Facts of the Case:
A search was conducted by the Income Tax Department (ITD) on the premises of the petitioner (M/s J.M. Jain). During the search, the ITD seized various documents, digital material and recorded statements under Section 132(4) of the Income-tax Act, 1961. These materials were subsequently shared with the GST Department, which independently scrutinized them and issued a Show Cause Notice (SCN) under Section 74 of the CGST Act alleging large-scale GST evasion, suppression of turnover, maintenance of unaccounted accounts through a secret “JSK Server,” and other irregularities.
The petitioner challenged the SCN before the Delhi High Court on multiple grounds, mainly contending that Presumptions under Sections 132(4A) and 292C of the IT Act cannot be used under GST law, and therefore, the SCN is illegal. Further, the SCN relies on certain judicial precedents that are either non-existent or incorrectly cited, demonstrating reliance on flawed Artificial Intelligence (AI) tools. Therefore, the SCN is vague, lacks evidence, and is issued without jurisdiction. Section 75(2) of the CGST Act is unconstitutional.
The GST Department argued that they did not rely on the presumptions under the IT Act, but independently analysed the material. The SCN disclosed all relied-upon documents (RUDs) and material to the petitioner. Even if certain case citations were incorrect due to AI hallucination, the SCN itself contained sufficient factual basis.
Issue:
Whether presumptions under Sections 132(4A) and 292C of the Income-tax Act apply to proceedings under the CGST Act. Whether documents and statements seized by the Income Tax Department can constitute the basis for proceedings under the GST law. Whether the Show Cause Notice issued under Section 74 of the CGST Act was vague or unsupported by evidence, considering that certain case law citations in the SCN were incorrect or non-existent due to AI-generated errors
Held that
The Court held that presumptions under Sections 132(4A) and 292C of the Income-tax Act are rebuttable and apply only to proceedings under the IT Act, and only for provisional assessment purposes. These presumptions cannot be imported into GST proceedings. However, documents seized under the IT Act can be used by the GST authorities for independent investigation. There is no legal bar on the GST Department examining or relying on such material.
Further, The Court noted that the SCN explicitly reflected independent analysis by the GST authorities. They did not merely adopt the findings of the IT Department but reviewed the documents and statements before issuing the SCN. Thus, the SCN was not vitiated by the nature of the material.
Also, The Court made strong observations that Two of the case law citations in the SCN were incorrect or non-existent. AI tools can generate hallucinated or fake judgments, and officials must exercise caution. Authorities must verify all citations before reliance, particularly when AI tools are used.
However, the Court held that the SCN contained sufficient factual material and evidence independent of the flawed citations. The petitioner had access to all RUDs. Therefore, the SCN was not vague nor invalid merely because certain judicial precedents were incorrectly cited.
Case Name: M/s. J.M. Jain Prop Sh Jeetmal Choraria Versus Union of India Through Its Secretary & Ors. dated 18.11.2025
To read the complete judgement 2025 Taxo.online 3115
