A diamond trader facing a ₹425.27 crore customs has received major relief from the Supreme Court after the court found that the customs adjudicating authority had relied on non-existent judgments, fake citations and legal propositions that did not appear in the cases cited.
The Supreme Court, in its September 2 judgment in Vijay Ghanshyam Gadiya v. Union of India & Anr., did not examine whether the underlying customs allegations against Gadiya were correct. Instead, a bench of Justices Dipankar Datta and Sheel Nagu focused on the integrity of the adjudication process and found that the use of dubious legal material was enough to make the penalty order unsustainable.
The court therefore set aside both the ₹425.27 crore penalty imposed by the Additional Commissioner of Customs, Surat, and the Gujarat High Court order that had upheld it. The case will now have to be decided afresh by another officer of the same rank.
Why was the ₹425 crore penalty imposed?
The case originated with an Order-in-Original passed by the Additional Commissioner of Customs, Surat, on October 8, 2025.
Under Section 114 of the Customs Act, 1962, the authority imposed a penalty of ₹425,27,99,100 on Vijay Ghanshyam Gadiya. The customs authorities alleged that natural diamonds had been misdeclared as lab-grown diamonds in order to avail of a lower tariff.
Gadiya challenged the penalty before the Gujarat . However, the High Court dismissed his challenge on January 20, 2026.
He then approached the Supreme Court.
The Supreme Court did not find it necessary to examine the merits of the customs allegations because Gadiya raised a different and significant issue. He argued that several judgments and legal articles relied upon by the customs authority in its penalty order had been generated using artificial intelligence.
The Supreme Court decided to check the claim itself.
Supreme Court finds fake citations and AI hallucinations
The bench said it had individually verified the judgments and articles cited in the customs order.
Its findings were striking.
The court said some of the case laws relied upon by the customs authority were either non-existent or carried fake citations. It also found that some cases did exist, but did not lay down the legal propositions attributed to them.
The court said this appeared to be an “hallucination of AI”.
This finding became critical because the Supreme Court had already laid down a strict position on AI-generated legal material in its July 2026 judgment in Pooja Ramesh Singh v. Jammu & Kashmir Bank Ltd.
In that case, the Supreme Court had said courts must adopt a zero-tolerance approach towards producing, citing or relying on precedents without verification. It held that a decision based on fake or hallucinated material could not stand, even if the material had only an indirect bearing on the decision-making process.
The Supreme Court applied that principle to Gadiya’s customs case.
It concluded that the reliance on dubious material was “fatal” to the sustainability of the penalty order.
What happens to the ₹425 crore penalty now?
The Supreme Court has not permanently wiped out the customs proceedings against Gadiya.
Instead, it set aside the original Order-in-Original as well as the Gujarat High Court order confirming the penalty. The proceedings have been revived and will now be decided afresh by an officer of the same rank, but not by the officer who passed the October 2025 order.
This means the underlying customs dispute remains open. The latest ruling gives Gadiya relief from the existing penalty order, but it does not amount to a finding that the alleged diamond misdeclaration never happened.
The Supreme Court also left it to the appointing authority to decide whether any action should be taken against the officer who authored the original order.
Supreme Court’s warning on using AI in legal decisions
The judgment also sends a wider message to government authorities, courts and lawyers using generative AI for legal research.
The Supreme Court acknowledged that AI can be used as an assistive tool to speed up decision-making. But it drew a sharp line between assistance and adjudication.
Referring to its earlier ruling, the court said AI may serve as “training wheels”, but allowing it to take the “pilot’s seat” would be imprudent and dangerous.
The distinction is important for taxpayers and businesses facing regulatory or tax orders. An authority can use technology to search for legal material, but the responsibility to verify whether a judgment exists and whether it actually supports the proposition being relied upon remains with the human decision-maker.