HYDERABAD : While setting aside the demand and penalty imposed on a food court by the tax authorities, a division bench of the High Court has held that the “transfer of business” as a whole is not taxable under the Telangana VAT Act, 2005.
The bench of Justice V Ramasubramanian and Justice J Uma Devi was allowing a writ petition filed by Paradise Food Court of Secunderabad area, represented by Ali Hemati, challenging the decision of the tax authorities to impose tax for selling their business to another entity.
In May 2014, the petitioner entered into a Business Transfer Agreement with a company by name Paradise Food Court Private Limited, 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.
Under the 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.
Upon coming to know of the said agreement, the assistant commissioner of commercial taxes levied tax on the sale of fixed assets, sale of goodwill and other income in view of transfer of business on the ground that there was no provision in the Telangana VAT Act, 2005 which exempts sale of goods when a business was sold as an ongoing concern.
The bench noted that the petitioner assails the impugned order on grounds of lacking of jurisdiction and violation of the principles of natural justice.
“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 and they are (1) cases where the assessing officer lacks jurisdiction and (2) cases where principles of natural justice stand violated,” the bench observed.
Referring to provisions under the VAT Act 2005, the bench held that the transfer of business, as a whole, was not per se included in the charging provision. It was only by virtue of a logic that every transfer of business would also include a sale of goods of the business that the charging provision was sought to be invoked.
“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.
It may not be open to the department to claim that a statutory rule goes contrary to the provisions of the Act.”
The bench allowed the petition by setting aside the demand and penalty imposed on the petitioner.