1. General principle for business expenses
Section 37(1) of the Income Tax Act allows deduction of any expenditure (not being capital, personal, or covered by sections 30–36) “laid out or expended wholly and exclusively for the purposes of business or profession.”
So, the test is:
Direct nexus with the conduct of business, AND
Wholly and exclusively for business purposes.
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2. Nature of your CA expenses
Part 1 (Consultation in March 2025):
This consultation was about the PF withdrawal impact (which is personal/salary-linked income, not arising from your business). While your business losses and financials may have been considered, the dominant purpose was to address overall personal tax liability, not solely the business.
Part 2 (Return preparation in July 2025):
Filing ITR-3 involves consolidating all heads of income (salary, PF withdrawal, business income/loss, etc.). Unlike a company, where tax return prep is only for business, in a sole proprietorship your ITR = your personal + business income combined. Therefore, expenses for preparing your return are viewed as personal compliance costs, not business expenditure.
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3. Judicial precedents
Courts and tribunals in India have consistently held:
Income-tax return preparation fees and tax litigation costs for individuals / proprietors are not allowable as business expenses unless they relate solely to computation/defence of business income.
Example: CIT v. Birla Cotton Spinning & Weaving Mills Ltd. (82 ITR 166, SC) allowed expenses on defending business-related taxation matters.
But where the expenditure relates to tax on total income (including non-business heads), tribunals have generally disallowed it as personal in nature.
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4. Application to your case
Since your ITR filing and consultation involved both salary and PF (non-business heads) along with business losses, the expenses cannot be said to be “wholly and exclusively” for business.
Therefore, strictly as per statute and judicial interpretation, these expenses should not be booked as deductible business expenditure in your P&L.
At best:
If you had engaged a CA only for preparing business books, GST returns, or advising on business taxation matters, those would be deductible.
But where the service is mixed (business + personal), the safe and correct treatment is to treat them as personal expenses.
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5. Practical advice
Do not claim these CA consultation/ITR prep costs as business expense in your sole proprietorship.
You may, however, claim separately identifiable expenses for business-only compliance (GST return filing fees, tax audit fees, bookkeeping charges, MCA filings if any) — those are fully deductible.
Keep the ITR-related consultancy outside your business accounts, ideally paid from your personal bank account to avoid any mismatch.
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Conclusion:
For a sole proprietorship, CA fees for Income Tax return preparation or advice involving salary/PF/non-business heads of income are treated as personal expenses, not allowable business deductions under section 37(1). Only business-specific compliance costs (GST, accounts, audits, etc.) qualify as deductible business expenditure.
Do you need assistance to draft a split-expense policy for proprietors — i.e., how to cleanly separate CA fees between “business deductible” and “personal non-deductible” — so you can keep books more defensible in case of scrutiny ? If yes feel free to connect with us.
Thanks
CA Damini Agarwal
www.thewitcorp.com
