Bombay High Court pulls up tax officer for citing fake, AI-generated case laws

The Bombay High Court recently rebuked the Assessing Officer of the National Faceless Assessment Centre (NFAC) for citing AI-generated, non-existent judicial decisions while raising a ₹27.91-crore tax demand against a company [KMG Wires Private Limited v. AO, NFAC].A Division Bench of Justices BP Colabawalla and Amit Jamsandekar observed that the officer relied on three case laws that “do not exist at all,” underscoring how the unverified use of Artificial Intelligence in quasi-judicial proceedings can distort outcomes.“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,” the Court cautioned..KMG Wires had challenged the assessment order dated March 27, 2025, for the Assessment Year 2023–24, whereby its total income was assessed at ₹27.91 crore, as against ₹3.09 crore originally declared. The company also assailed the consequential demand notice under Section 156 and show-cause notice for penalty under Sections 274 read with 271AAC of the Act.The company replied and confirmed transactions under question by submitting invoices, e-way bills, GST returns and transport receipts running into 100 pages. Despite this, the AO recorded that no reply was received.Counsel for the company also pointed out that the officer cited three judicial precedents that do not exist to justify including opening balances under Section 68 of the Act..Counsel for the NFAC fairly admitted 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 found and were an “error” subsequently sought to be rectified. However, he challenged the maintainability of the writ petition..The Bench rejected the Revenue’s objection on maintainability, holding that the case involved a fundamental violation of natural justice. It noted that the department had ignored the supplier’s detailed response and relied on “non-existent” judgments to justify an addition of ₹22.66 crore.The Court emphasised that quasi-judicial authorities cannot depend blindly on AI-assisted searches or automated results, especially when adjudicating taxpayers’ rights.“Mistakes like the present one creep in when such results are not duly cross-verified before use,” the judges said, directing officers to exercise due caution when referring to precedents..The Court remanded the matter to the Assessing Officer to begin afresh, issue a clear show-cause notice and provide the company a personal hearing before December 31, 2025. Any judicial decisions proposed to be relied upon must be notified at least seven days in advance, and the final order must be a speaking one addressing all submissions..Advocates Dharan Gandhi and Aanchal Vyas appeared for the company.Advocate Akhileshwar Sharma represented the NFAC..[Read Judgment]