The Supreme Court has set aside a customs penalty of approximately ₹425.28 crore after finding that the adjudicating authority had relied upon non-existent judicial decisions, fake citations and inaccurate legal propositions apparently generated through artificial intelligence.

A Bench comprising Justice Dipankar Datta and Justice Sheel Nagu held that reliance on such dubious material rendered the penalty order unsustainable and consequently revived the proceedings for fresh consideration by an officer of the same rank other than the officer who had passed the original order.

The dispute arose from an Order-in-Original dated October 8, 2025, passed by the Additional Commissioner of Customs, Surat. The customs authority imposed a penalty of ₹425,27,99,100 on the appellant under Section 114 of the Customs Act, 1962.

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The department alleged that a consignment of natural diamonds had been misdeclared as lab-grown diamonds to obtain the benefit of a lower tariff.

The appellant challenged the penalty before the Gujarat High Court. However, the High Court dismissed the appeal through an order dated January 20, 2026, prompting the appellant to approach the Supreme Court.

Before the Supreme Court, the appellant contended that several judgments and articles referred to in the Order-in-Original were generated using artificial intelligence.

Instead of immediately examining the merits of the customs dispute, the Supreme Court independently verified the judgments, citations and articles relied upon by the adjudicating authority.

The verification revealed serious deficiencies. According to the Court, some of the cited decisions did not exist, while others carried fake citations. Certain judgments that did exist did not lay down the propositions attributed to them in the penalty order.

The Court observed that the purported legal conclusions drawn from those decisions appeared to be the product of an AI hallucination.

The Bench relied upon the Supreme Court’s earlier decision in Pooja Ramesh Singh v. Jammu & Kashmir Bank Ltd., 2026 SCC OnLine SC 1258, which addressed the use of AI-generated material in judicial decision-making.

In that ruling, the Court had declared that courts must adopt a zero-tolerance approach towards the production, citation or use of unverified AI-generated precedents.

The earlier judgment held that it would amount to misconduct for an advocate to cite fabricated decisions without verification. It would equally constitute a serious lapse if a judge relied upon fake or hallucinated material while determining a case.

The Supreme Court reiterated that a decision contaminated by even a small amount of fabricated legal material could not be treated as a valid decision in the eyes of the law. Such decisions would have to be set aside irrespective of whether the false material had a direct or indirect bearing on the ultimate conclusion.

The Supreme Court clarified that it was not opposed to the legitimate use of artificial intelligence in the adjudicatory process. It acknowledged that AI could operate as an assistive tool and help accelerate decision-making.

The Bench, however, drew a clear boundary between assistance and adjudication.

“Assistance can never be substituted for adjudication,” the Court observed, adding that AI could serve as “training wheels”, but entrusting it with the “pilot’s seat” would be imprudent and dangerous.

The judgment also referred to the draft Regulations for Use of Artificial Intelligence in Courts, 2026, recently released by the Supreme Court for comments and suggestions. Although the regulations were yet to be finalised, the Bench noted that the use of AI in adjudicatory processes was no longer unfamiliar.

The fundamental requirement, however, was that every judgment, citation and legal proposition produced with AI assistance must be independently checked and verified by the human decision-maker.

The Supreme Court held that the adjudicating authority’s reliance on non-existent or inaccurately represented decisions was fatal to the sustainability of the customs penalty.

The Bench did not adjudicate the underlying allegations concerning the alleged misdeclaration of natural diamonds. Instead, it set aside both the Gujarat High Court’s order and the October 8, 2025 Order-in-Original.

As a result, the customs proceedings against the appellant have been revived and must now be decided afresh.

The Court directed that the fresh adjudication be conducted by an officer holding the same rank as the original adjudicating authority, but not by the officer who had passed the defective penalty order.

The Additional Solicitor General appearing for the authorities did not dispute the need for interference and remand in view of the circumstances identified by the Court.

The Supreme Court also took note of the seriousness of an adjudicating officer relying on fabricated or hallucinated legal material while imposing a penalty exceeding ₹425 crore.

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