The Bombay High Court rebuked an NFAC tax officer for relying on non-existent, AI-generated judgments while raising a Rs 27.91 crore tax demand against KMG Wires Pvt Ltd. The Court warned that quasi-judicial officers must not “blindly rely” on AI results without proper verification.
Mumbai: The Bombay High Court recently came down strongly on the Assessing Officer (AO) of the National Faceless Assessment Centre (NFAC) for using fake, AI-generated court decisions while raising a massive tax demand of Rs 27.91 crore against a company.
A Division Bench of Justices BP Colabawalla and Amit Jamsandekar noted that the officer relied on three case laws that “do not exist at all.”
The Court highlighted the growing concern over the unverified use of Artificial Intelligence in government and quasi-judicial decisions, saying it can lead to serious errors that affect people’s rights.
The judges cautioned,
“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…are not to be blindly relied upon, but should be duly cross-verified before using them.”
KMG Wires had challenged the assessment order dated March 27, 2025, for the Assessment Year 2023–24. In that order, the company’s total income was calculated at Rs 27.91 crore, while it had originally declared Rs 3.09 crore.
The company also challenged the related demand notice under Section 156 and the show-cause notice for penalty under Sections 274 read with 271AAC of the Income Tax Act.
The company argued that it had submitted a detailed reply with all necessary evidence — including invoices, e-way bills, GST returns, and transport receipts — totaling around 100 pages. However, the Assessing Officer wrongly mentioned in the final order that “no reply was received.”
During the hearing, the company’s lawyer pointed out that the officer had cited three judicial precedents that could not be found anywhere and were completely fake. These were allegedly used to justify adding the company’s opening balances under Section 68 of the Income Tax Act.
Counsel appearing for the NFAC admitted before the court that the supplier’s response “appears to be not taken into consideration” and that the so-called judicial precedents cited in the assessment order could not be traced.
He acknowledged that it was an “error” which they later tried to correct. However, he also argued that the company’s writ petition before the High Court was not maintainable.
The Division Bench firmly rejected this objection. It said the case clearly involved a serious violation of the principles of natural justice since the department ignored the taxpayer’s detailed submissions and relied on “non-existent” judgments to make an addition of Rs 22.66 crore.
The Court reminded all officers that they must not depend blindly on AI-generated or automated search results while performing quasi-judicial duties. Such decisions directly affect taxpayers’ rights and must be made carefully and responsibly.
The Bench warned,
“Mistakes like the present one creep in when such results are not duly cross-verified before use.”
To ensure fairness, the Bombay High Court sent the case back to the Assessing Officer for a fresh assessment. It directed that a proper and clear show-cause notice be issued to the company and that a personal hearing must be given before December 31, 2025.
The Bench further ordered that any judicial decisions the officer plans to rely on must be shared with the company at least seven days in advance.
The final assessment order must also be a reasoned or “speaking” order that addresses every submission made by the taxpayer.
The Court’s direction serves as a strong reminder to tax authorities and other government officers about the responsible use of technology, especially Artificial Intelligence, in official and legal decision-making.
It stressed that while AI tools can assist in finding information, they can never replace human judgment, verification, and accountability.
Advocates Dharan Gandhi and Aanchal Vyas represented KMG Wires Private Limited, while Advocate Akhileshwar Sharma appeared for the NFAC.
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