State Legislature incompetent to levy tax on electricity generation under the guise of water drawal charges.

The State of Uttarakhand enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012," to levy a tax on "drawal of water" for hydroelectric power generation

Various power generating companies (Appellants) challenged the Act's constitutional validity, arguing it was a colorable exercise of power to tax "electricity generation," a field reserved for the Union or subject to Entry 92A List I

A Division Bench of the High Court delivered a split verdict on October 25, 2023: the then Chief Justice upheld the Act, while Justice Ravindra Maithani struck it down as ultra vires

The matter was referred to Justice Alok Kumar Verma as a referee judge to resolve the deadlock

1. Whether the State Legislature possesses the legislative competence under List II of the Seventh Schedule or Article 288 to impose a tax on the drawal of water for electricity generation

2. Whether the impugned tax is, in pith and substance, a tax on the "generation of electricity" rather than on "water"

3. Whether Section 17 of the Act suffers from the vice of "excessive delegation" by failing to provide guidelines for fixing tax rates

4. Whether the State is barred by the "doctrine of promissory estoppel" from levying the tax due to existing Implementation Agreements

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

It relied on the principle that "Taxation" is a distinct matter from general subjects of legislation, and power to tax cannot be derived from a general entry (e.g., Entry 17 List II) as an ancillary power, per State of West Bengal v. Kesoram Industries Ltd.

The Court followed the rule that "Authority of Law" under Article 265 requires strict legislative competence

Regarding delegation, it applied the doctrine that essential legislative functions, including fixing tax rates without policy guidelines or limits, cannot be abdicated to the executive

Finally, it upheld the rule that there is no "promissory estoppel against the legislature" in the exercise of its legislative functions, per M/s Hero Motocorp Ltd. v. Union of India

The Court analyzed the charging sections (Sections 12 and 17) and definitions (Section 2), noting that the "taxable event" was not the mere drawal of water, but specifically the drawal for electricity generation

Consequently, it determined the "pith and substance" of the Act was a tax on electricity generation, for which the State lacks competence as no such entry exists in List II

The Court rejected the State's reliance on Entries 45, 49 (land), and 50 (minerals) of List II, holding that water used for power generation cannot be classified as "land" or "minerals" for taxing purposes in this context

Regarding Section 17, the Court found it to be "naked delegation" because it allowed the executive to fix rates without any statutory ceiling or policy guidance

However, the Court sided with the Chief Justice on the point of estoppel, holding that contractual exemptions in Implementation Agreements cannot override the State's sovereign (though here incompetent) legislative power

The Court held that the State Legislature lacks the competence to levy a tax on electricity generation and that Section 17 of the Act is void due to excessive delegation. While the plea of promissory estoppel was rejected, the Act was struck down on the grounds of lack of legislative competence and improper delegation of power