Bombay High Court: Income Tax Department Cannot Take a Contrary Stand After Consistently Accepting the Same Position
Doctrine of Consistency, Estoppel and Article 265: Revenue Cannot Blow Hot and Cold in Tax Matters
Can the Income Tax Department Change Its Stand Whenever It Suits It?
Imagine a taxpayer follows a particular method of taxation.
The Department examines the matter and accepts the position.
The same position continues for years.
The taxpayer, naturally, proceeds on the understanding that the Department has accepted the legal position.
Then suddenly, in a subsequent year, the Department changes its stand and says:
“We now believe the position was wrong. Therefore, you must pay tax.”
Can the Revenue do this?
The Bombay High Court, while considering the principle of consistency in tax matters, has reiterated an important proposition: the Revenue cannot casually adopt a position contrary to its own earlier stand, particularly where the same issue has already been considered and accepted.
The Court relied upon its earlier decisions in Nirmala Mehta v. CIT, reported in 269 ITR 1, and Balmukund Acharya v. DCIT, reported in 310 ITR 310, while discussing the doctrine of consistency, estoppel and the constitutional mandate contained in Article 265 of the Constitution of India.
The principle is simple but powerful:
The Revenue cannot blow hot and cold at the same time.
The Principle of Consistency in Taxation
Income-tax law involves numerous factual and legal questions which may continue from one assessment year to another.
For example:
• treatment of a particular receipt;
• nature of an expenditure;
• method of accounting;
• character of an asset;
• taxability of a recurring transaction;
• interpretation of a particular provision
• ; or
• treatment of a particular business activity.
If the facts and circumstances remain substantially the same, a taxpayer is entitled to expect a degree of consistency from the tax administration.
This does not mean that the Department can never change its view.
The law may change.
Facts may change.
A higher judicial authority may settle the issue differently.
A previous decision may be demonstrated to be erroneous.
But merely changing the Department’s stand without a legally sustainable basis can create serious problems.
That is where the doctrine of consistency assumes importance.
What Did the Bombay High Court Observe?
As reflected in the attached presentation, the Bombay High Court relied upon its earlier rulings in:
1. Nirmala Mehta v. CIT — 269 ITR 1
and
2. Balmukund Acharya v. DCIT — 310 ITR 310
The Court referred to the principle that the doctrine of estoppel may prevent the Revenue from adopting a different stand when that stand is contrary to the position earlier taken by it.
The Court also made an important distinction.
While the doctrine of estoppel may ordinarily have limited application against a taxing statute, that does not mean that the Revenue can disregard the law or adopt inconsistent positions merely because it is dealing with taxation.
The taxpayer remains entitled to have the matter decided according to the Income-tax Act and the law applicable to the case.
Estoppel Cannot Create a Tax Liability
This is a particularly interesting aspect of the principle.
There is a fundamental rule in taxation:
There can be no tax without authority of law.
This principle flows from Article 265 of the Constitution of India, which provides that:
“No tax shall be levied or collected except by authority of law.”
Therefore, tax cannot be imposed merely because:
• the taxpayer agreed to a particular treatment earlier;
• the taxpayer did not object in an earlier year;
• the Department adopted a particular interpretation;
• the taxpayer acquiesced to an assessment; or
• an administrative practice existed.
Ultimately, the levy must have the authority of law.
This cuts both ways.
The Revenue cannot say:
“We accepted this earlier, therefore it must necessarily remain correct forever.”
Equally, it cannot say:
“We made a mistake earlier, so we can now impose a tax which the statute itself does not authorise.”
The statute remains supreme.
Article 265: The Constitutional Safety Net
Article 265 is one of the most important constitutional protections in taxation.
It establishes a simple rule:
Tax must have statutory authority.
The Revenue cannot collect tax merely on the basis of administrative convenience or departmental interpretation unsupported by law.
Therefore, when a taxpayer challenges a tax demand, one of the fundamental questions is:
Where is the authority of law for this levy?
If the answer cannot be found in the statute, the demand becomes constitutionally vulnerable.
This is why the Bombay High Court’s reference to Article 265 adds another dimension to the doctrine of consistency.
The dispute is not merely about whether the Department changed its view.
It is ultimately about whether the tax being demanded has legal authority.
Can the Revenue Ever Change Its Earlier Position?
Yes.
This is an important qualification.
The doctrine of consistency does not mean that an incorrect interpretation becomes permanently binding on the Revenue.
For instance, suppose:
• the facts in the subsequent year are different;
• the statutory provision has been amended;
• a higher court has subsequently interpreted the provision differently;
• new evidence has emerged; or
• the earlier acceptance was based upon a fundamentally different factual or legal position.
In such circumstances, the Department may have a legitimate basis for taking a different view.
Therefore, the correct principle is not:
“Revenue can never change its stand.”
Rather, it is:
“Revenue should not arbitrarily depart from its earlier accepted position when the facts and law remain the same, particularly without explaining the basis for the change.”
Consistency does not freeze the law.
It prevents arbitrariness and contradictory approaches.
The Problem With “Year-by-Year” Tax Administration
One common misconception is that because income tax is assessed year by year, the Department can freely take a different position every year.
While each assessment year is technically a separate assessment unit, tax administration cannot become a game of:
“Same facts today, different interpretation tomorrow.”
If an issue has been repeatedly examined and accepted, and the factual and legal position remains unchanged, an abrupt departure requires justification.
Otherwise, taxpayers face an impossible situation.
They cannot plan their affairs.
They cannot predict their tax liability.
They cannot rely upon an accepted interpretation.
And every completed assessment becomes merely a temporary truce rather than a settled position.
The doctrine of consistency seeks to bring certainty and fairness into tax administration.
Nirmala Mehta: An Important Bombay High Court Precedent
The Bombay High Court’s decision in Nirmala Mehta v. CIT, reported in 269 ITR 1, has been an important authority in discussions concerning consistency and the conduct of the Revenue.
The decision is particularly relevant because it emphasises the importance of fairness in the administration of tax law.
The taxpayer should not be placed in a position where the Revenue takes contradictory positions on substantially identical circumstances without a proper legal basis.
The underlying principle is that tax administration must be fair, consistent and legally sustainable.
Balmukund Acharya: Revenue Cannot Ignore Its Own Earlier Approach
The Bombay High Court also relied upon its earlier judgment in Balmukund Acharya v. DCIT, reported in 310 ITR 310.
The decision is frequently cited for the proposition that the Revenue cannot adopt inconsistent positions and that the Department must act in accordance with law.
The broader message is particularly relevant in today’s tax environment, where taxpayers deal with:
• faceless assessments;
• automated processing;
• system-generated notices;
• reassessment proceedings;
• digital compliance;
• centralised processing; and
• multiple levels of departmental review.
Technology may change the manner in which tax administration is conducted.
But the fundamental legal principles do not change.
What If the Department Says: “The Earlier Assessment Was Wrong”?
That argument alone may not be sufficient.
The Department may certainly correct an error where the law provides an appropriate statutory mechanism.
But there is a difference between:
Correcting an error in accordance with law
and
Changing the departmental position merely because a different view is now considered more favourable to the Revenue.
The second approach can create serious concerns regarding consistency and fairness.
The Revenue must demonstrate the legal basis for its action.
The mere fact that the Department has subsequently changed its mind does not automatically create a tax liability.
Acquiescence by the Taxpayer Does Not Create a Tax
Another significant principle emerging from the attached material is that acquiescence cannot take away a relief to which the taxpayer is otherwise legally entitled.
Suppose a taxpayer did not challenge an incorrect position in an earlier year.
Can the Department argue:
“You accepted it earlier, so you cannot claim the correct treatment now”?
Not necessarily.
If the statute grants a particular benefit or relief, the taxpayer’s failure to claim it in an earlier year does not automatically extinguish the statutory entitlement for another year, subject of course to the conditions and limitations prescribed by law.
Similarly, the Revenue cannot use a taxpayer’s earlier acquiescence as a substitute for statutory authority.
Again, Article 265 provides the constitutional backdrop.
A tax liability must flow from law—not from consent, acquiescence or departmental convenience.
Judicial Precedent Cannot Be Ignored Simply Because an Appeal Is Pending
The attached presentation also highlights another significant proposition.
The Revenue cannot simply disregard a judicial precedent on the ground that the decision has been challenged before the Supreme Court.
This is an extremely important point in tax litigation.
A High Court judgment remains binding on authorities within its jurisdiction unless:
• it is stayed;
• it is overruled;
• it is modified; or
• a binding decision of a higher court changes the legal position.
Merely filing an appeal does not automatically erase the judgment.
Therefore, the Department cannot ordinarily say:
“We know the High Court has decided this issue, but we will ignore it because the matter has been challenged before the Supreme Court.”
That approach can undermine the judicial hierarchy.
Why This Principle Is Particularly Important Today
Taxpayers increasingly receive notices generated through centralised and automated systems.
A particular issue may be treated one way by one assessing authority and differently by another.
Similarly, different years may sometimes witness different departmental positions despite substantially identical facts.
In such an environment, consistency becomes more—not less—important.
The Revenue’s powers are substantial.
But those powers operate within a legal framework.
The tax officer is an administrator of the law, not the author of the law.
That distinction is fundamental.
Does Consistency Mean Every Taxpayer Gets the Same Treatment?
Not automatically.
The doctrine of consistency is generally concerned with comparable facts and circumstances.
If two taxpayers have materially different facts, the Revenue can legitimately reach different conclusions.
Similarly, if the statutory provisions applicable to two assessment years are different, different tax treatment may be justified.
Therefore, taxpayers relying upon the principle of consistency should establish:
1. the earlier position adopted by the Revenue;
2. the relevant facts in the earlier year;
3. the legal provision involved;
4. the manner in which the issue was decided;
5. the facts in the subsequent year; and
6. the absence of any material change in law or circumstances.
The stronger the factual and legal similarity, the stronger the consistency argument.
A Simple Illustration
Suppose a taxpayer owns a particular asset.
For several assessment years, the Income Tax Department accepts a particular legal treatment of income arising from that asset.
The taxpayer continues to maintain the same arrangement.
There is no amendment in law.
No new facts emerge.
No higher court overturns the earlier interpretation.
But suddenly, in a later year, the Department takes the opposite position and raises a substantial demand.
The taxpayer can legitimately ask:
“What changed?”
If the answer is nothing, the Revenue may have difficulty justifying its inconsistent approach.
That does not mean the earlier assessment automatically determines the later year.
But it does mean that the Department’s departure requires proper legal justification.
What Taxpayers Should Do When the Department Changes Its Stand
If a taxpayer receives a notice or assessment taking a position contrary to an earlier accepted position, the taxpayer should carefully document the history.
Step 1: Collect earlier assessment orders
Identify exactly how the issue was dealt with in previous years.
Step 2: Compare the facts
Demonstrate that the facts remain substantially identical.
Step 3: Check the law
Confirm whether there has been any amendment, notification or judicial development affecting the issue.
Step 4: Identify binding judicial precedents
If a jurisdictional High Court has already decided the issue, its binding nature should be specifically brought to the Department’s attention.
Step 5: Raise Article 265 where appropriate
Where the proposed levy lacks statutory authority, the constitutional protection under Article 265 can assume importance.
Step 6: Challenge an unsustainable demand
Where the issue involves jurisdiction, violation of binding precedent or absence of statutory authority, the taxpayer should consider the appropriate appellate or writ remedy based on the facts.
Five Golden Rules From the Bombay High Court’s Approach
The principles highlighted in the attached presentation can be remembered through five simple rules:
Rule 1 — Consistency Matters
The Revenue should not arbitrarily change its position on identical facts.
Rule 2 — Estoppel Has Limited but Important Relevance
While estoppel cannot override a taxing statute, the Revenue cannot use inconsistency as a substitute for lawful tax administration.
Rule 3 — Article 265 Is Supreme
No tax can be levied or collected except by authority of law.
Rule 4 — Acquiescence Does Not Destroy Statutory Rights
A taxpayer’s earlier acceptance cannot necessarily deprive the taxpayer of a relief which the law otherwise grants.
**Rule 5 — Judicial Decisions Cannot Be Ignored
A binding judicial precedent cannot simply be disregarded because the Department does not agree with it or has challenged it before a higher court.
Frequently Asked Questions
Q1. What is the doctrine of consistency in income tax?
It is the principle that where facts and law remain substantially unchanged, the Revenue should ordinarily maintain consistency in its approach rather than arbitrarily taking contradictory positions in different years.
Q2. Can the Income Tax Department change its view?
Yes. A change may be justified where there is a change in law, facts, or a subsequent binding judicial decision, or where the earlier position was legally unsustainable and the law provides a mechanism to correct it.
Q3. What is Article 265 of the Constitution?
Article 265 provides that no tax shall be levied or collected except by authority of law.
Q4. Can the Department ignore a High Court judgment because an appeal is pending before the Supreme Court?
The mere filing of an appeal does not by itself erase the binding effect of a judgment. The precise effect depends upon whether the judgment has been stayed, modified or overruled and upon the applicable judicial hierarchy.
Q5. Does taxpayer acquiescence make an otherwise non-taxable amount taxable?
No. Tax liability must have statutory authority. Acquiescence or consent cannot independently create a tax liability where the law does not impose one.
Q6. Does the doctrine of consistency mean that every assessment must always be identical?
No. The principle operates where the relevant facts and law are materially similar. A change in facts, law or binding judicial precedent can justify a different conclusion.
Conclusion: Tax Administration Cannot Be a Game of Changing Rules
The principle highlighted by the Bombay High Court is much larger than any individual tax dispute.
A taxpayer is expected to comply with the law.
The Revenue must do the same.
If the Department accepts a particular position for years and the facts and law remain unchanged, it cannot casually reverse its position without explaining the legal basis for doing so.
At the same time, the taxpayer cannot claim that an erroneous departmental view must continue forever merely because it was accepted earlier.
The ultimate test is always the law.
That is why the reference to Article 265 is so important.
Tax cannot be collected because the Department believes it should be collected. Tax can be collected only when the law authorises it.
The Bombay High Court’s reliance on Nirmala Mehta v. CIT (269 ITR 1) and Balmukund Acharya v. DCIT (310 ITR 310) reinforces this broader philosophy of tax administration.
And perhaps the simplest way to remember the principle is:
Consistency prevents arbitrariness, precedent maintains discipline, and Article 265 keeps taxation within the boundaries of law.
In taxation, therefore, the Revenue may change its view—but it cannot change the law.
The copy of the order is as under:
