Court cautions against blind reliance on AI-generated results in quasi-judicial decisions
In a significant ruling reinforcing the importance of procedural fairness in India’s new era of faceless tax assessments, the Bombay High Court has set aside an income tax assessment order passed against KMG Wires Private Limited, citing gross violations of natural justice and unverified reliance on non-existent case law, possibly sourced through artificial intelligence.
The judgment, delivered by Justices B.P. Colabawalla and Amit S. Jamsandekar on 6 October 2025, addresses the assessment order issued under Section 143(3) read with Section 144B of the Income Tax Act, 1961 for Assessment Year 2023–24. The National Faceless Assessment Centre (NFAC) had assessed KMG Wires’ total income at ₹27.91 crore, as against the company’s declared income of ₹3.09 crore.
Key Facts and Issues
The NFAC had made two major additions to the company’s income:
- Disallowance of purchases worth ₹2.15 crore from Dhanlaxmi Metal Industries, allegedly because the supplier failed to respond to a departmental notice.
- Addition of unsecured loans from directors amounting to a peak balance of ₹22.66 crore, by treating them as unexplained cash credits.
KMG Wires challenged the order before the High Court, arguing that:
- The supplier had in fact responded to the departmental notice under Section 133(6) on 8 March 2025, confirming the transactions and submitting extensive supporting evidence (invoices, GST returns, e-way bills, etc.).
- The tax authorities ignored this reply and wrongly recorded that “no response was received.”
- The so-called “peak balance” computation included opening balances and relied on three judicial decisions that did not exist—suggesting blind use of AI-sourced case references without verification.
Government’s Response
The Department’s counsel admitted that the supplier’s response “appears not to have been considered” while passing the assessment order. It was also conceded that the cited judgments could not be located and that this error had since been “rectified.” However, the Revenue maintained that the additions were otherwise justified.
Court’s Observations
The High Court found the assessment process deeply flawed, observing that:
- The addition for purchases was made without considering crucial evidence that was duly filed before the order.
- The reliance on non-existent judicial decisions was unacceptable.
- In the age of AI, officers performing quasi-judicial functions must not rely blindly on system-generated results without independent verification.
“When one is exercising quasi-judicial functions, it goes without saying that such results [thrown open by AI] are not to be blindly relied upon, but should be duly cross-verified,” the bench cautioned.
The Court also noted that no show cause notice or proper working had been given to the taxpayer before adding the peak balance.
Outcome
The Court:
- Quashed and set aside the assessment order, the consequential demand notice under Section 156, and the penalty show cause notice under Section 274 read with Section 271AAC.
- Remanded the case to the Assessing Officer with directions to:
- Issue a fresh show cause notice clearly stating proposed additions.
- Provide the taxpayer adequate opportunity and a personal hearing.
- Ensure any judgments relied upon are disclosed at least seven days in advance.
- Pass a speaking order addressing all submissions, by 31 December 2025.
Importantly, the Court clarified that it expressed no opinion on the merits of the additions, leaving all issues open for re-examination.
Significance of the Judgment
This decision is a timely reminder that technology cannot replace judicial application of mind. The Court’s remarks highlight growing concerns about unverified use of AI tools in official decision-making—especially in sensitive, quasi-judicial domains like taxation.
For taxpayers, the case reinforces that faceless assessments must still follow due process and adhere to the principles of natural justice. For the tax administration, it signals that transparency, human oversight, and accountability remain essential, even in an AI-driven system.
Case Reference:
KMG Wires Private Limited vs. National Faceless Assessment Centre & Others
Writ Petition (L) No. 24366 of 2025
High Court of Bombay (O.O.C.J.)
Judgment Date: 6 October 2025
Bench: Justice B.P. Colabawalla and Justice Amit S. Jamsandekar