Supreme Court scraps ₹425 crore penalty over fake citations, AI hallucinations in customs order

The Supreme Court on Wednesday set aside a ₹425.28 crore customs penalty imposed on a diamond trader after finding that the adjudicating officer had relied on non-existent cases, fake citations and legal propositions hallucinated by artificial intelligence (AI). [Vijay Ghanshyam Gadiya v. Union of India and Another].A Bench of Justices Dipankar Datta and Sheel Nagu held that reliance on such dubious material was fatal to the penalty order.“The use of AI in this case, resulting in reliance placed by the second respondent on material which is dubious, proves fatal to the sustainability of the order imposing penalty on the appellant. Such circumstances compel us to interfere and remand the case,” the Court said.Thus, the Court set aside the penalty order passed by the Additional Commissioner of Customs, Surat as well as the Gujarat High Court order that had confirmed it..The case arose from an order passed by the Additional Commissioner on October 8, 2025, imposing a penalty of ₹425.28 crore on Vijay Ghanshyam Gadiya under Section 114 of the Customs Act, 1962. The penalty was imposed for allegedly misdeclaring a consignment of natural diamonds as lab-grown diamonds to attract a lower tariff.Gadiya challenged the penalty before the Gujarat High Court. However, the High Court dismissed his challenge on January 20, 2026, prompting him to approach the Supreme Court.Before the apex court, Gadiya contended that several judgments and articles relied upon by the customs officer had been generated using AI..AI may well serve as training wheels but entrusting it with the pilot’s seat would be both imprudent and dangerous.Supreme Court.The Supreme Court independently verified the cited material and found substance in his contention.“Upon verifying such judgments and articles, it does appear that the second respondent has relied upon case laws that are either non-existent or have fake citations. A further investigation has also revealed that some of the case laws relied upon by the second respondent, which do exist, do not lay down the ratio deduced therefrom and it appears to be a hallucination of AI,” the Court observed..The Bench said that AI could be used as an assistive tool to speed up decision-making, but cautioned that it could never replace adjudication.“Assistance can never be substituted for adjudication. AI may well serve as training wheels but entrusting it with the pilot’s seat would be both imprudent and dangerous."The Court also referred to its earlier decision in Pooja Ramesh Singh v. Jammu & Kashmir Bank Limited, which called for zero tolerance towards the use of unverified AI-generated precedents by both judges and lawyers..Supreme Court sets aside NCLT judgment for relying on hallucinated AI-generated citations.In view of these findings, the top court revived the proceedings against Gadiya and directed that the matter be decided afresh by an officer of the same rank other than the officer who had passed the original order.It also left it to the appointing authority to consider initiating appropriate action against the author of the customs order..[Read Judgment]