2013 (12) TMI 629 - HC - VAT and Sales Tax

Applicability of Explanation 3 to Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959 - Revenue was of the view that the separate value given to immovable and movable assets, intangible and tangible assets Held that - The intention of the parties was to sell Thoraipakkam and Ranipet Units, the authorities including the Sales Tax Appellate Tribunal committed serious error in holding that there was separate sale of immovable assets and movable assets by referring to the balance sheets and profit and loss account produced before the authorities - when the parties to the agreement had agreed upon the value for the sale of two units - the assessee had not agreed to piecemeal sale of business, on the mere fact that the purchaser had given the value of the immovable assets and movable assets separately by itself would not defeat the claim of the assessee for exemption from taxation - The sale of the entire stock-in-trade as such could not be treated as sale of business in entirety - the assessee continued to be in business and retained business in those units, the question of exclusion of turnover relating to stock in trade does not arise. The bifurcation of the price would not in any manner go against the intention of the parties viz., sale of entire unit at Thoraipakkam and Ranipet in favour of the purchaser and going by the various terms of the agreement - there was no justifiable ground to accept that the sale consideration would form part of the turnover Following Deputy Commissioner (C.T)., Coimbatore Vs. K.Behanan Thomas 1976 (4) TMI 202 - MADRAS HIGH COURT - when there is transfer of business as a whole even if it be an unit, were two independent units, Explanation 3 to Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959 cannot be attracted to the assessee - The demand as well as the penalty levied on the assessee set aside Decided in favour of Assessee.

Issues Involved:
1. Denial of exemption claim under Explanation 3 to Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959.
2. Requirement of transferring all businesses for exemption eligibility.
3. Emphasis on retention of assets during business succession.

Issue-wise Detailed Analysis:

1. Denial of exemption claim under Explanation 3 to Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959:
The assessee contested the Sales Tax Appellate Tribunal's decision, which denied the exemption claim for the transfer of Genset, light engineering component, and agro engine businesses to M/s. Greaves Limited. The assessee argued that the transfer was a comprehensive sale of business units as going concerns, thus qualifying for exemption under Explanation 3 to Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959. The agreement dated 15.12.1993 included the sale of immovable and movable assets, technical assistance agreements, and a non-compete clause, indicating a complete transfer of business. The assessee provided annual reports from before and after the transfer to support their claim. However, the Assessing Officer rejected the claim, arguing that the agreement specified separate values for immovable and movable assets, making the sale of movable properties taxable.

2. Requirement of transferring all businesses for exemption eligibility:
The Tribunal's decision was based on the erroneous belief that for an exemption to apply, all businesses of an assessee must be transferred. The assessee retained its two-wheeler business in Thiruvotriyur, which the Tribunal considered as a continuation of business, thus negating the exemption claim. The assessee argued that the transfer of specific business units, as a whole, should suffice for exemption, even if other business activities continue. The Tribunal's reliance on the decision in Tools and Machineries Ltd. Vs. State of Madras was misplaced, as it dealt with the sale of stock-in-trade while the business continued, which is distinguishable from the present case where entire business units were transferred and ceased operations post-transfer.

3. Emphasis on retention of assets during business succession:
The Tribunal emphasized the retention of certain assets by the assessee, suggesting that this indicated a continuation of business. The assessee contended that the retained assets were not part of the transferred business units and were retained to avoid burdening the transferee. The Tribunal failed to apply the correct legal test, which should determine whether the retained assets were used in the same line of business or retained for other reasons. The assessee cited several precedents, including Deputy Commissioner (C.T.) Coimbatore Vs. K.Behanan Thomas, where the sale of a business unit as a whole, even with retained assets, qualified for exemption.

Judgment:
The High Court found merit in the assessee's arguments, distinguishing the current case from the Tools and Machineries Ltd. case. The court emphasized that the intention of the parties was to transfer the business units as going concerns, including all assets and liabilities, technical agreements, and a non-compete clause. The separate valuation of assets did not negate the comprehensive nature of the transfer. The court referred to previous judgments, including Deputy Commissioner (C.T.) Coimbatore Vs. K.Behanan Thomas and Monsanto Chemicals of India (P) Ltd Vs. State of Tamil Nadu, which supported the assessee's position. The court concluded that the transfer of the business units qualified for exemption under Explanation 3 to Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959. Consequently, the order of the Sales Tax Appellate Tribunal was set aside, and the demand and penalty imposed on the assessee were annulled. The Tax Case (Revision) was allowed with no costs.

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