Legal Notes by Arvind Datar: Res Judicata, estoppel and taxation

As a general rule, in taxation matters, the principles of res judicata or estoppel do not apply. Each assessment year is treated as a distinct unit and there is no bar on either the assessee or the Department from taking a different view of a transaction in a subsequent year. Certain Privy Council decisions had taken the view that any decision taken would be limited to that particular assessment year. It has also been held by the Supreme Court of India that each year’s assessment is separate, and the decision arrived at in a particular year cannot be regarded as binding in the assessment for the subsequent year or years. Thus, the fact that certain shares were held to be stock-in-trade in one previous year, will not preclude the Income-tax Officer from treating it as a capital investment in the next year. However, the court held that findings of fact in the earlier year would be ‘good and cogent evidence’ for the subsequent year. Similarly, there are other decisions which have held that findings of fact or law in the earlier year cannot be ignored or brushed aside or departed from unless there are ‘good and cogent reasons’ to do so.

In 1930, a Full Bench of the Madras High Court in Sankaralinga Nadar T.M.M. v. CIT, AIR 1930 Mad 209 (FB), considered the earlier Privy Council decisions and held that it will not be open to an ITO to “capriciously” depart from the earlier view unless fresh facts came to light that would entitle the ITO to come to a different conclusion. Another remarkable decision is that of Chagla C.J. in H.A. Shah & Co. v. CIT, (1956) 30 ITR 618, where the learned judge posed the question as to whether the ITO could go back on a finding given for an earlier year merely because the principle of res judicata did not apply. He also asked whether the ITO, on his own free will, could come to a different conclusion in a subsequent year?

Thus, an analysis of these decisions shows that one view was that res judicata and estoppel are not applicable to tax matters, while the other view was that the tax authorities ought not to depart from their earlier view unless there were a good and cogent reasons to do so.

However, till 1981, no decision clearly spelt out the circumstances that would justify the Department to take a view different from that of the earlier years. There is an excellent analysis of the entire law on this controversy in a Delhi High Court division bench judgement rendered by Justice S. Ranganathan in J.K. Synthetics Ltd. v. Union of India, 1981 (8) ELT 328. In a decision remarkable for its scholarship and critical analysis, the following principles were laid down as to when the Department would depart from its earlier views:

(i) If the facts are different or further and fresh facts are brought on record; or

(ii) if the process of manufacture has changed (this was a central excise case); or

(iii) if the relevant entries in the Tariff have undergone a modification; or

(iv) if, subsequent to the earlier decision, there has been a pronouncement of a High Court or the Supreme which necessitates reconsideration of the issue.

It is submitted that these principles were laid down in a case relating to central excise and reference has been made to tariff entries and the process of manufacture. But the same principles will apply to cases involving direct taxes, customs and GST.

It is important that the principles laid down above are distinguished from the view taken in Radhasoami Satsang v. CIT, (1992) 193 ITR 321, 329 (SC), wherein it was held that if a particular view has been followed for several years, the Department will not be permitted to adopt a different view. Thus, a consistent view taken over several assessment years may be an estoppel against the Department taking a different view. But the principles laid down by Ranganathan J. will apply even if a conclusion has been reached for one year; the Department cannot then take another view in the subsequent year, unless the four principles are satisfied.

In BSNL v. Union of India (2006) 3 SCC 1, a three-judge bench analysed the earlier case law and held that res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar courts from entertaining issues on the same cause of action whereas the cause of action for each assessment year is distinct.

It is further submitted that the above principles are applicable even if a particular view is taken in the case of another assessee. If the statutory provisions are the same, the Department cannot depart from its earlier view. It is often found that even if a view taken in another case has been reversed and there is a binding decision of the Tribunal, High Court or Supreme Court, the Department takes a different stand in another case. It is submitted that these principles will apply to such cases as well. Indeed, the BSNL decision cited above, has held that, where facts and law in a subsequent assessment year are the same, no authority ,whether quasi-judicial or judicial, can generally be permitted to take a different view.

It is also submitted that if show cause notices are issued contrary to a binding ruling or contrary to a view accepted by the Department for an earlier period, it is advisable to file a writ of prohibition. The High Court can prohibit or restrain the Department from taking a contrary view. To this extent, there will be an estoppel.

Therefore, although the principes of res judicata and estoppel do not apply to tax matters, the view taken in one assessment year or for one period will remain binding for later assessment years as well. Unless the Department can establish that the principles laid down by Ranganathan J. are satisfied, they cannot take a contrary stand in subsequent years or for different assessees.

Arvind P. Datar is a Senior Advocate.