Bombay High Court: an incidental surplus doesn't disqualify a charitable hospital's tax exemption

The Income Tax Department had refused to approve Breach Candy Hospital Trust's claim to exemption under Section 10(23C)(via) of the Income-tax Act, available to a hospital existing 'solely for philanthropic purposes and not for purposes of profit,' after computing a recurring surplus from the Trust's accounts across several assessment years. The Trust challenged the rejection by writ petition. Allowing the petitions on 12 October 2026, Justices B.P. Colabawalla and Farhan P. Dubash held, first, that the Department's own surplus computation was flawed because it failed to properly account for depreciation and capital expenditure; correctly computed, the hospital had actually run at a deficit in the relevant year.

More importantly, the Court held that a hospital generating an incidental financial surplus is not, by that fact alone, disqualified from the 'philanthropic, not-for-profit' exemption; what matters is whether the surplus is privately distributed or ploughed back into the institution's own medical objects, such as equipment and facilities. The Court also invoked the tax 'rule of consistency' from Radhasoami Satsang v. CIT: since the Trust's charitable character had been accepted by the Department in earlier years on materially unchanged facts, the Department needed a reasoned basis to depart from that acceptance, which it had not shown. Both rejection orders were quashed, and the Department was directed to grant approval within eight weeks.