Section 40A(3) Income Tax Act | Cash Salary Payments Below Rs. 10,000 Per Day Per Employee Exempt from Disallowance : ITAT Delhi

The Income Tax Appellate Tribunal (ITAT), Delhi, has delivered a significant ruling on the applicability of Section 40A(3) of the Income Tax Act, 1961, concerning cash salary payments. The Tribunal held that payments made below Rs. 10,000 per day per employee do not attract disallowance under this provision, even if the aggregate monthly salary exceeds the EPF threshold of Rs. 15,000. The judgment clarifies the scope of Section 40A(3) in the context of temporary employment arrangements, particularly in sectors like liquor retail where cash payments are prevalent.

Background & Facts

The Dispute

The appellant, Sidhivinayak Associates, operates liquor vends/shops in Punjab under a license allotted by the Government of Punjab for the period 01.04.2017 to 31.03.2018. The assessee participated in a government auction and was allotted 414 PML vends/shops and 213 IMFL vends/shops, aggregating to 627 vends/shops across urban and rural areas. To manage these vends, the assessee appointed temporary staff on a weekly basis, paying salaries in cash.

Key Facts

• The assessee filed its return of income for A.Y. 2018-19 on 08.10.2018, declaring a total income of Rs. 2,02,57,010.
• The case was selected for scrutiny, and a notice under Section 143(2) was issued on 22.09.2019.
• During assessment proceedings, the Assessing Officer (AO) disallowed salary expenses of Rs. 21,59,84,000 under Section 40A(3) of the Act, on the grounds that payments were made in cash without sufficient documentary evidence.
• The AO also disallowed refreshment expenditure of Rs. 85,61,165 and initiated penalty proceedings under Section 270(9).
• The assessee contended that:
  • Employees were paid weekly salaries below Rs. 10,000 per day, complying with Section 40A(3).
  • Employees were temporary, hired from nearby villages, and lacked bank accounts.
  • EPF and ESI were not applicable as monthly salaries exceeded Rs. 15,000, the statutory ceiling for mandatory EPF contributions.
  • The assessee submitted employee lists, identity proofs, salary registers, and cash books during proceedings.

Procedural History

• 07.09.2021: Assessment order passed by the National Faceless Assessment Centre (NFAC) under Section 143(3) r.w.s 144B, disallowing salary expenses.
• 29.10.2025: CIT(A)-NFAC upheld the disallowance.
• ITA No. 7212/Del/2025: Appeal filed before ITAT Delhi.

Relief Sought

The assessee sought deletion of the disallowance of Rs. 21,59,84,000 under Section 40A(3), arguing that:

• Payments were made in compliance with the Rs. 10,000 per day limit.
• EPF was not mandatory as salaries exceeded Rs. 15,000 per month.
• Documentary evidence was submitted to prove the genuineness of payments.

The Legal Issue

The central question before the ITAT was whether cash salary payments made below Rs. 10,000 per day per employee violate Section 40A(3) of the Income Tax Act, even if the aggregate monthly salary exceeds the EPF threshold of Rs. 15,000 and the employees are temporary.

Arguments Presented

For the Appellant (Assessee)

• Compliance with Section 40A(3): The assessee argued that no single payment exceeded Rs. 10,000 per day per employee, thus complying with Section 40A(3). The AO’s order itself attached an employee list showing payments below this threshold.
• EPF Non-Applicability: Since monthly salaries exceeded Rs. 15,000, EPF was not mandatory under Paragraph 26(6) of the EPF Scheme, 1952. The assessee cited that voluntary EPF contributions require a joint request, which was not applicable here.
• Genuineness of Payments: The assessee submitted employee lists, identity proofs, salary registers, and cash books to prove the genuineness of payments. The AO did not dispute the payments but only invoked Section 40A(3).
• Precedents Cited:
  • Vivek Gupta vs. ITO (ITA No. 5727/Del/2011)
  • Brothers Pharma Pvt. Ltd. vs. ITO (ITA No. 635/JP/2012)
  • ITO vs. Satish Singh (ITA No. 449/KOL/2025)

For the Respondent (Revenue)

• The Departmental Representative (DR) relied on the orders of the AO and CIT(A), arguing that:
  • The assessee failed to provide sufficient documentary evidence for cash payments.
  • No employees were on payroll records as per PF data, raising suspicions about the genuineness of payments.
  • The disallowance under Section 40A(3) was justified as the payments were made in cash without proper substantiation.

The Court's Analysis

The ITAT examined the scope of Section 40A(3) and the assessee’s compliance with its provisions. Key observations included:

• No Violation of Section 40A(3): The Tribunal noted that the AO did not dispute the genuineness of the salary payments but disallowed them solely on the ground of cash payments. The assessee’s explanation that no single payment exceeded Rs. 10,000 per day per employee was not rebutted by the AO. The Tribunal held that Section 40A(3) was not violated as the payments complied with the Rs. 10,000 per day limit.

  "We note that the reasons for additions crystallized by the AO was that the salary expenses debited by the assessee are in cash. Further, the AO has also adversely viewed the fact that the assessee has failed to fulfil statutory application of salary payments as no employees are on payroll record as per PF data basis. We however, note that the payments of salary to the employees of the assessee, has not been questioned by the AO. The AO has not raised any suspicion that such payments are not genuine. It is only the provision of section 40A(3) which has been invoked to make the disallowance."

• EPF Applicability: The Tribunal observed that the assessee’s explanation regarding EPF non-applicability (since salaries exceeded Rs. 15,000 per month) was not rebutted by the AO. The AO did not provide any evidence to contradict the assessee’s claim that EPF was not mandatory.

• Nature of Business: The Tribunal acknowledged the unique nature of the assessee’s business, which required hiring temporary staff from rural areas on a weekly basis. The AO’s failure to consider the practical constraints of the assessee’s operations (e.g., lack of bank accounts among employees) was deemed unjustified.

• Burden of Proof: The Tribunal emphasized that the AO did not bring any material on record to show that the payments violated Section 40A(3). The disallowance was based on presumptions rather than evidence, which was insufficient to uphold the addition.

The Verdict

The ITAT allowed the assessee’s appeal and deleted the disallowance of Rs. 21,59,84,000 under Section 40A(3). The Tribunal held that:

• Cash payments below Rs. 10,000 per day per employee do not violate Section 40A(3), even if the aggregate monthly salary exceeds Rs. 15,000.
• The AO’s reliance on Section 40A(3) was misplaced as the assessee complied with the Rs. 10,000 per day limit.
• The assessee’s explanation regarding EPF non-applicability was not rebutted, and the disallowance was unjustified.

What This Means For Similar Cases

Section 40A(3) Applies Only to Single-Day Payments

• Daily Limit Compliance: Practitioners must emphasize that Section 40A(3) applies only to single-day payments exceeding Rs. 10,000. If payments are structured to comply with this limit (e.g., weekly payments below Rs. 10,000), the provision is not attracted.
• Aggregation Not Relevant: The Tribunal clarified that aggregating payments over a month or year is not permissible under Section 40A(3). The focus is solely on per-day payments.

EPF Threshold Does Not Automatically Trigger Section 40A(3)

• EPF and Section 40A(3) Are Distinct: The judgment distinguishes between EPF applicability (based on monthly salary) and Section 40A(3) compliance (based on daily payments). Even if monthly salaries exceed Rs. 15,000, Section 40A(3) is not violated if daily payments are below Rs. 10,000.
• Voluntary EPF Contributions: The Tribunal noted that Paragraph 26(6) of the EPF Scheme, 1952 allows voluntary EPF contributions for employees earning above Rs. 15,000, but this requires a joint request and is not mandatory.

Documentary Evidence Is Critical for Cash Payments

• Substantiation of Payments: Assessees must maintain detailed records (e.g., employee lists, salary registers, cash books, identity proofs) to substantiate cash payments. The Tribunal relied on the assessee’s documentary evidence to delete the disallowance.
• AO’s Burden: The AO cannot disallow payments solely on the ground of cash transactions without cogent evidence of violation. The Tribunal emphasized that presumptions are insufficient to uphold additions.

Temporary Employment Arrangements Require Flexible Interpretation

• Sector-Specific Considerations: The judgment acknowledges the practical challenges in sectors like liquor retail, where temporary staff from rural areas may lack bank accounts. The AO must consider business realities before invoking Section 40A(3).
• Weekly Payments: Employers can structure weekly payments to comply with Section 40A(3), provided the per-day limit is respected.