The State Legislature Lacks Competence to Levy Water Tax on the Generation of Electricity

Various hydroelectric power corporations challenged the constitutional validity of "The Uttarakhand Water Tax on Electricity Generation Act, 2012"

A Division Bench of the Uttarakhand High Court 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 a third judge, Justice Alok Kumar Verma, to resolve the deadlock

The petitioners argued that the State lacked legislative competence as the tax was on electricity generation (a Union subject) and challenged Section 17 for excessive delegation

The State contended the tax was on the "drawal and use of water" under Entries 17, 45, 49, and 50 of List II

1. Whether the State Legislature has the competence under List II or Article 288 to impose a tax on water drawn for electricity generation.

2. Whether the tax, in pith and substance, is a tax on water or a tax on electricity generation.

3. Whether Section 17 of the Act suffers from the vice of excessive delegation.

4. Whether the State is barred by the doctrine of promissory estoppel from levying the tax due to prior Implementation Agreements with the power companies.

The Court applied the Doctrine of Pith and Substance to determine the real 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 the distribution of legislative powers

Based on State of West Bengal v. Kesoram Industries Ltd., the court held that taxation is a distinct matter and cannot be inferred from a general legislative entry

Regarding delegation, it followed the principle that while rate-fixing can be delegated, the legislature must provide policy guidelines or limits

On promissory estoppel, it applied the principle from M/s Hero Motocorp Ltd. v. Union of India that there can be no estoppel against the legislature in the exercise of its legislative functions

The Court examined the Charging Section (Section 12 read with Section 2) and determined that since the tax is triggered only when water is drawn specifically for electricity generation, the taxable event is the generation process itself, not the mere drawal of water

It rejected the State’s reliance on Entry 49 (Land) and Entry 50 (Minerals) of List II, noting that water used for power generation does not constitute "land" or "minerals" in the context of taxing power as per H.S. Dhillon

The Court found that Article 288 is an enabling provision for specific cases and not a general source of legislative competence

Regarding Section 17, the Court observed an absence of any minimum/maximum limits or policy guidelines for the State Government to fix tax rates, characterizing it as "naked delegation"

While the Court rejected the petitioners' "Promissory Estoppel" argument because executive agreements cannot bind the legislature, this did not save the Act from its lack of legislative competence

It held that the tax is in pith and substance a tax on the generation of electricity, a field the State Legislature is not competent to enter

Section 17 was held to be bad in law due to excessive delegation of power without policy guidelines

The plea of promissory estoppel was rejected as it cannot interdict legislative functions

The reference was answered in favor of striking down the Act.