State Legislature lacks competence to tax electricity generation; such levy is ultra vires the Constitution.

The appellants, various hydroelectric power companies, challenged the constitutional validity of "The Uttarakhand Water Tax on Electricity Generation Act, 2012." This Act imposed a tax on the "drawal of water" for the purpose of generating electricity.

The appellants argued that the State lacked the legislative competence to tax electricity generation and that the Act was barred by the doctrine of promissory estoppel due to prior implementation agreements exempting them from such levies.

A Division Bench of the High Court delivered a split verdict on 25.10.2023, with one judge upholding the Act and the other striking it down as ultra vires.

The matter was subsequently referred to a third judge, Hon'ble Justice Alok Kumar Verma, for a majority opinion.

1. Whether the true nature (pith and substance) of the tax is on the "drawal of water" or on the "generation of electricity"

2. Whether the State Legislature has the competence to enact such a tax under Entries 17, 18, 45, 49, or 50 of List II, or under Article 288 of the Constitution

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

4. Whether the State is barred from imposing the tax under the doctrine of promissory estoppel

The Court applied the Doctrine of Pith and Substance to determine the true character of the legislation regardless of its nomenclature.

It relied on the principle that Taxation is a distinct matter from general legislative heads, and power to tax cannot be inferred from general entries (e.g., Entry 17).

The Court referred to Article 265, which mandates that no tax be levied except by "authority of law" (legislative competence).

Precedents like State of West Bengal v. Kesoram Industries Ltd. were used to establish that the power to tax must be traced to specific taxing entries.

Regarding delegation, the Court applied the rule that essential legislative functions, such as fixing tax rates without a ceiling or guidelines, cannot be abdicated to the Executive.

Finally, it applied the principle that there can be no promissory estoppel against the Legislature in the exercise of its functions.

The Court determined that while the State claimed the tax was on the "drawal of water," the charging section (Section 12 read with Section 2(f)) only triggered liability if water was drawn specifically for electricity generation; thus, the taxable event was the generation itself.

Under the constitutional scheme, electricity generation is not a field available for taxation by States under List II.

The Court rejected the State’s attempt to link "water" to "land" under Entry 49 (Taxes on lands) or "minerals" under Entry 50, noting that water used for power is a distinct category and Ichchapur Industrial Coop Society did not make a universal declaration of water as a mineral.

Regarding Section 17, the Court found it to be "naked delegation" because it allowed the Government to vary rates without any statutory maximum or policy guidelines.

On the point of promissory estoppel, the Court held that even if the State Government promised exemptions in contracts, it cannot bind the State Legislature’s sovereign power to enact law.

The Court held that the Act suffers from excessive delegation.

The Court disagreed with the appellants on the ground of promissory estoppel, holding it inapplicable against legislative functions.

Consequently, the majority view of the High Court is that the Act is unconstitutional.