Tax Dept relied on AI to issue income tax notice:Bombay HC cancels flawed order, warns that AI results can’t substitute human judgment

In a significant ruling highlighting the dangers of unverified reliance on Artificial Intelligence (AI) in decision-making, the Bombay High Court has set aside a tax assessment order for violating principles of natural justice. The court cautioned authorities that AI-generated results cannot replace human judgment, especially in quasi-judicial matters. The ruling, delivered on October 29, 2025, by a Division Bench of Justice B.P. Colabawalla and Justice Amit S. Jamsandekar, involved an income tax dispute for the Assessment Year 2023–24. Case Background The petitioner challenged an assessment order passed under Section 143(3) read with Section 144B of the Income Tax Act, 1961. The order had assessed the petitioner’s total income at ₹27.91 crore, including two major additions: 1. Disallowance of purchases worth ₹2.15 crore from Dhanlaxmi Metal Industries on the ground that the supplier did not respond to a verification notice. In tax law, disallowing purchases refers to denying a claimed deduction for business expenses. 2. Addition of ₹22.66 crore towards alleged unsecured loans from directors, based on what the assessing officer claimed were judicial precedents. Advocates Dharan V. Gandhi and Aanchal Vyas represented the petitioner, while Akhileshwar Sharma appeared for the Revenue Dept. Assessee’s Arguments Counsel for the petitioner argued that the tax officer had ignored vital evidence. The supplier had in fact replied to the notice under Section 133(6), confirming the transactions and providing invoices, transport receipts, e-way bills, and GST returns – all before the order was passed. The officer’s claim that no reply was received was factually incorrect. The second addition – loans from directors – was based on three judicial decisions that do not exist, revealing a serious lapse in due diligence. High Court’s Observations The court found that the officer had failed to consider available evidence and had relied on non-existent judgments. On AI and Judicial Responsibility In a striking remark, the Bench observed: 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, such results are not to be blindly relied upon but should be cross-verified before use. The court emphasised that technology should aid decision-making, not replace human reasoning or fairness. Violation of Natural Justice The High Court ruled that the assessment order was passed in complete breach of natural justice. Evidence submitted by the taxpayer was ignored, and the additions were made without giving the petitioner a fair opportunity to respond. Although the taxpayer could have appealed to a higher tax authority, the court held that the gravity of procedural lapses warranted direct interference under Article 226 of the Constitution. Court’s Directions The court quashed: The matter was remanded to the Assessing Officer with the following directions: The Bench clarified it had made no comments on the merits of the additions. Reactions from legal experts Conclusion The Bombay High Court’s ruling serves as a landmark reminder that while AI can support administrative efficiency, human oversight and verification remain essential. Blind reliance on AI tools or unverified data, especially in judicial or regulatory decisions, can lead to grave miscarriages of justice.