Colourable trust and loan arrangements were treated as ineffective where control, documentation, and commercial substance were absent.

A company's separate legal personality did not prevent scrutiny of whether a family trust arrangement was real or merely colourable. The Court treated the alleged transfer and declaration of trust as sham where the shares and securities remained under the assessee's control, no formal transfer was required, the trust deed was unregistered, and the company's role was confined to paper entries without commercial purpose. It also found that amounts routed through the company as supposed loans were not genuine loans, since dividends and interest had been received by the assessee, there was no written loan arrangement, no authorising resolution, no security, no corresponding cash movement, and no repayment. The sums were therefore taxable in the assessee's hands.

---

---

Issues: (i) Whether the alleged transfer and declaration of trust in favour of the family company were genuine or merely sham arrangements. (ii) Whether the amounts credited as loans represented genuine loans or were in substance withdrawals of income assessable as the assessee's taxable income.

Issue (i): Whether the alleged transfer and declaration of trust in favour of the family company were genuine or merely sham arrangements.

Analysis: The company was duly incorporated and had a separate legal personality, but that did not prevent the Court from examining whether the documents and surrounding conduct were real or colourable. The shares and securities remained in the assessee's control, no formal transfers were ever called for, the declaration of trust was not registered, and the company's practical activity was confined to paper entries. The concealment of the arrangement and the absence of any convincing commercial purpose supported the inference that the transaction was not a bona fide transfer of beneficial ownership.

Conclusion: The alleged transfer and declaration of trust were not genuine, and the finding was against the assessee.

Issue (ii): Whether the amounts credited as loans represented genuine loans or were in substance withdrawals of income assessable as the assessee's taxable income.

Analysis: The dividends and interest were received by the assessee himself and were thereafter routed through book entries into the company's accounts as supposed advances. There was no contemporaneous written loan arrangement, no resolution authorising the advances, no security, no cash movement corresponding to the alleged loans, and no repayment. On those facts, the purported loans were held to be a device for disguising the assessee's receipt of income through a controlled company.

Conclusion: The alleged loans were not genuine loans and were merely withdrawals of income disguised as loans, with the result that the sums were taxable in the assessee's hands, against the assessee.

Final Conclusion: The reference was answered in favour of the revenue on the material questions, and the assessee was held liable on the disputed sums.

Ratio Decidendi: In assessing income, the Court may look behind the form of a company-controlled arrangement and treat purported transfers or loans as ineffective where the evidence shows that they are merely colourable devices and not real commercial transactions.

---