Colourable device in share transfer can raise a referable question of law on anti-avoidance treatment.

A tribunal's finding that a share transfer by a Hindu undivided family to its karta was a colourable device to reduce tax liability can itself raise a referable question of law when the legal effect of proved facts is in issue. The High Court held that the surrounding circumstances relied on by the Tribunal, including deferred consideration and absence of interest, did not eliminate the legal issue whether the transaction could be ignored under the anti-avoidance principle associated with McDowell. The refusal to state the case was therefore unsustainable, and the Tribunal was directed to refer the formulated question of law.

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Issues: Whether the Tribunal was justified in refusing to refer the question arising from its finding that the transfer of shares by the Hindu undivided family to its karta was only a device to reduce tax liability and, therefore, whether the transaction was liable to be ignored under the principle applied in McDowell.

Analysis: The Tribunal's conclusion rested on its inference from the surrounding facts, including deferred receipt of consideration and absence of interest, that the transaction was entered into only to lighten the tax burden and was a colourable device. The Court held that, on the material recorded, the correctness of that legal inference and the applicability of the principle on which the Tribunal relied raised a question of law fit for consideration. The existence of some factual findings did not exclude the referable legal issue as to whether the transaction was valid or could be ignored on the basis of the Tribunal's approach.

Conclusion: The refusal to make a reference was unsustainable, and the Tribunal was directed to state the case and refer the formulated question of law.

Final Conclusion: The matter was allowed at the stage of reference, with the legal issue on validity of the share transfer and the application of the anti-avoidance principle left for answer on reference.

Ratio Decidendi: Where a tribunal's conclusion that a transaction is a colourable device turns on the legal effect of proved facts, the resulting inference may itself raise a referable question of law.

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