CAG Reports Not Binding Or Self-Executing; Cannot Form Basis Of Recovery Or Adverse Action Without Independent Adjudication: Jammu & Kashmir And Ladakh High Court

The Court further ruled that CAG’s reports are recommendatory and advisory in nature, lacking conclusive evidentiary value unless scrutinised and accepted by a competent authority or legislature.

The High Court was hearing two writ petitions filed by two flour mills challenging recovery proceedings initiated by the Food Corporation of India (FCI) based on CAG audit remarks that FAQ (Fair Average Quality) wheat had been lifted by the mills instead of URS (Under Relaxed Specification) wheat.

A Bench comprising Justice Wasim Sadiq Nargal, while adjudicating the matter observed that, “…any unilateral or ex parte conclusion drawn by the CAG regarding the nature of wheat quality without the involvement of the petitioners and without technical corroboration by the FCI or other qualified agencies is legally not tenable in the eyes of law, procedurally flawed, and outside the scope of the CAG’s jurisdiction and it’s finality.”

Background

The petitioner flour mills had participated in e-auctions conducted by the FCI. On being pronounced successful bidders and having deposited payments, they lifted the allotted wheat stocks, which were duly certified and documented by FCI officials.

Years later, CAG submitted a report suggesting that the petitioners had lifted FAQ wheat instead of URS wheat, thereby causing loss to the FCI. Acting solely on these audit observations, the FCI initiated recovery proceedings and imposed restrictions on the petitioners’ participation in future tenders.

The petitioners contended that they had lifted wheat only after due certification by FCI officials and that the action taken against them was arbitrary, belated, and violative of contractual terms.

The respondents defended the action, asserting that FAQ wheat was lifted in violation of the tender and that recovery was justified in light of the CAG’s findings.

Court’s Observations

On Tender Conditions and FCI’s Responsibility

The High Court, while examining several clauses of the tender, observed that while the responsibility for arranging transport vehicles lay with the successful bidders, the actual process of loading the stocks onto the trucks was to be carried out exclusively by the Food Corporation of India (FCI) at its own expense. The Bench held that “the entire process of delivery, including the classification and loading of the wheat, was under the complete supervision and control of FCI officials. Therefore, any allegations of misclassification, such as the assertion that FAQ (Fair Average Quality) wheat was loaded instead of URS (Under-Release Standard) wheat are entirely baseless, unjustifiable, and legally untenable.”

Furthermore, the Court held that as per the tender the obligation to certify both the quality and quantity of the wheat stocks rested entirely with FCI’s staff at the time of delivery, noting that “FCI, having certified and delivered the goods, is now estopped from raising any subsequent disputes or afterthoughts concerning issues such as classification, quality, or any recovery claims.”

On the Scope of CAG’s Powers & Nature of CAG Reports

Explaining the limited mandate of the CAG with respect to quality assessment of the produce, the Bench clarified that its role remains confined to financial audit and oversight, and does not extend to making determinations on the quality of agricultural produce. The Bench observed that “…the distinction between URS and FAQ wheat is a technical and qualitative assessment, requiring examination of grain characteristics and other scientific parameters, which can only be determined by trained quality control personnel through physical inspection and laboratory testing at the time of procurement. 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.”

The Bench underscored that CAG reports are recommendatory and not enforceable by themselves. Stressing on the absence of binding effect, the Bench remarked that “CAG's reports are not binding or self-executing and serve only as recommendations; they do not carry conclusive evidentiary value unless accepted by the competent Government authority or legislature after scrutiny. Recovery or adverse actions against a private party cannot be initiated based solely on CAG observations, unless these are independently determined through adjudicatory proceedings, which include a thorough appreciation of evidence and adherence to due process.”

Accordingly, the Bench held that recovery or adverse action against the flour mills initiated by the FCI by placing reliance solely on CAG remarks is procedurally flawed and constitutionally impermissible.

On Principles of Natural Justice, Limitation, and Constitutional Safeguards

The High Court noted that the petitioners were neither supplied with the CAG report nor granted an opportunity of hearing before recovery was ordered. Referring to A.K. Kraipak v. Union of India (1970), the Court emphasised that “the failure to furnish the petitioners with a copy of the CAG report that contains adverse findings constitutes a denial of procedural fairness. The petitioner was not afforded any opportunity to respond to the allegations or clarify the facts before the report was finalized or acted upon. 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 also held that the recovery proceedings were vitiated by delay, as they had been initiated more than five years after the alleged transaction. It stressed that administrative action must conform to the principle of reasonable time, remarking that “the long and unexplained lapse of more than five years before the initiation of recovery reflects gross delay and laches, attracting the principles laid down in P.S. Sadasivaswamy v. State of Tamil Nadu (1975), where the Hon’ble Supreme Court held that even absence of a statutory bar, courts will not assist stale demands where the party has slept over its rights.”

Further, the Bench found that unilateral recoveries based solely on CAG observations, without any adjudicatory process, violated the constitutional guarantees under Articles 14 and 21. Justice Nargal observed that "Article 14, which guarantees equality before the law and guards against arbitrary State action, is infringed when punitive consequences are imposed on the petitioner without adherence to a fair and uniform procedure. Simultaneously, Article 21, which guarantees the right to life and personal liberty, including the right to livelihood, reputation, and due process, is also breached when adverse actions are taken without affording the petitioner a reasonable opportunity of being heard. Thus, any such action founded solely on untested CAG observations is constitutionally unsustainable and legally impermissible."

Conclusion

The High Court held that the CAG is not empowered to assess the quality of agricultural produce, that its reports are non-binding, and that recovery or adverse action cannot be based solely on audit reports by CAG made without independent adjudication.

Consequently, the impugned recovery communications issued by FCI were quashed, and the petitioners were allowed to participate in future tenders without impediment.

Both writ petitions were accordingly allowed.

Cause Title: Mahajan Roller Flour Mills v. Food Corporation of India & Ors (Neutral Citation: 2025:JKLHC-JMU:2707)

Appearances
Petitioners: Senior Advocate Sunil Sethi, Advocate Ankesh Chandel, Advocate Paras Gupta

Respondents: Advocate Ahtsham Hussain Bhat.

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