Legislative Competence Sustained only for Taxing Entries; State Cannot Levy Water Tax on Electricity Generation.

The State of Uttarakhand enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012," imposing a tax on "users" drawing water for hydroelectric power generation.

Multiple power companies (THDC, NHPC, etc.) challenged the Act's constitutional validity, arguing the State lacked legislative competence as the tax was effectively on electricity generation, not water.

A Division Bench of the High Court delivered a split verdict on 25.10.2023: the Chief Justice upheld the Act, while Maithani, J. struck it down as ultra vires.

The matter was referred to a third judge (Verma, J.) to resolve the deadlock.

Several appellants also pleaded "Promissory Estoppel" based on Implementation Agreements where the State promised not to levy such taxes.

1. Whether the impugned tax is a tax on the "drawal of water" or a tax on the "generation of electricity"

2. Whether the State Legislature has the competence to enact the law under Entries 17, 18, 45, 49, or 50 of List II or Article 288 of the Constitution

3. Whether Section 17 of the Act suffers from the vice of "excessive delegation"

4. Whether the State is barred from levying the tax by the doctrine of Promissory Estoppel due to prior contractual agreements

The court applied the Doctrine of Pith and Substance to determine the true character of the levy, noting that the nomenclature is not conclusive.

Taxation is a distinct matter from general legislative subjects; power to tax cannot be derived from a general entry as an ancillary power (State of West Bengal v. Kesoram Industries Ltd.).

Article 246 governs the distribution of powers, and Article 265 mandates that no tax be levied except by authority of law.

Regarding Excessive Delegation, the court held that while rates can be delegated, the legislature must provide clear policy guidelines and retain control.

No Promissory Estoppel against the Legislature in the exercise of its legislative/taxing functions (M/s Hero Motocorp Ltd. v. Union of India).

The Court analyzed the charging section (Section 17) and definitions (Section 2), concluding that the taxable event is not mere drawal of water, but drawal specifically for electricity generation. Under the doctrine of pith and substance, this makes it a tax on electricity generation.

The State's attempt to link the tax to "land" under Entry 49 or "minerals" under Entry 50 of List II was rejected; the court found no specific taxing entry in List II authorizes a tax on water usage for power.

Section 17 was found to grant "naked" and "unfettered" power to the Executive to fix tax rates without any policy guidelines or upper limits, amounting to excessive delegation.

On the point of Promissory Estoppel, the Judge disagreed with Maithani, J., holding that a contract with the State Government cannot bar the State Legislature from exercising its sovereign power to tax.

Section 17 of the Act is void due to excessive delegation.

The plea of Promissory Estoppel was rejected, as there is no estoppel against legislative functions.

On the point of difference, Verma, J. concurred with Maithani, J. regarding the unconstitutionality of the Act, thereby forming the majority view to strike down the legislation.