The State Legislature lacks competence to tax electricity generation by cloaking it as a water tax.

Various hydroelectric power corporations challenged the constitutional validity of "The Uttarakhand Water Tax on Electricity Generation Act, 2012." The appellants argued that the State lacked the legislative competence to tax the generation of electricity and that such a tax violated existing Implementation Agreements

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

Consequently, the matter was referred to a third judge (Justice Alok Kumar Verma) to resolve the tie in terms of Chapter VIII Rule 3 of the High Court Rules

1. Whether the true nature (pith and substance) of the tax under the Act is 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 law under Entries 17, 18, 45, 49, or 50 of List II, or under Article 288 of the Constitution

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

4. Whether the State is barred from imposing the tax by the doctrine of "promissory estoppel" due to prior agreements exempting such levies

The court applied the "Doctrine of Pith and Substance" to determine the true character of the legislation, noting that "taxation is a distinct matter" and power to tax cannot be inferred from general entries

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

Precedent from State of W.B. v. Kesoram Industries Ltd. was used to establish that the power to tax is not an ancillary power to a general entry

Regarding delegation, the court applied the principle that "essential legislative functions," such as fixing tax rates without a ceiling or policy guidelines, cannot be delegated

Finally, it applied the rule that there is "no estoppel against the law or legislature" regarding the exercise of sovereign taxing power

The Court analyzed the charging section (Section 12) and definitions (Section 2), concluding that because the tax is only triggered when water is drawn specifically "for generation of electricity," the taxable event is the generation itself

The Court rejected the State's argument that the tax fell under "Land" (Entry 49) or "Minerals" (Entry 50), clarifying that R.S. Rekhchand Mohota and Ichchapur Industrial were context-specific and did not grant a general power to tax water as land or minerals in this instance

On delegation, the Court found Section 17 provided "naked delegation" because it allowed the executive to vary rates without any maximum limit or legislative policy

Regarding promissory estoppel, the Court reasoned that the agreements were with the Executive, which cannot bind the Legislature from exercising its sovereign power to tax, and thus the plea of estoppel failed

It held that the tax is, in pith and substance, a tax on electricity generation, which the State lacks competence to impose under List II. Furthermore, Section 17 was held invalid for "excessive delegation"

The Court sided with the then Chief Justice on the point of "promissory estoppel," ruling that the doctrine cannot be invoked against the legislature's exercise of taxing power