Desai, C.J:— This is a statement of case submitted to this Court by the Income Tax Appellate Tribunal, Allahabad Bench, inviting it to answer the following two questions:

(1) “Whether on the facts and circumstances of this case the amount of Rs. 5,39,057/- was rightly disallowed under rule 12(1) of Schedule 1 of the Excess Profits Tax Act?”

(2) “Whether on the facts and circumstances of this case the amount of Rupees 1,28,743/- was rightly disallowed under rule 12(1) of Schedule 1 of the Excess Profits Tax-Act?”

2. The statement refers to two chargeable accounting periods (1) 1945 and (2) 1946. The assessee at whose instance this statement has been submitted, is a public limited company having several branches and several subsidiary companies. Its business is looked after by a Board of Directors and the working of the branches, by Managers. Generally Directors themselves are appointed as Managers. The Directors and the Managers are paid their monthly salaries or fees and commission worked out at certain fixed percentages of the net profits. The commission is fixed at the time of the appointment or subsequently by a resolution. By a resolution the Board of Directors had decided that the commission should be paid to the Managers, the Directors and the branch Managers “none audited profits only after depreciation had been allowed for, but prior to any allocation or appropriation of such profits including provision for taxation”. This resolution was subsequently clarified by the Board resolving that the words “including provision for taxation” were intended to, and did specifically cover, all forms of taxation including excess profits tax and other like impositions”. The result was that the excess profits tax was not to be deducted for arriving at the figure of the net profits for calculating the commission. Accordingly the assessee has been calculating the commission by applying the percentages to the profits without deducting the excess profits tax payable.

3. In the chargeable accounting periods 1943 and 1944 the commission paid to the Directors and the Managers was worked out by applying the percentages to the net profits without deducting the excess profits tax payable for the periods. The Excess Profits Tax Officer objected to it and as required by rule 12 of schedule 1 of the Act recalculated the commission by applying the percentages to the net profits arrived at after deducting the excess profits tax, and on 30-3-1945 assessed the tax accordingly. Excess profits tax is payable on the amount by which the profits in respect of any business during any chargeable accounting period exceed the standard profits. The profits are to be determined in accordance with the first schedule., vide section 2(19). The schedule was amended by the second Amendment Act No. 24 of 1941 and rule 12(1) given below, was added:

“12(1) — In computing the profits of any chargeable accounting period no deduction shall be allowed in respect of expenses in excess of the amount which the Excess Profits Tax officer considers reasonable and necessary having regard to the requirements and, in the case of directors' fees or other payments for services, to the actual services rendered by the persons concerned.”

4. It was this duly that the Excess Profits Tax Officer performed. He took into consideration the fact that the percentages had been fixed long before the Excess Profits Tax Act came into force when there was no question of deducting the excess profits tax from the profits for determining the net audited profits. The object behind the Excess Profits Tax Act was to prevent the owner of a business from making a large fortune out of the war. So it provided for the sharing between him and the State of the excess profits, that is the excess of the profits over standard profits. If the commission payable to the Directors and the Managers was worked out on the basis of the profits without deduction of the excess profits tax they got much larger than they would have if the profits were taken into consideration after deducting the excess profits tax. Thus they obtained a greater advantage than even the assessees and this is another fact that the Excess Profits Tax Officer took into consideration. On the basis of these facts he held that it was unnecessary and unreasonable to pay them more than the agreed percentages of the profits before deduction of the excess profits tax. The orders passed by him were upheld by the Income Tax Appellate Tribunal on 22-3-1947. Though its attention was drawn to the absence of evidence regarding any extra services having been rendered by the Directors and the Managers it recorded no finding that they had not rendered extra services. It gave no reasons of its own and contended itself with observing that, the Excess Profits Tax Officer was justified in acting as he did. Subsequently it stated the case under section 66(2) of the, Income Tax Act; I shall come to this presently.

5. The Excess Profits Tax Officer took up the assessment of the excess profits tax for the next chargeable accounting periods ending 31-12-1945 and 31-3-1946 and on 15-12-1947 and 31-3-1948 passed assessment orders on the same lines as for the chargeable accounting periods 1943 and 1944. In the assessment orders he said:

“For reasons stated in the order dated 30-3-1945 under Rule 12 Schedule 1 for the chargeable accounting period to 31-12-1943. I hold that, having regard to the requirements of the business and the actual services rendered by the persons concerned, the commission allowed to management and Directors is both unreasonable and unnecessary.”

6. He also referred to the fact that the Tribunal had on 22-3-1947 confirmed his orders. The assessee preferred appeals from the two assessment orders which were dismissed by the Tribunal on 30-12-1949. It observed in its order that “the nature of the work and the service rendered by the management and the Directors has not all changed.” Then under section 66(2) it submitted this statement of case.

7. During the pendency of this reference the earlier statement submitted by it referring the questions arising out of its earlier order dated 22-3-1947 came up for decision before Bhargava and Mehrotra, JJ. The question they had to answer was “whether, on the facts and circumstances of this case, the amounts of ……for the chargeable accounting period from January 1, 1943, to December 31, 1948, and of Rs.……. for the chargeable accounting period from January 1, 1944, to December 31, 1944, were rightly disallowed under rule 12(1) of Schedule 1 of the Excess Profits Tax Act?”

and they answered it in the negative. They look the finding of the Excess Profits Tax Officer to be that the previous practice and the agreements did not require the commission to be calculated on the basis of the profits without deduction of the excess profits tax and held that this did not furnish the reason for disallowing a part of the commission under rule 12(i). They relied upon Shyam Lal Prag Narain v. Commissioner of Income-tax, 1955-27 ITR 404 : (AIR 1955 All 299) (FB) in which a Full Bench of this Court had set aside the disallowing of a part of commission under rule 12(1) merely on the ground of its being an ex gratia payment e.g a payment which the assessee was not liable to make under the agreement. The Full Bench had decided that a payment could not be held to be unnecessary and unreasonable merely on the ground that it was ex gratia without consideration of other facts and circumstances. The learned Judges held that this decision of the Full Bench was fully applicable because the Excess Profits Tax Officer and the Tribunal had held that under the terms of the resolution the proper way of paying the commission was to calculate it after deducting the excess profits tax liability. They assumed that neither of them had considered whether the commission paid to the Directors and the Managers was necessary and justified or not, keeping in view the ordinary commercial practice, the commercial expediency and the services rendered by them, because there was not a word about these matters in their orders. Since the Tribunal did not record any finding of fact with regard to the necessity for the payments, the exigencies of the business and the services rendered by the recipients the learned Judges answered the question in the negative. The judgment is reported in British India Corporation Ltd. Kanpur v. Commr. of Excess Profits Tax, 1958-33 ITR 826 : AIR 1957 All 826.

8. There are two questions before us but they are identical with each other, the only difference being that one refers to the chargeable accounting period 1945 and the other to the charageable accounting period 1946. These questions are undisputedly identical (except for the figures) with the question answered by Bhargava and Mehrotra, JJ. The Excess Profits Tax Officer has not given any reasons for applying rule 12(1) in the particular manner and has simply relied upon the previous assessment orders. On the other hand, the Tribunal has gone into the matter with some detail. It referred to his findings (though based on the earlier assessment orders) that the commission allowed to the recipients was unreasonable and unnecessary and to the fact that no additional material was produced by the parties during the assessment for the chargeable accounting periods 1945 and 1946 and held that the Excess Profits Tax Officer was justified in basing his orders on the earlier orders.

9. The assessee has calculated the commission correctly in accordance with its resolutions but the question before the Excess Profits Tax Officer was not whether it was in accordance with the agreements and the resolutions but whether it was reasonable and necessary within the meaning of rule 12(1). He was bound to allow it to be deducted in order to arrive at the net profits if it was both reasonable and necessary; he was bound to disallow any portion of it which he found to be either unreasonable or unnecessary. Reasonableness and necessity both are required for allowing the deduction; this means that if either is lacking no deduction is to be allowed. It is not correct to say that a deduction cannot be disallowed unless it is found to be both unreasonable and unnecessary. In the earlier reference Bhargava and Mehrotra, JJ. appeared to be under the impression that it was necessary for the Excess Profits Tax Officer to find, before disallowing a deduction, that it was “neither reasonable nor necessary having regard to the requirements of the business”, vide page 831.

10. The Full Bench in Shyamlal Pragnarain's case 1955-27 ITR 404 : (AIR 1955 All 299), also observed that “the amount could be disallowed…. if…. it was not reasonable and it was not necessary having regard to the requirements of the business and the actual services rendered”. The Full Bench did not discuss whether for disallowing a deduction both unreasonableness and want of necessity are required or either is enough and presumed (presumably from the fact that both reasonableness and necessity are required for allowing it) that both are required. As the question was not expressly raised before, and decided by, Bhargava and Mehrotra, JJ. in one case and the Full Bench in the other case, the assumption on which they proceeded would not bind us.

11. The profits, from which the standard profits are to be deducted for determining the amount on which the excess profits tax is levied, are computed by deducting out-goings from in-comings. While deducting out-goings consisting of expenses the Excess Profits Tax Officer is required to consider whether the expenses are reasonable and necessary or not. In this case he found that part of the commission paid to the Directors and the Managers was not reasonable and necessary and, therefore, did not deduct it in computing the profits. In his opinion the commission that would have been calculated by applying the percentages to the net profits computed after making provision for the excess profits tax liability would have been both reasonable and necessary. The commission actually paid was calculated by applying the percentages to the profits without making any provision for the excess profits tax liability. It is the difference between these two commissions that has been found by the Excess Profits Tax Officer to be unreasonable or unnecessary. That the commission paid was worked out in accordance with the resolutions passed by the assessee is of no consequence. If it was not necessary for the assessee to pass the resolutions the commission paid in accordance with them cannot be said to be necessary and reasonable does not at all depend upon whether it was in accordance with the resolutions or not. Whether the payment was reasonable or necessary or not was to be determined by the Excess Profits Tax Officer and the assessee could not simply by passing a resolution take the determination out of his hands.

12. The commission calculated by applying the percentages to the profits would have been found to be reasonable and necessary if there had been no excess profits tax liability at all but when that liability was imposed by the enforcement of the Act making the excess profits divisible half and half between the assessees and the Government, the excess profits to be charged with the tax had to be worked out in such a way as to preclude the Directors and the Managers receiving any share out of them. In other words, the excess profits should have been worked out first and the Government's share in them paid to it and then the assessee could share the remainder with the Directors and the Managers in any manner it liked. The finding of the Excess Profits Tax Officer amounts to this that whatever commission would have been paid after making provision for the excess profits tax liability would have been reasonable and necessary and that nothing more was reasonable or necessary. Only what would have been paid after deduction of the excess profits tax would have been reasonable and necessary having regard to the requirements of the business and the actual services rendered by the Directors. Once he started with the promise that only that commission was reasonable and necessary it followed that anything paid more than, it was not reasonable and necessary having regard to the requirements of the business and the actual services rendered by the Directors and it became obligatory upon him by rule 12(1) to disallow it. I, therefore, sec. nothing erroneous in what he did and what the Tribunal did.

13. The question of commission paid to a Director or Managing Director can be examined from four points of view, (1) whether it is covered by the agreement between the company and the Director or Manager—whether the company is bound to pay it under the agreement, (2) whether payment, of the commission can be said to be laid out wholly and exclusively for the purposes of the company's business within the meaning of sec. Hon 10(2)(xv) of the Income Tax Act, (3) whether it is of a reasonable amount with reference to his pay and the conditions of his service, the profits and the general practice within the meaning of section 10(2)(x) and (4) whether payment of the commission (or a part of it) is not reasonable and necessary having regard to the requirements of the business and the actual services rendered by the Director.

14. These questions are distinct from one another and an answer given to any of them is no guide to the answer to be given to any of the remaining three. A payment may be in accordance with the agreement and the company may be legally bound to pay it but it does not follow that it was laid out wholly and exclusively for the purposes of its business within the meaning of section 10(2)(xv) or was both reasonable and necessary within the meaning of rule 12(1). Similarly a payment which is found to be laid out wholly and exclusively for the purposes of the business within the meaning of S. 10(2)(xv) is not always reasonable and necessary within the meaning of rule 12(1); an unreasonable or unnecessary payment can be laid out wholly and exclusively for the purposes of the business. A payment may be said to be necessary when it is obligatory under the agreement and similarly an ex gratia payment may be said to be not necessary. The only common factor that may be found in any, two of the questions is that of reasonableness; what is reasonable for purposes of S. 10(2)(x) may also be found to be reasonable, for purposes of rule 12(1). What was decided in Shyamlal Pragnarain 1955-27 ITR 404 : (AIR 1955 All 299) (FB) was that a payment could not be dis-allowed under rule 12(1) simply on the ground that it was ex gratia because “even an ex gratia payment may be……an allowable I deduction under section 10(2)(x) …….and rule 12”. What was meant appears to be that necessity for paying does not arise only from the agreement.

15. The Full Bench did not lay down that the fact of its being ex gratia is not relevant at all; it seems to have conceded that it may lie relevant for deciding whether it was necessary or not. What it said is that it is not of “much importance”. It laid down that other facts and circumstances should be considered along with the fact that it is an ex gratia payment before concluding that the payment was neither reasonable nor necessary. Further as it assumed that both unreasonableness and want of necessity were required for disallowing a payment, it could be justified in laying down that both the conditions were not satisfied if all that was found was that it was ex gratia. An ex gratia payment may be said to be not necessary but cannot always be said to be not reasonable. So only the condition of want of necessity is satisfied. It conceded that what an assesses should pay to the Manager depends upon the terms of the contract between the two and it cannot be denied that it may not be necessary to pay what one is not legally bound to pay. In N.M Rayaloo Iyer and Sons v. Commissioner of Income Tax, 1954 26 I.T.R 265 : (AIR 1955 Mad 56) there is a dictum that the commercial expediency required under rule 19(1) is that required for purposes of section 10(2)(xv) and that there is not much difference between the two provisions. It may be that the difference is not great but there undoubtedly is a difference; the difference is said to be not great because there is some similarity such as that the commercial expediency is the test for applying both the provisions.

16. In Walchand and Co. Ltd. v. Hindustan Constructions Co. Ltd. 1944-12 I.T.R 104 : (AIR 1944 Bom 5) the Bombay High Court held that on the hue construction of the managing agency agreement the excess profits tax paid by the assessee should be deducted in calculating the net profits for determining the Managing agency commission. In Commissioner of Income Tax Delhi v. Delhi Flour Mills Co. Ltd. 1959 35 I.T.R 15 : (AIR 1959 SC 185) the agreement between the assessce and the managing agent was that the former should pay to the latter in addition to a salary a commission at a certain percentage on the net profits to be computed after allowing working expenses and interest on loans but without setting aside anything to reserve or other special funds. The Supreme Court held that it was an agreement essentially to share the profits, e.g the net profits, and that consequently the divisible profits should be computed after deducting the excess profits tax. In the instant case we have resolutions but they have been taken to be equal to agreement.

17. The facts in Ahmedabad Manufacturing and Calico Printing Co. Ltd. v. Commissioner of Excess Profits Tax, Bombay North, Kutch and Saurashtra Baroda, 1960-38 I.T.R 675 : (AIR 1960 SC 1297) were that the company-made large payments by way of bonus or coin-mission to its employees and also made large contributions to their provident funds, the payments and the contributions were on the basis of percentages applied to its profits without deduction of the income tax or the excess profits lax according to the agreements and the Provident Fund Regulations made by the Company the payments and the contributions were to be made by applying the percentages to the profits before providing for depreciation and income tax and super tax and the Excess Profits Tax Officer held that the payments and the contributions should have been calculated on the basis of the profits after deducting the excess profits tax. The Excess Profits Tax Officer did not expressly record the finding that the payment and the contributions were not reasonable and necessary within the meaning of rule 12. The Income Tax Appellate Tribunal on appeal called for a finding on this point from him and he did so and submitted a statement showing the proportion of the bonus or commission paid to each employee to his salary and the proportion of the contribution to his salary. The Tribunal dismissed the appeal and then referred the case to the High Court.

18. It was contended before the High Court that the Excess Profits Tax Officer could act either on the ground (a) that the payment of bonus or commission and of contribution in the provident fund calculated at a certain percentage of the profits without deduction of the excess profits tax was per se unreasonable and unnecessary or on the ground (b) that the payment was unreasonable and unnecessary having regard to the requirements of the business and that as he acted solely on the first ground he could not consequently be said to have acted under rule 12. The Supreme Court had no difficulty in rejecting the contention. It first referred to the fail that the question referred to it did not involve any question about there being no evidence to support the Tribunal's finding. Then it referred to the statement submitted to the Tribunal by the Excess Profits Tax Officer after remand and it was the material on which it gave its finding. The statement showed that the payments were extraordinarily high. It Observed (see page 685 (of ITR): (at pp. 1302-1303 of AIR)).

“It was open to the Excess Profits Tax Officer to say that payment to an employee or contributions to the provident fund, before deducting the excess profits tax, were unreasonable, and led to an unnecessarily large payment to the employees, having regard to the needs of the business. In other words, the Excess Profits Tax Officer having come to conclusion (b) ……applied conclusion (a), viz., that the payment of percentage without deduction of excess profits tax was per se unreasonable and unnecessary”.

(Conclusion (a) is ground (a) and conclusion (b), ground (b) above.) In James Finlay and Co., Ltd. v. Finlay Mills Ltd. (1945) 47 Bom LR 774 the agreement was for payment of commission at a certain percentage on the net annual income before setting aside any sum for payment of any lax on income and the Bombay High Court held that as excess profits tax was a tax on income it was not to be deducted before calculating the commission obviously the decision turns upon an interpretation of the agreement and not upon the payment of commission being found to be necessary and reasonable. The decision is therefore, of no avail here.

19. My answer to the questions would, therefore, be in the affirmative. But it was vehemently contended on the assessee's behalf that the decision of Bhargava and Mehrotra, JJ. in the earlier reference operates as res judicata. The questions that we have to answer are not abstract questions of law but are concrete questions referring to particular sums and the question that was answered on the earlier reference also was a concrete question in regard to a particular sum and for a particular chargeable accounting period. The question of law that is involved in the instant questions is same as was involved in the earlier reference and, had the questions in the earlier reference and in the instant reference been abstract questions of law, one would have undoubtedly found them to be exactly similar and would have had great difficulty in saying that the decision on the question in the earlier reference did not operate as res judicata. But as it is, there is no identity between the question of the earlier reference and the instant questions Not only the chargeable accounting periods are different but also the sums are different Then in the earlier reference the decision was based upon assumptions, the failure on the part of the Tribunal to mention in its order the facts and the circumstances considered by it and the disallowing of the disputed amount on the ground that under the terms of the agreement between the company and the Directors the commission was to be calculated after deducting the excess profits tax instead of on the ground that it was not reasonable and necessary having regard to the requirements of the business and the services actually rendered. The orders of the Excess Profits tax Officer and the Tribunal disallowing the deduction were set aside but not on merits. The learned Judge did not find that the payment was both reasonable and necessary; they did not enter into that question at all. There was undoubtedly a finding that the payment was not both reasonable and necessary but it was set aside because it was based on the wrong ground that under the agreements and the previous practice the commission had to be calculated after deducting the excess profits tax from the profits. It is clear that the decision in the earlier reference based not on merits of the question of law involved but on what actually had been done by the Excess Profits Tax Officer and the Tribunal in respect of the particular chargeable accounting period cannot operate as res judicata in respect of another order passed by them in respect of another chargeable accounting period. As the orders of the Excess Profits Tax Officer and the Tribunal which were the basis of the decision in the earlier reference are not before us we cannot say that the orders passed by them in the instant reference are similar to them and that consequently the decision in the earlier reference operates as res judicata. Then there is the fact that in the instant case the Tribunal took into consideration also a statement prepared by the Excess Profits Tax Officer showing how enormous are the sums paid to the Directors and the Managers by way of commission, which distinguishes the instant case from the earlier case. Thus on facts I find that the questions that we have to answer at present are different from the ques Hon answered in the earlier reference.

20. The authorities are divided on the question whether a decision in respect of a question arising in taxation for one year operates as res judicata when the same question arises in respect of taxation for a subsequent year in taxation matters as in licensing matters, there is no has no controversy inter partes, and no decision in favour of one of them and against the other, as observed by Lord Herschell in Boulter v. Kent Justices, (1897) AC 556, and Malik, C.J and Seth, J. in Kamlapat Motilal v. Commissioner of Income-tax, U.P 1950-18 ITR 812 at p. 818 (AIR 1950 All 249 at p. 251).

21. In the case of Kamlapat Motilal 1950-18 ITR 812 : (AIR 1950 All 249) Malik, C.J observed at page 818 “if any question of right or title which is not peculiar to the year of assessment has been decided by a competent court, the decision may be treated as res judicata in subsequent years, but the law is well settled that if the decision is of the Income-tax authorities, that decision cannot operate as res judicata”, because they are not Courts, there are no two parties before them and there are no pleadings. The decision given on the earlier reference was certainly a decision by a competent court but it was not on any question of right or title, it being on the question whether the Excess Profits Tax Officer was justified in disallowing deduction of commission merely on the ground that it was worked out without deduction of the excess profits tax from the profits. There was no dispute about the right of the assessee at all. The only right of an assessee is to have a reasonable and necessary expense deducted in computing the profits but nobody questioned this right and this Court was not called upon to adjudicate upon it. Therefore, the decision, though of a competent court, did not operate as res judicata: it did not affect the assessment of the assessee to the excess profits tax in a subsequent year. The reasons on account of which this Court held that the Excess Profits Tax Officer was not justified in disallowing the deduction might not exist in subsequent years; this confirms that the decision was not about any right or title because a right or title does not vary from year to year and does not depend upon circumstances. In Commissioner of Inland Revenue v. Sneath, (1932) 2 KB 362. Lord Han-worth observed:—

“…. 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 I cannot think that it is to be treated as an estoppel binding upon the same party for all years.”

22. Greer. L.J concurring said:—

“It is final not as a judgment inter partes but as the final estimate of the statutory estimating body. No lis comes into existence until there has been a final estimate of the income which determines the tax payable. There can be no is until the rights and duties are ascertained and thereafter questioned by litigation.” In Broken Hill Proprietary Co. Ltd. v. Municipal Council of Broken Hill, (1926) AC 94, the Judicial Committee held that a previous decision by the High Court of Australia as to the valuation for a previous year was not res judicata Lord Carson said all page 100:

“The decision of the High Court related to a valuation and a liability. In 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 question namely, the valuation for a different year and the liability for that year. It is not eadem question, and therefore the principle of res judicata cannot apply”

23. I may refer to 49 Law Quarterly Review page 14, which contains an editorial note on these two decisions. The decision in Sneath's case 1932 2 KB 362 is said to be of general interest, being concerned with res judicata on which branch of the law there is little learning. It was further noticed that the court of Appeal did not have to answer in that case whether the tax in one year is a different tax from that in a subsequent year so that it cannot be the basis of res judicata except for the year for which the matter is decided. This question was considered in the other decision; the decision was said to be sufficiently clear though difficult to reconcile with the subsequent decision in Hoystead v. Commissioner of Taxation, (1926) AC 155. In Society of Medical Officers of Health v. Hope (1960) 1 All ER 317, the House of Lords approved of the decisions in the cases of Sneath 1932-2 K.B 362 and Broken Hill Proprietary Co. Ltd. 1962 AC 94, vide the speeches of Lord Radcliffe at pp. 320 and 321 and of Lord Keith at page 325. Lord Radcliffe dealing with rating and taxation said at p. 321:

“With regard to both one has to begin by recognising that there is high and frequent authority for the proposition that it is not in the nature of a decision given on one rate or tax that it should settle anything more than the bare issue of that one liability and that, consequently, it cannot constitute an estoppel when a new issue of liability to a succeeding year's rate or tax comes up for adjudication. The question of this liability is a ‘new question’. It is not ‘eadem question’. The ‘cause of action is different’. The subject-matter is a different year's tax and a different year's assessment and is not the same as the subject-matter of the previous ruling”.

24. Then he referred to several cases including those of Broken Hill Proprietary Co. 1926 AC 94 and Sneath 1932-2 KB 362 and added

“It would not be at all easy for us to depart from this long line of authoritative opinion, even if we wanted to. Personally. I do not want to, because I think that, on the whole, it is more in the public interest that tax and rate assessments should not be artificially encumbered with estoppels…. the jurisdiction of the tribunal to which the decision belongs by the administrative scheme is a limited one. It is limited in the sense that its function begins and ends with that of deciding what is to be the assessment or liability of a person for a defined and terminable period. The assessment seems inherently to be of a passing nature”

25. In Visheshwara Singh v. Commissioner of Income Tax B and O AIR 1961 SC 1062 Hidayatullah, J., speaking for the Supreme Court, said that “there is no such thing as res judicata in income-tax matters” and maintained the order passed by the High Court of Patna on a reference under section 66 of the Income Tax Act. In New Jehangir Vakil Mills v. Commissioner of Income Tax Bombay. AIR 1964 SC 318 S.K Das, J. observed:—

“The doctrine of res judicata …… does not apply to such decisions” (decisions by Income Tax Officers for particular assessment years); “in some cases it has been held that though the Income-tax Officer is not bound by the rule of res judicata ……. he can reopen a question previously decided only if fresh facts come to light or if the earlier decision was rendered without taking into consideration material evidence etc.” (page 321)

26. He did not accept the law laid down in Hoystead's case 1926 AC 155. In Hoystead's case 1926 AC 155 the Privy Council had held that the Commissioner of Taxation was estopped from taking a certain view during an assessment in one year by the contrary view expressed by the High Court on a reference in respect of assessment for an earlier year. The decision of the High Court on the reference rested on a matter which was admitted but was fundamental to the decision and the objection was that a decision based on admission could not operate as res judicata and it was this question that was answered in the affirmative by the Judicial Committee. The question whether a decision regarding a tax liability in one year operates as res judicata when a similar question arises in a subsequent year was not discussed before, and was not answered by the Judicial Committee.

27. In the case of Hope 1960-1 All ER 317, Lord Radcliffe wondered (vide page 323) that the point of new subject matter was not raised before the Judicial Committee and Lord Keith of Avonholm said at page 325:—

“That authority is not binding on this House, and the point was never taken in the case that a decision on liability to assessment to tax for one year is not conclusive of liability to assessment in a later year. The judgment would seem to conflict with what was said a month earlier in Broken Hill Proprietary. Co. (1925) All ER 672 : 1926 AC 94 ……. by a Board differently constituted, rejecting a plea of res judicata …. some of the things that were said in that case are not ……… entirely consistent with what was said in New Brunswick Rly. Co. v. British and French Trust Corpn., Ltd., (1938) 4 All ER 747 : 1939 AC 1 or with what I regard as essential to a successful plea of res judicata, a common medium concludendi in the two actions”.

28. Again in Gaffoor v. Income Tax Commissioner Colombo, (1961) AC 584 the Judicial Committee found it impossible to treat Hoystead's case 1926 AC 155 as constituting a legal authority on the questions of estoppels in respect of successive years of tax assessment. The City of New Orleans v. Citizens' Bank (1857) 42 Law Ed 202, is the leading American authority laying down that the doctrine of res judicata applies in Federal tax matters. White. J said at page 210-211:—

“The estoppel resulting from the thing adjudged does not depend upon whether there is the same demand in both cases, but exists, even although there be different demands, when the question upon which the recovery of the second demand depends has under identical circumstances and conditions been previously concluded by a judgment between the parties or their privies the mere fact that the demand in this case is for a tax for one year, and the demands in the adjudged cases were for taxes for other years, does not prevent the operation of the thing adjudged, if in the prior cases the question of exemption was necessarily presented and determined upon identically the same facts upon which the right of exemption is now claimed.

The argument that as a matter of public policy the principle of the thing adjudged should be held not to apply to controversies as to taxation, if there be merit in it, should be addressed to the law-making and not to the judicial department.”

29. He made it clear that only those questions which are presented and decided on an earlier occasion operate as res judicata on a subsequent occasion. In United States v. Stone and Downer Co., (1926) 71 Law Ed 1013, Taft, C.J referred to the above decision as laying down the general rule but added that it is not the rule in a number of States and distinguished it from the case before him because

“there the thing adjudged was the existence of an immunity of the property of a bank from taxation due to a contractual obligation of the state or city government to the bank, a personal relation which might without embarrassment and with much more safety be permanently fixed for one taxpayer than a question of fact or law affecting discriminatingly one of a whole class of importers and giving the exceptional operation in its favour of a general tariff on articles of merchandise largely imported” (page 1027).

30. The question that was decided here in the earlier reference did not depend upon a personal relation. Doughlas, J. said in United States v. International Building Co. (1952) 97 Law Ed. 1182 at page 1187 that “estoppel by judgment is applicable in the federal tax field” but uttered a note of warning that “estoppel by judgment includes matters in a second proceeding which were actually presented and determined in an earlier suit” and that unless there was “an adjudication of the merits, the doctrine of estoppel by judgment would serve an unjust cause: it would become a device by which a decision not shown to be on the merits would forever foreclose inquiry into the merits” (page 1188).

31. In re, Ram Datta Sita Ram 1947-15 ITR 61 (All) a Full Bench of this Court while recognising that in income-tax matters a decision concerning a particular year is not a res judicata and does not create an estoppel observed that or “all the same it has to be seen if there was any good and valid ground for taking a different view in 1938-1939 from that taken in 1933”. We were also referred to Devilal Modi v. Sales Tax Officer, AIR 1965 SC 1150 in which the Supreme Court held that a decision on a petition for certiorari against a certain sales tax assessment order operates as res judicata to bar another petition for certiorari against it. This decision does not help the company at all because it only confirms that the effect of res judicata is confined to assessment for the same year I may also refer to the editorial note on “Res Judicata in Tax Litigation” in 46 Harvard Law Review, 692. The contentions that successive tax suits do not involve the essential elements of res judicata and that the sovereign power to tax should not be rendered impotent by prior adverse decisions are criticised in it, the former because it disregards that res judicata is generally held applicable to identical issues, even where the causes of action are distinct, and the latter because of the strong policy underlying the whole doctrine of prior adjudication — the interest of the community in the termination of disputes and the right of an individual to be protected from vexatious multiplication of suits in which repeated adjudications of the same matter are sought. At the same time a distinction is drawn between a prior decision taking effect as stare decisis and its operating as res judicata. Where the issue raised in a subsequent action is of “substantial similarity” extending the doctrine of res judicata to it introduces an uncertainty and the doctrine of stare decisis seems better adopted to it.

32. It would appear that the weight of authority, and particularly the authority by which we would be bound, is in favour of not applying the doctrine of res judicata in taxation matters. A tax authority in dealing with taxation in one year is not bound by a decision in a previous year on the same question. There is no material difference if the previous decision was given by a High Court on reference. The High Court's jurisdiction is advisory and it does not decide the question of the Department's rights and the assessee's liabilities. In a reference under the Income-tax Act or under the Excess Profits Tax Act it does pronounce a judgment but it is for advising the Tribunal as to what order it should pass and does not by its own force affect the rights and the liabilities of the Department and the assessee. If it answers the question in the same way in which it was answered by the Tribunal the Tribunal has to do nothing on receipt of its judgment and the rights and the liabilities remain governed by its own order. If it answers the question differently the Tribunal will pass a fresh order in conformity with its judgment and the rights and the liabilities will be governed by the fresh order Whether the order passed by the Tribunal was passed by it on its own or on the High Court's advice should not affect the question whether it would operate as res judicata in subsequent years. In any case, I have not come across any case laying down that while a decision of the Tribunal on its own may not operate as res judicita in a subsequent year it would so operate if it is based on the advice given by a High Court on reference. Of course when the Tribunal receives the High Court's advice on reference in one year it would be bound when the same question arises in a subsequent vear but it would be on the ground of stare decisis and not of res judicata.

33. For the above reasons as matter of pure law also I would hold that the decision in the earlier reference did not operate as a res judicata. As regards its effect as stare decisis I think that it stands overruled by the decision in Ahmedabad Manufacturing & Calico Printing Co., 1960-38 ITR 675 (AIR 1960 SC 1297) (Supra).

34. I answer both the questions in the affirmative.

35. A copy of this judgmcnl should be sent under the signature of the Registrar and the seal of the Court to the Tribunal as required under section 65(5) of the Income Tax Act.

36. The Commissioner of Income Tax should get his costs of this reference which is assessed at Rs. 400/-. Counsel's fee is assessed at Rs. 400/-. S.C Manchanda, J.: I agree.

DJ/D.R.R

37. Questions answered affirmatively.