Karnataka High Court: The single Judge Bench of Anant Ramanath Hegde, J., was called upon to consider the following major issues:
- Whether the supply of electricity to ensure minimum demand, without actual consumption of electricity, amounts to consumption or sale and enables the State to levy tax on the tariff for the supply of electricity?
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Whether Section 3(1) of the Karnataka Electricity (Taxation on Consumption) Act, 1959 (1959 Act) as amended by Amending Act 7 of 2003 and Amending Act 5 of 2004 imposing tax on electricity charges ultra vires?
While considering the afore-stated issues, the Court declared Section 3(1) of the 1959 Act, as amended by Act No.7 of 2003 and Act No.5 of 2004, imposing tax on electricity charges as unconstitutional. The Court further clarified that only the tax on ‘minimum tariff’ has been held unconstitutional and not the tax collected on the consumption of electricity.
The Court held that supply of electricity to the consumer to ensure availability of electricity for consumption, does not amount to consumption or sale, unless the electricity consumed by the consumer, and the State has no legislative competence under Entry 53, List II of Seventh Schedule to the Constitution to levy tax on minimum tariff. The State is competent to levy tax under Entry 53, List II of Seventh Schedule only on actual consumption or sale of electricity.
Background:
The liability to pay tax under the original Section 3(1) before 2003 amendment was on the energy consumed,
After Amendment of 2003 to the 1959 Act, the State was enabled to impose ad-valorem tax at 5% on the ‘electricity charges’ payable by all the consumers except the consumers under the Agricultural (Irrigation Pump sets up to an exclusive of 10 horsepower) Bhagya Jyoti and Kutira Jyoti categories. Furthermore, the 1959 Act was amended again in 2004, wherein ad valorem tax (electricity tax) at 5% was to be levied and paid on the electricity charges payable (excluding arrears) by all the consumers except consumers under agricultural (irrigation pump sets upto and inclusive of 10 Horse Power), Bhagya Jyothi and Kutirajyothi categories.
Thus, under the amended provisions of 2003 and 2004, the liability to pay tax was on the electricity charges, which also included the ‘minimum tariff’ levied for the supply of electricity. “To put it differently, under the unamended provision, there was no obligation to pay tax on the minimum charges levied on supply, but the liability to pay tax was only on the electricity consumed”.
The petitioners challenged the aforementioned provisions of the 1959 Act. In terms of the impugned provision, the tax was levied on electricity charges, which included the charges on consumption as well as supply. The provision provided for levy of tax not exceeding 12 paise per unit of ‘energy consumed’ every month, as may be notified by the State Government. The petitioners questioned the validity of the impugned provisions on several grounds. However, at the time of hearing, the challenge was confined to legislative competence to levy tax on the electricity which is supplied but not consumed.
Court’s Assessment on issue of levy of tax on minimum tariff for supply electricity and validity of Amended Section 3(1):
Perusing the issues raised in the petition, the Court pointed out that the 1959 Act was enacted to have a uniform tax structure all over the State on taxation on the consumption of electricity. It was noted that under the Constitution, there are two distinct legislative fields covering electricity- Entry 53 in List II and Entry 38 in List III of the Seventh Schedule. Furthermore, Entries 53 and 38 operate in a different field. Entry 38 does not enable the State to pass a law on taxation in connection with the consumption and sale of electricity. The law on taxation on electricity is authorised only in Entry 53 of List II of Seventh Schedule. “If the makers of the Constitution intended to cover all aspects, including taxation on consumption and sale of electricity in List III (Concurrent list) of seventh schedule, there was no need to have taxation on consumption and sale of electricity in List II of Seventh Schedule”.
The Court noted that the 1959 Act was enacted in exercise of the legislative power conferred under Entry 53 in List—II of Seventh Schedule of the Constitution. Perusing Entry 53, the Court noted that a plain reading unmistakably suggests that the taxing power is conferred on the State on the consumption or sale of electricity.
Therefore, on examination of Entries 53 and 38, the Court pointed out that any interpretation to hold that the expression ‘Electricity’ appearing in Entry 38 in List III includes taxation on consumption or sale of electricity, will render Entry 53 in List II as useless. It is a settled position that interpretation should always lean in ensuring the provision of law or any expression in a provision of law is not rendered otiose. That is more so when it comes to the interpretation of the provisions of the Constitution.
Therefore, the Court opined that that Entry 38 in List III enables the State to legislate on electricity, except the taxation on consumption of and sale of electricity, and the State’s legislative power to impose tax on electricity is traceable only under Entry 53 in List II and such power is confined only on consumption and sale of electricity.
The Court had to consider whether the supply of electricity to ensure minimum demand without actual consumption of electricity amounts to consumption or sale? the Court stated that if the licensee supplies electricity to a consumer and demands a certain Tariff as a minimum Tariff payable irrespective of consumption, then such Tariff cannot be termed as a Tariff on consumption or a tariff on sale. The charges for consumption start only when the electricity is consumed. The minimum Tariff imposed is towards the cost of ensuring a continuous supply of electricity. Only when the said supply is consumed, then the consumer, must pay for consumption charges. Thus, only when the electricity is consumed it is sold. Till then, it is only a supply. If the supply of electricity to a consumer is charged then it is a Tariff, on supply, not on sale.
The Court referred to Section 4 of the Sale of Goods Act, 1930, the Court said that when the supplier of electricity supplies it to the designated point at the consumer’s place, it is quite possible that the consumer may tap the electricity so supplied for consumption or may not use it at all. If it is consumed by the consumer, then the consumer must pay the price fixed for such consumption, where the delivery actually takes place, and electricity is utilised by the consumer. In such an event, the delivery is complete, and the electricity is used, and the sale of electricity is complete. However, if the consumer does not tap and consume the electricity so supplied, the delivery of the goods (electricity) does not take place, and the contract for sale of electricity does not end up in a contract of sale, and in such situation, there is no sale.
The Court elucidated that when the supplier of electricity supplies electricity to a specified point at a place belonging to the consumer, from where the consumer can tap the electricity for consumption, it is only an ‘agreement to sell’ electricity and not a ‘sale’ of electricity.
The Court stated that if the consumer is taxed on the ‘minimum tariff’ charged for the supply of electricity for ensuring constant supply for electricity consumption at any given point of time, then it amounts to taxation on electricity which is not yet sold but only agreed to be sold. With the language used in Entry 53 of List-II of Seventh Schedule, it is evident that State has the power to enact a law on consumption and sale. However, Entry 53 in List-II of Seventh Schedule does not enable the State to enact law to impose tax when the electricity not sold but agreed to be sold, where the actual sale does not take place. Thus, the State lacks legislative competence to impose a tax on electricity charges, which includes the minimum tariffs on electricity supplied but not sold. Thus, the Court found that the impugned provisions amount to a colourable exercise of legislative power.
Therefore, the Court held that provisions of the amended Section 3(1) of the 1959 Act as amended vide Act No.7 of 2003 and Act No.5 of 2004 providing for tax on electricity charges which includes the ‘minimum tariff’ are unconstitutional as the State has no legislative competence to levy tax on ‘minimum tariff’ for the electricity which is not consumed.
Perusing the issue that whether the petitioners were entitled to refund of the tax paid by way of restitution, the Court said that merely because a law providing for a tax on ‘minimum tariff’ on electricity is held to be unconstitutional, the petitioners are not automatically entitled to reimbursement of tax collected under a law which is declared unconstitutional.
The Court further stated that petition challenging the constitutional validity of a provision ipso facto does not become infructuous, if the provisions under challenge are amended or omitted during the pendency of the petition. Whether such petition becomes infructuous or not depends on the nature of relief sought and consequences suffered under the provisions questioned which are to be decided on the facts and circumstances obtained in such case.
The Court observed and clarified that though the law is held to be unconstitutional and the said law is omitted in the year 2018, the benefit of this judgment is available only to the petitioners who have approached the Court and not to others who have not challenged the provision of law and paid the tax.
Declaring the impugned provisions as unconstitutional, the Court directed the State to reimburse the tax collected from the Karnataka Chambers of Commerce from 15-01-2009 till 18-07-2018 – the date on which the impugned provisions were amended.
[Sona Synthetics v. State of Karnataka, Writ Petition No.3935 of 2008, decided on 20-6-2025]
Advocates who appeared in this case :
Petitioners: SRI M S RAGHAVENDRA PRASAD, ADVOCATE
Respondents: SRI RAJKUMAR M, AGA FOR R1 TO R3, SRI H.V. DEVARAJU, ADV. FOR R4 TO R6 R7 AND R8 are served but unrepresented
