Sale of Business as a Going Concern would not attract VAT: Hyderabad HC [Read Judgment]

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The division bench of the Hyderabad High Court in M/s. Paradise Food Court v. state of Telangana, held that VAT cannot be imposed on the sale of business as a going concern under the provisions of the Telangana VAT Act, 2005.

The petitioner-Firm, in the present case, sold their entire business to a Company in consideration of equity shares and compulsorily convertible preference shares being allotted to the partners. Under the Business transfer agreement, all the tangible and intangible assets and all the rights and liabilities of the partnership firm were to be transferred to the company as an ongoing concern.

The VAT Department levied tax on the petitioners on the other income, consideration received on sale of fixed assets and on sale of goodwill on the ground that there is no provision in the Telangana VAT Act, 2005 which exempts sale of goods, when a business is sold as an ongoing concern. Following the assessment proceedings, the Department also initiated penalty proceedings against the assessee.

Challenging the above order before the High Court, the petitioners vehemently contended that after the insertion of Section 2(6)(c) under the  Telangana VAT Act, the species of business transfer or a slump sale or sale as an ongoing concern, continue to remain outside the purview of taxation. It was also contended that there could be no sale without a consideration being paid in cash and an officer discharging the functions conferred by the statute and the Rules is not competent to decide whether a Rule is ultra vires the Act or not.

After analyzing the charging section, i.e s. 4(1) of the Act, the bench found that the sale of a business as is not covered either by the charging Section, viz., Section 4(1) or by the definition of the expression goods under Section 2(16).it was also noted that in order to constitute a ‘sale’ within the meaning of section 2(28), a transfer of property in the goods or the transfer of the right to use, should take place in the course of trade or business.

Allowing the petition, the bench clarified that “when a business in transferred in entirety as a going concern, with all the rights and liabilities, (i) there is no sale of any taxable goods and (ii) that even if there is a deemed sale of goods, as understood in common parlance, it does not take place in the course of trade or business, to come within the definition under section 2(28). No business can be transferred in the course of trade or business, unless a person is in the very business of buying and selling business houses. Therefore, unless a sale takes place in the course of trade or business, it is not covered by the Act.

It was contended on behalf of the department that unless the transfer results in the closure of trade, commerce, manufacture or adventure, the same cannot escape the charging provisions of the State.

Rejecting the contentions of the department, the bench observed that the sale of business, by itself has not been made chargeable to tax under any of the provisions of the VAT Act, 2005. It is only the sale of goods either per se or as part of works contract and not the sale of business, which is made chargeable to tax under the Act.

The bench considered another important aspect that no Input Tax Credit will be available in the case of transfer of business as a whole under Section 13(5)(b). Therefore, the amendment brought forth to the definition of the expression business has not altered the scenario.

The division bench also observed that in consideration of the transfer of the business as a whole, the partners of the petitioner were allotted equity shares and preferential shares in the company. “Therefore, to treat the same as a sale of goods merely on the ground that all the assets of business are individually mentioned in the Schedule together with their value, is completely contrary to the Statutory prescription. Therefore, the impugned order has been passed on an assumed jurisdiction, where none exists.”

Read the full text of the Judgment below.

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