Tax on drawal of water for electricity generation is a tax on electricity generation and ultra vires State legislative competence.

The State of Uttarakhand enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012"

Hydropower companies (appellants) challenged the Act’s constitutional validity, arguing it unconstitutionally taxed electricity generation under the guise of a water tax

A Division Bench previously delivered a split verdict: the then Chief Justice upheld the Act, while Justice Ravindra Maithani struck it down as ultra vires

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

Several appellants also contended the State was barred by the doctrine of promissory estoppel due to specific Implementation Agreements (IAs) exempting them from such levies

1. Whether the State Legislature possessed the legislative competence to enact the Act 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 "drawal of water" or on the "generation of electricity"

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 was barred from imposing the tax based on the doctrine of promissory estoppel

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

It relied on M.P.V. Sundararamier and Co. vs. State of A.P. for the principle that taxation is a distinct legislative field and cannot be derived from general entries

The Court followed Goodyear India Ltd. vs. State of Haryana, affirming that the "measure of tax" is not conclusive of its nature

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

Finally, it applied the rule from M/s Hero Motocorp Ltd. vs. Union of India that there is no promissory estoppel against the legislature in the exercise of legislative functions

The Court analyzed the charging sections (Sections 2(f), 2(i), and 12) and found that the taxable event is not mere drawal of water, but drawal specifically for electricity generation; thus, in pith and substance, it is a tax on electricity generation

The Court rejected the State's reliance on Entry 49 (land) and Entry 50 (mineral rights) of List II, noting that water does not constitute "land" for taxation as a unit

The declaration of water as a "mineral" in previous precedents was limited to specific statutory contexts and not universal

The Court found that Article 288 is an enabling/saving provision and not an independent source of legislative power

On delegation, the Court observed that Section 17 provided "naked delegation" without minimum/maximum limits or guidelines, rendering it unconstitutional

On the point of promissory estoppel, the Court reasoned that the agreements were with the Executive, not the Legislature, and a sovereign taxing power cannot be interdicted by contractual promises

It held that the State Legislature lacked competence as "taxation" is a distinct field and no Entry in List II authorizes a tax on electricity generation

The Court further held that Section 17 involves excessive delegation of power

Regarding promissory estoppel, the Court concurred with the then Chief Justice, holding that the doctrine cannot be invoked against the exercise of legislative functions

The Act was struck down.