Bombay HC Quashes Tax Order: AI Can’t Replace Human Fairness

Bombay HC Quashes Tax Order:

TPL – HGIEPL Joint Venture vs. Revenue [W.P. (L) No. 15292 of 2022]

Background of the Case

The appellant, TPL-HGIEPL Joint Venture (a consortium of Tata Projects Ltd. and HG Infra Engineering Pvt. Ltd.) filed its return on 27 July 2022, declaring Rs. 6.15 crores as gross receipts below the Rs. 10 crore threshold requiring an audit. The CPC issued a defects notice contending that the appellant’s income exceeded Rs. 10 crores (including Rs. 16.82 crores from “write-back of liabilities”). The Appellant argued that “write-backs” were not operational receipts. Despite submissions, the CPC passed an AI-generated order invalidating the return without reasons, prompting the writ petition.

Arguments by the Appellant

The appellant contended that the impugned order was non-speaking and failed to address the Appellant’s rebuttal, violating the principle that “reasons are the heartbeat of justice”. The AI-driven CPC system lacked human intervention, rendering the order akin to the “inscrutable face of a sphinx”. They further stated that Rs. 16.82 crore write-back (from Note 19 of financial statements) was a non-operational adjustment, not “gross receipts” under Section 44AB. Further, the defects notice provided an opportunity to respond, and the AI’s conclusion was based on pre-programmed rules.

Respondent’s Response

The respondent, Revenue stated that the CPC’s automated system correctly flagged the return since the total declared income (Rs. 16.82 crores) exceeded the Rs. 10 crore threshold. Write-backs constitute “receipts” under Section 44AB, necessitating an audit. The Appellant should have exhausted the statutory remedy under Section 264 (revision by Commissioner) before approaching the High Court.

Court Findings and Decision

The Bombay High Court, held that the non-reasoned, AI-generated order violated principles of fairness. The Court emphasized that automation cannot override constitutional safeguards. Since the CPC’s AI lacks discretion to provide reasons, remanding the case would serve no purpose. Tax Authorities must upgrade AI systems to incorporate reasoned decisions. Taxpayers should first exhaust Section 264 remedies unless exceptional circumstances exist.

The High Court declined to rule on merits but allowed the Appellant to file a revision petition before the Commissioner. The Commissioner must decide within 3 months, ensuring a reasoned order after hearing the Appellant.