FCI Entitled to Recover Cost-Saving Amount for Delayed Black-Topping Despite Godown Being Operational, Rules J&K High Court
The Jammu & Kashmir High Court dismissed a writ petition by a PEG Scheme godown operator challenging FCI penalty recoveries for delayed black-topping of internal roads, holding the firm estopped by its own undertakings and unable to approbate and reprobate under the same contract.
The High Court of Jammu & Kashmir and Ladakh at Srinagar has dismissed a writ petition filed by M/S Alpine Agro Services, a registered partnership firm, which had challenged two communications dated 3 September 2021 and 15 November 2021 issued by the Food Corporation of India directing recovery of amounts from monthly rentals on account of delayed completion of black-topping of internal roads at its godown. Justice M. A. Chowdhary, sitting singly, held that the firm had furnished undertakings acknowledging the incomplete work, had failed to meet even the extended deadline, and could not now dispute the consequential recoveries while continuing to derive benefits under the same Lease and Service Agreement. The judgment was pronounced on 6 June 2026.
The PEG Scheme Arrangement and the Dispute
The Food Corporation of India invited tenders under the Private Entrepreneur Guarantee (PEG) Scheme for construction of godowns for storage of foodgrains in Jammu & Kashmir. Under the PEG Scheme, private entrepreneurs build, own and operate storage facilities, and FCI pays assured monthly rentals on a Guaranteed Hiring Basis irrespective of actual utilisation of storage capacity.
M/S Alpine Agro Services, through its authorised partner Abdul Majid Mattoo, was awarded the construction of a godown with a storage capacity of 17,500 MT at Srinagar on a “Build, Own and Operate” basis vide Letter of Memorandum dated 21 May 2013 for a guaranteed period of ten years. A Lease and Service Agreement was executed on 17 June 2016, deemed to have commenced from 26 February 2015. The godown was taken over on Guaranteed Hiring Basis for the period 27 February 2015 to 20 May 2024 at the approved rate of Rs. 10.20 per quintal per month, subject to annual escalation in accordance with the Wholesale Price Index.
At the time of takeover, the drainage work and black-topping of the internal roads had not been completed. The firm filed an undertaking on 24 February 2015 to complete drainage by March 2015 and black-topping by September 2015. It failed to do so. On the firm's request, FCI extended the deadline for black-topping to one year from the date of takeover, that is, up to 26 February 2016. The firm again failed to complete the work within the extended period. Black-topping was ultimately completed only during May–June 2017.
FCI issued a communication on 21 October 2016 proposing imposition of penalty. The firm claimed it was never served with this communication and came to know of it only in November 2017. Its representation for reconsideration was rejected on 7 November 2017. An amount of Rs. 1,58,002 was recovered from the firm's rentals at that stage. The two impugned communications of 2021 directed further recoveries, which the firm challenged before the High Court.
How FCI Calculated the Recoverable Amount
The recoveries traced their origin to decisions of a High Level Committee (HLC) that had examined the issue of non-completion of black-topping by PEG investors across the country. The HLC had directed that in cases where black-topping was completed beyond the permissible period, rentals from the commencement of hiring till completion of the work would be regulated on Actual Utilization Basis with a deduction equivalent to twice the Cost Saving Amount (CSA).
FCI explained the methodology in an additional affidavit filed during the proceedings. The cost of black-topping was assessed at Rs. 123.22 per square metre. The area of the godown premises measured 7,693.68 square metres. On this basis, the annual cost saving was computed at Rs. 9,48,015, translating into a monthly figure of Rs. 79,001. The recovery of Rs. 1,58,002 represented twice the monthly cost-saving amount. The initial recovery had been initiated in compliance with audit objections raised by the Comptroller and Auditor General of India, which had noticed that certain PEG godowns, including the petitioner's, had received rentals on Guaranteed Hiring Basis without completing the required infrastructure.
FCI's position was that Guaranteed Hiring Basis payments presuppose complete infrastructure as envisaged under the Model Tender Form. A firm that had not provided the full infrastructure was not entitled to the benefit of assured rentals as if the facility were complete. Rather than terminating the contract under Clause 5 of the Lease and Service Agreement — which empowered FCI to do so upon breach — the Corporation had taken a lenient view and limited its action to recoveries.
The Petitioner's Arguments
The firm raised three principal contentions. First, it argued that the writ petition was maintainable because FCI, being a State within the meaning of Article 12 of the Constitution, must satisfy the test of fairness and non-arbitrariness even in contractual matters, relying on Noble Resources Ltd. v. State of Orissa, (2006) 10 SCC 236.
Second, relying on M.P. Power Management Co. Ltd. v. Sky Power Southeast Solar India (P) Ltd., (2023) 2 SCC 703, the firm contended that contractual powers of a State instrumentality cannot be exercised in a manifestly arbitrary or disproportionate manner. It argued that FCI had accepted the infrastructure, operationalised the godown, and continuously derived benefit from it without interruption; it could not subsequently alter the financial arrangement through unilateral recoveries based on subsequent HLC decisions that were neither expressly contemplated in the Lease and Service Agreement nor preceded by any adjudicatory determination of breach.
Third, drawing on Kailash Nath Associates v. Delhi Development Authority, (2015) 4 SCC 136, the firm submitted that compensation or penalty can be awarded only upon proof of actual loss. Since FCI had continued to utilise the godown without any interruption and had demonstrated no actual financial loss from the delayed black-topping, the recoveries were punitive in character and unsustainable.
On the question of delay, the firm pointed to the death of a partner and the extraordinary law and order situation in the Kashmir Valley during 2016, supported by a communication from the District Development Commissioner, Bandipora, stating that no macadamization work had been undertaken in the district during that period.
How the Court Reasoned
Justice Chowdhary identified the core factual position as largely undisputed: the firm had acknowledged incomplete infrastructure at the time of takeover, had furnished undertakings to complete the work, had failed to meet the original deadline, had sought and obtained an extension, and had again failed to complete black-topping within the extended period of 26 February 2016.
On the law and order argument, the Court found it misplaced. The extended deadline expired on 26 February 2016, whereas the disturbances in the Valley began only in July 2016. The firm's failure to complete the work therefore predated the disturbances it sought to rely upon. The communication from the District Development Commissioner, Bandipora, relating to the absence of macadamization work during 2016 could not assist the firm when its obligation had already expired before the disturbances commenced.
On the argument that FCI had accepted and continuously utilised the godown, the Court held that this did not assist the firm. FCI had taken a lenient view by not terminating the contract under Clause 5 of the Lease and Service Agreement, which it was entitled to do. Allowing the firm to continue operating while simultaneously imposing recoveries was a more favourable course than termination. The firm could not use FCI's forbearance as a shield against the consequential financial adjustment.
The Court rejected the contention that the recoveries were not expressly contemplated under the Lease and Service Agreement. The firm had not challenged the decisions of the High Level Committee, which were the source of authority for the recoveries. The impugned communications of 2021 were merely consequential to those HLC decisions. Challenging only the consequential orders while leaving the underlying HLC decisions intact was insufficient to dislodge the basis of the recovery.
On the doctrine of approbate and reprobate, the Court applied the principle from State of Punjab and Others v. Dhanjit Singh Sandhum, (2014) 15 SCC 144, holding that a party that has accepted the terms of a contract and derived benefits under it cannot simultaneously seek to avoid obligations flowing from the same arrangement. The firm had accepted the contractual terms, furnished undertakings, received rentals on Guaranteed Hiring Basis, and continued under the agreement. It was estopped from disputing the recoveries that flowed from its admitted breach.
The Court characterised the recovery methodology — based on the cost saved by not executing the black-topping work and the corresponding time value of money — as traceable to a uniform national policy applied to similarly situated PEG investors across the country, not as an arbitrary or disproportionate action directed specifically at the petitioner.
Outcome
Justice M. A. Chowdhary dismissed the writ petition, finding no merit or substance in the challenge. All connected civil miscellaneous applications were also dismissed. Any interim directions that had been operating during the pendency of the proceedings were vacated. The judgment was pronounced at Srinagar on 6 June 2026 and approved for reporting.