Legislation Imposing Water Tax on Electricity Generation is Ultra Vires State Legislative Competence

The appellants, various hydroelectric power companies, challenged the constitutional validity of "The Uttarakhand Water Tax on Electricity Generation Act, 2012"

The Act seeks to levy a tax on the drawal of water for electricity generation

Earlier, a Division Bench of the Uttarakhand High Court delivered a split verdict: the Chief Justice upheld the Act, while Justice Ravindra Maithani struck it down as ultra vires

Consequently, the matter was referred to a third judge, Justice Alok Kumar Verma, for a majority view

Several appellants also contended that the State was promissorily estopped from levying the tax due to Implementation Agreements (IAs) which promised no such levies for forty years

1. Whether the State Legislature possessed the legislative competence under the Seventh Schedule or Article 288 of the Constitution to impose the impugned tax

2. Whether the Act constitutes a tax on the "drawal of water" or, in pith and substance, a tax on the "generation of electricity"

3. Whether Section 17 of the Act suffers from the vice of excessive delegation by allowing the Government to fix tax rates without guidelines

4. Whether the State is barred by the doctrine of promissory estoppel from levying the tax in view of prior contractual agreements

The Court applied the "Doctrine of Pith and Substance" to determine the true nature of the legislation

It relied on M.P.V. Sundararamier and Co. vs. State of A.P. and State of W.B. vs. Kesoram Industries Ltd., establishing that taxation is a distinct matter from general subjects of legislation and cannot be derived from general entries as an ancillary power

The Court referred to Article 265, which mandates that taxes must be authorized by law within legislative competence

Article 246 regarding the distribution of powers

It further applied the principle that there can be no promissory estoppel against the exercise of legislative functions, as held in M/s Hero Motocorp Ltd. vs. Union of India

The Court analyzed the charging provisions (Sections 2, 12, and 17) and determined that the taxable event was not the mere drawal of water, but specifically the drawal for electricity generation

Applying the doctrine of pith and substance, the Court found the levy was effectively a tax on electricity generation, a field not available to State Legislatures under List II

The Court rejected the State's argument that the tax fell under Entry 49 (Taxes on lands) or Entry 50 (Taxes on mineral rights) of List II, noting that water is not a "unit of land" for taxation purposes and the declaration of water as a "mineral" in external precedents was context-specific and not universal

Regarding delegation, the Court observed that Section 17 provided no maximum limit or policy guidelines for the executive to fix tax rates, amounting to an "unfettered power" and "naked delegation"

Finally, regarding promissory estoppel, the Court held that while the State Government might be bound by its promises, the State Legislature’s sovereign power to tax cannot be interdicted by executive contracts

Section 17 was held to be bad for excessive delegation

the plea of promissory estoppel was rejected, as the doctrine does not operate against legislative functions

Justice Alok Kumar Verma concurred with the opinion of Justice Ravindra Maithani regarding the invalidity of the Act