In a landmark judgment that underscores the perils of automating justice, the Bombay High Court has scrapped an income tax assessment order issued based on unverified Artificial Intelligence (AI) inputs, declaring that technology cannot replace human judgment in quasi-judicial functions. The court emphasized that while AI can be a tool, "blind reliance" on its outputs violates the principles of natural justice.
The ruling, delivered on October 29 by a Division Bench of Justice B.P. Colabawalla and Justice Amit S. Jamsandekar, cancels a tax demand of nearly ₹28 crore against a taxpayer.
The court found that the Assessing Officer had relied on non-existent legal precedents and ignored submitted evidence, actions seemingly facilitated by an over-dependence on automated systems.
A Flawed Assessment
The case centered on an assessment for the 2023-24 fiscal year. The Income Tax Department made two significant additions to the petitioner’s income: a disallowance of purchases worth ₹2.15 crore from a supplier and an addition of ₹22.66 crore for alleged unsecured loans.
The petitioner’s counsel, Advocates Dharan V. Gandhi and Aanchal Vyas, presented a robust defense. They demonstrated that the supplier, Dhanlaxmi Metal Industries, had indeed responded to the tax department’s verification notice, providing invoices, transport receipts, and GST returns. The officer’s claim that no reply was received was factually incorrect.
More strikingly, the department’s second addition was based on three judicial decisions that, upon the court’s scrutiny, were found to be non-existent. This revealed a critical failure in due diligence.
The Court’s Stern Warning on AI
In its most consequential observations, the Bench directly addressed the growing trend of AI reliance in governance. “In this era of Artificial Intelligence (AI), one tends to place much reliance on the results thrown open by the system,” the court noted. “However, when one is exercising quasi-judicial functions, such results are not to be blindly relied upon but should be cross-verified before use.”
The judgment clarified that AI should serve as an aid to decision-making, not a replacement for human reasoning, analysis, and fairness. The court ruled that the entire assessment was passed in “complete breach of natural justice,” as the taxpayer’s evidence was ignored and additions were made without a proper hearing.
Remand and Fresh Directives
Exercising its powers under Article 226 of the Constitution, the court set aside the assessment order, the ensuing demand notice, and a penalty notice. It has sent the case back to the Assessing Officer with strict directives to ensure a fair process.
The officer must now issue a fresh, detailed show-cause notice, grant a reasonable oral hearing, and disclose all judicial decisions to be relied upon at least seven days in advance. A new, reasoned order must be passed by December 31, 2025, which addresses every argument made by the taxpayer. The court clarified it expressed no opinion on the merits of the tax additions itself.
Legal experts hail the ruling as a critical check on the unexamined adoption of technology in law. “This judgment is a timely reminder that efficiency cannot come at the cost of justice,” said a Mumbai-based tax lawyer who wished to remain anonymous. “It establishes that the human element of verification and application of mind is non-negotiable, especially when state power affects citizen rights.”
The Bombay High Court’s decision sets a vital precedent for all regulatory and judicial authorities, mandating that the convenience of AI must be tempered with human oversight to prevent grave miscarriages of justice.
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