For decades, India’s income-tax framework extended preferential treatment to educational and medical institutions in recognition of their public utility role. The Income-tax Act, 1961 offered two principal exemption pathways—Section 10(23C) and Section 11—allowing institutions a degree of flexibility in structuring their tax affairs. Until recently, many institutions operated comfortably within both regimes, invoking either as circumstances demanded. That era has decisively ended.
What has emerged in its place is a tightly regulated, compliance-driven regime where choice is limited, timelines are unforgiving, and procedural errors can have irreversible consequences. The transformation has not been abrupt but incremental—shaped by successive Finance Acts between 2014 and 2025—each narrowing discretion and amplifying risk. The exemption regime has undergone a paradigm shift from flexibility to procedural finality, with successive amendments elevating compliance requirements to a determinative threshold that increasingly eclipses substantive charitable purpose.
2014: The Doctrine of “Complete Code”
The first decisive shift occurred with the insertion of Section 11(7) by the Finance Act, 2014, which was aimed at curbing the practice of charitable entities selectively availing exemptions under Section 10 without adhering to the application and compliance discipline mandated under Section 11; however, educational and medical institutions continued to enjoy a limited dual benefit, particularly through Section 10(23C). Parallel restrictions were subsequently introduced within Section 10(23C) itself, preventing institutions approved thereunder from resorting to other clauses of Section 10 upon breach of statutory conditions—reflecting legislative unease with what was perceived as “regime arbitrage,” though a degree of maneuverability still remained. In this context, the Supreme Court has consistently held that the statutory framework governing charitable exemptions constitutes a self-contained or “complete code.” In American Hotel and Lodging Association Educational Institute v. CBDT (2008) 301 ITR 86 (SC), the Court emphasised that approval under Section 10(23C) is not a one-time formality but a continuing regulatory mechanism subject to ongoing compliance, while in Queen’s Educational Society v. CIT (2015) 372 ITR 699 (SC), it clarified that the dominant object test governs educational institutions and that generation of surplus, by itself, does not vitiate exemption so long as profit-making is not the primary purpose. These decisions constitute the jurisprudential backdrop against which subsequent legislative tightening must be evaluated, with the true inflection point ultimately arriving through the Finance Act, 2020.
2020: The Statutory Election Principle
Parliament imposed a decisive policy choice: one institution, one exemption regime. The amendments to Section 11(7) introduced by the Finance Act, 2020 reflect legislative reliance on the principle of statutory election once an assessee consciously opts for a particular statutory regime, it must abide by the consequences of that choice. While the Act now enforces this election rigidly, courts have historically distinguished between voluntary election and statutory deeming fiction.
By amending Section 11(7) and introducing two provisos, once an institution obtained approval under Section 10(23C), its registration under Section 11 registration became automatically inoperative—without the need for any formal cancellation order. Institutions already enjoying both benefits were statutorily pushed into the Section 10(23C) regime with effect from 1 June 2020. A narrow, one-time exit was provided—allowing a switch back to Section 11—but only at the cost of permanently surrendering eligibility under Section 10(23C). Simultaneously, all charitable entities were required to undergo fresh registration or re-approval, dismantling the concept of perpetual or grandfathered exemptions.
In CIT v. Mahindra Mills Ltd. (2000) 243 ITR 56 (SC), the Supreme Court held that a statutory benefit cannot be forced upon an assessee unless expressly mandated. Conversely, the 2020 amendments impose automatic inoperability without requiring an express act by the institution—raising questions as to whether the “choice” is truly voluntary or merely notional. From this point onwards, exemption ceased to be a flexible privilege and became a binding election with long-term consequences.
2022-23: Compliance Becomes Central
The Finance Act, 2022 marked a significant step in aligning the compliance architecture of the two exemption regimes by introducing the concept of a “specified violation,” thereby expressly empowering the tax authorities to cancel registration or approval upon the occurrence of defined statutory defaults. The Finance Act, 2023 carried this approach substantially further and fundamentally altered the risk profile for charitable institutions by expanding the scope of “specified violation” to include applications containing incorrect, incomplete, or false particulars, even in cases where approvals had been granted automatically or on a provisional basis. In parallel, Section 115TD was fortified to treat failure to apply for registration or approval within the prescribed timelines as a deemed exit from the exemption framework, consequently triggering taxation of accreted income. Further, the residual entry routes under Section 12A(1)(ac) and Section 10(23C) were significantly narrowed, with the effect that institutions which had already commenced activities and had previously claimed exemption were effectively barred from re-entering the exemption regime if they fell outside the specified statutory windows. By this stage, the exemption law had unmistakably transitioned from a benevolent, facilitative framework to a tightly rule-bound compliance code.
2024–25: Procedural Rigor and Administrative Tightening
The changes witnessed during 2024 and 2025, though not marked by sweeping legislative amendments, have been no less consequential in their practical operation. Administrative scrutiny has intensified, with authorities increasingly invoking the expanded definition of “specified violation” to revisit and question historical applications, particularly those filed during the transitional phase of 2020–2021, and defects earlier regarded as curable are now frequently treated as substantive lapses. Simultaneously, statutory timelines have acquired near-jurisdictional significance, as delays in filing audit reports in Form 10B or 10BB, re-registration applications, or allied compliances are being examined with heightened rigidity and markedly reduced tolerance for condonation, especially in cases where exemptions under both regimes had earlier been claimed. The faceless and automated compliance environment has further amplified risk, as system-driven cancellations, denial of continuation of registration, and trigger-based proceedings under Section 115TD increasingly operate with limited human discretion, leaving institutions with minimal opportunity to offer explanations at the threshold stage. By 2025, a clear policy stance has emerged that procedural discipline is non-negotiable, with the exemption framework being administered less as a welfare measure and more as a regulatory regime demanding precision, consistency, and informed compliance. At the same time, courts have repeatedly cautioned that efficiency cannot override fairness, reiterating that principles of natural justice remain integral to tax administration; in State of Orissa v. Dr. Binapani Dei (AIR 1967 SC 1269), the Supreme Court unequivocally held that even administrative orders entailing civil consequences must conform to the requirements of natural justice.
Section 115TD and the Jurisprudence on Accreted Income
Section 115TD was introduced as an anti-abuse measure to prevent the misuse or diversion of charitable assets upon conversion or dissolution of a trust or institution, with its constitutional validity resting on the premise that accumulated surplus, having earlier enjoyed tax exemption, must be brought to tax when the charitable character of the entity ceases. However, the increasing resort to system-triggered cancellation of registration or initiation of proceedings under Section 115TD, often without affording an effective opportunity for rectification or explanation, raises serious concerns of procedural fairness and proportionality. In DIT (Exemptions) v. Charanjiv Charitable Trust (2014) 43 taxmann.com 300 (Delhi HC), the Delhi High Court underscored that denial of exemption must be founded on a substantive departure from charitable objects and activities, and not on mere technical or procedural defaults. Against this judicial backdrop, equating a failure to apply within the prescribed timeline with a “conversion into an ineligible form” appears to extend Section 115TD beyond its original anti-abuse rationale, converting what was intended as a safeguard against misuse into a penal consequence for procedural lapse.
Indian tax jurisprudence has consistently recognised that procedural provisions are intended to be the handmaids of justice rather than its mistress, a principle that assumes particular significance in the context of charitable exemptions. The Supreme Court, in CIT v. Gujarat Oil & Allied Industries (1993) 201 ITR 325 (SC), held that procedural defects which do not go to the root of the matter ought not to defeat substantive statutory rights, and this position was echoed earlier in State of Punjab v. Shyamalal Murari (1976) 1 SCC 719, where the Court observed that procedure is designed to advance the cause of justice and not to obstruct it. Applying these principles, courts have traditionally treated the incorrect invocation of a statutory provision—especially during periods of legislative transition—as a curable defect rather than a fatal error. The same jurisprudential approach is reflected in the Court’s emphasis on bona fide conduct and absence of mens rea, as articulated in Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC), where it was held that penal consequences should not follow merely because they are legally permissible, in the absence of deliberate defiance or contumacious conduct. Although Section 115TD is not styled as a penalty provision, its effect in subjecting accumulated charitable income to confiscatory taxation closely mirrors penal consequences, and the absence of any statutory requirement to examine mens rea or bona fide belief in transitional or technical default cases raises serious concerns of disproportionality and fairness.
Expansion of “Specified Violation”
The expansion of the definition of “specified violation” by the Finance Act, 2023 to include incorrect or incomplete applications must be evaluated against the constitutional doctrine of proportionality. In Modern Dental College v. State of Madhya Pradesh (2016) 7 SCC 353, the Supreme Court authoritatively held that any regulatory measure affecting rights must satisfy four cumulative tests, namely the existence of a legitimate aim, a rational nexus between the measure and that aim, necessity in the sense of the least restrictive alternative, and a proper balancing of competing interests. When this framework is applied to the charitable exemption regime, the cancellation of registration and consequent taxation of accreted income solely on account of filing an application under an incorrect statutory clause—without any demonstrated revenue loss, diversion of funds, or misuse of charitable assets—appears susceptible to challenge as an excessive and disproportionate response, extending beyond what is reasonably necessary to achieve the stated regulatory objectives.
Legitimate Expectation and Transitional Fairness
Beyond proportionality, the amendments also raise concerns relating to fairness in regulatory transition. Institutions that had operated for decades under the parallel exemption regimes could legitimately expect that any abrupt statutory realignment would be accompanied by clear administrative guidance and adequate remedial mechanisms. The doctrine of legitimate expectation, as recognised by the Supreme Court in Navjyoti Co-op. Group Housing Society v. Union of India (1992) 4 SCC 477, arises where a public authority departs from a consistent past practice without fair notice or justification. Viewed in this light, the automatic inoperability of registration under Section 11—operating by statutory fiction without any formal communication or cancellation order and followed by irreversible fiscal and regulatory consequences—arguably offends this doctrine, particularly where institutions acted bona fide on the basis of the prevailing administrative practice and historical regulatory framework.
Judicial Synthesis and Concluding Observations
Judicial precedents consistently affirm that substantive statutory benefits ought not to be denied on account of mere procedural errors, that penal or quasi-penal consequences must bear a rational and proportionate relationship to the nature of the default, and that the doctrines of legitimate expectation and natural justice remain integral to fair tax administration. Against this settled jurisprudence, the contemporary exemption regime reflects a decisive legislative shift towards procedural absolutism. While the objective of preventing misuse of charitable exemptions is undoubtedly legitimate, the current framework carries a real risk of ensnaring bona fide charitable institutions in a web of irreversible consequences arising from transitional or technical lapses rather than substantive wrongdoing. Whether the courts will recalibrate the balance between statutory rigidity and equitable interpretation in such cases remains to be seen; until such clarity emerges, charitable institutions must recognise that exemption today is no longer determined solely by charitable purpose, but equally—if not more—by procedural perfection.
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