2025 (3) TMI 1441 - HC - Income Tax

AI-generated order by the CPC or the computer portal - Return was declared invalid for non-filing a compulsory audit report u/s 44AB - Petitioner responded to the defects notice by pointing out that it had claimed gross receipts or income under the head of Profits and Gains of Business or Profession amounting to Rs.6.15 crores only which was much less than the threshold limit of Rs.10 crores. Hence the Petitioner submitted that there was no requirement to obtain and e-file a tax audit report. HELD THAT - The AI-generated impugned order contains no reasons in this case. The argument that the software is not programmed to record elaborate reasoning or that the previous system was too cumbersome may not be the answer. The new system certainly offers numerous advantages and is efficient. However it must evolve to include what was essential in the earlier system. For example while no detailed judgment is expected when declaring a return invalid the order must provide minimal reasoning so that the affected party can take corrective action or effectively challenge the reasoning. Such minimum compliance with the principle of natural justice cannot be dispensed with on the grounds of expediency or due to the machine s limitations. Nothing in the impugned order explains why the cause presented by the Petitioner was deemed unacceptable. There is no indication that the cause shown by the Petitioner was given due consideration despite the order s format stating that a response was considered. The impugned order indeed resembles the inscrutable face of a sphinx. Therefore based upon the violation of principles of natural justice or because the impugned order is a nonspeaking order we could have set aside the order and remanded the matter for fresh consideration. However our apprehension is that the CPC or the portal which is programmed in a particular manner may be able to do no better even upon remand. Therefore a remand may not solve the problem. However where the Petitioner has an alternate and effective remedy in the form of a revision under Section 264 of the IT Act we see no reason to entertain this Petition or investigate issues of compliance with the requirements of Section 44AB in the specific facts of each case. Such investigation would as noted earlier involve scrutiny of the returns interpretation of the documents accompanying the returns and not merely interpreting the provisions of Section 44AB. There would also be the question of interpreting the guidance note and other matters. In the present case we are concerned with the alleged non-compliance with the requirements of Section 44AB. However returns can be declared invalid under Section 139 (9) of the IT Act for various reasons. In each such case it would not be possible to exercise extraordinary jurisdiction and undertake such an elaborate exercise bypassing the alternate and statutory remedy under Section 264 of the IT Act. If such a remedy is resorted to an official of the Commissioner of Income Tax rank would examine whether declaring the return as invalid was legal and proper. The factual matters which invariably arise could also be effectively investigated by the Commissioner exercising revisional jurisdiction in the first instance. Petitioner is best placed to avail of the alternate remedy under Section 264 of the IT Act. At the same time we believe that the Respondents must create a system in which their CPC or portal demonstrates thoughtful consideration and the essence of the orders is not like the inscrutable face of a sphinx. Resorting to Artificial Intelligence (AI) is certainly welcome. However when the application of thoughtful consideration through actual intelligence is required it cannot be cast aside simply because AI and automation represent the expedient future. The principles of natural justice and fairness are too valuable to be sacrificed at the altar of AI and automation expediency. We decline to entertain this Petition but relegate the Petitioner to avail of the alternate remedy under Section 264 of the IT Act.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

Whether the impugned AI-generated order declaring the Petitioner's tax return as invalid for non-compliance with Section 44AB of the Income Tax Act, 1961, violates the principles of natural justice due to lack of reasoning.
Whether the Petitioner should be relegated to an alternate remedy under Section 264 of the Income Tax Act instead of the Court exercising its extraordinary jurisdiction.
Whether the ICAI Guidance Note can be relied upon to exclude certain receipts from the turnover calculation for audit requirements under Section 44AB.
Whether the AI-generated order was valid in declaring the tax return invalid without providing adequate reasoning.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of the AI-Generated Order and Principles of Natural Justice

Relevant Legal Framework and Precedents: The judgment discusses the necessity of providing reasons in support of orders as a facet of the principles of natural justice, referencing several Supreme Court decisions, including Kranit Associates Private Limited vs. Masood Ahmed Khan and Assistant Commissioner, Commercial Tax Department vs. Shukla and Brothers.
Court's Interpretation and Reasoning: The Court found that the AI-generated order lacked reasoning, rendering it a non-speaking order. It emphasized that even administrative orders must provide reasons to ensure fairness and allow for effective challenges.
Key Evidence and Findings: The order merely stated that the Petitioner's response was unacceptable without providing reasons, which the Court found insufficient.
Application of Law to Facts: The Court applied the principle that orders affecting rights must contain reasons, finding the impugned order deficient in this regard.
Treatment of Competing Arguments: The Court acknowledged the Respondent's argument about the efficiency of AI-generated orders but stressed the need for minimal reasoning to comply with natural justice.
Conclusions: The Court concluded that the order violated principles of natural justice due to its lack of reasoning.

2. Availability of Alternate Remedy under Section 264

Relevant Legal Framework and Precedents: The Court discussed the rule of exhaustion of alternate remedies, referencing decisions such as B. Muralidhar vs. Deputy Commissioner of Income-tax and Oberoi Constructions Ltd vs. The Union of India.
Court's Interpretation and Reasoning: The Court held that the Petitioner has an effective alternate remedy under Section 264 and that the rule of exhaustion should apply rigorously in fiscal matters unless exceptions apply.
Key Evidence and Findings: The Court found no compelling reason to bypass the alternate remedy, as the Petitioner could seek a revision of the order.
Application of Law to Facts: The Court applied the rule of exhaustion, determining that the Petitioner should pursue the alternate remedy.
Treatment of Competing Arguments: The Court considered the Petitioner's reliance on a Gujarat High Court decision but found that deeper scrutiny of the returns was necessary, which could be better handled by the revisional authority.
Conclusions: The Court declined to entertain the petition and directed the Petitioner to seek a revision under Section 264.

3. Reliance on ICAI Guidance Note

Relevant Legal Framework and Precedents: The Court considered the persuasive value of the ICAI Guidance Note in interpreting accounting terms, referencing Commissioner of Income Tax VII, New Delhi vs. Punjab Stainless Steel Industries.
Court's Interpretation and Reasoning: The Court acknowledged the guidance note's persuasive value but emphasized that its interpretation required deeper scrutiny.
Key Evidence and Findings: The Court noted the Petitioner's argument that certain receipts should not be included in turnover calculations under the guidance note.
Application of Law to Facts: The Court found that interpretation of the guidance note should be left to the revisional authority.
Treatment of Competing Arguments: The Court considered the Petitioner's reliance on the guidance note but found that the revisional authority was better suited to interpret it in the context of Section 44AB.
Conclusions: The Court left the interpretation of the guidance note to the revisional authority.

SIGNIFICANT HOLDINGS

The Court held that the AI-generated order violated principles of natural justice due to lack of reasoning, emphasizing that "the face of an order passed by a quasi-judicial authority or even an administrative authority affecting the parties' rights must speak."
The Court declined to exercise its extraordinary jurisdiction, directing the Petitioner to avail of the alternate remedy under Section 264, stating, "The rule of exhaustion of alternate remedy, though a rule of discretion and not a rule of compulsion, must be applied with utmost rigour when it comes to fiscal law statutes."
The Court emphasized the need for AI-generated orders to evolve and include minimal reasoning, stating, "The principles of natural justice and fairness are too valuable to be sacrificed at the altar of AI and automation expediency."
The Court left open all contentions for the revisional authority's decision, ensuring that the Petitioner could pursue a reasoned order on merits.

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