AI Slip-Ups and Natural Justice: Bombay High Court Quashes Income Tax Assessment.


06 October 2025 Civil Writ Petition >> Civil & Consumer Law   |   Income Tax >> Tax Laws  

In a recent order of KMG Wires Private Limited V/S The National Faceless Assessment Centre, Delhi and Others, the Bombay High Court set aside an income tax assessment order for finding various procedural defects, including non-consideration of a vital reply by the assessee's supplier and reliance on non-existent judicial precedents sourced through artificial intelligence. The Court held such lapses to be a gross breach of the principles of natural justice.

The petitioner had challenged the assessment order passed under Section 143(3) read with Section 144B of the Income Tax Act, 1961 for the assessment year 2023–24. The Assessing Officer had determined the petitioner's total income at Rs. 27.91 crores against the returned income of Rs. 3.09 crores and issued a corresponding demand under Section 156.

 

 

The Court noted two major additions in the order:
  • Disallowance of purchases amounting to Rs. 2.15 crore from a supplier on the ground that the vendor did not respond to a notice under Section 133(6).
  • Addition of unsecured loans from the directors on a "peak balance" basis which also included opening balances.
On examination, it turned out that the supplier had responded to the notice by submitting the invoices, e-way bills, and other supporting documents. The department's affidavit conceded that this response was "not taken into consideration." The Court held that this oversight was fatal to the assessment.

Even more striking was the finding that three judicial decisions were cited by the Assessing Officer for inclusion of opening balances while computing peak credits, but those judgments did not exist at all. The Court observed that in an era of Artificial Intelligence, officers must not rely blindly on AI tool-generated results without human verification.

Holding the assessment order to have been passed in total non-compliance with the principles of natural justice, the court set aside the order and all further proceedings consequent thereto, including the demand notice and penalty notices. The matter was thus remanded to the Assessing Officer with directions to issue a fresh show cause notice, grant sufficient hearing, and pass a reasoned, speaking order by 31 December 2025. 


The judgment is a timely reminder that while technology can assist adjudication, it cannot substitute the due application of mind that is expected of tax authorities. Procedural fairness and reasoned decision-making remain the cornerstones of any assessment under Indian tax law.


Section 143, Income Tax Act - 1961  

Section 144B, Income Tax Act - 1961  

Income Tax Act, 1961