The Revenue said the hospital ran systematic profits. Over those nine years it ran a deficit of 21.87 crore
Justices B.P. Colabawalla and Farhan P. Dubash quashed two refusals of approval under Section 10(23C)(via), holding that a surplus does not by itself show a profit purpose and that penalising a hospital for improving its equipment inverts the test.
The Chief Commissioner of Income-tax refused Breach Candy Hospital Trust the approval it needs to keep its receipts out of its taxable income, holding that the hospital generates systematic profits and so does not exist solely for philanthropic purposes. A division bench of the Bombay High Court has quashed both refusal orders, and found that across the nine assessment years in the first petition the hospital did not run a surplus at all. It ran an aggregate deficit of ₹21,87,28,218.
What the provision asks
Section 10(23C)(via) of the Income-tax Act, 1961 allows receipts on behalf of a hospital to be left out of the computation of its total income, provided the hospital meets the statutory requirements and obtains approval from the prescribed authority. The requirement at the centre of this case is that the institution exist “solely for philanthropic purposes and not for purposes of profit”.
Breach Candy Hospital Trust, a company incorporated under the Companies Act of 1913, applied for that approval. By an order of 15 April 2010 the Chief Commissioner rejected its applications for assessment years 2002-03 to 2010-11. By a second order of 28 September 2012 he rejected the application for assessment year 2011-12 and the years following. Those two orders became Writ Petition No. 2462 of 2010 and Writ Petition No. 1051 of 2013, and because the issues overlapped the parties agreed they be decided together.
Justice B.P. Colabawalla and Justice Farhan P. Dubash framed the question in two parts: what the statutory phrase means, and whether the grounds the Chief Commissioner relied on justify refusing approval.
Fifty-six years of the same objection
The dispute is older than the provision it now turns on. The trust was registered as a public trust under the Bombay Public Trusts Act, 1950 on 22 September 1953. The Finance Act, 1970 inserted clause (22A) into Section 10 with effect from 1 April 1970, excluding the income of a hospital existing solely for philanthropic purposes and not for purposes of profit. That clause carried both requirements the present case is about, but it required no separate approval from anybody.
The hospital claimed under it from assessment year 1970-71. For every year from 1970-71 to 1995-96 the exemption was allowed, the single exception being assessment year 1989-90, which the Assessing Officer rejected and which was allowed on appeal.
Then, for assessment years 1996-97 to 1998-99, the Assessing Officer denied it. His reasons are worth reading beside the orders now quashed: substantial surpluses, the small proportion of expenditure devoted to poor and needy patients, and profits generated by certain activities including the sale of medical supplies. Three decades on, the Revenue was still running the first two of those arguments.
Section 10(23C)(via) replaced the old clause and added the approval requirement, with a first proviso requiring an application in the prescribed form and a second empowering the prescribed authority to call for documents and make inquiries into the genuineness of the institution's activities. Rule 2CA of the Income-tax Rules set the procedure. The Central Board of Direct Taxes exercised the approval function first; the Chief Commissioner or Director General became the prescribed authority under the amended rule.
That matters for a reason the hospital pressed hard. The Board itself granted approval for assessment years 1999-2000 to 2001-02 after examining substantially the same objections about surpluses and expenditure on poor patients. Mr Mistri's argument was that the Chief Commissioner could not depart from that approval without identifying a material change in the facts or the law, and he relied on Radhasoami Satsang v. CIT and Pr. CIT v. Quest Investment Advisors Pvt. Ltd. for the proposition that the Revenue must take a consistent approach in materially similar cases. Registration under Section 12A had been granted on 26 July 1999, assessments had accepted the charitable character of the trust in granting exemption under Section 11, and the Section 80G approval was still in force — none of which, he accepted, decides entitlement under Section 10(23C)(via) by itself, but all of which forms part of the statutory treatment the Revenue had consistently accorded.
The arithmetic that was never there
The first impugned order rested on a finding that the hospital generates systematic profits. The Bench worked through the figures for assessment years 2002-03 to 2010-11 taken together and found no adjusted surplus of the kind alleged. On the contrary, at the end of assessment year 2010-11 there was an aggregate deficit of ₹21,87,28,218. The finding of systematic profit was held to be incorrect and incapable of being sustained.
Part of the disagreement was about depreciation. The Revenue would not allow it in computing surplus, and would not treat the acquisition of assets as application of income once depreciation had been allowed. The Bench noted that the Tribunal had itself allowed normal depreciation in computing the hospital accounts in a later appeal, and held that the Chief Commissioner was not entitled to reject capital expenditure in the way he had.
A surplus is not the same thing as a profit purpose
The Bench then gave an independent reason why the orders could not stand, and this is the part of the judgment with reach beyond this hospital.
Even where an annual surplus does remain, its source and its use have to be considered. Here the expenditure is on the hospital and its medical facilities. The Chief Commissioner had treated the prospect of increased receipts from improved facilities as proof of a profit purpose. That approach, the Bench held, would penalise a philanthropic hospital for improving its equipment or expanding its capacity. The question is whether the expenditure serves the institution's philanthropic purpose or some unrelated commercial activity.
On that question the constitutional documents of the trust mattered. Clause 3(I)(a) of its memorandum confines the principal undertaking to the hospital and to medical care, for persons of any community. Clause 4 requires income and property to be applied to the objects and prohibits distribution of profits to members, directly or indirectly, by dividend, bonus or otherwise. Clause 8 requires whatever property remains on dissolution, after liabilities are discharged, to be devoted to charitable purposes. The Bench found no independent commercial undertaking and no unrelated substantive object identified anywhere in the impugned orders. The activities the Revenue actually pointed to were the hospital's medical services, its equipment, its consultants and the management of its funds; the outpatient consultation rooms serve diagnosis and treatment.
There is one further strand, drawn from a decision on educational institutions that the Bench applied to hospitals. The statutory conditions extend to hospitals and medical institutions, and any incidental business must be connected with the qualifying activity. Clause 3(I)(a) directs the creation and maintenance of a hospital for philanthropic purposes, and the supporting powers in the memorandum have to be read in aid of that object rather than as licences for something else. Measured against that, the outpatient consultation rooms the Revenue objected to serve diagnosis and treatment — they are not the letting out of premises, which is the kind of activity that would stand apart from the qualifying purpose.
The hospital also continues to hold registration under Section 12A and approval under Section 80G, neither of which the Revenue had disturbed.
What the Charity Commissioner's scheme requires
Running alongside the tax question is a set of obligations the hospital carries under the scheme framed by the Charity Commissioner, and the Bench treated these as evidence rather than formality. Beds are earmarked for indigent patients. A further percentage is reserved for patients from weaker sections receiving concessional treatment. An Indigent Patients Fund must be maintained, with a contribution of two per cent of gross billing as the scheme prescribes. Specified services must be provided without charge. There is periodic reporting to the Charity Commissioner.
Those, the Bench held, are substantial and enforceable obligations directed specifically at access to medical care. The hospital had placed its compliance reports and the Charity Commissioner's own report confirming compliance before the authorities, and no adverse determination by the Charity Commissioner had been shown.
Three of the Revenue's objections were answered on that footing. The earmarking of beds and the provision of treatment cannot be discarded merely because the value of the concessions, expressed as a percentage of total receipts, looks small. The contribution to the Indigent Patients Fund and the expenditure out of it cannot be treated as identical measures without regard to the scheme's own accounting and utilisation requirements. And the reservation for indigent patients, and the separate reservation for weaker-section patients, do not establish that every patient occupying one of the remaining beds falls outside a philanthropic activity — the availability of treatment to paying patients helps sustain the very same medical facilities.
On the concessions given to the hospital's own staff, the Bench cut in both directions. A contractual benefit to an affluent executive cannot automatically be counted as relief to an indigent patient. But the hospital had clarified that staff treatment was not charged to the Indigent Patients Fund, and the Revenue had established no contrary diversion from that fund. The general objection to staff concessions therefore proved neither a breach of the scheme nor the absence of a philanthropic purpose.
The second petition, and the years that are left
For assessment year 2011-12 and after, the Bench reached the same conclusion without needing to decide one of the hospital's arguments — that in determining whether a surplus exists, only amounts arising from the core activity of operating a hospital should count. It did not have to, because on the objects of the trust, its actual activities and its use of funds in that period, the hospital existed solely for philanthropic purposes and not for profit. Surplus does not, by itself, establish that a hospital exists for profit.
One practical limit comes from an additional affidavit the hospital filed on 7 October 2026, setting out what had happened during the years the petitions were pending. Although its application of 22 September 2011 had sought approval for assessment year 2011-12 and subsequent years, the approval now to be granted is restricted to assessment years 2011-12 to 2021-22.
Order
Rule was made absolute in both petitions and both were allowed. The order of 15 April 2010 rejecting approval for assessment years 2002-03 to 2010-11 is quashed and set aside, and the order of 28 September 2012 rejecting approval for assessment year 2011-12 and subsequent years is quashed and set aside.
The Chief Commissioner, or whichever authority is now competent to grant it, must issue the orders granting approval under Section 10(23C)(via) for both sets of years, consistent with the findings in the judgment, within eight weeks of the judgment being uploaded on the High Court website. For the second petition that approval is to cover assessment years 2011-12 to 2021-22.
Mr Jehangir D. Mistri, Senior Advocate, appeared for the hospital with Mr Fenil Bhatt and Mr Danish Qureshi; Mr Suresh Kumar for the Revenue. The first petition had been pending for sixteen years and the second for thirteen.