25 May 2015

Applicability of res judicata in tax matters


Res Judicata is the Latin term for "a matter (already) judged", or "a thing adjudicated". It means a case or suit already decided. It was recently defined as “a final judgment on the merits by a court having jurisdiction is conclusive between the parties to a suit as to all matters that were litigated or that could have been litigated in that suit” by the Tennessee Court of Appeals [see end note 1]. In the Income Tax Act, 1961 (“ITA”) the principle is incorporated, though only to a degree, in Section 158A of the ITA. This section provides that the decision of the High Court or the Supreme Court in the case of assessee may be applied by the AO to an identical question arising in the assessee’s assessment proceedings in another year, provided the assessee requests for the same. Even so, res judicata is a wider concept, certain key issues on which shall be discussed in the subsequent paragraphs.


Inapplicability of res judicata in taxation

The general rule that is being applied over many years is that the doctrine of res judicata is not applicable in tax matters as has been already introduced earlier. The principle underlying is that no one should present same set of facts differently so as to reach different conclusions in different financial years. If the same issue is dealt with, in different financial years, differently, this will cause a lot of confusion and harassment. Financial law by its very nature is ever dynamic and changes every year. Consistency in law and its interpretation is hence essentially expected not only from tax authorities but also from the assessees.

Certain decisions of Supreme Court (SC) have held that the principle of res judicata is inapplicable in tax matters and the general rule is not to apply this doctrine. In Instalment Supply (Pvt.) Ltd. [see end note 2] the SC held that in tax matters there is no question of res judicata because each year's assessment is final only for that year and does not govern later years.

In Radhasoami Satsang Vyas [see end note 3] the Supreme Court observed that each assessment year is a separate unit. Decision in one year may not carry forward and hold for a subsequent year. The court held that in taxation matters, the rule of res judicata, as embodied in Section 11 of Civil Procedure Code, 1908 (CPC) has no application. Each year’s assessment and decision is hence final to only that financial year and hence so determines the liability of the assessee of that particular financial year or period. It is open to the authorities to consider the issues and position of the assessee in the subsequent years. The decision was affirmed by the Apex Court in the Municipal Corporation of City of Thane [see end note 4] case.

In India, as early as in 1930, the conflicting views that whether the doctrine is applicable or not, were reconciled by a Full Bench of the Madras High Court in Sankaralinga [see end note 5], wherein it was held that questions relating to rights of parties and not varying with income of the party, if decided by court should be res judicata and the same question should not be argued subsequently. However, questions which do depend on factors determining income or considerations which vary every year forming questions which relate to different years and also vary from year to year cannot be held res judicata. These questions need to be argued for every year and need to be settled for each and every year as and when the dispute arises. The principle of res judicata hence should be applied only if there is a fundamental issue in question and the facts which change every year cannot utilize this doctrine for defence.

The Allahabad High Court reiterated the same rule regarding the doctrine of res judicata in Kamlapat [see end note 6] and held that a general and a fundamental question of right or title once decided should be res judicata and should govern the question in subsequent years. This should hold even if the question has not been decided expressly and the same result should follow. However, the Bombay High Court in H.A. Shah [see end note 7] have a slightly different view. It held that "the principle of estoppel or res judicata does not strictly apply to the Income Tax authorities" and declared 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."

Res judicata was hence excluded from tax matters as has already been discussed earlier. This along with other judgments as discussed above rendered the doctrine inapplicable to tax disputes. But, once again, due to judicial wisdom and considerations of public policy, the advantages of the rule continued to remain available. This took a different form. It needs to be mentioned that constructive res judicata has lost its role as far as tax matters are concerned. Constructive res judicata gets its formulation in explanation IV of Section 11 of CPC. The Supreme Court in The Workmen of Cochin [see end note 8] explained the meaning of res judicata with respect to constructive res judicata as:

“The rule of constructive res-judicata is engrafted in Explanation IV of Section 11 of the Code of Civil Procedure and in many other situations also Principles not only of direct res-judicata but of constructive res-judicata are also applied, if by any judgment or order any matter in issue has been directly and explicitly decided, the decision operates as res-judicata and bars the trial of an identical issue in a subsequent proceedings between the same parties. The Principle of res judicata comes into play when by judgment and order a decision of a particular issue is implicit in it, that is, it must be deemed to have been necessarily decided by implications even then the Principle of res judicata on that issue is directly applicable. When any matter which might and ought to have been made a ground of defence or attack in a former proceeding but was not so made, then such a matter in the eye of law, to avoid multiplicity of litigation and to bring about finality in it, is deemed to have been constructively in issue and, therefore, is taken as decided"

The question had also been earlier addressed by the Apex Court when the matter came up directly for consideration in Amalgamated Coalfields [see end note 9] It held that,

“In considering of 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.”

The Supreme Court gave a somewhat balanced approach in the understanding and application of this issue. It distinguished between questions which arise incidentally and questions of law which arise directly and substantially in any financial year. The effect of application of the principle and of legal decisions under these different circumstances will be different. An issue which is significant only for a particular year once decided cannot be held res judicata for a subsequent year.


Rule of consistency

Though largely, the jurisprudence has been that res judicata is inapplicable to tax proceedings, courts at times have preferred the rule of consistency. In the case of Sunil Kumar Ganeriwal [see end note 10] for example, the Bombay High Court relied on the rule of consistency. In this case, the assessing officer had accepted the transaction of shares as investment and income arising from it under the head short term capital gains in earlier and also in subsequent assessment years. In a particular year, it was held by the assessing officer to be under head profits and gains from business owing to the frequency, scale and period of holding. The ITAT Mumbai held that the rule of consistency demanded that the Assessing Officer can't take a different view in selective assessment year, and ruled in favour of the assessee.

Recently, in the case of Man Mohan Kedia [see end note 11] the Calcutta High Court, though giving a finding that res judicata is inapplicable to tax proceedings, emphasized on the importance of maintaining consistency in tax proceedings. It was held by the High Court that in taxation cases the Revenue Department is taken as one party for all assessment years and the assessees together taken as the other party. That which is decided between the Revenue and one assessee in an assessment year, having permanent effects should not be decided otherwise or treated in any other way by the revenue with regard to any other assessee, so as to maintain consistency and fairness in government action.


As a general rule, the principle of res judicata is not applicable to tax related proceedings. An assessment of particular year is final, complete and binding in relation to the assessment year in which the decision is given. In income-tax proceedings, though the principle of res judicata does not apply,  rule of consistency which in itself emanates from the doctrine of res judicata does apply, i.e., if no fresh facts come to light on investigation, the assessing officer is not entitled to reopen the same question on mere ground of suspicion or change of opinion. This view of courts is also based on principle of natural justice. This principle broadly safeguards the interests of the assessees against arbitrary actions ariarising out of prerogative interpretations and biased actions of the departmental authorities.
[The author is a Principal Associate, Direct Tax Practice, Lakshmikumaran & Sridharan, Mumbai ]


End Notes:

  1. J. M. Hanner Construction Company,, Inc. v. Thomas Brothers Construction Company, Inc, 2012
  2. Instalment Supply (Pvt.) Ltd. v. Union of India, AIR 1962 SC 53
  3. Radhasoami Satsang Vyas v. CIT, 1991 Indlaw SC 948
  4. Municipal Corporation of City of Thane v. Messrs Vidyut Metallics Limited and another, 2007 INDLAW SC 900
  5. T.M.M. Sankaralinga Nadar & Bros.v. CIT, (1929) 4 ITC 226 (MAD.)
  6. Kamlapat Motilal v. CIT, (1950) 18 ITR 812 (AHD.)
  7. H. A. Shah and Co. v. CIT, (1956) 30 ITR 618 (Bom)
  8. The Workmen of Cochin Port Trust v. The Board of Trustees of the Cochin Port Trust and Anr, AIR 1978 SC 1283
  9. Amalgamated Coalfields v. Janapada Sabha, AIR 1964 SC 1013
  10. Sunil Kumar Ganeriwal v. Deputy Commissioner of Income-tax, Circle 14(2), Mumbai, [2011] 16 taxmann.com 311 (Mum.)
  11. Man Mohan Kedia v. Income Tax Officer, Kolkata, [2015] 370 ITR 649 (Calcutta)


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