2017 (5) TMI 127 - HC - VAT and Sales Tax

Levy of VAT on sale of Business - Validity of assessment order - violation of principles of natural justice - lack of jurisdiction - the writ petitioner/dealer claimed exemption invoking Rule 36 of the Telangana VAT Rules. But the assessing officer came to the conclusion that the Rule went beyond the charging provision and other provisions of the Act - Whether The Assessing Officer Had Jurisdiction? - Held that - 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 - What the assessing officer has done in this case is to take the consideration fixed under the Business Transfer Agreement for every item of asset, as the sale of individual items of goods including goodwill and confirmed the demand made in the show cause notice. Therefore, it is clear that even the Assessing Officer could not regard the transfer of business as a sale, but split such transfer as involving the sale of individual items. The Assessing officer was completely wrong in thinking that the sale of a business as a whole is taxable simply because such a sale also involves a sale of several items used in the course of business. Another important feature is that the petitioner which is a partnership firm, sought to transfer the entire business as a going concern under a business transfer agreement to a private limited company of which the partners of the petitioner were the shareholders. 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. The impugned order was without jurisdiction - petition allowed - decided in favor of petitioner.

Issues Involved:
1. Jurisdiction of the Assessing Officer.
2. Violation of Principles of Natural Justice.
3. Validity and Application of Rule 36 of the Telangana VAT Rules, 2005.

Detailed Analysis:

Jurisdiction of the Assessing Officer:
The petitioner challenged the jurisdiction of the assessing officer on three grounds:
(a) Business transfer or slump sale remains outside the purview of taxation even after the insertion of clause (c) under Section 2(6) of the Act.
(b) There could be no sale without a consideration being paid in cash.
(c) 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.

The court analyzed the relevant provisions of the Telangana VAT Act, 2005, particularly Section 4(1) which obliges every dealer to pay tax on every sale of goods. The expression "sale" is defined in Section 2(28) and "goods" in Section 2(16). The court noted that the sale of a business as a whole is not covered by the charging Section 4(1) or by the definition of "goods" under Section 2(16). Additionally, a sale within the meaning of Section 2(28) should take place in the course of trade or business, which is not the case when a business is transferred in entirety as a going concern.

The court concluded that the transfer of business as a whole does not constitute a sale of taxable goods and even if deemed as a sale, it does not occur in the course of trade or business. Therefore, the assessing officer's attempt to split the transfer into individual sales of assets was incorrect. The court also reviewed past judgments, including Coromandal Fertilisers Limited v. State of A.P., and found that the transfer of an entire business undertaking cannot be regarded as a sale in the course of business by the dealer.

Violation of Principles of Natural Justice:
The petitioner argued that the principles of natural justice were violated. The court noted that the petitioner was given an opportunity to file objections and was granted a personal hearing. However, the assessing officer's decision to treat the business transfer as individual sales of assets without proper jurisdiction and understanding of the law constituted a violation of natural justice.

Validity and Application of Rule 36 of the Telangana VAT Rules, 2005:
The court examined the validity of Rule 36, which exempts the transfer of a business from VAT subject to certain conditions. The Department contended that the rule cannot go contrary to the charging provision and that the pre-conditions for exemption were not satisfied.

The court found that Rule 36 was validly issued under Section 78 of the Act and was intended to keep the transfer of a business as a whole out of the purview of the charging provision. The court emphasized that the transfer of business as a whole is not chargeable to tax under Section 4(1) and that the denial of Input Tax Credit under Section 13(5)(b) supports this interpretation.

The court also noted that the Department's argument that a statutory rule goes contrary to the provisions of the Act was not tenable. The court cited the Supreme Court's decision in Commissioner of Sales Tax v. Indra Industries, which held that the taxing authority cannot advance an argument contrary to its interpretation of the law.

The court concluded that the impugned order was passed without jurisdiction and on a misunderstanding of the law. Therefore, the writ petition was allowed, and the impugned order was set aside.

Conclusion:
The court held that the assessing officer lacked jurisdiction to levy VAT on the transfer of business as a whole. The principles of natural justice were violated due to the improper jurisdiction and understanding of the law by the assessing officer. Rule 36 of the Telangana VAT Rules, 2005, was found valid and applicable, and the impugned order was set aside.

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