Clause 21 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(a) reports amounts debited to the profit and loss account that are capital or personal expenditure, advertisement in a political party publication, club payments, and the prohibited expenditure within Explanation 3 to section 37(1).
From the ICAI Guidance Note on Tax Audit (Revised 2026), the 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 nine sub-headings of clause 21(a)
| Nature | |
|---|---|
| (i) | Capital expenditure |
| (ii) | Personal expenditure |
| (iii) | Advertisement expenditure in any souvenir, brochure, tract, pamphlet or the like published by a political party |
| (iv) | Expenditure incurred at clubs being entrance fees and subscriptions |
| (v) | Expenditure incurred at clubs being cost for club services and facilities used |
| (vi) | Expenditure for any purpose which is an offence or is prohibited by law, or by way of penalty or fine for violation of any law (enacted in India or outside India) |
| (via) | Expenditure by way of any other penalty or fine not covered above |
| (vii) | Expenditure incurred to compound an offence under any law in force, in India or outside India |
| (viii) | Expenditure incurred to provide any benefit or perquisite, in whatever form, whose acceptance violates any law, rule, regulation or guideline governing that person's conduct |
| (ix) | Expenditure incurred to settle proceedings initiated in relation to contravention under such law as notified by the Central Government |
Paragraph 33 sets the frame: clause 21 requires the amount of expenditure in respect of each of the items to be stated. Those expenses may be allowable, may not be allowable, or may be allowable subject to limits — the clause asks for the amount either way. Verification requires examining the books and other relevant documents, the basis of classification and the groups under which such expenses have been debited.
Capital expenditure at clause 21(a) — the four tests
Paragraph 33.1: capital expenditure is not allowable in computing business income unless specifically provided in the Act. The term is not defined, and no conclusive test or rules can be laid down. Paragraph 33.2 gives the tests generally applied:
- Whether it brings into existence an asset or advantage of enduring benefit — the question of enduring or permanent nature depends on the facts, permanency being relative.
- Whether it is referable to fixed capital or fixed assets, in contrast to circulating capital or current assets.
- Whether it relates to the basic framework of the assessee's business.
- Whether it is expenditure to acquire an intangible asset.
These are not exhaustive (paragraph 33.3), and paragraph 33.4 adds an independent point: the nature of the receipt in the hands of the recipient is not a determining factor for the payer. A capital receipt for the payee does not make it capital expenditure for the payer, or vice versa — the case of the payer has to be considered independently.
Paragraph 33.5: ordinarily capital expenditure should not be debited to the profit and loss account at all, and the Accounting Standards apply to financial statements audited under section 44AB. So besides disclosing the amount at clause 21(a), the auditor should give a suitable disclosure or qualification in para 3(a) of Form No. 3CB, depending on the facts. Reporting the number without considering the qualification leaves half the job done.
Paragraph 33.6: the details should be maintained in a classified manner, stating the amount under various heads separately. Since part of the capital expenditure may be allowable in the computation, it is advisable to maintain particulars of the nature of expenditure, the amount incurred, and the provision under which it is admissible. Preliminary expenses which are capital expenditure and are debited should be reported — and what goes into the e-filing portal is the total capital expenditure to the extent written off and debited to the profit and loss account.
Personal expenditure
Paragraph 33.7: personal expenses debited to the profit and loss account are specified under this sub-clause because they are not deductible under section 37. Importantly, the word "personal" is confined to and attached with the "assessee", and not necessarily to persons other than the assessee.
Paragraph 33.8: certain personal expenditure, though debited under business heads such as travel, communication or entertainment, may be identified from narration, employee interviews or internal audit reports and classified as inadmissible. The examples given are family air travel booked under a staff head and a personal driver's salary.
Paragraph 33.9 adds the company-law hook: section 143(1)(e) of the Companies Act, 2013 specifically requires the auditor to inquire whether personal expenses have been charged to revenue account. For an assessee audited under another law, the tax auditor verifies whether the personal expenses debited have been reported; for others, he verifies them while conducting the audit and checks whether they are mentioned under this clause.
Paragraph 33.10 recommends a five-column working paper matching the utility: serial number; nature and particulars of expenditure; account head under which debited; amount of expenditure; remarks.
Advertisement in a political party publication
Paragraph 33.11: section 37(2B) provides that no allowance shall be made in respect of expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. Such expenditure should be segregated and reported.
Paragraph 33.12 deals with the harder case — a publication of a trade union or labour union formed by a political party:
| Status of the union | Reporting at clause 21(a) |
|---|---|
| Has a distinct legal entity | Not required to be indicated |
| Does not have a separate and distinct legal entity | Must be indicated |
Paragraph 33.13 points to the other side of the ledger: section 80GGB allows a deduction for a company's contribution to political parties and electoral trusts, which is reported at clause 33 of Form No. 3CD. An advertisement payment and a contribution are different things and belong in different clauses.
Worked example
| Item | Sub-heading |
|---|---|
| Software licence of enduring benefit charged to repairs | (i) Capital — plus a qualification in para 3(a) of Form 3CB |
| Preliminary expenses written off during the year | (i) Capital, to the extent written off and debited; cross-refer clause 19 (section 35D) |
| Proprietor's family holiday booked under staff travel | (ii) Personal |
| Advertisement in a political party's souvenir | (iii) |
| Advertisement in the magazine of a separately registered trade union | Not reported here |
| Company's contribution to an electoral trust | Clause 33, not clause 21(a) |
Audit checklist
- Apply the four capital-expenditure tests, and decide the payer's position independently of the payee's.
- Report capital expenditure to the extent written off and debited, and consider a para 3(a) qualification.
- Look for personal expenditure inside travel, communication and entertainment heads, using narration and internal audit reports.
- Remember "personal" attaches to the assessee.
- Segregate political party publication advertising, and test the legal status of any trade union publisher.
- Keep the five-column working paper for personal expenditure and the classified schedule for capital items.
- Report each sub-heading separately — the clause is a list, not a total.
Common mistakes
- Reporting the amount without qualifying where capital expenditure sits in the profit and loss account.
- Deciding capital or revenue from the payee's treatment.
- Missing personal expenditure booked under business heads.
- Reporting a political contribution at clause 21(a) instead of clause 33.
- Combining sub-headings into a single figure.