Rule 31 — GAR
Original Rule Text
31. Allocation between capital and revenue expenditure on a capital scheme
(1) The allocation between capital and revenue expenditure on a Capital Scheme for which separate capital and revenue accounts are: to be kept shall be determined in accordance with such general or special orders as may be prescribed by the President on the advice of: the Comptroller and Auditor General.
(2) The following are the main principles governing the allocation of expenditure on a Capital Scheme, between Capital and Revenue accounts:
project as well as charges for intermediate maintenance of the work while not: yet opened for service. It would also bear charges for: such further additions and improvements as may be sanctioned under rules made by competent authority.
(b) Subject to
(c) below, revenue account should bear all: subsequent charges for maintenance and: all working expenses. These embrace all expenditure on the working and upkeep of the project and also on such renewals and replacements and such additions, improvements or extensions as prescribed by Government.
(c) In the case of works of renewal and: replacement which partake both of a capital and revenue nature, the: allocation of expenditure should be regulated by the broad principle that revenue: should pay or provide a fund for the adequate replacement of all wastage or depreciation of property originally provided out of capital grants and: that only the cost of genuine improvements, whether determined by prescribed rules or formulae or under special orders of Government, should be debited to Capital account. Where under special orders of Government, a Depreciation or Renewals Reserve Fund is established for renewing assets of any commercial department or undertaking, the distribution of expenditure on renewals, and replacements between Capital account and the Fund should be so regulated as to guard against over- capitalisation on the one hand and excessive withdrawals from the Fund on the other.
(d) Expenditure on account of reparation of damage caused by extraordinary calamities such as flood, fire, earthquake, enemy action, should be charged to Capital account or to Revenue account or divided between them in such a way as may be determined by Government according to the circumstance of each case.
(e) Capital receipts in so far: as they relate to expenditure previously debited to Capital heads, accruing during the process of construction of a project, should be utilised in reduction of capital expenditure. Thereafter, their treatment in the accounts will depend on circumstances, but except under a special rule or order of Government, they should not be credited to the revenue account of the department or undertaking.
What This Means
Rule 31 applies specifically to Capital Schemes — large government projects (like a dam, a power plant, or a railway line) for which separate capital and revenue accounts must be maintained. The central question it answers is: when you are running such a project, how do you decide which costs go to the Capital account (investment) and which go to the Revenue account (ongoing operations)?
The broad principle is that the Capital account bears all costs associated with creating the asset and bringing it into operational service — the initial construction cost, all additions and improvements made under prescribed rules, and even charges for maintaining the partially-built work before it opens for service. Once the asset is operational, the Revenue account takes over: all maintenance, working expenses, renewals, and replacements are charged to revenue. This mirrors commercial accounting practice — you capitalise what it costs to build something, and you expense what it costs to run and maintain it.
Two important refinements address grey areas. First, for renewals and replacements (which are neither pure capital improvements nor pure running costs), the guiding principle is that revenue should fund adequate replacement of all assets that were originally paid for out of capital — you are just returning the asset to its original condition. Only genuine improvements go to capital. Second, for commercial departments that maintain Depreciation or Renewals Reserve Funds (as authorised by Government), the split between Capital and the Fund must be carefully managed to avoid over-capitalisation on one hand and depleting the fund on the other. For damage caused by extraordinary events (floods, fires, earthquakes, enemy action), the split between capital and revenue is decided by Government on the facts of each case.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- 1Capital account bears: initial construction costs, pre-opening maintenance of the work, and sanctioned additions and improvements.
- 2Revenue account bears: all post-opening maintenance, working expenses, routine renewals and replacements.
- 3For renewals and replacements, revenue should fund replacement of what capital originally provided; only genuine improvements go to capital.
- 4Commercial departments may maintain Depreciation/Renewals Reserve Funds — allocations between Capital and the Fund must guard against both over-capitalisation and fund depletion.
- 5Capital receipts arising during construction (e.g., sale of materials) should reduce capital expenditure, not be credited to revenue.
- 6Damage from extraordinary calamities (flood, fire, earthquake) — the capital/revenue split is determined by Government based on the circumstances of each case.
- 7The allocation principles are subject to general or special orders prescribed by the President on CAG's advice.
Practical Example
The Central Water Commission is constructing a major multi-purpose dam (Project Varun) costing Rs. 8,000 crore. During construction, the following costs arise: Rs. 6,500 crore for civil construction (correctly booked to Capital account); Rs. 45 crore for intermediate maintenance of the partly-constructed spillway — since the dam has not yet opened for service, this is also correctly booked to Capital account.
After the dam becomes operational, a flood damages one of the gates. Repairs cost Rs. 12 crore. The Project Director proposes booking the entire amount to the Capital account since it involves replacement of a major component. The Chief Accounts Officer applies Rule 31(c) and (d): the Rs. 12 crore represents replacement of an asset originally provided out of capital, not an improvement. Under the general principle, revenue should bear the replacement cost. Additionally, since this is flood damage (an extraordinary calamity under Rule 31(d)), the specific capital/revenue split requires Government's determination. The matter is referred to the Ministry of Jal Shakti for an order before the entry is finalised. If the damage were instead a genuine upgrade (installing new automation equipment not in the original design), that additional cost would correctly go to the Capital account.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
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This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.