PAYMENT OF INTEREST OUT OF CAPITAL DURING CONSTRUCTION

Under the provisions of section 208, a company which has raised money by issue of shares to meet the cost of construction of any work or building or provision of any plant which cannot be made profitable for a long time, can pay interest on paid-up capital for a period and subject to conditions specified in sub-sections (2) to (7) of section 208. Accordingly, the payment of interest should be verified as follows :—

1.  Ascertain that the payment is authorised by the Articles or by a special resolution.
2.  Verify that the previous sanction of the Central Government for making such payment has been obtained.
3.  Confirm that the interest has been paid only for such period as has been authorised by the Central Government and does not extend beyond the half-year next following during which the construction was completed or the plant was provided.
4. Verify that the rate of interest shall, in no case exceed such rate as the Central Government may, by notification in official Gazzette direct.
5.  Check that the amount of interest paid has been added to the cost of assets created out of the capital.

The interest paid being a part of the capital expenditure incurred in bringing into existence assets, it should be added thereto. Until so added, it must be shown as a separate item in the Balance Sheet under the head ‘Miscellaneous Expenditure’.