Providing transportation services on commercial lines to school

Providing transportation services on commercial lines to school students does not constitute charitable purpose under section 2(15).

Issue

Whether an institution providing student transport services on commercial lines against a fee, generating recurring surpluses, is entitled to regular registration under Section 12AB as a charitable entity under Section 2(15) of the Income-tax Act, 1961 / Section 2(23) of the Income-tax Act, 2025.

Facts

Registration Application: The assessee-trust applied for regular registration under Section 12AB of the Income-tax Act using Form No. 10AB for Assessment Year 2025–26.
Core Activity: The CIT(Exemptions) observed that the trust’s predominant activity was providing transportation facilities to students of St. Xavier’s School, Chandigarh.
Commercial Nature: Transportation charges were collected from students, resulting in surplus funds generated year after year.
Rejection of Application: CIT(Exemptions) held that rendering transport services on commercial lines does not fall within the ambit of “charitable purpose” under Section 2(15) and subsequently rejected the Section 12AB registration.

Decision

Obligation to Verify Genuineness: The Commissioner is under a statutory duty to satisfy himself regarding the genuineness of activities and the charitable character of an institution. He is not expected to merely read the recitals of a trust deed, but must pierce the veil to ascertain the true nature, substance, and predominant purpose of the activities.
Alignment of Objects and Activities: Declared objects must align with actual activities. Where the predominant activity is found to be rendering commercial services for consideration, registration under Section 12AB cannot be granted merely because the activity incidentally facilitates an educational institution.
Final Verdict: The assessee-trust is not entitled to registration under Section 12AB. The issue is decided in favor of the Revenue.

Key Takeaways

Substance Over Form: Registration proceedings under Section 12AB empower tax authorities to look beyond trust deeds and scrutinize the actual economic nature of operations.
Commercial Surpluses Negate Charitable Intent: Generating continuous, systematic surpluses through service fees indicates commercial conduct rather than relief or charitable objective.
Incidental Support Is Insufficient: Providing a service that merely aids or facilitates an educational institution does not automatically classify that service as an educational or charitable activity under Section 2(15).

HIGH COURT OF GUJARAT

Jorss Bullion (P.) Ltd.

Income-tax Officer

A.S. Supehia and Ms. VAIBHAVI D. NANAVATI, JJ.

R/SPECIAL CIVIL APPLICATION NO. 23191 of 2019

JULY 31, 2026

Manish J Shah for the Petitioner. Dev D Patel for the Respondent.

JUDGMENT

A. S. Supehia, J.- By way of the present writ petition, the petitioner-Company is challenging the Notice dated 29.03.2019 issued under Section 148 of the Income Tax Act,1961 (for short ‘the Act’) seeking to reopen the assessment for the Assessment Year (for short ‘A.Y’) 2012-13, which has culminated into Assessment Order dated 10.12.2019 under Section 143(3) read with Section 147 of the Act and subsequently, the Demand Notice dated 10.12.2019 under Section 156 of the Act came to be issued.

2. At the outset, learned advocate Mr.Manish Shah appearing for the petitioner has submitted that despite the petitioner having pointed out the settled legal precedent on the interpretation and applicability of provision of Section 2(22)(e) of the Act, the assessment order has been passed. He has pointed out that the decision of Delhi High Court in the case of CIT v. Ankitech (P.) Ltd, [2012] 340 ITR 14 (Delhi) and the decision of this Court in the case of CIT v. Daisy Packers (P.) Ltd [2013] (Gujarat) ,though referred in the objection taken by the petitioner, the same were totally ignored and hence the petitioner is constrained to file the present writ petition instead of availing the remedy of filing an appeal under Section 246A of the Act.

FACTS OF THE CASE

3. For the A.Y 2012-13 the petitioner filed its return of income declaring total income of Rs.1,64,59,510/-. The case of the petitioner was selected for scrutiny assessment and accordingly the Notice dated 23.09.2013 under Section 143(2) of the Act came to be issued. Thereafter, the petitioner was asked to furnish the computation of total income along with audited Balance Sheet and Audit Report. The petitioner submitted the same, and after threadbare assessment of all the materials supplied by the petitioner an assessment order under Section 143(3) of the Act was passed on 23.03.2015 by the Assessing Officer. It is the case of the petitioner that after almost four years from date of passing of the assessment order, on 29.03.2019 the Notice under Section 148 of the Act was issued alleging that the income chargeable to tax has escaped assessment.

3.1 In response to such Notice, the petitioner has filed the return on income on 03.04.2019. The reasons for reopening of the assessment has been supplied to the petitioner on 03.05.2019.

3.2 . Upon perusal of such reasons, it is noticed that the aspect of reopening of the assessment is premised on a common shareholder namely Pushpak Realities Private Limited between the present petitioner-Company and Amber Enclaves Private Limited. It mentions that Pushpak Realities (P.) Ltd. held 90% of shareholding in the assessee-Company and 49.88% shareholding in Amber Enclave (P.) Ltd, during the previous year i.e. 2011-12, and since the Pushpak Realities (P.) Ltd was the beneficial owner of more than 20% of the shares in both assessee-Company as well as Amber Enclave Pvt. Ltd, the said transaction comes under the purview of Section 2(22)(e) of the Act. The petitioner vide its letter dated 07.06.2019 specifically clarified that the aforesaid factual aspects are erroneous and the same has been mentioned incorrectly and stated that Pushpak Realities(P.) Ltd has only 4.60% shareholding in the assessee-Company and not 90% which has been recorded. Thereafter, a detailed objections were also filed vide communication dated 17.10.2019, and in the said objection the petitioner has cited various case laws including the aforementioned Judgments rendered by the Delhi High Court as well as by this Court and urged that the proceedings may be dropped. However, the impugned assessment order has been passed by rejecting the explanations given by the petitioner. Hence, the present writ petition.

SUBMISSION ON BEHALF OF PETITIONER

4. Learned advocate Mr. Shah at the outset has submitted that the issue is squarely covered by the decision of this Court in the case of Daisy Packers (P.) Ltd. (supra) and the decision of Delhi High Court in the case of Ankitech (P.) Ltd. (supra) and urged that the impugned Notice may be quashed and set aside. Moreover, it is submitted that the reopening of the assessment after a period of four years is impermissible, unless it is established that the petitioner has withheld any tangible material affecting assessment of return of income from the Revenue. It is submitted that during the original scrutiny assessment, the petitioner had disclosed all the details by furnishing computation of total income along with audited Balance Sheet and Audit Report, and accordingly, the assessment order under Section 143(3) of the Act was passed. It is contended that the transactions of the petitioner-Company and the shareholder company namely Pushpak Realities (P.)Ltd to the tune of 4.60% would not fall within the ambit of the provision of Section 2(22)(e) of the Act. Since all the tangible materials were available before the Assessing Officer, hence, the petitioner was not supposed to explain the same.

5. While pointing out the objections raised by the petitioner in the communication dated 17.10.2019, it is contended that the issue with regard to the deemed dividend within the meaning of Section 2(22)(e) of the Act, cannot be made a basis for reopening the assessment which has been explained by the petitioner. Moreover, it is contended in the objection that the petitioner is not a registered shareholder of Amber Enclave (P.) Ltd., which can be seen from the Annual report of Financial Year 2011-12 and 2012-13 filed with Registrar of Companies (ROC). Therefore, the question of treating loan given or advanced by Amber Enclave (P.) Ltd., to the present assessee-Company which is not a registered shareholder, the issue of deemed dividend under the provision of Section 2(22)(e) of the Act does not arise. Finally, it is submitted that since the assessment is premised on the incorrect appreciation of law and the facts are illegal, the assessment runs contrary to the statutory provisions. The petitioner-Company vide communication dated 13.11.2019, had clarified to the Assessing Officer that since the objection has been rejected, the petitioner intended to challenge the said order by filing a writ petition against the rejection order and till that time it was urged that the matter may be adjourned. Thus, it is urged that the impugned assessment order, which is passed beyond the provisions of law and legal precedent, is required to be quashed and set aside and the petitioner may not be relegated to file alternative remedy of appeal.

SUBMISSIONS ON BEHALF OF THE RESPONDENT

6. Opposing the foregoing submissions, learned Senior Standing Counsel Mr. Dev D. Patel appearing for the respondentRevenue has submitted that the decision of Delhi High Court in the case of Ankitech (P.) Ltd. (supra) was challenged before the Supreme Court by filing the appeal and the Supreme Court referred the decision rendered in Ankitech (P.) Ltd. (supra) at Larger Bench vide order dated 18.01.2018. Subsequently, the Civil Applications were withdrawn and dismissed vide order dated 18.08.2021. Thus, it is urged that the law enunciated by the Delhi High Court, on which, the reliance is placed by the petitioner-Company may not be considered. The petitioner since having an alternative remedy may be relegated to file an appeal under Section 246A of the Act. In support of his submissions, reliance is placed on the case of CIT v. Chhabil Dass Agarwal 357 ITR 357 (SC).

ANALYSIS & OPINION

7. We may first deal with the alternative remedy available to the petitioner. It is true that the petitioner is having remedy of filing a statutory appeal before Commissioner of Income Tax (Appeals), however, the petitioner has carved out a case of entertaining the present writ petition. The Supreme Court in the case of Chhabil Dass (supra) on which reliance is placed by the respondent clarifies thus:

“19. Thus, while it can be said that this Court has recognized some exceptions to the rule of alternative remedy, i.e., where the statutory authority has not acted in accordance with the provisions of the enactment in question, or in defiance of the fundamental principles of judicial procedure, or has resorted to invoke the provisions which are repealed, or when an order has been passed in total violation of the principles of natural justice, the proposition laid down in Thansingh Nathmal case, Titagarh Paper Mills case and other similar judgments that the High Court will not entertain a petition under Article 226 of the Constitution if an effective alternative remedy is available to the aggrieved person or the statute under which the action complained of has been taken itself contains a mechanism for redressal of grievance still holds the field. Therefore, when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained ignoring the statutory dispensation.”

Thus, there are exception available which can be applied to entertain the writ petition under Article 226, albeit availability of alternative remedy of statutory appeal. In our considered opinion, the case of the petitioner falls under exception for the following reasons :-

(a)

we find that the impugned order runs contrary to the settled legal precedent as enunciated in the case of Ankitech (P.) Ltd. (supra) and Daisy Packers (P.) Ltd. (supra), which the petitioner in his objection has already referred. However, while passing the Assessment Order such decisions are totally ignored and there is no reference made therein.

(b)

Another aspect is that the respondent has not denied that the reopening is premised after statutory limit of four years as provided under Section 147 of the Act. It is not the case of the Revenue that the petitioner has suppressed tangible material. All the facets including the shareholding Pushpak Realities (P.)Ltd Company were already presented in the scrutiny assessment proceedings by furnishing the total income including the audited Balance Sheet and Audit Report. The details with regard to the Directors of holding in the company were also mentioned including the details captioned by Amber Enclaves (P.)Ltd of Rs.2,77,650/-, for the year under consideration. Further details with regard to the shareholders of Amber Enclaves (P.) Ltd., were also furnished. It is not disputed that the assessee-Company is not a registered shareholder of Amber Enclave (P.) Ltd., which was already mentioned in the Annual Returns and the details filed by the Registrar of Company (ROC) and hence, the question of treating the loan given or advanced by Amber Enclave (P)Ltd., to the present assessee-Company, who is not a registered shareholder under the provision of deemed dividend under Section 2(22)(e) of the Act would not arise.

(d)

As far as the issue of Pushpak Realities (P.) Ltd is concerned, it is also not disputed that the shareholding is only 4.60%.

(e)

Additionally, the reopening of the assessment is beyond the period of statutory limitation of 4 years, which is governed by the proviso to Section 147 of the Act. Under the first proviso to Section 147 of the Act, an assessment previously completed under Section 143(3) or Section 147 of the Act cannot be reopened after four years from the end of the relevant assessment year unless there was a failure by the assessee to fully and truly disclose all material fact. We find there is no failure on the part of the petitioner in disclosing the material facts in the scrutiny assessment. The petitioner had disclosed its share holding pattern and also of Amber Enclave (P.) Ltd., on the demand of the assessing officer. The Assessing Officer has ascertained the applicability of provision of Section 2(22)(e) of the Act. Hence, the re-opening which is de hors the statutory provisions calls for interference by this Court, in exercise of power under Article 226 of the Constitution of India.

(f)

Finally, this Court while passing the order dated 26.12.2019, had stayed the operation of the impugned order dated 10.12.2019. By now more than seven years have passed and, since then no attempts have been made by the Revenue to vacate the interim relief or to hear the writ petition, the petitioner cannot be relegated to avail the alternative remedy, unless the issue was left open.

8. We may at this stage, refer to the judgment of the Delhi High Court in the case of Ankitech (P.) Ltd (supra), wherein, the Delhi High Court, while examining the provision of Section 2(22) (e) of the Act has held thus:

“22. Insofar as the provisions of Section 2(22)(e) are concerned, we have already extracted this provision and taken note of the conditions/requisites which are to be established for making provision applicable. In CIT v. C.P. Sarathy Mudaliar [1972] 83 ITR 170, the Supreme Court had traced out the assessee of this provision in the following manner:

“Any payment by a company, not being a company in which the public are substantially interest, of any sum (whether as representing a part of the assets of the company or otherwise) made after 31.05.19987 by way of advance or loan.

First limb

(a) to a shareholder, being a person who is the beneficial of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power,

Second limb

(b) or to my concern in which, such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)

Third limb

(c) or any payment by any such company on behalf, or for the individual benefit, or any such shareholder, to the extent to which the company in either case possesses accumulated profits.”

23. It is rightly pointed out by the Bombay High Court in Universal Medicare (P) Ltd. (supra) that Section 2(22)(e) of the Act is not artistically worded. Be as it may, we may reiterate that as per this provision, the following conditions are to be satisfied:

“(1) The payer company must be a closely held company.

(2) It applies to any sum paid by way of loan or advance during the year to the following persons:

(a) A shareholder holding at least 10 of voting power in the payer company.

(b) A company in which such shareholder has at least 20% of the voting power.

(3) The payer company has accumulated profits on the date of any such payment and the payment is out of accumulated profits.

(4) The payment of loan or advance is not in course of ordinary business activities.”

The Delhi High Court, further while dealing with the Explanation-3 to the provision of Section 2(22)(e) of the Act has held thus:

“24. The intention behind enacting provisions of Section 2(22)(e) is that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions, such payment by the company is treated as dividend. The intention behind the provisions of Section 2(22)(e) of the Act is to tax dividend in the hands of shareholders. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance.

25. Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under Section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to ‘dividend’. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to ‘shareholder’. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under Section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of ‘deeming shareholder’, then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective.”

9. Thus, a cumulative reading of the observations of the Delhi High Court and the provision of Section 2(22)(e) of the Act along with Explanation 3 to Section 2(22)(e) of the Act manifests that the provision of Section 2(22)(e) of the Act would get satisfied, (1) if the payer company is a closely held company, (2) it applies to any sum paid by way of loan or advance during the year to persons, i.e. (a) A shareholder holding at least 10% of voting power in the payer company, (b) A company in which such a shareholder has at least 20% of the voting power and (c) A concern (other than company) in which such shareholder has at least 20% interest and (3) the payer company has accumulated profits on the date of any such payment and the payment is out of accumulated profits, and finally, the payment of loan or advance is not in course of ordinary business activities. These aspects do not apply to the case of the petitioner. It is not denied by the revenue that the Pushpak Realities (P.) Ltd., is having only 4.60% shareholding in the petitioner-company, which is less than 20% as prescribed under the statute.

10. We reiterate the observations made by the Delhi High Court, wherein, it is held that the intention of the legislature behind enacting the provision of Section 2(22)(e) of the Act is that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend, because if so distributed, the dividend income would become taxable in the hands of the shareholders and instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern, in which such shareholders have a substantial interest or make any payment on behalf of or for the individual benefit of such shareholders and in such an event, by deeming provision, the payment by the company is treated as a dividend.

11. It is true that the decision of Delhi High Court in the case of Ankitech (P.) Ltd. (supra), was the subject matter of challenge before the Supreme Court in Civil Appeals emanating from IT Appeal No.462 of 2009, in the case of CIT v. Madhur Housing and Development Co. 401 ITR 152 (SC), the Supreme Court by the order dated 18.01.2018, passed in National Travel Services v. CIT 401 ITR 154 (SC) /(Civil Appeal Nos.2068 to 2071 of 2012 & 837 of 2018) , referred the issue to a Larger Bench, which was subsequently withdrawn and dismissed vide order dated 10.08.2021. Thus, the order of referring the issue to Larger Bench vide order dated 10.01.2018 would pale into insignificance as the Supreme Court did not render any decision on the issue of correctness of law and without opining on the legality and law enunciated by the Delhi High Court in the case of Ankitech (P.) Ltd. (supra). This Court, in the case of Daisy Packers (P.) Ltd. (supra) while following the decision of Ankitech (P.) Ltd. (supra) has reiterated the legal position.

12. The petitioner in its objection had cited the judgment of Delhi High Court and this Court, and explained that the provision of section 2(22)(e) of the Act does not get attracted. However, the same was entirely ignored.

13. Accordingly, in light of foregoing observations, the writ petition succeeds. The impugned Notice passed under Section 148 of the Act is hereby quashed and set aside along with the consequential Assessment Order and Demand Notice.