CAG Report Can't Impose Financial Liability Without Due Adjudication: J&K High Court Quashes FCI's Recovery Against Flour Mills

The Jammu and Kashmir and Ladakh High Court has ruled that even if a report of the Comptroller and Auditor General of India (CAG) is considered to possess some evidentiary value, it can at best serve as an indication of possible irregularities and cannot be treated as conclusive proof to impose financial liability.“The CAG, being a constitutional audit authority, is not vested with the statutory function or technical expertise to conduct such scientific evaluations. Its mandate is limited to auditing financial transactions and verifying compliance with procedural and fiscal norms”, Justice Wasim Sadiq Nargal remarked. These observations came through a judgment in two clubbed writ petitions filed by flour mills of Jammu, whereby the court quashed recovery proceedings initiated by the Food Corporation of India (FCI), holding that the entire process was arbitrary, time-barred, violative of natural justice, and contrary to contractual obligations.The dispute arose out of tenders issued in March 2016 through which two flour mills along with their allied units successfully lifted wheat stocks from FCI depots. Years later, in 2021 and 2022, FCI raised demands alleging that instead of Under Relaxed Specification (URS) wheat, the mills had lifted Fair Average Quality (FAQ) wheat, thereby causing a loss to the exchequer. The recovery was based primarily on observations made in a CAG report. The mills, however, approached the Court arguing that the entire wheat was lifted strictly under the supervision and certification of FCI officials, that no substitution of stocks ever took place, and that the CAG report had never even been furnished to them.Justice Nargal undertook a detailed legal analysis by framing many issues for determination. Answering the first question as to whether CAG could comment upon the quality of agricultural produce the Court held that the CAG's constitutional mandate was confined to auditing accounts and financial propriety and it lacked any technical or scientific jurisdiction to decide whether wheat lifted was URS or FAQ. Such determinations, the Court observed, can only be made by trained quality control personnel of FCI or other statutory agencies through scientific testing. The Court underscored that “even if a CAG report is considered as having some evidentiary value, it can only be regarded as an indication of possible irregularities and cannot impose financial liability without further corroboration and formal adjudication through proper legal channels.”Closely connected with this was the question as to whether any unilateral conclusion drawn by CAG without associating the petitioners or without technical corroboration from competent authorities could be sustained. The Court held that such action was wholly beyond CAG's jurisdiction and constitutionally impermissible. Relying on precedents including A.K. Kraipak v. Union of India and Arvind Gupta v. Union of India, the court reiterated that CAG reports are advisory in nature and not binding adjudicatory findings. Acting upon them without independent inquiry, the Court said, would violate Articles 14 and 21 of the Constitution, which safeguard equality before law and the right to livelihood.On another issue as to whether the failure to supply the CAG report to the petitioners violated principles of natural justice the Court held that it did, noting that the petitioners were condemned unheard on the basis of a document they had never seen. “In absence of prior notice and returning of the findings behind the petitioners' back amount to an ex parte condemnation, which is legally unsustainable,” the Court observed.As to the question of whether the respondents were justified in initiating recovery proceedings against the petitioners solely on the basis of audit observations contained in the report of the Comptroller and Auditor General of India (CAG), despite the fact that such reports are merely recommendatory in nature, the Court reiterated that recoveries cannot be based solely on CAG audit objections. Citing Supreme Court precedents, it held that CAG reports cannot be treated as conclusive evidence for fastening liability unless accepted by competent authority and followed by lawful adjudication. “The CAG, though a constitutional authority under Article 149 of the Constitution, does not possess adjudicatory powers. Its role is to examine the accounts of the Union and State Governments and make recommendatory observations, not binding determinations”, the court underscored. The Court also found force in the plea of estoppel, since the wheat had been released only after certification by FCI officials. Having certified the quality and quantity of stocks, FCI could not turn around years later to claim otherwise.In view of these findings Justice Nargal allowed both writ petitions and quashed the recovery communications. “Respondents are restrained from withholding the amount of the petitioners in any other tender and also not to create any...

CAG Report Can't Impose Financial Liability Without Due Adjudication: J&K High Court Quashes FCI's Recovery Against Flour Mills

Aleem Syeed

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