When a legislature which has no power to legislate frames legislation so camouflaging it as to appear to be within its competence when it knows it is not, it can be said that the legislation so enacted is colourable legislation.
In K.C. Gajapati Narayan Deo v. State of Orissa,  SCR 1 the Orissa Agricultural Income-tax (Amendment) Act, 1950, was challenged on the ground of colourable legislation or a fraud on the Constitution as its real purpose was to effect a drastic reduction in the amount of compensation payable under the Orissa Estates Abolition Act, 1952. The facts were that a Bill relating to the Orissa Abolition Act, 1952 was published in the Gazette on January 3, 1950.
It provided that any sum payable for agricultural income-tax for the previous year should be deducted from the gross asset of an estate for working out the net income on the basis whereof compensation payable to the estate owner could be determined.
Thereafter on January 8, 1950, a Bill to amend the Orissa Agricultural Income-tax, 1947, was introduced to enhance the highest rate of tax from 3 annas to 4 annas in a rupee and to reduce the highest slab from Rs. 30,000 to Rs. 20,000. The next Chief Minister, however, dropped this Bill and introduced a fresh Bill enhancing the highest rate to 12 annas 6 pies in a rupee and reducing the highest slab to rs. 15,000 only.
On the same becoming law it was challenged on the ground that the real purpose of the legislation was to drastically reduce the compensation payable to the estate owners.
Mukherjea, J., who spoke for the Court observed as under:
“It may be made clear at the outset that the doctrine of colourable legislation does not involve any question of bona fides or mala fides on the part of the legislature. The whole doctrine resolves itself into the question of competency of a particular legislature to enact a particular law.
If the legislature is competent to pass a particular law, the motives which impelled it to act are really irrelevant. On the other hand, if the legislature lacks competency, the question of motive does not arise at all. Whether a statute is constitutional or not is thus always a question of power.”
Thus the whole doctrine resolves itself into a question of competency of the concerned legislature to enact the impugned legislation. If the legislature has transgressed the limits of its powers and if such transgression is indirect, covert or disguised, such a legislation is described as colourable in legal parlance.
The idea conveyed by the use of the said expression is that although apparently a legislature in passing the statute purported to act within the limits of its powers, it had in substance and reality transgressed its powers, the transgression being veiled by what appears on close scrutiny to be a mere pretence or disguise.
In other words if in pith and substance the legislation does not belong to the subject falling within the limits of its power but is outside it, the mere form of the legislation will not be determinate of the legislative competence.
In Sonapur Tea Co. Ltd. v. Must. Mazirunnessa,  1 SCR 724 it was reiterated relying on Gajapati’s case that the doctrine of colourable legislation really postulates that legislation attempts to do indirectly what it cannot do directly.