The Commissioner (Exemption) has refused our school society's regular approval under s.10(23C)(vi), cancelled the provisional approval and directed exit tax - what is left to us, and does the society even need the approval for these years?
The client is a society registered under the Societies Registration Act 1860 at Kanpur in 2009, running a senior secondary school and, since 2019, a B.Ed. college. It has never held registration under s.12A or s.12AB. Until FY 2020-21 its receipts were under the sub-clause (iiiad) limit and it claimed that sub-clause. It filed Form 10A on 12 September 2022 and Form 10AC dated 26 September 2022 granted provisional approval under sub-clause (vi) for AY 2023-24 to AY 2025-26. Form 10AB for regular approval went in on 27 June 2024; the department says the outer date was 25 March 2023. The Commissioner (Exemption), Lucknow, after notices of 11 November 2024 and 6 February 2025, passed an order on 20 March 2025 refusing approval, cancelling the provisional approval from AY 2023-24 and directing computation of accreted income of Rs 7,25,00,000, taxed at the maximum marginal rate of 42.744 per cent - Rs 3,09,89,400. The grounds are that the society hires out its auditorium (Rs 9,60,000), runs buses for outsiders (Rs 4,40,000) and houses non-students in the hostel (Rs 6,00,000); that FY 2023-24 receipts of Rs 4,62,00,000 less expenditure of Rs 3,44,00,000 left Rs 1,18,00,000 in fixed deposits; that the secretary's son draws Rs 18,00,000 as administrator and the president's building fetches Rs 6,00,000 rent; and that Form 10AB was late. School fees were Rs 3,62,00,000, college fees Rs 76,00,000 and donations Rs 4,00,000. CPC processed the AY 2024-25 return under s.143(1) on 14 August 2025 taxing gross receipts.
Before answering any ground in the refusal, put each year's educational receipts against the sub-clause (iiiad) limit. The school took Rs 3,62,00,000 and the college Rs 76,00,000 in FY 2023-24 - Rs 4,38,00,000 against a prescribed limit of Rs 5 crore. Pull the FY 2022-23 figures before extending that conclusion back a year. For every year in which the aggregate stays under the limit the society needs no approval at all, and the refusal decides nothing for those years except the exit-tax direction. That changes what you file, where you file it and what you concede. Opening on whether the society exists solely for educational purposes concedes that the approval was necessary.
Sub-clause (iiiad) exempts the income of an educational institution existing solely for educational purposes and not for purposes of profit where the aggregate annual receipts do not exceed the amount prescribed by Rule 2BC - one crore rupees up to AY 2021-22, five crore rupees from AY 2022-23, when the sub-clause also began to aggregate the receipts of all the person's educational institutions. A Jaipur Bench so held for AYs 2012-13 and 2015-16, each institution having its own limit, and recorded that the Finance Act 2021 changed the position from AY 2022-23. One High Court has held the benefit is activity-centric: the limit is tested against the receipts of the eligible institution alone, the society's other income is not clubbed, and this survives the 2021 amendment. On Rs 4,38,00,000 of fee receipts the society is inside the limit for AY 2024-25 whichever way the other Rs 24,00,000 is treated. An Amritsar Bench allowed the same claim to be made for the first time in appeal, as a question of law already on the record.
The approval regime was rewritten with effect from 1 April 2021. Sub-clause (vi) approval is no longer a standing grant by the prescribed authority named in the old text: a new applicant files Form 10A and receives provisional approval for three assessment years, converts it by Form 10AB, and on that application the Commissioner calls for documents, makes such enquiry as he thinks necessary and either approves for five years or, after a reasonable opportunity of being heard, rejects the application and cancels the provisional approval. Almost every older decision on sub-clause (vi) is on the pre-2021 text and on a different deciding authority, and citing it without saying so is how these replies fail. The Board's circular of 25 April 2024 extended the date for Form 10A and Form 10AB to 30 June 2024 and allowed entities whose Form 10AB had been rejected only for lateness or a wrong section code to apply afresh in that window; one High Court has recorded that clause in dismissing a Revenue appeal. The filing of 27 June 2024 is inside it.
The sub-clause exempts a university or educational institution existing solely for educational purposes and not for purposes of profit. The Supreme Court has held that 'solely' means to the exclusion of all others and has rejected the older predominant-object test, and that business receipts stay exempt only where the business is incidental to the educational object and separate books are kept - letting hostels to non-students and hiring out premises being the very examples. Two earlier Supreme Court decisions in this library are marked partly overruled in consequence: the one holding that a surplus ploughed back does not destroy the exemption, which reasoned on predominant object, and the one separating threshold from monitoring conditions. Use the first on surplus and not on predominance. The library's own statement of the business condition is that application of the profits is not one of the two conditions - the two are that the business is incidental to the objects and that separate books are maintained for it.
A Chandigarh Bench set aside a rejection of a sub-clause (vi) application founded on surplus generation, parking of funds in fixed deposits and non-filing of returns, and remanded the application to the Commissioner (Exemption) to be decided afresh in accordance with law and with the later Supreme Court decision in mind. So the point survives the change in the law, but what it produces is a remand. The earlier Supreme Court decision says the same on the narrow question - a surplus put back into buildings and equipment does not mean the institution has ceased to exist solely for education - and is marked partly overruled only on its predominant-object reasoning. One High Court has held that a body which imparts education and training as part of a statutory function is not carrying on trade merely because it charges fees and ends with a surplus. Here the surplus is Rs 1,18,00,000 on receipts of Rs 4,62,00,000, 25.5 per cent, and it sits in fixed deposits, which is a permitted mode.
The Supreme Court separated the threshold conditions - the actual existence of an educational institution existing solely for education and not for profit, plus approval - from the monitoring conditions in the provisos, and held that approval could not be refused on a monitoring condition standing alone. That decision is marked partly overruled and the later Supreme Court decision on 'solely' is why, so use the distinction and not the reasoning. The library's entries on the parallel registration provision run the same way: the Commissioner satisfies himself about the objects, the genuineness of the activities and compliance with other laws material to achieving those objects, and a Mumbai Bench held that whether income has actually been applied outside India is an assessment question and not a registration-stage ground; another Bench held an application cannot be rejected as premature because activities had not commenced; the Supreme Court has held registration cannot be refused merely because a newly formed trust has done nothing yet; and one High Court has held the Commissioner cannot add a condition the section does not carry.
The statute does not prohibit the payment; it catches the excess or the shortfall. One High Court holds that the provision deems a salary to a specified person to be applied for his benefit only to the extent it exceeds what may reasonably be paid for the services, so a reasonable salary is not a breach at all. Another holds that the burden of showing rent inadequate is on the Department and the market rate is not the only yardstick, and declined to disturb a rent that exceeded the municipal valuation adopted for house tax where the officer's only material was enquiries from estate agents. Rs 18,00,000 for a full-time administrator and Rs 6,00,000 a year for a building are figures to be justified with comparables - appointment letter, duties, hours, two or three comparable salaries, the municipal rateable value - not figures to deny. And even where a breach is made out, two High Courts hold that only the offending amount loses the exemption, not the whole of the income.
The order does three things and they are severable: it refuses approval, it cancels the provisional approval, and it directs computation under s.115TD. A Bench faced with that combination set the order aside and restored the matter for de novo consideration, the Commissioner having rejected the application solely for non-filing of documents, after two notices at very short intervals, without any verification or enquiry. The exit tax is charged at the maximum marginal rate on accreted income - broadly the fair market value of total assets less total liabilities on the specified date - and Rs 7,25,00,000 at 42.744 per cent is Rs 3,09,89,400, the largest figure in the file. That rate is thirty per cent with the highest surcharge and cess, read from the Finance Act; nothing in this library fixes it. The Board position here records that since the Finance Act 2022 even a failure to make the application required by the corresponding clauses of the first proviso to s.10(23C) is itself a deemed conversion, so letting the approval lapse is not neutral.
The CPC denial is a separate proceeding on its own clock and it is where the money is being demanded. An adjustment under s.143(1)(a) requires a prior show-cause notice, and a Bench deleted a Rs 4.20 crore disallowance made without one. Check the audit form before anything else: since rule 16CC and rule 17B were substituted with effect from 1 April 2023 three alternative tests decide between Form 10B and Form 10BB, any one of them putting the entity into Form 10B, and the first is total income above five crore rupees computed before the exemption claimed. At Rs 4,62,00,000, with no foreign contribution and no application outside India, this society is in Form 10BB. If the wrong form did go in, a Bench has held that where the accounts were in fact audited and a report uploaded in time the choice of form is a procedural lapse and not a failure of a substantive condition. Put sub-clause (iiiad) in the grounds for AY 2024-25 as the primary claim and approval as the alternative.
Where the educational receipts are under the prescribed limit the years usually resolve on that ground and the approval appeal becomes academic for them, which is why it is the first thing to compute. On the approval itself the commonest outcome by a distance is a remand: the Tribunal sets the refusal aside and sends the application back to the Commissioner, and the society waits another eighteen months for the same enquiry done properly. A grant by the Tribunal itself is rare. The non-educational receipts are the ground that most often survives a remand, because separate books are a fact and not an argument. The s.115TD direction usually falls with the refusal it depends on. The intimation demand is usually reversed, but slowly and on a second application.
