‘Audit remarks are advisory, not binding’
Restrains FCI from withholding amounts payable to mills
Mohinder Verma
JAMMU, Sept 10: The High Court of Jammu & Kashmir and Ladakh has ruled that recovery or adverse actions against private parties cannot be initiated solely on the basis of observations made by the Comptroller and Auditor General (CAG) of India unless such findings are independently determined through proper adjudicatory proceedings.
Justice Wasim Sadiq Nargal delivered the judgment while allowing two writ petitions filed by Mahajan Roller Flour Mills and Amar Roller Flour Mills and others against recovery proceedings initiated by the Food Corporation of India (FCI). The High Court quashed the impugned orders and held that the FCI had acted arbitrarily in relying exclusively on a CAG report to impose financial liability on the petitioners.
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The petitioners through Advocate Ahtsham Hussain Bhat and Senior Advocate Sunil Sethi with Advocate Paras Gupta argued that the action was taken without notice or hearing and that they were never supplied a copy of the CAG report, which formed the sole basis of the demand. They stressed that the CAG has no jurisdiction to assess wheat quality, and its audit remarks, being merely recommendatory, could not justify financial recovery.
The petitioners maintained that they lifted only URS (Under Relaxed Specification) wheat certified and released under FCI supervision, with weighment slips duly signed by Corporation officials. If FAQ (Fair Average Quality) wheat was issued, they said, the responsibility lay with FCI’s own staff, not the millers.
They also highlighted the five-year delay in issuing recovery notices for contracts completed in 2016, calling the claims time-barred under the Limitation Act. Further, they alleged that FCI’s decision to block their participation in other tenders was arbitrary and caused undue business hardship.
The High Court drew a clear line around the CAG’s constitutional mandate and observed, “while the CAG is empowered to conduct financial audits and point out procedural or fiscal irregularities, it has no statutory authority or technical competence to assess the quality of agricultural produce like wheat”.
As the dispute centered around whether the mills lifted URS wheat or FAQ wheat under a 2016 tender, the High Court held that such qualitative distinctions require scientific testing and certification by trained quality control staff of the FCI, not audit officials.
“Any adverse conclusion drawn by the CAG regarding the nature of wheat quality without technical corroboration by competent agencies, and without associating the petitioners, is legally unsustainable”, Justice Nargal ruled, adding “as per the established legal principles, the CAG reports are commendatory in nature and not binding evidence. They can form the basis for further inquiry but cannot themselves be treated as proof of wrongdoing”.
Quoting Supreme Court judgments, the High Court emphasized that CAG performs an audit function, not an investigative or adjudicatory function, and its reports are advisory and not conclusive proof of wrongdoing, adding “such findings, if acted upon without independent investigation, may lead to arbitrary and unjust consequences, violating Articles 14 and 21 of the Constitution”.
The High Court strongly criticized FCI for acting on the CAG’s remarks without giving the petitioners a fair chance to defend themselves. The mills were neither supplied copies of the CAG report nor issued proper notices before the recovery orders were passed, the High Court added.
This, Justice Nargal said, amounted to condemning the petitioners unheard, violating the fundamental principle of audi alteram partem (hear the other side). “Unilateral preparation and use of the CAG report against the petitioners, without opportunity of hearing, is an ex parte condemnation and legally unsustainable,” the judgment stated.
The High Court also pointed out that Clause 15 of the tender clearly provided that any disputes were to be adjudicated by courts of competition jurisdiction at Jammu. By bypassing this contractual clause and unilaterally issuing recovery orders five years after the contract was completed, the FCI acted without jurisdiction and contrary to law.
Further, the High Court ruled that the recovery claim, raised in 2021 for transactions completed in 2016, was hopelessly barred by limitation. Under the Limitation Act, claims for breach of contract must be filed within three years. The delayed action was therefore legally untenable.
By attempting to penalize the mills without due process, the High Court held, the FCI’s actions infringed Article 14 (protection against arbitrariness) and Article 21 (right to livelihood and fair procedure) of the Constitution.
Accordingly, the High Court quashed the recovery communications issued in 2021 and 2022, restrained the FCI from withholding amounts payable to the mills in future tenders and barred it from creating hurdles in their participation in upcoming e-auctions. Moreover, the High Court declared the impugned actions arbitrary, time-barred and beyond the CAG’s jurisdiction.
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