ASSETS

Depreciable Assets: [Section 22(15)]

Depreciable asset means any tangible movable property, immovable property (other than unimproved
land), or structural improvement to immovable property, owned by a person that:

(a) has a normal useful life exceeding one year;

(b) is likely to lose value as a result of normal wear and tear, or obsolescence; and

(c) is used wholly or partly by the person in deriving income from business chargeable to tax,

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; and

“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.

Eligible Depreciable 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 in relation to which a deduction has been allowed under another
section of this Ordinance for the entire cost of the asset in the tax year in which the
asset is acquired.

Intangible Asset:[Section 24(11)]

“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).

Cost of Intangible Asset:

Cost in relation to an intangible, means any expenditure incurred in acquiring or creating the intangible,
including any expenditure incurred in improving or renewing the intangible; and

Per-commencement Expenditure:[Section 25(5)]

In this section, “pre-commencement expenditure” means any expenditure incurred before the
commencement of a business wholly and exclusively to derive income chargeable to tax, including the

cost of feasibility studies,

construction of prototypes, and
trial production activities,
but shall not include any expenditure which is incurred in acquiring land, or which is depreciated or
amortised under section 22 or 24.

Disposal and acquisition of assets: [Section 75]

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, including when the asset is:
Understanding of the
(a) sold, exchanged, transferred or distributed; or
terms “Disposal” and
(b) cancelled, redeemed, relinquished, destroyed, lost, “Acquisition” of business
expired or surrendered. asset is important for tax
[Section 75(1)] purposes due to the
reasons that:
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 a) After acquisition of a
transmitted. [Section 75(2)] business asset,
deduction on account
of depreciation, initial
3) The application of a business asset to personal use shall be
allowance and first
treated as a disposal of the asset by the owner of the asset at the time the year allowance as the
asset is so applied. [Section 75(3)] case may be, are
admissible.
4) Where a business asset is discarded or ceases to be used in
business, it shall be treated to have been disposed of. [Section 75(3A)] b) After disposal of a
business asset,
5) A disposal shall include the disposal of a part of an asset. [Section deduction on account
75(4)] of depreciation, initial
allowance and first
year allowance as the
6) A person shall be treated as having acquired an asset at the time case may be, are not
the person begins to own the asset, including at the time the person is admissible.
granted any right. [Section 75(5)]
c) At the time of disposal
7) The application of a personal asset to business use shall be of a business asset,
treated as an acquisition of the asset by the owner at the time the asset is gain or loss on
so applied. [Section 75(6)] disposal of asset is
recognized and
charged to the head
8) In this section, -
“Income from
Business”.
“business asset” means an asset held wholly or partly for use
in a business, including stock-in-trade and a depreciable
asset; and

“personal asset” means an asset held wholly for personal use.

[Section 75(7)]
Cost: [Section 76]

1) Except as otherwise provided in this Ordinance, this section Cost of an asset includes:
shall establish the cost of an asset for the purposes of this Ordinance.
[Section 76(1)] (i) Consideration given
for the asset
2) The cost of an asset purchased by a person shall be the sum of (ii) Cost of acquiring the
the following amounts, namely: asset.
(iii) Cost of disposing of
(a) The total consideration given by the person for the the asset.
asset, including the fair market value of any (iv) Expenditure of capital
consideration in kind determined at the time the asset nature to alter or
is acquired; improve the asset.
 (b) any incidental expenditure incurred by the person in acquiring and disposing of the
asset; and

(c) any expenditure incurred by the person to alter or improve the asset,

but shall not include any expenditure that has been fully allowed as a deduction under this
Ordinance.[Extracts from section 76(2)]

3) The cost of any personal asset which has been applied for business use, shall be the fair market
value of the asset determined at the date it is applied to business use. [Extracts from section 76(3)]

Cost of an asset produced or constructed by a person:[Extracts from section 76(4)]

The cost of an asset produced or constructed by a person shall be:

a) the total costs incurred by the person in producing or constructing the asset

b) any incidental expenditure incurred by the person in acquiring and disposing of the asset; and

c) any expenditure incurred by the person to alter or improve the asset,

Asset acquired with a loan in foreign currency: [Section 76(5)]

1) 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.

2) Difference, if any, on account of foreign currency fluctuation, shall be taken into account in the
year of occurrence for the purposes of depreciation.

3) In determining whether the liability of a person has increased or decreased, account shall be
taken of the person’s position under any hedging agreement relating to the loan. [Extracts from section
76(6)]
Illustration-1: Zam Zam & Co has purchased Machinery worth of $100,000 four years ago which was
financed from a foreign currency loan. The conversion rate of $ in Pak Rupee at the time of purchase of
Machinery was 1: 95 respectively. The loan was repayable in five annual instalments of equal amounts in
$ amounts. Calculate cost of asset during each year and depreciation expense to be allowed as per
provisions of Income tax ordinance. The $ vs Rupee conversion ratio is given in the table below:

Years $ amount Convertible

Rupee value
4 years ago 1 95
3 years ago 1 92
2 years ago 1 96
1 year ago 1 105
Current 1 102
year

Solution:

Years Adjusted Accumulated Adjusted Depreciation Depreciation

value of Depreciation at written down rate Allowed
asset due the beginning value for
to of the year depreciation
exchange purposes
rate
fluctuations
1 2= (Note: 3 4= (2-3) 5 6 =(4x5)
1)
4 years ago 9,500,000 0 9,500,000 15% 1,425,000
3 years ago 9,440,000 1,425,000 8,015,000 15% 1,202,250
2 years ago 9,460,000 2,627,250 6,832,750 15% 1,024,913
1 year ago 9,660,000 3,652,163 6,007,838 15% 901,176
Current year 9,800,000 4,553,338 5,246,662 15% 786,999

Note:1

Years Value of Installment $ vs Prevailing $ Increase / Adjusted

Asset in value in $ Rupee vs Rupee (decrease) in value of
Pak Rupee terms parity at parity at the the value of asset due to
at the time the time time of asset due to exchange
of of payment of exchange rate rate
purchase Purchase instalment fluctuations fluctuations
1 2=(Note: 2) 3 4 5 6=3x(4-5) 7=(2+6)
4 years ago 9,500,000 20,000 95 95 - 9,500,000
3 years ago 9,500,000 20,000 95 92 (60,000) 9,440,000
2 years ago 9,500,000 20,000 95 96 20,000 9,460,000
1 year ago 9,500,000 20,000 95 105 200,000 9,660,000
Current year 9,500,000 20,000 95 102 140,000 9,800,000

Note: 2

Purchase Price in $ Terms: = $ 100,000

Convertible Rupee value per $ = 95
Value of Asset in Pak Rupee at the time of purchase = Rs. 9,500,000
($ 100,000x95)

Disposal of an asset in parts: [Section 76(7)]

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 fair market
values determined at the time the person acquired the asset.

Illustration-2: Beta Printers has recently disposed of component A of its printing press at Rs.500,000.
The printing press having written down value of Rs. 1,125,000comprises of three components A,B &C
having fair market value of Rs. 500,000, Rs. 550,000 and Rs. 600,000 respectively. Calculate, cost of
components and gain or loss on disposal of component A.

Solution:

Cost of Components:

Name of the Fair Market Value Cost of Printing Cost of each component
Component (FMV) Press based on FMV
A 500,000 1,125,000 340,909
B 550,000 375,000
C 600,000 409,091
Total 1,650,000 1,125,000

Gain or loss on disposal of asset:

Disposal value of component A Rs. 500,000

Cost of Component A Rs. 340,909
Gain on disposal of Component A Rs. 159,091

Acquisition of an asset by a person is the derivation of an amount The source of income

chargeable to tax / exempt from tax: whether it was exempted
income or an income
1) Where the acquisition of an asset by a person is the derivation of chargeable to tax has no
an amount chargeable to tax, the cost of the asset shall be the amount so impact on the cost of an
charged plus any amount paid by the person for the asset. [Section 76(8)] asset. The cost of asset
for tax purposes will be
2) Where the acquisition of an asset by a person is the derivation of the payment made by the
person for acquisition of
an amount exempt from tax, the cost of the asset shall be the exempt
asset whether the source
amount plus any amount paid by the person for the asset. [Section 76(9)] of income was taxable or
exempt from tax.
Asset acquired from any subsidy etc. exempt from 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. [Section 76(10)]

Notwithstanding anything contained in this section, the Board may prescribe rules for determination of
cost for any asset.[Section 76(11)]
Illustration-3: Osma Floor Mills has purchased a quality control unit at a cost of Rs. 2,200,000. Calculate
the cost of quality control unit if the equipment is purchased from funds as per following details:

(i) The equipment is purchased from a grant of Rs. 1,500,000 received from Government (exempt
from tax) and remanning amount from own sources.

(ii) The equipment is purchased from a subsidy of similar amount received from Government, if such
subsidy was taxable at the time of receipt.

Solution:

S.# Subsidy / Nature Self Total cost of Remarks

Grant received of Grant Financing asset for tax
from / Subsidy (Rs.) purposes
Government (Rs.)
(Rs.)
(i) 1,500,000 exempt 700,000 700,000 Exempted amount of subsidy is not
added in the cost of the asset
(ii) 2,200,000 taxable 2,200,000 Taxable amount of subsidy is
- added in the cost of the asset

Consideration received: [Section 77]

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 fair market value thereof, whichever is the higher, including the fair market
value of any consideration received in kind determined at the time of disposal.[Section 77(1)]

Illustration-4:Hamza Associates has disposed of its Machinery to M/s Ali & Co at Rs. 500,000. The
Machinery was acquired Three years ago by Hamza Associates at a cost of Rs. 800,000. Depreciation
allowed as per income tax ordinance is Rs. 308,700. The fair market value of the similar machinery is Rs.
600,000. Calculate:

1) The consideration received by Hamza Associates for tax purposes

2) The gain or loss on disposal of machinery chargeable to business income

Solution:

1. Consideration received by Hamza Associates: Rs. Rs.

Higher of:
The actual consideration received 500,000
The fair market value at the time of disposal 600,000
i.e the higher amount is: 600,000

2. Gain or loss on disposal of an asset

Consideration received for disposal of asset 600,000
Less: Cost of asset at the time of disposal
Cost of acquisition of an asset 800,000
Less: Depreciation allowed as per Income Tax Ordinance 308,700
Cost of asset at the time of disposal / WDV 491,300
Gain on disposal of an asset 108,700
Consideration of a lost / destroyed asset:[Section 77(2)]

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 —

(a) an insurance policy, indemnity or other agreement;

(b) a settlement; or

(c) a judicial decision.

Illustration-5:M/s Shaukat Carriers runs goods transport business through trucks. One of the trucks
operated by the firm caught fire during its transit from Karachi. The vehicle was totally destroyed and
become irreparable. The vehicle was insured from Beta Insurance and an insurance claim was settled at
Rs. 800,000. M/s Shaukat Carriers realized Rs. 100,000 form the sale of wreckage of the destroyed
vehicle. Calculate consideration received for tax purposes.

Solution:

Consideration received for the vehicle: Rs.

Insurance claim 800,000
Scrap value / residual value 100,000
Consideration received for tax purposes 900,000

Consideration of an asset applied to personal use or discarded asset:[Extracts from section 77(3)]

The consideration received for an asset applied to personal use or discarded asset shall be the fair
market value 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.

Consideration received by a leasing company etc.

The consideration received by a scheduled bank, financial institution, modaraba, or leasing company
approved by the Commissioner (hereinafter referred to as a “leasing company”) 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 subject to the condition 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.
[Section 77(4)]

Consideration of assets disposed of in bulk:

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 fair market values determined
at the time of the transaction. [Section 77(5)]

Notwithstanding anything contained in this section, the Board may prescribe rules for determination of
consideration received for any asset.[Section 77(6)]

Illustration-6: Humayun Builders have recently disposed of its three concrete mixing plants in an open
auction at Rs. 750,000. The fair market value these concrete mixing plants was Rs. 250,000, Rs. 300,000
and Rs. 325,000 respectively. Calculate, consideration received for each plant according to Income Tax
Ordinance 2001.

Solution:
(Amount in Rs.)
Name of Fair Market Value Consideration Consideration of each
 Equipment (FMV) received in bulk plant based on FMV
Plant 1 250,000 750,000 214,286
Plant 2 300,000 257,143
Plant 3 325,000 278,571
Total 875,000 750,000

Non-arm’s length transactions: [Section 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 fair market value 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 clause (a).

Non-recognition rules: [Section 79]

1) No gain or loss shall be taken to arise on the disposal of an asset -

(i) between spouses under an agreement to live apart;

(ii) by reason of the transmission of the asset to an executor or beneficiary on the death of a person;

(iii) by reason of a gift of the asset;

(iv) by a company to its shareholders on liquidation of the company; or

(v) by an association of persons 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.

In all of the above 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.
[Extracts from sections 79(1)& 79(3)]

(vi) 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;

2) The person’s cost of a replacement asset in case of compulsory acquisition 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. [Extracts
from sections 79(1) & 79(4)]

The above expression can be denoted in the form of following formula:

Cost of a replacement asset Amount Amount

(Rs.) (Rs.)
Cost of the asset disposed of XX
Add: Consideration given by the person for the replacement asset XX
Less: Consideration received by the person for the asset disposed of XX XX
Cost of a replacement asset XXX

3) The above provisions shall not apply where the person acquiring the asset is a non-
resident person at the time of the acquisition. [Extracts from sections 79(1) & 79(2)]
Illustration-7: Shahzeb Pvt. Limited purchased a replacement asset worth of Rs. 700,000 owing to
compulsory acquisition of an asset already in operation costing Rs. 620,000 at Rs. 640,000. Calculate,
cost of replacement asset in accordance with Income Tax Ordinance 2001.

Solution:

Cost of a replacement asset Amount Amount

(Rs.) (Rs.)
Cost of the asset disposed of 620,000
Add: Consideration given by the person for the replacement asset 700,000
Less: Consideration received by the person for the asset 640,000 60,000
disposed of
Cost of a replacement asset 680,000
Depreciation: [Section 22]

1) Subject to this section, a person shall be allowed a deduction for the depreciation of the person’s
depreciable assets used in the person’s business in the tax year. [Section 22(1)]

2) The depreciation deduction for a tax year shall be computed by applying the rate specified in Part
I of the Third Schedule against the written down value of the asset at the beginning of the year subject to
the condition that the asset has been used wholly for business purposes. [Extracts from section 22(2)]

3) Where a depreciable asset is used in a tax year partly in deriving income from business
chargeable to tax and partly for another use, the deduction allowed under this section for that year shall
be restricted to the fair proportional part of the amount that would be allowed if the asset was wholly used
to derive income from business chargeable to tax. [Extracts from section 22(3)]

4) The rate of Depreciation is as under:

S.# Type of Asset Rate

1 Building (all types). 10%
2 (i) Furniture (including fittings), 15%
(ii) Machinery and plant (not otherwise specified),
(iii) Motor vehicles (all types),
(iv) Ships,
(v) Technical or professional books.
3 (i) Computer hardware including printer, monitor and allied items , 30%
(ii) Machinery and equipment used in manufacture of I.T. products,
(iii) Aircrafts and aero engines.
4 In case of mineral oil concerns the income of which is liable to be
computed in accordance with the rules in Part-I of the Fifth Schedule.

(i) Below ground installations 100%

(ii) Offshore platform and production installations. 20%
5 A ramp built to provide access to persons with disabilities not exceeding 100%
Rs.250,000 each.

Illustration-8:The written down value of the following assets own by M/s Shehroz Traders is given below.
Calculate the Depreciation Chargeable to Business Income keeping in view the provisions of Income Tax
Ordinance 2001, if:

(i) The assets are used wholly for business

(ii) The assets are used 50% for business and 50% for private use.

Name of the asset Written Down

Value (WDV)
Vehicle 840,000
Building 2,500,000

Solution:

(i) The assets are used wholly for business

Name of the asset WDV Rate of Depreciation

Depreciation Chargeable to taxable
Business Income
Vehicle 840,000 15% 126,000
Building 2,500,000 10% 250,000
Total 2,500,000 376,000
 (ii) The assets are used 50% for business and 50% for private use.

Name of the asset WDV Rate of Depreciation Proportional Depreciation

Depreciation as per third usage of Chargeable
schedule asset for to taxable
business Business
purposes Income
Vehicle 840,000 15% 126,000 50% 63,000
Building 2,500,000 10% 250,000 50% 125,000
Total 2,500,000 376,000 188,000

Written down value of the new/ used asset applied to

business: Depreciation is calculated by
applying depreciation rate on written
The written down value of a depreciable asset of a person at down value (WDV) of the asset at the
the beginning of the tax year shall be: beginning of the year.

(a) where the asset was acquired in the tax
year, the cost of the asset to the person as
reduced by any initial allowance in respect
of the asset under section 23; or
(b) in any other case, the cost of the asset to
the person as reduced by the total
depreciation deductions (including any initial
allowance under section 23 allowed to the
person in respect of the asset in previous
tax years.
The written down value of the asset
is determined as under:
(i) In case of an asset acquired /
purchased in a tax year:
WDV=cost of asset-initial allowance
(ii) In case of an existing asset:
WDV=cost of asset-(initial allowance-
depreciation allowance already
charged)

“Explanation,- For the removal of doubt, it is clarified that where any building, furniture, plant or
machinery is used for the purposes of business during any tax year for which the income from such
business is exempt, depreciation admissible under sub-section (1) shall be treated to have been allowed
in respect of the said tax year and after expiration of the exemption period, written down value of such
assets shall be determined after reducing total depreciation deductions (including any initial allowance
under section 23) in accordance with clauses (a) and (b) of this sub-section.
[Section 22(5)]

Written down value of the asset partly used for business:

Where a depreciable asset is used in a tax year partly in deriving income from business chargeable to tax
and partly for another use, the written down value of the asset shall be computed on the basis that the
asset has been solely used to derive income from business chargeable to tax. [Extracts from section
22(6)]

Illustration-9: Assuming the same data in Illustration 8 (ii), compute the written down value of the assets
for the next tax year.

Solution:

Name WDV Rate of Depreciation Proportional Depreciation WDV for

of the Depreciation as per third usage of Chargeable the next
asset schedule asset for to taxable tax year
business Business
purposes Income
1 2 3 4=(2x3) 5 6=(4x5) 7=(2-4)
Vehicle 840,000 15% 126,000 50% 63,000 714,000
 Building 2,500,000 10% 250,000 50% 125,000 2,250,000
Total 2,500,000 376,000 188,000
2,964,000

Restriction of total deductions allowed against the cost of a depreciable asset:

The total deductions allowed to a person during the period of ownership of a depreciable asset under this
section and section 23 shall not exceed the cost of the asset. [Section 22(7)]

Treatment of gain or loss on disposal of a depreciable asset:

The gain or loss on disposal of
Where, in any tax year, a person disposes of a depreciable asset, no an asset is charged to the
depreciation deduction shall be allowed under this section for that year head of income “Income from
and: Business” in the relevant tax
year.
(a) if the consideration received exceeds the written
down value of the asset at the time of disposal, the Gain or Loss on disposal of an
excess shall be chargeable to tax in that year under asset is ascertained as under:
the head “Income from Business”; or
Gain /(Loss) on disposal of
(b) if the consideration received is less than the written asset = A-B
down value of the asset at the time of disposal, the Where:
difference shall be allowed as a deduction in A=Consideration received on
computing the person’s income chargeable under disposal of asset
the head “Income from Business” for that year. B= Written down value of the
[Section 22(8)] asset
Illustration-10: Refer to lllustration-4 for explanation

Gain or loss on disposal of an asset partly used for business:

Where a depreciable asset is used in a tax year partly in deriving income from business chargeable to tax
and partly for another use, the written down value of the asset to ascertain gain or loss on disposal of the
asset shall be increased by the amount that is not allowed as a deduction as a result of the proportionate
use of the asset for the purposes other than business use. [Extracts from section 22(9)]

Illustration-11: Assuming the same data in Illustration 8 (ii), compute the gain or loss on disposal of the
asset in the next tax year.

Solution:

WDV for
Proportional Depreciation the next
Name Depreciation usage of Chargeable tax year
Rate of
of the WDV as per third asset for to taxable to
Depreciation
asset schedule business Business ascertain
purposes Income gain or
loss
1 2 3 4=(2x3) 5 6=(4x5) 7=(2-6)
Vehicle 840,000 15% 126,000 50% 63,000 777,000
Building 2,500,000 10% 250,000 50% 125,000 2,375,000
Total 3,340,000 376,000 188,000 3,152,000

Subject to sub-sections (13) and (14), the rules in Part III of Chapter IV (Section 75-disposal & acquisition
of assets, 76-cost, 77-consideration, 78-Non Arms length transaction, 79- non recognition rule) shall
apply in determining the cost and consideration received in respect of a depreciable asset for the
purposes of this section. [Section 22(11)]

Depreciation deduction of a leased asset:

The depreciation deductions 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 by the leasing company
or an investment bank or a modaraba or a scheduled bank or a development finance institution and
leased to another person shall be deductible only against the lease rental income derived in respect of
such assets. [Section 22(12)]

Illustration:

For the purposes of this section,

(a) the cost of a depreciable asset being a passenger transport vehicle not plying for hire
shall not exceed two and half million rupees;

(b) the cost of immovable property or a structural improvement to immovable property shall
not include the cost of the land;

(c) any asset owned by a leasing company or an investment bank or a modaraba or a

scheduled bank or a development finance institution and leased to another person is
treated as used in the leasing company or the investment bank or the modaraba or the
scheduled bank or the development finance institution’s business; and

(d)where the consideration received on the disposal of immovable property exceeds the
cost of the property, the consideration received shall be treated as the cost of the
property.
[Section 22(13)]
Gain or loss on disposal of a passenger transport vehicle not plying for hire:

Where clause (a) of sub-section (13) applies, the consideration received on disposal of the passenger
transport vehicle for the purposes of sub-section (8) shall be computed according to the following formula:

A x B/C
where –

A is the amount received on disposal of the vehicle;

B is the amount referred to in clause (a) of sub-section (13); and

C is the actual cost of acquiring the vehicle.

[Section 22(10)]
Illustration:

Consideration of a depreciable asset exported out of Pakistan:

Where a depreciable asset that has been used by a person in Pakistan is exported or transferred out of
Pakistan, the person shall be treated as having disposed of the asset at the time of the export or transfer
for a consideration received equal to the cost of the asset. [Section 22(14)]
Initial allowance: [Section 23]

(i) 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 referred to as an “initial allowance” [Extracts from section
23(1)]

(ii) The initial allowance will be admissible later of the following tax years:

a) The tax year in which the asset is used by the person for the purposes of his business, or
b) The tax year in which commercial production is commenced.
[Extracts from section 23(1)]

(iii) The amount of the initial allowance of a person shall be computed by applying the following rates:
a) Plant and machinery 25%
b) Buildings 15%
. [Extracts from section 23(2)]

(iv) The rules in section 76 shall apply in determining the cost of an eligible depreciable asset for the
purposes of this section. [Section 23(3)]

(v) A deduction allowed under this section against the assets owned by the following institutions and
leased to other persons shall be deducted only against the leased rentals income derived in
respect of such assets.

a) A leasing company
b) An investment bank
c) A modaraba
d) A scheduled bank
e) A development finance institution
[Extracts from section 23(4)]

[Section 23(5)]
First Year Allowance: [Section 23A]

(i) First year allowance shall be admissible in respect of plant, machinery and equipment installed
by any industrial undertaking set up in specified rural and under developed areas, or engaged in
the manufacturing of cellular mobile phones and qualifying for exemption under clause (126N) of
Part I of the Second Scheduleand owned and managed by a company. [Extracts from section
23A(1)]

(ii) First year allowance is admissible in lieu of initial allowance. [Extracts from section 23A(1)]

(iii) First year allowance shall be allowed in respect of assets put to use after July 1, 2008. [Extracts
from section 23A(1)]

(iv) The rate of first year allowance shall be 90%.

(v) The following provisions of initial allowance shall mutatis mutandis apply to the first year
allowance. [Section 23A(2)]

(a) The rules in section 76 shall apply in determining the cost of an eligible depreciable asset
for the purposes of this section.

(b) A deduction allowed under this section against the assets owned by the following
institutions and leased to other persons shall be deducted only against the leased rentals
income derived in respect of such assets.

✓ A leasing company
✓ An investment bank
 ✓ A modaraba
✓ A scheduled bank
✓ A development finance institution

(vi) The Federal Government may notify “specified areas” for the purposes of this section. [Extracts
from section 23A(3)]

Accelerated depreciation to alternate energy projects: [Section 23B]

(i) First year allowance to alternate energy projects shall be admissible in respect of plant,
machinery and equipment installed for the generation of alternate energy by an industrial
undertaking set up anywhere in Pakistan, and owned and managed by a company. [Extracts from
section 23B(1)]

(ii) First year allowance to alternate energy projects is admissible in lieu of initial allowance. [Extracts
from section 23B(1)]

(iii) The rate of first year allowance to alternate energy projects shall be 90%.

(iv) First year allowance to alternate energy projects shall be allowed against the cost of the eligible
depreciation assets put to use after first day of July, 2009. [Extracts from section 23B(1)]

(v) The following provisions of initial allowance shall mutatis mutandis apply to the first year
allowance.

(a) The rules in section 76 shall apply in determining the cost of an eligible depreciable asset
for the purposes of this section.

(b) A deduction allowed under this section against the assets owned by the following
institutions and leased to other persons shall be deducted only against the leased rentals
income derived in respect of such assets.

✓ A leasing company
✓ An investment bank
✓ A modaraba
✓ A scheduled bank
✓ A development finance institution

Intangibles: [Section 24]

A person shall be allowed an amortisation deduction in accordance with this section in a tax year for the
cost of the person’s intangibles:

(a) that are wholly or partly used by the person in the tax year in deriving income from
business chargeable to tax; and

(b) that have a normal useful life exceeding one year.

[Section 24(1)]

No deduction shall be allowed under this section where a deduction has been allowed under another
section of this Ordinance for the entire cost of the intangible in the tax year in which the intangible is
acquired. [Section 24(2)]

Subject to sub-section (7), the amortization deduction of a person for a tax year shall be computed
according to the following formula, namely:—

A
B
where —

A is the cost of the intangible; and

B is the normal useful life of the intangible in whole years.

[Section 24(3)]
An intangible —

(a) with a normal useful life of more than ten years; or

(b) that does not have an ascertainable useful life,

shall be treated as if it had a normal useful life of ten years. [Section 24(4)]

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 under this section 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. [Section 24(5)]

Where an intangible is not used for the whole of the tax year in deriving income from business chargeable
to tax, the deduction allowed under this section shall be computed according to the following formula,
namely: —

A x B/C
where —

A is the amount of amortization computed under sub-section (3) or (5), as the case may be;

B is the number of days in the tax year the intangible is used in deriving income from business
chargeable to tax; and

C is the number of days in the tax year.

[Section 24(6)]

The total deductions allowed to a person under this section in the current tax year and all previous tax
years in respect of an intangible shall not exceed the cost of the intangible. [Section 24(7)]

Where, in any tax year, a person disposes of an intangible, no amortisation deduction shall be allowed
under this section for that year and —

(a) if the consideration received by the person exceeds the written down value 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

(b) if the consideration received is less than the written down value 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.
[Section 24(8)]

For the purposes of sub-section (8) —

(a) the written down value of an intangible at the time of disposal shall be the cost of the
intangible reduced by the total deductions allowed to the person under this section 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 under this section if the intangible
were wholly so used; and

(b) the consideration received on disposal of an intangible shall be determined in

accordance with section 77.
 [Section 24(9)]
For the purposes of this section, an intangible that is available for use on a day (including a non-working
day) is treated as used on that day. [Section 24(10)]

25. Pre-commencement expenditure: [Section 25]

A person shall be allowed a deduction for any pre-commencement expenditure in accordance with this
section. [Section 25(1)]

Pre-commencement expenditure shall be amortized on a straight-line basis at the rate of 20%. [Section
25(2)]

The total deductions allowed under this section in the current tax year and all previous tax years in
respect of an amount of pre-commencement expenditure shall not exceed the amount of the expenditure.
[Section 25(3)]

No deduction shall be allowed under this section where a deduction has been allowed under another
section of this Ordinance for the entire amount of the pre-commencement expenditure in the tax year in
which it is incurred. [Section 25(4)]