State Legislature Lacks Competence to Levy Water Tax on Electricity Generation as it Lacks Specific Taxing Entry

The appellants, comprising various Central and Private hydroelectric power corporations, challenged the constitutional validity of "The Uttarakhand Water Tax on Electricity Generation Act, 2012"

The Act sought to levy a tax on "water drawn for generation of electricity"

A Single Judge initially dismissed the writ petitions in 2021

On appeal, a Division Bench delivered a split verdict: the then Chief Justice upheld the Act, while Justice Ravindra Maithani struck it down as ultra vires; consequently, the matter was referred to Justice Alok Kumar Verma for a tie-breaking opinion

The appellants primarily contended that the State lacked legislative competence as the tax was, in pith and substance, a tax on electricity generation, not water

1. Whether the State Legislature possessed the legislative competence under List II of the Seventh Schedule or Article 288 of the Constitution to enact the Act

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

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 without guidelines

4. Whether the State was 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 nature of the legislation

The Court relied on Article 246 read with List II of the Seventh Schedule, noting that "Taxation" is a distinct matter and power to tax cannot be derived from a general entry (e.g., Entry 17 regarding 'Water')

Reliance was placed on State of W.B. v. Kesoram Industries Ltd., establishing that the power to tax must be found in a specific taxing entry

The Court applied the principle that "essential legislative functions," such as fixing tax rates without policy guidelines or limits, cannot be abdicated to the Executive

The Court upheld the principle from M/s Hero Motocorp Ltd. v. Union of India that there is no promissory estoppel against the legislature in the exercise of its legislative functions

The Court analyzed the charging sections (Sec 12, 17, and 18) and definitions (Sec 2) of the Act. It found that the taxable event was not the mere drawal of water, but specifically the drawal of water for electricity generation

Under the doctrine of pith and substance, the Court concluded the levy was a tax on electricity generation

The State could not trace this power to Entry 17 (Water), Entry 45 (Land revenue), Entry 49 (Land/Buildings), or Entry 50 (Mineral rights) of List II, as water used for power generation does not constitute "land" or "minerals" in this taxing context

Section 17 was found to be "naked delegation" because it allowed the State Government to fix and vary tax rates without any maximum limit or legislative guidance, thus constituting excessive delegation

Regarding promissory estoppel, the Court held that while the State Government might be bound by contracts, the State Legislature’s sovereign power to tax cannot be interdicted by such agreements

The Court held that the State Legislature lacked the competence to levy a tax on electricity generation and that Section 17 of the Act is void due to excessive delegation of legislative power; however, the plea of promissory estoppel was rejected