Case at a Glance
An Additional Commissioner of Customs, Surat, imposed a penalty of Rs. 425,27,99,100 under Section 114 of the Customs Act, 1962 for allegedly mis-declaring natural diamonds as lab-grown diamonds, and the Gujarat High Court dismissed the appeal. Before the Supreme Court the appellant pointed out that several judgments and articles cited in the order were AI-generated. Having checked the citations itself, the Court found case laws that were “either non-existent or have fake citations”, set aside both the penalty order and the High Court’s order without going into the merits, and directed fresh adjudication by a different officer of the same rank.
On 8 October 2025, the Additional Commissioner of Customs, Surat (the second respondent) passed an Order-in-Original imposing a penalty of Rs. 425,27,99,100 on the appellant under Section 114 of the Customs Act, 1962, on the allegation that natural diamonds had been mis-declared as lab-grown diamonds to pay a lower tariff. On 20 January 2026, the Gujarat High Court dismissed the appellant’s challenge.
In the Supreme Court, the appellant contended that several judgments and articles cited in the Order-in-Original were AI-generated. The Court considered it unnecessary to examine the merits of the mis-declaration allegation and instead verified the cited authorities itself.
The Key Question Before the Court
Can a quasi-judicial order imposing a penalty survive when it relies on case laws that are non-existent, carry fake citations, or do not lay down the propositions attributed to them?
What the Court Found and What It Said About AI in Adjudication
Writing for the Bench, Justice Dipankar Datta recorded that “it does appear that the second respondent has relied upon case laws that are either non-existent or have fake citations”, and that some existing cases did not lay down the ratio attributed to them, which the Court described as an apparent AI hallucination. The Court relied on Pooja Ramesh Singh v. Jammu & Kashmir Bank Ltd., (2026) 07 SC CK 2067, 2026 SCC OnLine SC 1258, quoting its observation that “such a decision is no decision in the eyes of the law.”
Addressing the use of artificial intelligence in adjudication, the Court noted the draft Regulations for Use of Artificial Intelligence in Courts, 2026, which are not yet finalised, and observed that AI “may well serve as training wheels but entrusting it with the pilot’s seat would be both imprudent and dangerous.” Reliance on such dubious material “proves fatal to the sustainability of the order imposing penalty on the appellant.” The Additional Solicitor General did not join issue on this point.
What the Court Actually Held
- The Order-in-Original dated 8 October 2025, which relied on non-existent, fake or misattributed case laws, could not be sustained; it was set aside along with the Gujarat High Court’s order confirming it.
- A decision resting on such material is, as held in Pooja Ramesh Singh, no decision in the eyes of the law.
- The proceedings were revived, to be decided afresh by an officer of the same rank other than the officer who passed the 8 October 2025 order.
- The Court left it to the appointing authority to decide, in accordance with law, whether to initiate action against the author of the order.
Why This Judgment Matters
- It applies the Supreme Court’s zero-tolerance approach to unverified AI-generated precedents to tax and customs adjudicating officers.
- It shows that a penalty of any size falls if its legal reasoning rests on fabricated authority.
- It signals possible accountability for officers who pass such orders.
What Should Advocates Take Away From the Judgment?
For Taxpayers and Importers
- Check every authority cited in a show cause notice or adjudication order; fake or misquoted citations are a strong ground of challenge.
- A successful challenge on this ground leads to fresh adjudication, not an automatic end to the case.
For Counsel and Officers
- Verify every citation against an authoritative source before relying on it, whether drafting pleadings or orders.
- Cite Pooja Ramesh Singh and this judgment when an order relies on AI-hallucinated material.
- Note that the merits of the diamond mis-declaration allegation remain open for fresh decision.
Key Takeaways
- An order built on fake or non-existent case law is no decision in law.
- AI may assist, but cannot take the ‘pilot’s seat’ in adjudication.
- The ₹425-crore penalty goes back for fresh decision by a different officer.
- Action against the author of the order is left to the appointing authority.
Frequently Asked Questions
Why did the Supreme Court set aside the customs penalty?
Because the Order-in-Original relied on case laws that were non-existent or had fake citations, and on cases that did not lay down the ratio attributed to them, which the Court found fatal to the penalty order.
Did the Court decide whether the diamonds were mis-declared?
No. It found it unnecessary to examine the merits and revived the proceedings for fresh decision by another officer of the same rank.
What did the Court say about using AI in courts?
It referred to the draft Regulations for Use of Artificial Intelligence in Courts, 2026, and said AI may serve as training wheels but entrusting it with the pilot’s seat would be both imprudent and dangerous.
Conclusion
Vijay Ghanshyam Gadiya v. Union of India, (2026) 09 SC CK 0096 is a stark warning that the reliability of a decision depends on the reliability of the authorities it cites, and that unverified AI output has no place in quasi-judicial reasoning.
Practical takeaway: Whether you draft a petition or an adjudication order, verify every citation at source; an order resting on hallucinated law can be set aside regardless of the amount at stake.
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