A customs officer’s penalty order just became a cautionary tale for anyone tempted to let AI do their legal research unsupervised — and it cost a taxpayer ₹425 crore in the process.

The Case

On September 2, 2026, the Supreme Court set aside a penalty of ₹425.28 crore imposed on diamond trader Vijay Ghanshyam Gadiya, after finding that the customs officer who imposed it had relied on case law that simply didn’t exist — the product of AI-generated legal hallucinations.

The story starts in October 2025, when the Additional Commissioner of Customs, Surat, penalized Gadiya under Section 114 of the Customs Act, 1962, accusing him of mis-declaring a consignment of natural diamonds as lab-grown diamonds to dodge a higher tariff. Gadiya challenged the penalty before the Gujarat High Court — and lost, in January 2026.

That’s when things got interesting. Before the Supreme Court, Gadiya’s counsel argued that several of the judgments and legal propositions the customs officer had relied on in the original penalty order were not real — they’d been generated by AI, complete with fabricated citations to cases that never happened.

What the Court Found

A bench of Justices Dipankar Datta and Sheel Nagu didn’t just take the appellant’s word for it — they went and checked the citations themselves. What they found: the customs official’s order leaned on legal propositions and case law that were either non-existent or backed by fake citations, apparently generated by AI and never verified before being used in an official government order.

The Court held that relying on this kind of dubious, unverified material was fatal to the penalty order’s validity. As a result, both the original customs penalty and the Gujarat High Court’s order upholding it were set aside. The Court didn’t let Gadiya off entirely, though — it remanded the matter for a fresh decision, to be made by a different customs officer of equal rank.

Why It Matters

This is one of the more concrete examples yet of what happens when AI tools are used in official decision-making without anyone fact-checking the output. It’s not a private lawyer getting caught citing a fake case in a brief — a well-known and increasingly common story worldwide — this is a government adjudicating authority basing a nine-figure penalty partly on citations that simply don’t exist.

For anyone using AI to speed up legal research — lawyers, in-house counsel, or government officers alike — this judgment is a pointed reminder: AI-generated case law and citations need to be independently verified before they go anywhere near an order, a brief, or a judgment. The technology can accelerate the search; it can’t replace someone actually checking that the cases are real.

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This summary is based on the Supreme Court’s order dated September 2, 2026 in Vijay Ghanshyam Gadiya v. Union of India & Anr. (2026 INSC 947), and reporting by Bar & Bench, LiveLaw, and MediaNama. Read the full order on Indian Kanoon. This is provided for informational purposes only and is not legal advice — please verify details against the original order before relying on this post.