The Supreme Court on Wednesday set aside a ₹425.27-crore customs penalty imposed on a diamond trader after finding that the adjudicating authority had relied on non-existent or incorrectly cited judicial precedents that appeared to have been generated or hallucinated by artificial intelligence.

A Bench comprising Justice Dipankar Datta and Justice Sheel Nagu allowed the civil appeal filed by one Vijay Ghanshyam Gadiya and quashed both the Gujarat High Court order and the original customs adjudication order.

The penalty had been imposed by the Additional Commissioner of Customs, Surat, on October 8, 2025, under Section 114 of the Customs Act, 1962. The appellant had been accused of mis-declaring a consignment of natural diamonds as lab-grown diamonds in order to pay a lower tariff. The Gujarat High Court subsequently dismissed his challenge to the penalty on January 20, 2026.

Fake Citations used

Before examining the merits of the customs dispute, the Supreme Court considered the appellant's contention that several judgments and articles cited in the original order had been generated using AI.

The Bench said it independently verified the cited material and found that some of the cases relied upon were non-existent or carried fake citations. It further found that some cases did exist but did not establish the legal propositions attributed to them, describing this as an apparent “hallucination of AI.”

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 referred to its recent decision in Pooja Ramesh Singh v. Jammu & Kashmir Bank Ltd., which had stressed a zero-tolerance approach towards the use of unverified AI-generated legal precedents. It noted that advocates citing such material without verification could commit misconduct, while judicial reliance on fake or hallucinated precedents would constitute a serious lapse affecting the integrity of adjudication.

AI can assist, but cannot replace adjudication

The Bench also issued a word of caution caution on the use of artificial intelligence in judicial and adjudicatory processes.

The bench noted that Supreme Court has published draft Regulations for Use of Artificial Intelligence in Courts.

"Notwithstanding that the regulations are yet to be finalised, use of AI as an assistive tool to speed up the decision- making process cannot be denied. However, a note of caution must be sounded: 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 held that the reliance on dubious material was fatal to the sustainability of the customs penalty. It therefore set aside the Gujarat High Court's order as well as the October 2025 Order-in-Original.

The proceedings have been revived for fresh adjudication by an officer of the same rank, but not the officer who passed the original order. The Court also left it to the appointing authority to decide whether action should be taken against the author of the original order in accordance with law.

Case : Vijay Ghanshyam Gadiya v Union of India and Another

Citation : 2026 LiveLaw (SC) 884

Click here to read the judgment

Related - Citing AI-Generated Fake Precedents Is Advocate Misconduct; Judgments Based On Them Are Void : Supreme Court