Midha 2002 download

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Bench: A D Singh, M Sharma

Dr. Y.R. Midha vs Union Of India (Uoi) And Ors. on 6/3/2002

JUDGMENT

Anil Dev Singh, J.

1. The unsavoury controversy presented in the writ petition results from a challenge inter alia to the action of

the fourth respondent in awarding the contract to carry out physical verification of the stocks and inventories

of the Food Corporation of India to M/s. SGS Ltd, a Mumbai based firm of surveyors in which the fourth

respondent's son works as Executive marketing.

2. The petitioner, a member of the Indian Audit and Accounts Service, was working as Principal Director

(Commerce and Audit) and Ex-officio Member, Audit Board, New Delhi. The first respondent is the Union of

India which has been represented through the Ministry of Food and Consumer Affairs, Department of Food

and Civil Supplies, New Delhi; second respondent is also the Union of India represented through the Ministry

of Finance, New Delhi; third respondent is the Office of the Comptroller and Auditor General of India, New

Delhi; fourth respondent is the Comptroller and Auditor General of India, New Delhi (for short 'the CAG');the fifth to ninth respondents are/were the officers of the third respondent; tenth respondent is the Food

Corporation of India (for short 'the FCI'), and the eleventh respondent is a company, namely, SGS India

Limited.

3. The facts giving rise to this petition are as follows:-

4. On June 30, 1997, the Secretary to the Government of India, Ministry of Food and Consumer Affairs,

Department of Food and Civil Supplies, wrote a letter to the CAG requesting a special audit of the

inventories/stocks of rice held by the FCI in the States of Punjab, Uttar Pradesh, Haryana, Madhya Pradesh,

Andhra Pradesh, Tamil Nadu and Orissa within one month. This request was made in view of the

discrepancies between the figures of stock of rice available with the Government of India and the FCI. Theletter reads as follows:-

"As a result of the discrepancies between the figures of stock of rice available with the Government of India

and the FCI, the Cabinet Committee on Prices viewed this discrepancy with grave concern and have directed

that a 'special audit' be carried out for the years 1995-96 and 1996-97 about the stocks of rice maintained with

the FCI as well as stock procured for Central Pool by different agencies of the States of Punjab, Uttar Pradesh,

Haryana, Madhya Pradesh, Andhra Pradesh, Tamil Nadu and Orissa.

2. The Ministry is of the view that a 'special audit' involving inventories/stocks with FCI and the concerned

State should be carried out by the Comptroller and Auditor General of India and are requested to submit a

report, preferably within one month.

3. A line in confirmation will be highly appreciated."

5. In response to the aforesaid letter, the Chairman, Audit Board & Deputy Comptroller and Auditor General,

by his letter dated July 1, 1977, apprised the Secretary, Ministry of Food & Consumer Affairs, Department of

Food & Civil Supplies, that it will not be possible to physically verify the stocks within one month. It was also

pointed out that a plan was being developed for doing the needful and the same was expected to be ready by

July 15, 1977.

6. On July 4, 1997, the Cabinet Secretary wrote a letter to the fourth respondent requesting the latter to depute

an appropriate team to carry out special audit in respect of inventories/stocks held for the Central Pool by the

Dr. Y.R. Midha vs Union Of India (Uoi) And Ors. on 6 March, 2002

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F.C.I. and the concerned state agencies. The letter reads as follows:-

"Please refer to D.O. Letter No. 5-26/97-BP.I/S(FC&CS)/143/97 dated 30th June 1997 addressed by Shri B.K.

Taimini, Secretary, Department of Food and Civil Supplies regarding carrying out of a special audit in respect

of inventories/stock held for the Central pool by FCI and the concerned State agencies.

As intimated to you, government has viewed the discrepancies between figures of stock maintained in

Government of India and that reported by FCI seriously. It has been directed that a special audit should becarried out in respect of the stocks so as to arrive at the correct position.

I will be grateful if you could kindly arrange to depute an appropriate team to carry out the special audit and

let us have a report within a month, if possible. I am asking the Secretary, Department of Food and Civil

Supplies to render full assistance to the audit team to enable them to complete the work expeditiously."

7. Accepting the request of the Government of India for carrying out the special audit of the inventories/stocks

of the food grants held for the central pool by the F.C.I. and the concerned agencies of the State Governments,

it was decided that the audit of the book balances of the F.C.I. be conducted by M/s. Thakur Vaidyanath Aiyar

& Co., New Delhi, M/s. Suri & Co., Chennai, M/s. Price Waterhouse & Co., Calcutta, M/s. S.B. Billimoria &

Co., Mumbai.

8. For the purpose of physical verification of the stocks and inventories of the F.C.I., SGS India Ltd., a

Mumbai based firm of surveyors, was engaged by means of letter dated August 13, 1997. At this stage it will

be convenient to set out relevant part of the letter:-

"I am directed to state that the Comptroller and Auditor General of India has been pleased to appoint your

firm, SGS (India) Limited, as Surveyors to carry out physical verification of ground balances of stocks of

wheat, rice and paddy of Food Corporation of India (FCI) as well as the stocks of wheat, rice and paddy held

by the agencies of the State Governments for the central pool of Government of India, and report on the

results of such physical verification. The above work of physical verification is to be carried out in accordance

with the following terms and conditions:

* Complete physical verification of ground balances of wheat, rice and paddy held by FCI as well as by the

State Agencies for the Central Pool will be carried out by your firm in association with the following firms of

Chartered Accountants, appointed by the Comptroller and Auditor General of India for the respective zone of

FCI:

-------------------------------------

Region Firm's Name

Northern Thakur Vaidyanath Aiyar & Co

Region New Delhi.

Southern Suri & Co., Chennai. Region.

Eastern and Price Waterhouse, Calcutta

North Eastern

Region.




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that it will not be possible to physically verify stocks within one month. It was also pointed out that the plan

for verifying the stocks was being developed and would be ready by 15th of July, 1997. Soon after the

dispatch of the aforesaid letter, the Cabinet Secretary, on July 4, 1997, while referring to the letter of the

Secretary, Ministry of Food and Consumer Affairs, dated June 30, 1997 pointed out that the Government had

viewed the discrepancies between the figures of stocks maintained by the Government of India and that

reported by the FCI seriously. The CAG was requested to arrange an appropriate team to carry out the special

audit in respect of the stocks so as to arrive at correct position. This letter along with the letter of the

Secretary, Ministry of Food and Consumer Affairs, dated June 30, 1997 was marked to the AssistantComptroller and Auditor General (Commercial) [for short 'the AC(C)']. Pursuant thereto the AC(C) recorded a

note dated July 8, 1997 wherein it was brought out that while the letter from the Secretary, Ministry of Food

and Consumer Affairs, specified that stocks of rice maintained in the FCI as well as the stocks of rice

procured for the central pool by different agencies of the States were required to be audited, the letter of the

Cabinet Secretary did not mention the name of the stocks of food grains or the States in which they are lying

with the FCI which required to be audited. It was suggested that special audit should be conducted to cover

stocks of wheat and rice in 1547 godowns covering the entire country instead of only the States mentioned

specifically by the Secretary, Ministry of Food and Consumer Affairs. As per the note, the work of special

audit was required to have three components - viz., (1) auditing the book balances of the FCI; (2) physical

verification of the ground balances and inventories of the FCI; and (3) comparing the actual ground balances

with the book balances of the FCI and the reported balances of food stocks in the books of the government. Itwas pointed out that the book balances of the FCI as on March 31, 1997 were to be verified by taking into

account the following:-

(a) Opening balance of foodgrains as on April 1, 1995;

(b) Procurement and acquisition of food grains during the year 1995-96 and 1996-97;

(c) Issue of foodgrains during the aforesaid years; and

(d) Closing balance of foodgrains as on March 31, 1997.

It is important to note that AC(C) in the aforesaid note proposed that the work should be entrusted to reputed

firms of Chartered Accountants, and since the work would involve complete verification of stocks and

inventories, reputed firms of certified surveyors/valuers may be engaged to check the ground balances of the

stocks of food grains as neither the third respondent, office of the CAG, nor the Chartered Accountants were

possessed of the requisite technical expertise for such type of work. Reference was made to Section 34(5)(b)

of the Food Corporations Act, 1964 (for short 'the FC Act'), in support of the view that the CAG is entitled to

conduct supplementary or test audit of the FCI by such person or persons as the CAG may by general or

specific order direct. In view of the aforesaid provisions it was felt that the work could be entrusted to the firm

of chartered accountants and surveyors/valuers. It was pointed out that by way of ground work, to begin with

SGS India Limited, a member of International Institute of Surveyors and based in Mumbai, and specialising in

stock management, warehousing services, etc., was approached for furnishing of work plan with quotations of

its fees. Besides, it was pointed out that the antecedents & capabilities of other reputed firms were being

ascertained. A reference was also made to the letter of the Chairman, Audit Board and Deputy CAG, dated

July 1, 1997 addressed to the Secretary, Ministry of Food and Consumer Affairs, whereby the Government of

India was informed that three months' time starting from August 1, 1997 would be required to complete the

audit and for preparation of the report. The Chairman, Audit Board and Deputy CAG, marked the note of the

AC(C) to the CAG with his comments for seeking approval to the following proposal of the AC(C):-

It is proposed that this work may be entrusted to reputed C.A. firms. Besides, as the work will involve

complete physical verification of stocks/inventories, it is also proposed that for verifying the ground balances

reputed firms of certified Surveyors/Valuers may be engaged as neither our Department nor the Chartered

Accountants have the requisite technical expertise."




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It appears that the proposal was seen and approved by the CAG on July 8, 1997. Since the CAG approved the

proposal of AC(C), inter alia, to audit the book balances of the FCI, a list of firm of chartered accountants

with points of 40 and above as per the panel prepared in 1986 in respect of Delhi, Bombay, Calcutta and

Madras was taken into consideration and the following firms in terms of professional standing and repute as

well as scores allotted to them were considered for the purpose of conducting audit of the book balances in

various FCI zones:-

1. M/s. Thakur Vaidyanath Aiyer Northern Region. & Co., New Delhi.

2. M/s. S.B. Billimoria and Co. Western Region.

3. M/s. Price Waterhouse, Calcutta. Eastern and North Eastern Region.

4. M/s. Fraser & Ross, Madras. Southern Region.

Accordingly these firms were recommended for entrustment of the audit of the book balances. This was

approved by the Chairman, Audit Board and Deputy Comptroller and Auditor General [DAT(C)] on July 10,

1997. It appears from the note of AC(C) dated July 21, 1997 that subsequently M/s. Fraser & Ross declined to

work on the ground that it was already engaged in statutory audit of several companies. It was decided byDAI(C) to engage M/s. Suri & Co., Madras, in place of M/s. Fraser & Ross.

11. On July 24, 1997, a tripartite meeting of the aforesaid four firms of chartered accountants, the firm of

surveyors M/s. SGS India Limited, and the DAI(C), was held. In this meeting the following decisions were

taken:-

(a) In view of shortage of time and the national importance of the project the work must start by 1st

August'97.

(b) The physical verification of ground balances will be carried out by the surveyors in association with the

C.A. firms in the respective FCI regions.

(c) Audit teams from this department will be simultaneously deployed with the teams of C.A. firms and the

surveyors at the godowns. The audit teams will carry out the system checks as part of the sectoral review

already under way in respect of FCI. They will also facilitate the other teams.

(d) To finalise the detailed work-programmes and movement schedules for each region, meetings will be held

at Calcutta, Mumbai, Delhi and Chennai before end of July'97, between the respective C.A. firms, the

surveyors and officers of this department.

(e) Immediately on completion of these details, the C.A. firms and the surveyors will quote their fees along

with the detailed calculation for the same."

[see note of the AC(C) dated July 25, 1997]

12. Pursuant to the aforesaid decisions, the aforesaid firms of Chartered Accountants intimated their

professional fees for the work in question as per the following details:-

Region Firm's Name Professional fees (Rs. In lakhs Revised Fees (Rs. in lakhs)

Northern Region Thakur Vaidyanath Aiyar & Co, New Delhi. 134.19 90.87 Southern Region Suri & Co.,

Chennai 94.30 66.73




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Eastern and North Eastern Region, Price Waterhouse & Co., Calcutta. 170.50 148.00

Western Region S. Billimoria & Co, Mumbai. 107.60

M/s SGS India Ltd., by its letter dated August 5, 1997, (for short 'the quotation') not only quoted the rates but

also specified the modus operandi for verification of the stocks as per below:-

"This is in continuation to our discussions regarding above subject.

We have formulated the action plan for all the godowns of FCI covering the country for physical verification

of the stocks. Our modus-operandi for the same, is as below:-

1. Quantity

Quantity will be assessed on weight/volume ratio i.e. determination of density by physically determining bulk

density/stowage factor.

SUCH STOWAGE FACtor will be uniformly applied in all centres for assessment of stocks. Alternatively the

tonnage will be calculated on the basis of accessible portions of stacks.

2. Quantity

Samples will be drawn from all accessible stacks, analysed and disposed off after spot analysis. Parameters for

determining of quality of various commodities will be determined as below:-

(I) Rice: A composite sample of stacks will be analysed for following refractions:

(i) LB ratio

(ii) damaged

(iii) discoloured

(iv) discoloured

(v) chalky

(II) Wheat : Wheat will be checked for weeviled bored kernels.

(III) Paddy: Paddy will be checked for weeviled damaged.

Based on above refractions of three commodities, we will be declaring class and category.

Damaged stacks

Damaged cargo will be classified on the following parameters and will be assessed & analysed separately and

report of the same will be submitted via our lab in due course and not at the spot.

(i) Sound grains

(ii) Broken of sound grains




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(iii) Slightly damaged grains

(iv) Touched/discoloured & chalky grains.

(v) Completely damaged grains (vi) Weeviled grains

3. Rates :

We have worked out our rates on the basis of approximate data available with us for quantities available to be

covered for physical verification which are as follows:-

(a) up to 10 million tonnes : Rs.6.00 per metric tonne (b) Above 10 and less than : 15 million tonnes

Rs.5.25per metric tonne (c) Above 15 and less than : 20 million tonnes. Rs.4.75 per metric tonne

These rates are all inclusive except for photography charges which will be additional at cost.

4. Reporting:

In order to facilitate coordinating with your good office, centralised reporting will be intimated to your officeon every Wednesday for the previous week from our Delhi office. The name of contact person is MRS.

IPSITA PATEL, alternative names are Mr. Kamal Poplai and Capt. Y.N. Pushkarna and the fac nos. are as

below:

011-682 4182

011-692 9675

- Number of godowns covered

- Quantity assessed per godown and which will be sent in the format as per Annexure-I.

To ensure smooth functioning of the operations, we have to prevail upon your good office to instruct FCI to

extend full co-operation, provide adequate labour, ladders, calibrated scales, etc. etc. Enclosed is the format as

per Annexure-II, which if presented to our team prior to commencement of assessment of individual godown

will facilitate the process of assessment. Godown in charge are requested to keep this information ready in

advance.

FCI to kindly ensure that all stacking in the godowns is done in regular geometric shapes and no stacks are

presented in collapsed stage.

Cargo stacked in the open storage will be construed as a godown, subject to a maximum ceiling of 5000

tonnes.

No stack should be under fumigation at the time of inspection. Tentative programme of individual region/zone

will be submitted in advance, however any changes in the scheduled program, if any, will be informed one

week ahead of such changes.

No receipts/dispatches should be undertaken during the inspection of godowns.

We hope you will find our offer competitive, in case any query, pl. feel free to contact us and we look forward

in associating with you and awaiting work order for the same.




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xx xx xx"

On receipt of the rates, the AC(C) on July 25, 1997 recorded a note in which the rates quoted by SGS India

Ltd. were described to be within the limits prescribed by the Wealth Tax Rules, 1957. The terms and

conditions under which the work was proposed to be entrusted to the surveyors M/s. SGS India Ltd. were

quoted in para 16 thereof which reads as follows:-

"* Complete physical verification of ground balances of wheat, rice and paddy held by Food Corporation ofIndia as well as by the State Agencies for the Central Pool will be carried out by the firm of Surveyors in

association with the firms of Chartered Accountants for the respective zone of FCI.

* The physical verification will include hundred percent counting of the bags with appropriate weighing of the

bags.

* The firm of Surveyors will carry out quality testing of the food stocks as per established international norms

and will report on the same.

* The firm of Surveyors will furnish reports of physical verification in the formats prescribed by this office.

* The firms of Chartered Accountants will verify the book balances of foodgrains as on 31st March 1997 in

the respective Zones. Certification will take into account opening balance as on 1st April 1995, transactions

relating to procurement/acquisitions during 1995-96 and 1996-97 and issues during these years.

* On completion of the verification of book balances and ground balances, discrepancy statements will be

jointly authenticated by the authorised representatives of the firms of Surveyors and that of the Chartered

Accountants as per prescribed forma.

* The verification of book balances will also be authenticated by the firm with confirmation by the authorised

representative of FCI.

* The work will be completed within 30th September 1997. Any spill-over beyond this date, due to factors

beyond the control of the firm, will be considered.

* The verification certificates of the firm are to be sent to MAB-IV, New Delhi, with copy to the office of the

CAG.

* The firm will be paid for the verification work on completion of the same, and on the basis of actual

quantity verified.

In para 17 of the aforesaid office note, it was proposed that the work of physical verification of stocks be

entrusted to M/s. SGS India Ltd., Mumbai. This para reads as under:-

"17. In view of para 15 above, it is proposed that the work of physical verification of the stocks of wheat, rice

and paddy of FCI and agencies of State Governments may be entrusted to M/s. SGS India Limited, Mumbai,

subject to the terms and conditions stipulated in para 16 above and at the rate quoted by the firm.

The requisite approval to the proposals was sought in para 18 of the office note, which states as follows:-

18. CAG's kind approval is solicited for the proposals contained in paras 13 and 17 above."

The proposal was recommended to be accepted by the DAI(C). Accordingly on August 11, 1997, the CAG

accepted the proposal.




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13. The above facts which have been culled out from the official record of the CAG particularly the office

nothings show that the proposal to appoint SGS originated from AC(C) Shri D.J. Bhadra and not from the

SGS. The reason for appointment of SGS as surveyor based upon the magnitude of the work involved and the

time constraint within which it was required to be completed. Keeping in view the two factors it was

considered that the work needed to be executed by firms specialising in stock management, warehousing

services, etc. From a conjoint reading of the office nothings dated July 25, 1997 and August 11, 1997 of

ACC(C) Shri Bhadra it is apparent that SGS was selected to undertake physical verification of stocks of food

grains of the FCI all over India in view of its experience, expertise and size. Even the petitioner in his reportdated March 20, 1998 relating to "Special Audit of Food Corporation of India" described SGS as well known

and reputed firm of stock verifiers. At this stage it will be necessary to quote the relevant part of the report,

which is as follows:-

"Following Government of India's request vide D.O. letter No. 5-26/97-BP I/S (FaC-S)/143/97 dated June 30,

1997 Shri B.K. Taimni, Secretary, Ministry of Food & Consumer Affairs, (Department of Food & Civil

Supplies), New Delhi, to the Comptroller & Auditor General of India, CAG had got the total stocks of wheat,

rice and paddy of Food Corporation of India physically verified. For the purpose, CAG had appointed a

well-known and reputed firm of stock verifiers for determination of such stock in all Depots of FCI and also a

panel of reputed firms of Chartered Accountants, who had to work out the stock balances as on 13.3.1997

with reference to the stock verification report of the verifiers...."

It may be pointed out that the petitioner had taken over as the Principal Director of Commercial Audit and

Ex-Officio Member, Audit Board-IV, New Delhi, (for short 'MAB-IV') on December 4, 1997 and the report

rendered by him was in that capacity. We hasten to add that the aforesaid remarks made by the petitioner

relate to the reputation of the firm and we are not referring to these remarks to convey that the petitioner was

satisfied with the execution of the work by SGS. In the circumstances, it appears that AC(C) Shri Bhadra had

proposed the name of SGS on relevant considerations. This is also borne out from the affidavit of Shri R.

Srinivasan, Deputy Director (Legal) of the third respondent in the office of the CAG dated May 8, 2000, in

which it is stated that respondent No. 11-SGS was selected after carefully ascertaining the credential of the

firm and its suitability for the work. It was also averred that the respondent No. 11 was engaged as no other

firm possessed the technical skill and the coverage required to undertake the work of physical verification onall India basis. The affidavit refers to the fact that the firm has all India reach having at its command 26 labs,

40 officers and over 1700 employees and considerable experience of over 40 years of inspection of all kinds

of cereals as also verification and supervision of goods discharged and loaded at various ports in India,

determination of weight of such goods by mechanical as well as volumetric methods, drawing appropriate

samples, quality inspection and analysis, and the extensive experience of working with major central public

sector undertakings like SAIL, BPCL, ONGC, BHEL, MMTC as well as various other State Government

organisations like Electricity Boards and Municipal Bodes, Public Health Engineering Departments. In the

private sector, the firm had been working for Hindustan Lever, Essar Steel, Nestle India, Indian Tobacco

Company, Ranbaxy Lab, Tata Exports, TISCO etc. It is also stated that it was ensured that the rates quoted by

respondent No. 11 were reasonable and were compared with the sale of fees charged by registered valuers,

and the rates were found to be within the limits prescribed by the Wealth Tax Rules. It is asserted that the fact

that son of respondent No. 4 was working in respondent No. 11-SGS did not influence the decision to award

the work to respondent No. 11. According to the affidavit, the decision was an institutional decision and not of

any individual.

14. In the affidavit of Mr. Iain L. Webster, CEO and Managing Director of respondent No. 11, dated

November 19, 2001 it is stated that respondent No. 11 is the larger inspection, testing and verification

organization headquartered in Geneva, Switzerland; that SGS operates in 140 countries through out the world

from 850 offices and 340 laboratories; that SGS in India had been operating for almost 50 years and has under

its umbrella extensive network of 35 offices and 27 laboratories; that respondent No. 11 offers a wide range of

independent services to most industries and has a specialised work force of around 2000 employees; that

respondent No. 11 deals with agricultural products/commodities, food grains, textiles, minerals and mines,




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machineries, oil and petroleum products etc; and that respondent No. 11 is an ISO 9002 certified company

having well documented practiced system for its branches across the country. The affidavit also brings out the

fact that respondent No. 11 has undertaken work of various government departments and undertakings either

through commercial negotiations or through empanelment or otherwise. It is claimed that respondent NO. 11

has worked for 130 companies including public sector organisations. Names of some of the government

departments and organisations have been referred to in the affidavit. These are-

(i) Ministry of External Affairs.

(ii) World Food Programme.

(iii) Bharat Petroleum Corporation Ltd.

(iv) Project & Equipment Corporation.

(v) Punjab State Electricity Board.

(vi) Petroleum Conservation Research Association.

(vii) Delhi Vidyut Board.

(viii) UNICEF.

(ix) Food Corporation of India.

(x) NAFED.

It is also asserted that respondent No. 11 in the last five years has undertaken work of inspection testing and

verification entrusted to it by the following organisations against the fee mentioned against each of them:-

(1) MMTC Rs. 3.77 crores. (2) Indian PetroChemical Rs. 1.64 crores. Company.

(3) Steel Authority of India Rs. 1.13 crores. (4) India Sugar & General Rs. 0.44 crores. Industry.

(5) Karnataka Power Rs. 0.48 crores. Corporation.

(6) Indian Aluminium Co. Rs. 0.44 crores. (7) Hindustan PetroChemical Rs. 0.16 crores. Corpn. (8) S.T.C.

Rs. 0.49 crores.

(9) Cotton Corporation of India Rs. 0.32 crores.

15. It appears that though the office note dated July 8, 1997 recorded by AC(C) Bhadra speaks of the

endeavor to ascertain the antecedents and capabilities of other reputed firms besides SGS for the purpose of

obtaining quotations, noting has ben brought on record which could show that any such endeavor was made.

Even the office file No. CA-III/259-97 of MAB-IV of respondent No. 3 relating to special audit of

inventory/stocks held by Food Corporation of India, which has been numbered as Vol-I, doe snot contain any

document to show that any such exercise was undertaken. The file at pages 5/C to 8/C has details with regard

to the functioning of the SGS in India. There are no papers with regard to other firms of surveyors. It appears

to us from the office note recorded by AC(C) dated August 11, 1997 that quest for surveyors ended as SGS

was approached for a viable work plan in respect of the physical verification of the stocks as according to the

enquiry it was revealed that SGS had the requisite size and expertise necessary for undertaking physical

verification of stocks of food grains all over India. It will be too much to assume that the proposal was made




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to entrust the work of physical verification of stocks of wheat, rice and paddy pertaining to the FCI to M/s.

SGS India Ltd. because the son of respondent No. 4 was working in that company. The proposal mooted by

the office of the SGS was approved by respondent No. 4 Respondent No. 4 under Section 21 of the

Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 (for short 'the CAG

Act') had the power to delegate the functions/powers to a subordinate authority to consider the question of

bestowing approval to the proposal. This fact was not disputed by the learned Solicitor General as also Mr.

Shakdher appearing for the respondents. The unsavoury controversy would not have arisen in case respondent

No. 4 utilising the power under Section 21 would have delegated the function of considering the proposal to asubordinate authority. This position in the first instance was not disputed by the learned Solicitor General as

also Mr. Shakdher appearing for the respondents. Subsequently, however, they modified their stand and

submitted that the overall responsibility was that of respondent No. 4. Assuming that Section 21 of the CAG

Act was not applicable or the physical verification of stocks of food grains did not attract the provisions of the

CAG Act, in that event there would be no statutory impedient in entrusting the matter of finalising the

contract and matters connected therewith to a senior and responsible officer of the CAG. But it should not be

lost sight of the fact that SGS is a vast company which has presence in 40 countries. In India alone it has a

large work force in which Shri Ajay Shunglu, son of respondent No. 4, is one of the employees. He is neither

the CEO nor holding a position next to the CEO. As per the affidavit filed by the SGS dated August 22, 2000,

Shri Ajay Shunglu was appointed on November 15, 1995 as management trainee on probation for a period of

six months with basic salary of Rs. 7,000/- per month. He was selected being M.A. Economics from NewSchool, New York and was also having work experience of five years in different organisations. On June 1,

1997 Shri Ajay Shunglu was confirmed as Executive Marketing. On April 5, 1999, Mr. Ajay Shunglu was

promoted to the post of Assistant Manager. As per the affidavit, no undue privilege or extraordinary benefit

was ever given to him by the company and he got the promotions and increments in normal course of the

business of the company in consonance with is qualifications and experience along with other employees of

the company. The affidavit further goes on to clarify that no special favor or out of turn promotion was given

to him. Besides, it is pointed out that he was never associated with the contract in question. It will be a sad day

if a high constitutional authority gives a contract to a firm just because his son happens to be one of its

employees out of a work force of 2000.

16. It is a salutary principle of jurisprudence that no one can be a judge in his own cause. The principle appliesto both judicial as well as administrative decisions. Wether the judicial authority or the administrative

authority is actually biased is not the test for the action to survive. The real test is whether the circumstances

are such as to create a reasonable apprehension in the mind of others that there is a real likelihood of bias

penetrating the decision. In case there is a real likelihood of bias entering the determination of the authority,

whether judicial or administrative, the same will stand vitiated. Under our constitutional system where rule of

law had been given primacy, justice must not only be done but also appear to have been done. For this the

decision making process must not be polluted by considerations of pecuniary or personal interest. The

decision must be just, fair and reasonable and in keeping with rule of law. In the instant case in approving the

proposal of the AC(C) and the DAI(C) to entrust the work of physical verification to respondent No. 11,

whether there was a real likelihood of respondent No. 4 being biased. In this regard, it needs to be considered

whether a right minded person would think that in the circumstances there was a real likelihood of a bias on

the part of the person who has to take a decision. Considering the facts that the proposal did not emanate from

respondent No. 4 and the same was based upon the reputation, expertise, experience and size of SGS, it does

not appear to us that there was any bias on the part of the respondent No. 4 in approving the proposal of

AC(C) Bhadra. Besides, the work was of an urgent nature and keeping the time constraint in view and having

regard to the consideration that there was no other company having an all India presence, experience and

expertise as was possessed by SGS, the work was entrusted to SGS without inviting tenders. It is pointed out

in the affidavit of respondent No. 11 dated November 19, 2001 that it has not only provided services to

different organisations through various contractual arrangements, but it was also called upon to perform

inspection of various organisations through empanelment.




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the notice of the Justices the fact that the deputy clerk of the court who had retired with the Justices was

brother of F.G. Langham and was himself a partner of the same firm of solicitors in which F.G. Langham was

also a partner. The conviction was quashed by the King's Bench Division. It found the presence of deputy

clerk to be objectionable at the time the Justices retired to consider their decision. It seems to us that there is

nothing common between the present case and Sussex Justices case (supra). In the peculiar circumstances of

the case, the decision of Sussex Justices case was held to be vitiated in view of he deputy clerk's relationship

to the case.

21. In R. v. Barnsley Licensing Justices, ex p Barnsley and District Licensed Victuallers' Assn. (1960) 2 QB

167 = (1960) 2 All ER 703, it was held by Justice Devlin, L.J., that the question of bias must be inferred from

the circumstances. In this regard it was stated as follows:-

"We have not to inquire what impression might be left on the minds of the present applicants or on the minds

of the public generally. We have to satisfy ourselves that there was a real likelihood of bias, and not merely

satisfy ourselves that was the sort of impression that might reasonably get abroad. The term 'real likelihood of

bias' is not used, in my opinion, to import the principle in R. v. Sussex Justices [(1924) 1 KB 256, to which

Salmon, J. referred. It is used to show that it is not necessary that actual bias should be proved. It is

unnecessary and, indeed, might be most undesirable to investigate the state of mind of each individual justice.

'Real likelihood' depends on the impression which the court gets from the circumstances in which the justiceswere sitting. Do they give rise to a real likelihood that the justices might be biased? The court might come to

the conclusion that there was such a likelihood without impugning the affidavit of a justice that he was not in

fact biased. Bias is or may be an unconscious thing and a man may honestly say that he was not actually

biased and did not allow his interest to affect his mind, although, nevertheless, he may have allowed it

unconsciously to do so. The matter must be determined on the probabilities to be inferred from the

circumstances in which the justice sit."

22. Thus, the court is to determine from the circumstances whether or not there was a real likelihood of bias

entering the determination of the authority. In R. v. Liverpool City Justices, ex p Topping , [1983] 1 All E.R.

490, the Division Court held that in such cases, the correct test to determine whether there is an appearance of

bias, rather than whether is actual bias, and that as to the way in which the test is to be applied is to askwhether a reasonable and fair minded person sitting in court and knowing all the relevant facts has a

reasonable suspicion that a fir trail for the applicant was not possible.

23. In case the work was entrusted to respondent No. 11-SGS on extraneous considerations there was no

reason why the petitioner should have waited to file the instant writ petition. The writ petition has been filed

admittedly after the work has been executed. The petitioner ought to have filed the writ petition immediately

on entrustment of the work to SGS India Ltd. It is not the case of the petitioner that since he did not come to

know of the entrustment of the work to SGS in August 1997, it was not possible to file the writ petition earlier

than the date on which it was actually filed. In fat on December 4, 1997, as already pointed out, when the

petitioner took over as Principal Director of Commercial Audit and Ex-Officio Member, Audit Board-IV,

New Delhi, he recorded in his report dated March 20, 1998 that the CAG had appointed a well known and

reputed firm of stock verifiers for determination of such stock in all the depots of FCI. At that point of time he

was not troubled by the close relationship of respondent No. 4 with one of the employees of the SGS. Rather

he used laudatory words for SGS. In case respondent No. 4 had not acted impartially objectively and without

bias, the petitioner could have given an indication to that effect in the report or could have filed the writ

petition much earlier than the did, challenging the action of respondent No. 4 in approving the proposal to

appoint respondent No. 11 to verify the stocks of food grains in the godowns of the FCI. The petition has been

filed at a stage when the petitioner felt threatened by a departmental action in respect of a case of sexual

harassment. We will revert to this aspect of the matter and deal with it, a little more, in detail at a later stage.

24. While we think that respondent NO. 4 would have been well advised if it had left the matter of selection of

a stock verifier for the work in question to a serious and responsible officer, at the same time we do not find




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any material to hold that there was real likelihood of bias entering the decision of respondent No. 4 in

according approval to the appointment of respondent No. 11 for carrying out the physical verification of the

stocks of food grains in the godowns of the FCI. It is significant t note that the fourth respondents' son was

one of the employees of SGS out of its work force of 1700 employees. No one else, apart from the petitioner,

has challenged the appointment of respondent No. 11 to undertake the aforementioned survey. None of the

firms of surveyors felt aggrieved by the appointment of respondent No. 11. Not even a single firm of

surveyors has come up before us to alleged bias in selection of respondent No. 11 as the stock verifier for

carrying out physical verification of stocks in the depots of the FCI. Even if the contention of the petitionerwas to prevail it is too late in the day to cancel the contract in regard to which work has been executed.

Therefore, for all these reasons the plea of bias falls and is hereby rejected.

25. It was also urged by Mr. D.N. Goburdhan that respondent No. 4 against whom allegations of bias have

been made has not filed an affidavit controverting them and the allegations should be deemed to have been

accepted by him. It may be noted that the allegations are of a general nature as opposed to specific ones and

are based on the assumption that since the son of respondent No. 4 is working with SGS, the former must

have favored the latter. The allegations are in the realm of conjectures and surmises and need not be answered

by respondent No. 4 on affidavit. The Supreme Court in Hem Lal Bhandari v. State of Sikkim and Ors. , ,

where allegations of mala fides were levelled against the Chief Minister of Sikkim in relation to a detention

matter, held as follows:-

"7. The petitioner has made various allegations of mala fides against the Chief Minister of Sikkim. These

allegations are not supported by any acceptable evidence. Therefore, we do not propose to consider them.

Much was made of the fact the Chief Minister has not filed a counter-affidavit himself denying the

allegations. According to us it is not necessary since the allegations are wide in nature and are bereft of

details. We do not think it necessary in all cases to call upon persons placed in high positions to controvert

allegations made against them by filing affidavits unless the allegations are specific, pointed and necessary to

be controverter..."

Following the principle laid down by the Supreme Court in the above decision, we see no force in the

submission of the learned counsel and reject the same. In so far as the submission of the learned counsel forthe petitioner that the work could have been undertaken by the employees of the office of the CAG as it has a

large work force of almost 50,000 employees is concerned, it appears from the affidavit and the office

nothings that the work of physical verification of the stocks was a specialised type of work and they did not

have the requisite expertise for the same.

26. Mr. Goburdhan next contended that despite the fact that the scope of the work was reduced, respondent

No. 11 was paid full amount without any consequential reduction. He also submitted that the work performed

by respondent No. 11 was not up to the mark and there were several deficiencies in it. According to him, at

least on this score deduction should have been made from the amounts paid to it. We have given our deep

consideration to the submission. We may recall that from the office note of the AC(C) dated July 8, 1997 it

appears that special audit in respect of stocks of food grains in respect of 1547 godowns was contemplated.

On that basis respondent No. 11 was approached for a viable work plan in respect of physical verification of

the ground balances of the stocks and inventories of the FCI. On August 5, 1997 SGS gave its action plan for

physical verification of stocks and indicated its modus operandi for the same as per below:-

"Quantity will be assessed on weight/volume ratio i.e. determination of density by physically determining

bulk density/stowage factor. xx xx xx"

Besides, it also quoted the following rates for undertaking physical verification of stocks:-

"a) up to 10 million tonnes :Rs. 6.00 per metric tonne


http://indiankanoon.org/doc/1290768/http://indiankanoon.org/doc/1290768/http://indiankanoon.org/doc/1290768/http://indiankanoon.org/doc/1290768/http://indiankanoon.org/doc/1290768/http://indiankanoon.org/doc/1290768/http://indiankanoon.org/doc/1290768/http://indiankanoon.org/doc/1290768/http://indiankanoon.org/doc/1290768/http://indiankanoon.org/doc/1290768/


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b) Above 10 and less than :Rs. 5.25 per metric tonne 15 million tonnes

c) Above 15 and less than :Rs.4.75 per metric tonne 20 million tonnes.

These rates are all inclusive except for photography charges which will be additional at cost."

On August 12, 1987, SGS quoted the following revised rates:-

"a) up to 10 million tonnes :Rs.6.00 per metric tonne. b) Above 10 and less than 15 million tonnes . :Rs.5.00

per metric tonne.

c) Above 15 million tonnes :Rs.4.00 per metric tonne..

These rates are all inclusive of photography and development charges."

The work of physical verification of stocks was entrusted to respondent No. 11 vide letter of the AC(C) dated

August 13, 1997. The letter postulated physical verification of stocks which was to include 100% counting of

bags with appropriate weighing of the same. It needs to be emphasised that the letter of the AC(C) was not in

consonance with the quotation submitted by respondent No. 11. While respondent No. 11 by its letter datedAugust 5, 1997 had specified use of volume density method for determining the stocks, the letter of the

AC(C) dated August 13, 1997 talked of physical verification of the stocks including 100 percent counting of

bags with appropriate weighing thereof.

27. It appears from the office note dated August 22, 1997 that the representatives of respondent No. 11 met

Shri I.P. Singh, ADA(I) in his Chamber on August 19, 1997. At the meeting, the AC(C) was also present.

They pointed out that respondent No. 11 was facing difficulties with some of the terms specified in the work

order placed on it. It was emphasised that 100 percent counting of bags in each of the godowns will take a

long time as each stack would have to be broken and counted. Besides, each bag will have to be weighed as

the bags may not be of standard weight. It was suggested that respondent No. 11 should be permitted to adopt

system of determination of total weight of stocks by volume-weight ratio taking into account the all Indiaaverage of density factory of the stacks. It also needs to be noticed that in the meeting it was pointed out that

the counting of bags is to take place in 2492 godowns. The difficulties were also discussed on August 19,

1997 with the CAG. The note dated August 22, 1997 of the AC(C) records as follows:-

"Captain Y.N. Pushkarna, Area Manager and Shri Kamal Poplai, Manager Operations of M/s. SGS India Ltd.

met Shri I.P. Singh, A.D.A.I. in his chamber on 19 August 1997. The undersigned was also present. The

officials of M/s. SGS India pointed out that the Firm was facing difficulties with some of the terms specified

in the Work Order placed on them.

(a) They submitted that if 100% counting of the bags in each of the 2492 Godowns was carried out, the

physical verification of ground balances would take a long time and will have to be extended way beyond

30.9.97, as each stack would have to be "broken" and counted, as well as weighed in as much as the bags may

not always be of a standard weight. They suggested that they be permitted to adopt the system of

determination of total weight of a stack by volume-weight ratio, taking into account the all-India average of

density factor of the stacks, determined by them by averaging such density factors found by them in the four

Zones of the FCI, in the pilot studies conducted by them earlier. They also pointed out that as per their

quotation, quantity is to be assessed on weight volume ratio.

b) Secondly, they pointed out that the adoption of a "cut-off date" by the physical verification teams, was not

feasible and it was for the Chartered Accountant Firms to work out the ground balances as on 31.3.97, from

the figure furnished by the Surveyors on the date of physical verification.




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c) Thirdly, they sought changes in the format of certificates to be furnished by the teams conducting the

physical verification.

The above submissions were thereafter discussed by the C&AG on 19th August 1997, with the officials of

M/s. SGS India Ltd. Shri I.P. Singh, A.D.A.I., Shri Abhijit Das, Secretary to C&AG and the undersigned,

were present.

The following decisions were taken:-

1. A sample of 16 (sixteen) bags or 1% of the stacks, whichever is higher, should be taken from each stack in

each godown. These bags would be weighed and shortages worked out based on this sample. Also, the density

factor for assessment of quantity on volume/weight ratio, specific to that godown only, would be determined.

2. The sample bags should be weighed 100%.

3. In addition 500 stacks at random are required to be "broken" and completely counted and weighed on all

All-India basis.

4. This apart, the method of determination of quantity by volume-weight ratio would be applied to all thestacks in the Godown concerned, taking into account the density factor described above. Based on this

method, the number of standard bags would also be worked out.

5. The verification would be conducted only in respect of the Godowns owned/hired/leased by the Food

Corporation of India.

6. The C&AG directed that the determination of the ground balances as on 31.3.97, by taking into account the

receipts and issues between the date of physical verification and 31.3.1997, is to be carried out by the Firms of

Chartered Accountants. Therefore, no cut-off date need be specified by the physical verification teams.

7. The C&AG also desired that the format for certificates required to be furnished by the Surveyors, bere-examined by Shri IP Singh, A.D.A.I. and the Surveyors.

Accordingly, a Meeting was held by Shri I.P. Singh, A.D.A.I. on 21 August 1997 with Captain Y.N.

Pushkarna and Shri Kamal Poplai, representatives of M/s. SGS India Ltd. Shri D.J. Bhadra, A.C.(C) Ms.

Vijaya Moorthy, MAB-IV, New Delhi, Shri Preman Dinaraj, Director, O/O MAB-IV, New Delhi were also

present.

After detailed discussions, taking into account the relevant factors, the following were agreed to:

1. M/s. SGS India Ltd. will carry out the physical verification of ground balances, in accordance with the

procedure as detailed in Chapter 10 to be read with Appendix-10 of Internal Audit Manual (Volume-I) of the

Food Corporation of India.

2. A minimum of 16 Bags or 1%, whichever is higher, of the foodgrains from each stack, from each Godown,

is to be selected for Random sampling as prescribed in the Paragraph 1 above. The average density as also the

average weight per bag is to be worked out from the stack of sample bags. With this, the Weight-Volume

Density Analysis of each stack in the concerned godown is to be carried out for arriving at the total weight of

that stack and the number of bags per stack in the concerned Godown. Further one normal stack, per Godown

subject to a minimum of 500 stacks all over India, is required to be fully counted and weighed and the results

obtained, be compared with the sample figures already arrived at. This will help in determining the corrective

factor wherever necessary to be adopted in the Weight Volume Density Analysis.




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3. In addition, wherever there are abnormal shortages, such Godowns will be subjected to detailed physical

verification. If any stack arouses suspicion, such stacks will be subjected to 100% counting and weighment.

Besides, 100% weighment shall be conducted in respect of Baby Stacks (defined as stacks where the number

of bags is less than 20% of the total number of bags received right from the creation of the stack).

4. The verification would be conducted only in respect of the Godowns owned/hired/leased by the Food

Corporation of India.

5. The Surveyors will only declare stocks available in various godowns as on the date of start of physical

verification of the Godown.

6. The Certificate of Physical Verification required to be furnished by the Surveyors as already enclosed with

the Work Order will remain as it represents the ground balances of the Godown as a whole. The formats of

Certificates now proposed by M/s. SGS India Ltd. can be attached along with the prescribed certificate. The

responsibility for accuracy and veracity of the certificates so furnished would rest with M/s. SGS India Ltd.

7. With a view to ensuring the authenticity and acceptability of the findings and conclusions thereof, and to

avoid any disputes at a subsequent stage, M/s. SGS India Ltd. may get the same duly signed by the Authorised

Representative of the concerned Godown/Warehouse/Depot. A copy of the same may also be handed over tothe Authorised Representative of the FCI and acknowledgement obtained for record. Wherever FCI

representative refuses to sign the report of SGS (India), they will record this fact and proceed further for the

verification of other godowns.

8. On intimation regarding completion of 10% of the Physical Verification of Ground Balances, and on receipt

of the prescribed requisite Reports from the Surveyors, a review would be undertaken at the Office of the

C&AG, to be attended by the Auditee (FCI), the Surveyors, and the Chartered Accountant Firms."

28. Thus, it is apparent from the reading of the office note that the physical verification of stocks was to be

undertaken by following volume-density method. This was necessitated in view of the peculiar circumstances

which are also apparent from the office note recorded by the DAI(RC) on February 3, 1998:-

"From the previous notes, it is apparent that SGS has followed a method of determination density not strictly

in accordance with the method suggested by us. The methodology followed by them has been explained in

their note dated 31.1.98 which according to them was necessitated because of ground realities and other

problems encountered (like resistance byC FCI staff itself, labour problems, non-availability of weighment

facilities, logistic constraints) during verification of stock of more than 20,000 godowns.

The proposal of the DAI(C) that we ask SGS to do the verification exercise again for each godown strictly as

per our guidelines will have its own problems as it transpires now that the number of godowns may be in the

vicinity of 15,000 to 20,000 (I have requested AC(C) to find out the exact number of godowns). It will be a

phenomenal exercise and many of the problems encountered earlier may still persist. Moreover from April

onwards, fresh wheat stocks will start arriving in large quantities, it is doubtful whether FCI will be in a

position to assist/cooperate in the exercise of reverification. The Case will have to work out everything afresh

because after last verification, fresh procurement of Kharif and Rabi crops would completely change the stock

position.

Therefore, the matter needs to be discussed in detail as suggested by DAI(C) in para 10 of his note dated

27.1.98.

Sd/- 3/2/98

DAI(RC)"




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29. From the aforesaid office note it appears that number of godowns in which the food grains were stored

were between 15,000 to 20,000 and not 1,547 or 2,492 as estimated earlier. Respondent No. 11 in its

counter-affidavit, affirmed on July 25, 2000, underlined the magnitude of work. The relevant part of the

counter affidavit reads as follows:-

xx xx xx

It is also submitted that 11 million tons spread in 15000 godown represent approximate 70,000 stacks, eachstack normally being about 150 MT. It also represents a total number of bags (on basis of 96 Kg/bag)

amounting to 115,789,474. To weigh a stack means performing several operations which requires time and

manpower as well as equipment - dismantling of the stack, loading of bags on trucks, weighing the trucks on

weigh-bridge, discharging the trucks, restacking the bags. One stack would require abut 12 hours (one day)

and around 30 labour/truck drivers, weighing bridge operator) as well as the constant presence of at least 3

Inspectors of the answering Respondent. Hence even working on 10 Godowns per day in each area i.e. 40

Godowns per day, the operation would require 1750 days in the event there are no interruptions and no stock

moves during the period. It would also require the presence of 1200 persons constantly on the job for the

period as well as 120 Inspectors of the answering Respondent Company permanently present for the same

period.

xx xx xx"

30. In case 100 percent bags would have been counted and weighed, it would not have been possible to

complete the work within few months keeping in view the number of godowns which had to be covered and

also having regard to the large stocks of food grains. Therefore, volume-density method was agreed to be

employed for the purposes of verification of the stocks. If we go by the original understanding between the

parties, it was not in the contemplation of the parties that the stocks in 15,000 to 20,000 godowns of the FCI

will have to be verified. When the first note was recorded by the AC(C) on July 8, 1997 he had visualised the

work to be undertaken in 1547 godowns. Subsequently, it was perceived that there were 2492 godowns. Even

this figure was not correct. As is apparent from the office note dated February 3, 1998 recorded by the

DAI(RC) and the affidavit of respondent No. 11, it was ultimately realised that 15,000 to 20,000 godownswere required to be checked by the SGS. Thus this was not the original understanding of the parties and surely

not what respondent No. 11 had bargained for. Enormous task of physical verification of stocks of food grains

kept in 15,000 to 20,000 godowns located in different parts of the country required deployment of large

infrastructure and manpower Despite the fact that the work had to be undertaken in 15,000 or 20,000

godowns, respondent No. 11 was paid in accordance with the rates quoted by it at a point of time when it was

thought that work is required to be undertaken in 1547 godowns only. We should not be understood to convey

that respondent No. 11 was paid less. Respondent No. 11 was paid according to the actual quantity verified. It

may also be mentioned that though the work order dated August 13, 1997 provides for 100 percent counting

of bags, it does not provide for 100 percent weighment of bags. Therefore, to expect that each bag should have

been weighed is even beyond the scope of the work order. According to the stand of respondents 1 to 9, as

referred to in their affidavit dated 8th May, 2000, complete extent of the work could not be visualised in the

first instance in view of its uniqueness and vastness of the operation involved an the decisions taken on

August 21, 1997 were in the nature of expounding, clarifying and streamlining the scope of the work. There is

no material on record to fault the stand taken by the said respondents.

31. Learned counsel for the petitioner pointed out that the work executed by respondent No. 11 was not

satisfactory. We have gone through the record. We find that on January 27, 1998 A.C.(C) recorded a note in

which deficiencies were pointed out in the physical verification of the stocks of food grains by the SGS. The

said office note inter alia pertains to the analysis of 100 certificates submitted by the SGS relating to physical

verification of stocks of the FCI (for short 'the certificates'). Summing up the deficiencies in the certificates,

the office note records as follows:-




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" xx xx xx

From the foregoing, it emerges that (I) in most of the cases SGS (India) does not appear to have applied the

agreed upon methodology in letter and spirit; (2) there is difference in methodology adopted in respect of

North-West-South and of East Zone; (3) there are some calculation errors/clerical errors; (4) Whereas in the

South, FCI representatives appear to have signed the working sheets without protest in Karnataka, Kerala and

Tamil Nadu (In Andhra Pradesh there is some), in the North the incidence of such protests is much higher.

Another important point is whether the methodology prescribed envisaged the repetition of the procedure of

creating a sample stack in each godown or that the experience of one godown was to be used in the depot in

which the godown was.

It is further submitted that it may kindly be decided whether and to what extent SGS (India) is to be asked to

re-do the verification and what is the exact methodology. If with reference to the final interpretation of the

methodology, some or a large number of depots are to be reverified, then a list of such depots will have to be

prepared. Preparation of this list can be completed only after all the certificates have been checked.

We may also need to ascertain as to (1) why the staff of MAB attached to the verification team of SGS could

not intimate the failure of SGS to follow the approved methodology and (2) why the certificates received fromSGS were not verified as and when these were received so as to detect well in time the deviation from the

methodology.

Sd/- 27.1.98

(D.J. BHADRA)

A.C.(C)"

Again in office note recorded by the DAI(C) on January 27, 1998 it was recorded that on scrutiny of about

100 certificates out of a total of 1511 certificates it was found that most of them were deficient and the figuresof stocks mentioned therein contained errors and omissions. The deficiencies were attributed in the note to the

failure of the SGS to educate the manpower employed by SGS to follow the correct methodology or to evolve

the system of supervision and monitoring to ensure that proper methodology was followed and

errors/omissions were detected and rectified soon after their scrutiny. Besides, it was pointed out that if the

certificates had been checked by the staff of the MAB the deficiencies in the certificates could have been

detected much earlier. It was also suggested that in case the certificates were accepted with deficiencies, it

could be reported to the Government of India that SGS was appointed in view of its reputation and past

experience, and after verification it has certified a certain stock balance but it will not be possible to certify

that the methodology adopted by the SGS was correct or appropriate and the certificates after scrutinisation

were found to be acceptable. An apprehension was also expressed that the Government would not be satisfied

with the certificates and in case question was raised on merits of the certificates it would be difficult to answer

the same. The note referred to the fact that already the report has been delayed and if the SGS was asked to

repeat the exercise it will take at least another four to five months to complete the task since the godowns will

have to be visited again. It was suggested that since the certificates submitted by the SGS were found to be not

acceptable it was not prudent to make any payment to them even on percentage basis or in respect of godowns

for which certificates were found to be correct. It was pointed out that once the SGS received part payment it

would lose motivation for repeating the verification work and the entire payment would be infructuous as new

verifier would like to repeat the entire exercise. It was also suggested that since the matter was quite serious

the CAG may like to call a meeting for reviewing the matter and taking final decision.

32. On February 3, 1998, the DAI(RC) recorded his comments and it was pointed out that the SGS had

followed a method for determining density not strictly in accordance with the method suggested to it. It was




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also pointed out that the methodology followed by SGS had been explained in its note dated January 31, 1998

which according to the SGS was necessitated because of ground realities including resistance by the FCI staff,

labour problems, non-availability of weighment facilities, logistic constraints and the fact that stock of more

than 20,000 godowns had to be verified. In connection with the proposal of the DAI(C) that SGS should be

asked to undertake the verification of the stocks again in respect of each godown the DAI(RC) was of the

opinion that it will have its own problems as it transpired that the number of godowns to be in the vicinity of

15,000 to 20,000 and it would be a massive exercise and many of the problems encountered earlier would still

persist. Besides, from April onward fresh wheat stocks would start arriving in large quantities. A doubt wasexpressed whether the FCI will be in a position to assist in the exercise of reverification and the Chartered

Accountants would have to repeat the exercise again as after verification fresh procurement of kharif and rabi

crops would completely change the stock position.

33. It appears that keeping in view the aforesaid office notes a meeting of the concerned officers were held as

per the direction of the CAG dated February 4, 1998. In this meeting it was noted as follows:-

" xx xx xx

2. The committee noted that the following two options were identified in the note dated 27.1.1998 by DAI

(Commercial).

(i) That verification certificates as given by SGS by acted upon.

(ii) That SGS be asked to undertake the verification of stocks again.

[Reference: paras 5 & 6 of page 6/N-F.No.CA.III/259-97 (Vol.III)].

The Committee did not go into award and management of the contract etc. It considered the question whether

a report could be issued to the Government on the basis of the verification as done by SGS or whether the

verification be redone.

3. The Committee felt that in the instant case the work had to be got done by specialised outside agency.

Nevertheless in the opinion of the Committee, it would be desirable if the CAG is to be associated to ensure

that the methodology followed is cleared by CAG, that the laid down methodology has been actually followed

in field and that the sample chosen for verification has CAG's clearance.

4. In this case, the Committee noted that there have been s ignificant gaps in these areas. No doubt in a

meeting taken on 21.8.1997 (pages 265-264/c-F.No.CA.III/259-97 Vo.I), the sample and also the

methodology was discussed with the firm of verifiers. It was also decided that after 10% of the work was

done, the position would be reviewed. However,the fact remains that though MAB staff were attached with

the SGS teams visiting the depots, these aspects apparently were not overseen as the work went along. In fact,

it is evident from sub-para (c) of page 8/n of F.No.CA.III/259-97-Vol.1) that the task entrusted to the audit

teams was to 'carry out the system checks as part of the sectoral review already under way in respect of FCI.'

They were also to 'facilitate the other teams.' The review after conclusion of 10% of work also did not take

place, notwithstanding the fact that the local problems being encountered by SGS were getting thrown up.

Reportedly some of these local problems compelled SGS to follow different methods in different places. In

other words, these MAB teams, in so far as SGS and Chartered Accountants were concerned, were merely

trying to smoothen the working of both SGS and the firms of CAs. Once the overseeing role was forgone, it

would naturally be impossible to inject this element ex-post facto. The only alternative would be to do the

whole exercise again. This is not condoning any deficiency that may be there in SGS working, but it merely

acknowledges that if IAAD intends to oversee any activity, that needs to be done at the appropriate moment.




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5. It is true that SGS followed somewhat varying methodologies/sampling methods from place to place. Some

of the instances, inter alia are:-

(i) The meeting dated 21.8.1997 referred to in para 4 above talked of drawing samples from each godown.

The Committee however was advised that the discussions with SGS all through were with reference to a

number of around 1600 which, as matter of fact, is the number of the depots and not godowns. In fact, the

total number of godowns is still not known.

(ii) Even for drawal of specific samples, SGS has not followed any uniform practice.

(iii) While SGS has generally followed the volumetric method, in the Eastern Region they have followed the

peripheral counting method to a large extent, due reportedly to local problems.

6. The findings of the Committee of three officers {PD(AEC), AC(C) and Director (DT)}, after detailed

scrutiny of 50 cases, concluded that the departure/deficiencies, inter-alia, were as below:

(i) In 14 cases the density factor adopted for a depot related to another depot. This was stated to be due to lack

of weighment facility in the depot.

(ii) In as many as 35 cases either samples were not drawn from the requisite number of stacks or sufficient

number of bags were not drawn and so on.

(iii) In 3 cases the density factor was not worked out for the 3 different commodities (wheat, rice and paddy)

separately.

7. In an exercise as voluminous and wide-spread as this, there may be compulsions due to local conditions

leading to varied practice to some extent. SGS too have apparently functioned under difficult local conditions.

The point in that situation would be to judge whether the process consequently got vitiated to a point that the

findings would become completely unreliable. The Committee, however, did not find any quick way to assess

the degree/extent to which the departures in the sampling procedure and the methodology could have affectedthe final outcome. In this context, the Committee felt that one had to take note of the fact that the firm was

selected on the basis of its standing in the field.

8. The Committee noted that Govt.'s request to CAG had come as early as in July 1997 and the request was to

complete the verification within a month. That was obviously impossible and more than 6 months have

already gone. If the exercise has to be redone, normally it would take another 4-5 months, quite apart from

other consequential difficulties. With the General Election on, no exercise would be possible till the first week

of March in any case. Shortly thereafter, the Rabi procurement would start in April and is likely to go on till

June. When this procurement is on, all the depots would be in turmoil making any exercise of physical

verification by an outside agency impossible. Therefore, in practical terms, the Committee noted, any

re-verification would have to start only after June and would not be complete before September/October 1998.

The Committee appreciated that this time-parameter, quite apart from any other factor, may not be acceptable

having regard to the commitment given by CAG. Redoing the exercise would thus appear impracticable.

9. Under the circumstances, the Committee felt that subject to having the calculation errors corrected, there is

perhaps no alternative but to proceed on the basis of the verification report as worked out by SGS. It was felt

that a report on the following lines could be sent:

"Following Government of India's request vide DO letter No. 5-26/97-BP. I/S(FaC-S)/143/97 dated June 30,

1997 from Shri B.K. Taimni, Secretary, Ministry of Food & Consumer Affairs, (Department of Food & Civil

Supplies), New Delhi, to the Comptroller and Auditor General of India, CAG had got the total stocks of

wheat, rice and paddy of Food Corporation of India physically verified. For the purpose, CAG had appointed




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20.3.98"

Once the Committee took a decision to accept the report subject to correction of errors and did not arrive at a

conclusion that the deviations in the work assigned to SGS had vitiated the report, perhaps it was concluded

that the payment to the SGS be made as per the rates quoted by it.

38. On March 26, 1998, the petitioner, being MAB and dealing with the question of payment to SGS and

Chartered Accountants, made the following properties :-

" The quantity claimed to have been physically verified in the bill presented by M/s SGS will be restricted to

the quantity reflected in physical verification certificates for each unit furnished by them and received in this

office.

2. A proportionate deduction will be made from the bills of C.As for depots which have not been visited

before the finalisation of reports or the result of which have not been included in the report, presuming that

expenditure on visiting of all depots in a particular region is uniform. This has been so clarified now in your

letter under reference.

3. No additional amount shall be paid to any of the C.A./Surveyor unless a communication to this effect isreceived from Headquarters office."

By a letter dated March 27, 1998, the AC(C) communicated the approval of the concerned authority to the

aforesaid proposal Nos. 1 and 2. Thus, it appears that the bills were paid keeping in view the quantities

physically verified by SGS. Having observed thus, we at the same time note that at one stage the deputy

Comptroller and Auditor General, While clarifying that payment as per work done should be made and

proportionate deductions could be made from the bills of the Chartered Accountants by taking into account

the number of depots which they did not cover, also threatened disciplinary action against the petitioner in

case orders of the fourth respondent in that behalf were not carried out. This is reflected from the

communication of the Deputy Comptroller & Auditor General-cum-Chairman, Audit Board, dated March 26,

1998 to the petitioner. When an officer who is to make payment of the bills is threatened in this manner it islikely to affect his judgment and condition his mind. We do not approve of this. However, the warning was

not given with regard to the payment of the bills of the SGS.

39. It was canvassed by Mr. Goburdhan that the work of physical verification under taken by the fourth

respondent was beyond the scope of the powers of the CAG. Learned counsel for the respondents took the

stand that the work assigned to SGS being work of physical verification of the food stocks of the FCI, it

cannot be construed as an audit of accounts and was not an exercise conducted within the purview of Section

19 of the CAG Act and Section 34 of the FC Act. It was submitted on behalf of the respondents that since the

exercise was not barred by any statutory provisions, the CAG accepted to undertake the work as requested by

the Government of India. We have considered the submissions of learned counsel for the parties. It is difficult

for us to accept the view that the exercise relating to verification of stocks did not fall within the purview of

the CAG Act or the FC Act. The CAG is a constitutional authority and the duties, powers and obligations of

the CAG are governed by the Constitution and the statute. It is not supposed to undertake an extra

constitutional or extra statutory work. In case it takes up any assignment which does not fall within the

purview of the statutory provisions, the staff of the CAG will not be bound to execute the same. According to

Section 34(5)(b) of the FC Act, the CAG is entitled to conduct supplementary or test audit of the FCI either

itself or by a person or person as he may direct. Section 34(5)(b) of the FC Act reads as follows:-

"Accounts and Audit:

34. (1) .....




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(2) .....

(3) .....

(4) .....

(5) The Comptroller and Auditor-General of India shall have power -

(a) .....

(b) to conduct a supplementary or test audit of the accounts of a Food Corporation by such person or persons

as he may authorise in this behalf; and for the purpose of such audit, to require information or additional

information to be furnished to any person or persons so authorised, on such matters, by such person or

persons, and in such form as the Comptroller and Auditor-General may, by general or special order, direct.

xx xx xx"

Thus, it is obvious that the work of supplementary audit of the FCI could be conducted by the CAG itself or

any agency authorised by it. Thus, it cannot be said that appointment of SGS along with the CharteredAccountants to undertake physical verification of the stocks of FCI was outside the province of the fourth

respondent. It seems to us that the word "audit" used in Section 34 cannot be construed in a limited sense.

Audit of accounts of the FCI may require physical verification of the stocks held by it in order to ascertain

whether the stocks reflected in the books of accounts match with the stocks actually held by it. Unless the

physical verification of stocks is undertaken, going through accounts may not be sufficient. In this regard we

may refer to "Statement of MAOCARO" 1988 which was issued under Section 227 of the Companies Act.

MAOCARO 1988 applies to certain companies including companies providing services. Undoubtedly, the

FCI will fall in the category of a company providing services. MAOCARO refers to matters to be included in

auditors report. It while dealing with the subject of inventories provides as follows:-

xx xx xx "

(iii) Inventories

* Ensure that physical verification is conducted at reasonable intervals of :

(a) finished goods:

(b) stores and spare parts:

(c) raw materials.

* See that the procedure followed for physical verification is adequate, having regard to size of the company

and nature of its business.

* Ensure that cut off procedures have been followed.

* Further ensure that procedure for identifying damaged and obsolete items of inventory is proper and

adequate.

* Also ensure that the discrepancy, if any, noticed on physical verification as compared to book records have

been properly dealt with in the accounts.




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* Compare the raw material consumption ratio for the current year with previous year.

* Ensure that method of valuation of ratio is appropriate and properly discharged in the accounts. * Further

ensure that the method of valuation of stocks is same as that followed in the previous year.

* If there is change in the method of valuation, then the effect of such change in accounts should be separately

disclosed and quantified."

40. Thus, the idea of physical verification of stocks is not foreign to the concept of audit. Rather it is part and

parcel of the same. In a given case verification of stocks may become necessary for the purpose of audit of the

accounts. It appears to us that even under Section 19 of the CAG Act, the CAG is empowered to audit the

accounts of Corporations established by or under law made by Parliament. Section 19(2) of the said Act reads

as follows:-

Audit of Government companies and corporations.

19(1) .....

(2) The duties and powers of the Comptroller and Auditor-General in relation to the audit of the accounts ofcorporations (not being companies) established by or under law made by Parliament shall be performed and

exercised by him in accordance with the provisions of the respective legislations.

xx xx xx"

41. On the same principle, which we have employed for construing Section 34(5)(b) of the FC Act, we are of

the view that the CAG was empowered to undertake the audit of accounts of the FCI and audit would also

mean the verification of the stocks held by the latter. There is nothing in the CAG Act or the Constitution

which debars the CAG from ordering physical verification of the stocks of food grains of the FCI. There is no

force in the contention of the appellant and the same is accordingly rejected.

42. Mr. Goburdhan submitted that since it was a case of single tender contract exceeding Rs. One crore in

value the previous consent of the Finance Ministry should have been obtained before disbursing the amount to

the SGS. It was argued on behalf of the respondents that the Delegation of Financial Powers Rules on the

basis of which this submission was made by the counsel for the petitioner does not apply to the CAG as it is

not a department of the Government of India. It is not necessary to go into this question as we find that in

response to the letter of the Deputy Comptroller and Auditor General of India dated August 13, 1997

requesting for funds to the tune of Rs. 17 crores in regard to the exercise to be undertaken for the purpose of

physical verification of the ground balances of stocks of wheat, rice and paddy of the Food Corporation of

India, the Government of India accorded approval vide letter of the Additional Secretary (Budget) to the

Government of India, Ministry of Finance, Department of Economic Affairs, dated September 2, 1997, which

reads as follows:-

"Kindly refer to your d.o. letter No.

2453-BRS/132-97(I) dated August 13, 1997, regarding verification of stocks of wheat, rice and paddy with the

Food Corporation of India, by IA&AD.

2. We agree to an additional expenditure not exceeding Rs. 17 crore being incurred on the exercise in the

current year. As this is not on a New Service, the Department may go ahead with the expenditure which may

for the present be met by temporary reappropriation within Grant No. '33 - Audit'. Supplementary grant will in

any case be necessary for expenditure arising out of Government decision on the Pay Commission's

recommendations. This item can also be included in the Proposals at that stage.




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Secretary (E) has seen.

xx xx xx"

43. Thus, it is apparent that expenditure not exceeding Rs. 17 crores was allowed by the Government of India.

Once the expenditure of Rs. 17 crores was allowed to be incurred by the CAG on the aforesaid exercise, it

cannot be argued that there was no sanction by the Government of India to incur the expenditure.

Accordingly, the contention of the learned co

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