Para 3.16.30 — MSO (Audit)
Original Rule Text
3.16.30 It is the function of Government to determine the source from which expenditure of a capital nature shall be financed. However, it is one of the duties of Audit to bring to the notice of the proper financial authority cases in which its decision appears contrary to principles of sound financial administration. The principle of prudent finance was once enunciated by the Government of India in the following terms:
"Two conditions must be fulfilled before it would be justifiable for the Government of India to spend loan funds on unproductive purposes. These are, firstly that the objects for which the money is wanted are so urgent and vital that the expenditure can be neither avoided, postponed nor distributed over a series of years, and secondly that the amount is too great to be met from current revenues ".
It may be said generally that the cost of all comparatively small schemes, whether productive or unproductive, ought to be met from revenue. Audit will legitimately use its influence in this matter by discouraging a tendency to secure relief from present taxation by the expedient of transferring items of expenditure doubtfully classifiable as capital from the Revenue section of the budget to the section outside the Revenue Account.
What This Means
While funding decisions are the government's domain, audit must flag cases where spending from borrowed funds appears contrary to prudent financial management. The Government of India's established principle is that borrowings should fund unproductive purposes only when the expenditure is so urgent it cannot be avoided, postponed, or spread over multiple years, and the amount is too large for current revenues to bear. Small schemes, whether productive or not, should ordinarily be funded from revenue.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- 1Audit must flag government decisions to fund expenditure from borrowings that appear financially imprudent
- 2Two conditions for borrowing for unproductive purposes: urgency AND amount too large for current revenues
- 3Small schemes should be met from revenue regardless of whether they are productive
- 4Audit discourages shifting doubtfully-capital items from Revenue to Capital to reduce current tax burden
Practical Example
A state government decides to fund a Rs 3 crore office renovation from market borrowings, classifying it outside the Revenue Account as capital expenditure. The audit team flags this, noting the expenditure is neither urgent nor too large to meet from revenue. They report that the classification appears designed to relieve current revenue rather than reflecting genuine capital investment, and recommend the government review the classification.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
What is the risk of classifying revenue items as capital?▼
Can audit prevent the government from borrowing for a specific purpose?▼
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.