The prescribed authority has refused our s.10(23C)(vi) approval because we have not shown that income was applied the way the third proviso requires. Can it refuse on that ground at the approval stage?
Not on that ground standing alone. The Supreme Court separated the threshold conditions in s.10(23C)(vi) — the actual existence of an educational institution existing solely for education and not for profit, plus approval by the prescribed authority — from the monitoring conditions in the provisos on application, accumulation and deployment of income, whose compliance depends on events that have not occurred when a first application is made. But this decision must now be read subject to New Noble Educational Society (SC, 19 October 2022), which overruled it on the meaning of 'solely' and held, at para 76(f), that its observations suggesting the Commissioner could not call for records apply only to newly set up charities, the proviso to s.10(23C) not being confined to newly set up trusts.
Decided by the Supreme Court (S.H. Kapadia J and B. Sudershan Reddy J) on 2008-05-09, reported as Civil Appeal No. 3468 of 2008 (Supreme Court of India). It bears on section 10(23C), section 10(23C)(vi) of the Income Tax Act 1961, in Capital Gains Exemptions, Charitable Trusts & Exemption and How Tax Law Is Read matters.
This is still the case every applicant cites when a s.10(23C)(vi) or (via) application is rejected on grounds that belong to assessment rather than approval, and the threshold/monitoring distinction survives New Noble. What does not survive is the rest of it. American Hotel decided the 'solely' question by importing the predominant-object test from Surat Art Silk (its para 29), and New Noble para 76(e) overruled American Hotel and Queen's Educational Society 'to that extent'. New Noble para 76(f) went further and said in terms that the observations in American Hotel suggesting the Commissioner could not call for records, and that examination of accounts belongs to the assessment stage, apply only to newly set up charities — the proviso is not confined to new institutions. Because New Noble was made prospective (its para 78), an approval or assessment year governed by the law as it stood before 19 October 2022 can still be argued on American Hotel; a fresh application decided after that date cannot.
Binding on every court and authority in India.
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The appellant was a United States non-profit educational institute operating through a branch office in India. On 7 April 1999, within days of the Finance Act 1998 taking effect, it applied for initial approval under s.10(23C)(vi). The CBDT rejected the application by order dated 12 October 2004 on the footing that the institute remitted its surplus abroad instead of applying it to education in India. The Delhi High Court dismissed the writ petition (W.P.(C) No. 17978/04) by judgment dated 24 November 2006. The appellant came to the Supreme Court contending that the conditions in the provisos are matters of ongoing compliance and cannot be applied to defeat a first application for approval.
The appeal was allowed. The order of the CBDT dated 12 October 2004 and the Delhi High Court judgment dated 24 November 2006 were set aside and the matter remitted to the CBDT for fresh consideration, with the clarification that the appellant had fulfilled the threshold pre-condition of actual existence of an educational institution under s.10(23C)(vi) and that approval could not be refused on that count (paras 33, 40, 44 and 45).
The Court read the provisos to s.10(23C)(vi) as drawing a distinction between the stipulation of conditions and compliance with them. The threshold conditions are the actual existence of an educational institution and approval of the prescribed authority, for which an application in the standardised form must be made under the first proviso; only when actual existence is established does the question of compliance with the provisos arise. The third proviso contains monitoring requirements — application, accumulation and deployment of income in specified assets — whose compliance turns on events that have not taken place on the date of an application for initial approval (para 33). On whether the institute existed for profit, the Court applied Surat Art Silk, recording at para 29 that the test is the predominant object of the activity, that the purpose does not lose its character merely because some profit arises, and that the prescribed authority's duty is to ascertain whether the balance of income is applied wholly and exclusively to the objects for which the applicant is established. That last strand is the strand New Noble removed.
The threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardized form in terms of the first proviso.
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Handle my notice → Ask a CA on WhatsAppNot on that ground standing alone. The Supreme Court separated the threshold conditions in s.10(23C)(vi) — the actual existence of an educational institution existing solely for education and not for profit, plus approval by the prescribed authority — from the monitoring conditions in the provisos on application, accumulation and deployment of income, whose compliance depends on events that have not occurred when a first application is made. But this decision must now be read subject to New Noble Educational Society (SC, 19 October 2022), which overruled it on the meaning of 'solely' and held, at para 76(f), that its observations suggesting the Commissioner could not call for records apply only to newly set up charities, the proviso to s.10(23C) not being confined to newly set up trusts. This was decided by the Supreme Court (S.H. Kapadia J and B. Sudershan Reddy J) and bears on section 10(23C), section 10(23C)(vi) of the Income Tax Act 1961. It is reported as Civil Appeal No. 3468 of 2008 (Supreme Court of India). This is still the case every applicant cites when a s.10(23C)(vi) or (via) application is rejected on grounds that belong to assessment rather than approval, and the threshold/monitoring distinction survives New Noble. What does not survive is the rest of it. American Hotel decided the 'solely' question by importing the predominant-object test from Surat Art Silk (its para 29), and New Noble para 76(e) overruled American Hotel and Queen's Educational Society 'to that extent'. New Noble para 76(f) went further and said in terms that the observations in American Hotel suggesting the Commissioner could not call for records, and that examination of accounts belongs to the assessment stage, apply only to newly set up charities — the proviso is not confined to new institutions. Because New Noble was made prospective (its para 78), an approval or assessment year governed by the law as it stood before 19 October 2022 can still be argued on American Hotel; a fresh application decided after that date cannot. If it applies to you, the first step is this: Identify precisely which sub-clause you are on — (vi) and (via) require approval, (iiiab)/(iiiac) and (iiiad)/(iiiae) do not — because American Hotel is an approval case and has nothing to say about the non-approval sub-clauses.
The appellant was a United States non-profit educational institute operating through a branch office in India. On 7 April 1999, within days of the Finance Act 1998 taking effect, it applied for initial approval under s.10(23C)(vi). The CBDT rejected the application by order dated 12 October 2004 on the footing that the institute remitted its surplus abroad instead of applying it to education in India. The Delhi High Court dismissed the writ petition (W.P.(C) No. 17978/04) by judgment dated 24 November 2006. The appellant came to the Supreme Court contending that the conditions in the provisos are matters of ongoing compliance and cannot be applied to defeat a first application for approval. The matter was decided on 2008-05-09 by the Supreme Court (S.H. Kapadia J and B. Sudershan Reddy J). On those facts the Supreme Court held as follows. The appeal was allowed. The order of the CBDT dated 12 October 2004 and the Delhi High Court judgment dated 24 November 2006 were set aside and the matter remitted to the CBDT for fresh consideration, with the clarification that the appellant had fulfilled the threshold pre-condition of actual existence of an educational institution under s.10(23C)(vi) and that approval could not be refused on that count (paras 33, 40, 44 and 45).
The Court read the provisos to s.10(23C)(vi) as drawing a distinction between the stipulation of conditions and compliance with them. The threshold conditions are the actual existence of an educational institution and approval of the prescribed authority, for which an application in the standardised form must be made under the first proviso; only when actual existence is established does the question of compliance with the provisos arise. The third proviso contains monitoring requirements — application, accumulation and deployment of income in specified assets — whose compliance turns on events that have not taken place on the date of an application for initial approval (para 33). On whether the institute existed for profit, the Court applied Surat Art Silk, recording at para 29 that the test is the predominant object of the activity, that the purpose does not lose its character merely because some profit arises, and that the prescribed authority's duty is to ascertain whether the balance of income is applied wholly and exclusively to the objects for which the applicant is established. That last strand is the strand New Noble removed. In the words reproduced by the source cited on this page: "The threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardized form in terms of the first proviso." The decision followed or applied Addl. CIT v. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1 (SC) — applied at para 29, and it is this application that New Noble Educational Society later overruled.
It was decided by the Supreme Court on 2008-05-09 and is reported as Civil Appeal No. 3468 of 2008 (Supreme Court of India). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 10(23C), section 10(23C)(vi), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed. The order of the CBDT dated 12 October 2004 and the Delhi High Court judgment dated 24 November 2006 were set aside and the matter remitted to the CBDT for fresh consideration, with the clarification that the appellant had fulfilled the threshold pre-condition of actual existence of an educational institution under s.10(23C)(vi) and that approval could not be refused on that count (paras 33, 40, 44 and 45). It arises in Capital Gains Exemptions, Charitable Trusts & Exemption and How Tax Law Is Read matters, on section 10(23C), section 10(23C)(vi) of the Income Tax Act 1961, and was decided by S.H. Kapadia J and B. Sudershan Reddy J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Separate the rejection reasons into threshold reasons (do you actually exist as an educational institution, and do all your objects relate to education) and monitoring reasons (application, accumulation, mode of investment). Attack only the second class on American Hotel. Before writing 'predominant object' anywhere in the reply, check the date. New Noble's test — all objects must relate to imparting education, and an object unrelated to education is fatal even if education predominates — is the law from 19 October 2022 and para 78 directs that it operate prospectively; identify whether your approval application or assessment year falls before or after that date and say which, rather than treating the date of the officer's order as the test. Do not build a case on the argument that the Commissioner is barred from calling for audited accounts at the approval stage: New Noble para 76(f) confines American Hotel's observations on that point to newly set up charities and holds the proviso applies to existing institutions too. Whether para 76(f) reaches an application made before 19 October 2022 is open, because the para 78 direction is expressed as covering 'the law declared in the present judgment' while the reason given for it is the departure on 'solely' alone — take that point if your year is earlier, but produce the accounts anyway and show the surplus was generated in the course of providing education. If your matter concerns an approval application made or an assessment year falling before 19 October 2022, plead the prospective-operation direction in New Noble para 78 expressly, and say what you are relying on it for.
Partly overruled — read this first. Overruled in part by New Noble Educational Society v. CCIT (SC, 19 October 2022). I read New Noble's own conclusions. Para 76(e) reads: 'The reasoning and conclusions in American Hotel (supra) and Queen's Education Society (supra) so far as they pertain to the interpretation of expression 'solely' are hereby disapproved. The judgments are accordingly overruled to that extent.' Para 76(f) does not use the language of disapproval; only 76(e) does. It holds that the Commissioner under the second proviso 'is not bound to examine only the objects of the institution' and is 'free to call for the audited accounts or other such documents for recording satisfaction', and then says of this case: 'The observations made in American Hotel (supra) suggest that the Commissioner could not call for the records and that the examination of such accounts would be at the stage of assessment. Whilst that reasoning undoubtedly applies to newly set up charities, trusts etc. the proviso under Section 10(23C) is not confined to newly set up trusts – it also applies to existing ones. The Commissioner or other authority is not in any manner constrained from examining accounts and other related documents to see the pattern of income and expenditure.' It therefore confines American Hotel on this point rather than overruling it. Para 78 directs that 'the law declared in the present judgment shall operate prospectively'. The reason para 78 gives for prospectivity is confined to the departure on the meaning of 'solely', but the direction itself is that 'the law declared in the present judgment shall operate prospectively', which on its face covers 76(f) and 76(g) as well. The text does not resolve which reading is right and I located no later authority resolving it. Whether the 76(f) holding on the Commissioner's power to call for accounts governs an approval application made or decided before 19 October 2022 is therefore open, and this entry does not assume an answer. What New Noble did NOT disturb is the threshold/monitoring distinction drawn in American Hotel para 33, which is why the case is partly and not wholly overruled. I did not run a systematic check of High Court treatment of American Hotel after October 2022. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The text I read prints the appeal number as Civil Appeal No. 3468 of 2008 and gives no ITR citation, so none is stated here. Paragraph 29 (the Surat Art Silk / predominant-object passage) and the opening words of paragraph 33 were each retrieved twice and came back in identical words. I did not read the Delhi High Court judgment of 24 November 2006 that was set aside. Paragraph 33 was retrieved in full on a later pass and the quote is now the complete sentence. The disposal is at paragraphs 43 to 45; paragraph 45 is where the appeal is allowed. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed. The order of the CBDT dated 12 October 2004 and the Delhi High Court judgment dated 24 November 2006 were set aside and the matter remitted to the CBDT for fresh consideration, with the clarification that the appellant had fulfilled the threshold pre-condition of actual existence of an educational institution under s.10(23C)(vi) and that approval could not be refused on that count (paras 33, 40, 44 and 45).
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