Bombay High Court Quashes ₹22 Crore Tax Notice Based on Fake AI Rulings

The Bombay High Court has struck down a ₹22 crore tax notice after finding that the Income Tax Department relied on 3 non-existent judicial rulings generated by Artificial Intelligence (AI). The court said the department should have verified these references before using them in the assessment order.

How the Case Began

The case started when a taxpayer challenged an assessment order passed under Section 143(3) read with Section 144B of the Income Tax Act for the assessment year 2023–24. The tax officer had increased the taxpayer’s income from ₹3.09 crore to ₹27.91 crore and issued a tax demand notice under Section 156, along with a show-cause notice for penalty.

The additions were made on two counts —

• Disallowance of purchases worth ₹2.16 crore from Dhanlaxmi Metal Industries because the supplier allegedly did not respond to a Section 133(6) notice.
• Addition of unsecured loans worth ₹22.66 crore from directors, calculated on a “peak balance” basis.

Court Finds Major Errors

The High Court found that the supplier had, in fact, replied to the tax department’s notice and submitted documents such as invoices, GST returns, e-way bills, and transport receipts. Despite this, the tax officer’s order wrongly stated that no reply was received.

Even more concerning, the officer cited three judicial rulings that turned out to be completely fake. The court noted that while AI tools can be helpful, officers must not rely on them blindly without verifying the authenticity of their results. 

Violation of Natural Justice

The court observed several procedural lapses, including the absence of a show-cause notice before adding the ₹22.66 crore as “peak balance.” The taxpayer was not given an opportunity to explain or respond, violating the principle of natural justice.

The High Court said such oversights show a complete breach of due process and fairness expected in quasi-judicial proceedings.

Court’s Final Decision

The Bombay High Court quashed the entire assessment order, demand notice, and penalty notice. It directed the assessing officer to issue a fresh, reasoned show-cause notice, provide a personal hearing, and verify all judicial references before relying on them. The court has given time until December 31, 2025, to pass the new order.

Conclusion

The ruling highlights the risks of unverified AI use in legal and tax proceedings. While technology can improve efficiency, the Bombay High Court made it clear that human oversight remains essential to ensure fairness, accuracy, and adherence to natural justice.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.