Principles of Res Judicata under Tax laws

 Those who are not familiar with Latin jargons, Principle of Res Judicata essentially means that any person who has approached Court against any cause of action which has already been decide by the Court, the said parties are restrained from approaching the Court again to agitate the same cause of action. In simple words, if you have filed a case against someone say on the issue of breach of contract then once the said issue is decided, you cannot file a case for breach of same contract against the same person. This common law principle is envisaged under Section 11 of the Civil Procedure Code. The intention of this principle is to stop multiplicity of cases.

You will find a common term being used that is “there is no estoppel in tax laws”. Promissory Estoppel essentially means that a party is prevented by his own acts from claiming a right to detriment of the other party who was entitled to rely on such conduct and has acted accordingly. However, under tax laws, an order of assessment made at the instance of the Assessee does not operate as a legal bar on him to subsequently contend otherwise - this is due to the reason that each assessment year is independent.

Does this mean that the Department can keep on raising the same issue again and again? Answer is in the negative.

Under Indirect taxes, an Assessee files its returns [Bill of Entry in cases of customs] by self-assessing its tax liability and pay tax accordingly. The Assessing Officer can scrutinize the documents submitted / maintained by the Assessee and if any short payment of tax is detected proceedings are initiated by issuing a show cause notice which culminates into an order after following principles of natural justice. The said Order if drops the demand proposed in the show cause notice and Department does not file any appeal against the said order then for another period, Department cannot agitate the same issue. For example, Assessee is supplier of Animal Feed and claiming benefit of concessional rate of GST. Assessing Officer challenges the said classification and alleges that Assessee is not entitled to claim the benefit of concessional rate. This allegation of the Assessing Officer is negatived by the Appellate Authority. The said order of the Appellate Authority is accepted by the Department and no further appeal if filed, then the Department for same Assessee cannot raise the same issue again.

The Hon’ble Supreme Court has gone to an extent to hold that if the Department has accepted one issue in case of an Assessee, the same issue cannot be agitated against a different Assessee. Therefore, in the above example, say the entire industry is classifying particular type of product as “Animal Feed”. But, Department is of the view that the said type of product is NOT an “Animal Feed” and thus, not eligible to claim the benefit. However, this challenge of the Department is negatived by the Appellate Authority in case of one Assessee and Department did not challenge the said order. In such a case, Department is precluded from raising the same issue in case of any other Assessee.

Under direct Tax, adjudication proceedings function slightly differently as compared to indirect taxes in general. An Assessee files its income tax return which is deemed to be assessed unless picked up for scrutiny. For each assessment year, separate assessment proceedings are initiated [though different years may be picked up for scrutiny simultaneously]. Each assessment year is treated as a separate unit. However, the principle of res judicata is still applicable and if there is no material change in facts, Department cannot take a different and contradictory stand.

Thus, from the precedents available on this point it is safe to conclude that principle of res judicata applies under tax laws. However, I am of the view that in following circumstances this principle may not apply:

1.     Disputed demand is less than the monetary limit prescribed for filing an appeal. In such a case, presumption can be drawn that Department did not accept the order but could not file the appeal due to the monetary limit.

2.     Assessee had misrepresented facts before the Department. This emanates from the legal principle that fraud vitiates everything.

3.     If any position taken by the Department is in the interest of public at large.