The Bombay High Court has sternly reprimanded a tax officer of the National Faceless Assessment Centre (NFAC) for relying on non-existent, AI-generated judicial decisions while issuing a ₹27.91 crore tax demand against KMG Wires Private Limited.

A Division Bench comprising Justice B P Colabawalla and Justice Amit Jamsandekar observed that the officer had referred to three fabricated case laws to justify the addition of income under Section 68 of the Income Tax Act.

The Court noted that such reliance on unverified AI-generated material was a gross violation of judicial discipline and principles of natural justice.

The Bench remarked that in the modern era of Artificial Intelligence, officials often tend to depend heavily on automated legal searches. However, while performing quasi-judicial functions, authorities cannot blindly trust AI outputs without independent verification.

“Results thrown up by the system are not to be blindly relied upon,”

The Bench cautioned.

“Such errors creep in when judicial officers fail to cross-verify before use.”

KMG Wires had challenged the assessment order dated March 27, 2025, for AY 2023–24, which enhanced its total income from ₹3.09 crore to ₹27.91 crore. Despite the company submitting invoices, e-way bills, GST returns, and transportation receipts, spanning over 100 pages, the AO recorded that “no reply was received.”

During arguments, counsel for the company, Advocates Dharan Gandhi and Aanchal Vyas, pointed out that the officer cited judgments that do not exist in any law report or database.

The NFAC’s counsel, Advocate Akhileshwar Sharma, admitted that the supplier’s reply “was not considered” and that the judicial precedents “could not be traced.”

The Bench rejected the Revenue’s objection regarding maintainability of the writ, stating that the case involved a fundamental breach of natural justice.

The Court found that the department not only ignored the taxpayer’s submissions but also relied on “fictitious” authorities to justify additions totaling ₹22.66 crore.

The Court directed the Assessing Officer to conduct the proceedings afresh. A new show-cause notice must be issued and a personal hearing granted to the company before December 31, 2025.

Further, any judicial precedents relied upon must be disclosed at least seven days in advance of the hearing, and the final order must be a speaking order addressing all contentions.

The Bench also issued a broader caution: tax officers must verify every AI-generated citation before using it in assessment or adjudication to preserve the sanctity of quasi-judicial proceedings and taxpayer rights.

Parties and Bench Details

• Case Title: KMG Wires Private Limited v. Assessing Officer, National Faceless Assessment Centre (NFAC)
• Bench: Justice B P Colabawalla and Justice Amit Jamsandekar
• Advocates for Petitioner: Dharan Gandhi and Aanchal Vyas
• Advocate for Respondent (NFAC): Akhileshwar Sharma
• Assessment Year: 2023–24
• Order Date: March 27, 2025
• Court Direction Deadline: December 31, 2025

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