Form 3CD Clause 21 Working Paper Format 2026
FORM 3CD CLAUSE 21(a) AND 21(d) — INADMISSIBLE EXPENDITURE WORKING PAPER
Assessee: {{client_name}} · PAN: {{client_pan}} · Previous year ended: {{period_end}} · Assessment Year: 2026-27
What the clause asks: clause 21 collects amounts debited to the profit and loss account that are not admissible. Sub-clause (a) asks for capital, personal, advertisement, club, penalty and similar expenditure, row by row. Sub-clause (d) asks whether expenditure covered by section 40A(3) read with Rule 6DD was paid by account payee cheque or draft and, if not, for payment-wise details, with a second part for amounts deemed to be income under section 40A(3A). This working paper covers (a) and (d). Sub-clause (b), amounts inadmissible under section 40(a) for TDS defaults, has its own working paper; the other sub-clauses are tracked in Part 4 so nothing is missed.
1. Clause 21(a) — capital, personal and similar expenditure
| Nature (as the clause lists it) | Ledger account(s) reviewed | Particulars | Amount debited to P&L ₹ | Evidence ref. |
|---|
| Capital expenditure | | | | |
| Personal expenditure | | | | |
| Advertisement in a souvenir, brochure, tract, pamphlet or the like published by a political party | | | | |
| Clubs — entrance fees and subscriptions | | | | |
| Clubs — cost of club services and facilities used | | | | |
| Penalty or fine for violation of any law | | | | |
| Any other penalty or fine | | | | |
| Expenditure for a purpose that is an offence or is prohibited by law (including compounding and prohibited benefits or perquisites) | | | | |
| Expenditure to settle proceedings for contravention of a law notified by the Central Government (row added from 1 April 2025) | | | | |
| Total reported under clause 21(a) | | | | |
- The rows above paraphrase the form. Enter the figures against the exact rows of the current utility, which splits some of them further.
- Capital expenditure: scan repairs and maintenance, legal and professional, software, freight and installation, and consumables for items that create an asset or an enduring benefit. Depreciation on what is capitalised then moves to clause 18.
- Personal expenditure: for a company, the test is expenditure that is personal to directors or employees and not a contractual entitlement. For proprietors and firms, look at vehicle, telephone, travel, insurance and household items passing through the business.
- Penalty versus compensation: a payment that is compensatory (for example, interest for delayed payment of a tax, or damages under a contract) is not a penalty for violating a law. Record the section under which each amount was levied and the reasoning. Report the fact; the allowability decision is taken in the computation.
- Settlement row: Explanation 3 to section 37(1) now treats expenditure to settle proceedings for contravention of notified laws as incurred for a prohibited purpose. Check the current CBDT notification for the list of laws before concluding that a settlement or consent payment falls in this row.
- Club expenditure is reported even where it is for business; the auditor reports the amount and does not decide allowability in this row.
2. Clause 21(d)(A) — cash payments covered by section 40A(3)
| Sr. | Date of payment | Nature of payment | Amount ₹ | Name of payee | PAN / Aadhaar of payee (if available) | Rule 6DD exception claimed (clause) or none | Amount disallowable ₹ |
|---|
| 1 | | | | | | | |
| 2 | | | | | | | |
| 3 | | | | | | | |
| 4 | | | | | | | |
| 5 | | | | | | | |
| 6 | | | | | | | |
| Total | | | | | | |
- The test: a payment, or the aggregate of payments, to one person in one day above ₹10,000, made otherwise than by account payee cheque, account payee bank draft, electronic clearing through a bank account or another prescribed electronic mode. The limit is ₹35,000 for payments for plying, hiring or leasing goods carriages.
- Aggregate by payee and by day. Several cash vouchers of ₹9,000 to the same person on the same day are one payment for this test; the same amounts on different days are not.
- Rule 6DD lists the exceptions — among them payments to banks and the Government, payments through the banking system, payments for agricultural, forest, dairy, poultry and fish produce made to the cultivator, grower or producer, payments in a village or town not served by a bank, and payments required on a day when banks were closed for a holiday or strike. Cite the specific clause of the rule for every exception claimed and keep the supporting fact on file.
- The disallowance is of the whole payment, not the excess over the limit.
- Bearer and crossed (not account payee) cheques fail the test in the same way as cash. Where cheque images cannot be obtained, say so — see Part 5.
3. Clause 21(d)(B) — deemed income under section 40A(3A)
| Sr. | Year in which the expense was allowed | Date of payment this year | Nature of liability | Amount paid ₹ | Name and PAN / Aadhaar of payee | Rule 6DD exception or none | Deemed income ₹ |
|---|
| 1 | | | | | | | |
| 2 | | | | | | | |
| 3 | | | | | | | |
Section 40A(3A) covers a liability allowed as a deduction in an earlier year on accrual and paid this year in a mode that breaches the limit. The payment is deemed to be business income of this year. Test settlements of opening creditors and outstanding expenses, not only current-year expense vouchers.
4. Other sub-clauses of clause 21 — cross-reference
| Sub-clause | Subject | Applicable? (Y/N) | Amount ₹ | Working paper ref. |
|---|
| 21(b) | Amounts inadmissible under section 40(a) — TDS not deducted or not paid | | | |
| 21(c) | Interest, salary, bonus, commission or remuneration to partners or members inadmissible under section 40(b) / 40(ba) | | | |
| 21(e) | Provision for gratuity not allowable under section 40A(7) | | | |
| 21(f) | Sums paid as employer not allowable under section 40A(9) | | | |
| 21(g) | Liabilities of a contingent nature debited to P&L | | | |
| 21(h) | Expenditure relating to income not forming part of total income — section 14A | | | |
| 21(i) | Interest inadmissible under the proviso to section 36(1)(iii) | | | |
5. Evidence to obtain
- General ledger for repairs, legal and professional, rates and taxes, miscellaneous, staff welfare, business promotion, advertisement, and membership and subscription accounts.
- Orders, challans and demand notices for every fine, penalty, late fee, interest and compounding or settlement payment, showing the law and section invoked.
- Cash book and petty-cash records in a form that can be sorted by payee and date; a day-wise, payee-wise aggregation above ₹10,000.
- Bank statements and, where available, cheque images or a bank confirmation of account payee crossing for cheque payments.
- Support for each Rule 6DD exception: payee’s status as cultivator or producer, bank-holiday dates, location evidence for unbanked places.
- Management representation that all payments above the limit were made by account payee cheque, draft or electronic mode, except those listed.
6. Common errors
- Reporting only items already added back in the computation, instead of every amount of the stated nature debited to the profit and loss account.
- Testing each cash voucher against ₹10,000 without aggregating a payee’s payments for the day.
- Applying the ₹35,000 limit to any transport bill; it applies only to payments for plying, hiring or leasing goods carriages.
- Missing cash payments for purchases of stock or capital goods routed through a creditor’s ledger, and missing section 40A(3A) on opening balances.
- Reporting GST late fees, interest under tax laws and contractual damages as "penalty for violation of law" without reading the order.
- Certifying account payee status without evidence. Where the assessee cannot produce it, state in the clause that it was not possible to verify whether payments above the limit were made by account payee cheque or draft, as the necessary evidence is not in the assessee’s possession.
7. Flow to the return of income
Clause 21 amounts are entered in the Other Information schedule of the return (amounts debited to the profit and loss account to the extent disallowable under sections 37, 40 and 40A) and flow from there into the business-income schedule as additions to book profit. Section 40A(3A) amounts are added as deemed business income. Reconcile the total of this working paper to those schedule rows; where management claims an amount reported here as allowable, record the difference and the reason.
Conclusion: amounts reported under clause 21(a) total ₹ ____________; under clause 21(d)(A) ₹ ____________; under clause 21(d)(B) ₹ ____________. Limitations on verification stated in the report: ____________ [e.g. account payee status of cheques could not be verified].
Prepared by: {{prepared_by}} Reviewed by: Date: 1 October 2026
