State Legislature lacks competence to tax electricity generation by cloaking it as a water drawal tax.

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

Appellants challenged the Act’s constitutional validity, arguing the State lacked legislative competence as the tax was effectively on electricity generation, which falls under the Union’s domain.

A Division Bench of the High Court delivered a split verdict in 2023: the then 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 further contended that the State was promissorily estopped from levying the tax due to pre-existing Implementation Agreements (IAs) that guaranteed no such levies would be imposed

1. Whether the State Legislature has the legislative competence to impose a tax on the drawal of water for electricity generation under Entries 17, 18, 45, 49, or 50 of List II or Article 288 of the Constitution

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

3. Whether the doctrine of promissory estoppel prevents the State from levying the tax in light of contractual exemptions in Implementation Agreements

The Court applied the Doctrine of Pith and Substance to determine the true nature of the legislation, holding that the nomenclature of a levy is not conclusive

It relied on State of West Bengal v. Kesoram Industries Ltd., which establishes that "taxation" is a distinct field and power to tax cannot be derived from a general (non-taxing) legislative entry

Regarding delegation, the court applied the principle that while fixing rates can be delegated, the legislature must provide "policy guidelines" or "limits" to avoid excessive delegation

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

The Court analyzed the Act’s charging sections (Sections 12 and 17) and definitions, concluding that since the tax is only triggered when water is drawn specifically for electricity generation, it is in pith and substance a tax on the generation of electricity, not mere water usage

The Court rejected the State's reliance on Entry 49 (Taxes on land) and Entry 50 (Taxes on mineral rights), clarifying that water is not "land" for taxing purposes nor is it a "mineral" in a universal sense

On delegation, the Court found Section 17 provided "naked delegation" because it gave the Executive unfettered power to vary tax rates without any statutory ceiling or guiding policy

However, regarding promissory estoppel, the Court sided with the State/Chief Justice, reasoning that a contract between the Executive and a private party cannot interdict or bind the State Legislature’s sovereign power to enact taxing statutes

The Court held that the tax is effectively on electricity generation (a field not available to the State) and that the Act is void due to excessive delegation of the power to fix rates

Conversely, the Court held that the plea of promissory estoppel is not maintainable against the exercise of legislative power

The reference was answered by striking down the Act