Para 3.16.24 — MSO (Audit)
Original Rule Text
3.16.24 In theory, it is legitimate to make capital bear the charges for interest on money borrowed to finance the construction of a new project before the project becomes revenue earning. In fact, however, a Government project is only part of the operations of Government and it may be sound financial administration to meet interest charges from other revenues during the process of construction. The charge of interest to capital in Government accounts is justified only when there would be undue disturbance in the Government's budgetary position by taking interest to revenue. The writing back of capitalised interest should be the first charge on any capital receipts or surplus revenues derived from a project when commissioned.
What This Means
In theory, interest on borrowed money used to finance a project during construction can legitimately be charged to capital. However, since a government project is just one part of overall government operations, it may be sounder to absorb interest costs from other revenues during construction. Capitalising interest is justified only when charging it to revenue would unduly disturb the government's budget. Once the project starts earning, any capital receipts or surplus revenues should first be used to write back the capitalised interest.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- 1Interest during construction can theoretically be charged to capital
- 2Capitalising interest is justified only when it would unduly disturb the budget to charge it to revenue
- 3Writing back capitalised interest is the first charge on project earnings or capital receipts
- 4Government projects are part of overall operations, so interest can often be absorbed from other revenues
Practical Example
A state government borrows Rs 500 crore to build a toll road over four years. Rather than showing Rs 80 crore in annual interest as revenue expenditure and distorting the state budget, the Finance Department capitalises the construction-period interest. Once the toll road opens and generates toll revenue, the first use of that surplus is to write back the Rs 320 crore of capitalised interest to revenue.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
When is capitalising interest not justified?▼
What does 'writing back capitalised interest' mean?▼
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.