Income by deploying ex-servicemen as security guards not business activity

Income of section 25 company by deploying ex-servicemen as security guards was not business activity.

In a recent judgment, Kerala High Court has held that income by deploying ex-servicemen as security guards was not business activity for section 25 company established for assistance to the Ex-Servicemen.

ABCAUS Case Law Citation:
5083 (2026) (03) abcaus.in HC

The respondent assessee was a company registered u/s. 25 of the Companies Act and was wholly owned by the State Government and established for the welfare, development and rehabilitation of Ex-Servicemen and their dependants. 

The main objects of the assessee was to rehabilitate the Ex-Servicemen on no profit no loss basis and it collects some revenue by means of administrative charges.  The assessee also provided various financial assistance to the Ex-Servicemen and their dependants including education, scholarships, financial assistance for medical treatments, ex-gratia grants to the legal heirs of the Ex-Servicemen on their demise etc.  The assessee also trained the Ex-Servicemen in the installation of solar panels and run a medical store to the benefit of the Ex-Servicemen and their dependants at a price less than 18% to 40% of the MRP.  The assessee also employed the Ex-Servicemen in various government undertakings so that they can earn for their livelihood after serving in the Army.

Originally the assessee got registration u/s. 12A and continuously availed the benefit u/s. 12AA / 12AAB.  The assessee’s accounts were audited by the statutory auditors appointed by the C & AG and more than 85% of the revenue utilised towards the object of the company.  He

However, when the assessee filed an application for registration u/s. 12A(1)(ac)(iii) of the Act, The CIT(E) rejected the application holding that providing employment to Ex-Servicemen will not come under the charitable activities defined u/s. 2(15) of the Act. 

The Tribunal observed that in the initial stages, the department had treated the assessee as doing charitable activities and on that basis only, the registration u/s. 12A had been granted and benefits u/s. 11 were granted.

The Tribunal noted that the assessee formed a company with the aid of the Government and tried to assist the Ex-Servicemen and their dependants who are in need and without receiving anything from the members.  The mere incomes received by the assessee could not be treated as a profit and therefore their activities could be treated only as a charitable activity. Mere getting some income while executing the activities could not be treated as income obtained from trade/business and on that basis it could not be concluded that the assessee is not doing any charitable activities.

As a result, the ITAT set aside the order of the CIT(E) and directed the CIT(E) to grant the registration u/s. 12AA of the Act.  

Not satisfied with the decision of the ITAT, the Income Tax Department  challenged it before the Hon’ble High Court.

The Hon’ble High Court observed that registration u/s 12A was rejected by CIT(A) holding that, though two of their activities, namely, ‘Solar Panel Installation Unit’ and ‘Medical Stores’, appeared to be in consonance and in tune with their main objects, the third activity of deploying ex-servicemen as security guards and receiving payments towards such services, was only a business activity.

The Hon’ble High Court observed that it is well settled that when it comes to the evaluation of the factual question posed, what is relevant is the manner in which the income of the assessee is put to use.

The Hon’ble High Court noted that very mode of generation of income by the assessee was through activities that can possibly be construed to be business – be that the ‘Solar Panel Installation Unit’ or the ‘Medical Stores’. When the Commissioner had found that those two align with the objectives of the respondent, it is difficult to fathom how he then took the view that the third mode of generation of income, namely, by obtaining charges for deployment of ex-servicemen as security guards, would stand out of its purlieus.

As a result, the Appeal was dismissed.

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