The term ‘going concern’ is neither new to ever growing economy nor to GST. The concept of transfer of business on going concern basis existed even prior to the introduction of GST.
‘Going concern’ is an accounting assumption according to which an enterprise is viewed as continuing in operation for the foreseeable future. The Bombay High Court in the case of Jayaprakash Shamsundar v. Laxminarayan Murlidar [1] held that if a business is to be characterised as a going concern, that business must be run at the time of the assignment. The business must be a live business, a going business when transactions take place from time to time and there must be stock-in-trade.
This article attempts to explain whether the transfer of a business should be treated as a ‘transfer of a going concern, as a whole or an independent part thereof’ which is an exempt supply under GST laws.
The transfer of business on going concern basis is not the same as transfer of individual assets of the business. The assets of any business can be supplied either in piecemeal or for lumpsum consideration.
Under GST, the exemption has been granted for transfer of business as a whole or an independent part thereof.
Uttarakhand Authority for Advance Ruling[2] relied upon the following internationally accepted guidelines issued by Her Majesty’s Revenue & Customs (HRMC) to treat transfer of business as a going concern:
- The assets must be sold as part of a ‘business’ as a ‘going concern’.
- The purchaser intends to use the assets to carry on the same kind of business as the seller.
- Where only part of a business is sold it must be capable of separate operation.
- There must not be a series of immediately consecutive transfers.
Thus, it emerges that the transfer of business as going concern means transfer of essential business assets along with associated liabilities which enables the transferee to carry out the same business independently in the same manner as the seller used to carry before the transfer.
Here, a question may arise as to what constitutes business or an independent part thereof. The Madras High Court in case of Monsanto Chemicals v. State of Tamil Nadu [3] observed that a person may carry on several lines of business and each line of business would be a unit of business by itself. The Court held that if there is a sale of that unit of the business as a whole, then the assessee would not be liable to be taxed. However, it is relevant to note that retention of few assets of business shall not cause any hinderance in treating the transfer as going concern provided that all the necessary assets required for running the business independently by transferee have been transferred.[4]
Further, the continuity of same kind of business is the essence for transfer of going concern. It may be noted that the very definition of the term ‘going concern’ suggests that the business should be continued for a foreseeable period and there is no intention to liquidate the same, there should be continuity of the same business by the transferee as was being carried on by the transferor. The same has also been recognized by HMRC as one of the characteristics to qualify as transfer of business as going concern. For instance, in case where the transferor, who is running business of manufacturing and sale of goods, transfers its business to a transferee and such transferee in turn leases out the manufacturing facilities then the continuity of same business may be questioned by applying principles laid by HMRC.
Taking another example, in case where the transferee merely intends to further transfer the running business onto another buyer rather than carrying on same business as that of the transferor, the availability of the exemption may be disputed.
In authors’ view in order to constitute transfer as a going concern, the transferee must continue the same kind of business as carried on by the transferor for a foreseeable period of time and what constitutes to be “same kind of business” has to be considered on a case to case basis.
In the backdrop of harlequin history of taxation of transfer of business, it would be interesting to see as to how GST on the same will unfold in the times to come.
[The authors are Joint Partner and Senior Associate, respectively, in GST practice at Lakshmikumaran & Sridharan, Gurugram]
[1]AIR 1983 Bom 364
[2] 2020 (035) GSTL 0510 AAR
[3] [1982] 51 STC 278 (Mad)
[4] Premier Automobiles Ltd. vs Income Tax Officer And Anr. (2003) 182 CTR Bom 202
M/S. Indo Rama Co. Petition No. 4 of 2003, Co. Appl. No 762 of 2009, July 23, 2012.
