A diamond trader received a customs penalty of ₹425.27 crore from the Additional Commissioner of Customs, Surat, for allegedly mis-declaring natural diamonds as lab-grown diamonds to pay lower import duty. The penalty order was confirmed by the Gujarat High Court. When the case reached the Supreme Court, a discovery was made that will define how courts approach AI in legal proceedings: the adjudicating customs authority had cited judicial precedents that simply did not exist — or were incorrectly cited — and appeared to have been generated or hallucinated by artificial intelligence.

The Supreme Court set aside the entire penalty.

What the Court Found

On examining the customs adjudication order, the Supreme Court bench found that the authority had relied on non-existent or incorrectly cited judicial precedents. The Court was clear: orders passed by statutory adjudicating authorities must rest on actual, traceable law — not on citations that cannot be verified because they do not exist. The Gujarat High Court's order confirming the penalty was also set aside.

Why This is a Landmark Finding

This is believed to be among the first instances in India where a court has expressly identified and acted upon the use of AI-hallucinated case citations by a government authority in an official adjudication order. AI language models can sometimes generate plausible-sounding but entirely fictional case citations — a phenomenon called "hallucination." When a government officer uses AI to draft an order and does not verify the citations, the result can be orders citing non-existent precedents.

The Supreme Court's response was unequivocal: such an order cannot stand.

What This Means for Anyone Facing a Government Order

If you have received an order from any government authority — customs, GST, income tax, RERA, any tribunal or regulatory body — that cites judicial precedents, verify every single case cited. Use official databases (SCCOnline, SCC, Indian Kanoon, Supreme Court website) to confirm the cases exist and actually say what the order claims they say. If citations cannot be traced, this is a ground to challenge the order.

Doctrine of Non-Reformatio in Peius — Also Applied

The Court also applied the doctrine of non-reformatio in peius (no change for the worse) — holding that a party cannot be placed in a worse position merely for exercising their legal right to appeal. The customs authority had enhanced the penalty after the trader exercised appeal remedies — the Court set this enhancement aside.

Practical Guidance

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If you have received a penalty order from any customs, GST, income tax, or regulatory authority — read it carefully. Verify every case law cited. If any citation leads nowhere or does not say what the order claims, file a challenge on this ground.

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Never use AI-generated content in legal proceedings without verifying every citation. This applies to advocates, litigants, and government officers alike. Citing a non-existent case law before a court is a serious professional and legal failure.

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The doctrine of non-reformatio in peius protects you when you appeal — your position cannot be worsened merely because you exercised your right of appeal. If any authority has enhanced a penalty or order after you filed an appeal, challenge this enhancement.

Case Reference
Vijay Ghanshyam Gadiya v. Union of India and Another | 2026 LiveLaw (SC) 884 | Hon'ble Justice Dipankar Datta & Hon'ble Justice Sheel Nagu | September 1, 2026 | Hon'ble Supreme Court of India

Frequently Asked Questions

Questions people commonly search on this topic

Can a government penalty order be set aside for citing fake case laws? +
Yes. The Supreme Court has set aside a ₹425 crore customs penalty after finding that the adjudicating authority cited non-existent judicial precedents that appeared to be AI-generated hallucinations. An order that rests on non-existent law cannot be sustained.
What are AI hallucinations in legal cases? +
AI language models sometimes generate plausible-sounding but entirely fictional case citations — a phenomenon called hallucination. When a government officer uses AI to draft an adjudication order without verifying citations, the result can be orders citing non-existent cases. The Supreme Court has set aside a penalty order on this ground.
How do I verify if a case cited in a government order actually exists? +
Use official legal databases: the Supreme Court of India website (sci.gov.in), SCC Online, Indian Kanoon (free), or Manupatra. Search the exact case name and citation number. If the case does not appear in any of these databases, it likely does not exist. Also verify whether the actual existing judgment says what the order claims.
What is the doctrine of non-reformatio in peius? +
The doctrine of non-reformatio in peius means that a party should not be placed in a worse position merely for having exercised a legal right to appeal. If a government authority enhanced a penalty or order after you filed an appeal, this enhancement may be challenged under this doctrine — as the Supreme Court held in this case.