in upholding AO’s action making disallowance of business expenditure incurred on account of salaries paid to the employees to the extent of Rs. 22,41,000/ -, purely on gross misinterpretation, misconstruction and misapplication of the provisions of Section 40A(3) of the Act and under misconceptual, arbitrary and perverse observations and hence, being without jurisdiction, bad in law, in-valid, illegal, unwarranted of facts, is liable to be quashed or annulled in toto.

2. On the facts and in the circumstances of the case as well in law, the learned CIT (Appeals), NFAC, New Delhi has erred in providing proper opportunity of being heard and passed the ex-parte order, without granting hearing through Video Conferencing even though specifically requested to the CIT(A) and hence, the order passed by the CT(A) is against the principles of natural justice and hence, being without jurisdiction, bad in law, in-valid, illegal, is liable to be quashed or annulled in toto.

3. Your appellant further reserves his rights to add, alter, amend or modify any of the aforesaid grounds before or at the time of hearing of an appeal.”

2. Facts of the case, in brief, are that the assessee is a commission agent of Gujarat Gas Limited and running a CNG Filling Station. Original return of income was filed by the assessee on 06/10/2018 for the assessment year under consideration declaring total income at Rs. 6,54,710/-. The said return of income was processed under Section 143(1) of the Income Tax Act, 1961 (in short, the Act) and thereafter selected for scrutiny under CASS. Notice under Section 143(2) and 142(1) of the Act were issued from time to time. In response to which, the assessee submitted the details called for under e-filing portal under the faceless assessment scheme. During the assessment proceedings, the assessee was asked by the Assessing Officer to furnish party-wise details of expenses mentioning name, address, PAN, total payment paid during the year, balance outstanding, mode of payments alongwith supporting documents. In response to which, the assessee filed ledger extract of the expenses before the Assessing Officer. The Assessing Officer on verification, found that the assessee has submitted two ledger accounts of supervisor salary expenses for the same period (F.Y. 2017-18). On perusal of the ledger accounts of salary expenses, it was found by the Assessing Officer that the assessee had made cash payment of Rs. 3,45,600/- (Rs. 28,800/- per month) and Rs. 35,28,000/- (Rs. 2,94,000/- per month) to supervisor and filler respectively. The Assessing Officer has noted in the assessment order that on a plain sight of these ledger accounts reveals that in salary expenses there are same amount debited to ledgers each month on a certain date (mostly on the last date of month) during the year. Further the Assessing Officer observed on perusal of the submissions made by the assessee uploaded on 05/03/2021 that in the first ledger of supervisor salary contains the name of three supervisors i.e. Karan Shah, Sanjay Vaniwala 85 Sagar Gandhi and shown the payment of Rs. 9,500, Rs. 9,800 85 Rs. 9,500/- per month respectively and payment shown in cash. Whereas the second ledger of supervisor salary submitted on 06/03/2021, contains the name of two supervisors i.e. Hasmukh Budhiyabhai Patel 85 Sanjay Vaniwala and shows payment of Rs. 21,300 85 Rs. 7,500 respectively for each month and payment is shown in cash. Further in the covering letter submitted on 05/03/2021, the total amount paid to supervisors mentioned at Rs. 2,55,600/- to Hasmukh Budhiyabhai Patel and Rs. 90,000/- to Sanjay Vaniwala. Hence there is mismatch in details submitted by assessee on different dates regarding payment to Supervisors and it appears that assessee has submitted different details to mislead assessment proceedings. Similarly, monthly salary above Rs. 10,000/- is shown to 8 fillers and payments were made in cash. The Assessing Officer, therefore, held that it was clear that the salary expenses of supervisors and fillers are similar for each month during the year under consideration. The Assessing Officer, therefore, has stated in the assessment order that it is hard to believe that these statements are genuine as salary expenses for each month cannot be same due to leaves, quitting job and addition of new employees on the ground that the assessee failed to produce any supporting documents explaining the same and the ledger accounts submitted by the assessee, the same to be not genuine and fabricated. The Assessing Officer, accordingly, added a sum of Rs. 22,41,000/-under Section 40A(3) of the Act and added the same to the total income of the assessee.

3. Aggrieved by the order of the Assessing Officer, the assessee filed appeal before the ld. CIT(A), who vide the impugned order, dismissed the appeal of the assessee and confirmed the addition made by the Assessing Officer on the ground that the assessee was not able to show that the decision of the Assessing Officer was arbitrary, biased, irrational, vindictive or capricious without any basis on the ground that the assessee did not file any explanation to substantiate the expenses incurred by the assessee despite the fact that several notices were issued to the assessee as per the details given on page No. 4 of the impugned order.

4. Aggrieved by the order of the ld. CIT(A), the present appeal has been filed before this Tribunal.

5. During the course of appellate proceedings, detailed written submissions alongwith ledger extracts, copy of cash book etc. were filed before us and it was claimed that the expenses incurred were genuine.

6. On the other hand, the ld. Sr. DR supported the orders of the lower authorities.

7. We have carefully considered the facts of the case and the material available on record and also considered the submissions made by the appellant’s counsel. Since the appellant has submitted voluminous details of the expenses incurred and claimed to have been duly reflected in the books of account, we consider it appropriate to restore the matter back to the file of the Assessing Officer to examine the same after affording the appellant adequate opportunity of being heard. The appellant is also directed to appear before the Assessing Officer alongwith all the details which was submitted before us and substantiate the genuineness of the expenses made by the appellant.

8. In the result, this appeal of the assessee is allowed for statistical purposes only.

Order is pronounced under the provisions of Rule 34 of IT(AT) Rules, 1963 on 18/06/2026.