State Legislature lacks competence to tax electricity generation through water drawal or usage.

The Uttarakhand State Legislature enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012," which levied a tax on "users" drawing water from any source within the state for electricity generation

Various power generating companies (THDC, NHPC, etc.) challenged the constitutional validity of the Act, arguing that the State lacked legislative competence as the tax was effectively on "electricity generation" (a Union subject) rather than "water"

Previously, a Division Bench of the Uttarakhand High Court had delivered a split verdict: the Chief Justice upheld the Act, while the companion judge struck it down as ultra vires

Consequently, the matter was referred to a third judge (Justice Alok Kumar Verma) for a majority opinion

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

2. Whether the Act constitutes a "colorable exercise of power" by taxing electricity generation under the guise of taxing water?

3. Whether Section 17 of the Act suffers from the vice of "excessive delegation" by granting the State Government unfettered power to fix tax rates without legislative guidelines?

4. Whether the State is barred by the "Doctrine of Promissory Estoppel" from levying this tax due to prior implementation agreements exempting the companies from such levies?

The court applied the "Doctrine of Pith and Substance" to determine the true nature of the levy

It relied on Article 265, which mandates that no tax be levied except by authority of law, and Article 246 regarding distribution of legislative powers

State of West Bengal v. Kesoram Industries Ltd., establishing that taxation is a distinct matter and cannot be derived from general legislative entries

Union of India v. H.S. Dhillon, defining the scope of Entry 49 List II (Tax on lands)

The court also applied the principle 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 section" and definitions, noting that the "User" is only liable to pay tax if water is drawn specifically for electricity generation

It determined that while the State claimed the tax was on "water" (Entry 17) or "land" (Entry 49), the taxable event was inextricably linked to the generation of electricity

Following Kesoram Industries, the Court held that the power to tax is not an ancillary power and must be found in a specific taxing entry; since List II contains no entry for tax on electricity generation (which falls under List I), the State lacked competence

Furthermore, the Court found Section 17 of the Act unconstitutional because it delegated the power to fix tax rates to the Executive without any ceiling or policy guidelines, amounting to "naked delegation"

Regarding promissory estoppel, the Court rejected the appellants' plea, reasoning that agreements with the Executive cannot fetter the sovereign legislative power of the State

The Court sided with the Chief Justice on the point of promissory estoppel, holding the doctrine inapplicable against legislative action.

The reference was answered by striking down the Act