Delhi High Court Upholds GST Notice Based On Income Tax Intelligence; Cautions Dept Against AI-Generated Fake Citations In SCN

The Division Bench, comprising Justice Prathiba M. Singh and Justice Shail Jain held the challenge to the SCN as 'premature' and noted existence of a clandestine server that revealed a parallel accounting system and modus operandi of the Petitioner. The High Court deliberated upon GST evasion of more than Rs. 88 crores through suppressing income, dual books, underpriced invoices, statutory audit records, digital devices including WhatsApp communication as set out in the Show Cause.

However, on discrepancies found in the judgments cited in Show Cause Notice the High Court cautioned the Department on use of Artificial Intelligence. The High Court called for physical books from the library to verify the existence of three judgments cited in the SCN and found 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 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.”

Petitioner was a trader in readymade garments and was working as a commission agent. The case stemmed from a Show Cause Notice issued pursuant to a search conducted by the Income Tax Department wherein a secret server was unearthed that allegedly had two sets of records containing parallel books of accounts with unaccounted transactions. This led to Income tax assessments regarding concealment of taxable income across FY 2019‑20, 2020‑21, and 2021‑22. Parallelly, the Income Tax Department had given the information relating to search and their findings of the investigation along with the Relied Upon Documents, special audit reports, statements made by various persons etc. to the Goods and Services Tax Department for scrutiny. On May 28, 2022, the GST Department issued a Show Cause Notice (SCN) creating demand on the Petitioner, its family members, accountants etc.

Petitioner challenged the Show Cause Notice issued by Joint Director, Directorate General of GST Intelligence (DGGI) on twin grounds of constitutional validity of Section 75 of the CGST Act, 2017 and validity, legality of SCN.

On validity of SCN, the High Court referred to principles laid down by Supreme Court in case of Armour Security to state that SCN contained documents, statements, Relied Upon Documents, all of which were scrutinized by the GST Department on its own. Thus, it was observed that SCN cannot be held to be baseless or vague while clarifying that to ascertain GST liability documents and records were scrutinized by the GST Department, prima facie, on its own. It also referred to various judicial precedents on 'presumption' which are rebuttable but founded on material recovered during Income Tax investigations can form 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.”

On whether search and seizure information obtained during an Income Tax Department proceedings can form basis of an SCN under GST, the High Court ruled on interplay between Income Tax Act and GST Act. Particularly Section 132 (4) and (4A) of the Income Tax Act relating to 'Search and Seizure', Section 292C of the Income Tax Act .

The High Court from the SCN indicating large scale GST evasion inferred that material collected during search under the Income Tax Act “cannot lead to any presumptions nor can they straightaway constitute evidence under the CGST Act”. The High Court clarified that although documents, material seized in an Income Tax search proceedings could be used to make provisional assessments or presumptions, such material cannot become foundation for framing final assessments under GST. Further, the High Court also observed that statements could be as evidence in proceedings under the Income Tax Act, could be starting point for investigation under the CGST Act, though they may not directly constitute evidence for proceedings under the CGST Act.

On the AI‑generated judgments cited in the SCN, the High Court relied on Bombay HC rationale in case of KMG Wires Private Limited and IP Infringement dicta in case of Christian Louboutin SAS.

Accordingly, the High Court finding that this is the second round of litigation directed the Petitioner to file reply to the SCN and disposed off the writ petition.

Case Name: J M Jain Prop SH Jeetmal Choraria vs. UOI

Citation: 2025 LiveLaw (Del) 1613

Case No.: W.P.(C) 16754/2025

Date of Decision: 18.11.2025

For Petitioner: Advocates J.K. Mittal, Vandana Mittal, Mukesh Choudhary

For Respondent: SSC Anurag Ojha with Advocates Brijesh Yadav, Dipak Raj, Avinash Shukla, Priyatam Bhardwaj, Shagan Vaswani