State Legislature lacks competence to tax electricity generation via water drawal; such taxation constitutes excessive delegation.

The appellants and writ petitioner, comprising various hydroelectric power companies, challenged the constitutional validity of the "Uttarakhand Water Tax on Electricity Generation Act, 2012".

A Coordinate Bench of the High Court initially dismissed the writ petitions in 2021.

Upon appeal, a Division Bench delivered a split verdict on 25.10.2023: the then Chief Justice upheld the Act, while Justice Ravindra Maithani struck it down as ultra vires.

Consequently, the matter was referred to Justice Alok Kumar Verma to provide an opinion on the points of difference.

The appellants contended that the State lacked legislative competence to tax electricity generation and that the tax violated existing Implementation Agreements.

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

2. Whether the State Legislature has the competence to enact the said Act under Entries 17, 18, 45, 49, or 50 of List II of the Seventh Schedule or 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?

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

The Court applied the "Doctrine of Pith and Substance" to determine the true nature of the legislation.

It relied on State of West Bengal v. Kesoram Industries Ltd., establishing that taxation is a distinct matter from general subjects and cannot be derived from general entries as an ancillary power.

The Court referred to Article 246 regarding the distribution of legislative powers and Article 265, which mandates that no tax be levied except by "authority of law".

Regarding delegation, it applied the principle that "essential legislative functions," such as fixing tax rates without policy guidelines, cannot be abdicated to the Executive.

It applied the rule from M/s Hero Motocorp Ltd. v. Union of India that there is no promissory estoppel against the Legislature in the exercise of its legislative functions.

The Court analyzed the charging provisions, noting that under Sections 2(f), 2(i), and 12, the tax is only attracted if water is drawn specifically for the "generation of electricity," making the generation the taxable event.

It rejected the State's argument that water is "land" (Entry 49) or a "mineral" (Entry 50), clarifying that R.S. Rekhchand Mohota and Ichchapur Industrial Coop Society were context-specific and did not grant universal taxing powers over water for electricity.

The Court found Section 17 of the Act to be a "naked delegation of power" because it allowed the State to fix and vary rates without any maximum limits or policy guidelines.

While the Court found the Act ultra vires due to lack of competence, it disagreed with the appellants on promissory estoppel, reasoning that an agreement with the State Government cannot interdict the Sovereign Legislative power.

The Court held that the tax is in pith and substance on the "generation of electricity," a field where the State lacks competence.

Section 17 was held invalid for "excessive delegation".

The reference was answered in favor of striking down the Act, although the plea of "promissory estoppel" was held not maintainable against the Legislature.