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Introduction

The issue of whether employers can claim income-tax deductions on delayed deposits of employees’ Provident Fund (PF) and Employees’ State Insurance (ESI) contributions has been one of the most litigated and confusing areas of Indian tax law. Over the years, different High Courts across the country have taken contradictory positions, leaving employers, tax professionals, and compliance teams uncertain about the correct legal position.

In a significant development, the Supreme Court of India has agreed to examine this issue and resolve the long-standing conflict. A Division Bench comprising Justice J.B. Pardiwala and Justice Sandeep Mehta has issued notice in the case of Woodland (Aero Club) Private Limited Director v. Assistant Commissioner of Income Tax (SLP (C) No. 1532 of 2026). The Court will decide whether an employer can claim a deduction under the Income-tax Act, 1961, for employees’ PF and ESI contributions that are deposited after the due dates prescribed under the respective welfare laws, but before the due date of filing the income-tax return.

Background of the Dispute

Every month, employers deduct certain amounts from employees’ salaries towards statutory welfare schemes such as Provident Fund and Employees’ State Insurance. These deductions are not the employer’s own money; they are amounts collected from employees and held by the employer for onward remittance to statutory authorities.

Under labour welfare laws such as the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, and the Employees’ State Insurance Act, 1948, strict timelines are prescribed for depositing these contributions. Delays attract interest, damages, and other consequences under the respective Acts.

The controversy arises under the Income-tax Act, 1961: if these employees’ contributions are deposited late under welfare laws, but before the due date for filing the income-tax return, can the employer still claim them as a deduction while computing taxable income?

For years, taxpayers relied on favourable court decisions that allowed such deductions. However, several High Courts, including the Delhi High Court, have taken a stricter view, denying deductions for delayed deposits of employees’ contributions. This divergence has now compelled the Supreme Court to step in.

Statutory Framework Under the Income-tax Act

To understand the controversy, it is essential to examine the relevant provisions of the Income-tax Act, 1961.

Section 2(24)(x): Employees’ Contributions as Income

Section 2(24)(x) includes within the definition of “income” any sum received by the employer from employees as contributions to PF, ESI, or similar welfare funds. This means that the moment an employer deducts PF or ESI from an employee’s salary, that amount becomes the employer’s income for tax purposes.

This legal fiction is crucial. It treats employees’ contributions differently from employer’s own contributions and forms the foundation of the revenue’s argument.

Section 36(1)(va): Deduction of Employees’ Contributions

Section 36(1)(va) allows deduction of employees’ contributions only if they are credited by the employer to the employees’ account in the relevant fund on or before the “due date.” The Explanation to this section defines “due date” as the date by which the employer is required to credit the employees’ contribution under the relevant welfare law.

In simple terms, this provision links tax deductibility directly to timely compliance with labour welfare statutes.

Section 36(1)(iv): Employer’s Contributions

Employer’s own contributions to PF and similar funds are governed by Section 36(1)(iv). These contributions are not treated as income under Section 2(24)(x). Instead, they are allowable as business expenditure, subject to conditions laid down in the Act.

Section 43B: Actual Payment Basis

Section 43B allows certain deductions, including employer’s contributions to PF and ESI, only on actual payment. Importantly, it permits deductions if payment is made on or before the due date for filing the income-tax return under Section 139(1), even if payment is made after the end of the financial year.

The controversy lies in whether this beneficial provision also applies to employees’ contributions covered under Section 36(1)(va).

Employer’s Contribution vs Employees’ Contribution: A Fundamental Difference

One of the central issues in the dispute is whether employer’s contributions and employees’ contributions should be treated alike for tax purposes.

Employer’s contributions represent the employer’s statutory obligation. These are business expenses incurred by the employer and are not first treated as income.

Employees’ contributions, on the other hand, are amounts deducted from employees’ salaries. The employer merely acts as a trustee or custodian of these funds. The law treats these sums as income of the employer under Section 2(24)(x), with deduction allowed only if strict conditions are met.

This conceptual distinction has been emphasised by courts that support the revenue’s position.

Divergent Judicial Views Across High Courts

Over the past two decades, Indian High Courts have expressed sharply divergent views on this issue.

View Allowing Deduction Before Return Filing Date

Several High Courts took a liberal and taxpayer-friendly approach. They held that both employer’s and employees’ contributions are covered by Section 43B. According to this view, if the contributions are deposited before the due date for filing the income-tax return, the deduction should be allowed.

This interpretation relied heavily on the Supreme Court’s earlier decision in CIT v. Alom Extrusions Ltd., which emphasised the intent of Section 43B to encourage actual payment rather than penalise delays.

Courts following this approach focused on substance over form, treating delays as procedural lapses rather than grounds for permanent disallowance.

View Disallowing Deduction After Statutory Due Date

Other High Courts, including the Delhi High Court, adopted a strict interpretation. They held that employees’ contributions are governed exclusively by Section 36(1)(va) read with Section 2(24)(x). According to this view, deduction is permissible only if the contribution is deposited within the due date prescribed under the relevant welfare law.

These courts reasoned that Section 43B applies only to employer’s contributions and cannot override the specific conditions imposed for employees’ contributions. They also distinguished Alom Extrusions on the ground that it did not consider Sections 2(24)(x) and 36(1)(va).

The Delhi High Court’s Reasoning

The Delhi High Court, whose decision is under challenge before the Supreme Court, firmly supported the revenue’s position.

It held that employees’ contributions deducted from salaries are deemed income of the employer and are held in trust. The employer’s failure to deposit these amounts within the statutory due date results in a permanent disallowance.

The Court further ruled that the non-obstante clause in Section 43B cannot be extended to employees’ contributions governed by Section 36(1)(va). It also observed that Explanation 5 to Section 43B, which clarifies certain aspects of deductibility, does not dilute the specific requirements applicable to employees’ contributions.

The Supreme Court’s Intervention

Recognising the conflicting interpretations across High Courts, the Supreme Court has agreed to examine the issue.

In the Woodland (Aero Club) case, the Division Bench recorded that there are “two schools of thought” regarding the interpretation of the term “due date.” One school insists on strict compliance with welfare law deadlines, while the other allows deductions up to the return filing date.

Acknowledging the extensive and conflicting body of precedents, the Bench observed that the issue requires authoritative resolution and issued notice, returnable in four weeks.

Arguments of the Revenue

The revenue’s arguments are rooted in statutory interpretation and policy considerations:

1. Employees’ contributions are treated as income under Section 2(24)(x).

2. Deduction under Section 36(1)(va) is conditional upon timely deposit under welfare laws.

3. Section 43B does not apply to employees’ contributions.

4. Allowing delayed deposits would defeat the objective of protecting employees’ welfare funds.

According to the revenue, employers should not benefit from delays in remitting money that belongs to employees.

Arguments of the Assessee-Employer

The assessee-employer relies on principles of equity, consistency, and legislative intent:

1. The purpose of Section 43B is to ensure actual payment, not to impose harsh penalties.

2. Treating employer’s and employees’ contributions differently leads to arbitrary results.

3. Several High Courts have allowed deductions if payment is made before the return filing date.

4. Once payment is made, no loss is caused to the exchequer or employees.

The assessee also highlights the compliance burden and practical difficulties faced by businesses.

Practical Impact on Employers

Until the Supreme Court settles the issue, employers face uncertainty and litigation risk.

Tax assessments may disallow deductions for delayed deposits, leading to higher tax demands, interest, and penalties. Employers must also deal with inconsistent treatment depending on jurisdiction.

From a compliance perspective, the safest approach is to ensure that employees’ contributions are deposited within the statutory due dates under PF and ESI laws.

Possible Outcomes and Implications

The Supreme Court’s decision will have far-reaching consequences:

1. A ruling in favour of employers could provide relief and bring uniformity.

2. A ruling in favour of the revenue would reinforce strict compliance and increase tax costs for non-compliant employers.

3. Past assessments and pending litigation may be impacted depending on whether the ruling is applied retrospectively or prospectively.

Why This Issue Matters

This issue is significant because it affects millions of employees and thousands of businesses. Accurate interpretation promotes trust in the tax system, ensures employee welfare, and provides clarity to employers.

Courts must balance strict statutory interpretation with practical realities and legislative intent.

Conclusion

The Supreme Court’s decision in the Woodland (Aero Club) case is expected to finally resolve the long-standing controversy surrounding the deductibility of delayed PF and ESI deposits. By addressing conflicting High Court rulings, the apex court will provide much-needed clarity and certainty.

Until then, employers should adopt a cautious approach and prioritise timely compliance with welfare laws. The forthcoming judgment will shape not only tax jurisprudence but also compliance culture in India.

Case Details

• Case Title: Woodland (Aero Club) Private Limited Director v. Assistant Commissioner of Income Tax

• Case Number: Petition for Special Leave to Appeal (C) No. 1532 of 2026

• Bench: Justice J.B. Pardiwala and Justice Sandeep Mehta

Patta Chitta is one of the most important land records in Tamil Nadu. It serves as official proof of ownership, land classification, and revenue compliance. Whether you are purchasing property, inheriting ancestral land, applying for a home loan, or planning a resale, a valid Patta Chitta is critical.

Despite this, Patta Chitta applications are frequently rejected. This often causes panic among landowners and buyers. However, the reality is reassuring—most Patta Chitta rejections are procedural and temporary, not permanent.

In almost every case, rejection simply means that some data mismatch, missing compliance, or documentation gap must be corrected. Once rectified, approval is very much achievable.

Why Do Patta Chitta Applications Get Rejected?

Patta Chitta approval depends on three core factors:

1. Accuracy of land details such as survey number, extent, and boundaries

2. Clear and continuous ownership records

3. Full compliance with government dues and survey requirements

If even one of these factors is missing or inconsistent, the application is likely to be rejected. Let us now examine the most common reasons in detail.

1. Survey Number Mismatch

Why does a survey number mismatch lead to Patta Chitta rejection?

Survey number mismatch is the single most common reason for Patta Chitta rejection. A survey number is the unique identity of a land parcel in revenue records. If the survey number mentioned in your Sale Deed does not exactly match the government revenue database, the application is automatically rejected.

Even a minor mismatch—such as a wrong digit or missing subdivision—can trigger rejection.

Common causes of survey number mismatch

1. Typographical errors in registered Sale Deeds

2. Use of old survey numbers instead of updated resurvey numbers

3. Incorrect subdivision references (for example, 100/1 instead of 100/1A)

4. Land subdivisions or mergers not reflected in old documents

This issue is especially common in rapidly developing areas where large plots were divided into residential layouts over time.

How to fix survey number mismatch

1. Obtain the Field Measurement Book (FMB) sketch from the local survey office or online portal

2. Compare the survey details in your Sale Deed with current revenue records

3. Identify the exact point where the mismatch occurs

4. Submit a correction or grievance application through the Taluk office or Tamil Nadu e-Services portal

5. Attach supporting documents such as the parent deed, FMB sketch, and ID proof

6. Follow up with the Village Administrative Officer (VAO) for verification

Early consultation with revenue officials can significantly reduce correction time.

2. Unpaid Government Dues and Taxes

How do unpaid dues cause Patta Chitta rejection?

Patta Chitta not only confirms ownership but also verifies that the land is compliant with government obligations. If any government dues are pending, the system flags the application during verification.

Modern digital systems link land records with tax databases, making it impossible to bypass unpaid dues.

Common types of unpaid dues

1. Land Revenue Tax (Kist) payable annually to the Revenue Department

2. Local body taxes payable to municipalities or panchayats

3. Water cess applicable to certain agricultural lands

4. Agricultural-to-residential land conversion charges

This problem is particularly common in inherited or vacant properties where previous owners may have skipped tax payments for several years.

How to fix unpaid dues-related rejection

1. Check pending dues at the VAO office or relevant online tax portal

2. Pay all outstanding amounts immediately

3. Collect official stamped receipts for each payment

4. Upload these receipts during Patta reapplication or reply to the query

5. Reapply once the system reflects updated payment status

Impact of unpaid dues on approval

1. Land tax arrears usually result in automatic rejection

2. Local body dues often put applications on hold

3. Conversion charges lead to conditional rejection until paid

Clearing dues early improves both approval chances and resale value.

3. Incomplete or Outdated Land Surveys

Can incomplete land surveys stop Patta Chitta approval?

Yes. Incomplete or outdated land surveys are a major reason for rejection. If boundaries or measurements do not match official records, revenue authorities cannot issue a new Patta Chitta.

Many rural and peri-urban lands were last surveyed decades ago. Over time, roads, layouts, and encroachments may have altered the ground reality.

Warning signs of survey-related problems

1. Boundary disputes with neighboring landowners

2. Plot size mismatch between Sale Deed and actual site

3. Missing or damaged pages in the Field Measurement Book

4. Objections raised during site inspection

How to correct survey-related issues

1. Apply for a resurvey at the Taluk office

2. Pay the prescribed survey fee

3. Inform adjacent landowners before the site visit

4. Be present during the government surveyor’s inspection

5. Ensure boundaries and measurements are properly recorded

6. Wait for the surveyor’s report to be submitted to the Tahsildar

7. Once updated, reapply for Patta Chitta

Although time-consuming, a completed survey ensures long-term legal clarity.

4. Inheritance and Ownership Documentation Issues

Why do inheritance issues cause Patta Chitta rejection?

Patta Chitta requires a clear, uninterrupted chain of ownership. In inherited properties, rejection occurs when authorities cannot verify how ownership passed from one generation to the next.

Revenue records often continue to reflect ancestors’ names even decades later, leading to rejection when heirs apply without proper documentation.

Common ownership-related gaps

1. Missing Legal Heir Certificate

2. Unregistered family partition deeds

3. Oral or informal land division within families

4. Ongoing court disputes or stay orders

How to resolve inheritance-related rejection

1. Obtain a Legal Heir Certificate from the Tahsildar

2. Register a Partition Deed or Settlement Deed if land is divided

3. Compile the complete chain of title from the original owner to the current claimant

4. Attach death certificates, heir certificates, and registered deeds

5. Reapply once ownership records are complete

For high-value or multi-heir properties, legal guidance is strongly recommended.

5. Incorrect or Poor-Quality Document Uploads

How do document upload errors lead to rejection?

In the digital Patta Chitta system, uploaded documents are the primary basis for verification. If documents are unclear, incomplete, or incorrect, officials cannot verify ownership and must reject the application.

Common document upload mistakes

1. Uploading a Sale Agreement instead of a registered Sale Deed

2. Missing back pages containing registration stamps and signatures

3. Blurred or low-resolution scans

4. Uploading wrong or outdated Encumbrance Certificates

Best practices for document upload

1. Scan documents at a minimum resolution of 300 DPI

2. Use PDF format for all uploads

3. Ensure every page of each document is included

4. Name files clearly for easy reference

5. Double-check readability before submission

High-quality digital submissions significantly increase approval chances.

Conclusion: Patta Chitta Rejection Is a Fixable Problem

Patta Chitta rejection is frustrating but rarely final. In most cases, rejection highlights outdated records, minor mismatches, unpaid dues, or missing documentation accumulated over decades.

By understanding the top Patta Chitta rejection reasons and following the structured correction steps explained above, landowners can secure clear, dispute-free land records. A proactive approach with revenue authorities and proper documentation is the key to success.

Introduction: Why This Supreme Court Ruling Matters

The question of whether heavy industrial and mining machinery should be treated as “motor vehicles” under Indian law has troubled industries, tax authorities, and courts for decades. With increasing mechanisation, factories and mines routinely use dumpers, excavators, loaders, dozers, surface miners, and drills—all of which are mechanically propelled and capable of movement, yet rarely, if ever, touch public roads.

In a landmark judgment, the Supreme Court of India has now decisively clarified that heavy machinery used exclusively within factories or enclosed industrial premises is not liable for motor vehicle registration or road tax. This ruling brings long-awaited certainty to industries across India and reinforces the constitutional limits on State taxation powers.

The decision came in Ultratech Cement Ltd. v. State of Gujarat, where the Court examined the scope of the Motor Vehicles Act, 1988 and the taxing power of States under the Constitution.

Background of the Dispute

How the Issue Arose

The dispute originated in the State of Gujarat, where transport authorities issued directions requiring registration under Section 39 of the Motor Vehicles Act, 1988 and payment of motor vehicle tax under Section 3 of the Gujarat Motor Vehicles Tax Act, 1958 for various categories of heavy machinery.

These machines included:

1. Dumpers

2. Loaders

3. Excavators

4. Dozers

5. Surface miners

6. Drilling equipment

Crucially, all these machines were used exclusively within factory and mining premises, which were fenced, controlled, and not accessible to the public. They were never driven on public roads.

Despite this, the authorities issued show-cause notices demanding:

1. Registration of the machinery

2. Payment of motor vehicle tax

3. Interest and penalty for alleged non-compliance

The Gujarat High Court upheld the State’s action, prompting the affected industries to approach the Supreme Court.

Legal Questions Before the Supreme Court

The appeals raised fundamental questions of constitutional and statutory interpretation:

1. Do heavy industrial machines used only inside factories qualify as “motor vehicles” under Section 2(28) of the Motor Vehicles Act, 1988?

2. Can a State levy motor vehicle tax on equipment that is not used or intended for use on public roads?

3. Does mere mechanical propulsion or theoretical mobility make machinery taxable as a motor vehicle?

Contentions of the Appellants (Industries)

Senior counsel appearing for the appellants advanced a structured and evidence-based argument.

1. Exclusion Under Section 2(28) of the Motor Vehicles Act

Section 2(28) defines a “motor vehicle” but expressly excludes:

“a vehicle of a special type adapted for use only in a factory or in any other enclosed premises.”

The appellants argued that:

1. The machinery was specially designed and manufactured for off-road industrial use

2. It was certified by manufacturers as unsuitable for ordinary road use

3. It lacked essential road-use features such as lighting systems, speed regulation, suspension suitable for highways, and compliance with road safety norms

2. Constitutional Limitation Under Entry 57, List II

The power of States to levy motor vehicle tax flows from Entry 57 of List II of the Seventh Schedule to the Constitution, which permits taxation only on:

“vehicles suitable for use on roads.”

The appellants emphasised that constitutional entries define the outer boundary of legislative power. A State statute cannot expand this scope by clever wording.

3. Actual and Intended Use Is Decisive

Evidence showed that the machinery:

1. Operated only within enclosed premises

2. Never used public roads

3. Did not derive any benefit from road infrastructure maintained by the State

Therefore, imposing road tax would be arbitrary and unconstitutional.

Contentions of the Respondent State of Gujarat

The State took a broader interpretation of both the statute and its taxing power.

1. Wide Language of the Gujarat Motor Vehicles Tax Act

The State relied on Section 3(1) of the Gujarat Motor Vehicles Tax Act, 1958, which authorises tax on:

“all motor vehicles used or kept for use in the State.”

According to the State, the provision does not distinguish between on-road and off-road usage.

2. Mechanical Propulsion as the Test

The State argued that:

1. The machinery was mechanically propelled

2. It could move from one place to another

3. Some machines could theoretically be driven short distances on roads

Therefore, they fell within the broad definition of “motor vehicle” and attracted tax.

Constitutional Framework: The Foundation of the Judgment

Before interpreting statutes, the Supreme Court turned to the constitutional source of taxing power.

Entry 57, List II – A Built-In Limitation

Entry 57 authorises States to tax:

“vehicles, whether mechanically propelled or not, suitable for use on roads.”

The Court stressed that:

1. This phrase is not ornamental

2. It places a substantive constitutional limitation on State taxation

3. Any State law exceeding this limit is invalid to that extent

A taxing statute cannot enlarge the constitutional field by redefining what qualifies as a taxable vehicle.

Interpreting Section 2(28) of the Motor Vehicles Act, 1988

The Court undertook a careful textual and purposive interpretation of Section 2(28).

Two Distinct Parts of the Definition

1. Inclusive Part – Covers mechanically propelled vehicles adapted for use on roads

2. Exclusionary Part – Expressly excludes special-type vehicles adapted only for factory or enclosed premises use

The Court held that:

1. The exclusion is deliberate and substantive

2. It must be given full legal effect

3. Treating it as incidental would render the exclusion meaningless

Key Judicial Observations

1. Capability Is Not the Same as Suitability

The Court made a crucial distinction:

A vehicle may be capable of movement, but that does not make it suitable for ordinary road use.

Design intent, certification, and actual use are decisive factors.

2. Actual Use Cannot Be Ignored

Where consistent evidence shows that machinery:

1. Is designed for off-road use

2. Is certified as such

3. Is actually confined to enclosed premises

…it cannot be artificially pulled into the tax net.

3. Warning Against Overbroad Interpretation

The Court cautioned that accepting the State’s argument would lead to absurd consequences, such as:

1. Military tanks being taxed as motor vehicles

2. Aircraft towing vehicles being treated as road vehicles

Such outcomes could never have been intended by the Constitution or Parliament.

Reliance on Landmark Precedents

Bolani Ores Ltd. v. State of Orissa

The Court reaffirmed the principle from Bolani Ores Ltd. v. State of Orissa:

1. “Adapted for use upon roads” means suitable for ordinary road use

2. Vehicles confined to enclosed premises are not taxable

Tarachand Logistic Solutions Ltd. v. State of Andhra Pradesh

In Tarachand Logistic Solutions Ltd. v. State of Andhra Pradesh, the Court had held that:

1. Where a vehicle does not operate in a public place

2. And does not benefit from public roads

…imposing motor vehicle tax is unjustified.

The present judgment builds directly on these settled principles.

The Final Decision of the Supreme Court

The Supreme Court allowed the appeals and held that:

1. Heavy construction and industrial machinery used only within factories or enclosed premises

2. Is excluded from the definition of “motor vehicle” under Section 2(28)

3. Is not liable for registration under Section 39 of the Motor Vehicles Act, 1988

4. Is not subject to motor vehicle tax under the Gujarat Motor Vehicles Tax Act, 1958, unless actually used on public roads

The judgment was delivered by:

1. Justice Pankaj Mithal

2. Justice Prasanna B. Varale

Practical Impact of the Judgment

1. Relief for Industries and Manufacturers

Industries involved in:

1. Cement

2. Mining

3. Infrastructure

4. Power generation

5. Heavy manufacturing

will benefit from significant cost savings and reduced compliance burdens.

2. Clear Compliance Framework

Companies should now focus on:

1. Maintaining manufacturer certificates

2. Documenting exclusive off-road use

3. Ensuring machinery does not operate on public roads

3. Limits on State Tax Powers

States cannot expand motor vehicle taxation beyond the constitutional boundary of road suitability.

What If Such Machinery Is Occasionally Used on Roads?

The Court clarified that actual use matters. If:

1. Machinery is regularly or substantially used on public roads

2. Or modified for road suitability

…it may attract registration and tax for that period.

Conclusion: A Constitutionally Sound and Industry-Friendly Ruling

The Supreme Court’s ruling in Ultratech Cement Ltd. v. State of Gujarat is a decisive reaffirmation of constitutional discipline in taxation. By holding that heavy machinery used exclusively within factories is not liable for road tax, the Court has:

1. Protected industries from arbitrary taxation

2. Clarified the scope of the Motor Vehicles Act

3. Reinforced the principle that taxation must align with constitutional authority and practical reality

For industries, compliance professionals, and policymakers alike, this judgment sets a clear, fair, and legally sound benchmark for the future.

Quick Case Reference

• Case Title: Ultratech Cement Ltd. v. State of Gujarat & Ors.

• Case No.: Civil Appeal Nos. 3352–3353 of 2017

• Court: Supreme Court of India

• Coram: Justice Pankaj Mithal & Justice Prasanna B. Varale

Introduction

In a landmark judgment with far-reaching implications for India’s taxation framework, Special Economic Zones (SEZs), and the power sector, the Supreme Court of India has categorically ruled that customs duty cannot be levied on electricity generated within a Special Economic Zone and supplied to the Domestic Tariff Area (DTA).

The ruling came while deciding an appeal filed by Adani Power Limited, which had challenged the continued levy of customs duty on electrical energy generated in its SEZ-based power project and supplied to consumers in the DTA.

At its core, the judgment reinforces a foundational principle of Indian constitutional law: no tax can be imposed or collected without clear authority of law. The Court held that the absence of a statutory charging provision under the Customs Act, 1962 could not be cured through exemption notifications, delegated legislation, or changes in duty rates.

This decision is not merely about one company or one sector. It reasserts constitutional discipline under Articles 14 and 265 of the Constitution of India, strengthens judicial precedent, and provides much-needed clarity for SEZ developers, power generators, policymakers, and tax authorities across the country.

Background of the Dispute

Adani Power’s SEZ-Based Power Project

Adani Power Limited operates a thermal power generation unit located within a Special Economic Zone, a legally notified area established to promote exports, investment, and economic development through fiscal and regulatory incentives.

Electricity generated from this SEZ unit was supplied to the Domestic Tariff Area (DTA), i.e., the rest of India outside the SEZ. Under the SEZ framework, goods supplied from an SEZ to the DTA are treated as “imports” for limited purposes, primarily to determine applicable duties and taxes.

The Government’s Attempt to Levy Customs Duty

Despite the fact that imported electrical energy attracts a nil rate of customs duty, the Union Government issued a series of notifications starting from 2010, attempting to levy customs duty on electricity supplied from SEZs to the DTA on a per-unit basis.

These notifications sought to treat electricity generated within India—but inside an SEZ—as if it were imported goods, thereby making it liable for customs duty.

The First Round: Gujarat High Court’s 2015 Judgment

Adani Power challenged these notifications before the Gujarat High Court. In its landmark judgment dated 15 July 2015, the High Court struck down the levy.

Key Findings of the Gujarat High Court (2015)

The High Court held that:

1. Electricity generated within India cannot be treated as “imported goods”

2. There was no charging event under Section 12 of the Customs Act

3. Delegated legislation under Section 25 (exemption notifications) cannot create a tax where none exists

4. Levying customs duty in this manner violated Article 265 of the Constitution, which mandates that tax must be authorised by law

5. The levy also offended Article 14, as it destroyed parity between imported electricity (nil duty) and domestically generated electricity

This declaration of law was later affirmed by the Supreme Court, thereby giving it binding force.

The Second Round: Continued Levy and the 2019 High Court Judgment

Despite the clear declaration of law in 2015, customs authorities continued to levy and collect duty for later periods, relying on subsequent notifications that revised the rate or structure of duty.

When Adani Power sought refunds and enforcement of the earlier judgment, a coordinate bench of the Gujarat High Court in 2019 denied relief. The High Court reasoned that since the later notifications were not specifically challenged, the benefit of the 2015 ruling could not be extended automatically.

This narrow interpretation led to the present appeal before the Supreme Court.

Issues Before the Supreme Court

The Supreme Court was called upon to decide:

1. Whether customs duty could legally be levied on electricity supplied from an SEZ to the DTA

2. Whether later notifications could revive a levy already declared illegal

3. Whether a citizen must repeatedly challenge successive notifications based on the same invalid legal foundation

4. Whether the 2015 judgment had continuing and binding effect

Supreme Court’s Analysis and Observations

A Bench comprising Justice Aravind Kumar and Justice N.V. Anjaria undertook a detailed constitutional and statutory analysis.

1. Absence of a Charging Event Under the Customs Act

The Court reaffirmed that Section 12 of the Customs Act is the charging provision for customs duty. It applies only when there is import into, or export out of, India.

The Court categorically held:

“Electrical energy generated within India and wheeled into the Domestic Tariff Area is not, in truth, a case of import into India.”

Since electricity was generated domestically, the fundamental taxable event itself was missing.

2. Electricity Is Not “Imported Goods” in This Context

Although the SEZ Act treats supplies from SEZs to the DTA as imports for certain purposes, this legal fiction cannot override constitutional or statutory limits.

The Court clarified that:

1. Legal fictions must be strictly confined to the purpose for which they are created

2. They cannot be expanded to create a tax where the charging provision does not exist

3. Limits of Delegated Legislation Under Section 25

The Union argued that subsequent notifications issued under Section 25 of the Customs Act justified the levy.

The Court rejected this argument outright, holding that:

1. Section 25 only grants power to exempt or modify existing duties

2. It cannot create a new levy

3. Delegated legislation cannot cure the absence of legislative competence

The Court observed that what Parliament itself cannot do directly, cannot be done indirectly through subordinate legislation.

4. Parity Principle Under the SEZ Act

Under Section 30 of the SEZ Act, goods cleared from an SEZ to the DTA are chargeable to duties “as applicable to imported goods”.

The Supreme Court emphasised the parity principle:

1. Imported electricity attracts nil customs duty

2. Therefore, electricity supplied from an SEZ to the DTA cannot be subjected to a higher or different duty

Since this statutory position remained unchanged after 2015, the Court found no justification for a different outcome in later years.

5. Binding Nature of the 2015 Declaration of Law

One of the most significant aspects of the judgment is its reaffirmation of judicial discipline and precedent.

The Court held:

“Once a declaration of law is rendered and affirmed by this Court, it acquires binding normative force and governs all transactions resting on the same legal footing.”

The 2019 High Court decision was criticised for narrowing the scope of a coordinate bench’s judgment without referring the matter to a larger bench, which violated settled principles of judicial propriety.

6. No Need to Repeatedly Challenge Identical Illegality

The Supreme Court rejected the argument that Adani Power should have separately challenged every subsequent notification.

It held that:

1. Courts do not function on “technical formalism”

2. A citizen cannot be compelled to repeatedly litigate against the same illegality clothed in different forms

3. Once the foundation of a levy is struck down, all derivative actions fall automatically

7. Colourable Exercise of Power

The Court characterised the impugned notifications as a “colourable exercise of delegated power”, observing that merely altering the rate or timing of the levy does not legitimise an unconstitutional tax.

Constitutional Dimensions of the Judgment

Article 265: Authority of Law

Article 265 of the Constitution mandates:

“No tax shall be levied or collected except by authority of law.”

The Supreme Court reaffirmed that executive convenience or revenue considerations cannot override constitutional mandates.

Article 14: Equality Before Law

The levy was also found to violate Article 14, as it created arbitrary discrimination between:

1. Imported electricity (nil duty)

2. Domestically generated electricity supplied from SEZs

Final Decision and Directions

The Supreme Court:

1. Set aside the 2019 judgment of the Gujarat High Court

2. Allowed the appeal filed by Adani Power Limited

3. Declared that the customs duty levied on electricity supplied from SEZs to the DTA lacked authority of law

4. Directed the Union of India and customs authorities to refund the amounts collected, after verification, without interest

5. Ordered that no further demands be enforced for the period covered by the appeal

Importantly, the Court clarified that:

Its findings are confined to the existing statutory framework and do not prevent Parliament from enacting a future legislative regime, if it so chooses.

Broader Implications of the Judgment

For SEZ Developers and Power Producers

1. Provides long-term tax certainty

2. Prevents retrospective or indirect levies

3. Reinforces investor confidence in SEZ policy

For Tax Administration

1. Reaffirms limits of delegated legislation

2. Emphasises constitutional compliance over revenue considerations

For Constitutional Jurisprudence

1. Strengthens the doctrine of precedent

2. Protects taxpayers from repetitive litigation

3. Upholds the rule of law

Cause Title and Appearances

Case: Adani Power Limited & Anr. v. Union of India & Ors.
Neutral Citation: 2026 INSC 1

For the Appellant:
Senior Advocate P. Chidambaram

For the Respondents:
Raghvendra P. Shankar, Additional Solicitor General

Conclusion

The Supreme Court’s ruling in favour of Adani Power is a landmark affirmation of constitutional tax discipline. By holding that customs duty cannot be levied on electricity supplied from SEZs in the absence of a statutory charging event, the Court has reinforced the supremacy of law over executive action.

More importantly, the judgment sends a clear message: illegal levies cannot be sustained through procedural manoeuvres, altered rates, or repeated notifications. Stability, predictability, and respect for judicial outcomes remain central to India’s constitutional order.

For businesses, policymakers, and legal practitioners alike, this decision stands as a powerful reminder that taxation must always flow from law—not convenience.