Para 3.16.22 — MSO (Audit)

3.16.22 Capital expenditure is incurred either for increasing concrete assets of material and permanent character or reducing recurring liabilities. On the other hand, revenue

expenditure is the current expenditure of Government on its day to day functions and services. To be more specific, it can be said that the benefit arising from capital expenditure is received over a period of many years, but the benefit derived from revenue expenditure is short term and not of a permanent character. Classification of expenditure as “Revenue” or “Capital” is not determined by the source from which expenditure is met but by the nature of the expenditure itself. The following considerations are relevant in deciding whether or not expenditure is of a capital nature:

(i) It is not essential that the concrete assets should be productive in character or that they should even 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 substantial expenditure, say for instance, a scheme for the construction of a new city.

(ii) The purpose of the commutation of recurring liabilities is their extinction or reduction. Although expenditure on this purpose may be genuinely capital expenditure, it is always necessary to examine from the point of view of economical financial administration whether such capital expenditure does not in fact merely replace one set or recurring payments by another, e.g., whether the commutation of the monthly payments by debit to capital does not result in substitution of equivalent payments of interest.

(iii) 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 to the purpose of creating assets that will belong to these local bodies or institutions cannot legitimately be considered as capital expenditure.

(iv) Expenditure on a temporary asset cannot ordinarily be considered as expenditure of a capital nature.

Note: In some cases, according to the policy adopted by the Central, State or Union Territory Governments, certain types of expenditure which do not conform to the definition of capital expenditure are capitalised, as such expenditure due to its magnitude cannot be met from current revenues. Grants or subventions, expenditure on temporary construction works, etc. are some examples. This is done subject to the condition that the expenditure initially capitalised will be written back to revenue over a number of years. The Audit Offices should keep a systematic watch over the fulfilment of this important stipulation. It has also to be ensured that the temporary capitalisation of the expenditure has been specially authorised by the Controller General of Accounts on the advice of the Comptroller and Auditor General, as provided for in the

What This Means

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Key Points

• 1Capital expenditure increases permanent assets or reduces recurring liabilities; revenue expenditure covers day-to-day operations
• 2Classification is based on the nature of expenditure, not the source of funding
• 3Assets need not be productive or revenue-generating to qualify as capital
• 4Grants to local bodies for assets they will own cannot be treated as capital expenditure by the grantor
• 5Temporary capitalisation of non-qualifying expenditure requires CGA sanction and must be written back to revenue

Practical Example

This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.

Frequently Asked Questions

This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.