The Supreme Court, in an order passed by a Bench of Justices Dipankar Datta and Sheel Nagu, has set aside a customs penalty of approximately ₹425.28 crore imposed under Section 114 of the Customs Act, 1962, along with the Gujarat High Court's order that had upheld it — after finding that the adjudicating customs authority's own order relied on case-law citations that do not actually exist. The Bench described the underlying order as having been built on what it termed a "hallucination of AI," where a generative tool appears to have fabricated case names and citations that were then reproduced in an official adjudication order as if they were genuine precedent.
The matter arose out of a customs penalty dispute in which the assessee challenged the adjudicating authority's reliance on legal authorities that, on scrutiny, could not be traced to any real reported decision — the citations did not correspond to any actual judgment, and the propositions attributed to them did not exist in Indian case law at all. Both the original adjudicating order and the Gujarat High Court's order dismissing the challenge to it had proceeded on the assumption that the cited "precedents" were genuine, without either forum independently verifying the citations before relying on them.
In setting the penalty aside, the Supreme Court was emphatic that artificial intelligence tools have a legitimate, limited role in legal and quasi-judicial work but cannot be allowed to substitute for the adjudicator's own independent reasoning and verification. The Bench observed, in substance, that AI "may serve as training wheels" to assist research and drafting, but must never be allowed into "the pilot's seat" of an actual adjudicatory decision — meaning that any citation or proposition generated with the assistance of such a tool must be independently checked against the actual reported judgment before it is relied upon in a binding order, particularly one imposing a penalty of this magnitude.