Assets and Depreciation Chapter-10

Chapter

10 ASSETS AND DEPRECIATION

Topic covered
Section Rule
(For CAF-6 and ICMAP Students)
PART – I (FOR CAF-6 & ICMAP STUDENTS)
22 12 & 224 Depreciable asset
23 12 & 224 Initial allowance
23A 12 & 224 First year allowance
23B Accelerated depreciation to alternate energy projects [Part-II of Third Schedule]
24 Intangibles
25 Pre-commencement expenditure
Disposal of assets
Assets of leasing companies
75 Disposal & acquisition of assets
76 Cost of assets under various situations
77 Consideration received under various situations
PART – II (FOR CA MOD F & ICMAP STUDENTS)
78 Non-arm's length transactions
79 Non-recognition rules
MCQ’s with solutions
ICMAP & CA Mod C past papers theoretical questions

PART - I (For CAF-6 and ICMAP Students)

DEPRECIATION
1. Depreciation
Where a person is using depreciable asset to derive income from business, then he shall be allowed to deduct
depreciation of the depreciable asset from his income from business.
2. Depreciable asset [U/s 22(15)]
Any tangible moveable or immovable property (other than unimproved land) or structural improvement to immoveable
property, owned by a person that;
 has normal useful life of more than one year;
 is likely to lose value as a result of normal wear and tear or obsolescence; and
 is used by the person for his business purposes (wholly or partly)
but shall not include any tangible movable property, immovable property, or structural improvement to immovable
property in relation to which a deduction has been allowed under another section of this Ordinance for the entire cost of
the property or improvement in the tax year in which the property is acquired or improvement made by the person;
The depreciable asset includes building, plant and machinery, furniture and fixtures, computer hardware, technical
books, vehicles, air-craft, ships, below ground installation, offshore platforms and production installation in mineral oil
concerns.
Structural Improvement
Structural improvement in relation to immovable property includes any building, road, driveway, car park, railway line,
pipeline, bridge, tunnel, airport runway, canal, dock, wharf, retaining wall, fence, power lines, water or sewerage
pipes, drainage, landscaping or dam.

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3. Eligible Depreciable asset [U/s 23(5)]

All depreciable assets are eligible depreciable assets except following:
(a) Any road transport vehicle not plying for hire. (Trains and busses are example of vehicles plying for hire.)
(b) Furniture and fittings
(c) Any plant and 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

Particulars to be furnished to claim depreciation / amortisation [Rule 12]

An allowance for depreciation and amortization shall be allowed u/s 22, 23 and 24 on furnishing to CIR the following
particulars and information with the return of income for the tax year:
 Description of each depreciable asset and intangible.
 The extent of part used for business
 In case of acquisition during the tax year, the date of acquisition
 The tax WDV of each asset at beginning of tax year
 The amount of capital expenditure incurred on addition, alteration, improvement and extensions
 Total value of each asset on which depreciation is allowable
 WDV at beginning add: capital expenditure during tax year less: initial deprecation allowed, rates and amount
of initial and normal depreciation stating separately, normal useful life for each intangible, total depreciation or
amortization allowed for tax year
 WDV of each depreciable asset and the cost of asset or its remaining useful life. and
 On disposal of asset the sale proceed of the asset disposed of with WDV at beginning of tax year and the
excess or deficit on disposal.
Practically there is a separate annexure for furnishing of above information that is filed along-with the return of
income.
4. Conditions for leasing companies for claim of depreciation deduction [U/R 224]
The following conditions shall be fulfilled by a leasing company or a modaraba to claim deduction for depreciation on
lease of depreciable assets;-
(i) The leasing company is engaged principally in the business of leasing of assets and has been issued a licence
by the SECP to operate under the terms and conditions specified therein; and
(ii) the leasing company or a modaraba doing leasing business undertakes that where a motor vehicle is given on
lease, the purchase value thereof shall be restricted to the amount specified in the 3rd Schedule to the
Ordinance, for the purposes of claiming depreciation or the expenditure on such lease.

CALCULATION OF DEPRECIATION:
Depreciation shall be allowed only on depreciable assets. Rules regarding calculation of depreciation are as follows:
5. Where an asset not used for the whole of the year:
The depreciation on such asset shall be charged for the whole year e.g. assets used partly on seasonal basis in
sugar industry. [U/s 22(1)]
6. Where the useful life of an asset is one year:
No depreciation allowance shall be allowed however renewal or replacement cost shall be allowed as revenue
expenditure. [U/s 22(15)]
7. Rates of depreciation:
Depreciation shall be computed by applying the following rates against the written down value of 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) and machinery and plant, Motor vehicles (all types), ships, technical 15%
or professional books.
3. Computer hardware including printer, monitor and allied items, Machinery and Equipment used 30%
in manufacture of IT products, aircrafts and aero engines, Aerial photographic apparatus.

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4. In case of mineral oil concerns the income of which is liable to be computed with the rules in
Part I of the Fifth Schedule.
Below ground installations 100%
Offshore platforms and production installations. 20%
5. A ramp build to provide access to persons with disabilities not exceeding Rs.250,000 each. 100%

7.1 Written down value at the beginning of the year [U/s 22(5)]
The above mentioned rates are applied on the written down value (WDV) of the asset at the beginning of the year,
which is determined as below:
(a) In case of asset acquired during the year:
Cost xxx
Less: Initial allowance (if asset is eligible depreciable asset) (xxx)
WDV at the beginning of the year xxx
(b) In any other case:
Cost xxx
Less: Initial allowance allowed in previous years (xxx)
Less: Depreciation allowed in previous years (xxx)
WDV at the beginning of the year xx
7.2 Asset partly used for business:
Where an asset is partly used for business and partly for some other purpose then:
(a) Depreciation shall be allowed in proportion to the use of asset in the business [U/s 22(3),
(b) However, WDV shall be calculated in the normal way [U/s 22(6)].
Following example will demonstrate this situation:
Example - 1: 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
8. Initial allowance [U/s 23]
 A person who places an eligible depreciable asset into service in Pakistan for the first time in a tax year
shall be allowed a deduction of 25% for plant and machinery and 15% for building where the asset is used
by the person for the purposes of his business for the first time or the tax year in which commercial
production is commenced, whichever is later.
 A deduction allowed to a leasing company or an investment bank or a modaraba or a scheduled bank or a
development finance institution in respect of assets owned and leased to another person shall be deducted
only against the leased rental income derived in respect of such assets.
 "Eligible depreciable asset" means a depreciable asset other than -
 any road transport vehicle unless the vehicle is plying for hire;
 any furniture, including fittings;
 any plant or machinery that has been used previously in Pakistan; or
 any plant or machinery that has been allowed as deduction under another section for the entire cost of the
asset.
 Important note: It is worthwhile to mention here that under this section there is no concept of number of days
because either the initial allowance shall be allowed or not allowed.

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Example 2: In tax year 2015, 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
(Rupees)

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
9. First year allowance [U/s 23A]
 With effect from 01-07-2008 first year allowance @ 90% of the cost shall be allowed in respect of plant,
machinery and equipment installed by any industrial undertaking set up in specified rural and
underdeveloped areas or engaged in the manufacturing of cellular mobile phones and qualifying for
exemption under clause (126N) of Part I of the Second Schedule and owned and managed by a
company in lieu of initial allowance on "eligible depreciable assets". Except the above the provisions of the
Initial Allowance shall mutatis mutandis apply. The Federal Government may notify "specified areas" for the
purposes of this section.
 Important note: It is worthwhile to mention here that under this section there is no concept of number of days
because either the first year allowance shall be allowed or not allowed.
Example 3: In tax year 2015, A new plant for Rs.1,200,000 was purchased by an industrial undertaking set up in
area specified by Federal Government for first year allowance. Calculate closing WDV of the plant.
Solution: In this case, first year allowance @ 90% shall be allowed instead of initial allowance.
Rs.
First year allowance (1,200,000 x 90%) 1,080,000
Tax depreciation ((1,200,000 – 1,080,000) x 15%) 18,000
Closing WDV (1,200,000 – 1,080,000 – 18,000) 102,000
10. Accelerated depreciation to alternate energy projects [23B and Part-II of Third Schedule]
Any plant, machinery and equipment installed for generation of alternate energy by an industrial undertaking set up
anywhere in Pakistan and owned and managed by a company shall be allowed first year allowance in lieu of initial
allowance u/s 23, at the rate of 90% against the cost of the eligible depreciable assets put to use after July 01, 2009.
A deduction allowed to a leasing company or an investment bank or a modaraba or a scheduled bank or a
development finance institution in respect of assets owned and leased to another person shall be deducted only
against the leased rental income derived in respect of such assets.
"eligible depreciable asset" means a depreciable asset other than -
(a) any road transport vehicle unless the vehicle is plying for hire;
(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.
Important note: It is worthwhile to mention here that under this section there is no concept of number of days
because either the accelerated depreciation shall be allowed or not allowed.
Chart presentation of initial allowance, First year allowance & accelerated depreciation to alternate energy projects:
11. Intangibles [U/s 24]
Introduction:
The nomenclature of this term gives the impression that it only includes the cost of non-physical assets. However,
definition of this term under the tax law is far wider than this general impression. The definition of intangible in section
24 of the Ordinance is as under:

"intangible" means any patent, invention, design or model, secret formula or process, copyright, trade mark, scientific
or technical knowledge, computer software, motion picture film, export quotas, franchise, licence, intellectual property,
or other like property or right, contractual rights and 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).

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The above definition reveals that it also includes any expenditure that provides an advantage or benefit for a period of
more than one year. Therefore, amortization of any cost which has useful life of a period exceeding on year is
allowed.
Intangible eligible for amortization
 A person shall be allowed an amortisation deduction in a tax year for the cost of the person's intangibles;
 that are wholly or partly used by the person in the tax year in deriving income from business
chargeable to tax and
 that has a normal useful life exceeding one year.
 The term cost of intangible in this section means any intangible, means any expenditure incurred
in acquiring or creating the intangible, including any expenditure incurred in improving or renewing
the intangible;
 Limitation on amortization and method to compute amortization:
 No deduction shall be allowed where a deduction has been allowed under another section of this
Ordinance for the entire cost of the intangible.
 The total deductions allowed to a person under this section in the current tax year and all previous
tax years shall not exceed the cost of the intangible.
 Formula to compute amortization deduction is as under:
Cost of intangible / Normal useful life of the intangible in whole years
 Where an intangible asset useful life is more than ten years or not ascertainable:
An intangible with a normal useful life of more than ten years or that does not have an ascertainable
useful life shall be treated as if it had a normal useful life of ten years.
 Where an asset not used for the whole of the year:
 Where an intangible is used in a tax year partly in deriving income from business chargeable to tax
and partly for another use, the deduction allowed for that year shall be restricted to the fair
proportional part of the amount that would be allowed if the intangible were wholly used to derive
income from business chargeable to tax.
 Where an intangible is not used partly only to derive income from business chargeable to tax, the
amortization shall be computed according to the following formula, namely-
Amount of amortization x Number of days in the tax year the intangible is used in deriving
income from business chargeable to tax / Number of days in the tax year
 Amortization in case of disposal:
 Where, in any tax year, a person disposes of an intangible, no amortization deduction shall be
allowed under this section for that year;
 Gain / loss on disposal of intangibles:
 if the consideration received by the person exceeds the WDV of the intangible at the time of
disposal, the excess shall be income of the person chargeable to tax in that year under the
head "Income from Business"; or
 if the consideration received is less than the WDV of the intangible at the time of disposal,
the difference shall be allowed as a deduction in computing the person's income chargeable
under the head "Income from Business" in that year.
 WDV in case of disposal of and intangible asset:
 The WDV of an intangible at the time of disposal shall be the cost of the intangible reduced by
the total deductions allowed to the person in respect of the intangible or, where the intangible is
not wholly used to derive income chargeable to tax, the amount that would be allowed if the
intangible were wholly so used; and
 The consideration received on disposal of an intangible shall be determined in accordance with
section 77. An intangible that is available for use on a day (including a non-working day) is
treated as used on that day.
Chart presentation of depreciation under section 22 and intangibles under section 24:

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12. Pre-commencement expenditure [U/s 25]

Particulars Pre-commencement expenditure U/S 25

(1) (2)

1. To whom available A person shall be allowed deduction for the any above related expenditure.

2. Basis 20% straight line method

3. Limitation on pre-  The total deductions allowed under this section in the current and all previous
commencement tax years shall not exceed the amount of the expenditure.
expenditure
 No deduction shall be allowed for any pre-commencement expenditure where a
deduction has been allowed under another section of this Ordinance for the entire
amount of the pre-commencement expenditure.

4. Pre-commencement "Pre-commencement expenditure" means any expenditure incurred;

expenditure
 before the commencement of a business wholly and exclusively to derive income
chargeable to tax,
 cost of feasibility studies,
 construction of prototypes
 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 / SPECIAL POINTS ON DISPOSAL OF
DEPRECIABLE AND NON DEPRECIABLE ASSETS:
In case of disposal of the asset, following rules shall apply:
a. Total deduction (normal and initial allowance) allowed to a person during the period of ownership of a depreciable
asset shall not exceed the cost of the asset [U/s 22(7)].
b. No depreciation shall be allowed in the year of disposal [U/s 22(8)].
c. Gain / loss on disposal of depreciable asset;
 If the consideration received against the disposal of depreciable asset is more than its WDV, then excess
shall be chargeable to tax under the head “income from business” [U/s 22(8a)].
 If consideration received against the disposal of a depreciable asset is less than WDV, then the difference
shall be deducted from income chargeable to tax under the head “income from business” [U/s 22(8b)].
d. Where an asset was partly used for business and partly for some other purpose, then WDV at the time of
disposal shall be increased by depreciation not allowed on account of non business use [U/s 22(9)]. (See example
4)
e. If the cost of passenger transport vehicle not plying for hire is more than Rs. 2.5 million, then it shall be
considered equal to Rs.2.5 million and in this case disposal consideration shall also be reduced as per following
formula [U/s 22(10)]: (See example 5)
(Amount received on disposal of the vehicle x 2.5 million) / Actual cost of vehicle
Note: If the passenger transport vehicle in plying for hire then there is no limitation on cost of transport vehicle under
the aforesaid section.
f. The cost and consideration received in respect of a depreciable asset received as already discussed shall be
determined u/s 75 to 79 of the Income Tax Ordinance, 2001 [U/s 22(11)].
g. In case of disposal of immovable property, where consideration received exceeds the cost of asset then
consideration received shall be treated as the cost of asset [U/s 22(13)]. (See example 6)
h. Where a person exports an asset after using in Pakistan, then consideration received shall be treated as equal to
the cost of asset [U/s 22(14)]. (See example 7)
Example - 4: Consider the situation of example 1. What would be the treatment if asset is sold in year 4 for Rs. 500,000.

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Solution: Rs.

Consideration received 500,000

Less: WDV
WDV at the beginning of year 4 230,296
Depreciation not allowed in year 2 23,906
254,203
Income chargeable to tax 245,797

Important Note: It is worthwhile to mention here that although section 22(8)(a) states that the profit on disposal of
depreciable asset is equal to the difference between sale price and written down value of depreciable asset, however
the same shall be read with the limitations imposed under this section by sub section 13(d) and 14 on various assets
disposal.
Example - 5: 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 - 6: From the following information compute gain on sale of immovable property (including building that is for
personal use or otherwise non depreciable):
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.
Consideration received 500,000
Cost of asset (treated as equal to consideration received) 500,000
Difference Nil

Example 7: From following information compute gain on sale of asset which has been exported after using in Pakistan:
Cost Rs.100,000, WDV Rs.40,000, Consideration received Rs.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

A deduction allowed on account of normal depreciation to a leasing company or an investment bank or a modaraba or a
scheduled bank or a development finance institution in respect of assets owned and leased to another person shall be
deducted by the aforesaid respective persons. [U/s 22(13)(c)]
The total of deductions u/ss 22 to 23B allowable to a leasing company or an investment bank or a modaraba or a
scheduled bank or a development finance institution in respect of assets owned and leased to another person shall be
deducted only against the leased rental income derived in respect of such assets.
Example: From following information compute the depreciation admissible to the leasing company for two years;
- Lease rentals per year 1,200,000
- Cost of machinery 5,000,000
- Lease period 5 years
- Initial allowance 1,250,000
- Annual depreciation year 1 (15% of WDV) 562,500

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- Annul depreciation year 2 (15% of WDV) 478,125

- Annul depreciation year 3 (15% of WDV) 270,938
- Annul depreciation year 4 (15% of WDV) 406,406
- Annul depreciation year 5 (15% of WDV) 345,445
Solution: The computation of depreciation for five years is as under:
Rs.
Year 1 Depreciation for the year 1,812,500
Less annual lease rentals 1,200,000
Balance depreciation C/F 612,500
Year 2 Add: depreciation for the year 478,125
Total depreciation 1,090,625
Less annual lease rentals 1,200,000
Balance depreciation C/F -

Important note: From the second year to onwards the lessor is entitled to claim full amount of depreciation as the lease
rentals exceeds from the total depreciation from third year to onwards.

DISPOSAL AND ACQUISITION OF ASSETS

Disposal and acquisition of assets [U/s 75]

(A) Disposal of asset arises under the following cases:

S. No. Disposal of assets U/S 75

(1) (2)
1. A person who holds an asset shall be treated as having made a disposal of the asset at the time the
person parts with the ownership of the asset or when an asset is sold, exchanged, transferred or
distributed or cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered.
2. The transmission of an asset by succession or under a will shall be treated as a disposal of the asset
by the deceased at the time asset is transmitted.
3. The application of a business asset to personal use shall be treated as a disposal of the asset by the
owner of the asset at the time the asset is so applied.
4. Where a business asset is discarded or ceases to be used in business, it shall be treated to have
been disposed of.
5. A disposal shall include the disposal of a part of an asset.

(B) Acquisition of asset arises under the following cases:

S. No. Acquisition of assets U/S 75

(1) (2)
1. A person shall be treated as having acquired an asset at the time the person begins to own the asset,
including at the time the person is granted any right.
2. The application of a personal asset to business use shall be treated as an acquisition of the asset by the
owner at the time the asset is so applied.

Example: Distinguish between disposal and acquisition of asset under the following situations.
(a) Application of a business asset to personal use.
(b) Application of a personal asset to business use.
(c) Mr. Adnan sold a part of his business building for Rs. 1,000,000.
(d) There in no demand of Product-A produced by M/s Azeem and Co. Therefore proprietor discarded the
machinery which was used in production of Product-A.
(e) Factory building of AB and Co. was destroyed by earthquake.
(f) Mr. Amir exchanged his business vehicle for machinery.

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Solution:
(a) Application of business asset to personal use is treated as disposal of asset.
(b) Application of a personal asset to business use is treated as acquisition of asset.
(c) Disposal of a part of asset is treated as disposal of asset.
(d) When an asset is discarded, it is treated as disposal of asset.
(e) When an asset is destroyed / lost, it is also treated as disposal of asset.
(f) In this case, there is a disposal of vehicle and acquisition of machinery.
COST OF ASSETS UNDER VARIOUS SITUATIONS [U/S 76]

The Board may prescribe rules for determination of cost for any asset, however except otherwise provided in the Income
Tax Ordinance, 2001 the cost of an asset shall be determined as under.
1. Cost of an asset purchased:
The cost of an asset purchased by a person shall be the sum of the following amounts:-
 The total consideration given for the asset, including the FMV of any consideration in kind determined at the
time the asset is acquired;
 any incidental expenditure incurred in acquiring and disposing of the asset; and
 any expenditure incurred by the person to alter or improve the asset.
but shall not include any expenditure above that has been fully allowed as a deduction under this Ordinance.
Example: 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.
2. Cost where personal asset applied for business use The cost of an asset treated as acquired shall be the FMV
of the personal asset determined at the date it is applied to business use.
Example: Rs.
Cost of personal asset purchased 100,000
Book value of asset as on June 30, 2016 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,
2015 under the following situations:
A. If the fair market value of the personal asset as on June 30, 2016 is Rs.100,000.
B. If the fair market value of the personal asset as on June 30, 2016 is Rs.80,000.
C. If the fair market value of the personal asset as on June 30, 2016 is Rs.150,000.
Solution: In all the above cases the fair market value as on June 30, 2016 shall be taken as cost of asset irrespective
of its cost or book value for business purposes.
3. Cost of an asset produced or constructed
The cost of an asset produced or constructed by a person shall be the total cost incurred by the person in producing
or constructing the asset plus any expenditure in acquiring and disposing, alter or improving the asset incurred by the
person.
Example: 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

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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
4. Cost of an asset acquired through foreign currency
Where an asset has been acquired by a person with a loan denominated in a foreign currency and before full and
final repayment of the loan, there is an increase or decrease in the liability of the person under the loan as expressed
in Rupees, the amount by which the liability is increased or reduced shall be added to or deducted from the cost of
the asset, 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: On July 1, 2015, Mr. Zahid acquired a machine with loan in foreign currency ($50,000) equivalent to
Rs.4,000,000. On June 30, 2016, exchange rate was ($1 = RS. 85). Calculate the amount of tax depreciation and
initial allowance for tax year 2016.
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
Important note: Although the plain reading of the section states that any increase and decrease in exchange rate
before the final settlement of loan shall either be added or deducted from the cost of asset but the position is not so
as only that difference in exchange rate shall be recognized that will arise on actual repayment or availing further
foreign currency loan. The mere change in exchange rate without any repayment or acquiring loan will have no effect
on the cost of asset.
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.
The above position may be examined from the FBR Circular 3 of 2009 dated 17-07-2009 & CBR’s Circular No.3 of
1991 dated March 09, 1991 that is also approved by the ATIR vide ITA No.1448/HQ 1989-90 dated 15Th November,
1990.
It is worthwhile to mention here that the above circular is still saved by virtue of provisions of section 239(10) of the
ITO, 2001.
5. Cost of an asset acquired under hedging agreement
In determining whether the liability of a person has increased or decreased as above the consideration shall be taken
of the person's position under any hedging agreement relating to the loan.
Example: On July 01, 2014, 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, 2015, exchange rate was ($1 = RS. 85). Calculate the
amount of tax depreciation and initial allowance for tax year 2015.
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. Cost of an asset sold in parts
Where a part of an asset is disposed of by a person, the cost of the asset shall be apportioned between the part of
the asset retained and the part disposed of in accordance with their respective FMV’s determined at the time the
person acquired the asset.
Example: On July 01, 2015, Mr. Zahid acquired a building for Rs. 500,000. In May, 2015 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.

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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

7. Cost of an asset acquired from the amount chargeable to tax

Where the acquisition of an asset by a person is the derivation of an amount chargeable to tax, the cost of the
asset shall be the amount so charged plus any amount paid by the person for the asset.
8. Cost of an asset acquired from the amount exempt from tax
Where the acquisition of an asset by a person is the derivation of an amount exempt from tax, the cost of the
asset shall be the exempt amount plus any amount paid by the person for the asset.
Example: 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.
9. Cost of an asset acquired from the grant not chargeable and chargeable to tax
The cost of an asset does not include the amount of any grant, subsidy, rebate, commission or any other
assistance (other than a loan repayable with or without profit) received or receivable by a person in respect of the
acquisition of the asset, except to the extent to which the amount is chargeable to tax under this Ordinance.
Example: 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]

The Board may prescribe rules for determination of consideration received for any asset, however except otherwise provided
in the Income Tax Ordinance, 2001 the disposal consideration shall be determined as under.
10. Disposal consideration on sale:
The consideration received by a person on disposal of an asset shall be the total amount received by the person
for the asset or the FMV thereof, whichever is the higher, including the FMV of any consideration received in kind
determined at the time of disposal.
Example: 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

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11. Disposal consideration for lost or destroyed asset

Where an asset has been lost or destroyed by a person, the consideration received for the asset shall include any
compensation, indemnity or damages received by the person under:-
 an insurance policy, indemnity or other agreement;
 a settlement; or
 a judicial decision.
Example: Mr. Jamshed’s factory building was destroyed because of earthquake during the tax year 2016. 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
12. Disposal consideration for business asset applied to personal use or discarded or ceased to be used
The consideration received for an asset treated as disposed shall be the FMV of the asset determined at the time it
is applied to personal use or discarded or ceased to be used in business, as the case may be.
Example: In tax year 2015 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
13. Disposal consideration in respect of leased assets
The consideration received by a scheduled bank, financial institution, modaraba, or leasing company approved by the
CIR in respect of an asset leased by the company to another person shall be the residual value received by the
leasing company on maturity of the lease agreement provided that the residual value plus the amount realized
during the term of the lease towards the cost of the asset is not less than the original cost of the asset,

Example: 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 and 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.
14. Disposal consideration in respect combined sale of two or more assets
Where two or more assets are disposed of by a person in a single transaction and the consideration received for
each asset is not specified, the total consideration received by the person shall be apportioned among the assets
disposed of in proportion to their respective FMV’s determined at the time of the transaction.
Example: In tax year 2016 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:
Car-1 700,000, Car-2 300,000
Required: Compute gain on sale of these two cars.

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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.
15. Determination of consideration received by board
Notwithstanding anything contained in this section, the Board may prescribe rules for determination of consideration
received for any asset.

PART - II (For CA Mod F and ICMAP Students)

NON ARMS’ LENGTH TRANSACTIONS AND NON RECOGNITION RULES

1. Non-arm's length transactions [U/s 78]

Where an asset is disposed of in a non-arm's length transaction –
(a) the person disposing of the asset shall be treated as having received consideration equal to the FMV of the
asset determined at the time the asset is disposed; and
(b) the person acquiring the asset shall be treated as having a cost equal to the amount determined under (a)
above.

Example: Mr. Jamshed sold his factory building to his relative Mr. Amir for Rs. 500,000 i.e. transaction was non-
arm’s length transaction. 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 equal to FMV of building both for buyer and seller
irrespective of sale proceeds) 1,200,000
Less: WDV 600,000
Gain on disposal 600,000

2. Non-recognition rules for gain or loss on disposal [U/s 79]

No gain or loss shall be taken to arise on the disposal of an asset –

(a) between spouses under an agreement to live apart;
(b) by reason of the transmission of the asset to an executor or beneficiary on the death of a person;
(c) by reason of a gift of the asset;
(d) by reason of the compulsory acquisition of the asset 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;
(e) by a company to its shareholders on liquidation of the company; or
(f) by an AOP to its members on dissolution of the association where the assets are distributed to members in
accordance with their interests in the capital of the association-
Provided the above provisions shall not apply where the person acquiring the asset is a non-resident person at
the time of the acquisition.
In the above all the cases the person acquiring the asset shall be treated as –
(a) acquiring an asset of the same character as the person disposing of the asset; and
(b) acquiring the asset for a cost equal to the cost of the asset for the person disposing of the asset at the time of
the disposal.

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Cost of replacement assets under compulsory acquisition:

The person’s cost of a replacement asset referred to in clause (d) above shall be the cost of the asset disposed of
plus the amount by which any consideration given by the person for the replacement asset exceeds the
consideration received by the person for the asset disposed of. The formula for the above is as under:
Cost of asset disposed
Plus consideration given Less consideration received on disposed of asset
Example: Explain in which of the following cases gain or loss on disposal shall not be recognized:

a. Mr. Adnan gave his business car to his wife under an agreement to live apart.
b. Business car of Mr. Ikram was completely destroyed in an accident in current tax year and he received claim
from insurance company.
c. Mr. Adnan gave his business car to his wife under an agreement to live apart. His wife is a non-resident in tax
year 2015.
d. A company disposed of its assets to its shareholders on liquidation of the company.
e. An AOP disposed of its assets to its members on dissolution of the AOP in accordance with their interest in the
capital of the association, all the members are non-resident.
f. Mr. Amir gave his factory to his brother as gift. His brother is a non-resident.
Solution:
a. this case no loss or gain shall be recognized.
b. this case gain or loss shall be recognized which is equal to insurance claim received less WDV of the car.
c. this case gain or loss shall be recognized as car was given to non-resident person.
d. gain or loss shall be recognized.
e. n or loss shall be recognized as the members are non-resident.
f. n or loss shall be recognized as the brother is non-resident.

MASTER QUESTION
Briefly explain the tax treatment in respect of each of the following independent situations:
a) Aiza (Pvt.) Ltd has re-valued its Building in accordance with International Accounting Standards and
consequently charged depreciation on the re-valued amount.
b) Aiza (Pvt.) Ltd during the year has opened an overseas office in France and has claimed initial allowance and
depreciation on eligible depreciable assets purchased by the office.

c) Uzair Limited has charged impairment in respect of one of its depreciable assets. The Commissioner is of the
view that impairment expense will not be allowed as an expense.

d) Uzair Limited has discontinued a major product line of its business and envisages selling off the machinery
related to this product line over a period of one to two years to get the right price. Uzair Ltd wants to claim
depreciation on the idle machinery until disposed of.
e) Ms. Sana sells a number of personal vehicles in a tax year and makes a significant amount of profit in the
process. She is of the view that the said income is exempt from tax.

f) XYZ Ltd has recorded a gain on revaluation of its foreign currency balances at the year end. The gain
comprises of both realized and unrealized amount.
g) On July 2014, Ms. Sana purchased a vehicle not plying for hire amounting to Rs. 4,210,000 to be used solely
for the purpose of her business. While preparing the tax return she has claimed initial allowance and
depreciation as per the prescribed rates given in the Income Tax Ordinance, 2001 for the full year on
Rs.4,210,000.

h) In August 01, 2014 Mr. Azhar purchased accounting software amounting to Rs. 5 million for his business. The
software has a useful life of 13 years. Mr. Azhar has charged full year amortization on straight line basis over
the useful life of the software.

i) Entertainment expense payable amounting to Rs. 210,000 has been debited to profit & loss account of ABC
Ltd. The company has not deducted any tax on the said expense.

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j) ABC (Pvt.) Ltd has charged depreciation according to the rates admissible under the tax law amounting to Rs.
125,000 on machinery taken on a finance lease from a scheduled bank in August 2009. Lease rentals paid
during the tax year 2015 amounted to Rs. 220,000. The leased machinery was transferred to owned assets
on maturity on 30 April 2015. On maturity the accounting WDV of the assets was Rs. 500,000, market value
was Rs. 800,000 whereas residual value of the asset was Rs. 50,000.

Solution:
a) Deduction for depreciation is associated with tax written down values of assets calculated with reference to
specific provisions. Accounting revaluation of assets has no bearing on tax written down value of assets.
Consequently, depreciation will be allowed on tax written down values of building without taking into account
the effect of revaluation. [Ref:S22(5)]
b) Initial allowance is only available on assets used in Pakistan. Accordingly, the company will not be entitled to
deduction on account of initial allowance on assets purchased by the branch for use in business outside
Pakistan. The company will however be allowed to claim normal depreciation on all depreciable assets. [Ref:
S 23 (1) and S 22]
c) The contention of the Commissioner is correct. Charge for impairment of fixed assets is not a tax deductible
expense. As the impairment charge will be ignored for tax purpose, the written down value of assets will not
be reduced by the charge and depreciation will be calculated as if no impairment has taken place.
d) One of the criteria for an asset to qualify as ‘depreciable asset’ is that it should be used partly or wholly for
deriving business income. As the product line has been discontinued and the machinery is no more in use,
therefore, it ceases to qualify as a ‘depreciable asset’. Accordingly, no deduction will be allowed for
depreciation. [Ref: S 22 and S75(3A)]
e) Income from sale of personal motor vehicles is not taxable under the head Capital Gains. If the vehicles are
bought and sold with the motive of trade, the resultant gain will constitute business income. However, vehicle
intended for personal use are excluded from the definition of capital assets. [Ref: S 37(5) (d)]
f) Unrealized gain on revaluation of foreign currency balances is notional income in nature and is not liable to
tax. Foreign exchange gains will be included in the taxable income for the tax year in which realized.
g) Full year depreciation should be charged on restricted value of Rs. 2,500,000. As vehicle is not an eligible
depreciable asset, therefore, initial allowance cannot be claimed.
h) Amortization should be allowed for 91 days over the useful life of 10 years only. (S. 24(4), 24(6))

i) Tax is required to be deducted at the time of payment. Since the expense is still payable, therefore, company
has rightly claimed the said expense.

j) In case of assets taken on finance lease, lease rentals are an admissible deduction instead of depreciation.
Further, as the asset was transferred during the tax year 2015, therefore, full year depreciation will be allowed
on the residual value of the asset. No initial allowance will be allowed as the asset was already in use. [(S. 22,
S.28(1)(B),S23)].

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MULTIPLE CHOICE QUESTIONS

Q.1. Pre commencement expenditure is a_______________.
(a) Fictitious asset
(b) Depreciable asset
(c) Eligible depreciable asset
(d) None of these
Q.2. Disposal consideration on sale of an asset is
(a) Amount received on sale
(b) FMV
(c) Lower of FMV and amount received
(d) Higher of FMV and amount received
Q.3. Disposal consideration in case of lost asset comprises of______________.
(a) Salvage value
(b) Insurance claim
(c) both ‘a’and ‘b’
(d) none of these
Q.4. An approved leasing company is the one approved by _________________.
(a) FBR
(b) SECP
(c) CIR
(d) Provincial government
Q.5. Depreciation calculated under _________ is allowed as deduction against business income.
(a) First schedule
(b) Second schedule
(c) Third schedule
(d) Fourth schedule
Q.6. FMV is determined in relation to _______________.
(a) Property
(b) Services
(c) Perquisites
(d) All of these
Q.7. In case of an asset partly used only for business then depreciation will be allowed as deduction on _________basis.
(a) Full year
(b) Half year
(c) Proportionate
(d) Not allowed
Q.8. The depreciation charged in case of non-depreciable asset used wholly for business would be _______.
(a) Zero
(b) Half
(c) Full
(d) Proportionate
Q.9. The question of depreciation allowance does not arise if the income from business is ____________.
(a) Permanently exempt
(b) Exempt for specific period
(c) not exempt
(d) all of the above

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Q.10. Initial allowance on eligible depreciable assets (plant and machinery) is allowed at the rate of _________of asset.
(a) 40% of cost
(b) 40% of FMV
(c) 50% of WDV
(d) 25% of Cost
Q.11. In case of assets with a useful life of one year, depreciation is ___________allowed:
(a) Not
(b) on full year basis
(c) Proportionate basis
(d) All of these
Q.12. The initial allowance for depreciation is allowable for ___________.
(a) Depreciable assets
(b) Eligible depreciable assets
(c) Intangibles
(d) All of these
Q.13. Depreciation u/s 22 on assets partly for personal and partly for business use is allowable on basis
(a) Monthly
(b) Half yearly
(c) Quarterly
(d) Annual
(e) proportionate
Q.14. Where an intangible is not used for the business for the whole year, then amortization deduction would be on
______basis.
(a) Half of the charge
(b) Full year charge
(c) Proportionate
(d) None of these
Q.15. A person shall be allowed a deduction of amortization of pre-commencement expenditure on straight line basis
at_______.
(a) 10%
(b) 20%
(c) 25%
(d) 50%
Q.16. Amortization in any case cannot be___________ to / from total cost of intangible.
(a) Equal
(b) Less
(c) Higher
(d) None of these
Q.17. A deduction for amortization is allowed only when the intangible has a useful life of _________.
(a) Less than one year
(b) Equal to one year
(c) Higher than one year
(d) Indefinite period
Q.18. In case of export of an asset, disposal consideration would be treated as the __________________.
(a) Cost of asset
(b) FMV at the time of export
(c) Consideration received
(d) None of these

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Q.19. The cost of passenger transport vehicles plying for hire for Tax year 2011 for depreciation purposes would be equal
to ____.
(a) Actual cost
(b) Rs. 2,500,000
(c) Higher of actual cost and 2,500,000
(d) Lower of 2,500,000
Q.20. Initial allowance for depreciation on passenger transport vehicles not plying for hire is _______________.
(a) Allowed in the first year
(b) Allowed in last year
(c) Not allowed
(d) none of these
Q.21. In case of intangibles not used for the whole year, amortization allowed would be ___________.
(a) or the full year
(b) Not to charged
(c) Charged on number of days basis
(d) none of the above
Q.22. Any gain or loss on disposal of intangible shall be treated as income or deduction under income from ___________.
(a) Business income
(b) Other sources
(c) Capital gains
(d) None of these
Q.23. When an asset is sold, exchanged, transferred or distributed or cancelled, redeemed, relinquished, destroyed, lost,
expired or surrendered, it shall be treated as ___________________.
(a) Acquisition of asset
(b) disposal of an asset
(c) none of the above
Q.24. The application of a business asset to personal use shall be treated as _______________________.
(a) Acquisition of asset
(b) disposal of an asset
(c) none of the above
Q.25. The cost of an asset purchased by a person shall be_____________________.
(a) Total consideration given
(b) incidental expenditure in acquiring and disposing
(c) any expenditure to alter or improve the asset
(d) all of these
(e) none of the above
Q.26. Where an asset has been acquired with a foreign currency loan the cost of an asset shall be fluctuated due to
__________________.
(a) increase in exchange rate without payment of loan
(b) decrease in exchange rate without payment of loan
(c) No effect unless loan is repaid
Q.27. Where the person disposing of the asset under non-arm’s length transaction, the consideration shall be treated as
having received equal to _______________________.
(a) Actual consideration received
(b) Fair Market Value
(c) none of the above.
Q.28. Depreciation shall be computed on Building (all types) against the written down value at the beginning of the year at
the rate of _______________.
(a) 10%

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(b) 15%
(c) 30%
(d) 100%
(e) 20%
Q.29. Depreciation shall be computed on Furniture (Including fitting) and machinery and plant, Motor vehicles (all types),
ships, technical or professional books against the written down value at the beginning of the year at the rate of
_______________.
(a) 10%
(b) 15%
(c) 30%
(d) 100%
(e) 20%
Q.30. Depreciation shall be computed on computer hardware including printer, monitor and allied items, machinery and
equipments used in manufacture of IT products, aircrafts and aero engines, Aerial photographic apparatus against the
written down value at the beginning of the year at the rate of _______________.
(a) 10%
(b) 15%
(c) 30%
(d) 100%
(e) 20%
Q.31 Initial allowance on building is allowed at ____% of cost of building.
(a) 50
(b) 40
(c) 15
(d) 25
Q.32 Expenditures for acquiring land is included in _____.
(a) cost of land
(b) WDV of land
(c) depreciation of land
(d) all of above
Q.33 Depreciation in respect of asset acquired on lease is _________.
(a) admissible
(b) inadmissible
(c) equal to tax depreciation
(d) none of above
Q.34 Full year depreciation is charged in the year of _____.
(a) disposal
(b) destruction
(c) acquisition
(d) all of above
Q.35 Amount of depreciation allowed to ________ is restricted to the lease rental income derived during the year in
respect of leased assets.
(a) leasing companies
(b) individuals
(c) AOP
(d) all of above
Q.36 The cost of asset is allowed as expense where the asset with a useful life is ___ one year.
(a) less than or equal to
(b) more than
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(c) none of above

Q.37 The amount of any grant receivable in respect of acquisition of asset shall be included in the cost of such asset
where such grant is _______.
(a) exempt
(b) taxable
(c) none of above
Q.38 The cost of land and the cost of immovable property on such land are shown ________.
(a) separately
(b) together
(c) in profit and loss account
(d) all of above
Q.39 The consideration received on disposal of an immovable properly shall be treated as its ___ if it exceeds the original
cost of asset.
(a) cost
(b) WDV
(c) depreciation
(d) all of above
Q.40 The ___ of an asset is treated as disposal consideration in case of export of a depreciable asset.
(a) cost
(b) WDV
(c) depreciation
(d) all of above
Q.41 Value of motor vehicle not plying for hire is restricted to Rs. ____ for income tax purposes.
(a) 1,500,000
(b) 2,000,000
(d) 2,500,000
(d) 3,000,000
Q.42 _____ of a discarded asset at the date when it is discarded is treated as its disposal consideration of the discarded
asset.
(a) cost
(b) WDV
(c) FMV
(d) accumulated depreciation
Q.43 When an asset is acquired with a loan in foreign currency and exchange rate fluctuates before any repayment then
the difference on account of foreign currency fluctuation should be ___ for depreciation purposes.
(a) ignored
(b) taken into account
(c) exempt
(d) none of above
Q.44 When an asset is wholly used in the tax year and sold at the end of year, then _____ shall be charged.
(a) full year depreciation
(b) no depreciation
(d) 50% depreciation
(e) none of above
Q.45 Rate of depreciation for building is 10% of __________.
(a) cost
(b) accumulated depreciation
(c) WDV
(d) cost of land

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Q.46 The rate of depreciation for a ramp build to provide access to persons with disabilities not exceeding Rs.250,000
each is _____%.
(a) 50
(b) 70
(c) 80
(d) 100
Q.47 The normal useful life of an intangible asset is restricted upto ___ years from the date of purchase, where the life of
the intangible is either more than 10 years or not determinable.
(a) 20
(b) 10
(c) 5
(d) 2
Q.48 While considering non arm’s length transaction it ____ is considered as consideration received.
(a) WDV
(b) FMV
(c) cost
(d) all of above
Q.49 Where the consideration received is against assets sold in bulk, it would be apportioned on the basis of _________of
respective assets.
(a) WDV
(b) FMV at the date of disposal
(c) cost
(d) all of above
Q.50 _____ of an asset includes transfer of an asset between spouses under an agreement to live apart.
(a) acquisition
(b) destruction
(c) disposal
(d) none of above
Q.51 Tax depreciation is also known as _________ depreciation.
(a) statutory
(b) accounting
(c) actual
(d) all of above

ANSWERS
1 (a) 2 (d) 3 (b) 4 (c) 5 (c)
6 (d) 7 (a) 8 (a) 9 (a) 10 (d)
11 (a) 12 (b) 13 (e) 14 (c) 15 (b)
16 (c) 17 (c) 18 (a) 19 (a) 20 (c)
21 (c) 22 (a) 23 (b) 24 (b) 25 (d)
26 (c) 27 (b) 28 (a) 29 (b) 30 (c)
31 (c) 32 (a) 33 (b) 34 (c) 35 (a)
36 (a) 37 (b) 38 (a) 39 (a) 40 (a)
41 (d) 42 (c) 43 (a) 44 (b) 45 (c)
46 (d) 47 (b) 48 (b) 49 (b) 50 (c)
51 (a)

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ICMAP PAST PAPES THEORECTICAL QUESTIONS

Q. No 2(a) March 2015 In the light of section 24 of the Income Tax Ordinance, 2001:
(i) Define the term, intangibles.
(ii) Briefly explain that how the allowable deduction will be computed, if and intangible asset is not used for the whole
tax year in deriving income from business chargeable to tax?
Q. No 2(b) March 2015 Ms. Sara is a resident individual of Pakistan. She is moving to Canada and planning to sell all
assets of her business to Sigma (private) Limited, a resident company of Pakistan and a wholly owned company. Before
leaving Pakistan, Sara intends to file her income tax return and seeking your advice in respect of the conditions where no
gain or loss will be accounted for on disposal of her baseness to Sigma.

Required: Being a Tax consultant briefly state Ms. Sara regarding conditions where no gain or loss will be accounted for on
disposal of all the assets to Sigma as per section 95 of the income tax ordinance, 2001

Q. No. 2 (a) (i) Spring 2013 Define the term depreciable asset in accordance with the provisions of section
22(15) of the Income Tax Ordinance, 2001.

Q. No. 2 (a) (ii) Spring 2013 Considering the depreciable asset is used in a tax year partly for deriving
income from business chargeable to tax and partly for another use, describe the extent to which the deduction
may be admissible on account of depreciation.
Q. NO. 3(a) SUMMER-2008 What is treatment of a depreciable asset under section 22 of the Income Tax Ordinance, 2001 if
it is disposed of in a tax year?
Q. NO. 3 (d) SUMMER 2007 Describe in detail:
(i) Disposal and acquisition of assets u/s 75 of the Income Tax Ordinance, 2001.
(ii) Business and personal assets u/s 75(7) of Income Tax Ordinance, 2001.
Q. NO. 6(a) WINTER-2006 Briefly state assets eligible for initial depreciation allowance u/s 23(5) of the Income Tax
Ordinance, 2001.
Q. NO. 4(b) WINTER 2005 Explain the terms b. Non-arm’s length transactions
Q. NO. 2 WINTER-2004 What do you understand by the following terms as described in Income Tax Ordinance, 2001?
1- Disposal of Assets 2- Initial allowance u/s 23 3- Eligible depreciable assets 4- Business assets and personal assets
Q. NO. 2 WINTER-2003 Describe amortization of intangibles as an allowable expense under section 24 of the Income Tax
Ordinance, 2001.

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CA MOD C PAST PAPERS THEORECTICAL QUESTIONS

Q.NO.4 Autumn 2014 In Income Tax Ordinance, 2001 the term “disposal” has a wider connotation than sale
because it includes exchange, relinquishment, and extinguishment.
List the situations under which an asset owned by a person shall be treated to have been disposed of.

Q.6 Autumn 2012 In the context of Income Tax Ordinance, 2001,

(a) state the meaning of “Intangible”.
(b) discuss the rules relating to claiming of amortization deduction on intangibles.
Q. NO. 3(a) Autumn 2009 State the conditions which a tangible asset should meet to qualify as a depreciable asset.
Q. NO.6(b) Autumn 2007 A person who places an eligible depreciable asset into service in Pakistan for the first time in a
tax year shall be allowed initial depreciation allowance. List down the assets which do not come under the purview of
“eligible depreciable assets” for the purposes of initial allowance.
Q. NO.4(a) Spring 2005 Describe the assets that are not eligible for the purpose of claiming initial depreciation allowance.
Q. NO.3(a) Autumn 2004 List down the assets on which ‘Initial allowance’ can not be claimed?
Q. NO.3(b) Autumn 2004 What are the prescribed rates of normal depreciation on the following assets as per the Third
Schedule to the Income Tax Ordinance, 2001?
(i) Factory building
(ii) Residential quarter for labour
(iii) Furniture
(iv) Plant and machinery
(v) Computer and hardware
(vi) Technical books
(vii) New ships
(viii) Motor vehicle
Q.4 Nov 1995 For each of the following questions / select the correct answer from the choices given:
Where a fixed asset (on which tax depreciation is allowed) is actually sold, sales proceed is determined to be:
(a) Sale price
(b) Fair Market Value (FMV)
(c) Sale price or Fair Market Value (FMV) whichever is higher
(d) Amount deemed to be the sale proceeds by the tax authorities.

NOW SOLVE FOLLOWING NUMERICAL QUESTIONS OF MODULE C / AFC PAST PAPER RELATED TO THIS TOPIC

Q. NO. 3(I) & (II) AUTUMN 2013

Q. NO. 3(B) AUTUMN 2009

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170 Conceptual Approach to Taxes