State Legislature lacks competence to tax electricity generation; tax rates fixed without guidelines constitute excessive delegation.

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

The appellants primarily argued that the State lacked legislative competence as the tax was, in pith and substance, a tax on electricity generation—a field reserved for the Union.

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

Consequently, the matter was referred to a third judge (Justice Alok Kumar Verma) to resolve the tie.

The appellants also contended that the State was promissorily estopped from levying the tax due to pre-existing Implementation Agreements (IA) exempting them from such levies.

The Court applied the Doctrine of Pith and Substance to determine that the true character of a levy is defined by its taxable event, not its nomenclature.

The Court relied on Article 246 read with List II (Entries 17, 18, 45, 49, 50) and established that taxation is a distinct matter from general legislative entries; thus, power to tax cannot be derived from a general entry like Entry 17 (Water).

It followed State of West Bengal v. Kesoram Industries Ltd., holding that the power to tax must be clearly and precisely traced to a specific taxing 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 "naked delegation".

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

The Court analyzed the charging sections (Sections 12, 17, 18) and the definition of "User" (Section 2(f)), concluding that tax is triggered only when water is drawn specifically for electricity generation.

This nexus identified the taxable event as electricity generation, not the mere drawal of water.

The Court rejected the State's reliance on Entry 49 (Land) and Entry 50 (Minerals), noting that water is not "land" for the purpose of a unit-based property tax, nor is it a "mineral" in a universal sense relevant to this Act.

On delegation, the Court found that Section 17 provided no minimum/maximum limits or guiding principles for the Executive to fix tax rates, rendering it a "naked delegation" of power.

Regarding promissory estoppel, the Court reasoned that the agreements were with the Executive, not the Legislature, and a sovereign body cannot be stopped from exercising its legislative power to tax.

It held that the tax is in pith and substance a tax on electricity generation, which the State is not competent to levy.

It further held that Section 17 of the Act is bad for excessive delegation due to a lack of policy guidelines.

The Court rejected the plea of promissory estoppel, holding that no such estoppel lies against the legislature.

The reference was answered by striking down the Act.