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," which levied a tax on the drawal of water for hydro-power generation.

Various power corporations (THDC, NHPC, etc.) challenged the Act's constitutional validity, arguing it was a colorable exercise of power to tax electricity generation—a field they claimed was outside State competence. A Division Bench delivered a split verdict on 25.10.2023: the then Chief Justice upheld the Act, while Maithani, J. struck it down as ultra vires. The matter was referred to a third judge, Verma, J., to resolve the deadlock.

The appellants also contended that the State was promissorily estopped from levying tax due to existing Implementation Agreements.

1. Whether the State Legislature possesses the legislative competence under List II of the Seventh Schedule or Article 288 of the Constitution to impose "Water Tax" on the drawal of water specifically for electricity generation

2. Whether Section 17 of the Act suffers from the vice of excessive delegation by allowing the Executive to fix tax rates without legislative guidelines

3. Whether the doctrine of promissory estoppel prevents the State from enacting a taxing statute when prior agreements promised no such levies

The Court applied the Primary Rule of Literal Interpretation, holding 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 levy.

The court cited State of West Bengal v. Kesoram Industries Ltd., establishing that taxation is a distinct matter and power to tax cannot be derived from general legislative entries.

Furthermore, it applied the principle that there is "no promissory estoppel against the legislature" in the exercise of its legislative functions, as affirmed in M/s Hero Motocorp Ltd. v. Union of India.

The Court analyzed the Act’s charging sections and definitions, specifically Section 2(f) and 2(i), noting that the tax was not on the mere drawal of water but was contingent upon the use of that water for electricity generation.

Consequently, in pith and substance, the tax was deemed a levy on electricity generation, for which the State lacks competence in List II.

Regarding delegation, the Court found that Section 17 provided "naked delegation" because it allowed the State Government to fix and vary rates without any statutory ceiling or policy guidelines, thus violating the rule against excessive delegation.

On the issue of promissory estoppel, the Court reasoned that since taxation is a sovereign legislative function, a contract entered into by the Executive (the State Government) cannot bind the State Legislature or interdict its power to tax.

It further held that Section 17 of the Act is void due to excessive delegation.

However, on the point of promissory estoppel, the Court concurred with the then Chief Justice, holding that the doctrine cannot be invoked against the exercise of legislative power.