The Application of the Rule of Res Judicata to Income-Tax Matters in India

A court is prevented from coming of a different or contrary conclusion to the one arrived at by itself earlier mainly on the ground of res judicata or on the ground of estoppels by record.

Courts of law have adopted this particular rule of res judicata in order to give finality to litigation and also to confer the characteristic of conclusiveness to their decision.

Therefore, if a matter is litigated between the parties and a decision is arrived at by a Court that decision is binding between the parties and it is not open to either of the parties to repaginate the question covered by that decision.

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But the question is whether this principle of res judicata will apply to tribunals and authorities set up under the Income-tax Act.

The rule of res judicata does not apply to income-tax proceed­ings and the same question can be raised in subsequent years.

In the matter of assessment of income-tax, each year’s assess­ment is complete and the decision arrived at in a previous year, on materials before the tax authorities cannot be regarded as binding in the assessment for subsequent years.

In matters of taxation, there is no question of res judicata be­cause each year’s assessment is final only for that year and does not govern later years, as it determines only the tax for a particular period.

The principle of res judicata does not in terms apply to ad­ministrative proceedings.

The rule of res judicata does not apply to tax cases. Though the Income-tax Officer is not bound by the rule of res judicata or estoppels by record, yet he can reopen the matter of assessment only if fresh facts come to light, which, on investigation, would entitle the officer to come to a conclusion different from that of his predecessor.

Therefore, the fact that the assessed had not been treated as a dealer in shares and his profits from the purchase and sale of the shares in a certain year had not been assessed to income-tax as profits, does not operate, in any way, as res judicata or prevent his income in subsequent years being assessed as business profits.

The subject of applicability of the rule of res judicata to income- tax proceedings has been exhaustively discussed in a Bombay case of Shah & Co. v. C.I.T., (1956) 30 I.T.R. 618.

The assessment is final and conclusive between the parties only in relation to the assessment for the particular year for which it is made. No doubt, a decision reached in one year would be a cogent factor in the determination of a similar point in a following year but it is not to be treated as an estoppels binding upon the same party for all years.

Therefore, the very basis of an assessment is that it is self-contained and the decision given by the income-tax authorities is a decision relating to that particular assessment and binding upon the parties to the extent of that assessment.

When these authorities con­sider the case of the assessee with regard to a different assessment year, they are dealing with an entirely new case, and the decision given in the earlier assessment has no binding force upon either the assessee or the income-tax authorities in the next assessment.

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

It does not follow from the view that the principle of res judicata or estoppels does not strictly apply to the income-tax authorities, that it is open to a Tribunal to come to a different con­clusion from the one arrived at by that very Tribunal earlier without any limitation whatsoever.

There are the limitations upon the right of income tax authority not to be bound by the earlier decision or the right to revise the earlier decision.

If the first Tribunal comes to a particular decision on the con­struction of a particular document (e.g., a partnership deed), it would not be open to the second Tribunal to disturb the decision given by the Tribunal because the construction of the document is not a matter of computation or a matter of reckoning which may alter from year to year or from assessment to assessment.

Therefore, the mere fact that the second Tribunal may look upon the decision of the first Tribunal as erroneous in law, does not justify it in coming to a contrary conclusion or reversing the finding of the first Tribunal.

In order to enable the second Tribunal to depart from the finding of the first Tribunal, it is not essential that there must be some fresh facts which must be placed before the second Tribunal and which were not placed before the first Tribunal.

If the first Tribunal failed to take into consideration material facts (i.e., facts which had a consider­able bearing upon the ultimate decision) and if the second Tribunal is satisfied that the decision was arrived at because of the failure to take into consideration those material facts and that, if these material facts had been taken into consideration the decision would have been dif­ferent, then the second Tribunal is in the same position to revise the earlier decision as if fresh facts have been placed before it.

On prin­ciple there is not much difference between fresh facts being placed before the second Tribunal and the second Tribunal taking into con­sideration certain material facts which the first failed to take into con­sideration.

Even though the first Tribunal may take into consideration all the facts, still its decision may be so erroneous as to justify the sub­sequent Tribunal in not adhering to that decision. In such a case, the decision of the first Tribunal is perverse.

If the decision of the first Tribunal is either arbitrary or perverse, it will justify the second Tribunal in departing from the decision ar­rived at by the first Tribunal. Therefore, an earlier decision on the same question cannot be reopened if-

(i) That decision is not arbitrary or perverse,

(ii) That decision has been arrived at after due inquiry,

(iii) No fresh facts are placed before the Tribunal giving the later decision; and

(iv) The Tribunal giving the earlier decision has taken into con­sideration all material evidence.

A warning should be noted especially with regard to a Tribunal like the Appellate Tribunal, that it should be extremely show to depart from a finding given by an earlier Tribunal.

Even though the principle of res judicata does not apply, it is very desirable that there should be finality and certainty in all litiga­tions, including litigations arising out of the Income-tax Act.

It is not a very satisfactory thing that an assessee should feel a grievance that one Tribunal came to one conclusion and another Tribunal to a dif­ferent conclusion and that the two conclusions are entirely inconsis­tent with one another.

Therefore, the second Tribunal must be satisfied that the ordinary principles which apply to all Tribunals to try and give as far as possible finality and a conclusiveness to the decision arrived at.

The further limitation upon the power of the Tribunal to revise the decision given earlier by that very Tribunal is that the effect of revising this decision should not lead to injustice to the assessee.

If the Court is satisfied that by depriving the assessee of his rights under the later decision in an earlier year, the assessee lost an important ad­vantage or some benefit which he could have got under the Income- tax Act, then the Court may take the view that the departing from the earlier decision leads to injustice or denial of justice, and the Court may prevent the income-tax authority from doing something which would be unjust and inequitable.