2013 (9) TMI 647 - AT - Income Tax

Issue of notice u/s 148 of the Income Tax Act for assessing escaped income Held that - Assessee has filed the Income Tax Return on 27.11.2003 declaring income of Rs. -22,53,000/-, which was processed u/s. 143(1) of the IT Act on 28.4.2004. Since, it was not a case where an assessment was completed after proper scrutiny of the case u/s. 143(3) of IT Act, therefore, there was no question of due application of mind at the first instance; and therefore, theere is no question of change of opinion on the part of the AO. Rather, while processing u/s. 143(1) of the IT Act, the AO did not express any opinion at all and a return was processed as such - AO has not applied his mind in respect of claim of depreciation on goodwill on that occassion. There was no requisite inquiry in respect of the said claim - Income which was alleged to be chargeable into tax had escaped assessment, therefore, the AO had a convincing reason to believe that the said income escaped assessment hence lawfully reopened the assessment Decided against the Assessee. Depreciation on goodwill - The assessee company was formed on 19.2.1999. In support a certificate of incorporation is placed on record. The goodwill was acquired by the assessee in the Assessment Year 1999-2000 when the firm, as a going concern, was taken over by the company/ appellant along with all the assets. Held that - Reliance has been placed upon the judgment in the case of B. Raveendran Pillai, 2010 (9) TMI 434 - Kerala High Court . Wherein it has been held that goodwill is certainly comparable with trade mark, franchisee, copy right, etc., hence, entitled for the depreciation Respectfully following this decision wherein the doctrine of ejusdem generic is applied and held that the Goodwill is of like nature of intangible asset as prescribed, therefore, hold that under the totality of the facts and circumstances of the case the assessee is entitled for the claim of depreciation on the DWV of the goodwill for the year under consideration Decided in favor of Assessee. Disallowance of interest on advance made to sister concern - Interest of ₹ 2,12,507/-, being interest @ 12% on advances made to sister concern amounting to ₹ 17,70,891/- - Interest free deposits to the tune of ₹ 204.04 were available. The assesse has claimed that the said interest free deposits were advanced to the sister concern Held that - Merely by stating that the funds are available, no practical purpose is served unless and until through bank statements it is established that the interest free funds have actually been disbursed to the sister concern. In certain precedents, even the Courts have held that if the assessee has sufficient interest free bank balance, other than interest bearing funds, then he has to prove that out of those interest free bank balance transferred the funds to a sister concern. In the absence of any direct evidence, finding of Revenue is affirmed Decided against the Assessee.

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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