Faiz Enterprise v. State Tax Officer

What happened

Faiz Enterprise, a sole proprietorship, challenged the cancellation of its registration under the Goods and Services Tax Act, 2017. The cancellation order, and the orders that followed rejecting revocation and dismissing the appeal, were issued by state tax authorities in Surat.

At the first hearing on August 13, 2026, counsel for Faiz Enterprise told the High Court that the State Tax Officer's order relied on authorities that did not exist or did not apply. One judgment, cited as State of Gujarat v. Aarbee Structures Pvt. Ltd., 2024 (4) TMI 951, could not be found at all. A Madras High Court decision carried a different citation and did not support the point. A Calcutta High Court decision matched none of the citations given. The bench recorded: "It appears that the impugned order has been passed by the State Tax Officer by placing reliance exclusively on the AI generated case laws." It directed the government pleader to take instructions and warned that it would summon the officer and initiate action if the submissions proved correct.

What the court did

When the matter returned on August 20, 2026, the officer who wrote the order was present with three senior officers. In an affidavit he tendered an unconditional apology for "using the Artificial Intelligence (AI) in drafting the order and referring to the non-existent and irrelevant judgments," stating that he was a probationary officer and that the mistake arose from inexperience. He had attended a departmental training program on AI in drafting orders on August 18, 2026.

The same day, the Additional Commissioner of State Tax issued statewide instructions to adjudicating and quasi-judicial authorities, framed expressly in light of the court's August 13 order. Among them: any case law or provision identified through AI must be independently verified from primary official sources; where an AI tool paraphrases a ratio, the officer must locate the original paragraph and reproduce it verbatim; AI output may assist reasoning but cannot substitute for it; and "Failure to follow these instructions, including passing orders based on unverified AI content, will amount to misconduct and may attract disciplinary action."

The High Court set the instructions out in full in its judgment and directed that they "shall be scrupulously followed, and any violation of the instructions would amount to contempt of this Court." On the merits, with the department's agreement, it quashed the show-cause notice, the cancellation order, the order rejecting revocation and the appellate order, and directed a fresh notice and a reasoned order.

Where it stands

The registration proceedings start again from a new notice. The departmental instructions are in force across the state tax administration and now carry the High Court's contempt direction. No disciplinary action against the officer beyond the apology and training was reported in the judgment, and none was located as of October 8, 2026.

Less than two weeks later the Supreme Court of India reached a similar result for a customs officer's penalty order in Gadiya v. Union of India. Faiz Enterprise differs in one respect worth noting: rather than leaving discipline to the department, the court converted the department's own written verification procedure into an order of the court.

The obligation it engaged

The conduct engages Clause 3 of the Standard, independent authority, at its most basic: a citation was adopted without confirming that the case exists. The department's instruction to locate and reproduce the original paragraph whenever a system paraphrases a ratio is close to the Standard's own wording on characterizations.

Clause 4, checkability before adoption, is engaged as well. Before output is adopted, the person relying on it has to know what it will be checked against. Here the check was available in any law report, and it was run only after the taxpayer raised the problem in court.

Sources

• High Court of Gujarat (copy hosted for the AI Hallucination Cases database) · August 20, 2026
  Oral judgment, SCA No. 10123 of 2026
• Damien Charlotin, AI Hallucination Cases database · October 8, 2026
  AI Hallucination Cases

What could not be confirmed

The judgment does not name the AI tool used. The instruction reproduced in the judgment carries the date 18/08/2006 in its heading, which appears to be a typographical error for 18/08/2026; the judgment itself refers to it as dated 18/08/2026. No press coverage was located.