Para 4.8 — MSO (A&E)
Original Rule Text
4.8 When it has been decided that expenditure on a scheme for the creation of a new or additional asset shall be classed as capital, the following are the
(a) It is not essential that the concrete assets should be productive in character or that they should be revenue producing. A productive asset may be considered as one which produces sufficient revenue to afford a surplus over all charges relevant to its functioning. It may on rare occasions be necessary and justifiable to treat as capital a scheme not commercially remunerative but involving large expenditure say for the construction of a new city.
(b) It is inherent in the definition of capital expenditure that the assets produced should belong to the authority incurring the expenditure. Expenditure by Government on grants-in-aid to local bodies or institutions for the purpose of constructing assets which will belong to these local bodies or institutions cannot legitimately be considered as capital expenditure.
(c) Expenditure on a temporary asset cannot ordinarily be considered as expenditure of a capital nature.
main principles applicable to the treatment of the expenditure in the accounts.
(a) Capital bears all charges for the first construction of a project as well as charges for intermediate maintenance of the work while not yet opened for service and bears also charges for such further additions and improvements as may be sanctioned under rules made by competent authority.
(b) Subject to
(c) below, revenue bears 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 under rules made by competent authority are debitable to the Revenue Account.
(c) In the case of works of renewal and improvement which partake both of capital and revenue nature, it is impracticable to draw a hard and fast line between what is properly debitable to capital or to revenue. Allocation in such cases is made by detailed rules and formulae devised by the Executive authorities, which are applied in estimates and accounts to determine the allocation of expenditure between capital and revenue. These rules and formulae must necessarily be based upon some general principle of sound finance which should aim at an equitable distribution of burdens between present and future generations.
What This Means
Once expenditure on a project is classified as capital, specific accounting principles apply. Capital bears all first-construction costs and maintenance during construction. After commissioning, revenue bears all maintenance, working expenses, and minor renewals. For mixed renewal/improvement works, detailed rules allocate costs between capital and revenue. Interest on borrowed funds during construction may be charged to capital only if taking it to revenue would unduly disturb the budget.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- 1Capital bears all first-construction charges plus intermediate maintenance before the project opens for service
- 2Revenue bears all subsequent maintenance, working expenses, and eligible renewals after commissioning
- 3Mixed capital-revenue works follow detailed allocation rules and formulae
- 4Interest during construction may be charged to capital only in exceptional circumstances
- 5Capital receipts relating to previous capital expenditure reduce capital, not revenue
- 6Capitalized interest should be the first item written back when capital receipts or surplus revenue arise
Practical Example
A state builds a new bridge costing Rs. 100 crore over 3 years. During construction, the Rs. 100 crore plus Rs. 2 crore spent on protecting the incomplete structure from monsoon damage are all charged to capital. After the bridge opens, annual maintenance of Rs. 1 crore goes to revenue. Five years later, the bridge deck needs replacement costing Rs. 15 crore — the PWD applies its formula to split this between capital (enhancement component) and revenue (like-for-like replacement).
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
When can interest during construction be charged to capital?▼
What happens to capital receipts from a project?▼
How are mixed renewal/improvement works handled?▼
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.