State Legislatures lack clinical competence to tax electricity generation as taxation power cannot be inferred from general entries.

The State of Uttarakhand enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012," which mandated that users drawing water from any source for electricity generation must register and pay a "water tax".

Several hydropower companies challenged the Act’s constitutional validity, arguing it was a tax on electricity generation, which falls outside the State's legislative competence.

A Division Bench of the High Court delivered a split verdict on October 25, 2023: the 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 for a third-judge opinion.

1. Whether the State Legislature possesses the legislative competence to tax the "drawal of water for electricity generation" under Entries 17, 18, 45, 49, or 50 of List II or Article 288 of the Constitution.

2. Whether the Act, in pith and substance, imposes a tax on the generation of electricity rather than on the water itself.

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

4. Whether the State is barred by the doctrine of Promissory Estoppel from levying the tax due to existing Implementation Agreements with the appellants.

The Court applied the principle that taxation is a distinct matter from general subjects of legislation, and the power to tax cannot be derived from a general entry as an ancillary power (State of West Bengal v. Kesoram Industries Ltd.).

It utilized the Doctrine of Pith and Substance to determine the true nature of the levy over its nomenclature.

Article 246 marks the fields of legislation, and Article 265 mandates that no tax shall be levied without "authority of law," meaning legislative competence.

Regarding delegation, the "Essential Legislative Function" (the power to fix the tax rate or policy) cannot be abdicated to the executive without sufficient guidelines (Union of India v. Mohit Minerals Pvt. Ltd.).

There is no promissory estoppel against the legislature in the exercise of its legislative functions.

Justice Verma analyzed the charging section (Section 17) and definitions, noting that the taxable event is not the mere drawal of water, but specifically the drawal for electricity generation.

He reasoned that because the tax is triggered only upon the act of generating power, the "pith and substance" of the Act is a tax on electricity generation, not on water as a resource.

He rejected the State's reliance on Entry 49 (Taxes on land/buildings), citing UOI v. H.S. Dhillon to clarify that a tax on land must be on land as a unit, whereas this tax targets an industrial activity.

On the issue of delegation, the Court found Section 17 void because it provided "naked power" to the executive to fix and vary tax rates without any legislative ceiling or policy guidelines.

Regarding promissory estoppel, the Court sided with the Chief Justice’s view, holding that agreements reached by the executive branch cannot bind the State Legislature’s sovereign power to enact law, though the Act itself was ultimately found incompetent on other grounds.

The Court held that: (i) the State lacks legislative competence to tax electricity generation; (ii) the Act constitutes excessive delegation because it lacks guidelines for rate fixation; and (iii) while the plea of promissory estoppel cannot interdict legislative action, the Act is invalid due to a lack of constitutional authority. The reference was answered in favor of the appellants.