Bombay HC Quashes Income Tax Assessment Over Use of AI-generated Case Laws (Puneet Batra vs. Union of India & Ors.)

Bombay HC Quashes Income Tax Assessment Over Use of AI-generated Case Laws (Puneet Batra vs. Union of India & Ors.)

Issue: Whether an income tax assessment order is legally sustainable if the Assessing Officer (AO), performing a quasi-judicial function, relies on non-existent, fictitious, or AI-generated judicial precedents without proper cross-verification, thereby committing a procedural lapse and violating the principles of natural justice.

Facts:

• The petitioner challenged an income tax assessment order for the Assessment Year (AY) 2023-24, where the AO assessed the total income at a significantly higher figure (₹27.91 crore) than the returned income (₹3.09 crore).
• The petitioner argued that the additions were based on incorrect facts and unsupported, non-existent judicial precedents cited by the AO.
• One dispute involved purchases (₹2.15 crore) which the AO treated as unverifiable, claiming the supplier did not respond to a notice under Section 133(6). The petitioner showed that the supplier had, in fact, replied with evidence, which the department ignored.
• The department conceded that the references to certain untraceable judgments in the order might have been an inadvertent error later corrected via rectification.

Decision:

The Bombay High Court (Justices B.P. Colabawalla and Amit S. Jamsandekar) quashed the assessment order (passed under Section 143(3) read with Section 144B) and the consequential demand and penalty notices. The court found that the judicial precedents cited were entirely fictitious and the officer’s reliance on such unverified material rendered the assessment order unsustainable.

The matter was remanded back to the Assessing Officer for a fresh assessment to be completed on its merits.

Key TakeDowns:

• Mandate for Verification: The Court issued a stern warning that tax authorities exercising quasi-judicial functions cannot blindly rely on system-generated results or AI outputs without proper cross-verification, cautioning against such mistakes creeping into official decisions.
• Procedural Flaw: Ignoring the taxpayer’s substantive evidence (like the supplier’s response) and the failure to issue a proper show cause notice detailing the basis for the assessed figures were deemed procedural lapses that rendered the entire order invalid.
• Notice for Precedents: In the fresh assessment, the Court directed that if the AO chooses to rely on any judicial precedents, the assessee must be given at least seven days’ notice to counter those references.