STATE LEGISLATURE LACKS COMPETENCE TO LEVY WATER TAX ON ELECTRICITY GENERATION UNDER LIST II OF CONSTITUTION

Various hydroelectric power companies (appellants) challenged the constitutional validity of "The Uttarakhand Water Tax on Electricity Generation Act, 2012," which imposed a tax on water drawn for power generation.

A Coordinate Bench of the High Court initially upheld the Act 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 referred to Justice Alok Kumar Verma to resolve the tie.

The appellants argued they were promised tax exemptions under Implementation Agreements (IAs), and that the State lacked legislative competence to tax electricity generation.

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

2. Whether Section 17 of the Act suffers from the vice of excessive delegation by granting unfettered power to the State to fix tax rates without guidelines.

3. Whether the State is barred by the doctrine of promissory estoppel from levying the tax due to prior agreements promising exemptions.

The court applied Article 246 read with List II of the Seventh Schedule, specifically Entries 17, 18, 45, 49, and 50, noting that "Taxation" is a distinct subject from general legislative heads and cannot be inferred from a general entry.

It relied on State of West Bengal v. Kesoram Industries Ltd. regarding the distinction between general areas of legislation and specific taxing powers.

Article 265 was applied to ensure taxes are only levied by the "authority of law".

The court further applied the principle from Union of India v. H.S. Dhillon that a tax under Entry 49 (List II) must be on land and buildings as units.

Regarding delegation, it applied the doctrine of "essential legislative functions" which prohibits the abdication of rate-fixing to the executive without guidelines.

For promissory estoppel, it relied on M/s Hero Motocorp Ltd. v. Union of India, holding there is no estoppel against the legislature.

The court found that although the State claimed the tax was on the "drawal of water" under Entries 45, 49, or 50 of List II, the "taxable event" was inextricably linked to electricity generation.

Since electricity is "goods" and taxing its generation falls under the Union's residual powers (or specific List I entries), the State exceeded its competence.

The court rejected the State’s argument that water is "land" (Entry 49) or a "mineral" (Entry 50) for the purpose of this tax, distinguishing Rekhchand Mohota and Ichchapur Industrial Cooperative Society as being context-specific to Land Revenue Codes and specific mineral Acts.

On delegation, the court observed that Section 17 provided no maximum limits or policy guidelines for the executive to fix rates, representing a "naked delegation" of power.

Regarding promissory estoppel, the court sided with the Chief Justice’s view that agreements with the Executive cannot bind the State Legislature in the exercise of its sovereign taxing functions.

The court concurred with the Chief Justice on the point of promissory estoppel, holding that the plea of estoppel cannot interdict legislative action.

The final holding results in the Act being struck down for lack of legislative competence and excessive delegation.