Colourable device in share transactions can justify disallowance of artificial capital loss after applying human probabilities.

A share transaction structured to create an artificial short-term capital loss for set-off against capital gains may be disregarded where surrounding circumstances show it is not a genuine commercial arrangement. The test of human probabilities can be applied to examine the real nature of the transaction, including common control over the entities and the timing of the purchase and sale. On the facts, the loss was treated as arising from a colourable device and sham transaction, so the disallowance of the short-term capital loss was upheld.

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Issues: Whether the disallowance of short-term capital loss arising from the purchase and sale of shares was justified on the ground that the transaction was a colourable device and a sham transaction to set off capital gains.

Analysis: The assessee purchased shares at a high price and sold them within a short span at a much lower price, resulting in a substantial loss which was set off against short-term capital gains. The surrounding circumstances, including common control over the entities involved and the timing of the transactions, required application of the test of human probabilities to examine the genuineness of the transaction. A transaction may be legitimate tax planning only when it remains within the framework of law, but colourable devices adopted to avoid tax are not permissible. On the facts, the sale and purchase sequence was found to be designed to evade tax rather than reflect a genuine commercial arrangement.

Conclusion: The disallowance of the short-term capital loss was upheld, and the transaction was held to be a colourable device and sham transaction.

Ratio Decidendi: Where the surrounding circumstances show that a share transaction was structured primarily to create artificial loss for tax set-off, the authorities may disregard the form of the transaction and treat it as a colourable device after applying the test of human probabilities.

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