Amounts Inadmissible explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Clause 21(b) reports the amounts inadmissible under section 40(a): the two TDS limbs for non-resident and resident payments, plus wealth tax, exclusive State Government levies, salary paid abroad, unsecured employee-fund payments and employer-borne tax on non-monetary perquisites.
From the ICAI Guidance Note on Tax Audit (Revised 2026), the Eleventh and, by ICAI's own statement, concluding edition under the Income-tax Act, 1961. For tax years under the Income-tax Act, 2025 these particulars move to Form No. 26 under rule 47 of the Income-tax Rules, 2026.
The eight categories of amounts inadmissible
Paragraph 34.1: clause 21(b) has been substantially expanded to furnish detailed information for deduction and deposit of TDS. Section 40(a) specifies the amounts inadmissible — those which shall not be deducted in computing income under profits and gains of business or profession:
| Item | What is inadmissible |
|---|---|
| (i) — section 40(a)(i) | Non-resident payments: interest, royalty, fees for technical services or other sum chargeable under the Act, payable outside India or in India to a non-resident or foreign company, on which tax is deductible under Chapter XVII-B and has not been deducted, or after deduction not paid within time |
| (ii) — section 40(a)(ia) | Resident payments: 30% of any sum payable to a resident on which tax is deductible and has not been deducted, or after deduction not paid by the section 139(1) due date |
| (iii) | Any sum paid on account of wealth tax — section 40(a)(iia) |
| (iv) | Any royalty, licence fee, service fee, privilege fee, service charge or other fee or charge, by whatever name called, levied exclusively on, or appropriated directly or indirectly from, a State Government undertaking by the State Government — section 40(a)(iib) |
| (v) | Any payment chargeable under "salaries" payable outside India or to a non-resident where tax has not been paid nor deducted under Chapter XVII-B — section 40(a)(iii) |
| (vi) | Any payment to a provident or other fund established for the benefit of employees, unless the assessee has made effective arrangements to secure that tax shall be deducted from payments out of the fund chargeable under "salaries" — section 40(a)(iv) |
| (vii) | Any tax actually paid by an employer referred to in section 10(10CC) — that is, tax borne by the employer on non-monetary perquisites, which is exempt in the employee's hands but not deductible to the employer — section 40(a)(v) |
Paragraph 34.1(i) describes the non-resident limb as tax not paid "on or before the expiry of the time prescribed u/s 139(1)" and adds, in brackets, that this "seems inadvertently shown as 'section 200(1)' in notified form 3CD". So the form's own heading at 21(b)(i)(B) cites the wrong section. Report in the form as it stands, but compute against the section 139(1) timeline, and note the point in the working paper.
The reliefs that remove the amounts inadmissible
Both TDS limbs carry the same two escape routes, and both are reportable positions the auditor has to test before concluding that any amount is inadmissible:
- Later deduction or payment. Where tax is deducted in a subsequent year, or deducted in the previous year but paid after the prescribed time, the sum is allowed as a deduction in computing the income of the previous year in which the tax has been paid. For the resident limb, the first proviso allows the 30% back in that later year.
- The payee has paid. The second proviso to each limb, read with section 201, provides that where the assessee fails to deduct but is not deemed to be an assessee in default under the first proviso to section 201(1), it shall be deemed that the assessee has deducted and paid the tax on the date of furnishing of the return of income by the payee. Paragraph 34.8: where that relief is claimed, the tax auditor should verify compliance with section 201 and obtain and keep on record a copy of the certificate in Form 26A.
Paragraph 34.2 adds the practical instruction on Form 26A: check the certificate and how it has been reflected in the TDS statement filed in Form 24Q, Form 26Q or Form 27Q.
The non-TDS amounts inadmissible in practice
Wealth tax — item (iii)
Paragraph 34.12: the amount of wealth tax paid is not allowed under section 40(a)(iia) and is reportable at clause 21(b)(iv). It is pertinent to note that the Wealth-tax Act, 1957 was abolished with effect from 1 April 2016 by the Finance Act, 2016 — so the row will normally be nil, and a figure in it needs explaining.
State Government levies — item (iv)
Paragraph 34.13: section 40(a)(iib) makes inadmissible any royalty, licence fee, service fee, privilege fee, service charge or other fee or charge, by whatever name called, which is (a) levied exclusively on, or (b) appropriated, directly or indirectly, from a State Government undertaking by the State Government. The Explanation to the sub-clause defines a State Government undertaking. The auditor should verify if any such payment has been made by a State Government undertaking to the State Government and, if so, that it is reported at clause 21(b)(v).
Salary paid abroad — item (v)
Paragraph 34.14: where salary is paid outside India or to a non-resident and tax that was required to be deducted has not been deducted, or not paid after deduction, the amount is disallowed under section 40(a)(iii) and reported at clause 21(b)(vi). This information is required for each individual payee, with the date of payment and the name and address of the payee.
Employee fund payments — item (vi)
Paragraph 34.15: section 40(a)(iv) disallows any payment to a provident or other fund established for the benefit of employees unless the assessee has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable under "salaries". Reported at item (vii) of the sub-clause. The test is about the fund's own deduction machinery, not about the employer's payment into it — which makes this one of the amounts inadmissible most often overlooked, because nothing about the payment itself looks irregular.
Employer-borne tax on perquisites — item (vii)
Paragraph 34.16: tax paid by an employer on non-monetary perquisites is exempt in the employee's hands under section 10(10CC), and by section 40(a)(v) is not deductible to the employer. The amount is reported at clause 21(b)(viii) if it is debited to the profit and loss account.
The TAQRB observations
- "Consolidated provisions for various expenses were reported instead of payee-wise details, and inaccurate dates were reported in place of the actual dates of credit in the books of account."
- "Consolidated reporting in place of payee-wise details for the heads under which tax has not been deducted."
- "Incorrect classification of resident and non-resident in case of reporting of inadmissible amount on account of non-deduction of taxes."
- "Reporting of incomplete payee particulars such as address of payee."
All four are structural failures in how the amounts inadmissible are presented rather than in how they are computed. The form asks for a row per payee with date, amount, nature, name and address — and, for the deducted-but-unpaid tables, the amount of tax deducted. A single "provision for expenses" line with a year-end date satisfies none of it. The resident-or-non-resident classification decides which limb applies and therefore whether 100% or 30% is inadmissible.
Where the auditor's judgement enters
Paragraph 34.17: where the assessee submits that a sum debited to the profit and loss account is not among the amounts inadmissible under section 40(a), the tax auditor may exercise his judgement in the light of the applicable laws and report accordingly, and may rely upon judicial pronouncements. On a difference of opinion, he should mention it in his observation in Form No. 3CA or 3CB. Where the information is voluminous, he can apply materiality principles, test checks and compliance tests.
Paragraph 34.11 adds a cross-check that is easy to run and easy to fail: the particulars under clause 21(b) should not differ from the particulars given under clause 34 of Form No. 3CD, to the extent applicable.
And paragraph 33.23(f) supplies a no-duplication rule: where an amount is disallowed under section 37 and reported at clause 21(a) item (viii), reporting need not be done under clause 21(b) for non-deduction of tax at source on the same amount — with appropriate disclosure in Para 3 of Form 3CA or Para 5 of Form 3CB.
Worked example
| Payment | Limb | Amounts inadmissible reported |
|---|---|---|
| Rs 40,00,000 royalty to a foreign company; no TDS | 40(a)(i) | Rs 40,00,000 — full amount |
| Rs 40,00,000 contract payment to a resident; no TDS | 40(a)(ia) | Rs 12,00,000 — 30% |
| Same resident payment, payee filed his return and Form 26A obtained | Second proviso + section 201 | Nil, on verification of Form 26A and the TDS statement |
| Salary of Rs 18,00,000 paid to a non-resident abroad, no tax deducted or paid | 40(a)(iii) | Rs 18,00,000, payee-wise with date and address |
| Employer's tax of Rs 5,00,000 borne on employees' non-monetary perquisites, debited to the P&L | 40(a)(v) | Rs 5,00,000 |
| Wealth tax | 40(a)(iia) | Nil — the Act was abolished from 1 April 2016 |
Audit checklist
- Report payee-wise, with the actual date of credit or payment — never a consolidated provision.
- Classify each payee correctly as resident or non-resident; the disallowance is 100% or 30% accordingly.
- Capture name and address, and PAN where available, for every payee.
- Where the second proviso relief is claimed, obtain Form 26A and trace it into Form 24Q / 26Q / 27Q.
- Compute the non-resident limb against the section 139(1) timeline despite the form's reference.
- Check for State Government undertaking levies under section 40(a)(iib).
- Test the effective arrangements condition for employee fund payments.
- Reconcile the amounts inadmissible at clause 21(b) against clause 34, and avoid duplicating a clause 21(a) item (viii) amount.
Common mistakes
- Reporting a single consolidated provision instead of payee-wise rows.
- Disallowing 30% on a non-resident payment, or 100% on a resident one.
- Claiming the second proviso relief without Form 26A on file.
- Leaving the payee address blank.
- Reporting the same amount at both clause 21(a)(viii) and clause 21(b).