NEW DELHI — Setting a strict precedent on the integrity of judicial and quasi-judicial determinations, the Supreme Court of India has quashed a penalty order of over Rs 425 crore passed by the Customs department after finding that the adjudicating authority relied on fake, non-existent, and hallucinated case laws generated by Artificial Intelligence (AI). A Bench comprising Justice Dipankar Datta and Justice Sheel Nagu held that the use of such dubious AI material is fatal to the sustainability of the order, reiterating a policy of “zero-tolerance” against relying on unverified AI citations in the adjudicatory process.
Background of the Case
The dispute arose from an Order-in-Original dated October 8, 2025, passed by the Additional Commissioner of Customs, Surat (the second respondent). The officer had imposed a penalty of Rs. 425,27,99,100 on the appellant, Vijay Ghanshyam Gadiya, under Section 114 of the Customs Act, 1962, on allegations of mis-declaring a consignment of natural diamonds as lab-grown diamonds to pay a lower tariff.
The appellant challenged the penalty before the High Court of Gujarat. However, the High Court dismissed his appeal vide order dated January 20, 2026. Aggrieved by the High Court’s dismissal, the appellant approached the Supreme Court in appeal.
Arguments and Court’s Verification
Before the Supreme Court, the appellant contended that several judgments and articles cited by the Additional Commissioner in the Order-in-Original dated October 8, 2025, were generated using Artificial Intelligence.
The Supreme Court noted that entering into the merits of the challenge was unnecessary in light of this submission. The Bench undertook the effort to individually verify whether the appellant’s contention was true.
Upon verification, the Court discovered that the adjudicating officer had indeed relied on case laws that were either non-existent or had fake citations. Furthermore, the Court’s investigation revealed that some of the cited case laws that did exist did not lay down the ratio deduced from them, appearing to be hallucinations of AI. The Additional Solicitor General appearing in the matter did not join issue on these findings.
Landmark Precedent on AI in Adjudication
Faced with this discovery, the Supreme Court referred to its earlier decision in Pooja Ramesh Singh v. Jammu & Kashmir Bank Ltd. (2026 SCC OnLine SC 1258), which dealt directly with the use of AI in judgments. Reaffirming the principles laid down in that precedent, the Bench extracted key observations:
“It is necessary for courts to adopt a zero-tolerance mode for producing, citing or using artificial intelligence-generated precedents without verification. It is a misconduct on the part of an advocate to cite such judgments without verification. Equally, it is a serious lapse if a judge relies on such a fake or hallucinated artificial intelligence-generated material as precedents in support of the determination. We have no hesitation in declaring that such a decision is no decision in the eyes of the law, irrespective of whether such material had a direct or indirect bearing on the decision-making. Such decisions are to be set aside even if an iota of fake or hallucinated material enters the decision-making process, as it would violate the sanctity of adjudication. It is absolutely necessary to maintain integrity in decision page making, and we reiterate and declare zero tolerance for the Bar as well as the Bench to cite, refer to, or rely on such material. It is also clarified that our judgment shall have no bearing on the rightful use of artificial intelligence, but on the presentation or reliance on fake or hallucinated material as if it were a court precedent.”
‘Training Wheels, Not Pilot’s Seat’: Court’s Analysis
Addressing the broader role of technology, the Bench observed that while the issue incidentally fell upon it for consideration, the use of AI in adjudicatory processes is not foreign, pointing out that the Supreme Court had recently released the draft Regulations for Use of Artificial Intelligence in Courts, 2026 for public comments and suggestions.
While acknowledging that AI can serve as an assistive tool to speed up decision-making, the Court sounded an explicit note of caution:
“However, a note of caution must be sounded: 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 ruled that the adjudicating officer’s reliance on dubious material was fatal to the order imposing the penalty, necessitating the setting aside of the decisions and remanding the matter.
The Decision
Allowing the civil appeal, the Supreme Court set aside the impugned order of the Gujarat High Court confirming the penalty, along with the Order-in-Original dated October 8, 2025.
The proceedings against the appellant before the customs authority stand revived, with directions that the matter be decided afresh by an officer of the same rank other than the one who passed the original order. Additionally, the Bench left it to the wisdom of the appointing authority to initiate such action against the author of the October 8, 2025 order as may be warranted under the law.
Case Details
Case Title: Vijay Ghanshyam Gadiya vs. Union of India & Anr.
Case No.: Civil Appeal No. [Blank] of 2026 (Arising out of SLP (Civil) No. 15605 of 2026)
Bench: Justice Dipankar Datta and Justice Sheel Nagu
Date: September 02, 2026
