The Nainital Bench of the Uttarakhand High Court has clarified that the Uttarakhand Water Tax on Electricity Generation Act, 2012, in pith and substance, imposes a tax on generation of electricity because the levy is attracted only when water is drawn for the purpose of generating electricity, and not upon mere drawal of water. Since taxation is a distinct legislative field and no entry in List II relied upon by the State authorizes such a tax, the State Legislature lacked competence to enact the law.
At the same time, the Court held that Article 288 of the Constitution is not an independent source of legislative competence to impose such tax, and Section 17 of the Act is also vitiated by excessive delegation because it authorizes the executive to fix tax rates without any policy guidance or statutory limits. On that basis, the Court concurred with the view that the Act is ultra vires the Constitution.
A Single Judge Bench of Justice Alok Kumar Verma observed that the true nature of the levy had to be determined by applying the doctrine of pith and substance, and that the nomenclature of the levy was not conclusive. On a reading of the Uttarakhand Water Tax on Electricity Generation Act, 2012, as a whole, the Bench found that mere drawing of water did not attract the tax; rather the taxable event arose only when water was drawn for generation of electricity. The Bench therefore accepted the conclusion that the levy, in its real character, was a tax on generation of electricity and not merely on drawing or use of water.
The Bench further observed that taxation is a distinct matter for purposes of legislative competence, and the power to tax cannot be deduced from general legislative entries. After examining Entries 17, 18, 45, 49 and 50 of List II and Article 288 of the Constitution, the Bench held that none of these provisions supplied legislative competence to the State to impose the impugned levy. It specifically held that Article 288 is not a source of legislative competence, but only operates in a special context and, in any event, its conditions were not fulfilled in relation to the Act.
On excessive delegation, the Bench agreed with the view that Section 17 of the Act conferred power on the State Government to fix, review, increase, decrease or vary the rates of tax without laying down policy guidance or minimum and maximum limits. The Bench held that such delegation of an essential legislative function, namely rate fixation in a taxing statute, was unguided and amounted to excessive delegation.
On promissory estoppel, the Bench noted the appellants’ reliance on implementation agreements under which the State had undertaken not to impose taxes, duties, levies or charges on electricity generated by the projects. However, while recording that one of the Judges in the split verdict had accepted the plea for the subsistence period of the agreements, the Single Judge concurred with the then Chief Justice that there can be no promissory estoppel against the legislature in exercise of legislative functions.
Briefly, the special appeals arose from a common judgment dated February 12, 2021, by which a Coordinate Bench dismissed challenges to the constitutional validity of the Uttarakhand Water Tax on Electricity Generation Act, 2012. The appellants, comprising various hydropower generators and related entities, contended that the Act was beyond the legislative competence of the State Legislature and that, in substance, it imposed a tax on generation of electricity. A Division Bench later delivered a split verdict on October 25, 2023: the then Chief Justice upheld the Act, while the companion Judge struck it down as ultra vires, leading to a reference to the present Court under Chapter VIII Rule 3 of the High Court Rules.
The State’s case was that the incidence of tax under the Act was not on electricity generation as such, but on the drawing of water for use in electricity generation. The State initially referred to Entry 17 of List II, and subsequently sought to sustain the enactment with reference to Entries 45, 49 and 50 of List II, as well as Article 288 of the Constitution. The scheme of the Act was therefore examined, including the definitions of “electricity,” “user,” and “water tax,” and the charging and assessment provisions.
Under the Uttarakhand Water Tax on Electricity Generation Act, 2012, “electricity” was defined as electrical energy generated by way of water drawn from a source within the State; “user” meant a person or entity drawing water for generation of electricity; and “water tax” meant the rate levied for water drawn for generation of electricity. Sections 12, 17, 18 and 19 made the registered user liable to pay water tax whenever water was drawn for electricity generation, with assessment to be carried out by the Commission and rates to be fixed by the Government by notification.
Appearances:
Senior Advocates Sanjay Jain, Tushar Mehta, Saurabh Kirpal, D.S. Patni, Sujit Ghosh, U.K. Uniyal, along with Advocates Shobhit Saharia, Padmesh Mishra, Harshita Sukhija, Palak Jain, Nishank Tripathi, Avneesh Arputham, Dharmendra Barthwal, Kartik Nayyar, Kashish Bansal, Devika Tiwari, Anurag Bisaria, Siddhant Manral, Ajit Tiwari, Nishant Kumar, Anshika Agarwal, Mannat Daraich, Chetan Pathak, Rohit Arora, Abhishek Kumar, Nived V.V.N., Pragya Prakash Upadhyay, Neelabh Bisht, Aditi Singh, Kamakshi Sehgal, Ankur Saigal, Vikas Bahuguna, for the Appellant
Senior Advocate Dinesh Dwivedi, Deputy Advocate General T.S. Bisht, along with Advocates Prateek Dwivedi, Shivam Singh, and V.D. Bisen, for the State of Uttarakhand
Advocates Rajesh Sharma and Saurav Adhikari, for the Union of India
Advocate I.D. Paliwal, for the State of U.P.
