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Supreme Court Quashes ₹425 Crore Customs Penalty Against Vijay Ghanshyam Gadiya Over AI-Generated Fake Precedents
A Penalty Built on Sand: The AI Hallucination Problem
In a landmark ruling that underscores the perils of unverified artificial intelligence in legal proceedings, the has set aside a staggering ₹425.27 crore customs penalty imposed on diamond trader Vijay Ghanshyam Gadiya. The Apex Court found that the adjudicating officer had relied upon non-existent and — apparently generated by AI — to justify the massive fine.
A Bench of Justice Dipankar Datta and Justice Sheel Nagu quashed both the 's order and the original Customs adjudication order dated , which had imposed the penalty under .
The Case: Diamonds Misdeclared or Genuine Mistake?
The dispute stemmed from allegations that Gadiya, operating through in the , had exported natural diamonds while declaring them as lab-grown diamonds to evade higher tariffs. Customs authorities claimed that out of 58,089.13 carats examined, only 469.12 carats were lab-grown, with the rest being natural diamonds — a misdeclaration rate of nearly 99.2%.
The Additional Commissioner of Customs, Surat, concluded that Gadiya had facilitated and abetted improper export and imposed a personal penalty equivalent to the value of the goods. The upheld this order, prompting Gadiya to appeal to the Supreme Court.
Supreme Court's Own Verification: Fake and Hallucinated Precedents
Before examining the merits of the diamond dispute, the Supreme Court took up a startling contention raised by Gadiya's counsel: that several judgments and articles cited in the Customs order appeared to be AI-generated. The Bench independently verified each citation and made a damning discovery.
"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,"
the Court observed.
"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
therefrom and it appears to be a hallucination of AI."
This finding proved fatal to the penalty order.
Zero Tolerance for AI-Generated Case Laws: The Pooja Ramesh Singh Precedent
The Court invoked its recent decision in , which established a strict zero-tolerance policy regarding unverified AI-generated legal precedents. Quoting from that judgment, the Bench declared:
"It is necessary for courts to adopt a
for producing, citing or using artificial intelligence-generated precedents without verification. It is a
to cite such judgments without verification. Equally, it is a
if a judge relies on such a fake or hallucinated artificial intelligence-generated material as precedents in support of the determination."
The Court further noted that any decision founded on such material is
"
"
and must be set aside, regardless of whether the fabricated material had a direct or indirect bearing on the outcome.
AI as Training Wheels, Not the Pilot: Court's Caution on Technology in Adjudication
While acknowledging the potential of AI as an assistive tool — and noting the existence of draft Regulations for Use of Artificial Intelligence in Courts, 2026 — the Supreme Court issued a stern warning against over-reliance on technology.
"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 Bench cautioned.
The Court clarified that its concern was not with the legitimate use of AI, but with presenting fabricated or hallucinated material as genuine legal precedent.
The Final Order: Penalty Quashed, Matter Remanded for Fresh Adjudication
Finding that the reliance on dubious material undermined the integrity of the adjudication, the Supreme Court set aside both the 's order and the original Customs penalty order. However, the underlying case is not over — the Court revived the proceedings and directed that they be adjudicated afresh by a different officer of the same rank.
The Bench also left it to the appointing authority to determine whether disciplinary action should be initiated against the officer who authored the original order, "."
Implications for Judicial Integrity
This judgment sends a powerful message across the legal ecosystem: AI can assist, but it cannot replace human judgment and verification. Every precedent cited in an adjudicatory order must be independently verified, and any reliance on fake or hallucinated material will render the decision void. As the Supreme Court made clear, the sanctity of adjudication demands nothing less.
