The Income Tax Appellate Tribunal, Mumbai, has clarified that a pending application for notification under Section 10(46) of the Income Tax Act does not justify automatic denial of tax exemption. The Tribunal directed a de novo assessment, preserving all legal grounds raised by the assessee, including its claim as a state instrumentality.
Background & Facts
The Dispute
The appellant, Fees Regulating Authority, is a statutory body constituted under the Maharashtra Unaided Private Professional Educational Institutions (Regulation of Admission and Fees) Act, 2015. Its mandate includes regulating fee structures of unaided private educational institutions in Maharashtra to ensure reasonableness and prevent exploitation. For the assessment year 2017-18, the appellant filed its income tax return on 28.03.2018 declaring nil income, claiming exemption under Section 10(46) of the Income Tax Act, 1961. It was also registered under Section 12AA as a charitable trust.
Key Facts
The appellant was established by a State Legislature Act and functions as a regulatory authority for private educational institutions.
It filed an application for notification under Section 10(46) with the Principal Commissioner of Income Tax-23, Mumbai, on 29.01.2018.
The application was forwarded to the Under Secretary, Central Board of Direct Taxes (CBDT), on 30.01.2018.
No response was received from the Principal Commissioner or CBDT for over five years.
On 20.10.2020, CBDT issued a letter requesting the appellant to choose between retaining Section 12AA registration or pursuing Section 10(46) notification.
On 12.11.2020, the appellant responded affirmatively, expressing willingness to surrender Section 12AA registration if Section 10(46) notification was granted.
On 20.11.2023, the appellant wrote again to CBDT seeking notification with retrospective effect from 2016-17.
On 15.01.2026, CBDT sought fresh clarifications; the appellant responded on 23.01.2026 and 06.03.2026.
The appellant has never engaged in commercial activity.
The Maharashtra State Government has not yet notified the 2015 Act in the State Gazette.
Procedural History
28.03.2018: Assessee filed return for A.Y. 2017-18 claiming exemption under Section 10(46) and alternatively under Section 11.
02.12.2019: Assessing Officer issued order under Section 143(3), rejecting both exemptions on grounds of non-notification under Section 10(46) and non-compliance with Section 11(2) conditions.
04.06.2025: Commissioner of Income Tax (Appeals) upheld the AO’s order, holding that absence of CBDT notification and failure to file Form 10 rendered exemptions inapplicable.
15.04.2026: Hearing before ITAT Mumbai.
30.04.2026: ITAT Mumbai delivered order.
The Parties' Positions
For the Assessee
Argued that it is a statutory authority established under State legislation, entitled to exemption under Section 10(46) upon satisfying objective criteria.
Emphasized that its application for notification has been pending since 2018 and that delay is attributable to administrative inaction by CBDT.
Contended that it is an instrumentality of the State under Article 289 of the Constitution and thus immune from taxation.
Submitted that it has consistently cooperated with CBDT, responding to all queries and even offering to surrender Section 12AA registration.
For the Revenue
Maintained that Section 10(46) requires formal notification in the Official Gazette by the Central Government, which has not occurred.
Stated that the appellant failed to comply with procedural requirements under Section 11(2), including filing Form 10 and obtaining trustee resolution.
Argued that the claim of state instrumentality was raised for the first time before the Tribunal and cannot be entertained.
Relief Sought
The appellant sought: (1) quashing of the CIT(A) order dated 04.06.2025; (2) declaration that its income is exempt under Section 10(46); (3) alternative relief under Section 11; and (4) recognition of its status as a state instrumentality exempt under Article 289.
The Legal Issue
The central question was whether the denial of exemption under Section 10(46) is justified solely on the ground of non-notification by the Central Government, when the application for such notification has been pending for years without any adverse finding, and whether the assessee’s alternative claims under Section 11 and as a state instrumentality must be adjudicated de novo.
Arguments Presented
For the Appellant
The appellant relied on the plain language of Section 10(46), which exempts bodies established under State legislation if they are not engaged in commercial activity and are notified. It argued that the absence of notification is not a disqualification but a procedural step pending completion. It cited CIT v. Sardar Sarup Singh to support that administrative delay cannot be visited upon the assessee. It further submitted that its conduct - filing applications, responding to queries, and offering to surrender Section 12AA registration - demonstrated bona fide intent. It also raised the constitutional claim under Article 289, asserting that as a statutory body created by a State Act, its income is immune from Union taxation.
For the Respondent
The Revenue contended that Section 10(46) is a conditional exemption requiring explicit notification, which is a mandatory precondition. It cited CIT v. Maharashtra State Board of Secondary and Higher Secondary Education to affirm that notification is not a formality but a substantive requirement. It argued that the appellant’s failure to file Form 10 and obtain trustee resolutions under Section 11(2) rendered the alternative claim invalid. It further contended that the state instrumentality argument was raised for the first time before the Tribunal and was not part of the original return or appeal, thus barred under the doctrine of waiver.
The Court's Analysis
The Tribunal acknowledged that Section 10(46) requires notification in the Official Gazette as a condition precedent. However, it emphasized that the provision does not mandate that notification must precede the application. The Tribunal noted that the assessee’s application was filed in January 2018 and forwarded to CBDT within days, and that no adverse observations or rejection had been issued by any authority over the next seven years.
"The assessee has not been found to be ineligible; it has merely been left in administrative limbo. To penalise the assessee for the inaction of the revenue authorities would be contrary to the principles of natural justice and equity."
The Tribunal further observed that the assessee had cooperated fully with CBDT, responding to multiple queries as recently as March 2026. It held that the pendency of the notification application cannot be treated as a conclusive denial. The Tribunal also noted that the CIT(A) had failed to address the constitutional claim under Article 289, which was raised for the first time before it. The Tribunal held that such a substantial legal issue, especially one involving constitutional immunity, cannot be dismissed on procedural grounds.
The Tribunal further clarified that the appellant’s failure to file Form 10 under Section 11(2) was not fatal if the claim under Section 10(46) is pending, as the two exemptions are alternative and not mutually exclusive. The Tribunal held that the appellant must be given a fair opportunity to substantiate its claim under Section 11, including by filing the audit report and trustee resolution, if the Section 10(46) route is not successful.
The Verdict
The appeal is allowed for statistical purposes. The impugned order dated 04.06.2025 is set aside. The matter is restored to the file of the Assessing Officer for de novo adjudication, taking into account the outcome of the assessee’s pending application for notification under Section 10(46). The assessee shall be at liberty to file all necessary documents to substantiate its claim under Section 11, including Form 10 and trustee resolution. All contentions, including the claim of exemption under Article 289 as a state instrumentality, are kept open for consideration in the fresh assessment.
What This Means For Similar Cases
Pending Notification Does Not Bar Exemption Claims
Practitioners must now argue that administrative delay in processing Section 10(46) applications cannot be used to deny exemption.
Taxpayers should maintain a paper trail of all submissions and follow-ups to demonstrate bona fide intent.
AO and CIT(A) must not treat non-notification as automatic disqualification when applications are pending without adverse findings.
Constitutional Claims Must Be Addressed
Arguments under Article 289 regarding state instrumentality immunity cannot be dismissed merely because raised for the first time before the Tribunal.
Courts must examine whether the body is truly an instrumentality of the State, irrespective of procedural timing.
Practitioners should always plead constitutional exemptions alongside statutory ones, even if initially overlooked.
Alternative Exemption Claims Are Interchangeable
Claiming exemption under Section 10(46) does not preclude reliance on Section 11 as an alternative.
Failure to comply with Section 11(2) procedural requirements at the initial stage does not extinguish the right to rectify and refile if the primary claim is pending.
Assessing Officers must permit rectification of procedural lapses if the substantive eligibility is otherwise established.
