In a significant ruling, the Bombay High Court has set aside a ₹27.9-crore income tax assessment order passed against KMG Wires Private Limited, holding that the faceless assessment had violated basic principles of natural justice. The court also expressed concern over the Income Tax Department’s apparent reliance on non-existent case law generated by artificial intelligence (AI) tools.
The division bench of Justice B.P. Colabawalla and Justice Amit S. Jamsandekar delivered the order on October 6, 2025, in KMG Wires Pvt. Ltd. v. National Faceless Assessment Centre, Delhi & Ors.
Background
KMG Wires Pvt. Ltd., a Mumbai-based firm, had challenged the assessment order dated March 27, 2025, issued under Section 143(3) read with Section 144B of the Income Tax Act, 1961, for Assessment Year 2023–24.
The company’s returned income of ₹3.09 crore was drastically reassessed at ₹27.91 crore, prompting a writ petition before the High Court.
Two major additions had been made in the assessment:
- Disallowance of purchases worth ₹2.15 crore from Dhanlaxmi Metal Industries on the ground that the supplier failed to respond to a notice.
- Addition of ₹22.66 crore as "peak balance" of unsecured loans from directors.
KMG Wires argued that these additions were made without notice, without explanation, and in disregard of evidence submitted to the department.
Court's Observations
The bench took a sharp view of how the faceless assessment was conducted, terming it a clear violation of natural justice.
On the first issue, the judges noted that the supplier, Dhanlaxmi Metal Industries, had indeed replied to the department’s notice under Section 133(6) on March 8, 2025, providing invoices, e-way bills, GST returns, and other documents.
"Such a crucial piece of evidence, though available, was not considered," the court remarked, calling the oversight "a serious lapse."
When questioned, the Revenue’s counsel admitted that the supplier’s response "appears to have not been taken into consideration."
The court also highlighted a troubling instance of reliance on non-existent judgments in the assessment order.
"In this era of Artificial Intelligence, one tends to place much reliance on the results thrown open by the system," the bench observed. "However, when one is exercising quasi-judicial functions, such results are not to be blindly relied upon."
The judges noted that the so-called judgments cited by the assessing officer did not exist at all, suggesting that they may have been erroneously produced through AI-based tools.
Furthermore, the bench found that KMG Wires was never issued a show-cause notice before adding the alleged peak balances, nor was any working or calculation shared. “Even this grievance of the petitioner is justified,” the court stated.
Decision
Given the "peculiar facts" and the "gross procedural irregularities," the High Court held that it was unnecessary to direct the petitioner to pursue alternate remedies.
"We find that this is a fit case to interfere under Article 226 of the Constitution," the bench said, quashing the entire assessment order, the notice of demand under Section 156, and the penalty show-cause notice under Section 271AAC - all dated March 27, 2025.
The court remanded the matter back to the assessing officer, directing that:
- A fresh show-cause notice must be issued clearly stating the proposed additions.
- The assessee must be given reasonable opportunity to respond, including a personal hearing.
- If the department relies on any judicial precedents, copies must be shared at least seven days in advance.
- The final order must be a speaking order, addressing all contentions.
The reassessment has to be completed on or before December 31, 2025.
Concluding, the court clarified that it had not commented on the merits of the tax additions themselves.
"All rights and contentions of the parties are kept open," the bench said, disposing of the writ petition with no order as to costs.
Case Title: KMG Wires Private Limited vs. The National Faceless Assessment Centre, Delhi & Others
Case Type and Number: Writ Petition (L) No. 24366 of 2025
Date of Judgment: October 6, 2025
Counsel for Petitioner: Mr. Dharan V. Gandhi, Advocate, assisted by Ms. Aanchal Vyas
Counsel for Respondents: Mr. Akhileshwar Sharma, Advocate