No Prohibition Against CAG Audit: Delhi High Court Dismisses BSES Discoms' Challenge To Audit Show-Cause Notice

The Delhi High Court has dismissed a writ petition instituted by BSES Rajdhani challenging a show-cause notice issued by the Government of the National Capital Territory of Delhi under Section 20(3) of the Comptroller and Auditor General Act, 1971.

Holding the petition to be highly premature, the Court said that the Supreme Court's mandate contains no prohibition against an audit of the Petitioners, nor does it preclude such an audit from being conducted by the CAG, provided that the same is undertaken strictly in accordance with the provisions of the CAG Act and for complying with the directions

The Court observed that the impugned notice, which proposed to entrust the financial audit of the licensees to the Comptroller and Auditor General of India, was merely a preliminary procedural step designed to afford the petitioners a statutory opportunity of being heard.

The Vacation Bench of Justice Tejas Karia observed, "Further, the RA Judgment contains no prohibition against an audit of the Petitioners, nor does it preclude such audit from being conducted by the CAG, provided that the same is undertaken strictly in accordance with the provisions of the CAG Act and for complying with the directions contained in the RA Judgment. The facts and circumstances in which the URJA Judgment was rendered are materially distinguishable, and the ratio thereof is not attracted to the present case. The URJA Judgment cannot be read as excluding, in all circumstances, the possibility of an audit by the CAG in accordance with the CAG Act as it only held that such an audit would be a futile exercise in the context of the provisions of the Electricity Act under consideration in URJA Judgment. In the present case, the proposed audit is sought to be undertaken specifically for compliance with the directions contained in the RA Judgment. Accordingly, the URJA Judgment does not bar issuance of the Impugned Notice."

Senior Advocates Sandeep Sethi and Buddy Ranganathan appeared for the Petitioners, while ASG SV Raju and Senior Advocate Sanjeev Kumar Dubey appeared for the Respondents.

Brief Facts of the Case

The present writ petition was instituted under Article 226 of the Constitution of India, challenging an impugned notice issued by the Government of National Capital Territory of Delhi ("GNCTD") under Section 20(3) of the Comptroller and Auditor General (Duties, Powers and Conditions of Service) Act, 1971. By way of the impugned notice, the GNCTD proposed to entrust the audit of the Petitioners to the Comptroller and Auditor General of India (hereinafter referred to as the "CAG").

The Petitioners were incorporated following the unbundling and privatization of the erstwhile Delhi Vidyut Board. Soon after privatization, the CAG declined to audit the Petitioners on the grounds that they had ceased to be Government companies. Subsequently, a Division Bench of the High Court also quashed a previous direction of the GNCTD for a CAG audit, holding that parallel executive audits were impermissible and futile given the existence of an independent statutory regulator, namely the Delhi Electricity Regulatory Commission (hereinafter referred to as the "DERC").

In a separate landmark judgment concerning accumulated Regulatory Assets, the Supreme Court directed the Regulatory Commissions to formulate a roadmap for asset liquidation and to conduct an intensive audit into the financial under-recoveries of the distribution companies (BSES Rajdhani Power Limited & Anr. v. Government of NCT of Delhi & Ors.)

In the ensuing suo motu implementation proceedings, the Appellate Tribunal for Electricity ("APTEL") explicitly ruled that a CAG audit would contravene statutory provisions. Consequently, the APTEL quashed the audit approval granted by the Lieutenant Governor and directed the DERC to instead appoint a private Chartered Accountant to conclude the intensive audit within a stipulated timeframe.

While the DERC's statutory appeals against these directions were pending before the Supreme Court, the GNCTD issued the impugned notice seeking to re-initiate the CAG audit.

The Petitioners requested the GNCTD to withdraw the notice, contending that the executive action was void ab initio, illegal, and amounted to overreach during active judicial proceedings. Receiving no response from the respondent authorities, the Petitioners moved the High Court by way of the present writ petition.

Contentions of the Petitioners

The Petitioners contended that the impugned notice was ex facie illegal, constituted a colourable exercise of power, and was liable to be set aside at the threshold. It was submitted that the notice was issued in direct contravention of binding judicial pronouncements. The Petitioners asserted that the sole object of the respondent authorities was to derail the long-overdue liquidation of Regulatory Assets, and that tariff orders which had attained finality could not be reopened by executive action, as the same would offend the principles of estoppel and res judicata.

The Petitioners further urged that the impugned notice was void ab initio as it completely mischaracterized the mandate of the Supreme Court. It was argued that the Apex Court had directed an audit of the "circumstances" leading to the non-recovery of Regulatory Assets, which was essentially a commentary on regulatory failure and regulatory capture of the Delhi Electricity Regulatory Commission (DERC), rather than an audit of the private distribution companies themselves.

Furthermore, the Petitioners pointed out that the APTEL had already specifically quashed the prior entrustment of the CAG audit on merits, holding it to be statutory non-compliant. Since the orders of APTEL had not been stayed by the Hon'ble Supreme Court, they continued to remain valid and binding, thereby foreclosing the executive's power to issue the impugned notice.

Finally, it was stated that out of twelve Regulatory Commissions across India dealing with Regulatory Assets, eleven had seamlessly conducted the audit through independent Chartered Accountants, and the DERC alone was seeking to resurrect a CAG audit to achieve indirectly what had already been judicially rejected.

Contentions of the Respondents

The Respondents countered the writ petition by raising a preliminary objection as to its maintainability. It was contended that the impugned notice was merely in the nature of a show-cause notice, which did not give rise to any immediate cause of action or constitute an adverse order affecting the rights of the parties.

The Respondents submitted that the writ petition was highly premature, since the impugned notice merely afforded the Petitioners an opportunity of being heard and submitting their representation in strict compliance with the procedural safeguards provided under Section 20(3) of the Comptroller and Auditor General (Duties, Powers and Conditions of Service) Act, 1971.

On merits, the Respondents argued that the proposed entrustment of the audit to the CAG was strictly in conformity with the directions of the Supreme Court, which mandated a "strict and intensive audit" of the financial under-recoveries in the electricity sector.

The Respondents further highlighted that the impugned notice recorded serious financial irregularities, including instances where one Petitioner company had extended unauthorized loans and financial advances to another sister concern instead of prioritizing its statutory liabilities. Therefore, a comprehensive independent audit by the CAG was essential to check the diversion of funds and ensure financial propriety.

It was maintained that an audit by a constitutional authority like the CAG would ensure ultimate transparency, accountability, and regulatory compliance, thereby safeguarding consumer interests and securing the long-term institutional integrity of the electricity sector in the National Capital Territory of Delhi.

Observations of the Court

On the threshold question of maintainability, the Court observed that the impugned notice did not record any adverse findings or definitively determine any rights or liabilities of the parties. It was noted that the notice was merely a procedural step in adherence to Section 20(3) of the CAG Act, which statutorily mandates that a reasonable opportunity of being heard be granted before any entrustment of audit is finalized.

The Court sequentially rejected the Petitioners' contention that the proposed audit was restricted solely to the regulatory body and excluded the private distribution companies. It was observed that a holistic reading of the apex court's mandate for a "strict and intensive audit" sufficiently empowered the authorities to examine the financial records, accounts, and overall structural positions of the licensees.

Furthermore, the Court highlighted that the apex court did not explicitly bar the CAG from conducting such an exercise, clarifying that as long as the rigorous statutory prerequisites under Section 20 of the CAG Act were fulfilled, there was no legal impediment preventing the initiation of a CAG audit process.

"The contention that the audit contemplated under the RA Judgment is confined only to the DERC, and not to the Petitioners, is therefore without merit. It is also relevant that such a contention does not appear to have been urged before the APTEL, which is monitoring implementation of the RA Judgment. On the contrary, the APTEL has passed orders directing appointment of a Chartered Accountant for conduct of an audit concerning the Petitioners, which orders have not been assailed by the Petitioners before the Supreme Court. Therefore, the submission that GNCTD and the DERC have mischaracterised the scope of audit by referring to an audit of the Petitioners is, accordingly, unsustainable", the Court held.

Addressing the applicability of the earlier Division Bench ruling in the United RWAS Joint Action v. Union of India and Ors. (W.P.(C) 895/2011)["URJA"] case, the Court observed that the previous judgment was rendered in a fundamentally different factual matrix and legal context.

It was noted that while the earlier ruling quashed a parallel executive audit on the ground that it would interfere with the statutory tariff-fixation domain of the DERC, the present audit process was being initiated for the distinct purpose of complying with specific judicial directions concerning accumulated Regulatory Assets.

"In view of the foregoing, this Court is of the considered view that the ratio laid down in the URJA Judgment arose in a materially different factual and legal context and is not attracted to the facts of the present case. The issuance of the Impugned Notice, therefore, cannot be held to be barred by the law declared in the URJA Judgment", the Court observed.

The Court further noted that the current proceedings actively cured the prior procedural defect by affording the Petitioners a comprehensive opportunity of hearing, and that the proposed audit was prima facie in overwhelming public interest given its direct impact on end-consumers.

In its concluding remarks, the Court dismissed the writ petition as premature, while explicitly clarifying that its observations were confined strictly to evaluating the validity of the show-cause notice.

The Court directed the competent authority to independently adjudicate the impending statutory proceedings under Section 20(3) of the CAG Act on merits, after granting a full hearing to the Petitioners and without being influenced by any observations made in the present judgment.

All other rights and contentions regarding the implementation timelines were kept open, subject to the final outcome of the statutory appeals pending before the Supreme Court.

Cause Title: BSES Rajdhani Pvt Ltd. and Anr. v. Government of NCT of Delhi And Ors. [Neutral Citation:2026:d

Appearances:

Petitioners: Senior Advocate Sandeep Sethi, Senior Advocate Buddy Ranganathan, Advocate Amit Kapur, Advocate Alok Kumar, Advocate Anupam Varma, Advocate Gauhar Mirza, Advocate Varun Chandiok, Advocate Aditya Gupta, Advocate Aditya Ajay, Advocate Yash Srivastava, Advocate Shreya Sethi, Advocate Krishna Gambir, Advocate Adamya Ojha, Advocate Mahima Kaur.

Respondents: Additional Solicitor General S.V. Raju, Senior Advocate Sanjeev Kumar Dubey, Advocate Annam Venkatesh, Advocate Shaurya Sarin, Advocate Aditi Andley, Advocate Sameer Vashisht, Advocate Harshita Nathrani, Advocate Anirudh, Advocate Shah Rukh Khan, Advocate S.S. Hooda, Advocate Aditya Hooda.

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