The North Galilee Water Scheme would extend a dam and pump water 110 kilometres to the coal mine in central Queensland, to suppress dust and wash coal.

A department official in 2019 decided the project wasn't a coal mining activity or involving a large coal mining development.

Deeming it so would have mandated an assessment of whether the pipeline and other infrastructure had or was likely to have a "significant impact" on water resources.

In the Federal Court on Tuesday, Justice Melissa Perry ruled the delegate made an error of law by finding the harvesting and supply of water for decades was not integral to the conduct of mining operations at the Carmichael mine.

As a result, the project's approval was set aside and will be sent back to the department to restart the approval process.

It's the second time approval for the project has been scrapped after the environment department conceded in 2019 its consideration of public comments was inadequate.

The project would allow Adani to harvest and store up to 12.5 gigalitres of water from the Suttor River each year to provide a "secure and reliable" water supply for the mine.

It would be an alternative to water sourced from the Belyando River, a process covered by the approval of the mine itself.

Those behind the legal action said Tuesday's decision was a win for the protection of water, farmers and regional communities.

"(It) confirms that large coal mining developments cannot avoid facing water trigger assessment, even if their water infrastructure is a separate project," Environmental Defenders Office managing lawyer Sean Ryan said in a statement.

"It's a win for regional communities and farmers who depend on reliable flows of river water in our drought-prone landscape. It will set a new precedent that essential infrastructure for coal seam gas and large coal mining projects must be assessed under our national environment law," Australian Conservation Foundation chief executive Kelly O'Shanassy said in a statement.

Adani, which recently rebranded its Australian operation to Bravus, said it was considering its options on the progression of the water scheme.

But the decision won't impact the mine's construction or operation, it said.

"Regardless of today's court judgment, construction on the Carmichael mine and rail project is well underway, and importantly, the North Galilee Water Scheme project is not required for these construction activities," the company said in a statement.

"We have also secured water for the operational phase that does not require the North Galilee Water Scheme."

The pipeline application sought to take less than one per cent of the catchment's annual water flow, and only when the river was in flood, the company said.

The federal government and Adani were ordered to pay costs.

Australian Associated Press