Tribunal Ruling: Depreciation on goodwill allowed, interest disallowance upheld.

The Tribunal upheld the reopening of assessment under Section 147 r.w.s. 148, dismissing the assessee's claim of a mere change of opinion. The Tribunal allowed depreciation on goodwill, citing it as a depreciable asset. Disallowance of interest on advances to a sister concern was upheld due to lack of evidence. The addition of a secured loan was deleted as the lender's creditworthiness was established. Ad hoc disallowance of expenses was overturned, emphasizing proper documentation. The assessee's appeal was partly allowed for depreciation on goodwill, while the Revenue's appeal was dismissed regarding the secured loan addition and ad hoc expense disallowance.

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Issues Involved:
1. Reopening of assessment under Section 147 r.w.s. 148.
2. Depreciation on goodwill.
3. Disallowance of interest on advances to sister concern.
4. Addition of secured loan.
5. Ad hoc disallowance of various expenses.

Detailed Analysis:

1. Reopening of Assessment under Section 147 r.w.s. 148:
The assessee contended that the reopening of the assessment was based on a mere change of opinion and thus not justified. The assessment for A.Y. 2003-04 was reopened because the assessee claimed depreciation on goodwill, which the AO believed was not allowable. The CIT(A) upheld the reopening, stating no assessment under section 143(3) had been made initially, thus no change of opinion occurred. The Tribunal agreed, noting that since the original return was processed under section 143(1) without scrutiny, the AO had valid reasons to believe income had escaped assessment. Therefore, the reopening was lawful, and the ground was dismissed.

2. Depreciation on Goodwill:
The assessee claimed depreciation on goodwill, which the AO disallowed, arguing goodwill was not a depreciable asset under Section 32. The CIT(A) confirmed the disallowance, referencing prior decisions that goodwill acquired before 1.4.1998 did not qualify for depreciation. However, the Tribunal found that the goodwill was acquired after 1.4.1998 and referred to the Supreme Court's decision in CIT vs. SMIFS Securities, which held that goodwill is an asset under Explanation 3(b) to Section 32(1). Consequently, the Tribunal allowed the depreciation claim.

3. Disallowance of Interest on Advances to Sister Concern:
The AO disallowed interest on advances made to a sister concern, asserting that the assessee failed to prove a direct nexus between interest-free funds and the advances. The CIT(A) upheld this disallowance. The Tribunal affirmed the decision, stating that the assessee did not provide sufficient evidence to show that interest-free funds were specifically used for the advances. The ground was dismissed.

4. Addition of Secured Loan:
The AO added a loan received from Mr. Suresh B. Sheth to the income, questioning the creditworthiness of the transaction. The CIT(A) deleted the addition, noting the promoter's identity and regular tax filings. The Tribunal upheld the CIT(A)'s decision, affirming that the assessee had established the identity and creditworthiness of the lender, thus dismissing the Revenue's ground.

5. Ad hoc Disallowance of Various Expenses:
The AO made an ad hoc disallowance of 20% of certain expenses due to lack of supporting evidence. The CIT(A) deleted the disallowance, noting that 95% of the expenses were through cheques and the AO had no substantial basis for the disallowance. The Tribunal agreed with the CIT(A), finding no rationale for the ad hoc disallowance and thus dismissed the Revenue's ground.

Conclusion:
The assessee's appeal was partly allowed, granting the claim for depreciation on goodwill. The Revenue's appeal was dismissed, upholding the deletion of the addition for the secured loan and the ad hoc disallowance of expenses.

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