Supreme Court kills a ₹425-crore customs penalty built on fake AI citations

The Supreme Court on 2 September 2026 set aside a ₹425.28 crore customs penalty on diamond trader Vijay Ghanshyam Gadiya after finding that the order relied on material that did not exist, or did not say what the officer claimed — a textbook case of artificial-intelligence hallucination inside adjudication.

The bench of Justices Dipankar Datta and Sheel Nagu was dealing with an order of the Additional Commissioner of Customs, Surat, dated 8 October 2025, passed under section 114 of the Customs Act, 1962. The allegation was that natural diamonds had been misdeclared as lab-grown to attract a lower tariff. The Gujarat High Court dismissed a challenge to that order on 20 January 2026. The apex court has now set aside both the penalty and the High Court’s confirmation.

What moved the Court was verification of the judgments and articles cited in the customs order. Some citations were non-existent or fake. Some real cases did not lay down the ratio the officer used. The bench treated that as AI hallucination: the use of artificial intelligence resulting in reliance on dubious material was fatal to the penalty. Assistance, the Court said, can never be substituted for adjudication. AI may be training wheels; it is not the pilot’s seat.

The judges referred to Pooja Ramesh Singh v. J&K Bank on zero tolerance for unverified AI precedents. That line matters beyond one Surat file. If a quasi-judicial penalty of ₹425.28 crore can rest on invented case law, every customs house, every GST adjudication and every departmental inquiry that has begun to lean on chatbots is on notice: the officer signs, the officer must read.

The Court did not give Gadiya a clean chit on the diamond allegation. It remanded the matter for a fresh decision by an officer of the same rank other than the original author. The appointing authority may consider action against the author of the customs order. Proceedings stand revived. The misdeclaration claim lives; the tainted penalty does not.

That distinction is the public interest. A diamond trader’s tariff fight is one file. A customs bureaucracy that outsources legal reasoning to tools that invent judgments is a systemic risk. Section 114 penalties are meant to rest on facts of import, classification and intent, tested against real statute and real precedent. When the cited law is fake, the quantum — however large — cannot be saved by the seriousness of the allegation.

For Surat’s diamond trade, the 2 September order means the ₹425.28 crore figure is off the books until a clean officer rewrites the case. For the original author, it means the appointing authority has been told that action may be considered. For every other adjudicating officer, it means unverified AI citations are not a formatting error; they are a ground to wipe the penalty.

The desk records the set-aside, the remand, the hallucination finding, the training-wheels observation, the Pooja Ramesh Singh reference, and the explicit refusal of a clean chit. It does not invent a finding that the diamonds were or were not misdeclared. That question returns to a different desk in Surat, without the original author, and without fake case law.