THE PRINCIPLE OF RES JUDICATA HAS NO APPLICATION IN INCOME TAX PROCEEDINGS

[Mr. M. GOVINDARAJAN]

            Sec.11 of Civil Procedure Code, 1908 (hereinafter referred to as CPC) deals with the principle of res judicata. According to this section 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 expression former suit means a previously decided suit. Res judicata is sometimes treated as part of the doctrine of estoppel but the two are essentially different. Res judicata prohibits an inquiry in limine, whilst an estoppel is only a piece of evidence.

The law on the subject may be summarized as below:

* A decision on an issue of law operates as res judicata if the cause of action in the subsequent suit is the same that in the first suit;

* There is a conflict of decisions whether, if the causes of action in the two suits are different, an erroneous decision on a question of law operates as res judicata;

* There is no doubt that if the law is altered by the passing of a new Act after a decision in a case, the decision cannot operate as res judicata;

* A decree passed against a minor not properly represented is a nullity and cannot operate as res judicata;

* A judgment obtained by fraud or collusion cannot operate as res judicata;

* Where there are two or more conflicting decrees, the last decree alone is the effective decree, and it is this decree and not any other which can operate as res judicata;

* It is essential that the plea of res judicata be properly raised and the onus is on the party that sets it up.

The question raised in this article is whether the principle of res judicata is applicable in the income tax proceedings.  The answer is that it is not applicable in the income tax proceedings which are clearly established in the following case laws:

1.     Radhasoami Satsang V. CIT 1991 IndlawSC 948

The court held that "So far as the proposition of law is concerned, it is well settled and needs no further discussion.  In taxation matters, the strict rule of res judicata as envisaged by Section 11 of the Code of Civil Procedure, 1908 has no application. As a general rule, each year's assessment is final only for that year and does not govern later years, because it determines the tax for a particular period. It is, therefore, open to the Revenue/Taxing Authority to consider the position of the assessee every year for the purpose of determining and computing the liability to pay tax or octroi on that basis in subsequent years. A decision taken by the authorities in the previous year would not estop or operate as res judicata for subsequent year.

2.      Broken Hill Proprietory Co., V. Municipal Council, 1926 AC 94

The Judicial Committee of the Privy Council observed - 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 situation, namely, the valuation for a different year and the liability for the year. It is not 'Ieadem questio', and therefore, the principle of res judicata cannot apply.

3.      Amalgamated Coal fields Ltd., V. Janapada Sabha 1962 IndlawSC 490

The Supreme Court held - In our opinion, however, it is necessary to distinguish a decision on question which directly and substantially arose in any dispute about the liability for a particular year, and question which arose incidentally or collaterally.   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 up to a High court or to Supreme 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 in a subsequent year.

4.      Udayan Chinubhai V. Commissioner of Income Tax, Gujarat, 1967 (1) SCR 913

When the Income Tax Officer, Bombay recorded a finding that the original Hindu Undivided Family of Sir Chinubhai had been divided and ceased to exist, and the property had been partitioned, it was not open to the Income Tax Officer, Ahamedabad to revise or reconsider the previous order passed by the Income Tax Officer, Bombay and to revise the original family as if there was no partition and the status of joint family continued to exist.

The Court observed- It is true that an assessment year under the Income Tax Act is a self contained assessment period and a decision in the assessment year does not ordinarily operate as res judicata in respect of the matter decided in any subsequent year, for the assessing officer is not a Court and he is not precluded from arriving at a conclusion inconsistent with his conclusion in another year. It is open to the Income Tax Officer, therefore, to depart from his decision in subsequent years, since the statement is final and conclusive between the parties only in relation to the assessment for the particular year for which it is made. A decision reached in one year would be a cogent factor in the determination of a similar question in a following year, but ordinarily there is no bar against the investigation by the Income Tax Officer of the same facts on which a decision in respect of an earlier year was arrived at.  

5.      M.M. Ipah V. Commissioner of Income Tax, Madras, 1968 (1) SCR 65

The doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessment in one year binding in another year. The assessment and the facts found are conclusive only in the year of assessment: the findings on question of fact may be good and cogent evidence in subsequent years, when the same question fails to be determined in another year, but they are not binding and conclusive.

6.      Municipal Corporation of City of Thane V. Messrs Vidyut Metallics Limited and another 2007 INDLAW SC 900

In this case the Supreme Court observed - We are in agreement with the following observations of Ranganath Misra, C.J., in Radhasoami Satsang V. Commissioner of Income Tax, 1991 Indlaw SC 948-

"We are aware of the fact 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." (emphasis supplied)

In the present case, in earlier litigation, the court considered the evidence of Mr. Debe, Quality Control Manager who was described as 'expert' on the point and accepting his evidence, the court held that the goods imported by the company was ferrous in nature and not non-ferrous and the company was right in paying octroi under Item No. 71. It is thus a 'fundamental factor' and the nature of goods imported by the company was directly and substantially in issue, on the basis of which the decision was taken. It would indeed be very difficult to hold that such decision would not continue to operate in subsequent years unless it is shown that there are changed circumstances or the goods imported by the company in subsequent years was different than the one which was imported earlier and in respect of which decision had been arrived at by the court.

From the above judgment it is clear that the principle of res judiciata is not only inapplicable in income tax proceedings but also in other tax proceedings also.