Back to Answers
IndiaTax & ComplianceUpdated: Sep 13, 2026
Direct Answer
Classify expenses by examining the nature and payee of each transaction. Business expenses must be 'wholly and exclusively' for business purposes (Section 37). Personal withdrawals, grocery runs, or family trips must be tagged as 'Drawings' and excluded from the Profit & Loss statement to avoid scrutiny.
The Risk of Co-mingling Funds
Many freelancers, consultants, and SME owners use a single savings or current account for both business and personal use. Co-mingling funds makes tax filing chaotic and increases the risk of the Assessing Officer disallowing expenses during a tax audit.
Key Rules for Classification
Under Section 37 of the Indian Income Tax Act, any expenditure claimed must be:
- Not in the nature of capital expenditure or personal expenses.
- Laid out or expended wholly and exclusively for the purposes of the business or profession.
Practical Checking Steps
- Filter Common Personal Payees: Look for payments to Swiggy, Zomato, Netflix, schools, or local grocery stores. Unless you can prove these were for client meetings or office supplies, classify them as personal drawings.
- Analyze UPI Transactions: Small-ticket UPI payments are often a mix. Mandate clients to maintain petty cash vouchers or use a dedicated UPI ID for business.
- Apportion Mixed Expenses: For expenses like internet, mobile phones, or home office rent, apply a reasonable apportionment (e.g., 60% business, 40% personal) based on actual usage, and document the rationale.