Three Court of Appeal judges in London on Friday overturned last year's finding by a High Court judge that Ofsted inspectors were wrong to penalise the mixed-sex Al-Hijrah school in Birmingham on the basis of an "erroneous" view that segregation amounted to unlawful discrimination. The school is run by a religious group but most of its capital costs -building maintenance, etc. - are paid with taxpayer monies.
Schools regulator Ofsted, which brought the challenge, said the Al-Hijrah school in Birmingham, central England, was failing to prepare its pupils for life in modern Britain.
Following the ruling Ofsted's chief inspector Amanda Spielman said she was "delighted that we have won this appeal".
But a report in June 2016 found that the policy "limited the pupils' social development and the extent to which they were prepared for interaction with the opposite sex when they left school".
There are believed to be around 20 schools across the country operating similar policies, including Christian, Jewish and Islam schools.
"The school is teaching boys and girls entirely separately, making them walk down separate corridors, and keeping them apart at all times", she said according to the BBC.
Both girls and boys between four and 16 attend the school in Bordesley Green and while they mix in the early years, they are completely separated from Year 5 onwards.
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During the appeal hearing, Peter Oldham QC, appearing for the school's interim executive board, said boys and girls at Al-Hijrah, which is maintained by Birmingham City Council, were "treated entirely equally while segregated" and argued that was lawful.
It was also reported that inspectors found "offensive" books in the school's library that advocated wife beating and forced sex - local media reported.
Concerns were raised that the segregation limited the social development of the pupils and the effect this may have on their ability to interact with the opposite sex after they leave school.
Speaking after the Court of Appeal, Ofsted Head, the policy was "discrimination and is wrong".
She added: "This case involves issues of real public interest, and has significant implications for gender equality, Ofsted, government, and the wider education sector".
Ms Spielman said Ofsted will be "considering the ruling carefully to understand how this will affect future inspections".