Delhi HC Holds Challenge to GST SCN Citing AI‑Generated Judgments Premature, Directs Petitioner to Reply [Read Order]

The Delhi High Court has held that a writ petition challenging a GST Show Cause Notice (SCN) on grounds of citing AI‑generated judgments and relying solely on Income Tax findings was premature.

The Court directed the petitioner to reply to the SCN, participate in proceedings, and raise objections, including those relating to AI‑generated references, before the GST authority.

The case arose from an SCN dated 26 June 2025, which alleged that J.M. Jain had concealed purchase and sales turnover by maintaining “parallel accounts” on a JSK server accessed during an Income Tax investigation.

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The Income Tax materials included unaccounted stock, WhatsApp chats allegedly involving unreported commission and interest income, seized “kachchi parchis,” and statements recorded under Section 132(4) of the Income Tax Act.

The petitioner argued that these findings could not automatically be transplanted into GST proceedings without independent verification. It was also contended that the failure to rely on GST-specific investigation and the blanket reproduction of Income Tax findings rendered the SCN without jurisdiction and in violation of principles of natural justice.

A central grievance raised by the petitioner was the inclusion of at least one non-existent judicial precedent cited in the SCN. The petitioner highlighted that the citation was likely AI-generated, prompting concerns of mechanical drafting and lack of application of mind.

The High Court recognised the seriousness of this issue and directed that GST authorities must exercise extreme caution before relying on AI tools, ensuring that all case law is manually verified for authenticity. The Court observed that reliance on fictitious or hallucinated judgments undermines taxpayer confidence and compromises the integrity of adjudicatory processes.

However, despite taking note of the petitioner’s concerns, the Court declined to interfere with the SCN at this stage. It held that the adjudicating authority had indeed independently examined the materials received from the Income Tax Department, as demonstrated by the detailed references to stock variations, server-based accounting, and financial irregularities. The Court noted that the statutory scheme of GST mandates that a taxpayer must reply to the SCN and participate in adjudication before invoking judicial review. Since no final order had been passed and the petitioner had yet to file a comprehensive reply, the challenge was premature.

The Court further observed that the constitutional challenge to Section 75(2) of the CGST Act relating to deemed acceptance of tax liability when returns are not filed was also premature, as no proceedings invoking the provision had yet crystallised. The petitioner retains the right to raise all contentions, including objections regarding use of Income Tax evidence, while responding to the SCN.

The court observed that there can be no doubt that technological tools, such as Artificial Intelligence, may be used by Government Departments for analysis of evidence, preparation of summaries etc., subject to proper verification. However, there can also be no doubt that there cannot be any fake or non-existent judgments that can be cited by the Department

The Division Bench of Justice Prathiba M. Singh and Justice Shail Jain opined that several judicial precedents clearly demonstrate the risk of Artificial Intelligence hallucinating, by citing fake and non-existent judgments.

Under such circumstances, the GST Department as well as the ITDepartment must exercise utmost caution while citing judgements and must take full responsibility in case the same is cited or generated by using Artificial Intelligence software. Moreover, before issuing SCNs or finalising assessments, all judgements ought to be verified.

In conclusion, the Delhi High Court dismissed the writ petition, leaving all legal and factual issues open for adjudication by the proper authority. The petitioner has been directed to file a detailed reply to the SCN within the prescribed time. Simultaneously, the Court has issued a strong reminder to GST authorities to ensure due diligence, accuracy, and authenticity in the drafting of SCNs and to avoid unverified AI-generated citations.

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