Delhi High Court Rules In Favour Of Auditing Of Private Firms By CAG

Two writ petitions were filed against the orders issued by the DG of Audit, Post & Telecommunications to all telecom service providers, directing them to produce books of accounts and other documents for verification of revenue to CAG for a term of three years from 2006-07 to 2008-09

In an order with far-reaching consequences, the Delhi High Court on January 6, 2014, ruled that the Comptroller and Auditor General (CAG) of India was authorised to audit every rupee flowing into the Consolidated Fund of India, by way of revenue. It also dismissed the pleas filed by private telecom companies against audit of their accounts. This is a truly historic ruling!

The bench of two Judges of Delhi High Court comprising Justice Pradeep Nandrajog and Justice V Kameshwar Rao minced no words in making it clear, “If all the income of the State must, in view of the constitutional requirements, be credited to and form part of the Consolidated Fund of the State, it is obvious that the income, derived by the State from any contract, cannot be kept out of the general revenues… .” It is very rightly said–no person in his right senses will ever dispute this!

It is noteworthy that the two writ petitions were filed by the Association of United Telecom Services Providers of India and the Cellular Operators Association of India against the orders issued by the Director General of Audit, Post & Telecommunications to all telecom service providers , directing them to produce books of accounts and other documents for verification of revenue to CAG for a term of three years from 2006-07 to 2008-09 . According to the companies, CAG did not have the power to conduct a revenue audit of private telecom companies. This point was especially emphasised by them, while presenting their case before the court.

However, the bench of Delhi High Court noted that as licence holders, the companies were bound by contract to maintain accounts relating to the licence agreement and in particular, the revenue received by them. It further held, “There is a contractual obligation of the licensee to account for and pay to the Central government its share of the revenue … . Needless to state, without an accounting, there is no way by which the Central government can determine its dues.” Hence, this landmark judgment is bound to have an everlasting impact on the manner in which public-private partnership and joint ventures work in the country. For, the court itself had said: “A new emerging regulatory state was needed to curb the system that had grown out of club governance.”

While laying special emphasis on the fiduciary relationship of trust between the government and the companies, the bench held that under the terms of the licence agreement, the companies had undertaken the accounting responsibility for the Central government as well as themselves. The bench also took note of the glaring fact that the terms of the contract between the government and the telecom companies involved grant of permission to the companies to use the natural resource of spectrum in exchange for a consideration, which would include a percentage of the revenue of the company plus radio spectrum charges and entry fee. It thus concluded, “As the payment was received by the government out of the gross revenue received by the companies, it was within the jurisdiction of CAG.”

The bench of Delhi High Court further said, “We conclude by holding that neither Rule 5 of the Telecom Regulatory Authority of India, Service Providers (Maintenance of Books of Accounts and other Documents) Rules, is ultra vires Section 16 of the Comptroller and Auditor General (Duties, Powers and Conditions of Service) Act, 1971, nor is Section 16 ultra vires Article 149 (Power of CAG) of the Constitution of India.” It also stated, “We have already held… under the terms of the licence agreement, the licensee has undertaken the accounting responsibility for the Central government as well as itself.”

The bench further made its intentions known by declaring in unequivocal terms: “Thus, the accounts of the licensees, in relation to the revenue receipts, can be said to be the accounts of the Central government and thus subject to a revenue audit as per Section 16 of the Comptroller and Auditor General (Duties, Powers and Conditions of Service) Act.” However, the bench added an all-important caveat, which states: “The CAG audit would have to be restricted only to a revenue audit pertaining to the receipts and no more.” It was also made clear by the bench: “The Comptroller and Auditor General would not confuse himself with his wide, all-embracing power under Section 14 (2) of the Comptroller and Auditor General (Duties, Powers and Conditions of Service) Act, 1971, which includes inquiries into aspects like faithfulness, wisdom and economy in expenditures.”

By Sanjeev Sirohi

 

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