STATE LEGISLATURE LACKS COMPETENCE TO TAX ELECTRICITY GENERATION; FIXATION OF TAX RATES WITHOUT GUIDELINES CONSTITUTES EXCESSIVE DELEGATION

Various hydroelectric power companies (appellants/petitioner) challenged the constitutional validity of "The Uttarakhand Water Tax on Electricity Generation Act, 2012," which imposed a tax on water drawn for power generation.

A Division Bench of the Uttarakhand High Court previously delivered a split verdict on 25.10.2023: the then Chief Justice upheld the Act, while Justice Ravindra Maithani struck it down as ultra vires.

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

The appellants argued that the State lacked legislative competence as the tax was effectively on "electricity generation" (a Union subject) and not "water," and further contended that the State was barred by promissory estoppel due to existing implementation agreements.

1. Whether the State Legislature has the legislative competence to enact the Act under Entries 17, 18, 45, 49, or 50 of List II or Article 288 of the Constitution

2. Whether the Act, in pith and substance, imposes a tax on the "drawal of water" or on the "generation of electricity"

3. Whether Section 17 of the Act is void due to the excessive delegation of legislative power to the executive

4. Whether the State is barred by the doctrine of promissory estoppel from levying the tax in light of prior agreements

Primary Rule of Literal Interpretation: the intention of the Legislature must be found in the words used.

Doctrine of Pith and Substance: to determine the true nature of the levy regardless of its nomenclature.

Principle from State of West Bengal v. Kesoram Industries Ltd.: "Taxation" is a distinct matter and the power to tax cannot be derived from a general (non-taxing) legislative entry.

Promissory Estoppel: there is no promissory estoppel against the legislature in the exercise of its legislative functions (citing M/s Hero Motocorp Ltd. v. Union of India).

The Court analyzed the charging sections (Sections 2(f), 2(i), and 12) and concluded that since the tax is only triggered when water is drawn specifically for "generation of electricity," the taxable event is the generation itself and not the mere drawal of water.

It rejected the State’s argument that "water" is "land" (Entry 49) or a "mineral" (Entry 50), noting that Ichchapur Industrial Cooperative Society did not create a universal declaration of water as a mineral.

Regarding Article 288, the Court held it is a provision for exemption/limitation and not a source of legislative competence.

On delegation, the Court found Section 17 to be "naked delegation" as it provided no policy guidelines or limits on tax rates, thus failing the test of constitutional delegation.

On the point of promissory estoppel, the Court sided with the State's view that an agreement with the Government cannot interdict the legislative power of the State Assembly.

The Court held that the State Legislature lacks the competence to levy tax on the generation of electricity and that Section 17 of the Act suffers from excessive delegation.

The plea of promissory estoppel was rejected as it cannot operate against legislative functions. The reference was answered in favor of the appellants, effectively striking down the Act.