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Supreme Court Sets Aside ₹425 Crore Penalty on Diamond Trader Over AI Hallucinated Citations
A Penalty Built on Sand
In a landmark ruling that underscores the sanctity of judicial integrity, the set aside a staggering ₹425.28 crore customs penalty imposed on diamond trader Vijay Ghanshyam Gadiya . The penalty was quashed after the Court discovered that the adjudicating officer had relied on non-existent judgments and fake citations generated by artificial intelligence—a phenomenon the Court branded a "."
The Problem
The dispute originated from an dated , passed by the Additional Commissioner of Customs, Surat. The officer imposed the penalty under , alleging that Gadiya misdeclared a consignment of natural diamonds as lab-grown diamonds to avail a lower tariff. Gadiya challenged the order before the , which dismissed his appeal on , prompting him to approach the Supreme Court.
Before the apex court, Gadiya's counsel contended that several judgments and articles cited in the were generated using AI. The Court decided to independently verify these citations. What it found was alarming: some case laws cited were entirely non-existent or carried fake citations, while others—though real—did not lay down the legal propositions attributed to them. The Court concluded that these errors appeared to be the product of .
Zero Tolerance for Fake Citations
The Bench of Justices Dipankar Datta and Sheel Nagu referred to its earlier decision in Pooja Ramesh Singh v. Jammu & Kashmir Bank Ltd. (2026 SCC OnLine SC 1258), which established a for using unverified AI-generated precedents. That decision held that reliance on such material violates the and constitutes for both advocates and judges.
Reiterating this principle, the Court observed that even an iota of fake or hallucinated material entering the decision-making process renders the order unsustainable.
A Cautionary Note on AI
While acknowledging the potential of AI as an assistive tool, the Court drew a clear line. “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 remarked. The Court noted that it had recently released draft , but stressed that AI cannot replace human judgment.
Ordered
The Supreme Court set aside both the 's order and the penalty order. It revived the proceedings against Gadiya and directed by an officer of the same rank other than the one who passed the original order. The Court also left it to the appointing authority to consider initiating appropriate action against the officer, in accordance with law.
The ruling serves as a stark reminder that while technology can assist, it must never compromise the integrity of the judicial process.
