Dr V Nagaraja, Hyderabad V. ITO, Hyderabad

ITA 3/HYD/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5912 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-03-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 02-03-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 02-01-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A PATRA CIT AL REPRESENTATIVE
• Assessee Lawyers: R SIVANARAYANA
• Keywords: Share purchase agreement; Cost of acquisition

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI G.C.GUPTA, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMEBR ITA NO.03/HYD/09 (ASSESSMENT YEAR 2005-06) DR.V.NAGARAJAN, HYDERABAD. ( PAN AAEPN 0111 H ) V/S. INCOME-TAX OFFICER, WARD-2, HYDERABAD. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R.SIVANARAYANA, C.A. RESPONDENT BY : SHRI A.PATRA CIT-DEPARTMENTAL REPRESENTATIVE O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2005- 06 IS DIRECTED AGAINST THE ORDER OF COMMISSIONER OF IN COME- TAX(APPEALS)III, HYDERABAD DATED 8.11.2008. 2. ASSESSEE RAISED THE FOLLOWING GROUNDS- 1. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) -III HAS PASSED THE APPEAL ORDER BY DISALLOWING THE COMMISSION OF RS.1,55,32,400/- INCURRED IN CONNECTI ON WITH THE SALE OF SHARES. THE SAME IS OFFERED TO TA X UNDER THE HEAD LONG TERM CAPITAL GAINS. BUT IT IS NOT CO RRECT LEGALLY AND FACTUALLY AS PER THE PROVISIONS OF THE INCOME TAX ACT, 1961 ON THE FOLLOWING GROUNDS. ITA NO.03/HYD/09 DR.V. NAGARAJAN, HYDERABAD 2 2. THE EXPENDITURE CLAIMED BY THE APPELLANT WAS A G ENUINE ONE AS EVIDENCED BY THE TRANSACTION DETAILS AND THE DOCUMENTATION. 3. THE INCOM E TAX DEPARTMENT HAS GOT ADDITIONAL REVENUE IN THE FORM OF HIGHER TAX BRACKETS ON ACCOUNT OF T HIS TRANSACTION. 4. THE TRANSACTION WAS NOT AN AFTER THOUGHT ITEM AS AGREED BY THE LEARNED COMMISSIONER OF INCOM E TAX (APPEAL)- III 5. THE OBSERVATION THAT THE PAYEE HAS NOT CHARGED T HE COMMISSION FROM OTHERS CANNOT BE ANSWERED BY THE APPELLANT. HOWEVER, IT IN NO WAY AFFECTED THE TAX. THE APPELLANT HAS NOT RESORTED TO ANY WRONG DOING. THE PERSON WHO RECEIVED COMMISSION PAID TAX @ 30% PLUS SURCHARGE. HAD THE APPELLANT NOT SHOWN THE EXPENDITURE, THE REVENUE WOULD HAVE GOT ONLY 20% PL US SURCHARGE. THE SIGNIFICANT AND MOST RELEVANT FACT THAT THE GOVERNMENT HAS GOT MORE REVENUE ON ACCOUNT OF THIS TRANSACTION MISSED THE ATTENTION OF THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) III WHILE PASSI NG THE ORDER. 6. IN VIEW OF THESE VALID GROUNDS THE ORDER IS UNJ USTIFIED AND INCORRECT BOTH LEGALLY AND FACTUALLY. 7. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, DELETE , SUBSTITUTE ANY OR ALL OF THE ABOVE GROUNDS.' 3. BRIEF FACTS OF THE CASE ARE THAT IN THE RETURN FOR THE ASSESSMENT YEAR, THE ASSESSEE HAS SHOWN CAPITAL GAINS AT RS.1,52,98,599, COMPUTING THE SAME AS FOLLOWS- SALE PRICE RS. 2,70,27 ,088/- LESS: COMMISSION PAID RS. 1,05,00,000/- ___ ____________ RS. 1,65,27,0 89/- LESS: INDEXED COST OF ACQUISITIONN RS. 12,28,488/- _____________ __ RS. 1,52,98,595 __________ _____' ITA NO.03/HYD/09 DR.V. NAGARAJAN, HYDERABAD 3 ASSESSEE EXPLAINED BEFORE THE ASSESSING OFFICER THAT THE ASSESSE E WAS OWNING 99,550 EQUITY SHARES OF RS.10/- EACH OF M/S. ATI TECHNOLOGIES PVT. LTD.(ERSTWHILE CUTE SOLUTIONS PVT. LTD.) WHICH W ERE SOLD TO ATT TECHNOLOGIES, USA. ASSESSEE RECEIVED SALE CONSIDERATION OF RS.271 PER SHARE IN THE FINANCIAL YEAR 2004-05 AND RS.113.3 56 IN THE FINANCIAL YEAR 2005-06. ASSESSEE CLAIMED EXPENDITURE BY WAY OF COMMISSION PAID TO ONE SHRI DASARADHA R.GUDE, OF RS.1,05 ,00,000 IN THE ASSESSMENT YEAR 200506 AND OF RS.50,32,400 IN THE A SSESSMENT YEAR 2006-07. THUS, TOTAL OF COMMISSION PAYMENTS CLAIMED TO HAVE BEEN MADE TO GUDE WORKED OUT TO RS.1,55,32,400. T HE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSEE WITH REGARD TO THE PAYMENT OF COMMISSION ON THE FOLLOWING GROUNDS- (1) D.R.GUDE WAS ONE OF THE DIRECTORS OF THE COMPANY ALONG WITH THE ASSESSEE; (2) THE AMOUNT WAS NOT PAID TO GUDE, IMMEDIATELY ON RE CEIPT OF THE SALE CONSIDERATION. THE SALE PROCEEDS WERE FIRST UTIL IZED FOR GIVING UNSECURED LOANS TO OTHER COMPANY; (3) GUDE HAD NOT PROVIDED ANY SIMILAR SERVICE TO ANY OTHE R PERSON. (4) THE TOTAL COMMISSION WORKS OUT TO ABOUT 40% OF SALE CONSIDERATION WHICH IS ABNORMALLY HIGH. (5) GUDE, WAS NOT PROFESSIONAL CONSULTANT TO BE ENGAGED FOR NEGOTIATION FOR SALE OF SHARES. (6) THE ASSESSEE HAS NOT PRODUCED ANY DOCUMENTARY EVID3ENCE TO PROVE THAT THE SHARE DEAL WAS NEGOTIATED BY GUDE. COPY OF ITA NO.03/HYD/09 DR.V. NAGARAJAN, HYDERABAD 4 AGREEMENT FOR PAYMENT OF COMMISSION, TERMS AND CONDITIO NS, ETC. WERE NOT PRODUCED. (7) THE PAYMENT OF COMMISSION WAS ONLY AN AFTERTHOUGHT TO AVOID THE TAX. (8) COMMISSION PAYMENT WAS NOT A GENUINE EXPENDITURE AND HENCE NOT ALLOWABLE. 4. ON APPEAL, THE CIT(A) CONFIRMED THE DISALLOWA NCE OF COMMISSION. HENCE, THE ASSESSEE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTIE S. WE HAVE CAREFULLY PERUSED THE SHARE PURCHASE AGREEMENT DAT ED 18TH SEPTEMBER, 2004, WHICH WAS SIGNED BY THE ALL THE SHARE HOLDERS AND ALSO BY DASARADH GUDE AS 'STOCKHOLDERS' AGENT'. AS PER SUB-CLAUSE (A) OF CLAUSE 8.3 OF THE AGREEMENT, THE STOCKHOLDERS' AGENT WOULD RECEIVE NO COMPENSATION FOR HIS SERVICES, EXCEPT THAT THE STOCKHOLD ERS AGENT SHALL BE ENTITLED TO REIMBURSEMENT OF ALL REASONABLE O UT-OF-POCKET EXPENSES INCURRED IN SERVING IN HIS CAPACITY FROM THE SEL LING SHAREHOLDERS. IT WAS PROVIDED THAT THE STOCKHOLDERS A GENT MAY BE CHANGED BY THE SELLING SHAREHOLDERS FROM TIME TO TIM E, IN TERMS OF SUB-CLAUSE (A) OF CLAUSE 8.3 OF THE AGREEMENT WHICH READ S AS FOLLOWS- 'DASARADHA GUDE SHALL BE CONSTITUTED AND APPOINTED AS AGENT ('STOCKHOLDER'S AGENT') FOR AND ON BEHALF OF THE I NDEMNITORS TO GIVE AND RECEIVE NOTICES AND COMMUNICATIONS, TO AUTHORIZE DELIVERY TO PURCHASER OF ANY INDEMNIFICATION AMOUNT IN SATISFACTION OF CLAIMS BY PURCHASE, TO OBJECT TO SU CH DELIVERIES, TO AGREE TO, NEGOTIATE, ENTER INTO SETTLEMENTS AND COMPROMISES OF AND DEMAND ARBITRATION AND COMPLY WITH ORDERS OF COURTS AND AWARDS OF ARBITRATIONS WITH RESPECT TO SUCH CLA IMS, AND TO TAKE ALL ACTIONS NECESSARY OR APPROPRIATE IN THE JU DGMENT OF THE STOCKHOLDER'S AGENT FOR THE ACCOMPLISHMENT OF THE F OREGOING. ITA NO.03/HYD/09 DR.V. NAGARAJAN, HYDERABAD 5 SUCH AGENCY MAY BE CHANGED BY THE SELLING SHAREHOLD ERS FROM TIME TO TIME UPON NOT LESS THAN TEN (10 ) DAYS PRIO R WRITTEN NOTICE TO PURCHASE UPON THE VOTE OF SELLING SHAREHO LDERS HOLDING MORE THAN 50% OF THE COMPANY'S OUTSTANDING CAPITAL STOCK AS OF THE CLOSING. NO BOND SHALL BE REQUIRED OF THE STOCKHOLDER'S AGENT, AND THE STOCKHOLDER'S AGENT SH ALL RECEIVED NO COMPENSATION FOR HIS SERVICES, PROVIDED, HOWEVER , THAT THE STOCKHOLDERS AGENT SHALL BE ENTITLED TO REIMBURSEME NT OF ALL REASONABLE OUT-OF-POCKET EXPENSES INCURRED IN SERVI NG IN HIS CAPACITY FROM THE SELLING SHAREHOLDERS. NOTICES OR COM MUNICATIONS TO OR FROM THE STOCKHOLDER'S AGENT SHALL CONSTITUTE NOTICE TO OR FROM EACH OF THE INDEMNITOR S.' 5.1. THE ASSESSEE ALSO HAS ENTERED INTO MEMORANDUM OF UNDERSTANDING WITH SHRI D.GUDE FOR PAYMENT COMMISSION O N 19.9.2004, AFTER THE CONCLUSION OF THE SHARE PURCHASE AGR EEMENT ON 18.9.2004. RELEVANT CLAUSE OF THIS MEMORANDUM OF UNDE RSTANDING READS AS FOLLOWS- 'WHEREAS THE FIRST PARTY HAS OFFERED TO PAY A MAXIM UM SUM OF US$ 3,50,000 TO THE SECOND PARTY TOWARDS THE COM MISSION FOR CLOSING THE ACQUISITION DEAL WITH ATI TECHNOLOG IES INC., CANADA, THE SECOND PARTY BEING SUBSTANTIALLY INSTRU MENTAL FOR THE PROMOTION FOR THE ABOVE SAID COMPANY IN THE INT ERNATIONAL MARKET BRINGING DUE RECOGNITION AND VALUE TO THE CO MPANY AND SHAREHOLDERS OF THE COMPANY RESPECTIVELY. THE ABOVE SAID CONSIDERATION IS OFFERED TO THE SECOND PARTY FOR TH E CONTRIBUTION OF HIS EXPERTISE AND SIGNIFICANT EFFOR TS IN BUSINESS DEVELOPMENT AND ESTABLISHMENT OF GLOBAL CONTACTS FO R THE COMPANY, BECAUSE OF WHICH THE COMPANY HAS DEVELOPED TO THE PRESENT STAGE AND VALUED SO SIGNIFICANTLY THUS BRIN GING SIGNIFICANT BENEFITS TO THE FIRST PARTY. WHEREAS TH E SECOND PARTY HAS AGREED FOR THE SAME.' 5.2 AS NOTED BY THE CIT(A), THIS MOU HAS NOTHING TO DO WITH THE SALE TRANSACTION OF SHARES. THERE ARE OTHER SHARE H OLDERS OF CUTE SOLUTIONS, WHO HAVE NOT PAID ANY COMMISSION TO D.R.GUD E. HENCE, WE ARE NOT ABLE TO APPRECIATE WHY THE PRESENT ASSESSEE-SHARE- HOLDER ALONE IS REQUIRED TO PAY THIS EXORBITANT AMOUNT OF CO MMISSION TO SHRI ITA NO.03/HYD/09 DR.V. NAGARAJAN, HYDERABAD 6 D.R.GUDE. IT IS THE CONTENTION OF THE LEARNED COUNSEL OF THE ASSESSEE THAT IT WAS ONLY BECAUSE OF THE EFFORT OF SHRI GUDE, A SSESSEE IS ABLE TO FETCH SUCH A HIGH RATE OF SALE PRICE AND BECAUSE OF THIS, A SSESSEE WAS BOUND TO PAY SUCH COMMISSION. BUT THIS ARGUMENT OF THE A SSESSEE IS NOT SUPPORTED BY ANY DOCUMENTARY EVIDENCE WHATSOEVER. 6. FURTHER ARGUMENT OF THE LEARNED COUNSEL FOR TH E ASSESSEE IS THAT AMOUNT OF COMMISSION RECEIVED BY SHRI D.R.GUDE WAS OFFERED TO TAX IN HIS RETURN OF INCOME AND IN THE CASE OF RECIPI ENT, VIZ. SHRI GUDE, TAX WAS PAID AT 30% IN ADDITION TO SURCHARGE. HA D THE ASSESSEE NOT PAID THE COMMISSION IN QUESTION, INCOME, BY WAY OF CA PITAL GAINS, WOULD HAVE BEEN LIABLE TO TAXED ONLY AT 20% BESIDES SU RCHARGE THEREON, AND CONSEQUENTLY THERE IS NO LOSS TO THE REVENU E ON ACCOUNT OF PAYMENT OF COMMISSION AND IN FACT, DEPARTMENT STOOD TO GAIN IN THE FORM OF HIGHER REVENUES. IN SUPPORT OF THIS CONTENTION , HE PLACED RELIANCE ON THE DECISION OF THE KARNATAKA HIGH COURT I N THE CASE OF AGAR JAN V/S. CIT (298 ITR 60), WHEREIN IT WAS HELD T HAT WHEN BROKERAGE CHARGES PAID BY THE ASSESSEE BY ACCOUNT PAYEE CHE QUES, HAVE BEEN REFLECTED IN ITS RETURN BY THE RECIPIENT AND THE SAME WAS ALSO ACCEPTED BY THE DEPARTMENT, THEREBY TREATING THE SAME AS BROKERAGE RECEIVED FOR HAVING RENDERED SERVICES, THE AUTHORITIES COULD NOT HOLD AGAINST THE ASSESSEE-PAYEE AND THE AMOUNT PAID BY THE ASSESSEE TOWARDS BROKERAGE WAS DEDUCTIBLE. 7. WE ARE UNABLE TO APPRECIATE THIS ARGUMENT OF TH E LEARNED COUNSEL FOR THE ASSESSEE, IN THIS CASE, BOTH SHRI D.R.GUDE AND THE ASSESSEE WERE BOTH THE DIRECTORS OF THE SAME COMPANY AND PA YMENT ITA NO.03/HYD/09 DR.V. NAGARAJAN, HYDERABAD 7 OF COMMISSION IN QUESTION BY THE ASSESSEE, CANNOT BE CONSIDE RED AS AN 'ARMS LENGTH' TRANSACTION . AS SUCH, THE RATIO OF THE JUDGMENT OF THE KARNATAKA HIGH COURT REFERRED TO ABOVE, RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE CANNOT BE APPLIED TO THE FACTS OF THE PRESENT CASE. HAVING REGARD TO THE TOTALITY OF THE FACTS AND CI RCUMSTANCES OF THE PRESENT CASE, PAYMENT OF COMMISSION MADE TO A CO-DIRE CTOR OF THE ASSESSEE, THAT TOO COMPUTED AT AN EXCESSIVE RATE OF 40%, CAN NOT BE CONSIDERED TO BE GENUINE, AS IT IS EVIDENTLY A MAKE- BELIEVE/BOGUS/SHAM TRANSACTION. 8. THE TAXING AUTHORITY IS ENTITLED AND IS INDEED DUTY BOUND TO DETERMINE THE TRUE LEGAL RELATION RESULTING FROM A TRANSACTION. THE TAXING AUTHORITIES ARE NOT REQUIRED TO PUT ON BLINKE RS WHILE LOOKING AT THE DOCUMENTS PRODUCED BEFORE THEM. THEY ARE ENTITLED TO LOOK INTO THE SURROUNDING CIRCUMSTANCES TO FIND OUT THE REALITY OF THE RECITALS MADE ON THE DOCUMENTS. IT IS THE DUTY OF THE COURT, I N EVERY CASE, WHERE INGENUITY IS EXPENDED TO AVOID FACING AND WELF ARE LEGISLATION, TO GET BEHIND THE SMOKE SCREEN AND DISCOVER THE TRUE STATE OF AFFAIRS. THE COURT IS NOT TO BE SATISFIED WITH THE FORM AND LEA VE ALONE THE SUBSTANCE OF THE TRANSACTION,. THE TAXING AUTHORITY IS E NTITLED AND IS INDEED BOUND TO DETERMINE THE TRUE LEGAL RELATION R ESULTING FROM A TRANSACTION. MOTIVE ALONE CANNOT MAKE UNLAWFUL WHAT T HE LAW ALLOWS BUT AT THE SAME TIME IF THERE IS A PRESENCE OF BAD FAIT H OR FRAUD OR NON-BONA FIDENESS IN THE TRANSACTION, THE TAXING AUTH ORITIES ARE NOT BOUND TO CONSIDER THE LEGAL EFFECT OF THE TRANSACTION. IF THE ASSESSEE'S ACTS ARE NOT BONA FIDE BUT ARE AMBIGUOUS, SHAM OR MAKE- BELIEVE IT IS OPEN TO THE TAXING AUTHORITIES TO QUESTI ON AND DOUBT THE ITA NO.03/HYD/09 DR.V. NAGARAJAN, HYDERABAD 8 TRANSACTION AND TO FIND OUT THE TRUE, CORRECT AND REAL MEANING AND RESULT THEREOF. THE MAKE-BELIEVE TRANSACTIONS, THOUGH SEEMINGLY LEGAL, ARE NOT FREE FROM JUDICIAL SCRUTINY. IN THE CONTEXT OF DETERMINING WHETHER A TRANSACTION IS SHAM, OR ILLUSORY OR A DEVICE O R A RUSE OR A MAKE-BELIEVE, THE TAXING AUTHORITIES ARE ENTITLED TO PENETRATE THE VEIL COVERING IT AND ASCERTAIN THE TRUTH. 9. A TRANSACTIONS SHOULD NOT BE SEEN IN ISOLATION BUT IN CONSONANCE TO EACH OTHER. THE MATTER MAY ALSO BE CONSID ERED AND DECIDED UPON IN THE LIGHT OF HUMAN PROBABILITIES AND THE SURROUNDING FACTS AND CIRCUMSTANCES. THE PRINCIPLE 'WHAT IS APPARENT IS REAL' IS NOT SACROSANCT AND MAY BE OVERLOOKED IF SURROUNDING CIRCUMSTANCE S SO SUGGEST. IT IS TRUE THAT EVERY PERSON IS ENTITLED TO SO ARRANGE HIS AFFAIRS AS TO AVOID TAXATION BUT THE ARRANGEMENT MUST BE REAL, GENUINE OR BONA FIDE AND NOT A SHAM OR MAKE BELIEVE OR COLOUR ABLE DEVICE. TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITHIN THE FRAME WORK OF THE LAW. COLOURABLE DEVICE CANNOT BE PART OF TAX PLANNING AND IT IS WRONG TO ENCOURAGE OR ENTERTAIN THE BELIEF THAT IT IS HONOU RABLE TO AVOID THE PAYMENT OF TAX OR TO OBTAIN ANY ADVANTAGE OR BENEFI T FOR TAX PURPOSE BY DUBIOUS METHOD. A COLOURABLE TRANSACTION IS ONE, WHICH IS SEEMINGLY VALID, BUT FEIGNED OR COUNTERFEIT TRANSACTION ENTERED INTO FOR SOME ULTERIOR PURPOSES. THE TRANSACTION IS TO BE DECIDED AS SUCH BY REFERENCE TO THE MATERIAL OR EVIDENCE OR CIRCUMSTANCES OF EACH CASE. THE PRINCIPLE ON THE MATTER OF TAX EVASION AND TAX AV OIDANCE AS LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF MCDOWE LL & CO. LTD. V/S. CTO(154 ITR 148) CAN HAVE ITS APPLICATION ONLY WHE RE COLURABLE OR ARTIFICIAL DEVICES ARE ADOPTED AND NOT TO THE TRANS ACTIONS WHICH ARE ITA NO.03/HYD/09 DR.V. NAGARAJAN, HYDERABAD 9 OTHERWISE LEGITIMATE AND ARE UNDERTAKEN BONA FIDE IN THE ORDINARY COURSE OF BUSINESS. IN OTHER WORDS, MCDOWELL & CO'S CASE (SUP RA) CAN HAVE ITS APPLICATION WHERE THE DEVICES THOUGH SEEMINGLY LEGAL ARE ADOPTED IN COLLUSION OR WHETHER DEVICES ADOPTED ARE N OT GENUINE OR BONA FIDE BUT ARE SHAM, MAKE BELIEVE OR CAMOUFLAGED T O ESCAPE THE LIABILITY OF THE TAX OR TO OBTAIN CERTAIN BENEFIT FO R TAX PURPOSE. 10. IN THE PRESENT CASE, CONTENTION OF THE LEARNED CO UNSEL FOR THE ASSESSEE BEFORE US THAT THERE IS NO CASE FOR DOUBTING THE CASE OF THE ASSESSEE WITH REGARD TO PAYMENT OF COMMISSION TO SHRI DASARATH GUDE, WHICH IS A GENUINE PAYMENT OF COMMISSION IN TERMS O F AN AGREEMENT AND UNDERSTANDING. THE PAYMENT OF COMMISSIO N WAS PAID BY ACCOUNT PAYEE CHEQUE AND SHRI DASARADH GUDE RENDERE D SERVICES TO FACILITATE THE SALE OF SHARES. WE ARE UNABLE TO AP PRECIATE THESE ARGUMENTS OF THE LEARNED COUNSEL FOR THE ASSESSEE. AS ALR EADY NOTED ABOVE, BOTH THE ASSESSEE AND SHRI DASRADH GUDE ARE DIRE CTORS OF THE SAME COMPANY, AND THAT BEING SO SHRI DASARADH GUDE IS IN NO BETTER POSITION THAN THE ASSESSEE, AND AS SUCH IT IS NOT UNDERSTOO D AS TO HOW SHRI DASARADH GUDE COULD HAVE RENDERED ANY SERVICES TO T HE ASSESSEE FACILITATING SALE OF SHARES OF THE ASSESSEE. MORE SO, WHEN SHRI DASARADH GUDE RENDERED SUCH SERVICES TO THE ASSESSEE ALONE, AND OTHER SHAREHOLDERS COULD SELL THEIR SHARES WITHOUT MAKIN G ANY PAYMENT OF COMMISSION. BOTH SHRI GUDE AND THE ASSESSEE ARE DIRE CTORS OF THE SAME COMPANY, THE TRANSACTIONS IN QUESTION ARE NOT 'ARMS L ENGTH' TRANSACTIONS, THE AMOUNT OF COMMISSION PAID, WORKING O UT TO 40% ALSO REFLECTS THE UNREASONABLE AND EXCESSIVE NATURE OF PAY MENT. THESE FACTORS CLEARLY INDICATE THAT THE ASSESSEE'S TRANSACTION WITH DASARADH ITA NO.03/HYD/09 DR.V. NAGARAJAN, HYDERABAD 10 GUDE, WHICH IS NOT AN ARMS' LENGTH ONE AND APPEARS TO BE NOT A BONA FIDE OR GENUINE ONE. TAXING AUTHORITIES AS NOTED ABO VE, ARE EMPOWERED TO GO BEHIND THE TRANSACTION TO FIND OUT TH E REAL AND IF A TRANSACTION, IN THE BASIS OF EVIDENCE AND THE SURROUNDING CIRCUMSTANCES OF THE CASE, APPEARS TO BE NON-GENUINE OR BOG US OR A MAKE BELIEVE OF SHAM PME, WITH A VIEW TO AVOID TAX L IABILITY OR IF IT APPEARS THAT THE SERIES OF TRANSACTIONS EFFECTED BY THE ASSESSEE TO ACHIEVE THE DESIRED RESULT IS SHAM OR COLLUSIVE OR NON-GEN UINE, THE TAX AUTHORITIES CAN IGNORE THE TRANSACTION. SUCH A POWER OF TAX AUTHORITIES IS LEGALLY RECOGNIZED AND NOT TAKEN AWAY BY ANY OF TH E PROVISIONS OF THE ACT. THE TAX AUTHORITIES ARE ONLY BOUND TO CONSI DER THE LEGAL EFFECT OF THE TRANSACTION, ONLY IN THE ABSENCE OF ANY SUG GESTION OF BAD FAITH OR FRAUD OR NON-BONAFIDENESS OF NON-GENUINENESS BUT NOT IN THE CASE WHERE IT IS FOUND THAT THE ASSESSEE'S ACTS ARE NOT BONA FIDE OR GENUINE BUT ARE AMBIGUOUS, SHAM OR MAKE BELIEF AFFAI RS WITH A VIEW TO ACQUIRE CERTAIN BENEFITS FOR TAX PURPOSES. 11. THE APEX COURT IN THE CASE OF MCDOWELL & CO. LTD . (SUPRA) HELD THAT BONA FIDE BUSINESS ARRANGEMENT WITH INCIDENTA L FALL OUT BY WAY OF TAX BENEFIT CAN BE TOLERATED BUT TAX AVOIDANCE OR TAX EVASION BY MEANS OF COLOURABLE DEVICE OR MAKE BELIEVE TRANSACTI ON AND DUBIOUS MEANS CANNOT BE RECOGNIZED. IN THE CASE OF CIT V/S. DURGA PRASAD MORE (82 ITR 540), HON'BLE SUPREME COURT HELD THAT IT IS A WELL SETTLED PRINCIPLE OF LAW THAT APPARENT MAY BE CONSIDER ED REAL UNTIL IT IS SHOWN THAT THERE ARE REASONS TO BELIEVE THAT THE APPAR ENT IS NOT THE REAL. THIS MEANS THAT WHAT IS PROJECTED BY THE ASSESSEE MU ST BE ACCEPTED BY THE AUTHORITIES UNLESS THE AUTHORITIES HAVE R EASONS TO ITA NO.03/HYD/09 DR.V. NAGARAJAN, HYDERABAD 11 BELIEVE THAT WHAT IS PROJECTED BY THE ASSESSEE IS NOT GEN UINE. FOR THE PURPOSE OF UNCOVERING THE REALITY THE AUTHORITIES ARE EMPOWERED TO GO INTO THE SURROUNDING CIRCUMSTANCES OF THE MATTER. THEY A RE ENTITLED TO GO BEHIND THE MOTIVE OF THE TRANSACTION. IN THE CASE O F SUMATI DAYAL V/S. CIT(214 ITR 801), HON'BLE SUPREME COURT HELD THA T THE MATTER HAS TO BE CONSIDERED IN THE LIGHT OF HUMAN PROBABILITI ES AND THE SURROUNDING CIRCUMSTANCES, AND THE COURT HAD OCCASION TO CONSI DER THE PRINCIPLE 'WHAT IS APPARENT IS REAL' AND HELD THAT THIS PRINCIPLE IS NOT SACROSANCT AND MAY BE OVERLOOKED IF SURROUNDING CIRCUMSTANCE S SO SUGGEST. 12. EVEN AS FOR THE ARGUMENTS OF THE LEARNED COUNSEL F OR THE ASSESSEE THAT THERE IS NO REVENUE LOSS ON ACCOUNT OF THE COM MISSION PAYMENT IN QUESTION, AND IN FACT REVENUE STOOD TO GAIN , AS TAX WAS PAID BY THE RECIPIENT ON THE COMMISSION RECEIPT AT 30% PLUS SURCHARGE, INSTEAD OF 20% PLUS SURCHARGE THAT THE ASSESSEE WO ULD HAVE GOT TO PAY IF THERE WAS NO COMMISSION PAYMENT AND CAPITAL GAIN WITHOUT DEDUCTION ON ACCOUNT OF COMMISSION SIN QUESTION WAS OFFERED TO TAX, WE DO NOT FIND MERIT IN THE SAME, FOR THE RE ASON THAT UNDER THE INCOME-TAX ACT, INCOME HAS TO BE ASSESSED IN THE HANDS OF THE RIGHT PERSON AND ON THE RIGHT AMOUNT, IRRESPECTIVE OF THE TA X EFFECT OR OTHER CONSEQUENCES. WE ARE FORTIFIED IN THIS BEHALF BY THE DE CISION OF THE APEX COURT IN THE CASE OF ITO V/S. CH.ATCHAIAH (218 IT R 239), WHEREIN VIDE RELEVANT PORTION OF THE HEAD-NOTE ON PAGE 240, IT WAS HELD AS FOLLOWS- 'UNDER THE PRESENT ACT, THE INCOME-TAX OFFICER HAS NO OPTION LIKE THE ONE HE HAD UNDER THE 1922 AT. HE CAN, AND HE MUST, ITA NO.03/HYD/09 DR.V. NAGARAJAN, HYDERABAD 12 TAX THE RIGHT PERSON AND THE RIGHT PERSON ALONE. B Y 'RIGHT PERSON' IS MEANT THE PERSON WHO IS LIABLE TO BE TAX ED ACCORDING TO LAW, WITH RESPECT TO A PARTICULAR INCOME. THE EX PRESSION 'WRONG PERSON' IS OBVIOUSLY USED AS THE OPPOSITE OF THE EXPRESSION 'RIGHT PERSON'. MERELY BECAUSE A WRONG PERSON IS TAXED WITH RESPECT TO A PARTICULAR INCOME, THE ASSE SSING OFFICER IS NOT PRECLUDED FROM TAXING THE RIGHT PERSON WITH RESPECT TOT HAT INCOME.' 12. IN THE LIGHT OF THE ABOVE DISCUSSION, WE ARE OF TH E VIEW THAT THE GENUINENESS OF THE TRANSACTION IN THE PRESENT CA SE IS NOT SATISFACTORILY AND PROPERLY PROVED BY THE ASSESSEE. THOUG H IT IS APPARENT, THE ONUS HEAVILY LIES ON THE ASSESSEE TO PROVE THAT THE TRANSACTION IS GENUINE BECAUSE THE TRANSACTION IN THE INS TANT CASE WAS BETWEEN THE ASSESSEE AND HIS CO-DIRECTOR AND AS SUCH IS NOT A N 'ARMS LENGTH' TRANSACTION. THE TRANSACTION EFFECTED BY THE ASSESSEE IS NOT BONA FIDE COMMERCIAL TRANSACTION BUT SHAM, BOGUS, UNREAL , MAKE BELIEVE, COLLUSIVE AND ARTIFICIAL ARRANGEMENT WITH A MALA FIDE INTENTION TO ACQUIRE BENEFIT FOR TAX PURPOSES AND THEREFORE, THE EFFECT OF THE TRANSACTION, WHICH IS SEEMINGLY LEGAL, IS FIT TO BE DISRE GARD. ACCORDINGLY, WE FIND NO INFIRMITY IN THE ORDER OF TH E CIT(A). IT IS ACCORDINGLY UPHELD, AND THE GROUNDS OF THE ASSESSEE IN THI S APPEAL ARE REJECTED. 13. IN THE RESULT, ASSESSEE'S APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 5.3.2010 SD/- SD/- (G.C.GUPTA) (CHANDRA POOJARI) VICE PRESIDENT ACCOUNTANT MEMBER DT/- 5TH MARCH, 2010 ITA NO.03/HYD/09 DR.V. NAGARAJAN, HYDERABAD 13 COPY FORWARDED TO: 1. DR. V NAGARAJAN, FLAT NO.402, SIVA SAI APARTMENT S, H.NO.239, ROAD NO.9, WEST MARREDPALLY, SECUNDERABAD. 2. INCOME-TAX OFFICER, WARD-2, HYDERABAD . 3. COMMISSIONER OF INCOME-TAX(APPEALS) III, HYDERABAD. 4. COMMISSIONER OF INCOME-TAX-II HYDERABAD 5 THE DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. B.V.S.