Income tax querry

Check which years details do they want for the purpose income tax assessment. Prepare a detail statement of payment made to the employee, expenses incurred by him, and the final reconciliation. Although the reply has to be given by the employee, but the company will have to attest the letter certifying that the facts given in the reply are true and correct. 

If such a practice is going to continue, open a separate account for the employee in which he may operate it only for company's work. Depositing such money in his personal saving account is not a good idea.

agreed with mihir, first of all get some informations like for which year notice was issued, what informations and documents AO requires, etc. Then reply in the manner AO requires. show him the reconciliation with company's accounts duly attested by the company. 

further as mihir adviced you to open a separate account for such transactions to keep away yourself such problems.