'Don't Blindly Trust AI'; Bombay High Court Quashes Income Tax Assessment Passed On Unverified AI-Generated Case Laws

The Court stated that in the era of Artificial Intelligence, the tax authorities cannot blindly rely on such AI-generated results. AI-generated case laws must be cross-verified before using them in quasi-judicial functions.

Justices B.P. Colabawalla and Amit S. Jamsandekar stated that in this era of Artificial Intelligence ('AI'), one tends to place much reliance on the results thrown open by the system. However, 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.

In this case, during the assessment proceedings for the Assessment Year 2023-24, the Assessing Officer relied upon AI-generated case laws while passing the assessment order under Section 143(3) read with Section 144B of the Income Tax Act, 1961.

The petitioner/assessee is challenging the Assessment Order. By the impugned Assessment Order, Respondent No. 1/Assessing Officer has assessed the total income of the assessee at Rs.27.91 Crores in place of Rs. 3.09 Crores returned by the assessee.

The assessee submitted that the first addition of purchases of Rs. 2,15,89,932/- from one Dhanlaxmi Metal Industries was primarily made on the basis that the said party did not reply to the Notice under Section 133(6) of the Act. This is factually incorrect.

It was further submitted that said party had replied to the Notice under Section 133(6) of the Act. Not only did the said party confirm the transactions with the assessee, but provided voluminous details/evidence in that regard. Thus, the addition was made in ignorance and without considering the reply filed.

The department submitted that the reference to some judgments in the Assessment Order, which could not be found, was an error. This error has been rectified by the JAO by passing the rectification order. However, on merits, the addition is correctly made.

The bench noted that the judicial decisions relied upon are completely non-existent. In other words, there are no such decisions at all which are sought to be relied upon by the assessing officer. It is for the assessing officer to show from where such decisions were fetched.

It is also one of the grievances of the assessee that they are clueless as to how the figures are arrived at, as no basis or working was ever shown to the assessee, nor was any Show Cause Notice issued before making the addition of peak balance. Even this grievance of the assessee is justified, added the bench.

The bench quashed and set aside the Assessment Order passed under Section 143(3) read with Section 144B of the Act, the Notice of Demand under Section 156 of the Act, as well as the consequential Show Cause Notice for levy of penalty issued under Section 274 read with Section 271AAC of the Income Tax Act.

In view of the above, the bench remanded the matter back to the Assessing Officer and directed the assessing officer to issue a fresh Show Cause Notice to the assessee.

If any decisions are relied upon, then the Petitioner will be put to adequate notice of not less than 7 days, to counter such judgments, added the bench.

Case Title: KMG Wires Private Limited v. The National Faceless Assessment Centre

Case Number: WRIT PETITION (L) NO. 24366 OF 2025

Counsel for Petitioner/Assessee: Mr. Dharan V. Gandhi a/w Aanchal Vyas

Counsel for Respondent/Department: Mr. Akhileshwar Sharma

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