State legislature lacks competence to levy water tax on electricity generation as it constitutes a tax on production.

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

A Coordinate Bench of the High Court initially dismissed the writ petitions in 2021.

On appeal, a Division Bench delivered a split verdict: the Chief Justice upheld the Act, while Justice Maithani struck it down as ultra vires.

The matter was consequently referred to a third judge, Justice Alok Kumar Verma, to resolve the deadlock.

The appellants contended that the State lacked legislative competence to tax electricity generation and were further barred by promissory estoppel due to prior Implementation Agreements.

1. Whether the tax imposed by the Act is in pith and substance a tax on the "drawal of water" or a tax on the "generation of electricity"?

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

3. Whether Section 17 of the Act suffers from the vice of excessive delegation by granting unfettered power to the Executive to fix tax rates?

4. Whether the State is barred by the doctrine of promissory estoppel from levying the tax in light of existing agreements with the power companies?

The court applied the "Doctrine of Pith and Substance" to determine the true character of the levy.

It relied on M.P.V. Sundararamier & Co. v. State of A.P. and State of W.B. v. Kesoram Industries Ltd., which establish that taxation is a distinct matter and the power to tax cannot be derived from a general (non-taxing) legislative entry.

The court further applied the principle from Union of India v. H.S. Dhillon regarding the requirements of Entry 49 List II (taxes on land/buildings as units).

Regarding delegation, it applied the rule that the legislature cannot abdicate "essential legislative functions" without policy guidelines.

Finally, it followed M/s Hero Motocorp Ltd. v. Union of India, stating there can be no promissory estoppel against the legislature in its legislative functions.

The court analyzed the charging provisions, specifically Sections 2(f), 2(i), and 12, noting that the liability to pay tax is triggered only when water is drawn specifically for electricity generation.

It determined that the "taxable event" is the generation of electricity, not the mere drawal of water.

The court rejected the State’s reliance on Entry 49 (Taxes on Land), noting that water is not "land" for the purpose of this taxing entry and the tax was not assessed on land units.

It further found that Article 288 is an enabling provision for specific entities and not a general source of legislative competence.

Regarding Section 17, the court reasoned that the failure to provide any minimum/maximum limits or policy guidelines for fixing tax rates constituted a "naked delegation" of power to the Executive.

However, the court disagreed with the appellants on promissory estoppel, holding that at-will agreements with the Executive cannot interdict the Sovereign Legislative power.

The tax is in pith and substance a tax on the generation of electricity, which the State is incompetent to levy, and Section 17 is void due to excessive delegation of legislative power.

The plea of promissory estoppel fails as it cannot be invoked against a legislative act.

The reference was answered in favor of striking down the Act, concurring with the opinion of Justice Ravindra Maithani.