My society runs a school and has been claiming exemption under section 10(23C). The department now says my objects clause is not 'solely' educational, and my consultant tells me I cannot even apply for approval any more. Where do I actually stand?
Section 10(23C) is not one exemption but three kinds. Sub-clauses (iiiab) and (iiiac) run automatically for institutions wholly or substantially financed by the Government; (iiiad) and (iiiae) run automatically below a receipts threshold, which the sub-clauses themselves now put at five crore rupees of aggregate annual receipts of the person; (iv), (v), (vi) and (via) needed an approval. That approval route is shut: by clause 4(b) of the Finance (No. 2) Act 2024 (Act 15 of 2024), with effect from 1 October 2024, a proviso was inserted after the twenty-third proviso reading "Provided also that no approval under the second proviso shall be granted in relation to any application made on or after the 1st day of October, 2024", and the words "before the 1st day of October, 2024" were written into the first and second provisos. An entity already approved keeps its approval for the rest of its term, and then applies under section 12A(1)(ac) for registration under section 12AB instead. On the substance, New Noble Educational Society v CCIT (Supreme Court, 19 October 2022) held that "solely" means what it says, disapproved American Hotel and Queen's Educational Society so far as they interpreted that word, and directed that the law it declared "shall operate prospectively".
Start with the version of the law you are in. This page describes section 10(23C) of the Income-tax Act 1961 as it stands after the Finance (No. 2) Act 2024 (Act 15 of 2024, assented 16 August 2024). That Act still matters even though the 1961 Act has been replaced: the CBDT's own FAQs on the interplay and transition to the Income-tax Act 2025 put assessment year 2026-27 and earlier under the 1961 Act, with the Income-tax Act 2025 governing tax year 2026-27 onwards, and the department's press release of 1 April 2026 records the 2025 Act coming into force on that date. So for every year up to AY 2026-27, and for every notice about one of those years, section 10(23C) is the provision you are arguing about.
Section 10(23C) is three different exemptions wearing one number, and most disputes start because the wrong one was claimed. Sub-clauses (iiiab) and (iiiac) exempt a university or other educational institution, and a hospital or similar institution, that exists solely for educational or philanthropic purposes and not for purposes of profit and "is wholly or substantially financed by the Government". No approval is needed and there is no ceiling on receipts. Sub-clauses (iiiad) and (iiiae) cover the same two kinds of institution and switch the exemption on below a receipts figure. They are not conditioned on the absence of government money: a partly government-funded school that falls short of "wholly or substantially financed" can still claim (iiiad) if it is under the figure. Sub-clauses (iv), (v), (vi) and (via) are the approval sub-clauses: any other fund or institution established for charitable purposes which may be approved "having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States"; any trust or institution "wholly for public religious purposes or wholly for public religious and charitable purposes"; a university or other educational institution; and a hospital or other medical institution. On the threshold, read the statute and not the rule. Sub-clause (iiiad) now exempts an institution "if the aggregate annual receipts of the person from such university or universities or educational institution or educational institutions do not exceed five crore rupees", and (iiiae) says the same for hospitals. An Explanation after them adds that where the same person has receipts from both an institution within (iiiad) and one within (iiiae), neither exemption applies if the combined aggregate exceeds five crore rupees. Those words were put there by clause 6(d) of the Finance Act 2021 (Act 13 of 2021, assented 28 March 2021) with effect from 1 April 2022, that is from assessment year 2022-23, substituting "five crore rupees" for "the amount of annual receipts as may be prescribed". That substitution also disposes of a trap. Rule 2BC still prints "one crore rupees", and the department's own threshold-limits page repeats one crore against Rule 2BC, but since 1 April 2022 the sub-clauses have delegated nothing to a rule, so Rule 2BC has had nothing to operate on and was simply never rescinded. The other trap is that the test is now taken at the level of the person and aggregated across institutions, not institution by institution, which is why decisions on the old per-institution position are confined to years up to AY 2021-22.
For the approval sub-clauses, the first proviso is the gateway and the second is the enquiry. The first proviso says the exemption is not available to a fund, trust, institution, university or hospital within (iv), (v), (vi) or (via) unless it makes an application in the prescribed form and manner to the Principal Commissioner or Commissioner for grant of approval. The second proviso tells the Principal Commissioner or Commissioner what to do with it: satisfy himself about "the genuineness of activities of such fund or trust or institution or university or other educational institution or hospital or other medical institution" and about "the compliance of such requirements of any other law for the time being in force by it as are material for the purpose of achieving its objects", after calling for documents or making enquiry, and then pass a written order granting approval, ordinarily for five years, or rejecting the application after a hearing. The fifteenth proviso is the exit door: it lets the Principal Commissioner or Commissioner call for documents or make enquiry to satisfy himself about the occurrence of a specified violation and cancel the approval in writing, after a reasonable opportunity of being heard, for the previous year concerned and all subsequent previous years.
The third proviso is where the section 11 machinery is pulled in, and it is the condition most often failed on figures rather than on argument. It requires the fund, trust or institution to apply its income, or accumulate it for application, wholly and exclusively to the objects for which it is established, and provides that where more than fifteen per cent of its income is accumulated on or after 1 April 2002, the period of accumulation of the amount exceeding fifteen per cent shall in no case exceed five years. That is the same arithmetic as the eighty-five per cent rule under section 11, stated from the other side: fifteen per cent may be set aside without a clock running, anything above that has five years to be spent. The same proviso requires funds to be invested or deposited in the forms or modes specified in section 11(5). Get the fifteen per cent and the five years right before arguing about objects, because an accumulation that has run out of time is lost on the numbers whatever the objects clause says.
New Noble Educational Society v CCIT was decided by the Supreme Court on 19 October 2022 (Lalit CJI, Bhat and Narasimha JJ, judgment by Bhat J). On the word "solely", conclusion (a) of the judgment reads: "It is held that the requirement of the charitable institution, society or trust etc., to 'solely' engage itself in education or educational activities, and not engage in any activity of profit, means that such institutions cannot have objects which are unrelated to education. In other words, all objects of the society, trust etc., must relate to imparting education or be in relation to educational activities." The Court took the plain meaning: "The plain and grammatical meaning of the term 'sole' or 'solely' however, is 'only' or 'exclusively'", and treated "solely" as exclusively and not primarily. So the objects clause is now read literally. A memorandum or trust deed that carries powers to run a hospital, a marriage hall or a general relief programme alongside the school is a problem even if the school is all the society has ever actually done.
The Court did not, however, say that a surplus kills the exemption, and it did not shut out everything a school does besides teaching. Conclusion (b): "Where the objective of the institution appears to be profit-oriented, such institutions would not be entitled to approval under Section 10(23C) of the IT Act. At the same time, where surplus accrues in a given year or set of years per se, it is not a bar, provided such surplus is generated in the course of providing education or educational activities." Conclusions (c) and (d) place the proviso to section 10(23C) that deals with incidental business, which the Court calls the seventh proviso, alongside section 11(4A): both speak of profits "incidentally" generated, and the reference to "business" and "profits" in them means "the profits of business which is 'incidental' to educational activity ... i.e., relating to education such as sale of text books, providing school bus facilities, hostel facilities, etc." The distinction to hold on to is between an ancillary activity of an educational object, which is safe, and a separate object unrelated to education, which is not. Two further holdings change what an officer may look at. Conclusion (f) frees the Commissioner or other authority to call for audited accounts or other documents and records that the institution genuinely seeks to achieve the objects it professes, and says the authority is not in any manner constrained from examining accounts and other related documents to see the pattern of income and expenditure. Conclusion (g) holds that "wherever registration of trust or charities is obligatory under state or local laws, the concerned trust, society, other institution etc. seeking approval under Section 10(23C) should also comply with provisions of such state laws". That reads onto the second proviso's own words about compliance with any other law material for achieving the objects. In practice it means a society whose registration under the state societies or public trusts legislation has lapsed, or which never obtained the state recognition its activity requires, has a live exemption problem and not merely a state-law one.
Now the precise question of what New Noble did to the earlier line, because it is easy to state too widely and easy to state too narrowly. The formal overruling is in conclusion (e): "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." Read the qualification. On its own terms that overruling reaches only the meaning of "solely" — the predominant or primary object test, which no longer holds for the approval sub-clauses — so Queen's Educational Society's point that ploughing a surplus back into the institution is not by itself fatal survives, and New Noble restates it in conclusion (b). But conclusion (e) is not the only thing that happened to American Hotel. Conclusion (f) makes a second and narrower departure from it: "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." So American Hotel's separation of the threshold conditions from the monitoring conditions in the provisos is not simply intact: it survives for a newly set up institution, which still has no accounts to show, and not for an existing one, whose accounts the Commissioner may now call for at the approval stage. Citing either case today for a predominant-object argument on the objects clause is citing it for what it no longer says; citing American Hotel to keep an existing institution's accounts out of the Commissioner's hands is citing it against conclusion (f).
Then prospectivity, and be exact about it. The closing paragraph of the judgment reads: "In the light of the foregoing discussion, the assessees' appeals fail. It is however clarified that their claim for approval or registration would have to be considered in the light of subsequent events, if any, disclosed in fresh applications made in that regard. This court is further of the opinion that since the present judgment has departed from the previous rulings regarding the meaning of the term 'solely', in order to avoid disruption, and to give time to institutions likely to be affected to make appropriate changes and adjustments, it would be in the larger interests of society that the present judgment operates hereafter. As a result, it is hereby directed that the law declared in the present judgment shall operate prospectively. The appeals are hereby dismissed, without order on costs." Three things follow and nothing more. The appellants still lost, so prospective operation is not an escape for the party before the Court. The stated reason is to give institutions time to change their constitutions, which is the purpose against which any argument about reach should be tested. And the law declared operates hereafter, so it is not a warrant to reopen approvals or assessments already concluded on the older understanding. What the Court did not do is fix a cut-off date, or say in terms how a pending application, a pending assessment or a pending appeal for an earlier year is to be decided. That has been left to be worked out case by case, and the pattern in the Tribunal has been to send a rejection founded on surplus back to the Commissioner (Exemption) to be decided afresh rather than simply to reverse it.
The live practical point is the 2024 closure. Clause 4(b) of the Finance (No. 2) Act 2024 amended clause (23C) with effect from 1 October 2024 in three steps: in the first proviso, after the words "makes an application", the words "before the 1st day of October, 2024," were inserted; the same words were inserted in the second proviso after the words "first proviso"; and after the twenty-third proviso a new proviso was inserted reading "Provided also that no approval under the second proviso shall be granted in relation to any application made on or after the 1st day of October, 2024." The approval route under (iv), (v), (vi) and (via) is therefore closed to new applications. Nothing was taken away from anyone already approved: an existing approval runs out its term. What changes is the renewal. By clause 6 of the same Act, section 12A(1)(ac)(ii) and (iii) were widened so that an entity approved, or provisionally approved, under (iv), (v), (vi) or (via) applies under section 12A at least six months before its approval expires, and is registered under section 12AB. The department's own page on taxability of income of charitable or religious trusts, updated to the Finance Act 2026, puts it the same way: trusts previously approved under 10(23C)(iv), (v), (vi) or (via) whose registration is due for renewal on or after 1 October 2024 are now eligible to apply for registration under section 12A. Two things soften the move. The same clause 6 added a proviso letting the Principal Commissioner or Commissioner condone a delay in filing where he considers there is reasonable cause. And section 12AC, inserted by clause 8 with effect from 1 April 2025, keeps Chapter XII-EB out of the way where such an entity merges with another trust or institution of the same or similar objects that is itself registered or approved, subject to prescribed conditions. Missing the renewal window is not a paperwork slip: it is the trigger for the accreted-income charge under section 115TD.
So what does each side actually have to show. The officer or the Commissioner cannot deny the exemption merely by pointing at a surplus; conclusion (b) of New Noble forecloses that, and he must instead show either that the objects themselves are unrelated to the exempt purpose, or that the objective is profit-oriented, or that the surplus was not generated in the course of providing education. To cancel an approval he must show the occurrence of a specified violation, and the fifteenth proviso requires a written order after a reasonable opportunity of being heard. What the institution must show is narrower and more documentary than it used to be: an objects clause confined to the exempt purpose; that any trading receipts are incidental to that purpose and separately accounted for as the incidental-business proviso to section 10(23C) and section 11(4A) require; application of income or accumulation within the fifteen per cent and five-year limits of the third proviso, with funds held in section 11(5) modes; and compliance with whatever state or local registration its activity obliges it to hold, because conclusion (g) makes that part of the exemption question.
Two changes have landed on the same set of trusts within two years, and they pull in opposite directions. New Noble tightened the substantive test so that an objects clause drafted loosely twenty years ago is now a defect. The Finance (No. 2) Act 2024 then removed the forum in which that defect could be cured under section 10(23C) at all, because no fresh approval can be granted on an application made on or after 1 October 2024. An institution that lets its approval lapse without moving to section 12AB does not simply lose a year's exemption; it walks into the accreted-income charge.
There is also a live mismatch in the published material a reader is likely to rely on. Rule 2BC and the department's threshold-limits page still print one crore rupees, while the sub-clauses themselves carry five crore. Reading the rule rather than the section can cost an institution an automatic exemption it was entitled to, or produce a claim the officer will reject for a reason that no longer exists.
We charge fees for our public utility work. Does that cost us charitable status under s.2(15)?
A binding decision that covers my point was never considered when my order was passed. Is that a mistake apparent from the record?
My trust already has registration under section 12A. Can the Assessing Officer go behind it and re-examine whether the objects are charitable?
Our trust runs a business and puts the profit into its objects. Does s.11(4A) still deny the exemption?
Our trade association promotes commerce in our industry, but the work it does throws up a surplus every year. Does the surplus stop it being charitable?
Our trust benefits one caste. Can that be a charitable purpose at all?
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?
Our trust was formed weeks ago and has done nothing yet. Can registration be refused for that?
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