Rule 2E: Approval Guidelines under Section 10(23G) of the Income-tax Act
Rule 2E prescribed an approval process for enterprises engaged in specified infrastructure and other eligible businesses under the former Section 10(23G) framework. This guide explains its application, documentation, approval conditions, audit requirements and withdrawal procedure.
Purpose and scope of Rule 2E
Rule 2E of the Income-tax Rules, 1962 set out guidelines for approval of an enterprise wholly engaged in an eligible business for the purposes of Section 10(23G) of the Income-tax Act, 1961. The historical provision related to specified financing and investment income connected with qualifying enterprises and projects. It should not be confused with a general exemption for all infrastructure businesses.
1. Application to the Central Government - Form 56E
Under sub-rule (1), an enterprise could submit an application for approval to the Central Government in Form No. 56E, on or after 1 June 1998. This describes the original procedure and is not a current application route.
2. Documents accompanying the application
Sub-rule (2) specified supporting records intended to establish the enterprise's legal existence, qualifying activities and financial position:
- Constitution documents: a certificate of incorporation under the Companies Act, 1956, or another document establishing the constitution and legal status of the enterprise.
- Project records: the project report or agreement concerning the eligible business, duly approved by the Central Government, a State Government, a local authority or another statutory body, as applicable.
- Financial statements: balance sheets and profit and loss accounts for the preceding three previous years, together with accounts for the relevant part of the year of application.
An enterprise established during the preceding three years could provide financial statements for the shorter period of its existence, together with the relevant part of the application year.
3. Conditions for approval
Under sub-rule (3), the Central Government was to approve an enterprise for the purposes of Section 10(23G) if it was wholly engaged in the eligible business. Under sub-rule (4), the Government could request additional information or documents, including audited annual accounts, and undertake enquiries to verify eligibility.
4. Written approval and opportunity of hearing
Sub-rule (5) required a written order granting or refusing approval. Before refusing an application, the enterprise had to be given an opportunity of being heard. This procedural safeguard was part of the historical approval framework.
5. Books of account and audit report
Sub-rule (6) required every approved enterprise to maintain books of account and have them audited by an accountant as defined in the relevant provisions of the Income-tax Act, 1961. The signed and verified audit report had to be furnished to the jurisdictional Chief Commissioner of Income-tax before the due date for filing the return under Section 139(1).
6. Circumstances leading to withdrawal
Sub-rules (7) and (8) dealt with non-compliance and withdrawal of approval.
- The enterprise ceased carrying on the eligible business.
- It failed to maintain books of account or obtain the required audit.
- It failed to furnish the prescribed audit report.
After necessary enquiries, the Chief Commissioner was to report relevant circumstances to the Central Government within six months of the return-filing due date. If satisfied that the prescribed grounds existed, the Central Government was to withdraw approval, but only after giving the enterprise an opportunity of being heard.
7. Meaning of enterprise and eligible business
| Term | Meaning under the historical Rule 2E |
|---|---|
| Enterprise | An enterprise wholly engaged in the eligible business. |
| Eligible business | Business referred to in Section 80-IA(4), a qualifying housing project under Section 80-IB(10), or a hotel or hospital project as defined in the then-applicable Explanation 1 to Section 10(23G), subject to the statutory conditions. |
These cross-references must be read in their historical legislative context. The relevant definitions, project conditions and exemption provisions changed over time.
Practical relevance for taxpayers and researchers
Rule 2E remains useful when reviewing older approvals, assessing historical exemption claims, interpreting tax records or examining disputes relating to periods when Section 10(23G) applied. A historical approval does not by itself establish entitlement to a tax benefit for a later period.
For a present-day investment or infrastructure financing arrangement, examine the applicable provisions of the current income-tax legislation, the relevant transitional rules and any sector-specific requirements rather than relying on Form 56E or an approval issued under the former Section 10(23G) regime.
Frequently asked questions
What was Form 56E used for?
Form 56E was the prescribed application form for an enterprise seeking approval under the historical Rule 2E procedure linked to Section 10(23G).
Was an audit required after approval?
Yes. The historical rule required approved enterprises to maintain accounts, obtain an audit and furnish the audit report within the prescribed time.
Can a new approval be sought under Rule 2E in 2026?
The underlying Section 10(23G) exemption was omitted with effect from 1 April 2007. The old Form 56E approval mechanism should not be treated as an operative route for new claims.
Editorial update: 10 October 2026. This article explains the supplied historical Rule 2E text and its legislative context; it is not a substitute for reviewing the law applicable to a particular tax year.