The Uttarakhand Water Tax on Electricity Generation Act, 2012 is Unconstitutional for Lack of Legislative Competence and Excessive Delegation.

The State of Uttarakhand enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012," which levied a tax on "users" drawing water for the purpose of generating electricity.

Several power companies challenged the Act’s constitutional validity after a Coordinate Bench dismissed their initial writ petitions.

On appeal, a Division Bench delivered a split verdict on 25.10.2023: one judge upheld the Act as a tax on water use, while the other struck it down as an ultra vires tax on electricity generation.

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

The appellants primarily contended that the State lacked legislative competence and that the tax violated agreements exempting them from such levies.

1. Whether the State Legislature possesses the 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 "tax on water drawn for electricity generation" is, in pith and substance, a tax on the generation of electricity.

3. Whether Section 17 of the Act constitutes an unconstitutional delegation of essential legislative power (excessive delegation).

4. Whether the State is barred from imposing the tax by the doctrine of promissory estoppel due to prior Implementation Agreements.

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

It relied on M.P.V. Sundararamier vs. State of A.P. and State of W.B. vs. Kesoram Industries Ltd., which establish that "taxation" is a distinct legislative field and cannot be inferred from general entries (like Entry 17, List II).

The court cited Union of India vs. H.S. Dhillon to clarify that Entry 49 List II (Land/Buildings) requires a tax on units of property, not its use.

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

It applied the rule from M/s Hero Motocorp Ltd. vs. Union of India that promissory estoppel cannot be invoked against the legislature in the exercise of its legislative functions.

The Court examined the charging section (Section 17) and definitions, noting that tax liability only arises if water is drawn specifically for electricity generation; mere drawal does not trigger the tax.

Consequently, it determined that the taxable event is not the "water" itself, but the "generation of electricity," a field where the State lacks competence as electricity is regarded as "goods" under List I.

The Court rejected the State's reliance on Entry 49 (Land) and Entry 50 (Minerals), distinguishing Rekhchand Mohota and Ichchapur Industrial, finding that water in this context was neither a "unit of land" nor a "mineral" for taxing purposes.

The Court found Section 17 to be "naked delegation" because it allowed the State Government to fix and vary rates without any statutory ceiling or policy guidelines.

Regarding promissory estoppel, the Court sided with the view that executive agreements cannot interdict the sovereign power of a legislature to tax, although the underlying tax itself was found invalid on other grounds.

It held that (1) the tax is in pith and substance a tax on electricity generation, for which the State has no legislative competence [para. 66]; (2) Section 17 of the Act is bad for excessive delegation as it abdicates essential legislative functions without guidelines [para. 46]; and (3) while the Act is unconstitutional, the plea of promissory estoppel against a legislative act is not maintainable [para. 73].

The reference was answered in favor of the appellants.