No-Income Period Expenses: Claiming Deductions Under Section 37(1)

Running a business isn’t always smooth. Sometimes, due to market slowdown, legal issues, or other reasons, your business may earn zero income for a while. But what happens to your regular expenses during this time like rent, staff salaries, or electricity bills? Can you still claim them as deductions?

Section 37(1): What It Really Means

Section 37(1) of the Income Tax Act allows you to claim deductions for business expenses that aren’t covered under Sections 30 to 36. The key phrase here is:

“Expenses laid out or spent wholly and exclusively for the purpose of business or profession.”

This means if the expense was genuinely for your business even if you didn’t earn income during that time you may still be able to claim it.

When Deductions Are Allowed: Business Is Set Up but Idle

If your business is already set up and you're spending money to keep it alive and ready to restart, those expenses are usually allowed. Courts have confirmed that the tax department cannot dictate how you run your business.

Examples of Allowable Expenses:

• Rent for a closed office or factory – to avoid losing the space.
• Basic utility bills – to keep services like electricity or internet active.
• Salaries for key staff – so you don’t lose trained employees.
• Legal fees – to fix the issue that caused the business halt.

The Logic: You don’t need to earn income immediately. If the expense helps preserve your business setup so you can earn later, it’s valid.

When Deductions Are Not Allowed: Business Never Started or Shut Down

There’s a big difference between a business that’s temporarily inactive and one that never started or is permanently closed.

• Business was set up but paused – Expenses are usually allowed.
• Business never started or permanently shut – Expenses are not allowed.

If your business wasn’t active at all during the year, Section 37(1) won’t help.

Section 34(1): Not Meant for These Expenses

Section 34(1) is about depreciation and asset details. It doesn’t cover regular expenses like rent or salaries. So, if you're looking to claim operational costs during a no-income period, Section 34(1) doesn’t apply.

Quick Checklist: Can You Claim the Expense?

Before claiming deductions under Section 37(1), make sure:

• The expense is not for personal use or buying long-term assets.
• It’s not already covered under other sections like rent (Section 30).
• It was necessary for your business to stay ready for future work.
• You have proper records like bills, contracts, or receipts.

If you can show that the expense helped keep your business alive—even without income—you’re likely eligible for the deduction.

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