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Facts
The assessee, a U.P. Government Undertaking, filed a return declaring a loss. The Assessing Officer (AO) completed assessment under Section 143(3), making significant additions including disallowance of exemption under Section 10(26AAB) and disallowance of service tax/other taxes, assessing a high total income. The assessee's appeal to NFAC was dismissed ex-parte on merits, as no submissions or evidence were filed. The assessee contended that 'Margin Money' received from the State Government was wrongly accounted as income instead of a liability held in trust.
Held
The Tribunal admitted additional evidences filed by the assessee, noting they were germane to the dispute and supported by an affidavit explaining prior non-submission. The case was restored to the Assessing Officer (AO) to consider these additional evidences and re-adjudicate the issue of exemption under Section 10(26AAB) afresh, ensuring proper opportunity for the assessee.
Key Issues
1. Whether 'Margin Money' received by a State Government Undertaking constitutes income or a liability for the purpose of exemption under Section 10(26AAB). 2. Admissibility of additional evidences at the Tribunal stage when the assessee was non-compliant during lower appellate proceedings and its appeal was dismissed ex-parte.
Sections Cited
143(3), 10(26AAB)
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Income Tax Appellate Tribunal, LUCKNOW BENCH “B”, LUCKNOW
Before: SHRI. SUDHANSHU SRIVASTAVA & SHRI ANADEE NATH MISSHRA
This appeal has been preferred by the Assessee against the order dated 14.10.2024, passed by the National Faceless appeal Centre, Delhi (NFAC) for Assessment Year 2017-18. The assessee has also filed stay petition requesting for stay of demand raised by the Revenue against the assessee for assessment years 2017-18.
S.A. No.03/LKW/2025 Page 2 of 12 2.0 The brief facts of the case are that the assessee is a U.P. Government Undertaking Company and as per its objectives, it is involved in carrying on the work of supply of food grains and essential commodities to the public at large. The assessee- company filed its return of income for the year under consideration on 27.10.2017, declaring current year loss of Rs.8,02,196/-. The case of the assessee-company was selected for scrutiny under CASS. The Assessing Officer (AO) issued statutory notices to the assessee. In response to notices issued by the AO, the assessee-company submitted its reply electronically. The AO completed the assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter called “the Act’), assessing the total income of the assessee-company at Rs.47,01,45,364/- after making additions of Rs.46,67,57,397/- on account of disallowance of exemption under section 10 (26AAB) and of Rs.41,90,163/- on account of payment of service tax and other taxes.
2.1 Aggrieved, the Assessee preferred an appeal before the NFAC, which dismissed the appeal of the assessee by passing order ex-parte qua the assessee. However, while dismissing the appeal, the Ld. First Appellate Authority also observed as under:
“7. However, the case is being decided on merits and on the basis of available facts on record. It is seen that the case of S.A. No.03/LKW/2025 Page 3 of 12 the appellant company was selected for scrutiny through CASS. The appellant company is a U.P. Government undertaking company involved in carrying the work of supply of food grains and essential commodities. The appellant company had claimed exemption u/s 10(26AAB) of the Income Tax Act, 1961 amounting to Rs.46,67,57,397/-. During the assessment proceedings, the appellant company was asked to justify the claim of exemption u/s 10(26AAB) amounting to Rs.46,67,57,397/-. During the assessment proceedings, the appellant submitted its reply. Further the appellant company was asked to submit the proof of deposit of service tax of Rs.1,71,204/- and other taxes of Rs.40,18,959/-as claimed by the appellant company in its return of income. The appellant company had failed to produce documentary evidences in support of its claim. The appellant company had failed to produce proof of payment of service tax of Rs.1,71,204/- and other taxes of Rs.40,18,959/-, so that the amount of Rs.1,71,204/- and Rs.40,18,959/- was disallowed and added to the total income of the appellant company. The AO completed the assessment proceeding u/s 143(3) of the Income Tax Act, 1961 on 19/11/2019 and assessed the total income of the appellant at Rs.47,01,45,364/- by making additions of Rs.46,67,57,397/- on account of disallowance of exemption u/s 26(AAB) and Rs.41,90,163/- on account of payment of service tax and other taxes.
Further, on perusal of Form-35, it is seen that appellant has neither attached/uploaded any submission nor submitted evidences/document/ explanation in support of facts and grounds of appeal. Despite being given many S.A. No.03/LKW/2025 Page 4 of 12 opportunities, appellant did not respond during appellate proceeding nor furnished requisite details/explanations which were required to adjudicate the present appeal.
In the present case appellant has been provided sufficient opportunities but appellant failed to submit any submission or evidence during appellate proceedings in support of grounds of appeal as well as statement of facts and remained non-compliant, therefore, in view of the above facts, I am OME TAX DEPARTAR strained to uphold the order of the AO.”
2.2 Now, the assessee has approached this Tribunal challenging the order of the NFAC by raising the following grounds of appeal:
1. That Commissioner of Income Tax (hereinafter referred to as Ld. Officer) has erred on facts and law while upholding addition of Rs.46,67,57,397/- on account of disallowance of exemption u/s 10(26AAB) and Rs.41,90,163/- on account of payment of service tax and other taxes.
2. That Ld. Officer upheld the addition of Rs.46,67,57,397 without considering the findings recorded by the Assessing officer which is clear misreading of document on record and disregard of the provisions of law resulting in gross failure of justice to disallow the claim u/s 10(26AAB) of the appellant. 3. That Ld. Officer upheld the order of the Assessing Officer without analyzing the information available on record and relevant provisions of the Act.
S.A. No.03/LKW/2025 Page 5 of 12 4. The assessee reserves the right to add, delete, alter or amend any grounds of appeal stated above.
5. Any other relief which your good self may deem fit. 2.3 The assessee has also raised the following additional grounds of appeal:
1. BECAUSE, on the facts and in the circumstances of the case, the authorities below have failed to appreciate that the assessee never held any right, title or interest over the Margin money received from State Government and which was wrongly accounted as income in the Profit & Loss A/c. It was merely a repository thereof; acting in trust for and on behalf of the State Government (Food & Civil Supplies Department). The assessee corporation, being an instrumentality of the state, merely acted as an extended arm of the State Government facilitating discharge of Sovereign functions. These receipts could never be treated as the income of the assessee. Accordingly, no Income Tax on such receipts is permissible under law.
2. BECAUSE, on the facts and in the circumstances of the case, the receipts from the State Government do not represent the income of the company. The true/correct representation of the income in the Financial Statement is under re-compilation and finalization. The original financial statements contained a fundamental error in accounting treatment, where receipts that were liabilities were wrongly recognized as income. As a result, the income was significantly overstated, leading to an incorrect tax assessment. It is now believed that after revision of the accounts, the assessee would not be found in receipt of any S.A. No.03/LKW/2025 Page 6 of 12 taxable income and rather a loss might in fact reflect in the revised Financial Statements. The effect of the same is required to be taken into consideration before computing the taxable if any. 3.0 At the outset, the Ld. Authorized Representative for the assessee (Ld. A.R.) submitted that the assessee had moved a petition for admitting additional evidences before the Tribunal, vide application received by the Registry of this Tribunal on 08.09.2025. It was submitted that these additional evidences were germane to the issue of exemption under section 10(26AAB) of the Act and that these evidences could not be submitted before the lower authorities on earlier occasions. The Ld. A.R. submitted that the assessee is a Government Company registered under section 617 of The Companies Act, 1956 and is also a wholly owned Corporation of the Government of Uttar Pradesh. It was further submitted that the assessee was primarily engaged in the supply of essential commodities as the Public Distribution System for the general public in 18 Districts of Uttar Pradesh at prices which are determined by the State Government. It was further submitted that in the relevant year, the Foods & Civil Supplies Department of Uttar Pradesh Government had provided Margin Money to the assessee-Corporation for the purpose of transportation of food grains and other allied expenses, S.A. No.03/LKW/2025 Page 7 of 12 amounting to Rs.143.78 crores, which had been recognized as income in the Financial Statements for the relevant year. It was also submitted that, however, the Food and Civil Supplies Department, Government of Uttar Pradesh had issued a letter of demand to the assessee, directing repayment of excess margin money received over the actual expenditure incurred under the various expenditure heads for the financial years 2015-16 to 2023-24 and that this development had brought to light a fundamental fallacy in the earlier accounting treatment of such receipts. It was further submitted that in the Board Meeting held on 21.03.2023, the Board of Directors had resolved that the financial statements of the Corporation be appropriately rectified to reflect the true nature of such receipts as liabilities payable to the State Government, and not as income. The Ld. A.R. submitted that the receipts credited and booked in the financial statements on account of the Schemes being Margin Money for Transportation and other allied expenses, aggregating to Rs.143.78 crores were held in trust for and on behalf of the State Government by the assessee-Corporation for specific purposes and that the same did not constitute income of the assessee. It was submitted that the books of accounts maintained by the assessee-Corporation were due for appropriate revision and rectification in the light of the above development which came to S.A. No.03/LKW/2025 Page 8 of 12 the knowledge and understanding of the management of the Corporation. The Ld. A.R. submitted that in view of the above circumstances, the additional evidences were being filed with the following prayer:
I. That the authorities below have failed to appreciate that the assessee never held any right, title or interest over the Margin money received from State Government and which was wrongly accounted as income in the Profit & Loss A/c; It was merely a repository thereof; acting in trust for and on behalf of the State Government (Food & Civil Supplies Department). The assessee corporation, being an instrumentality of the state, merely acted as an extended arm of the State Government facilitating discharge of Sovereign functions. II. That the resolution regarding appropriate revision and rectification in the Financial Statements dated 21.03.2023 was passed much after the Assessment Order dated 19.11.2019, and hence, the assessee could not place the corrected treatment of such receipts before the Assessing Officer. III. The Applicant's appeal before the CIT(A) was dismissed ex-parte due to peculiar circumstances where it could not make effective representation. This was partly due to unintentional delays in the finalization of the company's statutory audits for several preceding years. The return of income for the relevant year was filed based on financial statements provided by the management, but the tax auditor S.A. No.03/LKW/2025 Page 9 of 12 had reported qualifications, noting that the statutory audit had not been carried out. IV. That the original financial statements contained a fundamental error in accounting treatment, where receipts that were liabilities were wrongly recognized as income. As a result, the income was significantly overstated, leading to an incorrect tax assessment. That the true/correct representation of the income in the Financial Statement was under re-compilation and finalization which has recently been approved by the Board of Directors of the company in the Board meeting held on 02.09.2025. V. That it is now believed that after revision of the accounts, the assessee would not be found in receipt of any taxable income and rather a loss has in fact reflected in the approved Financial Statements. The effect of the same is required to be taken into consideration before computing the taxable income if any.
3.1 The Ld. A.R. submitted that the assessee deserved an opportunity to present its case before the AO in the right perspective and, therefore, a proper opportunity should be granted to it.
4.0 Per contra, the Ld. CIT(DR) opposed the prayer of the assessee for admitting additional evidences and submitted that the assessee has been non-compliant during the entire course of proceedings before the Ld. First Appellate Authority and that being a Government Corporation, some responsibility for utter S.A. No.03/LKW/2025 Page 10 of 12 carelessness should be fixed. He argued that the Ld. A.R. should be directed to argue on merits of the case without admitting the additional evidences.
5.0 The Ld. A.R. also submitted that the assessee has also moved an application for stay of outstanding demand. It was further submitted that since the appeal of the assessee was dismissed by the NFAC, sustaining the addition/disallowance made by the AO, the AO, vide order dated 12.08.2025, required the assessee to pay the outstanding demand of Rs.15,74,26,775/- out of the total demand of Rs.20,74,91,401/-. Against this order, the assessee, vide letter dated 16.08.2025, had submitted before the AO that the assessee had already paid Rs.5,00,00,000/- on 10.12.2019 being more than 20% of the total demand of Rs.20,74,91,401/- and that the assessee had already filed an appeal challenging the impugned order of the NFAC and also a Stay Petition seeking stay of outstand demand before the Tribunal and, therefore, no coercive recovery measure may be initiated against the assessee till disposal of its Stay Petition pending before the Tribunal. However, the AO again issued a notice dated 21.08.2025 raising a demand of Rs.15,74,26,775/-. The Ld. A.R. prayed that the assessee should be granted complete stay of outstanding demand, as the assessee 6.0 Per contra, the Ld. CIT(DR) opposed the prayer for stay of outstanding demand and submitted that the AO had already rejected assessee’s petition for stay on merits.
7.0 We have heard the rival submissions and have also perused the material on record. It is not in dispute that there was complete non-compliance by the assessee during the course of first appellant proceedings. It is also seen that the assessee has filed an application for admission of additional evidences before the Tribunal, which is duly supported by an Affidavit explaining the reasons as to why the additional evidences could not be submitted earlier and also underlining the fact that these additional evidences would be germane to adjudicating the dispute at hand. In view of these facts, we are of the considered opinion that these additional evidences deserve to be admitted and, accordingly, we admit the same and after admitting the same, we restore this file to the Office of the AO with a direction to consider these additional evidences and adjudicate the issue of exemption under section 10 (26AAB) of the Act afresh after giving proper opportunity to the assessee to present its case. We also caution the assessee to fully comply with the directions of the AO S.A. No.03/LKW/2025 Page 12 of 12 in the set-aside proceedings when called upon to do so, failing which, the Assessing Officer would be at complete liberty to pass the order in accordance with law, based on the material available on record even if it is ex-parte qua the assessee. Accordingly, the appeal of the assessee is allowed for statistical purposes.
8.0 As we have already restored the appeal of the assessee to the Office of the AO, the Stay Application becomes infructuous and is dismissed as such.
9.0 In the final result, the appeal of the assessee stands allowed for statistical purposes and the Stay Application of the assessee stands dismissed as having become infructuous.
Order pronounced in the open Court on 17/09/2025.