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TMI Blog2010 (11) TMI 371X X X X Extracts X X X X X X X X Extracts X X X X ..... redit balance and that the appellant firm is following the cash system of accounting, wherein interest paid and received are recognized on actual payment and actual receipt. 4. It has been noticed in the assessment, that four partners have withdrawn substantial amount of capital, thereby their balance in the capital account as at the previous year ending 31st March, 2006 has resulted into a debit balance showing overdrawings. The details are as under:- Sara George Rs. 23,64,134.29 Susan Thomas Rs. 12,83,539.39 Elizabath Jacob Rs. 52,08,880.96 Anna Alexander (sic) Proposal was given at the assessment stage as to why interest at 12 per cent should not be charged on the excess drawings effected by the partners, to which, the assessee replied that the partners have credit balance during the earlier financial year 2004-05 but no interest was paid. This explanation was not found to be satisfactory with the AO. According to him if there is a provision in the partnership deed for payment of interest to the partners, there should be a provision to charge interest by the firm on the excess drawings of the partners. According to him nothing has been brought on record t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tner, Anna Alexander the overdrawing for the first time is made on 29th Dec., 2005 and it remains so upto 31st March, 2006 (p. 2). We find from p. 5 of the paper book that interest has been charged on the overdrawings. Similar will be the case with regard to the other partners, who have overdrawings on different dates. The appellant also filed a statement of affairs of the firm as on 29th Dec., 2005, wherein it is seen that net balance in the partner's capital account is credit. The learned representative contented that it is not as if excess drawings have not been charged with interest and the whole approach of the AO was on a misappreciation of this fact. With regard to the cash system of accounting, he has filed orders of this Bench in the group concerns which are contained in pp. 19 to 25 of the paper book, wherein the Hon'ble Tribunal has accepted the system of accounting followed by the appellant group concerns as cash system and held that the income can be recognized only when it is actually received. The decision of the Hon'ble Kerala High Court reported in CIT vs. Muthoot Finance Corporation (2001) 248 ITR 704 (Ker) was also drawn to our attention. 8. On hearing ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in his individual return filed is correct. She has not properly appreciated the documents filed before her wherein the interest received and interest payment has been shown, though there was no net surplus or deficit. According to her, the payment has not been made through bank and has treated the same as fictitious, designed to circumvent the provision of the Act. Further she has held that the provisions of ss. 40A(3) and 40(a)(ia) are applicable to this type of transaction. While confirming the additions made she has also directed the AO to invoke the provision of s. 40A(3) to make further addition of 20 per cent such interest paid to the partner. 12. Before us the learned representative argued, that the partners of the appellant firm have been consistently withdrawing amounts and interest from the same firm in which they are partners and investing in other firms which require funds for their business as a matter of commercial expediency. Wherever amounts are withdrawn, interest at 12 per cent is paid and wherever amount is invested, interest at 12 per cent is received and therefore, there will not be any surplus on this transaction. He has filed the copy of the computa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance of interest paid of Rs. 3.27 crores was not warranted. We are also of the opinion that since enhancement notice has not been issued in terms of s. 251(2), thereby not giving a reasonable opportunity of show cause to the assessee, the enhancement is bad in law. Further, having regard to the order of the Hon'ble Bench cited supra, we hold that provision under s. 40A(3) is not applicable in respect of interest payment made by a firm to a partner and the provision of s. 40(a)(ia) are also not applicable since this is specifically excluded. We, therefore, delete the disallowance made of Rs. 3.27 crores. 15. The third issue is agitated in ground Nos. 7 and 8. In the course of assessment, the AO noticed that in the current account of one of the partner, Shri George Jacob, cash has been introduced on different dates totalling to Rs. 12.18 crores. To a specific query from the officer, the assessee submitted that the particular partner has drawn amount from other firms wherein he is a partner and amount introduced in the assessee firm are out of the drawings from other firms. The details of these drawings were also filed with the AO. The explanation of the appellant was not sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 19. The last issue agitated is contained in ground Nos. 9, 10, and 11. Yet another addition made in the assessment is the disallowance of keyman insurance policy premium of Rs. 61,29,162 in the name of the partner of the assessee firm. According to the AO keyman insurance policy means a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person. According to him the main feature of the keyman insurance policy is, for a business person to take out an insurance policy insuring against loss of profits arising from the death, sickness or injury to a keyman who is either an employee or engaged in any manner whatsoever with the business of the said businessman. In short, according to him keyman should be different from business person who takes the policy and the keyman cannot be the owner of the business. Since, in the assessee's case, the policy is taken in the name of the partner it can be either a personal expenditure or capital expenditure, more so when the partners are the owners of the partnership firm. &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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