The State Legislature lacks competence to tax electricity generation as taxing power cannot be derived from general entries.

Multiple hydroelectric power generation companies (appellants) challenged the constitutional validity of "The Uttarakhand Water Tax on Electricity Generation Act, 2012," which imposed a tax on the drawal of water for power generation

A Division Bench of the Uttarakhand High Court previously delivered a split verdict: the Chief Justice upheld the Act, while the companion judge struck it down as ultra vires

The matter was referred to a third judge (Justice Alok Kumar Verma) to resolve the conflict

The appellants argued that despite being named a "water tax," the levy was actually a tax on electricity generation, a field outside the State’s legislative competence

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

1. Whether the true nature (pith and substance) of the tax imposed by the Act is a tax on the drawal of water or a tax on the generation of electricity

2. Whether the State Legislature possessed the competence under List II or Article 288 of the Constitution to enact the impugned legislation

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

4. Whether the State was barred by the doctrine of Promissory Estoppel from levying the tax due to existing implementation agreements with the power companies

The Court applied the Doctrine of Pith and Substance to determine the true character of the legislation, noting that nomenclature is not conclusive

It relied on Article 246 read with the Seventh Schedule, noting that the power to tax is a distinct legislative head and cannot be derived from general entries (State of West Bengal v. Kesoram Industries Ltd.)

The Court invoked Article 265, which mandates that taxes must be levied by the "authority of law," meaning within legislative competence

Regarding delegation, the Court applied the principle that while fixing rates can be delegated, the legislature must provide policy guidelines to avoid "naked delegation"

Finally, it followed the rule that there is no promissory estoppel against the legislature in the exercise of its legislative functions (M/s Hero Motocorp Ltd. v. Union of India)

The Court analyzed the charging sections (Sections 12 and 17) and definitions (Section 2), observing that the tax is triggered only when water is drawn specifically for electricity generation; mere drawal for other purposes is not taxed

This established that the "taxable event" is electricity generation, a field not found in List II

The Court rejected the State's reliance on Entry 49 (Taxes on land) and Entry 50 (Taxes on minerals), holding that water is not "land" for the purpose of a unit-based tax, and the classification of water as a "mineral" was context-specific to other statutes and not a universal rule

On delegation, the Court found that Section 17 provided no maximum limits or policy benchmarks for fixing tax rates, rendering it an unconstitutional abdication of essential legislative functions

Regarding promissory estoppel, the Court held that while the State Government might be bound by contracts, the State Legislature’s sovereign power to tax cannot be interdicted by such agreements

It held that the tax is, in pith and substance, a tax on the generation of electricity, which the State is not competent to levy; it further held that Section 17 constitutes excessive delegation of power

The Court rejected the plea of Promissory Estoppel, holding it does not apply against legislative functions and struck down the Act as unconstitutional