TMI Blog2010 (11) TMI 371X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge 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 to show that funds were given to partners on account of commercial expediency and nothing was also produced to show that the purpose of drawing these funds was to promote business interest of the assessee firm. 5. Before the first appellate authority, the assessee contented that the partners have drawn money as they are entitled to do so from the firm and that the appellant firm is following the cash system of accounting which has been accepted by the AO in the face sheet of the assessment order and under cash system of accounting interest received and paid will be recognized as revenue when it is actually paid or received. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 rival submissions and also on going through the facts and other supporting documents filed, we are of the considered view that the addition cannot be sustained. On the one hand, 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. Apart from that the various decisions relied upon by the learned counsel for the assessee in respect of the group concern also supports his stand of cash system of accounting, wherein, interest can be taxed, only when it is actually received. In fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 computation of income of the partner along with the copies of PandL a/c and balance sheet which are contained in pp. 26 to 30 of the paper book filed. It would be seen from the PandL a/c filed in respect of partner, Shri George Jacob at p. 29 of the paper book that interest received from the firm Muthoot General Finance of Rs. 3.27 crores has been shown as income. Therefore, it is not correct to hold that the partner has not disclosed interest received from the firm in his individual return. Merely because the net surplus between expenditure and income in the hands of the partner, Shri George Jacob is nil, the disallowance in the hands of the assessee firm is not w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 satisfactory to the AO and assessed the entire sum of Rs. 12.18 crores as assessee's income under s. 68 of the Act. Though separate books of accounts were maintained by partner, Shri George Jacob, the AO was not prepared to accept the same. 16. Before the first appellate authority, it was contented that clear explanation was given date-wise in the letter filed on 2nd Dec., 2008 and 26th Dec., 2008 thereby source of each credit being explained. After considering the remand report of the AO, the first appellate authority was of the view that the appellant had not filed any confirmation to prove the genuineness of the transactions. According to her, the appellant failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 20. Before the first appellate authority, it was stated that the keyman would include not only employees but also partners. In a moneylending business, money is the stock-in-trade. It is the partners who are keymen and as such premium paid on their behalf is allowable. Reliance was also placed on the decision of the Mumbai Bench of the Tribunal in the ITO vs. Modi Motors (2009) 126 TTJ (Mumbai) 495 : (2009) 31 DTR (Mumbai)(Trib) 347 : (2009) 27 SOT 476 (Mumbai). According to the first appellate authority, the policy has been taken on the life of the partner of the appellant firm. The payment by the assessee firm to the partner, other than rent is governed by the provision of ss. 28 to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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