What was the case?
The case was reportedly about the taxability of a transaction in which a person created a trust worth Rs 669 crore, mainly by transferring interest in a partnership to the trust. Generally, transfers of more than Rs 50,000 without consideration, if made to non-relatives, are taxable in the hands of the recipient. However the lawyers for the assessee, inter alia, contended that interest in a partnership firm is not a property within the meaning of the tax law. The ITAT ruled in favour of the tax department holding that an interest in a partnership is a type of share (like a stock market share) and hence taxable. The ITAT ruling was rare, as typically, in such cases the ruling is passed in favour of the assessee, which is the Trust.
The Judgements relied on in the order did not exist
As per the report, the ITAT relied on judgements by the Supreme Court and the Madras High Court to rule in favour of the tax department. However, in reality, these judgements were fictitious, and they do not exist in the archives of the Supreme Court and the Madras High Court.
Three of the judgements cited in the order were – K. Rukmani Ammal v. K. Balakrishnan (1973) 91 ITR 631 (Madras High Court), S. Gurunarayana v. S. Narasinhulu (2004) 7 SCC 472 (Supreme Court of India) and Sudhir Gopi v. Usha Gopi (2018) 14 SCC 452 (Supreme Court of India). The citations of the first two cases do not reportedly exist while the citation of the third case leads to a different case which is K. Subba Rao v. State of Telangana. A fourth citation mentioned in the order – 57 ITR 232(SC) had a case law called CIT v Raman Chettiar but the case relates to a Hindu Undivided Family not filling ITR, and had nothing to do with partnership firms.
Even the bench did not verify the judgements
As per the Mint report, some tax department representatives used the ChatGPT to find case laws in favour of the tax department and used the results produced by the AI tool in its favour. Even the bench did not verify the judgements and merely copy pasted the case laws on the submission of the tax department without exercising due diligence. This rendered the judgment wrong.
AI is being increasingly used to perform research work, including legal research. However, sometimes AI tools are prone to ‘hallucinations’, they return results that don’t exist in reality. Therefore, it is important to cross-check references produced by AI tools.
US law firm warns AI can invent fake cases, lawyers fined
Notably, this incident comes just a week after a major US law firm warned that Artificial Intelligence can invent fake case law. Earlier this month, personal injury law firm Morgan & Morgan sent an urgent email to over 1,000 lawyers saying that AI can invent fake cases and use of such cases in court filings can get the lawyers fired.
Recently a federal judge in the US threatened to sanction lawyers for using fictitious case citations in a lawsuit against Walmart. The court fined three lawyers totalling $5,000, including two from Morgan & Morgan. One lawyer admitted in court that he used AI to find citations, saying that the tool “hallucinated” the cases.
