The Uttarakhand Water Tax on Electricity Generation Act is Ultra Vires for Lacking Legislative Competence and Unlawful Delegation.

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

A Coordinate Bench of the High Court originally dismissed the writ petitions on 12.02.2021.

On appeal, a Division Bench delivered a split verdict on 25.10.2023: one Judge upheld the Act, while the other struck it down as ultra vires.

The matter was referred to a third Judge (Hon’ble Alok Kumar Verma, J.) to resolve the point of difference.

The appellants argued that while the Act claimed to tax "drawal of water," it was in pith and substance a tax on electricity generation, a field outside the State's legislative competence.

1. Whether the true nature and character 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 has the competence to enact the law under Entries 17, 18, 45, 49, or 50 of List II or Article 288 of the Constitution

3. Whether Section 17 of the Act suffers from the vice of excessive delegation by granting unfettered power to the Executive to fix tax rates

4. Whether the State is barred by the doctrine of promissory estoppel from levying the tax due to existing 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 for deciding legislative competence.

It relied on State of West Bengal v. Kesoram Industries Ltd., which establishes that "Taxation" is a distinct matter from general subjects of legislation and cannot be deduced from a general entry as an ancillary power.

The Court referred to Article 265, which mandates that no tax shall be levied except by authority of law, and Article 246, which demarcates the fields of legislation.

Regarding delegation, it applied the principle that while rate-fixing can be delegated, the legislature must provide clear policy guidelines to avoid excessive delegation.

It upheld 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 analyzed the Act’s charging sections (Sections 12 and 17) alongside definitions in Section 2. It observed that the "User" is only liable to pay tax if water is drawn specifically "for generation of electricity".

This direct link meant the taxable event was not the mere drawal of water (a general state subject under Entry 17) but the production of power, making it a tax on electricity generation.

The Court rejected the State's reliance on Entry 49 (Taxes on land) and Entry 50 (Taxes on mineral rights), clarifying that water used in this context does not constitute "land" or "minerals" for taxation purposes, and Article 288 is an enabling provision, not a primary source of legislative power.

Furthermore, because Section 17 allowed the State Government to fix and vary rates without any upper limit or legislative guidelines, it was deemed a "naked delegation" of power.

On the issue of promissory estoppel, the Court found that agreements between the Executive and the companies could not bind the Sovereign Legislature's power to enact laws.

It held that the State Legislature lacks the competence to tax electricity generation, as it is not a field listed under List II of the Seventh Schedule.

The Court also held that Section 17 of the Act is invalid due to excessive delegation.

The plea of promissory estoppel was rejected, holding that the legislature cannot be interdicted by prior executive contracts. The reference was answered by striking down the Act as unconstitutional.