CAG audit power must have clear statutory basis; Rule 5A cannot expand audit jurisdiction beyond the parent Act.

Audit powers of the Comptroller and Auditor General must rest on a clear constitutional or statutory source; the text states that, absent a request from the President or Governor or other competent authority, Section 16 of the CAG Act did not authorise audit of a non-government company's accounts or service tax records. Rule 5A of the Service Tax Rules, 1994 was read as permitting production of records for a lawful audit demand, not as creating an independent power for CAG-led audit. The commentary concludes that subordinate legislation cannot enlarge audit jurisdiction beyond the parent enactment.

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Issues: (i) Whether the Comptroller and Auditor General of India or an audit team subordinate to him had statutory authority to audit the accounts and service tax records of a non-government company in the absence of any request from the President, Governor, or competent constitutional authority; (ii) Whether Rule 5A of the Service Tax Rules, 1994 could validly be construed to authorize such audit and whether, on a harmonious reading, it merely permitted production of records for lawful audit purposes.

Issue (i): Whether the Comptroller and Auditor General of India or an audit team subordinate to him had statutory authority to audit the accounts and service tax records of a non-government company in the absence of any request from the President, Governor, or competent constitutional authority;

Analysis: The constitutional and statutory scheme was examined with reference to the powers of the Comptroller and Auditor General under the Constitution and the Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971. The judgment reasoned that the relevant provisions primarily relate to audit of government accounts, public receipts, substantially financed bodies, and audits undertaken on request by the President or Governor in appropriate cases. It was found that the petitioner was neither a government company nor a body substantially financed by governmental funds, and no request for audit had been made by the constitutional authorities contemplated by the statute. On that basis, the court concluded that Section 16 of the CAG Act did not confer authority to audit the accounts of a non-government company, and that the preconditions for such audit were absent.

Conclusion: The Comptroller and Auditor General of India had no authority, on the facts presented, to conduct audit of the petitioner's accounts and service tax records.

Issue (ii): Whether Rule 5A of the Service Tax Rules, 1994 could validly be construed to authorize such audit and whether, on a harmonious reading, it merely permitted production of records for lawful audit purposes.

Analysis: The rule-making power under Section 94 of the Finance Act, 1994 was held to be confined to carrying out Chapter V of the Act and the matters specifically enumerated therein. The judgment held that subordinate legislation cannot introduce a power of audit by the Comptroller and Auditor General where no such power exists in the parent enactment. Rule 5A(2) was construed, if at all, as creating an obligation to produce records on a lawful demand, not as conferring an independent power to undertake an unauthorized audit. The court therefore treated the rule as incapable of validating audit by the CAG or an audit party under his control beyond the limits of the parent statute.

Conclusion: Rule 5A of the Service Tax Rules, 1994 did not authorize unauthorized audit by the Comptroller and Auditor General of India, and could not enlarge the statutory power conferred by the parent Act.

Final Conclusion: The judgment recorded substantive findings against the asserted audit power and against any expansive reading of Rule 5A, but the writ petition was directed to be placed before a Division Bench for analogous hearing, so the matter was not finally concluded on merits by this order.

Ratio Decidendi: Audit powers of the Comptroller and Auditor General must be traced to a clear statutory or constitutional source, and subordinate rules cannot confer a new audit jurisdiction that the parent enactment does not authorize.

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