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Medium reported severity Internal Action

India's Supreme Court overturns customs penalty citing apparent AI hallucinations

On 8 October 2025 the Additional Commissioner of Customs in Surat imposed a penalty of ₹425,27,99,100 (about ₹425 crore) on a diamond trader under Section 114 of the Customs Act, 1962, for allegedly misdeclaring a consignment of natural diamonds as lab-grown diamonds to pay a lower tariff. The trader's challenge was dismissed by the Gujarat High Court on 20 January 2026. Before the Supreme Court the trader argued that judgments and articles cited in the penalty order had been generated using artificial intelligence. On 2 September 2026 a bench of Justices Dipankar Datta and Sheel Nagu, after checking the material, found that the order relied on case law that was non-existent or carried fake citations, and on real cases that did not lay down the propositions attributed to them, which the court said 'appears to be a hallucination of AI'. Holding that the use of AI and reliance on this dubious material was fatal to the order, the court set aside both the penalty order and the High Court's order without deciding the merits, sent the matter for fresh adjudication by a different officer of the same rank, and left any action against the order's author to the appointing authority. The AI tool used is not named in the read reports.

AI system
Unidentified AI tool
Occurred
8 Oct 2025 to 2 Sept 2026
Reported
2 September 2026
Event location
India
What the AI did
Informed a human decision about the person
Reported harm
Legal Harm
Whose AI use
An institution’s AI use
Setting
Justice · Public services · Finance
Evidence
AI involvement supported · Causal attribution supported · 4 sources, 1 underlying account
3 claims: 3 reported. 4 open questions
People reported harmed
1 person

AI system as recorded: Unidentified AI tool reportedly used in authorities cited in a customs penalty order; legal reports quote the Supreme Court describing nonexistent and misattributed case law as apparent AI hallucination

What Happened

According to Bar & Bench, SCC Online and Upstox, which report the judgment, the penalty order was passed on 8 October 2025 by the Additional Commissioner of Customs, Surat, and imposed ₹425,27,99,100 under Section 114 of the Customs Act, 1962, on the allegation that natural diamonds had been declared as lab-grown to attract a lower tariff. The Gujarat High Court dismissed the trader's challenge on 20 January 2026. In the Supreme Court the trader contended that several judgments and articles relied upon in the order had been generated using AI. The bench said it had individually verified that contention and quoted its finding that the officer had 'relied upon case laws that are either non-existent or have fake citations', and that some existing cases did not lay down the ratio deduced from them, which 'appears to be a hallucination of AI'. The court held that 'the use of AI in this case, resulting in reliance placed by the second respondent on material which is dubious, proves fatal to the sustainability of the order imposing penalty', cited its earlier decision in Pooja Ramesh Singh v. Jammu & Kashmir Bank Ltd. calling for zero tolerance of unverified AI-generated precedents, and remarked that AI 'may well serve as training wheels but entrusting it with the pilot's seat would be both imprudent and dangerous.' The Ukrainian legal outlet Sudovo-yurydychna hazeta (sud.ua) reported the case on 6 September 2026, converting the penalty to about US$45 million. The reports do not say which AI tool was used, how the officer used it, whether the trader paid any part of the penalty, or what the trader's legal costs were. The judgment text itself was not read.

Reported harm

A diamond trader was subjected for about eleven months to a ₹425 crore customs penalty order, and lost a High Court challenge to it, before India's Supreme Court voided the order because it relied on non-existent and misattributed case law that the court found appeared to be AI hallucination (Supreme Court judgment as reported by Bar & Bench, SCC Online and Upstox). The underlying proceedings were revived.

Outcome

Ongoing

The Supreme Court of India allowed the trader's civil appeal on 2 September 2026, set aside the Order-in-Original of 8 October 2025 and the Gujarat High Court's order of 20 January 2026, and revived the customs proceedings for fresh adjudication by an officer of the same rank other than the original author. It left it to the appointing authority to consider action against that officer. The merits of the misdeclaration allegation were not decided.

What remains unknown

  • Which AI tool the customs officer used and how it was used in drafting the order.
  • Whether the trader paid any part of the penalty or incurred other financial consequences while the order stood, and the trader's litigation costs.
  • The outcome of the revived adjudication and whether any action was taken against the officer.
  • The trader's country and place of residence.

What the evidence supports

AI involvement: supported. Bar & Bench, SCC Times and Upstox report that the Supreme Court verified the authorities used in the officer's penalty order, found nonexistent cases, false citations and misattributed propositions, and described them as apparent AI hallucination. The reports connect this material to the officer's order imposing the penalty, which the court set aside on that basis. This supports informed_decision_about: the human officer used the material in an adverse decision about the trader. The tool and how it was used remain unknown, and the judgment itself has not been inspected.

3 claims: 3 reported. What the statuses mean

Reported On 8 October 2025 the Additional Commissioner of Customs, Surat, imposed a penalty of ₹425,27,99,100 on a diamond trader under Section 114 of the Customs Act, 1962, for allegedly misdeclaring natural diamonds as lab-grown diamonds, and the Gujarat High Court dismissed his challenge on 20 January 2026.

Causal attribution. Facts of the proceedings as recited in the Supreme Court judgment, reported by legal outlets; the judgment itself was not read.

  • scconline.com(opens in new tab) supports · English
    'The present appeal arose out of an Order-in-Original dated 8 October 2025 passed by the Additional Commissioner of Customs, Surat, imposing a penalty of ₹425,27,99,100 on the appellant under Section 114, Customs Act, 1962, for misdeclaring a consignment of natural diamonds as lab-grown diamonds to pay a lower tariff. The challenge to the said penalty before the Gujarat High Court failed, as the appeal was dismissed vide order dated 20 January 2026.'
  • barandbench.com(opens in new tab) supports · English
    'The penalty was imposed for allegedly misdeclaring a consignment of natural diamonds as lab-grown diamonds to attract a lower tariff.'; 'the High Court dismissed his challenge on January 20, 2026, prompting him to approach the Supreme Court.'
Reported Legal reports quote the Supreme Court finding that the penalty order relied on nonexistent case law or fake citations, and on existing cases that did not support the attributed legal propositions, which it described as apparent AI hallucination.

Causal attribution. Finding of the Supreme Court after its own verification of the cited material, as quoted by the reports. The court attributes the defects to AI in qualified terms ('appears to be'); the tool is not named.

  • barandbench.com(opens in new tab) supports · English
    'Upon verifying such judgments and articles, it does appear that the second respondent has relied upon case laws that are either non-existent or have fake citations. A further investigation has also revealed that some of the case laws relied upon by the second respondent, which do exist, do not lay down the ratio deduced therefrom and it appears to be a hallucination of AI,' the Court observed.
  • upstox.com(opens in new tab) supports · English
    'Upon verification, the court found that the second respondent had "relied upon case laws that are either non-existent or have fake citations." It further found that some case laws which did exist did not lay down the legal propositions attributed to them, and that this "appears to be a hallucination of AI".'
Reported Legal reports say that on 2 September 2026 the Supreme Court treated reliance on dubious AI material as fatal to the penalty order, set aside that order and the High Court's order without deciding the merits, and revived the proceedings for fresh adjudication by a different officer of the same rank. The reports also say the court left any action against the order's author to the appointing authority.

Causal attribution. Holding of the Supreme Court as reported.

  • barandbench.com(opens in new tab) supports · English
    'The use of AI in this case, resulting in reliance placed by the second respondent on material which is dubious, proves fatal to the sustainability of the order imposing penalty on the appellant. Such circumstances compel us to interfere and remand the case,' the Court said.
  • scconline.com(opens in new tab) supports · English
    'The proceedings were revived for fresh adjudication by an officer of the same rank other than the officer who had passed the original order.'; 'The Court left it to the wisdom of the appointing authority to initiate such action against the author of the Order-in-Original dated 8 October 2025 as may be warranted in the circumstances, in accordance with law.'
  • upstox.com(opens in new tab) supports · English
    'The Supreme Court on Wednesday, September 2, 2026, set aside a customs penalty of over ₹425 crore'; 'A bench of Justice Dipankar Dutta and Justice Sheel Nagu did not examine the merits of the customs case at all.'
  • sud.ua(opens in new tab) context · Ukrainian
    'Верховний суд Індії 2 вересня 2026 року розглянув справу щодо використання штучного інтелекту працівником митниці, який послався на неіснуючі судові справи та фальшиві цитати, накладаючи штраф у розмірі близько $45 млн' (the Supreme Court of India on 2 September 2026 considered a case of a customs officer's use of AI, who cited non-existent cases and fake quotations while imposing a fine of about $45 million)

Sources

4 sources inspected, from 1 underlying account. Sources that repeat one account do not corroborate each other.

How the sources were read, and where the events happened

Full body (including JSON-LD article body) read by curl on 2026-09-29. Reports and quotes the Supreme Court judgment of 2 September 2026. Reinspected in the retained body on 2026-10-06; no direct judgment obtained in this review. Applies to s1.

SCC Times case note, read by curl on 2026-09-29; summarises the same judgment (2026 SCC OnLine SC 1741). Reinspected in the retained body on 2026-10-06; no direct judgment obtained in this review. Applies to s2.

Upstox (4 September 2026), read by curl on 2026-09-29; based on the same judgment. Reinspected in the retained body on 2026-10-06; no direct judgment obtained in this review. Applies to s3.

Ukrainian-language report (6 September 2026) read through the r.jina.ai relay on 2026-09-29 (direct fetch 403); translated by the reviewer. Cited only for context; it converts the penalty to about US$45 million. Reinspected in the retained body on 2026-10-06; no direct judgment obtained in this review. The Ukrainian article body was read with AI language assistance; it explicitly credits Supreme Court Observer and supplies context only. Applies to s4.

Event countries: India. Affected-person countries: Unknown. Court countries: India.

The order was passed by the Additional Commissioner of Customs, Surat, challenged in the Gujarat High Court and decided by the Supreme Court of India. The trader's country of residence is not stated in the read reports, so affected_person_countries is left empty.

Reviewed for publication 2026-10-06: Legal reporting describes a concrete penalty imposed on a trader through an administrative decision that used apparently AI-generated false authorities. The reported Supreme Court ruling connects reliance on that material to the decision to set the order aside. The trader is unnamed and the underlying customs allegation remains undecided. All cited accounts derive from the same judgment, whose text has not been inspected. No payment of the penalty or quantified financial loss is asserted.

People described

A diamond trader (not named here) penalised by the Surat customs authority

People reported harmed in this case

1 person

0 AI participants · 1 other person harmed

One trader, the appellant, on whom the penalty was imposed. The trader did not use the AI; the customs officer did. No other person is reported harmed.

Counted once within this case. The same person may appear in other cases. This count does not establish AI causation.

Tags

#india#surat#customs#supreme-court#hallucinated-citations#administrative-decision#penalty

Cite this case

Compiled per our published methodology: verification statuses, sourcing standards, and corrections process.

APA

NOPE. (2026). India's Supreme Court overturns customs penalty citing apparent AI hallucinations. AI incidents. https://nope.net/incidents/2026-surat-customs-penalty-ai-hallucinated-citations-supreme-court

BibTeX

@misc{2026_surat_customs_penalty_ai_hallucinated_citations_supreme_court,
  title = {India's Supreme Court overturns customs penalty citing apparent AI hallucinations},
  author = {NOPE},
  year = {2026},
  howpublished = {AI incidents},
  url = {https://nope.net/incidents/2026-surat-customs-penalty-ai-hallucinated-citations-supreme-court}
}

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