Supreme Court sets aside ₹425 crore customs penalty resting on AI-generated fake case law

The Supreme Court set aside a penalty of over ₹425 crore imposed under Section 114 of the Customs Act, 1962 on a trader accused of declaring natural diamonds as lab-grown diamonds to pay a lower tariff. The Gujarat High Court had upheld the penalty. Without going into the merits, the Court examined the appellant's contention that the Additional Commissioner of Customs, Surat had relied on judgments and articles generated using artificial intelligence. On checking each citation itself, the Court found that some of the cases relied on did not exist or carried fake citations, and that others, though real, did not lay down the principle attributed to them, which it described as an AI hallucination.

The Court applied its earlier decision in Pooja Ramesh Singh v. Jammu & Kashmir Bank Ltd., which declared zero tolerance for citing or relying on unverified AI-generated precedents and held that a decision into which even an iota of such material enters is no decision in the eyes of the law. It noted that the Court has released draft Regulations for Use of Artificial Intelligence in Courts, 2026, and said AI may assist but can never substitute for adjudication. The penalty order was quashed and the case sent back to be decided afresh by a different officer of the same rank, leaving any action against the author to the appointing authority.