Applicability of the doctrine of res-judicata in Income Tax proceedings

The doctrine of “Res-judicata”  when translated  to English  means “ a matter decided”. Simply put the doctrine predicates that no man can be tried twice for the same cause or, to put it in legal terms a matter/issue which has already been adjudicated cannot be raised again either in the same court or in a different court.  This doctrine mitigates the possibility of multiple, repetitive and vexatious legal proceedings thereby avoiding unnecessary wastage of resources and strain on the   legal system while also leading to a modicum of consistency in proceedings over time.  In common law the doctrine of Res-judicata enables a judge in a suit, when confronted with a suit that is identical to or substantially the same as an earlier/periods one, to by applying this principle to preserve the effect of the earlier judgement. The justification for applying this doctrine lies in the desire to promote efficiency and fairness and reduce unnecessary litigation. For a defendant, this doctrine enables him by relying in the absence of any change in the underlying facts or circumstances to obtain the same judgement as in an earlier case.

This doctrine is based on the following three Roman maxims which embody the combined result of the public policy [reflected in maxims (ii) and (iii) ]and private justice [expressed in the maxim (i)] and applies to all judicial proceedings whether civil or criminal: –

• Nemo debet lis vaxari pro eadem causa–i.e. no person  should be vexed annoyed, harassed  or vexed two times for the same cause;
• Interest republicae ut sit finis litium– i.e., it is in the interest of the state that there should be an end of litigation; and
• Re judicata pro veritate occipitur– i.e. the decision of the court should be adjudged as true

The following conditions need to be satisfied for the doctrine of Res-judicata to be applicable: –

            (i)        There must be a final judgment;
            (ii)        The judgment must be on the merits;
            (iii)       The claims must be the same in the first and second suits;
            (iv)      The parties in the second action must be the same as those in the first, or have been represented by a party to the prior action

This doctrine has widespread relevance in Civil Law.  In fact section 11 of The Code of Civil Procedure, 1908, recognises this doctrine as under:-

“No court shall try any suit or issue in which the matter directly and substantially in issue has been directly and substantially in issue in a former suit between the same parties, or between parties under whom they or any of them claim, litigating under the same title, in a court competent to try such subsequent suit or the suit in which such issue has been subsequently raised, and has been heard and finally decided by such court.”

The above Section in the Code of Civil Procedure gives statutory teeth to the basic proposition that once a matter is finally decided by a competent court no party can be permitted to reopen it in a subsequent litigation.        

On the taxation front, in general,  the doctrine has no application since each  assessment year is an independent unit and its assessment, based as it is on the specific facts prevalent for that year, is final  for and determines the tax only for that year and cannot govern or be made applicable to any later years. In one of the earliest decisions on the issue the Bombay High Court in the case of  H.A. Shah and Co. vs. CIT [(1956) 30 ITR 618 (Bom.)]  held that “the principle of estoppel or res judicata does not strictly apply to the Income Tax authorities” but also clarified that:-

“An earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision and if the Tribunal giving the earlier decision has taken into consideration all material evidence.”

This view was unequivocally also upheld by the Supreme Court in the case of Instalment Supply (P) Ltd v Union of India [(1962) AIR (SC) 53] whereby the general rule is to make this doctrine inapplicable for tax matters as the  findings/opinions recorded by either an Assessing or even an Adjudicating authority have no binding effect on even the same  issue in subsequent years.

 The views of the Supreme Court in the case of Instalment Supply Ltd (referred above) were very soon thereafter clarified and amplified in the case of Amalgamated Coalfields vs. Janapada Sabha [AIR 1964 SC 1013] with the following remarks:-

“In considering this question, it may be necessary to distinguish between decision on questions of law which directly and substantially arise in any dispute about the liability for a particular year, and questions of law which arise incidentally or in a collateral manner … the effect of legal decisions establishing the law would be a different matter. If, for instance, the validity of a taxing statute is impeached by an assessee who is called upon to pay a tax for a particular year and the matter is taken to the High Court or brought before this Court and it is held that the taxing statute is valid, it may not be easy to hold that the decision on this basic and material issue would not operate as res judicata against the assessee for a subsequent year”.

The Supreme Court in the a landmark decision on the issue in the case of Radhaswami Satsang vs CIT [(1992) 193 ITR 321 (SC)] while holding that the principle of res-judicata does not apply to income-tax proceedings since each is an independent unit in itself made the following subtle, yet relevant remarks which signified some kind of a shift in approach:-

“We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year”.           

The above view also finds echo in the following judgements:

• Therefore, in the absence of any valid and convincing reason, if same issue has not been pursued by the Revenue in appeal, there is no justification as to why such principles on res-judicata should not apply.

        Maharao Bhim Singh of Kota v CIT [(2016) 390 ITR 532,  (SC)].   

• But in tax cases relating to a subsequent year involving the same issue as an earlier year, the court can differ from the view expressed if the case is distinguishable or per incuriam.

        Bharat Sanchar Nigam Limited v UOI {[2006] 3 SCC ) ; Meeraj Estate Developers v CIT [(2019) 418 ITR 681 (Allahabad)]. 

• The principles of res-judicata will not apply only if the Revenue is able to establish compelling reasons for a departure from settled position.

        Godrej & Boyce Manufacturing Co Ltd v DCIT [(2017) 349 ITR 449(SC)].  

• There should be a finality attached to the issue once it stands decided by the higher courts on the merits.

         Parashuram Pottery Works Co Ltd v ITO [(1977) 106 ITR 1 (SC)]. 

• The Revenue should not be allowed to flip-flop on the issue

         CIT v Excel Industries Ltd [(2013) 358 ITR 295 (SC)].     

In the context of Excise Law( which principles will apply mutatis mutandis to income-tax proceedings also), the Delhi High Court in an exhaustive and landmark judgement in  the case of JK Synthetics Ltd v UOI [(1981) 8 ELT 328 (Delhi High Court)] considered several decisions on whether res-judicata or estoppel will apply in in tax matters and  held that the Department should not be permitted to change its view capriciously or  to take a different stand from its earlier view unless there are good or cogent reasons for a change in its view.  It then enumerated the following factors which could justify a departure from a stand taken in earlier year  :-

• If the facts are different or further and fresh facts are brought on record; or
• If the process of manufacturer has changed (this was a central excise case); or
• If the relevant entries in the Tariff have undergone a modification; or
• If, subsequent to the earlier decision, there has been a pronouncement of a Higher Court or the Supreme which necessitates reconsideration of the issue.

The above discussion seems to convey that while, in general, the doctrine of Res-judicata does not apply to tax proceedings, the rule of consistency which can be considered to be an off-shoot of the doctrine of res-judicata does apply. Applying this rule, the authorities are, in a way prohibited from, in the absence of any change in underlying circumstances or the discovery of any fresh facts to tinker with the decision  arrived at in any year merely on grounds of suspicion or even any change of opinion.  The principles  has its roots in the philosophy that a decision, which in the absence of any change in the underlying facts and circumstances which can have a cascading effect over several years should not be altered with or treated differently so as to maintain consistency and stability in the tax adjudication process. In the specific context of Income-tax law,  the above view has been upheld in the following cases:-

• Sunil Kumar Janeswar v DCIT, Cir 14(2), Mumbai [(2011) 16 Taxmann.com 311 (Mum)];
• Man Mohan Kedia v ITO Kolkata [(2015) 370 ITR 649(Calcutta)];
• DIT(E) v. Apparel Export Promotion Council [(2000) 244 ITR 734 (Del)];
• CIT v. Neo Polypack (P) Ltd [(2000) 245 ITR 492 (Del)];
• CIT v. Dalmia Promoters Developers (P) Ltd [2006] 281 ITR 346 (Delhi)
• DIT(E) v Escorts Cardiac Diseases Hospital Society [(2008) 300 ITR 75 (Del)];
• CIT v. Lagan Kala Upvan [(2002) 259 ITR 489 (Delhi)];
• Modi Industries Ltd [(2010) 327 ITR 570 (Delhi)];
• Parashuram Pottery Works Co Ltd v. ITO [(1977) 106 ITR 1 (SC)];

The rule of consistency enables stability in the entire tax assessments and appellate process. However, while it is incumbent on tax authorities to apply it in letter and spirit even assessee’s should fortify their stand to be able to prove that extant facts have remained similar preferably entail over various years. Only such an attitude and approach would enable some stability in the proceedings and obviate unnecessary time and resource consuming litigation.