The Bombay High Court, in a landmark ruling highlighting the perils of unverified AI use in official proceedings, has quashed an income tax assessment that was based on non-existent, AI-generated case laws.
The bench comprising Justices B.P. Colabawalla and Amit S. Jamsandekar held that tax authorities cannot depend on artificial intelligence tools without proper verification, especially while performing quasi-judicial functions under the Income Tax Act, 1961.
Court's Observation: AI Outputs Need Verification
The Court remarked that in today's era of Artificial Intelligence, system-generated information is increasingly used in research and decision-making. However, it cautioned that such results "are not to be blindly relied upon" and must be duly cross-verified before being cited in official orders.
"Otherwise, mistakes like the present one creep in," the bench observed.
Background of the Case
The dispute pertained to the assessment year 2023-24, where the Assessing Officer (AO) had enhanced the assessee's total income to Rs 27.91 crore as against the returned income of Rs 3.09 crore.
The AO disallowed purchases worth Rs 2.15 crore from Dhanlaxmi Metal Industries, alleging that the supplier failed to respond to a notice under Section 133(6). However, the assessee proved that the supplier had indeed responded and provided documentary evidence, which was ignored by the AO.
AI-Generated Case Laws and Procedural Lapses
The High Court took serious note of the fact that the assessment order cited judicial precedents that did not exist. The department later termed these references an "inadvertent error," claiming they were corrected through rectification.
Rejecting this explanation, the bench stated:
"There are no such decisions at all which are sought to be relied upon by the Assessing Officer."
The Court also pointed out that no proper show-cause notice was issued and no computation details were shared with the assessee before finalizing the assessment - procedural lapses that rendered the order invalid.
Order Quashed and Matter Remanded
Accordingly, the Bombay High Court set aside the assessment order passed under Section 143(3) read with Section 144B, along with the demand notice under Section 156 and the penalty notice under Section 274 read with Section 271AAC.
The matter has been remanded for fresh assessment, with clear instructions that if any judicial precedents are relied upon, the assessee must be given at least seven days' notice to respond.
Significance of the Judgment
This ruling serves as an important precedent in India's evolving AI and tax administration landscape, reinforcing the judiciary's stance that AI-generated content cannot replace verified legal research. It also underscores the responsibility of Assessing Officers to ensure procedural fairness and transparency while framing assessments.
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