In a writ petition, the Delhi High Court has upheld the Show Cause Notice (SCN) issued by the GST Department, which was based on an intelligence, by the Income Tax Department.
The Division Bench, Justice Prathiba M. Singh and Justice Shail Jain ruled the challenge to the SCN as ‘premature’ and noted the existence of a clandestine server that showed a parallel accounting system and modus operandi of the applicant.
The High Court reflected upon GST evasion of exceeding Rs. 88 crores through suppressing income, dual books, underpriced invoices, statutory audit records, digital devices, including WhatsApp communication, as mentioned in the Show Cause.
The High Court cautioned the Department on the use of Artificial Intelligence after discovering discrepancies in the rulings in the SCN. The HC, in order to verify the existence of the three judgments mentioned in the SCN, called for the physical books from the library and found a mismatch in citation.
“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……Thus, there are discrepancies in the judgments which are cited by the GST Department. The GST Department and even other Departments, including the IT Departmen,t 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.”
The applicant was a trader in readymade garments and was working as a commission agent. The case originated from a show-cause notice (SCN) issued as per a search conducted by the Income Tax Department, wherein a secret server was discovered that allegedly had two sets of records, including parallel books of accounts with unaccounted transactions. It led to the income tax assessments for the concealment of taxable income across FY 2019‑20, 2020‑21, and 2021‑22.
While the income tax department had provided the details of the search and their findings of the investigation, including the relied upon documents, special audit reports, statements made by various persons, etc., to the Goods and Services Tax Department for scrutiny. The GST department on May 28, 2022 has issued an SCN creating a demand on the applicant, its family members, accountants, etc.
The SCN has been contested by the applicant, which has been issued via the Joint Director, Directorate General of GST Intelligence (DGGI) on twin grounds of constitutional validity of Section 75 of the CGST Act, 2017, and the validity, legality of SCN.
The HC on the SCN validity referred to the norms specified by the Apex court in the case of Armour Security to state that SCN contained documents, statements, and Relied Upon Documents, all of which were scrutinised by the GST Department on its own.
Therefore, it was stated that SCN could not be held to be groundless or vague while specifying that to establish GST liability, documents and records were scrutinised by the GST Department, prima facie, on its own.
It even referred to distinct judicial precedents on ‘presumption’ which are rebuttable but established on material recovered at the time of the Income Tax investigations, can form the basis for assessment.
“61. Thus, while the prima facie presumption as existing under the IT Act would not apply under the CGST Act, the assets and material seized could form the basis of an independent investigation by the GST Department.”
The High Court addressed whether information obtained through search and seizure by the Income Tax Department can act as the basis for a Show Cause Notice (SCN) under the Goods and Services Tax (GST) law.
The ruling examined the connection between the Income Tax Act and the GST Act, particularly focusing on Section 132 (4) and (4A) of the Income Tax Act, which is related to search and seizure operations, as well as Section 292C of the Income Tax Act.
The High Court addressed a case involving large-scale GST evasion, stating that materials collected during searches conducted under the Income Tax Act “cannot lead to any presumptions nor can they directly serve as evidence under the CGST Act.”
The Court, while documents and materials seized in Income Tax search proceedings can be used for provisional assessments or to form presumptions, they cannot serve as the basis for final assessments under GST.
Additionally, the High Court noted that statements that may be considered evidence in proceedings under the Income Tax Act can serve as a starting point for investigations under the CGST Act, even though they do not directly form evidence in those proceedings.
Read Also: Debate on GST Notices: AI-Generated vs Human Intelligence
The HC concerning the AI-generated rulings mentioned in the SCN relied on the Bombay HC rationale in the case of KMG Wires Private Limited and IP Infringement dicta in the case of Christian Louboutin SAS.
Thereafter, the HC found that this is the second round of litigation and directed the applicant to submit the response to the SCN and disposed of the writ petition.
| Case Title | Ms J M Jain Prop Sh Jeetmal Choraria vs. Union of India |
| Case No. | W.P.(C) 16754/2025 & CM APPL. 68768/2025 |
| For Petitioner | Mr J.K. Mittal, Ms Vandana Mittal, Mr Mukesh Choudhary, Mr Lalitendra |
| For Respondent | Mr Brijesh Yadav, Mr Anurag Ojha, Mr Dipak Raj, Mr Avinash Shukla & Mr Priyatam Bhardwaj, Mr Shagan Vaswani |
| Delhi High Court | Read Order |
