State Legislature lacks competence to tax electricity generation; tax on water drawal for power held ultra vires.

Various hydroelectric power corporations ("Users") challenged the constitutional validity of "The Uttarakhand Water Tax on Electricity Generation Act, 2012"

The Act was enacted to levy a tax on water drawn for electricity generation within the state

A Division Bench of the High Court delivered a split verdict on October 25, 2023: the then Chief Justice upheld the Act, while Justice Ravindra Maithani struck it down as ultra vires

Consequently, the matter was referred to a third judge, Justice Alok Kumar Verma, to resolve the deadlock

The appellants primarily contended that the State lacked legislative competence to tax electricity generation, which they argued was the true nature of the levy

1. Whether the tax imposed by the Act is in pith and substance a "tax on water" (within State competence) or a "tax on the generation of electricity" (beyond State competence)?

2. Whether the Act is invalid due to excessive delegation of legislative power to the Executive under Section 17?

3. Whether the State is barred by the doctrine of promissory estoppel from levying the tax due to prior implementation agreements?

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

Article 246 read with Seventh Schedule Lists I and II, noting that taxation is a distinct legislative field and cannot be derived from general entries as an ancillary power (State of West Bengal v. Kesoram Industries Ltd.)

Article 265, which mandates that no tax be levied without authority of law

The principle that there is no promissory estoppel against the Legislature or the exercise of its legislative functions (M/s Hero Motocorp Ltd. v. Union of India)

The Doctrine of Excessive Delegation, which prohibits the legislature from abdicating essential functions, such as fixing tax rates, without providing policy guidelines

The Court analyzed the charging sections (Sections 2 and 12) and found that the taxable event is not the mere drawal of water, but specifically the drawal of water "for generation of electricity"

Under the doctrine of pith and substance, the Court concluded the levy is a tax on electricity generation, for which the State lacks an entry in List II; general entries like Entry 17 (Water) or Entry 49 (Land) cannot be used to justify a tax on a distinct subject like electricity generation

Regarding delegation, the Court observed that Section 17 allows the State Government to fix and vary tax rates without any upper limit or policy guidelines, amounting to "naked delegation"

Finally, on promissory estoppel, the Court held that while the State Government might be bound by contracts, the State Legislature’s power to tax cannot be interdicted by such agreements, as there is no estoppel against the law

The reference was answered by declaring the Act unconstitutional.

On the point of promissory estoppel, the Court held in favor of the State, ruling that the doctrine cannot be invoked to block the exercise of legislative functions