“colourable device”
The decision most relied on for colourable device is Sumati Dayal v. CIT (214 ITR 801), cited in 1,967 judgments on BharatTax.
Leading authorities on colourable device
The Revenue is entitled to look behind the apparent form of a transaction to discover its true nature, applying the test of human probabilities and surrounding circumstances. If transactions defy logic or are unnatural, they can be treated as bogus, even if supported by some documentation, especially in cases of cash credits or unexplained investments.
The Supreme Court held that while legitimate tax planning is permissible, transactions structured as a "colourable device" or "subterfuge" solely to avoid tax are impermissible. It mandates a judicial shift to look beyond the form to the substance of a transaction, allowing the lifting of the corporate veil in tax evasion arrangements.
A citizen is free to carry on business within the law, and mere tax planning without a motive to evade taxes through colorable devices is not frowned upon. The liability to taxation, for the purpose of tax treaty application, is a legal situation, not the fiscal fact of actual payment.
The exemption for long-term capital gains on share transactions is unavailable if the assessee fails to discharge the onus of proving the genuineness of gains arising from dubious share transactions designed to convert unaccounted income into tax-exempt capital gains. Courts will uphold an assessment based on the Revenue's evidence of price rigging or penny stock manipulation if the assessee cannot provide cogent evidence for the abnormal rise in share value.
When faced with allegations of bogus long-term capital gains from penny stocks, the Assessing Officer must discharge the onus of proving that the assessee's transactions were not genuine. The assessee can rely on the principle of preponderance of probability, and the Revenue must present substantial evidence to establish that the transactions were a colourable device or that the assessee was an entry operator.
Tax planning is legitimate only if it is within the framework of law. Colourable devices cannot be part of tax planning, and it is wrong to encourage avoiding tax through dubious methods.
An assessee may manage tax affairs to attract lower tax as permitted by law, and a genuine sale and leaseback transaction that provides substantial benefit is not a colourable device for tax avoidance.
The benefit of Section 10(38) for long-term capital gains is not available when transactions in penny stocks are found to be part of a scheme involving price manipulation or accommodation entries, indicating the gains are not genuine and lack actual investment.