Legal Updates

Case Note

KMG Wires Private Limited v. National Faceless Assessment Centre & Ors.

Bombay High Court, Ordinary Original Civil Jurisdiction
Writ Petition (L) No. 24366 of 2025
Coram: B.P. Colabawalla and Amit S. Jamsandekar, JJ.
Date of Decision: 6 October 2025

Headnote

Income Tax – Faceless Assessment – Principles of Natural Justice – Artificial Intelligence – Verification of AI-Sourced Legal References – Section 143(3) r/w Section 144B, Income-tax Act, 1961 – Breach of Natural Justice – Non-consideration of material evidence and reliance on non-existent judicial precedents – Quashing of Assessment Order and Remand.

Where the National Faceless Assessment Centre (NFAC) passed an assessment order without considering the supplier’s reply to a notice under Section 133(6) and relied upon non-existent case law, the Bombay High Court held that the order was in gross violation of the principles of natural justice. The Court observed that quasi-judicial authorities must not blindly rely on AI-generated or system-sourced results without human verification. The impugned assessment order, demand notice, and penalty proceedings were quashed and the matter was remanded for de novo assessment after due opportunity of hearing.

Facts

• The Petitioner, KMG Wires Private Limited, challenged an assessment order dated 27 March 2025 passed under Section 143(3) read with Section 144B of the Income-tax Act, 1961, for A.Y. 2023–24.

• The NFAC assessed the Petitioner’s income at ₹27.91 crore as against the returned income of ₹3.09 crore.

• Two major additions were made:

  1. Disallowance of purchases worth ₹2.15 crore from Dhanlaxmi Metal Industries on the ground that the supplier did not respond to a notice under Section 133(6).

  2. Addition of unsecured loans from directors as unexplained cash credits, based on a computed “peak balance” of ₹22.66 crore.

• The Petitioner contended that:

  • The supplier had, in fact, replied to the Section 133(6) notice on 8 March 2025, enclosing invoices, e-way bills, and GST returns, but this reply was ignored.

  • The “peak balance” addition included opening balances and relied on three judicial decisions that did not exist.

  • No show cause notice or computation details were shared prior to the addition.

• The Department admitted in its affidavit that the supplier’s response “appears not to have been considered” and that the cited decisions could not be traced, attributing it to an error subsequently “rectified.”

Issues

1. Whether the assessment order suffered from a breach of the principles of natural justice.

2. Whether the Court should exercise its writ jurisdiction despite the availability of an alternate appellate remedy.

3. Whether reliance on AI-generated or unverified legal references invalidates the assessment proceedings.

Held

The Bombay High Court allowed the writ petition, quashing the assessment order, demand notice, and penalty notice, and remanded the matter to the Assessing Officer for fresh consideration.

Reasoning

1. Non-consideration of Material Evidence:
   The Court noted that the supplier’s detailed response to the Section 133(6) notice—filed before the order—was not considered. This omission amounted to a serious procedural lapse.

2. Reliance on Non-Existent Judgments:
   The Assessing Officer relied upon three judicial decisions that were non-existent. The Court held that this illustrated a lack of judicial diligence and warned that officers cannot blindly rely on “results thrown open by the system” or AI tools.

   “When one is exercising quasi-judicial functions, such results are not to be blindly relied upon, but should be duly cross-verified before using them,” the Bench observed.

3. Violation of Natural Justice:
   No show cause notice was issued prior to adding the peak balance; nor was any working or basis provided. The taxpayer had no opportunity to rebut the findings.

4. Exercise of Writ Jurisdiction:
   Given the gross violation of natural justice and the acknowledged errors in the assessment, the Court held that this was a fit case for interference under Article 226 of the Constitution, notwithstanding the availability of an appellate remedy.

Operative Directions

• The assessment order, demand notice under Section 156, and penalty show cause notice under Section 274 r/w Section 271AAC were set aside.

• The matter was remanded to the Assessing Officer to:

  • Issue a fresh show cause notice specifying proposed additions.

  • Grant a personal hearing and adequate opportunity to respond.

  • Provide advance notice of at least seven days before relying on any judicial precedents.

  • Pass a speaking order by 31 December 2025.

• The Court clarified that it had made no findings on the merits of the case.

Significance

This judgment is among the first in India to expressly caution tax authorities against unverified reliance on AI-generated legal content. It underscores that technological tools cannot substitute human judicial application of mind. The ruling reaffirms that even under the Faceless Assessment Scheme, natural justice, transparency, and accountability remain paramount.

Endnotes – Related Case Law

1. GKN Driveshafts (India) Ltd. v. ITO, (2003) 259 ITR 19 (SC) – Duty to furnish reasons and provide opportunity of hearing in assessment proceedings.

2. CIT v. Pawan Kumar Agarwal (HUF), (2019) 417 ITR 421 (Bom) – Non-consideration of assessee’s explanation amounts to violation of natural justice.

3. Radha Krishan Industries v. State of Himachal Pradesh, (2021) 6 SCC 771 – Writ jurisdiction maintainable in cases of breach of fundamental procedural safeguards.

4. Sahara India (Firm) v. CIT, (2008) 300 ITR 403 (SC) – “Natural justice” is an integral component of fair procedure in quasi-judicial functions.

5. Godrej & Boyce Mfg. Co. Ltd. v. NFAC, 2023 SCC OnLine Bom 1049 – Faceless assessment must ensure adequate hearing and reasoned order; mechanical approach impermissible.