TAX/TAXATION

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Res Judicata in Tax Matters
by Sunil Gupta *

Cite as : (1989) 3 SCC (Jour) 20

When does the principle of res judicata apply in tax matters? The common understanding is that, notwithstanding the public policy behind the rule, it has no relevance to tax disputes. It is said that a finding or an opinion recorded by an authority or even by a court of law for one assessment year has no binding effect on the issues in subsequent assessment years. However, the recent judgment of the Allahabad High Court in U.P. Forest Corporation v. Income Tax Appellate Tribunal1 has dealt with this controversy and set at rest the many doubts and misgivings on the point.

The principle of res judicata is not the creature of any statute or the handiwork of any code of law. It is the gift of public policy. In the words of Sir Lawrence Jenkins "while founded on ancient precedent, (it) is dictated by a wisdom which is for all time".2 In Sri B. Temple v. V.V. Bhavanarayanacharyulu3 the Supreme Court observed:

"The doctrine of res judicata is not confined to the limits prescribed in Section 11, Civil Procedure Code. The underlying principle of that doctrine is that there should be finality in litigation and that a person should not be vexed twice over in respect of the same matter."

TWO CONFLICTING VIEWS:

Thus, as a matter of wisdom and public policy, the doctrine of res judicata has been imported in various jurisdictions. Curiously enough, however, the acceptability of the doctrine in tax matters has always remained a doubtful proposition. In England, as early as in 1925, there appeared two conflicting opinions. In Hoystead v. Taxation Committee4 the view taken was that "if in any court of competent jurisdiction a decision is reached, a party is estopped from questioning it in a new legal proceeding". In Broken Hill Property Co. v. Municipal Council5, on the other hand, it was held:

"The decision of the High Court related to a valuation and a liability to a tax in a previous year, and no doubt as regards that year the decision could not be disputed. The present case relates to a new question, viz., the valuation for different year and the liability for that year. It is not, eadem questio, and therefore the principle of res judicata cannot apply."

Supporting the latter view in Commissioners of Inland Revenue v. Sneath6, Greer, L.J. observed:

"It would be unfortunate if we were compelled to arrive at any other result, because it might well be that in any one year the tax-payer might not think it worthwhile to challenge the decision of the Commissioners for that particular year, though it might in later years prove to be worth his while to contest their view. On the other hand, it is equally likely that there may be many cases in which the Crown would be quite prepared to make a concession in one year, whereas they might rightly conclude in subsequent years that it would not be in the interests of tax-payers generally that they should make such a concession."

In India, however, as early as in 1930, the two conflicting English views were reconciled by a Full Bench of the Madras High Court in Sankaralinga v. CIT7 as follows:

"The principle to be deduced from these two cases is that where the question relating to assessment does not vary with the income every year but depends on the nature of the property or any other question on which the rights of the parties to be taxed are based, e.g., whether a certain property is trust property or not it has nothing to do with fluctuations in the income, such question, if decided by Court on a reference made to it would be res judicata in that the same question cannot be subsequently agitated. But if the question is decided by a Court on a reference which depends upon considerations which may vary from year to year, e.g., the case in Broken Hill Property Co. v. Municipal Council in which the average valuation had to be taken there could be no question of res judicata."

The same rule was reiterated by the Allahabad High Court both as regards res judicata as well as constructive res judicata in Kamlapat Motilal v. CIT8 as follows:

"If in the course of the assessment for one year a general question of right or title has been decided, this decision will not only govern the assessment for the year in question but in subsequent years even if the question has not been expressly decided but the decision is by implication, either because the point was not raised or was conceded, the same result will follow."

The Bombay High Court, however, struck a somewhat different note in H.A. Shah and Co. v. CIT9 holding that "the principle of estoppel or res judicata does not strictly apply to the Income Tax authorities" and yet declaring 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."

Thus, res judicata was excluded from tax matters. But, thanks, once again, only to judicial wisdom and considerations of public policy, the advantages of the rule continued to remain available though in a different way. Of course, the role of constructive res judicata in tax matters was sufficiently reduced.

THE SUPREME COURT'S VIEW:

The question came up directly for consideration by the Supreme Court in Amalgamated Coalfields v. Janapada Sabha10 The highest court evinced a highly, balanced approach:

"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 DELHI VIEW:

It appears, however, that for a long time the aforesaid Supreme Court decision remained unnoticed. Thus, in CIT v. Dalmia Dadri Cement Ltd.11, the Punjab & Haryana High Court chose to follow the Bombay decision. In Chiranjilal v. ITO12, the Delhi High Court permitted res judicata to operate but only qua 'the decisions of courts', not qua the decisions of departmental authorities or tribunals. In J.K. Synthetics v. Union of India13, the same High Court reduced the importance of res judicata in tax matters to a much lesser extent and evolved, instead, what may be described as the 'cogent factor' theory. It held:

"... while it has been repeatedly held that the principle of res judicata or estoppel as such will not apply in tax matters and that the view taken by the assessing or appellate or revisional authority or even the High Court in respect of any one assessment year period will not be final and conclusive for subsequent periods ... such decision will be a cogent factor in the determination of the same point in the following year ... It can be ignored or departed from only for good or cogent reasons."

THE ALLAHABAD VIEW:

It is, perhaps, for the first time in U.P. Forest Corporation v. I.T.A.T.1 that the Allahabad High Court has taken cognizance of the Supreme Court decision and enunciated the law in unequivocal terms. The Corporation had been adjudged to be a 'local authority' by the High Court and, on that ground, to be entitled to exemption from Income Tax in proceedings for Assessment Year 1976-77. In a subsequent Assessment Year the Income Tax Appellate Tribunal refused to treat the Corporation as a 'local authority' and denied the exemption to it disapproving the application of res judicata in tax matters. Rejecting the view of the Tribunal, R.M. Sahai, J. held:

"Even the view of the Tribunal that the decision in one assessment year does not apply as res judicata appears to be misconceived. It is contrary to the settled principles of law and shows complete ignorance by the Tribunal of the authority and solemnity which attaches to a decision given by a competent court on status or question of law.... The question whether petitioner was a local authority or not was not a question of fact. It was a question of law which directly and substantially arose in year 1976-77. The decision, therefore, could not be ignored by taking recourse to the principle that it related to earlier year."

Again, referring to the earlier Allahabad decision in Kamlapat Motilal v. CIT8, the learned Judge remarked:

"The Division Bench drew a distinction between decision given by assessing authority which includes a Tribunal and (decision given by a) competent court of law. It was held that so far the former are concerned the decision in one assessment year may not be binding on the other. But this principle was not applicable when a decision was given by a court of law. That stands on a different footing and precludes the subordinate authority from reopening the matter on a question of law even in subsequent years. The Tribunal, therefore, committed manifest error of law in ignoring the decision given by this court for (an) earlier assessment year."

The clear-cut principle which finally emerges from the latest Allahabad judgment is that res judicata applies even in tax matters provided the question in consideration is a question of law and further the decision on that question in the earlier case is a decision of a competent court of law. Conversely, the verdict of a departmental authority or tribunal even on a question of law, much less on a question of fact, which is inherently capable of varying from year to year does not and cannot operate as res judicata. This position cuts both ways. As observed by Chagla, C.J.9, as regards a defeated assessee it has its own virtues. According to His Lordship:

"This is a principle which is not merely helpful to the Income Tax Authorities but it is equally helpful to the assessee because if the Income Tax Authorities are not bound by any decision given in an assessment in favour of the assessee, equally so an assessee is not bound by any decision given in favour of the Department in any assessment."

THE MADRAS VIEW:

More recently, the Madras High Court in N.A. Namazie Endowment v. CIT14 has further liberalised the role of res judicata in tax matters by pinning down even the departmental authorities to their earlier decisions (as distinct from decisions of a court) in unchanging legal situations. After noticing a wide range of precedents, it has held:

"It appears to be well-established that a decision on the question as to whether a certain trust is a charitable trust or not which has nothing to do with the fluctuations in its income year after year will operate as res judicata and the same question cannot subsequently be reagitated."

Prohibiting the Income Tax Officer from reappraising the same question again and again, the High Court has held:

"The Income Tax Officer is not bound by the rule of res judicata or estoppel by record and ... he can reopen a question previously decided only if fresh facts come to light on investigation that would entitle him to come to a conclusion different from the one previously reached or if the earlier decision had been rendered without taking into consideration material evidence."

THE BOMBAY VIEW:

Similarly, in Tata Exports Ltd. v. Union of India15, a recent case under the Customs Act, 1962, the Bombay High Court, has voiced its concern over the vacillating and oscillating tendencies of the departmental authorities:

"It is unfortunate that the revisional authority should have ignored the earlier decision recorded by the three Secretaries and especially where the parties were the same and the consignments were imported under the identical licences. The revisional authority should have accepted the decision reached in the earlier proceedings and ought to have given relief in favour of the petitioner."

Again, in Naarden (India) Ltd. v. Union of India16, another recent case under the Central Excise and Salt Act, 1944, the Bombay High Court has expressed the view that earlier actions of the Excise authorities can and do bind them for all time to come:

"Before passing the appellate order the Appellate Collector could have had samples drawn and a report made. He chose not to do so and passed the appellate order holding that the petitioner's flavouring agents were entitled to the benefit of exemption under the notification. The Excise authorities could have carried the matter in revision to the Central Government but chose not to do so. In these circumstances the finding of the Appellate Collector binds the Excise authorities. Since Mr Bulchandani submitted that it could not bind them for all time, I clarify that the Excise authorities are indeed so bound by an order of the Appellate Collector, unless reversed or set aside. No mere Superintendent of Central Excise can decide that an order of an Appellate Collector was based on a wrong premise or was wrong and act contrary to it."

This last decision of the Bombay High Court goes to the extent of accepting the principle of constructive res judicata within the fold of tax matters. It inaugrates a new era in the history of res judicata in tax matters, having consequences of far-reaching significance and import, of course, as held by Chagla, J., both for the Revenue as well as for the assessee.

* Advocate, Supreme Court. Return to Text

1. Writ Petition No. 4424 of 1987 (Lucknow Bench) decided on 19.5.1988. Return to Text
2. In Sheoparsan Singh v. Ramanandan, AIR 1916 PC 78 Return to Text
3. (1970)1 SCC 673 Return to Text
4. 1925 All ER Rep 56 (PC) Return to Text
5. 1925 All ER Rep 672 (PC) Return to Text
6. (1932) 2 KB 362 Return to Text
7. AIR 1930 Mad 209 Return to Text
8. (1950) 18 ITR 812 Return to Text
9. (1956) 30 ITR 618 Return to Text
10. AIR 1964 SC 1013 Return to Text
11. (1970) 77 ITR 410 Return to Text
12. (1978) 115 ITR 410 Return to Text
13. (1981) 8 ELT 328 Return to Text
14. (1988) 174 ITR 58 Return to Text
15. (1989) 39 ELT 49 (Bom) Return to Text
16. (1989) 39 ELT 530 (Bom) Return to Text