Section 44AD of Income Tax Act - Few Technical Aspects

Dear Students/Readers,

Let us start with a small practical scenario.

Mr. Sanjay is engaged in the business of Civil Construction undertakes small government projects. He received the following amounts by way of contract receipts:

Mr. Sanjay paid Rs.50,00,000 to labourers in cash. He has brought forward loss and unabsorbed depreciation of the discontinued business Rs.45,000 and Rs. 30,000 respectively. Mr. Sanjay would like to opt for the provisions of section 44AD of the Act.

Three technical issues

On close reading of the above-referred problem of Mr. Sanjay, following three technical aspects emerge:

(1) Whether value of material supplied by the Government are to be included in Gross Receipts for the purpose of section 44AD?

(2) Whether disallowances under section 40A get attracted for the person opting under section 44AD?

(3) Whether adjustment of unabsorbed depreciation and brought forward business loss to be allowed against the income reported under section 44AD?

Analysis and Conclusion

The first issue gets resolved with the help of CBDT circular no. 684 of CBDT dated 10-06-1994, wherein para 31.1 of the said circular clarifies that "gross receipts are the amount received from the clients for contract and will not include the value of material supplied by the client."

So far as second issue is concerned, the payment to labourers fall under section 37(1) of the Act, being a general deduction under the head “Profits and Gains from Business or Profession”. However, one of the salient features of section 44AD of the Act is that the deduction under section 30 to 38 shall be deemed to have been allowed for the person opting for it. Therefore, question of disallowance in respect of payment to labourers under section 40A(3) does not arise since same has been deemed to have been allowed.

Now, let us revert to third issue which is more interesting. One of the salient features of section 44AD is that the deduction under section 30 to 38 shall be deemed to have been allowed. And depreciation is governed by section 32(2) of the Act, falling between section 30 to 38, therefore, deemed to have been allowed, hence same cannot be adjusted while computing the income under section 44AD of the Act. On the other hand, set-off of brought forward business loss is governed by section 72, which is beyond the provisions of section 30 to 38, therefore, same shall be adjusted against presumptive income computed under section 44AD of the Act.

Computation of Business Income in the hands of Mr. Sanjay

Finally, what shall be the presumptive income of Mr. Sanjay opting for section 44AD of the Act? Do post your answer in comment box.

You can also listen me

Happy Learning,
All the best.