State Legislature lacks competence to tax electricity generation by recharacterizing 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" drawing water for hydroelectric power generation

Various power generating companies (THDC, NHPC, JP Power, etc.) challenged the constitutional validity of the Act, arguing the State lacked legislative competence as the tax was effectively on electricity generation, a field occupied by the Union

Previously, a Division Bench of the High Court delivered a split verdict: the Chief Justice uprighted the Act, while Justice Maithani struck it down as ultra vires

Many appellants also argued the tax violated prior "Implementation Agreements" where the State promised not to levy such taxes

The matter was referred to Justice Alok Kumar Verma to resolve the tie

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

2. Whether the Act is void due to "excessive delegation" of legislative power under Section 17, which allows the Executive 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 contractual exemptions in Implementation Agreements

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

The Court relied on M.P.V. Sundararamier & Co. v. State of A.P. and State of W.B. v. Kesoram Industries Ltd., which establish that "Taxation" is a distinct matter and power to tax cannot be inferred from general (non-taxing) legislative entries

The Court applied Article 265 of the Constitution, mandating that no tax be levied except by authority of law

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

Regarding delegation, it followed Union of India v. Mohit Minerals, holding that essential legislative functions (like fixing tax rates) cannot be delegated without policy guidelines

The Court applied the rule from M/s Hero Motocorp Ltd. v. Union of India that there is no promissory estoppel against the legislature in the exercise of its functions

The Court examined the charging provisions (Sections 2(f), 2(i), and 17) and concluded that since the tax is only triggered when water is drawn for electricity generation, the taxable event is the generation process itself, not the mere drawal of water

The Court rejected the State's reliance on Entry 49 (Taxes on Lands), noting that water is not "land" for the purpose of a property tax unit

The Court rejected the State's reliance on Entry 50 (Mineral Rights), clarified that Ichchapur Industrial did not make water a mineral for all universal taxing purposes

The Court found that Section 17 of the Act granted "naked delegation" of power to the Executive to fix rates without any upper limit or policy guidance, violating the rule against excessive delegation

Regarding promissory estoppel, the Court held that while the State Government might be bound by contracts, the State Legislature’s sovereign power to tax cannot be interdicted by such agreements

The Court held that the State lacks legislative competence to tax electricity generation and that Section 17 constitutes an unconstitutional excessive delegation of power

The Court sided with the then-Chief Justice on the issue of promissory estoppel, holding the doctrine inapplicable against the exercise of legislative functions

The Act was struck down as invalid.