Banks Must Furnish Forensic Audit Report Before Calling Account 'Fraud'; Natural Justice Cannot Be Bypassed For Speed: Calcutta High Court

The Calcutta High Court has held that a bank cannot proceed to classify a borrower's account as “fraud” without first supplying the forensic audit report and the documents relied upon in the show cause notice, observing that principles of natural justice cannot be sacrificed in the name of expedition under the Reserve Bank of India's Master Directions.

Justice Krishna Rao set aside Indian Overseas Bank's decision declaring the petitioners' account as fraud, noting that an effective opportunity to respond is illusory unless the material forming the basis of the allegations is disclosed.

The petitioners had approached the Court challenging show cause notices dated February 28, 2025, contending that the bank relied on forensic audit reports prepared by KPMG and another auditor but failed to provide copies of those reports or the supporting documents. They argued that the notices merely reproduced selective portions of the audit findings and that without access to the underlying material, they were unable to submit a meaningful reply. It was further submitted that they had not had access to the records of the SREI entities since October 2021, making disclosure of documents even more critical.

During the pendency of the writ petition, and after the matter had been reserved for judgment, the bank issued fresh communications on January 15, 2026 declaring the petitioners' account as “fraud”. This prompted the petitioners to file an interim application, contending that the bank acted arbitrarily and in violation of natural justice by proceeding with the fraud classification without addressing their request for documents.

Opposing the plea, the bank argued that the RBI Master Directions envisage a time-bound and summary procedure, and that the petitioners ought to have filed a reply to the show cause notices instead of moving the Court. It was contended that detailed disclosure of all materials was not necessary at the notice stage.

The Court, however, referred to the coordinate Bench decision in Hemant Kanoria v. Bank of India, which held that while the fraud declaration process is summary, natural justice must be read into it. The Bench reiterated that if a forensic audit report or other documents form the basis of the show cause notice, such materials must be supplied to the noticee. The Court emphasized that the purpose of a show cause notice is to enable an effective defence, which cannot be achieved unless the relied-upon documents are made available.

Finding that the petitioners had specifically enumerated the documents required for responding to the allegations and that the bank nonetheless proceeded to declare the account as fraud during the pendency of the writ petition, the Court held the action to be unsustainable. It observed that the respondent acted without considering the petitioners' request and thereby deprived them of a fair opportunity to be heard.

Accordingly, the Court set aside and quashed the fraud declaration dated January 15, 2026 and directed the bank to supply the requested documents within two weeks or, if the records were voluminous, to permit inspection. The petitioners were granted two weeks thereafter to file their reply, and the bank was directed to take a fresh decision within two weeks of receiving the response. The writ petition and connected application were disposed of with these directions.

Case Title: Hemant Kanoria & Anr. v. Indian Overseas Bank

Case Number: W.P.A. No. 6872 of 2025

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