How a diamond trader got relief from a ₹425 crore penalty after customs used AI-generated citations

The Supreme Court on Wednesday, September 2, 2026, set aside a customs penalty of over ₹425 crore after finding that the adjudicating officer had relied on judgments and legal articles that were either non-existent, carried fake citations, or attributed legal propositions to real cases that those cases never laid down, all of which appeared to be AI-generated hallucinations.

The case involved Vijay Ghanshyam Gadiya, who was served an Order-in-Original by the Additional Commissioner of Customs, Surat, on October 8, 2025. The officer imposed a penalty of ₹425,27,99,100 under Section 114 of the Customs Act, 1962, for allegedly mis-declaring a consignment of natural diamonds as lab-grown diamonds to pay a lower tariff.

Gadiya challenged the penalty before the Gujarat High Court, which dismissed his appeal on January 20, 2026. He then moved the Supreme Court.

A bench of Justice Dipankar Dutta and Justice Sheel Nagu did not examine the merits of the customs case at all. Instead, it focused on a contention raised by Gadiya that several judgments and articles cited by the customs officer in the original penalty order were generated using artificial intelligence (AI).

The top court said it had "made the effort to individually verify whether such contention of the appellant is true."

Upon verification, the court found that the second respondent had "relied upon case laws that are either non-existent or have fake citations." It further found that some case laws which did exist did not lay down the legal propositions attributed to them, and that this "appears to be a hallucination of AI".

The court referred to its earlier decision in Pooja Ramesh Singh v. Jammu & Kashmir Bank Ltd., a precedent dealing with the use of AI in judgments.

The order quoted an excerpt from this judgement, which said:

The bench held that the reliance on dubious AI-generated material was "fatal to the sustainability of the order imposing penalty on the appellant".

The apex court set aside both the Gujarat High Court order and the original Order-in-Original, and revived the proceedings for fresh adjudication by a different officer of the same rank. The court also left it to the appointing authority to initiate action against the officer who authored the October 2025 order.

For taxpayers and businesses fighting adversarial orders from revenue authorities, the judgment establishes that any adjudication resting on unverified or AI-fabricated legal material is vulnerable to being struck down, regardless of the underlying merits of the case.