Sale of business not taxable: Hyderabad High Court

Hyderabad: The Hyderabad High Court has held that the sale of business as a whole was not taxable under the Telangana VAT Act, 2005.

A division bench comprising Justice V. Ramasubramanian and Justice J. Uma Devi was allowing a petition by M/s. Paradise Food Court, Secunderabad challenging the imposition of tax for selling its business to another entity.

The petitioner told the court that in May, 2014 it entered into a Business Transfer Agreement with a company by name Paradise Food Court Pvt. Ltd, agreeing and undertaking to transfer its entire business as an ongoing concern, in consideration of equity shares and compulsorily convertible preference shares being allotted to the partners of the petitioner-firm.

The bench said “As  a matter of rule, we would not entertain writ petitions under Article 226 as against the orders of assessment passed under any taxing statute, since any person affected by an order of assessment, will have an effective statutory alternative remedy of appeal. But there are two exceptions to this rule — cases where the assessing officer lacks jurisdiction; and cases where principles of natural justice stand violated.”

The bench noted that in this case, the petitioner assailed the impugned order on the ground that it lacked jurisdiction and violation of principles of natural justice.

Referring to provisions under the VAT Act 2005, the bench held that “the transfer of business as a whole is not per se included in the charging provision. It is only by virtue of logic that every transfer of business would also include a sale of goods of the business that the charging provision is sought to be invoked.”

The bench noted that “When the transfer of business by itself is not made chargeable to tax and when the definition of the word sale would apply only when there is a sale in the course of business or trade, the very nomenclature given in Rule 36 of Tax Rules as though the transfer of business is exempt from VAT, is redundant.”

Setting aside the demand and penalty imposed by the tax authorities, the bench said “It may not be open to the department to claim that a Statutory Rule goes contrary to the provisions of the Act.”