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Suppose I have acquired a source code that is Copyright (c) XYZ according to the BSD 3-clause license.

Now, I modify this source code and protect the end result software under a proprietary license.

Does BSD 3-clause license allow gaining such protections for modifications?

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Code that is licensed under BSD-3-clause can be included into proprietary software, yes. But this doesn't change the license of the code you copied. It remains under the BSD-3-clause license, and with it the attribution requirements.

Viewed from a different perspective, yes, you are allowed to modify code licensed under BSD-3-clause, and you can license those modifications however you want. The modified software as a whole then has proprietary parts and BSD-3-clause covered parts. For end users, this effectively makes the software as a whole proprietary, but from your perspective you still have to fulfill the license conditions like providing the required attribution.

Just like other permissive Open Source licenses (MIT, Apache-2.0, …), the BSD-3-clause requires that you give any recipients of the software a copy of the copyright+license notice, essentially providing the entire license header. Specifically, the BSD-3-clause requires in conditions 1 and 2:

1. Redistributions of source code must retain the above copyright notice, this list of conditions and the following disclaimer.

2. Redistributions in binary form must reproduce the above copyright notice, this list of conditions and the following disclaimer in the documentation and/or other materials provided with the distribution.

Providing this attribution does not mean the entire software is subject to that license! Attribution notices are very common in mobile apps that include open source components, or in modern web browsers. I've previously discussed this in the context of the Apache-2.0 license.

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