State-governed charitable trust is entitled to exemption as fund transfer for hazard mitigation equipment does not violate section 13.

By | July 6, 2026
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State-governed charitable trust is entitled to exemption as fund transfer for hazard mitigation equipment does not violate section 13.

Issue

Whether the appellant-trust, formed by the State Government for disaster mitigation, is entitled to tax exemption under Section 11 when its interest income was spent on purchasing high-end hazard mitigation computing equipment in the name of the State Government’s Secretariat, or if such an arrangement violates the restrictive provisions of Section 13.

Facts

  • Trust Setup: The appellant-trust was established by the State Government under the Indian Trusts Act and registered as a charitable entity under Section 12AA.

  • Funding & Control: The initial corpus was contributed entirely by the State Government, and the State Disaster Management Unit functioned as the operational secretariat for the trust.

  • Objects & Grant: The trust deed explicitly permitted using interest income as matching grants for disaster mitigation projects along the state’s coastline.

  • The Transaction: During the assessment year 2004-05, the trust claimed Section 11 exemption and accumulation under Section 11(2) on interest from fixed deposits. Out of this, ₹3.05 crores was granted to purchase high-end computing equipment for the A.P. Hazard Mitigation & Emergency Cyclone Recovery project.

  • Adjudication History:

    • The Assessing Officer denied the Section 11 exemption and taxed the entire interest income.

    • The Commissioner (Appeals) reversed the AO’s decision and allowed the exemption.

    • The ITAT (Tribunal) reversed the first appellate authority, holding that Section 13 was violated and denying the exemption.

Decision

  • Exemption Restored: The High Court set aside the Tribunal’s order and ruled in favor of the assessee trust.

  • Legitimate Fund Deployment: The court observed that the appellant provided clear bank certificates proving the legitimate transfer of funds to open a Letter of Credit for the equipment vendor.

  • No Adverse Findings: The court highlighted that the invoices being in the name of the State Government’s Disaster Management unit did not invalidate the charitable act, as there was absolutely no finding of misuse, misappropriation, or siphoning of funds.

Key Takeaways

  • Substance Over Form in Charity: When a state-backed trust spends money directly on its specified public utility goals (like cyclone recovery tracking), technicalities regarding whose name is printed on the vendor invoice will not nullify the exemption.

  • Section 13 Requires Real Abuse: To invoke the disqualifying provisions of Section 13, the tax department must establish concrete evidence of fund diversion, personal benefit, or financial misappropriation—not just procedural or administrative overlaps with government departments.

HIGH COURT OF TELANGANA
A.P. Vulnerability Reduction Fund Trust
v.
Assistant Director of Income-tax Exemptions-II
P. Sam Koshy and NANDIKONDA NARSING RAO, JJ.
Income Tax Tribunal Appeal No.173 of 2013†
JUNE  9, 2026
P. Sam Koshy.-The instant appeal has been filed by the appellant under Section 260A of the Income Tax Act, 1961 challenging the order dated 23.07.2012 in I.T.A.No.1138/Hyd/2011 passed by the Income-Tax Appellate Tribunal, Bench ‘A’, Hyderabad, (for short, ‘the impugned order’).
2. Heard Mr. C.V. Narasimham, learned counsel for the appellant, and Mr. Sri Vijhay K. Punna, learned Senior Standing Counsel for the Income Tax Department, for the respondent.
3. Vide the impugned order, the Tribunal had allowed the appeal preferred by respondent and reversed the order passed by the Commissioner of Income Tax (Appeals).
4. The Tribunal in the course of passing the impugned order had reversed the finding given by the Commissioner of Income Tax (Appeals) so far as provision of Section 13 of the Income Tax Act, 1961 (for short, ‘the Act’) being violative and also insofar as the appellant being entitled for exemption under Section 11 of the Act.
5. The appellant, viz., A.P. Vulnerability Reduction Fund Trust, was formed by the Government of Andhra Pradesh in accordance with provisions of the Indian Trust Act, 1882 on 27.11.1997 with Registration No.33/1998. The Trust was established to provide protection to the vulnerable areas of the State coastline, human and animal life, public and private property as against ravages of nature including cyclones, floods, etc. Since the purpose and object of the Trust being charitable it was also registered under the provisions of Section 12AA of the Act. The entire corpus of the appellant is one which is contributed by the State Government of Andhra Pradesh. The Disaster Management Unit of the State acts as a secretariat for the appellant as per Clause (iv)(6) of the Trust Deed. The administration of the funds as per Clause 7(d) of the Trust Deed is done by the Committee constituted by the Trust. As per clause (5) of the Trust Deed, the interest income of the funds can be used as matching grant to achieve the objects of the trust. The activities taken up by the appellant are mainly to evolve a long-term policy for hazard reduction, to formulate a long term disaster mitigation strategy, to enhance the disaster preparedness, to develop early warning capabilities at state level and further to create, maintain and upgrade the necessary infrastructural facilities accordingly. The income that is generated from the interest is utilized to undertake programmes, projects and schemes in order to meet the objects and activities carried out by the appellant so as to minimize the adverse impact in the event of any disaster. One of the major requirements for minimizing of adverse impact in the event of a disaster is by building a strong reliable and accurate warning dissemination system.
6. For the Assessment Year 2004-05, the appellant claimed exemption under Section 11 of the Act on the income earned as interest on fixed deposits as the income was accumulated as per Section 11(2) of the Act. The Assessing Officer initiated the assessment proceedings wherein the appellant informed the Assessing Officer of having granted Rs.3,05,00,860/- in July, 2003 for the purpose of purchasing high-end computing equipment and accessories by which collection, storage and analyzing, using and disseminating data relevant for the Andhra Pradesh Hazard Mitigation & Emergency Cyclone Recovery project. However, the Assessing Officer did not accept the same and doubted the contention of the appellant in the course of passing the Assessment Order dated 29.12.2006 and subjecting the entire interest income to tax by denying the exemption under Section 11 of the Act and raised a tax demand of Rs.79,23,878/-. Thereafter, the order passed by the Assessing Officer dated 29.12.2006 was subjected to challenge before the Commissioner of Appeals who reversed the order of the Assessing Officer by allowing the appeal vide order dated 28.01.2011 holding that appellant be entitled for exemption under Section 11 of the Act. The order passed by the Commissioner of Appeals dated 28.01.2011 was subjected to challenge before the I.T.A.T. vide ITA.No.1138/HYD/2011, which stood allowed in favour of respondent vide the impugned order dated 23.07.2012 by reversing the order passed by the Commissioner of Appeals by holding that the appellant herein is not entitled for exemption under Section 11 of the Act.
7. Aggrieved, the instant appeal has been filed by the appellant.
8. Learned counsel for the appellant contended that the Tribunal failed to appreciate the aims, objectives and activities of the appellant in the course of deciding the appeal. It was also the contention of the learned counsel for the appellant that the Tribunal having lost sight of the fact that the activities undertaken by the appellant was for ensuring protection of the vulnerable areas in the State coastline so also the human and animal life in those areas by giving protection against ravages of nature like cyclones, floods, etc. According to him, the Tribunal failed to take note of the fact that the nature of activities undertaken by the appellant was duly covered under the charitable purpose as defined under the Income Tax Act itself. Likewise, it was also the contention of the learned counsel for the appellant that the Tribunal ignored the fact that Clause (5) of the Trust Deed permitted the appellant to use the interest on income as grants to achieve the objects of the appellant. It was also the contention of the learned counsel for the appellant that the Tribunal ought to have appreciated the fact that merely non-entry of the purchases made in the Books of Account cannot by itself be permitted to draw an adverse inference so far as the actual usage of the funds are concerned. According to the appellant, the Tribunal failed to take note of its decision and the previous Assessment Order whereby a similar exemption under Section 11 of the Act was in fact granted to the appellant.
9. Per contra, learned counsel for the respondent, opposing the appeal contended that the order passed by the Assessing Officer and the order passed by the Tribunal, when read in conjunction, would give a clear indication of the shortcomings in the case of appellant which would disentitle him from exemption under Section 11 of the Act. It was the contention of the learned Standing Counsel for the respondent Department that in the course of the assessment, the assessee-appellant failed to explain as to how the so-called purchases of computer and other equipments made from M/s. Silicon Graphics were not reflected in the Books of Account nor was it reflected in the Balance Sheet; and therefore, contended that the finding arrived at by the Tribunal reversing the finding given by the Commissioner of Appeals cannot be said to be in any manner erroneous or contrary to law and thus prayed for rejection of the appeal by holding that the question of law raised does not have any merit.
10. Having heard the contentions put forth on either side and on a perusal of the records certain undisputed facts which are revealed from the pleadings are, viz.,
(a) the appellant herein is a Trust formed under the Indian Trust Act, 1882 by the then Government of Andhra Pradesh with a specific motive and object. The entire representatives of the Trust are from the Government of Andhra Pradesh;
(b) there is no dispute so far as the objectives of the Trust was to protect the vulnerability of the State coastline and the human and animal habitat from the ravages of nature like cyclones and floods;
(c) the activities undertaken by the appellant squarely falls within the definition of charitable purpose under the Act; and
(d) the entire corpus of the appellant-Trust is also contributed by the Government of Andhra Pradesh;
(e) There is also no dispute so far as the appellant having purchased high-end computing equipment and accessories for collection, storage, analization, usage and disseminating data relevant for the A.P. Hazard Mitigation and Emergency Cyclone Recovery project. These high-end computing equipments was one of the major equipment which are required in order to minimize the adverse impact of any disaster and it was possible only by completing the strong reliable and accurate warning dissemination system. The purchases made of Rs.3,05,00,680/- in July, 2003 was also for the very same purpose; and
(f) similar issue that had arisen in the previous Assessment Year 2003-04 pertaining to the very same appellant was accepted by the respondent-Department and those issues stood decided in favour of appellant both by the Commissioner of Income Tax (Appeals) and also by the Appellate Tribunal. Unlike this time, though the Commissioner of Appeals took a similar stand for this Assessment Year also, the Tribunal altogether took a different stand.
11. In addition to the aforesaid grounds what is also evidently apparent from the materials available on record is that the appellant produced certificates from its bank to show that the money was transferred for issuing Letter of Credit in favour of M/s. Silicon Graphics Pvt. Ltd. The Tribunal also in fact had at one point of time noted that invoices of M/s.Silicon Graphics Pvt. Ltd. were in the name of Government of Andhra Pradesh Disaster Management. The Tribunal also found that the Assessing Officer did find purchase of equipment with M/s.Silicon Graphics Pvt. Ltd. and those purchases were made by the A.P. Hazard Mitigation and Emergency Cyclone Recovery project of the Government of Andhra Pradesh; and it was under this project that the Government had awarded the contract for purchase of high-end computing equipment and other accessories under the aforementioned A.P. Hazard Mitigation and Emergency Cyclone Recovery project.
12. The Tribunal also failed to appreciate the fact that the appellant-Truest was in fact carrying out their activities directly in collaboration with the A.P. Hazard Mitigation and Emergency Cyclone Recovery project and the Disaster Management unit of the State. Another admitted factual position which is reflected is that there does not seem to be any finding arrived at by the respondent-Department that the funds of the Trust have been misappropriated or misused or have been siphoned away by any of the officers of the appellant-Trust. In the absence of a categorical finding of any misuse or misappropriation of funds, except for the fact that purchases so made not being reflected in the Books of Account or in the Balance Sheet, it is difficult to reach to the conclusion that appellant had violated the conditions otherwise stipulated under Section 13 of the Act. In the event of there being no prima facie strong material to show any violation or non-compliance of the provisions of Section 13 of the Act, there does not seem to be any cogent material available to hold that the appellant is not entitled for exemption under Section 11 of the Act.
13. Another aspect which goes strongly in favour of appellant is that the assessment orders for the previous years, more particularly of the immediate preceding year, i.e., Assessment Year 2003-04, wherein the very same Tribunal vide I.T.A.No.283 of 2007 had upheld a similar stand taken by the Commissioner of Income Tax (Appeals) for the Assessment Year 2003-04 by holding that the appellant is entitled for exemption under Section 11 of the Act.
14. For all the aforesaid reasons, this Court is inclined to allow the appeal by setting aside the impugned order passed by the Tribunal in I.T.A.No.1138/Hyd/2011, dated 23.07.2012, and confirming the order passed by the Commissioner of Income Tax (Appeals) in I.T.A.No.649/Tr./CIT(A)/GNT/06-07, dated 28.01.2011.
15. Accordingly, the appeal stands allowed as above. No costs.
16. As a sequel, miscellaneous petitions pending if any, shall stand closed.