State Legislature lacks competence to tax electricity generation; unfettered rate-fixing power constitutes excessive delegation.

The State of Uttarakhand enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012," imposing a tax on "users" (hydroelectric projects) for drawing water for power generation.

Various power companies challenged the Act’s vires, arguing the State lacked legislative competence as the tax was effectively on "electricity generation," a subject not within List II of the Seventh Schedule.

Several appellants also invoked "promissory estoppel," citing implementation agreements that promised exemption from such taxes.

A Division Bench of the Uttarakhand High Court delivered a split verdict in 2023: the Chief Justice upheld the Act, while Justice Maithani struck it down as ultra vires.

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

1. Whether the subject matter of the Act, in pith and substance, is a "tax on the drawal of water" or a "tax on the generation of electricity"

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

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

4. Whether the State is barred by the doctrine of promissory estoppel from imposing the tax due to prior contractual agreements

The Court applied the Doctrine of Pith and Substance to determine the true nature of the legislation, distinguishing between the nature of a tax and its measure.

It relied on Article 246 read with the Seventh Schedule, noting that power to tax cannot be derived from a general (non-taxing) entry.

The Court followed State of West Bengal v. Kesoram Industries Ltd., which establishes that "Taxation" is a distinct legislative field and cannot be inferred as an ancillary power from general entries.

Regarding delegation, it applied the principle that "essential legislative functions," such as fixing tax rates without a ceiling or policy guidance, cannot be delegated to the Executive.

Finally, it 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 Act's definitions, specifically Section 2(f) and 2(i), and observed that the taxable event is not the mere drawal of water, but specifically the drawal of water for electricity generation.

Under the "Pith and Substance" doctrine, the Court found the tax to be on the generation of electricity, a field where States lack competence, as no specific Entry in List II authorizes such a levy.

The Court rejected the State's reliance on Entry 49 (Taxes on Land) and Entry 50 (Mineral Rights), clarifying that water is neither land nor a mineral in the context of these taxing entries.

Regarding Section 17, the Court found "excessive delegation" because the Act granted the Executive "naked power" to fix and vary rates without any maximum limit or policy guidelines.

the Court rejected the appellants' plea of promissory estoppel, reasoning that while the Government was bound by agreements, the State Legislature’s sovereign power to tax cannot be interdicted by contract.

It held that the tax is substantively on electricity generation, for which the State lacks legislative competence.

It further held that Section 17 is void for excessive delegation.

Conversely, it sided with the then Chief Justice on the point that promissory estoppel cannot be invoked against the Legislature to strike down a taxing statute.