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Court rules out VAT on Paradise equity transfer
May, 11th 2017

The Hyderabad High Court has made it clear that Telangana tax sleuths can collect VAT from Paradise Hotel when it sells biryani but not when it transfers its equity into a new company.Sale of goods is taxable but the sale of business as a whole is not taxable under the Telangana VAT Act, 2005, it said. The popular biryani hotel was till now run as a partnership firm called Ms Paradise Food Court but it recently transformed itself into a new entity called Paradise Food Court Private Ltd.The old management too will have equity in the new company that may contain new investors.When the old management was transferring its equity into the new company, tax sleuths imposed VAT on this equity transfer also. The hotel then challenged this in the high court.The division bench comprising Justice V Ramasubramanian and Justice J Uma Devi pronounced in its judgment that the firm's regular business falls under VAT purview but its stake sale or sale of business as a whole does not fall under it.

The petitioner, a partnership firm, told the court that in May 2014, it had entered into a Business Transfer Agreement with a company leading to the creation of Paradise Food Court Private Limited. It also agreed and undertook to transfer its entire business as an ongoing concern, in consideration of equity shares and compulso rily convertible preference shares being allotted to the partners of the petitioner-firm.
The assistant commissioner of commercial taxes levied tax on 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 provides such exemptions.

The bench said "as a matter of rule, we would not entertain writ petitions under Article 226 as against the or ders of assessment passed under any tax 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. We will intervene when the authorities are acting without jurisdiction and when they are violating principles of natural justice". In the current case, they acted without jurisdiction because the Act did not confer any powers on them to tax the transfer of a business.

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The bench noted that in this case, the petitioner challenged the tax order on both grounds of lack of jurisdiction and violation of principles of natural justice.

Referring to the 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 a 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."

 
 
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