Prepared By:

Nadeem Butt (FCA)

Chartered Accountant
• Financial Advisor DAWAT -E- ISLAMI
• Chairman LTBA Tax Academy (2017-18)
• Vice Chairman LTBA Tax Academy (2016-17)
• Member (special invitees) Taxation Committee LCCI (2012-13)
• Audit & Tax Advisor of All Pakistan Cottage Industry & Small
Traders Association (2011-12)
• Conducted Income Tax Special audit for CBR (now FBR)
• Professional Author & Teacher of Taxation

Taj Arcade, 3rd Floor, Office # 06, Opposite Services Hospital, 73-Main Jail Road, Lahore – Pakistan
Ph: +92-42-35408635-36, 35408638 Fax: +92-42-35408641 Mob: 0333 / 0301-4245240
E-mail: nbco2007 @ yahoo / gmail / hotmail.com website: nbandco.com
FLOW CHART OF ASSETS & DEPRECIATION UNDER
THE INCOME TAX ORDINANCE, 2001

Cost of
Assets

Gain/ Loss Tax

on disposal Depreciation
of Assets

Disposal
Consideration Tax WDV
 SCOPE OF ASSETS AND
DEPRECIATION

Total relevant Sections / Rules

(13 = 11+2)

Total Sections Total Rules

(11) (2)

22, 23, 23A, 23B, 24, 25, 75, 76, 77, 78 79 12, 224
Notes on INCOME TAX ASSETS & DEPRECIATION for the tax year 2017

Topic covered
Sr. Section Rule
1. 75 Disposal & acquisition of assets

2. 76 Cost of assets under various situations

3. 77 Consideration received under various situations
4. 78 Non-arm's length transactions
5. 79 Non-recognition rules
6. 22 12 & 224 Depreciable asset
7. 23 12 & 224 Initial allowance
8. 23A 12 & 224 First year allowance
9. 23B Accelerated depreciation to alternate energy projects [Part-
II of Third Schedule]
10. 24 Intangibles
11. 25 Pre-commencement expenditure
12. 22 Exception to the rule cost incurred & consideration received
13. 22 Assets of leasing companies
ASSETS UNDER THE INCOME TAX ORDINANCE, 2001

Sr. Section Topic Covered

1. 75 Disposal & acquisition of assets
2. 76 Cost of assets under various situations
3. 77 Consideration received under various
situations
4. 78 Non-arm's length transactions
5. 79 Non-recognition rules
 DISPOSAL & ACQUISITION OF ASSETS

(A) Definitions
(B) Disposal of assets
(C) Acquisition of assets
(A) Definitions in this section [U/S 75(7)]

[Total 2]
SR. PARTICULARS DEFINITION
1. BUSINESS ASSET Means an asset held wholly or partly for
use in a business, including stock in trade
and a depreciable asset.

2. PERSONAL ASSET means an asset held wholly for personal

use.
(B) Disposal of asset (DOA) arises under the following cases [U/S 75 (1) TO (4)]
[Total 5 Cases]

SR. PARTICULARS EXPLANATION

1. PARTS WITH THE A person who holds an asset shall be treated as having made a
OWNERSHIP OF THE ASSET DOA at the time the person
OR OTHERWISE (a) parts with the ownership of the asset or
(b) when an asset is sold, exchanged, transferred or distributed
or cancelled, redeemed, relinquished, destroyed, lost, expired
or surrendered.
2. TRANSMISSION OF AN The transmission of an asset by succession or under a will
ASSET BY SUCCESSION OR shall be treated as a DOA by the deceased at the time asset is
UNDER A WILL transmitted.
3. APPLICATION OF A The application of a business asset to personal use shall be
BUSINESS ASSET TO treated as a DOA by the owner of the asset at the time the asset
PERSONAL USE is so applied.
4. BUSINESS ASSET IS Where a business asset is discarded or ceases to be used in
DISCARDED OR CEASES TO business, it shall be treated to have been disposed of.
BE USED IN BUSINESS

5. DISPOSAL OF A PART OF AN A disposal shall include the disposal of a part of an asset.

ASSET
IMPORTANT NOTE The entire aforesaid cases are partly discussed in disposal
consideration u/s 77 & partly u/s 79.
 (C)Acquisition of asset arises under the following cases [U/S 75(5) & (6)]
[Total 2 Cases]

SR. PARTICULARS EXPLANATION

1. OWNERSHIP A person shall be treated as having acquired
BEGINS OR (a) an asset at the time the person begins to own the
GRANTED RIGHT asset, including
(b) at the time the person is granted any right.

2. APPLICATION OF The application of a personal asset to business use shall

PERSONAL be treated as an acquisition of the asset by the owner at
ASSET TO the time the asset is so applied.
BUSINESS USE
 COST OF ASSETS UNDER VARIOUS SITUATIONS [U/S 76]
[TOTAL 9 CASES]
SR. PARTICULARS
1. COST OF AN ASSET (COA) PURCHASED

2. COA IF PERSONAL ASSET APPLIED FOR BUSINESS USE

3. COA PRODUCED OR CONSTRUCTED

4. COA ACQUIRED THROUGH FOREIGN CURRENCY

5. COA ACQUIRED UNDER HEDGING AGREEMENT

6. COA SOLD IN PARTS

7. COA ACQUIRED FROM THE AMOUNT CHARGEABLE TO TAX

8. COA ACQUIRED FROM THE AMOUNT EXEMPT FROM TAX

9. COA ACQUIRED FROM THE GRANT NOT CHARGEABLE &

CHARGEABLE TO TAX
 COST OF ASSETS UNDER VARIOUS SITUATIONS [U/S 76 (1) TO (11)]
[TOTAL 9 CASES]

Notwithstanding anything contained in this section, the Board may prescribe rules for
determination of cost for any asset, however except otherwise provided in the ITO, 2001 the cost
of an asset shall be determined as under.
SR. PARTICULARS EXPLANATION

1. COST OF ANSubject to serial (2), the COA purchased by a person shall be the sum of
ASSET (COA) the following amounts:-
PURCHASED
(a) The total consideration given for the asset, including the FMV of any
consideration in kind determined at the time the asset is acquired;
(b) any incidental expenditure incurred in acquiring & disposing of
the asset; and
(c) any expenditure incurred by the person to alter or improve the
asset. but shall not include any expenditure in (b) & (c) above that
has been fully allowed as a deduction under this Ordinance.
(Example–1 attached after this sheet)
2. COA IF The COA treated as acquired shall be the FMV of the personal asset
PERSONAL ASSET determined at the date it is applied to business use.
APPLIED FOR (Example–2 attached after next sheet)
BUSINESS USE
Example - 1

Determine the cost of asset from following information.

Rs.
Cash paid for purchase of asset 50,000
FMV of motorcycle given for purchase of asset 30,000
Legal expenses incurred on purchase of asset 10,000
Repair expenses (fully allowed as deduction) 5,000

Solution:
Rs.
Cash paid for purchase of asset 50,000
FMV of motorcycle given for purchase of asset 30,000
Legal expenses incurred on purchase of asset 10,000
Total 90,000

Note: As repair expenses have already allowed therefore the same shall not be
added in the cost of asset.
Example - 2
Rs.
Cost of personal asset purchased 100,000
Book value of asset as on June 30, 2017 85,000

You are required to compute the cost of asset if the same asset put to use for business purposes
as on June 30, 2017 under the following situations:

A.If the fair market value of the personal asset as on June 30, 2017 is Rs.100,000.
B.If the fair market value of the personal asset as on June 30, 2017 is Rs.80,000.
C.If the fair market value of the personal asset as on June 30, 2017 is Rs.150,000.

Solution: In all the above cases the fair market value as on June 30, 2017 shall be taken as cost
of asset irrespective of its cost or book value for business purposes.
3. COA The COA produced or constructed by a person shall be the
PRODUCED
(a) total cost incurred by the person in producing or constructing the
OR
asset
CONSTRUCT
plus
ED
(b) any expenditure in acquiring & disposing; and
(c) alter or improving the asset incurred by the person.
(Example – 3 attached after this sheet)
4. COA Where an asset has been acquired by a person with a loan denominated in a
ACQUIRED foreign currency & before full & final repayment of the loan, there is an
THROUGH increase or decrease in the liability of the person under the loan as
FOREIGN expressed in Rupees, the amount by which the liability is increased or
CURRENCY reduced shall be added to or deducted from the COA, as the case may be:
Explanation: Difference, if any, on account of foreign currency fluctuation,
shall be taken into account in the year of occurrence for the purposes of
depreciation.
(Example – 4 attached after next sheet)
5. COA In determining whether the liability of a person has increased or decreased
ACQUIRED as above the consideration shall be taken of the person's position under any
UNDER hedging agreement relating to the loan.
HEDGING
AGREEMENT (Example – 5 attached after next two sheets)
Example - 3

Determine the cost of plant manufactured by an AOP for its own use from the following information.
Rs.
Salary of engineer (fully engaged in manufacture of plant) 50,000
Raw material purchased for manufacture of plant 550,000
Wages to labour (40% for manufacture of plant) 100,000

Solution:
Rs.
Salary of engineer (fully engaged in manufacture of plant) 50,000
Raw material purchased for manufacture of plant 550,000
Wages to labour (40% portion related to manufacture of plant) 40,000
Total 640,000
Example - 4

On July 1, 2016, Mr. Zahid acquired a machine with loan in foreign currency ($50,000)
equivalent to Rs.4,000,000. On June 30, 2017, exchange rate was ($1 = RS. 85). Calculate the
amount of tax depreciation and initial allowance for tax year 2017.

Solution:

In this case, change in value of loan shall not be considered for depreciation.

Cost of asset 4,000,000

Initial allowance [4,000,000 x 25%] 1,000,000
WDV for depreciation u/s 22 3,000,000
Depreciation for the year [3,000,000 x 15%] 450,000
Example - 5

On July 01, 2016, Mr. Zahid acquired a machine with loan in foreign currency ($50,000)
equivalent to Rs.4,000,000. This loan is covered under hedging agreement and he shall not
be liable to pay any increase in the amount of loan due to change in exchange rate. On June
30, 2017, exchange rate was ($1 = RS. 85). Calculate the amount of tax depreciation and
initial allowance for tax year 2017.

Solution:

In this case, change in value of loan shall not be considered for depreciation purpose.

Initial allowance [4,000,000) x 25%] 1,000,000

Depreciation for the year [(4,000,000 – 1,000,000) x 15%] 450,000
6. COA SOLD IN Where a part of an asset is disposed of by a person, the COA
PARTS shall be apportioned between the part of the asset retained &
the part disposed of in accordance with their respective FMV’s
determined at the time the person acquired the asset.
In short the total COA shall be apportioned in the ratio of FMV
of asset at the time of acquisition.
(Example–6 attached after this sheet)
7. COA ACQUIRED Where the acquisition of an asset by a person is the derivation
FROM THE of an amount chargeable to tax, the COA shall be the amount
AMOUNT so charged plus any amount paid by the person for the asset.
CHARGEABLE TO
TAX
8. COA ACQUIRED Where the acquisition of an asset by a person is the derivation
FROM THE of an amount exempt from tax, the COA shall be the exempt
AMOUNT amount plus any amount paid by the person for the asset.
EXEMPT FROM (Example–7 attached after next sheet)
TAX
9. COA ACQUIRED
The COA does not include the amount of any grant,
FROM THE subsidy, rebate, commission or any other assistance (other
GRANT NOT than a loan repayable with or without profit) received or
CHARGEABLE & receivable by a person in respect of the acquisition of the
CHARGEABLE TO asset, except to the extent to which the amount is
TAX
chargeable to tax under this Ordinance.
(Example–8 attached after next two sheets)
Example - 6

On July 01, 2016, Mr. Zahid acquired a building for Rs. 500,000. In May, 2017 he
disposed of 1/4th of building for Rs. 300,000. On the date of acquisition, fair value of
part sold was Rs. 200,000 and fair value of remaining part was Rs.400,000. Determine
gain / loss on disposal and cost of building retained.

Solution:

Gain / loss on disposal:

Rs.
Consideration received on disposal 300,000
Less: Cost apportioned on the basis fair value
(500,000 x 200,000 / 600,000) 166,667
Gain on disposal 133,333

Cost of asset retained: Rs.

Cost of total asset 500,000
Less: Cost of asset disposed of (as above) 166,667
Cost of asset retained 333,333
Example - 7

Mr. Ahmed purchased vehicle to be used for his business purpose for Rs. 800,000. Rupees
200,000 was paid from taxable income while remaining Rs. 600,000 was paid from an
amount which is exempt from tax. What is the cost of asset?

Solution:

Cost of asset is determined by the amount paid and it is immaterial whether the amount
paid as purchase price of asset is taxable or exempt. Hence, the cost of asset is Rs.
800,000.
Example - 8

Mr. Naeem received grant of Rs. 500,000 from Government for purchase of an asset. Forty
percent (40%) of this grant is taxable and balance sixty percent 60% is exempt. Asset was
purchased by Mr. Naeem for Rs. 700,000. You are required to determine the cost of asset.

Solution

Rs.
Consideration paid for purchase of asset 700,000
Less: Exempt Government grant 420,000
Cost of asset 280,000
CONSIDERATION RECEIVED UNDER VARIOUS SITUATIONS [U/s 77]
[Total 5 Cases]

SR. PARTICULARS

1. DISPOSAL CONSIDERATION (DC) ON SALE

2. DC FOR LOST OR DESTROYED ASSET

3. DC FOR BUSINESS ASSET APPLIED TO PERSONAL USE OR DISCARDED

OR CEASED TO BE USED

4. DC IN RESPECT OF LEASED ASSETS

5. DC IN RESPECT COMBINED SALE OF TWO OR MORE ASSETS

 CONSIDERATION RECEIVED UNDER VARIOUS SITUATIONS [U/s 77(1) TO (6)]
[Total 5 Cases]
Notwithstanding anything contained in this section, the Board may prescribe rules for
determination of consideration received for any asset, however the disposal consideration shall
be determined as under.
SR. PARTICULARS EXPLANATION

DISPOSAL The consideration received by a person on DOA shall be the total

1. CONSIDERATION amount received by the person for the asset or the FMV
(DC) ON SALE thereof, whichever is the higher, including the FMV of any
consideration received in kind determined at the time of disposal.
(Example – 9 attached after this sheet)

DC FOR LOST OR Where an asset has been lost or destroyed by a person, the
2. DESTROYED ASSET consideration received for the asset shall include any
compensation, indemnity or damages received by the person
under:-
(a) an insurance policy, indemnity or other agreement;
(b) a settlement; or (c) a judicial decision.
(Example – 10 attached after next sheet)
DC FOR BUSINESS
The consideration received for an asset treated as disposed shall
ASSET APPLIED TO
3. be the FMV of the asset determined at the time it is applied to
PERSONAL USE OR
DISCARDED OR
personal use or discarded or ceased to be used in business, as
CEASED TO BE
the case may be.
USED (Example – 11 attached after next two sheets)
Example- 9

Mr. Jamshed sold his factory building to Mr. Amir for Rs. 1,000,000. However, the fair
value of building was Rs. 1,200,000. Compute gain / loss on disposal if WDV of building
is Rs.600,000.

Solution:
Rs.
Consideration received
(Higher of actual amount or fair value) 1,200,000
Less: WDV 600,000
Gain on disposal 600,000
Example - 10

Mr. Jamshed’s factory building was destroyed because of earthquake during the tax year
2017. He received Rs. 500,000 from insurance company in respect of this building. Compute
gain / loss on disposal if WDV of building is Rs. 1,600,000.

Solution:

Rs.
Consideration received
(Amount received from insurance company) 500,000
Less: WDV 1,600,000
Loss on disposal 1,100,000
Example - 11

In tax year 2017 Mr. Khan discarded his business car from business and applied that car for
his personal use. Fair Value on the date of application to personal use was Rs. 500,000.
Compute gain / loss on disposal if WDV of car at the beginning of tax year is Rs. 400,000.

Solution:

Consideration received Rs.

Fair value 500,000

Less: WDV 400,000
Gain on disposal 100,000
 DC IN The consideration received by a scheduled bank, financial institution,
4. RESPECT modaraba, or leasing company approved by the CIR in respect of an
OF asset leased by the company to another person shall be the residual
LEASED value received by the leasing company on maturity of the lease
ASSETS agreement provided that the residual value plus the amount realized
during the term of the lease towards the COA is not less than the
original COA,
(Example – 12 attached after this sheet)

DC IN Where two or more assets are disposed of by a person in a single

5. RESPECT transaction and the consideration received for each asset is not
COMBINED specified, the total consideration received by the person shall be
SALE OF apportioned among the assets disposed of in proportion to their
TWO OR respective FMV’s determined at the time of the transaction.
MORE In short the total DC shall be apportioned in the ratio of FMV of asset at
ASSETS the time of disposal.
(Example – 13 attached after next sheet)
Example - 12
A leasing Company has lease out its plant and machinery on the following terms and conditions;
Rs.
Lease rentals for five years (Principal plus mark-up price) 6,000,000
Cost of plant and machinery to leasing Company 4,000,000

You are required to compute the disposal consideration of lease asset under the following situations:

(a) If the principal amount in total lease rental is Rs. 3,500,000 and its residual value is Rs. 200,000.

(b) If the principal amount in total lease rental is Rs. 3,800,000 and its residual value is Rs. 100,000.

(c) If the principal amount in total lease rental is Rs. 4,000,000 & its residual value is Rs. 200,000

Solution:

In case A and B as the principal amount plus residual amount is less than the cost of
asset to the lessor therefore the disposal consideration shall be taken as Rs. 4,000,000
that is not less than the cost of asset to the lessor. However in case of C no adjustment
shall be made in the disposal consideration as the same is more than the cost of asset to
the lessor.
Example - 13

In tax year 2017 Mr. Khan disposed of his two business cars for a sum of Rs. 1,200,000. WDV of
car-1 is Rs. 300,000 and car-2 is Rs.400,000. Fair Value on the date of this transaction was as
follows:
Rs.
Car-1 700,000
Car-2 300,000

Required: Compute gain on sale of these two cars.

Solution:
Rs. Rs.
Car-1 Car-2
Consideration received (apportioned on the basis of
fair values) i.e. 70% : 30% 840,000 360,000
Less: WDV 300,000 400,000
Gain / (loss) on disposal 540,000 (40,000)

Important note: The tax department shall accept the value that will be higher from FMV and
disposal consideration received of respective asset. As the in the said example the consideration
received is higher the same has been taken into account however where the fair value will be
higher than the same shall be taken into account.
 Non-arm's length transactions [U/s 78]
Where an asset is disposed of in a non-arm's length transaction –

SR. PARTICULARS EXPLANATION

a. CONSIDERATION the person disposing of the asset shall be treated as having

RECEIVED ON received consideration equal to the FMV of the asset
DISPOSAL determined at the time the asset is disposed;

b. COST ON the person acquiring the asset shall be treated as having a cost
ACQUISITION equal to the amount determined under 1 above.

IMPORTANT This section is covering both personal and business assets

NOTE where applicable.
 Non-recognition rules for gain or loss on disposal [U/s 79]
[Total 9 = 6 cases with 3 additional points]
For the purposes of this Ordinance & subject to serial (7), no gain or loss shall be taken to
arise on the disposal of an asset (under the following six cases) (Covering both personal and
business assets)–

S R. PARTICULARS EXPLANATION
1. SPOUSES between spouses under an agreement to live apart;

TRANSMISSION OF by reason of the transmission of the asset to an

2. ASSET TO executor or beneficiary on the death of a person;
EXECUTOR ON
DEATH
3. GIFT by reason of a gift of the asset;

4. COMPULSORY by reason of the compulsory acquisition of the asset

ACQUISITION under any law where the consideration received for the
disposal is reinvested by the recipient in an asset of a
like kind within one year of the disposal;
BY COMPANY TO by a company to its shareholders on liquidation of the
5. SHAREHOLDERS ON company; or
LIQUIDATION
 BY AOP TO ITS by an AOP to its members on dissolution of the association where the
6. MEMBERS assets are distributed to members in accordance with their interests in
the capital of the association.

NON-APPLICATION Provided the above provisions from 1 to 6 shall not apply where the
7. OF ABOVE person acquiring the asset is a non-resident person at the time of
PROVISIONS the acquisition.
CHARACTER & In the above all the cases (except case 4) the person acquiring the
COST OF ASSET asset shall be treated as –
8. a. acquiring an asset of same character as the person disposing of the
asset; and
b. acquiring the asset for a cost equal to the COA for the person
disposing of the asset at the time of the disposal.
COST OFThe person’s cost of a replacement asset referred to in point 4 above
9. REPLACEMENT shall be the COA disposed of plus the amount by which any
ASSET UNDER consideration given by the person for the replacement asset
COMPULSORY exceeds the consideration received by the person for the asset
ACQUISITION disposed of. The formula for the above is as under:

Cost of asset disposed xxx

Add: consideration given xxx
Less: consideration received on disposed of asset xxx
DEPRECIATION UNDER THE INCOME TAX ORDINANCE, 2001

Topic covered
Sr. Section Rule

1. 22 12 & 224 Depreciable asset

2. 23 12 & 224 Initial allowance
3. 23A 12 & 224 First year allowance
4. 23B Accelerated depreciation to alternate
energy projects
5. 24 Intangibles
6. 25 Pre-commencement expenditure
DEPRECIATION
Sr. Heading Points
covered
1. Depreciation 7
2. Computation related points 5
1. DEPRECIATION [Total 7 points]
SR. PARTICULARS EXPLANATION
Where a person is using depreciable asset (DA) to derive BI, then he
1. DEPRECIATION shall be allowed to deduct depreciation of the DA from his BI.

Any tangible moveable or immovable property having normal useful life

DEPRECIABLE of more than one year & is being used by the owner for his business
2. ASSET [U/S purposes (wholly or partly) is DA.
22(15)] The DA includes building, plant & machinery, furniture & fixtures,
computer hardware, technical books, vehicles, air-craft, ships, below
ground installation, offshore platforms & production installation in
mineral oil concerns.
Structural improvement in relation to immovable property includes any
3. STRUCTURAL building, road, driveway, car park, railway line, pipeline, bridge, tunnel,
IMPROVEMENT airport runway, canal, dock, wharf, retaining wall, fence, power lines,
[U/S 22(15)] water or sewerage pipes, drainage, landscaping or dam. [U/s 22(15)]

All DA’s are EDA’s except following:

ELIGIBLE a. Any RTV not plying for hire. (e.g. Trains & busses plying for hire)
4. DEPRECIABLE
ASSET [U/S 23(5)]
b. Furniture & fittings
c. Any plant & machinery that has been previously used in Pakistan
d. Any asset whose total cost has already been allowed as deduction
in the tax year in which it is acquired
5. PARTICULARS TO BE
FURNISHED TO CLAIM
DEPRECIATION /
AMORTISATION [RULE
12] See chat given after the chart of normal, initial
allowance and FYA Chart.

On furnishing to CIR the following particulars &

information with the ROI for Practically there is a
separate annexure for furnishing of above
information that is filed along-with the ROI.
6. CONDITIONS FOR See chat given after the chart of normal, initial
LEASING COMPANIES FOR allowance and FYA Chart.
CLAIM OF DEPRECIATION
DEDUCTION [U/R 224]
7. DEPRECIATION AND See chat given after Rule 224 Chart.
INTANGIBLE ASSETS
COMPARISON CHART
2. CALCULATION OF DEPRECIATION
[Total 5 points]
Depreciation shall be allowed only on depreciable assets. Rules regarding calculation of
depreciation are as follows:
SR. PARTICULARS EXPLANATION
1. WHERE AN ASSET The depreciation on such asset shall be charged for the whole year e.g. assets
NOT USED FOR THE used partly on seasonal basis in sugar industry. [U/s 22(1)]
WHOLE OF THE
YEAR
2. WHERE THE No depreciation allowance shall be allowed however renewal or replacement cost
USEFUL LIFE OF AN shall be allowed as revenue expenditure. [U/s 22(15)]
ASSET IS ONE
YEAR
3. RATES OF Depreciation shall be computed by applying the following rates against the WDV of
DEPRECIATION the asset at the beginning of the year [U/s 22(2)]:
SR. TYPE OF ASSETS RATE
1. Building (all types) 10%
2. Furniture (Including fitting) & machinery & plant, Motor vehicles (all 15%
types), ships, technical or professional books.
3. Computer hardware including printer, monitor & allied items, 30%
Machinery & Equipment used in manufacture of IT products,
aircrafts & aero engines, Aerial photographic apparatus.
4. In case of mineral oil concerns the income of which is liable to be
computed with the rules in Part I of the 5th Schedule. 100%
(a) Below ground installations 20%
(b) Offshore platforms & production installations.

5. A ramp build to provide access to persons with disabilities not

100%
exceeding Rs. 250,000 each.
4. WDV AT THE The above mentioned rates are applied on the WDV of the asset at the beginning of the
BEGINNING OF year, which is determined as below:
THE YEAR [U/S
22(5)]
(A) In case of asset acquired during the year:
Cost xxx
Less: IA (if asset is EDA) (xxx)
WDV at the beginning of the year xxx
(b) In any other case:
Cost xxx
Less: IA allowed in previous years (xxx)
Less: Depreciation allowed in previous years (xxx)
WDV at the beginning of the year xxx

(Example – 14 attached after this sheet)

5. ASSET Where an asset is partly used for business & partly for some other
PARTLY USED purpose then:
FOR a. Depreciation shall be allowed in proportion to use of asset in the
BUSINESS business [U/s 22(3),
b. However, WDV shall be calculated in the normal way [U/s 22(6)].
(Example – 15 attached after next sheet)
Example 14:

In tax year 2017, Jazz Limited purchased a new plant and building for Rs.1,200,000 and
Rs. 500,000 respectively. Calculate initial allowance if any, tax depreciation and closing
WDV.

Solution:

Plant Building Total

Rs. Rs. Rs.

Cost 1,200,000 500,000 1,700,000

Initial allowance (25% for plant) and (15% for building) 300,000 75,000 375,000
900,000 425,000 1,325,000
Tax depreciation @ (15% and 10%) 135,000 42,500 177,500
Closing WDV 765,000 382,500 1,147,500
Example - 15
A person acquired machinery in year 1 for Rs. 500,000 for business purpose. In year 2 he used
that machinery for business purpose for six months and for remaining six months he used that for
some other purpose while in year 3 he used that machinery wholly for business use.

Required: Calculate (a) depreciation allowed and (b) closing WDV for three years.

Solution: (a) Year 3 Year 2 Year 1

Rs. Rs. Rs.
Cost 500,000
Less: initial allowance @ 25% 125,000
WDV at the beginning of the year (A) 270,937 318,750 375,000

Depreciation @ 15% (B) 40,641 47,813 56,250

Less: Depreciation not allowed because of non
business use - 23,907 -
Depreciation allowed 40,641 23,906 56,250
WDV at the end of year (A - B) 230,296 270,937 318,750
CHART PRESENTATION OF IA, FYA & ACCELERATED
DEPRECIATION TO ALTERNATE ENERGY PROJECTS
[Total 8 points]

SR. PARTICULARS IA U/S 23 FYA U/S ACCELERATED

23A DEPRECIATION
ON AEP U/S 23B

PART 1 [3 COMMON POINTS]

1. ELIGIBLE Means a DA other than the following:
DEPRECIABLE
ASSET (a) any RTV unless the vehicle is plying for hire; Same Same

(b) any furniture including fittings;

(c) any plant or machinery that has been used

previously in Pakistan; or

(d) any plant or machinery that has been

allowed as deduction under another section for
the entire cost of the asset.
2. RESTRICTION A deduction shall be allowed to a leasing
ON CLAIM OF company or an investment bank or a modaraba
TOTAL or a scheduled bank or a DFI in respect of Same Same
DEPRECIATION assets owned and leased to another person
ALLOWANCE shall be deducted only against the leased rental
income derived in respect of such assets.
3. CONCEPT OF No concept of number of days
NUMBER OF hence either allowed or not
DAYS allowed. Same Same

PART 2 [3 PARTLY COMMON

POINTS]
4. TO WHOM Any person in the manufacturing & To industrial undertakings Same as in
AVAILABLE other sectors. (including manufacturer & column 4 but
others) set up in specified rural with no
& under developed areas or limitation for
engaged in the set up area.
manufacturing of cellular
mobile phones and
qualifying for exemption
under clause (126N) of
Part I of the Second
Schedule and & owned &
managed by a Company.
5. BASIS 25% for plant & machinery & 90% of cost of EDA Same as in
column 4.
15% for building
6. ADMISSIBILITY If this allowance is allowed then
UNDER THE other two allowances shall not
ORDINANCE allowed as the total deprecation Same as in column 3 (in lieu of Same as in
claim should not exceed from the initial allowance). column 4.
COA.
 PART 3 [2 UN-COMMON
POINTS)
7. WHEN Later of the following:
AVAILABLE
a. EDA first time used in EDA installed & used. Same as in
Pakistan or column 4.
b. Commercial production
commenced.

8. EFFECTIVE 01-07-2002 (Tax year 2003) 01-07-2008 (Tax year 01-07-2009 (Tax
FROM 2009) year 2010)
PARTICULARS REQUIRED TO BE FURNISHED FOR CLAIMING DEPRECIATION
DEDUCTION OR INITIAL ALLOWANCE AMORTIZATION DEDUCTION [RULE 12]

Sr. Particulars Total

points
A. Particulars that shall be furnished with the return of income for 9
any tax year in order to claim a depreciation deduction U/S 22 to
23B or an amortization deduction U/S 24.
B. Particulars that shall be furnished with the return of income for 3
any tax year in which a depreciable asset or intangible is
disposed of in the year.
PARTICULARS REQUIRED TO BE FURNISHED FOR CLAIMING DEPRECIATION
DEDUCTION OR INITIAL ALLOWANCE AMORTIZATION DEDUCTION [RULE 12]
A. The following particulars shall be furnished by a taxpayer at the time of furnishing a return of income for any tax
year in order to claim a depreciation deduction U/S 22, an initial allowance U/S 23 or an amortization deduction
U/S 24 read with the Third Schedule to the Ordinance, namely:-
Sr. Heading Detail
1. Description of a description of each depreciable asset and intangible in respect of which a deduction is claimed;
each asset
2. Extent of partly where a depreciable asset or intangible is used in the tax year only partly in deriving income from
used assets business chargeable to tax, the extent of such part use;
3. Date of if the depreciable asset or intangible was acquired in the tax year, the date of acquisition;
acquisition during
the tax year
4. Opening WDV the WDV of each depreciable asset at the beginning of the tax year computed in accordance with sub-
section (5) of section 22 & the cost of each intangible as determined under sub-section (11) of section
24;
5. Addition / the amount of capital expenditure incurred in the tax year on additions, alterations. improvements or
adjustments in tax extensions in relation to any depreciable asset or intangible and where the depreciable or amortizable
year amount of such expenditure is limited under the Ordinance, the lower amount shall also be stated;
6. Value of each the total value of each depreciable asset for which a depreciation deduction is allowable for the tax
asset on which year (this is the sum of the amounts specified in clauses (e) and (f ), less any initial allowance allowed
depreciation is for the asset in that year;
allowable
7. Depreciation rates a) the prescribed rate of depreciation and initial allowance (if any) for each depreciable asset or class
/ useful life of asset for the tax year, and the normal useful life for each intangible;

Amount of (i) the amount of depreciation deduction and initial allowance (if any) for each depreciable
depreciation / asset for the year and the amount of amortization deduction for each intangible for the year;
amortization
8. Total depreciation the total depreciation deduction, initial allowance & amortization deduction allowed for the tax year;
B. The following particulars shall be furnished by a taxpayer at the time of furnishing a return of
income for any tax year in which a depreciable asset or intangible is disposed of in the year,
namely:-

Sr. Heading Detail

1. Considerati the consideration received for the asset or intangible;
on received
2. Opening the WDV of the asset or intangible disposed of at the
WDV beginning of the tax year; and
3. Gain or loss the excess or deficit of the consideration received in
on disposal relation to the WDV (i.e., note 2 less note 1 or vice versa, as
the case may be).
CONDITIONS FOR APPROVAL OF LEASING COMPANIES FOR
CLAIM OF DEPRECIATION DEDUCTION [Rule 224]
The following conditions shall be fulfilled by a leasing company or a modaraba to
claim deduction for depreciation on lease of depreciable assets under this rule, namely:-

Sr. Particulars Explanation

1. Principal The leasing company is engaged principally in the business of
business leasing of assets and has been issued a license by the SECP
leasing and to operate under the terms & conditions specified therein; and
its license
from SECP
2. Restriction the leasing company or a modaraba doing leasing business
on value of undertakes that where a motor vehicle is given on lease,
motor the purchase value thereof shall be restricted to the
vehicle given amount specified in the Third Schedule to the Ordinance, for
on lease the purposes of claiming depreciation or the expenditure on
such lease.
CHART PRESENTATION OF DEPRECIATION U/S 22 &
INTANGIBLES U/S 24 [Total 13 points]
SR. PARTICULA DEPRECIATION U/S 22 INTANGIBLES U/S 24
RS
(1) (3) (4)
(2)
PART 1 [3 COMMON POINTS]

1. TO WHOM A person. [u/s 22(1)] Same [u/s24(1)]

AVAILABLE

2. EFFECTIVE 01-07-2002 (Tax year 2003) (Implied) Same

FROM
3. TREATMENT The same shall be added or deducted
OF PROFIT OR from BI. [u/s 22(8)]
Same [u/s 24(8)]
LOSS ON
DISPOSAL
PART 2 [2 PARTLY COMMON
POINTS]
4. WHEN a. Same. And
AVAILABLE
a. Depreciable asset used during the b. having normal life more
tax year. than one year
b. ownership and
5. LIMITATION a. Not to exceed from the cost of DA. a. Same
ON TOTAL
DEPRECIATIO b. A deduction shall be allowed to a leasing b. Not applicable
N / company or an investment bank or a
AMORTIZATIO modaraba or a scheduled bank or a
N development finance institution in respect
DEDUCTIONS of assets owned & leased to another
person shall be deducted only against
the leased rental income derived in
respect of such assets.
PART 3 [8 UN-COMMON POINTS)
6. BASIS As per rates defined in third schedule. a. If normal useful life not determinable or
exceeds from 10 years, the same shall be
restricted to 10 years.

b. If normal useful life is equal or less than

10 years then the same shall be taken for
amortization purposes.
7. DEPRECIABL Means the following: Means the following:
E ASSET /
INTANGIBLE a. tangible moveable or immovable property any patent, invention, design or model, secret
MEANS having normal useful life more than one formula or process, copyright, trade mark,
year; and scientific or technical knowledge, computer
software, motion picture film, export quotas,
b. being used by the owner wholly or partly franchise, licence, intellectual property, or
for business purposes; other like property or right, contractual rights &
any expenditure that provides an advantage or
benefit for a period of more than one year

(other than expenditure incurred to acquire a

depreciable asset or unimproved land).
8. METHOD TO Only one method that is WDV. On straight line method but usage on
CHARGE days basis.
DEPRECIATION /
AMORTIZATION
9. CONCEPT OF The following two situations arises under
NUMBER OF DAYS this heading;
Allowed on usage basis by taking into
a. Where partly use for business but no other account the days.
use then full year depreciation shall be
allowed and

b. Where partly use for business but also for

other use then depreciation shall be
allowed on proportionate basis for
business related use only.
10. COMPUTATION OF a. In the first year cost less initial allowance, WDV shall be computed in the
WDV if any and normal way where intangible is to
retain in business.
b. In subsequent years cost less depreciation
allowed in the preceding tax years.

11. COMPUTATION OF The WDV computed by the following The WDV computed by the
PROFIT OR LOSS formula: following formula:
ON DISPOSAL IF
DEPRECIABLE / Cost less total depreciation (allowed + not Cost less total amortization (allowed
INTANGIBLE ASSET allowed) shall be increased by the total + not allowed) shall not be
PARTLY USED FOR depreciation not allowed in the preceding tax increased by the total amortization
BUSINESS & years till DA disposal in order to compute the not allowed in the preceding tax years
PARTLY FOR OTHER correct amount of profit or loss on disposal of till DA disposal as no such facility
PURPOSES DA. available under this section on
intangible.
12. INTANGIBLE Not applicable Shall be
AVAILABLE ON considered as
NON WORKING working day.
DAY

13. SPECIAL a. PTV’s not plying for hire Not applicable.

TREATMENT
b. Immovable property and
FOR
c. Export of depreciable asset after
use in Pakistan
Explain with examples.
 12.Pre-commencement expenditure [U/s 25]
[Total 4 points]
SR. PARTICULARS EXPLANATION
1. TO WHOM A person shall be allowed deduction for the any above related
AVAILABLE expenditure.
2. BASIS 20% straight line method
3. LIMITATION ON a. The total deductions allowed under this section in the
PCE current and all previous tax years shall not exceed the
amount of the expenditure.
b. No deduction shall be allowed for any PCE where a deduction
has been allowed under another section of this Ordinance for
the entire amount of the PCE.
4. DEFINITION OF "Pre-commencement expenditure" means any expenditure
PCE incurred;
a. before commencement of a business wholly & exclusively to
derive income chargeable to tax,
b. cost of feasibility studies,
c. construction of prototypes
d. trial production activities, but
shall not include any expenditure which is incurred in acquiring
land, or which is depreciated or amortized.
EXCEPTION TO THE RULE COST INCURRED and
CONSIDERATION RECEIVED

In case of disposal of the asset, following rules shall apply:

SR. PARTICULARS EXPLANATION

1. DEPRECIATION IN THE No depreciation shall be allowed in the year of disposal.
YEAR OF DISPOSAL
[U/s 22(8)]
2. ASSET PARTLY USED Where an asset was partly used for business and partly for some
FOR BUSINESS [U/s other purpose, then WDV at the time of disposal shall be increased
22(9)] by depreciation not allowed on account of non business use.
3. PASSENGER If the cost of PTV not plying for hire is more than Rs. 2.5 million,
TRANSPORT VEHICLE then it shall be considered equal to Rs.2.5 million & in this case
NOT PLYING FOR HIRE disposal consideration shall also be reduced as per following formula:
[U/s 22(10)] (Sale receipt on disposal of the vehicle x 2.5 million) / Actual cost of
vehicle
The capital gain / loss on disposal of disallowed portion of PTV shall
Important note: also excluded from section 37 due motor vehicle exclusion form
capital assets specified in section u/s 38(5) of the ITO, 2001.
Note: If the PTV is plying for hire then there is no limitation on cost of
PTV under the aforesaid section.
(Example – 16 attached after this sheet)
4. RULES FOR The cost & consideration received in respect of a DA received as
CALCULATION OF COST already discussed shall be determined u/s 75 to 79 of the ITO, 2001.
& CONSIDERATION
RECEIVED [U/s 22(11)]
5. DISPOSAL OF In case of disposal of immovable property (excluding cost of the
IMMOVABLE PROPERTY land), where consideration received exceeds the COA then
[U/s 22(13)(b) &(d)] consideration received shall be treated as the cost of asset..
(Example – 17 attached after next sheet)
6. EXPORT OF DA AFTER Where a person exports an asset after using in Pakistan, then
USE IN PAKISTAN [U/s consideration received shall be treated as equal to the COA.
22(14)] (Example – 18 attached after next two sheets)
7. Important Note: It is worthwhile to mention here that although section 22(8)(a) states
that the profit on disposal of DA is equal to the difference between
sale price & WDV of DA, however the same shall be read with the
limitations imposed under this section by sub section 13(b)(d) & 14 on
various assets disposal.
Example - 16

A person acquired a passenger transport vehicle for Rs. 3,000,000 for business purpose. This
vehicle was then sold for Rs.1,800,000 in year 2. Calculate gain on sale of vehicle in year 2.

Solution:

Calculation of WDV at the end of year 1: Rs.

Cost for tax purpose 2,500,000
Depreciation @ 15% 375,000
WDV at the end of year 1 2,125,000

Calculation of allowed portion in disposal consideration:

Allowed portion (1,800,000 x 2,500,000 / 3,000,000) 1,500,000

Calculation of profit / (loss) on disposal:

Consideration received – WDV as above (Rs.1,500,000 – 2,125,000) = (625,000)
Example - 17

From the following information compute gain on sale of immovable property (including
building that is for personal use or otherwise non depreciable):

Rs.
Cost 400,000
Consideration received on disposal 500,000

Solution:

As consideration received is more than cost of the immovable property, hence

consideration received shall be treated as cost of the property.
Rs.
Consideration received 500,000
Cost of asset (treated as equal to consideration received) 500,000
Difference Nil
Example 18:

From following information compute gain on sale of asset which has been exported after
using in Pakistan:
Rs.
Cost 100,000
WDV 40,000
Consideration received 160,000

Solution:

In this case cost shall be equal to the consideration received:

Rs.
Consideration received (equal to cost of asset for tax) 100,000
Less: WDV 40,000
Profit on disposal (equal to accumulated depreciation) 60,000
ASSETS OF LEASING COMPANIES
SR. PARTICULARS EXPLANATION
1. DEDUCTION ALLOWED A deduction allowed on account of normal depreciation to a leasing
IN RESPECT OF company or an investment bank or a modaraba or a scheduled
DEPRECIATION ON bank or a DFI in respect of assets owned & leased to another
LEASED ASSET person shall be deducted by the aforesaid respective persons. [U/s
22(13)(c)]
2. DEDUCTION SHALL BE The total of deductions u/s 22 to 23B allowable to a leasing
ALLOWED AGAINST company or an investment bank or a modaraba or a scheduled
LEASED RENTAL bank or a DFI in respect of assets owned and leased to another
INCOME ONLY person shall be deducted only against the leased rental income
derived in respect of such assets.