HC expresses Concern Regarding Tax Department’s Use of AI to Issue an Order against Assessee

The Bombay High Court reprimanded the tax department for using an AI-generated order to deny the assessee’s claims without providing explanations.

A taxpayer filed a petition in court because the tax department issued a non-speaking order that did not give any explanation for declaring the taxpayer’s tax return invalid due to the non-filing of a tax audit report. The order rejecting the taxpayer’s contentions was made without any explanation, which led the taxpayer to challenge the decision in court by filing a petition.

After hearing this case, a Division Bench of Justice MS Sonak and Justice Jitendra Jain outlined a problem in the system: the AI-generated order showed no indications of human thought. Therefore, instead of addressing the taxpayer’s arguments, the system mechanically rejected them. The court found this highly concerning.

The income tax department has been criticised by the Bombay High Court for using an AI-generated order to dismiss the taxpayer’s arguments without providing any clear justification.

The Bombay High Court pointed out that natural justice and fairness are too significant to be sacrificed for the sake of AI and automation. It stated that the reasons behind the order must be well explained since this forms a significant element of fairness. The court suggested that the tax department should set up a system within the Centralised Processing Centre (CPC) that ensures thoughtful consideration of cases, and the decisions should not be unclear like the “inscrutable face of the sphinx” and must be easy to understand by the taxpayers.

The judges gave a warning to the Revenue Department that the use of AI should not result in unfair decision-making. They outlined the importance of accountability and transparency in the tax system for its well-functioning.

The court has asked them to seek revisional jurisdiction under Section 264 of the Income Tax Act. The court has explained that cases regarding compliance with Section 44AB and the interpretation of ICAI Guidance Notes were best handled by the Commissioner of Income Tax (CIT). The court made it clear that the revisional authority must give the case fair consideration and ensure the petitioner is granted an opportunity to present their case.