Facts of the Case

M/S J M Jain, through its proprietor Jeetmal Choraria, challenged a show-cause notice dated 26.06.2025 issued by the Joint Director, DGGI, Delhi Zonal Unit, alleging large-scale GST evasion of over Rs 88 crore through a parallel accounting system codenamed 'JSK', discovered during an Income Tax search on 28.05.2022 based on statements, WhatsApp chats, special audit reports and unaccounted cash transactions of the firm, a commission agent in readymade garments. The petitioner also challenged the constitutional validity of Section 75(2) of the CGST Act, 2017, and contended that certain judgments cited in the SCN were AI-generated fabrications, since verified as non-existent by the Court's own physical check of the law reports.

Issues Involved

  1. Whether material and statements gathered by the Income Tax Department under Sections 132(4) and 132(4A), together with the presumption under Section 292C of the Income Tax Act, can independently found a GST show-cause notice under the CGST Act.
  2. Whether the SCN is vitiated by vagueness or by citation of fabricated, AI-generated judgments.
  3. Whether the challenge to Section 75(2) of the CGST Act is maintainable at the show-cause stage itself.

Petitioner's Arguments

  • The rebuttable presumption under Section 132(4A)/292C of the Income Tax Act applies only to IT Act proceedings and cannot form the basis for independent GST demands, absent the GST department's own supporting evidence.
  • Several judgments cited in paragraph 21 of the SCN, including Surjeet Singh Chhabda v. Union of India, appeared not to exist and were possibly generated by Artificial Intelligence tools without verification.
  • The SCN was vague and failed to meet the standards for a valid show-cause notice as laid down in Armour Security (India) Ltd. v. Commissioner, CGST.

Respondent's Arguments

  • The GST Department's Senior Standing Counsel submitted that it had independently scrutinised the Special Audit Reports and IT Department material 'from the GST point of view', reaching its own conclusions based on statements of numerous employees, suppliers and the proprietor, and that the challenge to Section 75(2) was premature since proceedings had not yet been converted to Section 73.

Court Order / Findings

  • Relying on PR Metrani v. CIT and later precedents, the Court held the presumption under Sections 132(4A)/292C of the Income Tax Act is a rebuttable presumption confined to IT Act proceedings and does not, by itself, extend to the CGST Act.
  • The Court held that while the IT Act presumption does not bind GST proceedings, the GST Department can independently scrutinise material and statements seized by the IT Department and rely on them to issue a show-cause notice, so long as it applies its own mind — as the record here showed it had.
  • On physical verification from the law reports, the Court found one cited judgment (Surjeet Singh Chhabda) to be entirely non-existent and another (Kishan Lal) wrongly attributed, cautioning both GST and IT authorities against blind reliance on AI-generated case citations without verification, while noting a third citation was correct.
  • The Court declined to quash the SCN as premature, directed the petitioner to file a reply and be given a personal hearing, and left the Section 75(2) challenge open for a later stage if proceedings are actually converted under Section 73.

Important Clarification

  • Material seized and statements recorded by the Income Tax Department under Section 132 can serve as the starting point for independent GST investigation, but cannot, by mere presumption, constitute conclusive evidence under the CGST Act — the GST Department must apply independent mind and scrutiny.
  • Government departments must verify judicial citations before including them in show-cause notices; fabricated or non-existent 'AI-hallucinated' precedents undermine the SCN's credibility even if they do not, by themselves, vitiate an otherwise well-particularised notice.
  • A constitutional challenge to Section 75(2) is premature where proceedings are still at the Section 74 SCN stage and have not been converted to Section 73(1).

Sections Involved

  • Section 74, CGST Act, 2017 – demand for tax evasion involving fraud/wilful suppression.
  • Section 75(2), CGST Act, 2017 – conversion of proceedings from Section 74 to Section 73 in specified circumstances.
  • Section 132(4)/(4A) and Section 292C, Income Tax Act, 1961 – search-related presumptions as to seized material.

Decision – In Favour of

The decision is in favour of the department at this stage — the challenge to the show-cause notice was rejected as premature, though the petitioner retains all objections for the adjudication proceedings and the Section 75(2) vires challenge remains open.

Case Details

High Court of Delhi at New Delhi – W.P.(C) 16754/2025 & CM APPL. 68768-68769/2025 – Coram: Hon'ble Justice Prathiba M. Singh and Hon'ble Justice Shail Jain – Judgment dated 18.11.2025.

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