Revenue warned on AI-hallucinated citations; IT Act presumptions inapplicable to GST proceedings

Issue

AI Verification: Whether Revenue authorities can rely on case law generated by Artificial Intelligence without human verification, leading to the citation of fake precedents.
Cross-Statute Application: Whether statutory presumptions under the Income Tax Act (Sections 132, 292C) regarding seized documents can be automatically imported into GST proceedings to draw adverse inferences.

Facts

Source of Dispute: The petitioner challenged a Show Cause Notice (SCN) issued by GST authorities.
Income Tax Raid: The SCN was largely rooted in documents and assets seized during a search and seizure operation conducted by the Income Tax (IT) Department.
Fake Citations: During the proceedings, the High Court detected that the Revenue’s SCN cited judgments that were non-existent/fake. These were likely generated by AI tools (hallucinations) used by the officers for drafting.
Revenue’s Argument: The Revenue attempted to apply presumptions under the IT Act (that seized documents belong to the person and contents are true) directly to the GST proceedings to validate the demand.
Petitioner’s Defense: The petitioner argued the SCN was vague, relied on “hallucinated” law, and improperly used IT Act presumptions to bypass the evidentiary burden under GST.

Decision

AI Warning: The Court issued a stern caution to Revenue authorities regarding the use of AI. While AI can be used for analysis, relying on it without human verification is unacceptable. Citing “hallucinated” or non-existent judgments undermines the legal process.
No Automatic Presumption: The Court held that presumptions under Sections 132(4) and 292C of the IT Act are rebuttable and specific to the Income Tax statute. They cannot be imported into GST proceedings to draw automatic adverse inferences against the assessee.
Evidentiary Value: Documents seized during an IT search are not “evidence per se” under the CGST Act. However, they serve as valid intelligence or a “starting point” for GST authorities to conduct an independent investigation.
SCN Validity: Despite the flaws regarding citations, the Court refused to quash the SCN. It found that the authorities had not relied solely on IT presumptions but had conducted independent scrutiny (audit reports, statements, digital records).
Adequate Details: Applying the principles of Armour Security, the Court ruled the SCN disclosed sufficient details to enable the petitioner to file a reply. The petition was dismissed.

Key Takeaways

The “AI Hallucination” Doctrine: The use of AI in legal drafting is permitted for assistance but strictly prohibited for citation without verification. Citing fake precedents generated by AI can vitiate the credibility of a notice and invite judicial strictures.

Silos of Presumption: Presumptions are statute-specific. The “deemed truth” of documents seized under the Income Tax Act does not automatically translate to “deemed evasion” under the GST Act. GST authorities must independently prove the relevance of the seized material.

Intelligence vs. Evidence: Material shared by the Income Tax Department to GST authorities acts as a trigger for investigation, not the conclusion of it.