Exemptions granted to parties paying electricity duty can be modified or revoked, but state authorities must give a reasonable notice period of one year, the Supreme Court of India has ruled in a recent case.
The court judgment resulted from (2026). The Maharashtra state government, in a 1 September 1994 notification, granted a tax exemption on the payment of electricity consumed by industries through captive power plants.
The Supreme Court ruled that the government can withdraw or modify tax exemptions it grants, citing section 5A of the Bombay Electricity Duty Act, 1958.
Another notification on 1 April 2000 enabled the government to bill the premises that had been consuming energy, which was challenged before the Bombay High Court.
On 16 June 2005 (2005 notification), another notification exempting payment of electricity duty on consumption of energy generated in captive power generation was released with retrospective effect. This effectively restored the earlier exemption from 1 May 2005.
However, the exemption was not restored for the period from 1 April 2000 to 30 April 2005.
The Bombay High Court decided that the 1994 notification invited parties to set up electricity generation facilities and the 2000 notification made this infrastructure subject to a higher rate of billing. The higher billing rate is grounds for parties to raise grievances with the state electricity authorities.
The state authorities rejected these representations on 25 January 2007. On 23 February 2007, notices were issued demanding payment.
The matter was again brought before the Bombay High Court. In a 5 October 2009 judgment, the court held that the object of granting an exemption was to encourage the industry to meet its own requirements and the state did not provide justifiable grounds for withdrawal of the exemption.
Finally, the court quashed the notifications observing them to be discriminatory, arbitrary and suffering from vice of non-application of mind.
This led the state government to file an appeal before the Supreme Court of India.
The state argued that the revenue generated is in the public’s interest and the power granting an exemption includes the power to withdraw it. The state’s arguments relied on (1962), (1994), and (1996) among other cases.
The respondents argued that the state did not provide proper justification for the notices and the withdrawal of exemption must be reasonable, non-arbitrary and within the ambit of article 14 of the Constitution of India.
They argued that the exemption notifications from the government led to the power producers making significant investments in setting up power plants. This bound the government by the doctrines of promissory estoppel and legitimate expectation. They relied on (1961) and other decisions to support their arguments.
The court, while considering the arguments and facts of the case, held that the exemption granted by the government was designed to promote industrial self-sufficiency in power generation, and there could be no assurance that the exemption would continue indefinitely.
The court observed that, “the right to enjoy the exemption from payment of tax is a defeasible right, as the same can be taken away in exercise of power under which it was granted”.
The court has observed that while the removal of the exemption is within the powers of the government, it is in the interest of justice that such removal take effect after the exhaustion of a notice period. The court decided that one year constitutes reasonable notice.
The Supreme Court then set aside the high court judgment and upheld the state’s power to withdraw or modify the exemptions it grants.
