(1992) 193 ITR 321 (SC)
Consistency of treatment across assessment years
Ordinarily not. Although each assessment year is a separate unit and res judicata does not strictly apply, a fundamental aspect permeating different years that has been accepted should not be changed absent a material alteration in facts or law.
Where a fundamental position has been accepted by the Revenue over many years, may it be departed from in a later year without any change in facts or law?
The assessee was a religious institution whose income had been treated as exempt for a long series of assessment years, the Revenue having accepted in earlier proceedings that the properties were held under trust for religious and charitable purposes. In the years in question the Revenue sought to depart from that settled treatment and tax the income, without pointing to any change in the constitution of the institution, the nature of its activities, or the governing law.
The matter reached the Supreme Court, which examined how far the principle that each assessment year is a separate unit permits the Revenue to unsettle a position consistently accepted.
For the assessee
The character of the institution and the basis on which its income was held exempt had been examined and accepted, and nothing had changed. Reopening a settled foundational position after many years, without any alteration in facts or law, produces uncertainty and is unfair to a taxpayer who has ordered its affairs accordingly.
For the Revenue
Each assessment year is a separate unit of assessment and the doctrine of res judicata does not apply to tax proceedings. An erroneous view taken in earlier years cannot bind the authorities for all time, and they are entitled to apply the correct legal position in any year.
The Court accepted the settled proposition that each assessment year is a separate unit and that the strict rule of res judicata does not apply to income tax proceedings, so a decision in one year does not operate as a binding adjudication for another. It held, however, that this does not mean that a position may be unsettled at will. Where a fundamental aspect permeating through 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 it over a period, it is not appropriate to allow the position to be changed in a subsequent year unless there is a material change in the facts or in the law. The Court reasoned that consistency and certainty are values of importance in the administration of a fiscal statute, and that taxpayers order their affairs on the footing of positions the Revenue has accepted. It confined the principle carefully: it does not prevent the Revenue from correcting its approach where circumstances have altered or where a superior court has laid down a different legal position, and it operates on fundamental aspects rather than on every item of computation.
A principle of general application, invoked across the IT Act 2025 wherever the Revenue departs from a treatment it has long accepted — the characterisation of an activity, the head under which income falls, the status of an entity, or the method of accounting followed. It carries particular weight in transfer pricing and in charitable trust matters, where the same fundamental characterisation recurs year after year, and it was applied in Excel Industries to resist a change in the year of taxability.