“Complete Breach of Natural Justice”: Bombay HC says results thrown open by AI are not to be Blindly Relied Upon in an Income Tax Case [Read Order]

The Bombay High Court, in a significant ruling addressing the use of Artificial Intelligence (AI) in tax adjudication, set aside an income tax assessment order after finding that the National Faceless Assessment Centre had acted in complete breach of the principles of natural justice.

A Division Bench comprising Justice B.P. Colabawalla and Justice Amit S. Jamsandekar delivered the judgment on October 6, 2025, while hearing a writ petition filed by KMG Wires Private Limited challenging an assessment order passed under Section 143(3) read with Section 144B of the Income Tax Act, 1961, for Assessment Year 2023–24. The impugned order had assessed the petitioner’s total income at ₹27.91 crore against the returned income of ₹3.09 crore.

The petitioner, represented by Advocate Dharan V. Gandhi, argued that the assessment order was passed without due consideration of evidence and without granting a proper opportunity of hearing. The primary addition of ₹2.15 crore towards alleged bogus purchases from Dhanlaxmi Metal Industries was made on the ground that the supplier had not responded to a notice under Section 133(6) of the Act. However, the supplier had, in fact, furnished a detailed reply confirming the transactions along with supporting invoices, e-way bills, transport receipts, and GST returns.

Further, the assessing officer added ₹22.66 crore as peak balances of unsecured loans from directors, including opening balances, relying on three judicial decisions that were found to be nonexistent. The petitioner contended that no show-cause notice or working was provided before such addition.

Counsel for the Revenue, Advocate Akhileshwar Sharma, defended the assessment order, arguing that the petitioner had an alternate remedy through appeal. However, he fairly admitted that the supplier’s response to the notice under Section 133(6) had not been considered, and that reliance on nonexistent judicial precedents was a mistake later sought to be rectified by an order dated September 22, 2025.

The High Court found merit in the petitioner’s contentions, holding that the assessment order was passed in gross violation of natural justice. The Bench noted that crucial evidence such as the supplier’s detailed reply was completely ignored. More strikingly, the Court criticized the reliance on AI-sourced judicial references that did not actually exist, observing:

“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.”

Setting aside the assessment order, the notice of demand under Section 156, and the penalty show cause under Section 274 read with Section 271AAC, the Court remanded the matter to the Assessing Officer. The AO was directed to issue a fresh show-cause notice, provide a reasonable opportunity of hearing, and pass a detailed, speaking order by December 31, 2025.

The Bench clarified that it had not made any observations on the merits of the additions, keeping all rights and contentions of the parties open.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates