GST Show Cause Notice Based On Income Tax Intelligence Valid: Delhi High Court Upholds SCN, Cautions Department Against AI-Generated Fake Citations
Deekshitha Sharmile
The High Court of Delhi Division Bench of Justice Prathiba M. Singh and Justice Shail Jain, in a writ petition, has upheld a show-cause notice issued by the GST Department on the basis of intelligence from the Income Tax Department and declined to interfere at the notice stage, calling the challenge premature. The Court noted that material from a search, including a clandestine server with a parallel accounting system, dual books, underpriced invoices, statutory audit records and digital devices such as WhatsApp communications, could be examined by GST authorities in relation to alleged GST evasion exceeding Rs 88 crore. The petitioner, engaged in trading garments and commission services, has been directed to file a reply, seek personal hearing and raise objections before the adjudicating authority.
The petitioner, a proprietorship firm engaged in trading readymade garments and acting as a commission agent, was subjected to an income tax search on 28 May 2022 based on intelligence received by the Income Tax Department. During the search, a secret “JSK” server was allegedly found at the firm’s registered premises, containing records of unaccounted transactions and parallel books of account. The Income Tax Department proceeded under the Income Tax Act, 1961, and shared its findings, relied upon documents (RUDs), special audit reports and recorded statements with the Goods and Services Tax Department for scrutiny.
Relying on this material, the GST Department issued a show cause notice proposing demands and penalties against the petitioner and connected persons under the Central Goods and Services Tax Act, 2017. The petitioner challenged the notice and the constitutional validity of Section 75(2) CGST Act, and contended that presumptions and statements under Sections 132(4) and 292C of the Income Tax Act could operate only within income tax proceedings and not form the basis of GST action. It was also argued that the SCN was vague, lacked independent GST evidence, and that certain case law citations in the SCN were allegedly Artificial Intelligence–generated or non-existent.
The GST Department submitted that it independently scrutinised the IT material, including special audit reports for FY 2019-20 to 2021-22, digital evidence (servers, WhatsApp chats), employee statements, and parallel accounts on the JSK server, to compute alleged GST evasion and frame the SCN under Section 74 CGST Act. The judgment sets out the reproduced provisions of Sections 132(4), 132(4A) and 292C of the Income Tax Act and discusses their rebuttable presumptions, as well as the use of material under Section 144 CGST Act. The Court also records that one cited precedent in the SCN was non-existent and another was miscited, cautions tax authorities about reliance on Artificial Intelligence tools for case law, and emphasises the need for human verification of AI-assisted outputs.
On the use of Artificial Intelligence and the problem of fake citations in tax proceedings, the Court observed: “There can be no doubt that technological tools, such as Artificial Intelligence, may be used by Government Departments for analysis of evidence, preparation of summaries etc., subject to proper verification. However, there can also be no doubt that there cannot be any fake or non-existent judgments that can be cited by the Department.”
After calling for the physical books to verify the judgments cited in the SCN, the Court further stated:
“Thus, there are discrepancies in the judgments which are cited by the GST Department. The GST Department and even other Departments, including the IT Department ought to be careful while citing judicial precedents in this manner, specially if the same has been produced or accessed through Artificial Intelligence software, as there is a clear possibility of the citations themselves being fake, as is clear from one of the judgments, which is cited in the present SCN.”
Summarising the broader risks of AI-generated material, the Court recorded: “The above-mentioned judicial precedents clearly demonstrate the risk of Artificial Intelligence hallucinating, by citing fake and non-existent judgements. Under such circumstances, the GST Department as well as the IT Department must exercise utmost caution while citing judgements and must take full responsibility in case the same is cited or generated by using Artificial Intelligence softwares. Moreover, before issuing SCNs or finalising assessments, all judgements ought to be verified.”
On the use of income-tax search material in GST proceedings, the Court stated: “In the present case, the seized documents and material passed on by the IT Department to the GST Department were scrutinized by the GST Department, prima facie, on its own. This is clear from a perusal of the SCN itself. The GST department did not simply take the findings of the IT department. Before issuing the SCN, the GST department analysed the documents, material, statements etc., and came to its own conclusions. At this stage the GST department has merely issued a SCN, which can be replied to and rebutted by the Petitioner. All grounds and legal objections would be available to the Petitioner.”
On the adequacy and clarity of the show cause notice, the Court recorded: “A perusal of the SCN would show that, at this stage, it cannot be said that the SCN is bereft of material particulars or that it is vague, in fact, all the documents, statements, evidence, etc. which was seized by the IT Department, and passed onto the GST Department is well within the knowledge of the Petitioner. Moreover, the RUDs have been supplied to the Petitioner. Thus, the SCN cannot be held to be baseless or vague.”
On writ interference at the show cause stage, the Court observed: “Under these circumstances, this Court is of the opinion that the challenge to the SCN is completely pre-mature. The Petitioner ought to reply to the SCN, and participate in the proceedings. The Petitioner ought to be given a chance of personal hearing, and the SCN is directed to be decided in accordance with law. The Petitioner is at liberty to take all objections in respect of the material or statements relied upon in the SCN, in accordance with law.”
The Court directed: “The GST Department has independently examined the material received from the Income Tax Department and found sufficient basis to proceed. The challenge to the show cause notice and to Section 75(2) of the CGST Act is rejected. The petition is dismissed.”
Advocates Representing the Parties
For the Petitioners: Mr. J.K. Mittal, Ms. Vandana Mittal, Mr. Mukesh Choudhary, Mr. Lalitendra & Mr. Mohit, Advs.
For the Respondents: Mr. Brijesh Yadav, Adv.; Mr. Anurag Ojha, SSC with Mr. Dipak Raj, Mr. Avinash Shukla & Mr. Priyatam Bhardwaj, Advs.; Mr. Shagan Vaswani, Adv.
Case Title: MS J M Jain Prop Sh Jeetmal Choraria vs Union of India Through Its Secretary & Ors.
Neutral Citation: 2025:DHC:10505-DB
Case Number: W.P.(C) 16754/2025 & CM Appl. 68768/2025
Bench: Justice Prathiba M. Singh, Justice Shail Jain
