The Supreme Court set aside a ₹425.27 crore customs penalty

Customs Act, 1962 — Section 114 — Customs penalty — AI-generated precedents — Fake and non-existent case laws — Natural diamonds allegedly misdeclared as lab-grown diamonds — Adjudicating authority relying upon unverified AI-generated legal material — Held, reliance on fake or hallucinated precedents vitiates the adjudication process — AI may assist legal decision-making but cannot replace human judgment — Penalty order set aside and matter remanded for fresh adjudication by a different officer.

The Supreme Court in Vijay Ghanshyam Gadiya v. Union of India & Anr., 2026 INSC 947, set aside a ₹425.27 crore customs penalty after finding that the adjudicating authority had relied upon non-existent judgments, fake citations and legal propositions that were not actually laid down in the authorities cited.

The matter arose from an Order-in-Original dated 8 October 2025 passed by the Additional Commissioner of Customs, Surat. A penalty of ₹425,27,99,100/- was imposed on Vijay Ghanshyam Gadiya under Section 114 of the Customs Act, 1962, in connection with the alleged misdeclaration of natural diamonds as lab-grown diamonds to avail a lower tariff.

The appellant challenged the order before the Gujarat High Court, which dismissed the challenge on 20 January 2026. He thereafter approached the Supreme Court.

Before the Supreme Court, it was argued that several judgments and legal materials relied upon by the adjudicating authority were generated or influenced by Artificial Intelligence.

Upon examining the authorities, the Supreme Court found that certain judgments were non-existent or carried fake citations, while some genuine judgments did not contain the legal propositions attributed to them.

The Court treated such reliance as a serious defect in the adjudication process and referred to its earlier decision in Pooja Ramesh Singh v. Jammu & Kashmir Bank Ltd., emphasising the need for verification of AI-generated legal material.

The Supreme Court clarified that it does not prohibit the legitimate use of AI in legal work. AI can assist lawyers, judges and authorities in research and other tasks, but human verification, reasoning and adjudication cannot be delegated to AI.

The Court observed:

“AI may well serve as training wheels but entrusting it with the pilot’s seat would be both imprudent and dangerous.”

Consequently, the Supreme Court allowed the appeal, set aside the Gujarat High Court's order as well as the original customs penalty order, and directed fresh adjudication by an officer of the same rank other than the officer who had passed the original order.

The Court also left it to the appointing authority to consider whether any action was warranted against the officer concerned.

Key Takeaway

AI can assist legal research, but it cannot become a substitute for legal verification and judicial application of mind.

Case Details

Case: Vijay Ghanshyam Gadiya v. Union of India & Anr.

Citation: 2026 INSC 947

Court: Supreme Court of India

Bench: Justice Dipankar Datta & Justice Sheel Nagu

Date: 2 September 2026

Provision: Section 114, Customs Act, 1962

Related Case: Pooja Ramesh Singh v. Jammu & Kashmir Bank Ltd.

Result: Appeal allowed; penalty order set aside; matter remanded for fresh adjudication.