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

The appellants, various hydroelectric power companies, challenged the constitutional validity of the Uttarakhand Water Tax on Electricity Generation Act, 2012. The Act imposed a tax on the drawal of water from sources within the State specifically for electricity generation

Previously, a Division Bench of the High Court 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 third-judge opinion

The appellants argued that the State lacked legislative competence under the Seventh Schedule and that the Act constituted a colourable exercise of power, violating agreements where the State promised not to impose such taxes

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

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

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

4. Whether the State is barred by the doctrine of "promissory estoppel" from levying the tax due to prior implementation agreements with the power companies

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

It relied on Article 246 read with the Seventh Schedule, noting that "Taxation" is a distinct matter from general subjects of legislation, and power to tax cannot be inferred from general entries like Entry 17 (Water)

Precedents including State of West Bengal v. Kesoram Industries Ltd. established that taxing powers must be traced to a specific taxing entry

Regarding delegation, the court applied the principle that fixing tax rates without a ceiling or legislative guidelines constitutes "excessive delegation"

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

The court analyzed the charging section of the Act, noting that the taxable event was not the mere drawal of water, but specifically the drawal of water for electricity generation

In pith and substance, this made it a tax on electricity generation, a field not available to the State under List II

The court rejected the State's reliance on Entries 45, 49 (Taxes on lands), and 50 (Taxes on mineral rights), holding that water does not constitute "land" or "minerals" for the purpose of these taxing entries in this context

On delegation, the court found Section 17 provided "naked delegation" because it lacked any policy guidelines or limits on the rates the executive could fix

However, the court ruled in favor of the State on the issue of promissory estoppel, holding that the State Legislature cannot be bound by executive promises or contracts when exercising its sovereign legislative powers

The court concluded that the State Legislature lacked the competence to levy a tax on electricity generation and that the Act also failed due to excessive delegation of the power to fix tax rates

While the court rejected the appellants' plea of promissory estoppel against the legislature, it ultimately concurred with the view that the Act is unconstitutional and must be struck down