The State Legislature lacks the competence to impose water tax on electricity generation as it constitutes a tax on production.

The appellants, various hydroelectric power companies, challenged the constitutional validity of "The Uttarakhand Water Tax on Electricity Generation Act, 2012."

The Act sought to levy a tax on the drawal of water from any source for the generation of electricity

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 (Alok Kumar Verma, J.) for a majority opinion.

The appellants argued lack of legislative competence and excessive delegation, while also invoking promissory estoppel based on "Implementation Agreements" where the State reportedly promised not to levy such taxes

1. Whether the State Legislature possesses 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 amounts to "excessive delegation" by granting the State Government unfettered power to fix tax rates under Section 17 without legislative guidelines

3. Whether the tax is, in pith and substance, a tax on the "drawal of water" or a tax on the "generation of electricity"

4. Whether the State is barred by the doctrine of promissory estoppel from levying the tax due to prior contractual agreements

The Court applied the "Doctrine of Pith and Substance" to determine the true character of the legislation

The Court relied on the principle that "Taxation" is a distinct matter from general subjects of legislation, such that power to tax cannot be derived from a general entry (e.g., Entry 17)

The power to tax cannot be derived from a general entry as held in State of West Bengal v. Kesoram Industries Ltd.

The Court applied the doctrine of "Excessive Delegation," which prohibits the legislature from abdicating essential legislative functions, such as fixing tax rates without policy guidelines

The Court applied the rule that there is "no promissory estoppel against the legislature" in the exercise of its legislative functions, citing M/s Hero Motocorp Ltd. v. Union of India.

The Court noted that under Sections 2(f), 2(i), and 12, the tax is only triggered when water is drawn specifically for electricity generation; mere drawal for other purposes is not taxed

Consequently, while the State labeled it a "water tax," in pith and substance, it is a tax on electricity generation

The Court found no entry in List II (State List) authorizing a tax on the generation of electricity, as general entries like "Water" (Entry 17) or "Land" (Entry 49) do not include taxing powers for this specific field

Furthermore, Section 17 of the Act provided 'naked delegation' to the executive to fix tax rates without any maximum limit or policy guidance, violating constitutional norms

On the point of promissory estoppel, the Court held that while the State Government might be bound by contracts, the State Legislature cannot be interdicted from exercising its sovereign taxing power by any such agreement

The Court rejected the plea of promissory estoppel, holding that the legislature cannot be estopped from enacting laws

The reference was answered by siding with the opinion that the Act must be struck down