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2010 (11) TMI 371 - AT - Income TaxAddition - Interest on overdrawing - The overdrawing made by the partners have been charged with interest, so much so it remains compensated - What has been paid to the partners is only the net interest after reducing the interest attributable to the overdrawing - In fact, the AO has also recognized the system of accounting followed by the assessee to be cash - Held that:- As per the decision of the Hon'ble Kerala High Court reported in CIT vs. Muthoot Finance Corporation (22000 -TMI - 14562 - KERALA High Court) , 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. Interest payment to the partners - Since interest has been offered by the partner in his individual return and since there is no condition that interest has to be credited by the firm in the partners' account the disallowance of interest paid of Rs. 3.27 crores was not warranted - Hence, 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 - As per the order of this Bench in ITA No. 595/Coch/2006 for the asst. yr. 2002-03 in respect of Muthoot Bankers vs. Asstt. CIT dt. 27th Sept., 2007 wherein at para '15', the Hon'ble Bench held that the term expenditure in s. 40A(3) should not be given wild interpretation so as to adversely affect the assessee and therefore, interest payment to the partners are not covered under s. 40A(3) - Therefore, delete the disallowance made of Rs. 3.27 crores. Cash has been introduced on different dates - It is clear that the assessee had introduced a sum of Rs. 12.18 crores in his account with the assessee firm - The various sources of drawing made by him(partner - Shri George Jacob) from the firms viz. Muthoot Bankers and Muthoot Builders have been filed with the AO, thereby the assessee's stand has been established - The genuiness of the credit remained satisfied - The AO has not attempted to verify such explanation of the assessee - Since the firms Muthoot Bankers and Muthoot Builders were already assessed at Trivandrum, these facts could have been easily verified by the AO - Therefore, we are of the opinion that addition made on this score cannot be sustained and accordingly it is deleted. Keyman insurance policy premium - As per the case of Bombay High Court in the case of CIT vs. B.N. Exports (2010 -TMI - 76319 - BOMBAY HIGH COURT), wherein their Lordships have held that under a keyman insurance policy the firm has not taken insurance for the personal benefit of the partner but for the benefit of the firm in order to protect itself against setback that may be caused, on account of the death of the partner and therefore insurance premium is deductible - Held that keyman insurance policy premium on the life of the partners is an allowable deduction.
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