The Bombay High Court quashed an income tax assessment after finding that the Assessing Officer relied on non-existent, AI-generated case laws while passing the order. The bench of Justices B.P. Colabawalla and Amit S. Jamsandekar observed that tax authorities cannot depend on artificial intelligence outputs without proper verification, especially when performing quasi-judicial duties.
The Court said that in the current era of Artificial Intelligence, reliance on system-generated results is common, but such outcomes must be carefully cross-checked before being used in official decision-making. The bench said, “when one is exercising quasi-judicial functions, it goes without saying that such results [which are thrown open by AI] are not to be blindly relied upon, but the same should be duly cross-verified before using them. Otherwise, mistakes like the present one creep in.”
The case involved an assessment for the year 2023-24, where the Assessing Officer assessed the petitioner’s total income at Rs 27.91 crore instead of the returned income of Rs 3.09 crore. The petitioner challenged this order and argued that the additions were based on incorrect facts and unsupported AI-generated references.
One of the main disputes concerned purchases of Rs 2.15 crore from Dhanlaxmi Metal Industries. The Assessing Officer treated these purchases as unverifiable, claiming the supplier did not respond to a notice under Section 133(6) of the Income Tax Act. However, the petitioner demonstrated that the supplier had indeed replied, confirming the transactions and submitting detailed evidence. The Court noted that the department ignored these responses while making additions.
The department argued that the reference to certain judgments in the assessment order, which could not be traced, was an inadvertent error later corrected through a rectification order. It maintained that the additions were justified on merits. The bench, however, found that the judicial precedents cited in the order were entirely fictitious. “There are no such decisions at all which are sought to be relied upon by the Assessing Officer,” the Court noted and held that the officer must show where such decisions were sourced from.
The Court also accepted the assessee’s grievance that the department never provided the working or basis of the assessed figures and did not issue a proper show cause notice before making the additions. Such procedural lapses, the Court said, rendered the order unsustainable.
Accordingly, the High Court quashed the assessment order passed under Section 143(3) read with Section 144B of the Act, the notice of demand under Section 156, and the consequential penalty notice under Section 274 read with Section 271AAC.
The matter was remanded to the Assessing Officer for a fresh assessment. The Court directed that if any judicial precedents are relied upon in the new proceedings, the assessee must be given at least seven days’ notice to counter them.
