ITAT Jaipur Remands ₹32.53 Lakh Salary Expense Claim for Reasonable Allowance

Robin Bhamboo Vs ITO (ITAT Jaipur)

Salary Claim Doubtful, But Employees Cannot Be Imaginary in a Running Cement Business: ITAT Rejects 100% Disallowance & Directs Reasonable Estimation

Entire Salary Expenditure Disallowed for Want of Evidence

The assessee was engaged in the business of wholesale and retail distribution of cement. While computing his business income for AY 2018-19, he claimed salary expenditure aggregating to ₹32,53,500.

The AO disallowed the entire expenditure on the ground that the assessee had failed to substantiate the genuineness of the salary payments with sufficient documentary evidence.

The CIT(A) confirmed the disallowance. Although the assessee had furnished the ledger accounts showing salary paid to employees, PAN details and bank account particulars were available only in respect of some employees. The assessee had also failed to furnish the relevant bank statements for the year under consideration to establish payment of salaries through banking channels.

The bank statements produced before the appellate authority related to the succeeding assessment year, namely AY 2019-20, whereas the year under appeal was AY 2018-19. The CIT(A) further noticed that a substantial part of the salary was stated to have been paid in cash.

On these facts, the CIT(A) held that the assessee had not discharged the burden of proving the genuineness of the expenditure and consequently sustained the entire disallowance.

Employee-Wise Salary Ledgers Produced Before ITAT

Before the Tribunal, the assessee contended that adequate details and supporting documents had been submitted before the lower authorities. These included employee-wise salary details, ledger accounts of employees, particulars of salary payable as on 31.03.2018 and details of the outstanding salary paid during FY 2018-19.

The assessee also relied upon bank statements for the period from 01.04.2018 to 31.03.2019 to support the payment of salary outstanding at the end of the relevant previous year.

The documents were certified as having been furnished before the authorities below in accordance with Rule 18 of the Income-tax (Appellate Tribunal) Rules.

Running Business Necessarily Requires Some Employees

The Tribunal first examined whether the entire expenditure could be disallowed merely because the assessee failed to substantiate every salary payment.

It observed that the assessee was admittedly engaged in wholesale and retail trading of cement. Considering the nature of this business, the assessee would necessarily have required employees to assist in carrying out activities such as handling orders, maintaining records, managing stock, attending customers, supervising loading and unloading & undertaking other incidental functions.

Therefore, the possibility that the assessee had incurred no salary expenditure whatsoever was completely ruled out.

The Tribunal accordingly disagreed with the approach of the AO and the CIT(A) in disallowing the entire claim of ₹32,53,500. Even if the evidence was inadequate to accept the claim in full, the existence of a running business could not be ignored.

Salary Pattern Raised Serious Doubts About the Full Claim

At the same time, the Tribunal was not satisfied with the evidence produced by the assessee for allowing the entire expenditure.

The employee-wise details showed monthly salaries ranging between ₹8,500 and ₹25,000. However, the ledger accounts revealed that while salary was credited month after month, payments through cheques were made primarily towards the end of the year. Payments allegedly made during the year were largely in cash.

The details also indicated that, in the case of several employees, salary for a number of months remained outstanding at the end of the year.

The Tribunal found this pattern commercially doubtful. Ordinarily, employees would not continue working for several months without receiving salary. Similarly, it appeared improbable that a businessman could retain his employees for extended periods without regularly paying them.

The assessee had also not furnished the PAN details of all the employees. In the absence of complete identification particulars, it was difficult for the Department to verify whether the persons were actually employed by the assessee, whether they had rendered services, whether the amounts claimed had accrued to them and whether they had ultimately received the salary.

Thus, while the existence of some salary expenditure was commercially inevitable, the genuineness and quantum of the entire claim of ₹32,53,500 remained inadequately substantiated.

Reasonable Salary Expenditure to Be Allowed on Estimate

The Tribunal held that the case required a balanced approach. The claim could neither be accepted in full nor rejected in its entirety.

However, the necessary information concerning the assessee’s turnover, volume of business, number of business locations, activities performed by the employees and salary expenditure allowed in earlier years was not available before the Tribunal. It was therefore not possible for the Tribunal itself to determine a reasonable amount.

Accordingly, the matter was restored to the AO with a direction to allow a reasonable salary expenditure after considering:

• the assessee’s past assessment history;
• the nature of the cement business;
• the volume of business carried on;
• the salary expenditure claimed and accepted in earlier years; and
• all other relevant surrounding circumstances.

The assessee’s appeal was thus partly allowed for statistical purposes.

Author’s Comments

This decision adopts a practical middle path between unquestioned acceptance and mechanical disallowance. The failure to maintain complete evidence may justify rejection of the accounts or estimation of expenditure, but it does not necessarily justify a conclusion that a running business incurred zero expenditure under a commercially essential head.

At the same time, commercial necessity establishes only the existence of some expenditure; it does not prove the entire quantum claimed. The assessee must still establish employee identity, nature of duties, period of employment, salary structure and actual payment. Salary ledgers prepared internally, without attendance registers, appointment details, PAN, bank proof or signed salary receipts, may not be sufficient.

The ruling is particularly relevant to small & medium businesses where salaries are frequently paid in cash. Such assessees should maintain employee-wise salary registers, attendance records, identity particulars, payment acknowledgements and proof of subsequent payment of outstanding salary.

The legal principle emerging from the order is clear: where expenditure is commercially inevitable but its exact quantum is not satisfactorily proved, a reasonable estimation is preferable to a blanket 100% disallowance.

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT JAIPUR

The present appeal has been filed by the assessee against the order passed by the National Faceless Appeal Centre (NFAC), Delhi(hereinafter referred to as “Ld. CIT(A)”), dated 02.05.2025 under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).

2. The grounds raised by the assessee read as under:-

1. On the facts & circumstances of the case and in law also Ld. Lower authorities grossly erred in making and confirming disallowance of Rs 32,53,500/- on account of salary expenses claimed by the assessee.

2. That the appellant craves his indulgence to add, amend, alter or delete the grounds of appeal.

3. The solitary issue in the present appeal pertains to disallowance of salary paid by the assessee amounting to Rs.32,53,500/-.

4. Orders of the Authorities below reveal that the assessee was a cement dealer in retail and wholesale distribution of cement. During the impugned year the assessee claimed salary paid to its employees amounting in all Rs.32,53,500/- while its profits chargeable to tax as Business Income. The same was disallowed by the AO noting that the same was not duly substantiated with evidences. The Ld. CIT(A) upheld the disallowance finding that the assessee had failed to discharge his onus to prove the genuineness of the expenses ,noting the fact as under:

• that though the assessee submitted ledger account of salary paid to its employees, he furnished PAN and bank account details of only a few employees
• did not submit any bank statements relating to the impugned year to show that the salary was paid from the Banks
• the bank account submitted by the assessee pertained to the succeeding assessment year i.e. AY 2019-20, the impugned year before us being A.Y 2018-19.
• that most of the payments of salary was made in cash.

5. Ld. Counsel for the assesses contention before us was that the details, documents and evidences submitted by the assessee duly substantiated his claim of salary expenses paid. In this regard, he referred to the documents filed before us ,certified as submitted to the Authorities Below in accordance with Rule 18 of the Income Tax Rules 1963 ,as under:-

• Salary details and ledger of employees
• Details of salary payable as on 31.03.2018 and paid during the F.Y. 2018-19
• Copy of bank statements for the period of 01.04.2018 to 31.03.2019 in support of payment of outstanding salary.

6. Ld. DR relied on the order of the authorities below.

7. We have heard both the parties, gone through the orders of the authorities below and have also perused the documents and evidences filed before us.

8. The assessee has claimed salary expenses of Rs.32,53,500/-, which were entirely disallowed by the Revenue Authorities. It is fact on record that he is a cement dealer. Therefore, he surely must have employed some people on salary to assist in carrying out his business. The possibility of no salary expenses being incurred is therefore completely ruled out. Therefore, we do not concur with the orders of the Authorities Below that the entire salary expense be disallowed in the absence of proper substantiation of the said claim.

9. Having stated so, it is to be adjudicated as to what extent of claim of salary expenses be allowed. We have noted that the Ld.CIT(A) has recorded the fact that the assessee did submit employee wise detail of salary paid and gave PAN details and bank account details of the employees. As per the details submitted before us, PAN detail of only few employees were given while bank account details of almost of all the employees was given. The detail is reproduced hereunder:-

M/s RSB Suppliers

Salary Details 2017-18

10. Copy of ledger accounts of these employees was also placed before us at P.B 2-22 and we have noted that while salary in the range of Rs.8,500/- to Rs.25,000/- was month wise credited to these accounts of the parties, the payments made to them by cheque was primarily at the end of the year in the month of February 2018. Any payment of salary during the year has been shown to be in cash. The salary details submitted also reveal that in the case of most of the employees though monthly salary was in the range of Rs.8,500/- to Rs.25,000/-, the salary payable at the end of the year ,shown as balance in the detail, represented the salary outstanding of several months.

11. All the above facts read together cast a serious doubt on the claim of the assessee of having paid salary of Rs.32,53,500/-. It is not possible that persons employed were paid salary only at the end of the year. Moreover, it is not possible for salary remaining unpaid of several months as at the end of the year. No employee would work in such conditions with anybody nor would a businessman possibly retain his employees in such circumstances.

12. Moreover the assessee has not furnished sufficient details of its employees by furnishing PAN details of all the employees so as to enable verification of factual claims of the assessee with regard to the persons being in his employment, earning salary as claimed and receiving salary mostly at the end of the year only.

13. Therefore, we agree with the authorities below that the assessee has not discharged his onus of proving the genuineness of claim of salary expenses but at the same time the fact of the assessee having employed persons for carrying out his business cannot be ruled out also.

14. Considering the entire facts and circumstances of the case, therefore, we are not inclined to allow the entire claim of the assessee of Rs.32,53,500/-. However, since the facts and figures relating to quantum of business carried out by the assessee was not available before us, we restore the matter back to the file of the AO to allow a reasonable amount of salary expenses, considering the past history of the assessee, the nature of the business of the assessee, the volume of the business of the assessee and all such relevant factors.

15. The grounds raised by the assessee are partly allowed for statistical purposes.

16. In effect, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the Open Court on 15.09.2026