Legislation Ultra Vires At Enactment Cannot Be Validated By Subsequent Adoption By Parliament: J&K&L High Court

The Court struck down the levy of water usage charges on hydropower projects under the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010, holding that the levy was in substance a tax on the generation of electricity, a field over which the erstwhile State Legislature lacked competence.

The Court was hearing a batch of three writ petitions filed by independent power producers operating river-based hydroelectric projects in the Union Territory of Jammu and Kashmir, challenging the provisions of the Act of 2010 and the demand notices issued pursuant thereto.

The petitioners contended that the State was levying a tax on the generation of electricity under the garb of water usage charges, which was beyond the competence of the State Legislature. The State defended the levy as a regulatory charge under Entry 17 of the State List and argued that the Act had been validated by its adoption under the Jammu and Kashmir Reorganization Act, 2019.

The petitions were heard by a Bench of Justice Rajnesh Oswal and Justice Sanjay Dhar, who observed,

“A piece of legislation, which is ultra vires the Constitution at the time of its enactment cannot be legitimized by its adoption by the Parliament subsequently.”

Background

All the writ petitioners are independent power producers to whom various independent hydro power projects were allocated by the Government for generation of hydroelectricity.

They operate river-based power projects and use water for generation of electricity. In 2010, the Legislature of the erstwhile State enacted the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010, providing for the levying of water usage charges, inter alia, on the use of water for generation of electricity. In exercise of powers under the Act, demand notices were issued against the petitioners from the year 2010 onwards.

The petitioners challenged the Act on the ground that under the garb of water usage charges, the Government was levying a tax on generation of electricity, which was beyond the competence of the State Legislature.

They contended that the use of water by hydro power projects is non-consumptive, and that the fact that the Water Resources Regulatory Authority fixed the charges on the basis of head height from which water is deployed for propelling the turbine, rather than on the quantum of water used, demonstrated that the levy was a tax on generation of electricity.

It was further contended that the levy was hit by the doctrine of promissory estoppel as the State Hydro Power Policy did not provide for any such charges.

The Union of India took the stand that the power to levy taxes on generation of electricity is not vested in the State Legislature, as under Entry 53 of List II, the States are authorized to levy taxes on the consumption or sale of electricity but not on generation.

The State defended the enactment by contending that under Entry 17 of List II, water including water power projects is specifically mentioned, and therefore the State was competent to levy water charges.

It was also argued that water falls within the definition of land and minerals, justifying the levy under Entries 49 and 50. Regarding the adoption of the Act under the Reorganization Act, the State argued that it could be presumed to have the assent of Parliament, which is vested with the power to tax the generation of electricity.

Court's Observation

The Court observed that the nomenclature given by the legislature to a levy does not determine its true character, and that the Court must consider the pith and substance of the relevant legislation.

The Court held that there was no direct quid pro quo in the case of the levy, as the State had no obligation to incur any expenditure on the operation, maintenance, and management of the hydropower projects. The fund created under Section 185-A was utilized for the establishment of hydel projects and capital investment in transmission networks, which were not services rendered to the projects. Thus, the Court held that the levy was a tax and not a fee.

On the question of the incidence of the levy, the Court observed that the tariff was calculated by reference to the head height, which is a proxy for hydropower potential rather than a charge for the physical quantity of water supplied. The Court held,

“In fact, in the operation of hydropower projects, the utilization and non consumption of water constitutes an inextricable and indispensable facet of the generation process; consequently, any statutory levy, charge, or exaction imposed at any stage prior to or during the generation of power tantamounts, in substance and effect amounts to tax upon the generation of electricity itself.”

The Court noted that Entry 53 of List II permits the State to impose a tax on consumption or sale of electricity, but no entry in List II vests the power to impose a tax on generation of electricity. The Court further held that electricity is goods, and Parliament has exclusive legislative competence to legislate on the production of electricity under the unamended Entry 84 of List I.

The Court referred to the decisions in M.P. Cements Manufacturers Association v. State of Madhya Pradesh (2004) and National Hydro-Electric Power Corp. Ltd. v. State of J&K (2005) to conclude that the enactment, to the extent it seeks to impose a tax on generation of electricity, was beyond the legislative competence of the erstwhile State.

On the State's alternative argument that water falls within the definition of land or minerals, the Court held that water has been categorized separately under Entry 17 of List II, and there is no taxing entry in the State List in respect of water. The Court held,

“If we include the water with land or mineral then Entry 17 of List-II becomes redundant, which could never have been the intention of the Constitution framers.”

Finally, addressing the argument that the Act was validated by its adoption under the Reorganization Act, the Court held,

“The argument appears to be an attempt in desperation to save the impugned legislation... Merely because the certain State Acts have been adopted in terms of the J&K Re- organization Act, which is an enactment of the Parliament, the adopted enactments would not cease to be enactments of the State of UT of J&K.”

The writ petitions were thus allowed. The impugned Act, to the extent it provides for levying water usage charges upon hydro power projects, was held to be ultra vires the Constitution and was struck down. The demand notices issued against the petitioners were quashed, and the State was restrained from imposing any tax on the generation of electricity under the garb of water usage charges.