Facts of the Case

  • The Revenue filed a batch of 17 appeals against the Assessees (with Mr. Sudhir Choudharie/Chaudhary as the lead reference case).
  • The historical trajectory of the assessment pattern adopted by the Assessing Officer (AO) demonstrated severe inconsistencies spanning over multiple decades:
    • AY 1979-80 to 1987-88 (9 Years): Assessed consistently as Salary Income.
    • AY 1988-89 to 1997-98 (10 Years): The AO altered the stance and assessed the earnings as Business Income. This variation was upheld by the CIT(A) but subsequently reversed by the Income Tax Appellate Tribunal (ITAT), which held the income to be Salary Income.
    • AY 1998-99 and 1999-2000 (2 Years): The AO accepted the position and assessed it as Salary Income.
    • AY 2000-01 (1 Year): The AO changed positions again to assess it as Business Income, which was subsequently set aside by the CIT(A) back to Salary Income.
    • AY 2001-02 to 2004-05: For a co-director (Ms. Anita Chaudhary) under identical facts, the income was treated as Business Income initially for AY 2001-02 but reversed by CIT(A) to Salary Income. For subsequent years up to AY 2004-05, it was assessed directly as Salary Income with no subsequent challenges filed by the Revenue.

Issues Involved

  • Whether the Revenue can arbitrarily alter its stance from year to year regarding the characterization of income (Salary vs. Business Income) under identical facts, without any shift in circumstances or fresh evidentiary warrant?
  • Whether the present batch of appeals raises any "substantial question of law" under Section 260A given the glaring absence of departmental consistency?

Petitioner’s (Revenue’s) Arguments

  • The Appellant/Revenue challenged the decision of the ITAT, aiming to defend the position that the income generated by the directors/assessees ought to be characterized as Business Income instead of Salary Income.
  • However, during the hearings, the counsel for the Revenue was unable to deny or dispute the factual matrix and timeline of flip-flopping assessments placed on record via affidavit by the Assessee.

Respondent’s (Assessee’s) Arguments

  • The Respondent placed a factual timeline on record through an affidavit demonstrating that the department itself had accepted the "Salary Income" classification for multiple recent assessment years (both prior and subsequent), as well as in the case of a co-director under identical circumstances.
  • The Assessee argued that under identical underlying facts, the Revenue must adopt a uniform policy and is barred from pursuing vexatious litigation due to the principle of consistency.

Court Order / Findings

  • The Hon’ble High Court of Delhi, comprising Justice Madan B. Lokur and Justice V.B. Gupta, strongly deprecated the fluctuating attitude of the Revenue.
  • The Court held that the principle of consistency must apply. On identical facts, unless there is a specific, legally justifiable warrant or change in circumstances to deviate, the Assessing Officer must follow a consistent pattern.
  • The Court observed that this "flip-flop" mechanism by the tax department not only causes undue harassment to taxpayers but also wastefully adds to the backlog of the Judiciary without any sound justification.
  • Conclusively, since the AO and CIT(A) had accepted the income as salary income in the recent past, the Court ruled that no substantial question of law arose. The appeals were summarily dismissed.

Important Clarification

  • While res judicata does not strictly apply to income tax proceedings as each assessment year is an independent unit, the Rule of Consistency acts as a binding administrative and judicial check. The Revenue cannot alter a settled position across identical assessment periods unless they bring to light fresh, material facts that distinguish the period in question from prior years.

Sections Involved

  • Primary Section: Section 260A of the Income-tax Act, 1961 (Substantial question of law).
  • Substantive Income Heads: Head of Income - Salary vs. Profits and Gains of Business or Profession (Section 15/16 vs. Section 28 of the Income-tax Act, 1961).

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2007:DHC:1790-DB/MBL22012007ITA1162002_163406.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.