Police are investigating allegations made against Labour’s mayoral candidate at a council meeting.
Meanwhile, Labour has described the accusations against councillor Dhindsa, who is standing against elected Mayor Dorothy Thornhill in the May elections, as "a blatant smear".
Mike Jackson, the chairman of Watford Labour Party, said: "It is a blatant smear against our mayoral candidate in the eve of an election. While Derek Scudder has supposedly found new evidence, the mayor said he had been concerned about this for some time.
"As far as we are concerned this is a dirty tactic and shows how fragile the Liberal Democrats are in Watford as they are so scared they are going to lose the election they have resorted to smears. We would not use such tactics.
"The timing of this tells you all you need to know."
The accusations were made at Watford Council on Wednesday 19 when councillor Scudder, was apologising for calling councillor Dhindsa a "shyster" at a previous meeting.
According to council minutes, councillor Scudder apologised to the council chairman, Steve Rackett, for using the word but then said he wished to explain the reason behind it.
He then made allegations against councillor Dhindsa, which he said he felt the council should investigate. Elected mayor Dorothy Thornhill said she felt the managing director should look into the issue.
A spokesman for the council said: "We take any allegations regarding the misuse of council taxpayers’ money extremely seriously and we are currently looking into the issue raised by councillor Scudder in order to assess what action needs to be taken."
This week Hertfordshire Constabulary said it had met with the council and was now looking into its investigation.
A spokesman for the force said: "Hertfordshire Constabulary met with Watford Borough Council yesterday (March 26). The Constabulary has been asked to investigate an alleged incident of fraudulent activity within the council.
"An investigation has already been undertaken by the council and officers are currently reviewing this to establish if any criminal offences have taken place. If this is found to be the case then a separate police investigation would be launched into the allegations.
"We cannot comment further at this time as there are active enquiries on-going."