State Legislature Lacks Competence to Levy Water Tax on the Generation of Electricity

The State of Uttarakhand enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012," imposing a tax on "users" (hydroelectric power producers) for drawing water to generate electricity

Appellants, including THDC and NHPC, challenged the Act’s constitutionality, arguing the State lacked legislative competence to tax electricity generation and that the Act violated prior agreements (Implementation Agreements) promising no such taxes

A Division Bench previously delivered a split verdict: the then Chief Justice upheld the Act, while Justice Maithani struck it down as ultra vires

The matter was referred to a third judge to resolve the deadlock

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

2. Whether the Act, in pith and substance, imposes a tax on the generation of electricity rather than on the water itself

3. Whether Section 17 of the Act suffers from the vice of excessive delegation by allowing the State Government to fix tax rates without policy guidelines

4. Whether the State is barred by the doctrine of promissory estoppel from levying the tax due to contractual exemptions in Implementation Agreements

The Court applied the Primary Rule of Literal Interpretation, stating that the intention of the Legislature must be found in the words used

It relied on the "Doctrine of Pith and Substance" to determine the true nature of the tax regardless of its nomenclature

Regarding legislative competence, it applied the principle from State of West Bengal v. Kesoram Industries Ltd., distinguishing between general subjects of legislation (Entry 17, List II) and distinct taxing powers

The court cited Union of India v. H.S. Dhillon to clarify that taxes on land (Entry 49, List II) must be on land as a unit

Finally, it applied the principle that there can be no promissory estoppel against the legislature in the exercise of its legislative functions, as seen in M/s Hero Motocorp Ltd. v. Union of India

The Court analyzed the charging sections (Sections 2, 12, 17, and 18) and concluded that the taxable event is not mere drawal of water, but specifically drawal for electricity generation; thus, in pith and substance, it is a tax on electricity generation

The Court rejected the State’s argument that "water" is "land" under Entry 49 or a "mineral" under Entry 50 of List II, noting that taxing powers must be specific and cannot be derived from general entries like Entry 17 (Water)

Furthermore, the Court found Section 17 to be an instance of "naked delegation" because it allowed the Executive to fix and vary tax rates without any legislative guidelines or upper limits

Regarding promissory estoppel, the Court reasoned that while the State Government made promises in contracts, these cannot bind the State Legislature’s sovereign power to enact laws, nor can an estoppel exist against a statute

The Court held that Section 17 is void due to excessive delegation

However, the Court sided with the then Chief Justice on the point of promissory estoppel, holding that the doctrine cannot interdict legislative functions

The reference was answered by striking down the Act as unconstitutional