Bombay High Court Quashes Rs. 22 Crore Tax Notice Based on Fake AI-Generated Judgments:

Bombay High Court Quashes Rs. 22 Crore Tax Notice Based on Fake AI-Generated Judgments The use of AI (artificial intelligence) is slowly growing day by day. Even the government is making use of it to announce punishment to lawbreakers. Imagine receiving an income tax notice where a tax demand is imposed as a result of a ruling given by some AI-generated tool. In reality, this has happened where a person has recently received an income tax notice as a result of three frictional court rulings suggested by AI tools to the tax officers. The taxpayer had filed a petition in the High Court and had won the case.

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Background of Case: According to a report, the Income Tax Department used artificial intelligence (AI) while preparing a tax notice worth Rs. 22 crore. However, the AI system mistakenly included references to three court cases that actually do not exist. A chartered accountant also highlighted a case where a taxpayer filed a writ petition (l) no. 24366 of 2025 in the Bombay High Court, challenging an assessment order issued under Section 143(3) read with Section 144B for the assessment year 2023-24. In that case, the assessing officer increased the assessee's income from Rs 3.09 crore to Rs 27.91 crore and thereafter issued a tax demand and penalty notice under Section 156 and Section 274, respectively.

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The tax assessment made two major changes:

• Rejection of purchases worth Rs. 2.16 crore from Dhanlaxmi Metal Industries because the company did not reply to a notice sent under Section 133(6) of the Income Tax Act.
• Addition of Rs. 22.66 crore as unsecured loans supposedly taken from the company’s directors, based on the highest balance (peak balance) method used by the tax officer.

The assessee claimed that these additions were a violation of the principles of natural justice. The evidence indicates that the supplier did respond to the notice issued under Section 133(6) on March 08, 2025, with the submission of proper invoices, e-way bills, transport receipts, and GST returns before the assessment conclusion. On the action, where AO made an addition of Rs. 22.66 crore in income as unsecured loans, the assessee claimed that they did not receive any prior show cause notice before this action. Additionally, there was no disclosure of calculation methods, and the AO referenced three non-existent court decisions to support the addition.

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Bombay High Court's Ruling: When the case was taken before the Bombay High Court, the court noted a clear procedural irregularity and serious contravention of the principle of natural justice:

• The court observed that the supplier was honest in that he submitted a detailed reply to the notice issued under Section 133(6). However, the tax authorities claimed "no such reply was filed," a mistake, which was immediately accepted by the department thereafter.
• The Assessing Officer mentioned three court cases that actually do not exist. The Court said that even though we live in an "age of Artificial Intelligence" and officials may use AI tools, they must still check and confirm such case references before using them in their decisions.
• The court noted that the assessee was not provided any calculation methodology by the tax authorities for the reported "peak balance" addition and was additionally not served with any show cause notice (SCN), which clearly shows the assessee was not given a chance to present their side.
• The High Court found that the court rulings cited by the tax department did not actually exist and asked for an explanation of how these fake judgments were found or created.
• The court says, "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."
• High Court says, "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. The Assessment Order passed shall be a speaking order and will deal with all the submissions of the Petitioner. The Assessment Order shall be passed on or before December 31, 2025"
• In conclusion, the Bombay High Court invalidates the notice and remands the case to the assessing officer (AO) for fresh consideration. Directed AO to issue a fresh notice after properly listening to the claims of the assessee.