Chapter 12

Tax Depreciation,
Amortization
&
Pre-commencement
Expenditures
1) TYPES OF DEPRECIATION
a) Normal depreciation. Normal tax dep is allowable on WDV of assets at the
beginning of the tax year at the following rates:
Assets Rate of dep
Buildings 10%
Furniture and Fittings 15%
Plant and machinery – general 15%
Computers and allied items including printer, monitor and IT 30%
related plant and machinery
Technical and professional books 15%
Motor vehicles and ships 15%
Aircrafts and aero engines 30%
Ramp built to provide access to persons with disabilities not 100%
exceeding Rs.250,000 each
100% depreciation for Ramp built to provide access to persons with disabilities not
exceeding Rs.250,000 each

Portion of Q.1 Dec 2015 ICAP CFAP

Admn expenses include Rs.650,000 in respect of the cost of two ramps. The
ramps were built to provide access to persons with disabilities.

Treatment
100% depreciation is not available as the cost of each ramp exceeds
Rs.250,000
Add Rs.650,000 in a/c profit &
Normal dep available to a building is allowed
The above rates shall also be used for normal depreciation on
an asset acquired during a tax year on full year’s basis (where
the asset is commissioned for use) on the cost of asset as
reduced by initial allowance (or accelerated depreciation).

No depreciation shall be calculated in the year of disposal.

 Initial allowance – section 23
Initial allowance is allowable @ 25% of the cost of asset if the asset is used for
business purpose in the tax year in which the asset is placed into service in
Pakistan or in which commercial production is commenced whichever is later, other
than the following:
– Immovable property or structural improvement to immovable property
– Road transport vehicle not plying for hire [Vehicles given on lease under
finance lease shall be considered as not plying for hire – FBR
brochure 10]
– Furniture and fittings
– Any plant and machinery that has been used previously in Pakistan.
[Opinion: machinery includes computers and IT related machinery]
Forklifting vehicle is considered as machinery
– Assets allowed as tax expense
Positive list for initial allowance:
Initial allowance is allowable on assets (other than negative list) including:

 Plant and machinery, computers and allied items and IT related machinery
not previously used in Pakistan. It means that second hand imported
machinery is eligible for initial allowance.
 Road transport vehicle plying for hire
 Technical and professional books

Note for students:

Initial allowance is not allowable where a depreciable asset is used
for business outside Pakistan
Example 1:
Opening tax WDV of the plant Rs.500,000
Tax WDV of disposals Rs.85,000
Purchase of plant during the year eligible for initial allowance Rs.200,000
Solution:
Opening Tax WDV 500,000
Less: Tax WDV of disposals 85,000
415,000
Addition net of initial allowance 150,000
Amount eligible for normal tax dep 565,000

Initial allowance @ 25% of Rs.200,000 50,000

Normal tax dep @ 15% of Rs.565,000 84,750
Total tax depreciation 134,750
Example 2:
Opening tax WDV of the plant Rs.900,000
Tax WDV of disposals Rs.80,000
Additions Rs.200,000 including Rs.90,000 previously used in Pakistan
Solution:
Opening Tax WDV 900,000
Less: Tax WDV of disposals 80,000
820,000
Addition previously used in Pakistan 90,000
Addition new plant net of initial allowance 82,500
Amount eligible for normal tax dep 992,500
Initial allowance @ 25% of Rs.110,000 27,500
Normal tax dep @ 15% of Rs.992,500 148,875
Total tax depreciation 176,375
Accelerated depreciation to alternate energy projects –
section 23B
Plant, machinery and equipments 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 @ 90% in lieu of initial allowance.
(d) Normal tax depreciation including initial allowance must be calculated
even if income of a business entity is exempt and therefore tax WDV after
the lapse of exemption period shall be the cost as reduced by total tax
depreciation including initial allowance during the exemption period.
 2. OTHER ASPECTS
a) Depreciable asset means any tangible property or structural improvement
(excluding cost of unimproved land) owned by a person that:

 has a normal useful life exceeding one year;

 is likely to lose value as a result of normal wear and tear, or obsolescence; and
 is used wholly or partly for taxable business purpose.

Structural improvement includes any building, road, driveway, car park, railway
line, pipeline, drainage, bridge, tunnel etc.

Meaning of ownership – FBR brochure 10

Note 1:
Where a depreciable asset is jointly owned by a taxpayer and an Islamic financial
institution pursuant to an arrangement of Musharika financing or diminishing Musharika
financing, the depreciable asset shall be treated to be wholly owned by the taxpayer and
therefore tax depreciation can be claimed.

Note 2: Beneficial Ownership – FBR brochure

‘Owned’ means legal ownership in most cases. However, it also includes real or
beneficial ownership in certain cases and therefore tax depreciation can be claimed e.g.
# Where a person can exercise the right of ownership and is entitled to the use or
income thereof without legal title

# Where a person enjoys full possession of the property but formal conveyance deed not
yet executed

# Building constructed by the person on land not owned e.g. leasehold land

# Assets held by members and applied for AOP’s business

Benami Transactions
Benami purchases are purchases in false name of another person, who does not pay
the consideration but merely lends his name. In this case the beneficial owner is the
person who actually purchased and paid the amount of property.

According to Benami Transactions (Prohibition) Act 2017 any property subject to

benami transaction may be confiscated by the Federal Government.

However, a property may be held by a person in a fiduciary capacity such as trustee,

partner, director of a company, agent or legal adviser
OR
An individual in the name of spouse, child, brother, sister or any lineal ascendant or
descendant
Note for students:
Depreciable asset and Eligible depreciable asset
Depreciable asset: Para 2(a) of chapter 12
Eligible depreciable asset means assets eligible for initial allowance

Q.2(a)(i) June 2015 ICAP CFAP

Under the provisions of the Income Tax Ordinance, briefly discuss the
following:
(i) “Depreciable asset” and “Eligible depreciable asset”. (Marks
5)
 DEPRECIABLE ASSETS
a) Depreciable asset means any tangible property or structural improvement
(excluding cost of unimproved land) owned by a person that:

 has a normal useful life exceeding one year;

 is likely to lose value as a result of normal wear and tear, or obsolescence;
and
 is used wholly or partly for taxable business purpose.

Structural improvement includes any building, road, driveway, car park, railway
line, pipeline, drainage, bridge, tunnel etc.
 ELIGIBLE DEPRECIABLE ASSETS
Eligible depreciable assets (i.e. eligible for initial allowance) are all assets used for
business purpose in Pakistan other than the following:
– Immovable property or structural improvement to immovable property
– Road transport vehicle not plying for hire [Vehicles given on lease under finance
lease shall be considered as not plying for hire – FBR brochure 10]
– Furniture and fittings
– Any plant and machinery that has been used previously in Pakistan.
[Opinion: machinery includes computers and IT related machinery]
– Assets allowed as tax expense
b) Cost of an asset shall be the total of the following:
i) Consideration given or FMV of any consideration given in kind.
ii) Expenditure incurred in acquiring and disposing off the asset; &

Expense in acquiring the asset may include: (i) Broker’s commission; (ii)
registration charges; (iii) taxes such as CVT other than income tax; (iv)
cost of valuation report by a valuer in respect of acquisition of asset of a
capital nature
iii) Amount paid to bring the asset to its present location and condition fit for its intended use
such as incidental expenses incurred in respect of acquisition, transportation, alteration,
improvement, renewal, installation.

Sales tax shall be included in the cost of depreciable asset where input
tax adjustment is not allowed
Cost of internally produced assets will also include a fair proportionate
part of factory and admn overheads
Purchase of assets through banking channel – section 75A
The following assets are required to be purchased through banking channel:
# Immovable property having FMV exceeding Rs.5 million (FMV is the value
fixed by FBR or value fixed by the provincial authority for the purpose of stamp
duty, whichever is higher); and
# Other asset having FMV exceeding Rs.1 million
If the above asset is not purchased through banking channel then the asset
shall not be eligible for tax depreciation or amortization and cost shall be
treated as zero for computation of any gain on sale of such asset.

The above provision is applicable for all assets whether it is a depreciable

asset, intangible, capital asset or stock in trade item.
Purchase of assets through banking channel – section 75A

Section 182(1) serial 21 of the Table:

If a person purchases immovable property having FMV exceeding Rs.5 million
through cash or bearer cheque then he shall pay penalty @ 5% of the value as
determined by FBR or by the provincial authority for the purpose of stamp
duty, whichever is higher.
c) Partial use for business
If an asset is used partly for business purpose and partly for other use
in a tax year then normal depreciation for the year shall be allowed
proportionately. However, initial allowance shall be calculated in the
normal manner as the provision of proportionate calculation is given
in section 22 (for normal depreciation) and not in section 23 (for initial
allowance).
Example:
Mr. A purchased a laptop on 1.7.20X2 at Rs.80,000 which is used 60% for his
business and purposes and 40% for his private use. Calculate the amount of
depreciation he can claim as tax deductible in the tax year 20X3.
Answer:

Tax Dep.
Cost on 1 July 80,000
Initial allowance @ 25% 20,000 20,000
60,000
Depreciation for the year @ 30% 18,000
Closing WDV 42,000
Normal dep allowable: 60% of 18,000 10,800

Dep disallowed on account of non-business use 7,200

d) Gain or loss on disposal of an asset shall be taken into business income and
considered as per tax workings i.e. consideration received less tax WDV. Therefore,
the following adjustments are required while calculating taxable business income:

Accounting gain on disposal of an asset deduction

Tax gain on disposal of an asset add back
Accounting loss on disposal of an asset add back
Tax loss on disposal of an asset deduction

sale proceed - WDV = Gain / Loss

Accounts 100 80 = A/c Gain 20 Less
Tax 100 65 = Tax Gain 35 Add

Accounts 70 80 = A/c Loss 10 Add

Tax 70 65 = Tax Gain 5 Add
Example
Disposal of a machine with the following details:

Sale proceed Rs.900,000

Tax WDV before disposal Rs.520,000
Accounting WDV before disposal Rs.650,000

Accounting Gain 900,000 – 650,000 = Rs.250,000 Less

Tax Gain 900,000 – 520,000 = Rs.380,000 Add

At the time of disposal, tax WDV shall be increased by the amount of

depreciation disallowed on account of non-business use.
 Dep. allowable
80% business useExample:
Tax year 20X3 Mr. C purchased a
Cost on 1.7.20X2 80,000 computer on
Initial allowance @ 25% 20,00020,000 1.7.20X2 at
60,000 Rs.80,000 which is
Normal depreciation for the year @ 30%18,000 14,400 used 80% for his
Closing WDV 42,000 business and 20%
Tax year 20X4 for his private
Opening tax WDV 42,000 purpose.
Normal depreciation for the year @ 30%12,600 10,080
Closing WDV 29,400 Mr. C sold this
computer on
Tax year 20X5
15.1.20X5 for
Opening tax WDV 29,400
Rs.50,000.
Add: Dep disallowed for non-business use
In the tax year 20X3 (18,000 – 14,400)3,600
Calculate the
In the tax year 20X4 (12,600 – 10,080) 2,520
amount of tax gain
Total tax WDV 35,520
or loss under
Less: Sale proceed 50,000
business income in
Tax gain on disposal 14,480
the tax year 20X5.
e) Disposal includes disposal of a part of an asset. A person shall be treated to
have made a disposal when he parts with the ownership of the asset including when
the asset is sold, exchanged, transferred, cancelled, destroyed, lost, expired,
ceases to be used etc.

Transfer of any depreciable asset or capital asset to an employee free of cost or at

lower than FMV shall be considered as disposal and taxable in the hands of the
employer at FMV minus (cost + allowable deductions, if any) under the head
business income in case of depreciable asset or under the head capital gain in the
case of capital asset.

This concept is also applicable if the asset is transferred to any other person for any
reason including on account of sales promotion scheme.
Portion of Q.1 Dec 2015 ICAP CFAP
Other income includes Rs.2,450,000 received from employees against sale of
5 vehicles. The market value and tax WDV of these vehicles at the time of
sale was Rs.5,250,000 and Rs.3,320,000 respectively. As per company’s
policy the vehicles are sold at their book values.

Treatment
(1)Tax gain on disposal 5,250,000 – 3,320,000 = Rs.1,930,000 to be added
to a/c profit

(2)Sale proceed of Rs.2,450,000 for vehicles sold at book value should have
been credited to vehicles a/c instead of other income and therefore need to
be deducted from a/c profit
f) Application of a business asset wholly to personal use shall be
treated as a disposal at FMV at the time it is so applied. Likewise,
application of a personal asset wholly or partly to business use shall be
treated as an acquisition at FMV at the time it is so applied.
g) Rebate, commission, grant or subsidy (not being in the nature of loan)
from Government or any other person shall be deducted from the cost of asset.

FBR brochure 10:

- Waiver of debt owed by the taxpayer related to acquisition of an asset shall
also be deducted from the cost / WDV of asset.
Chapter 11
Explanation.- For the purposes of this clause, it is declared
that the word ‘benefit’ includes any benefit derived by way of
waiver of profit on debt or the debt itself under scheme issued
by the State Bank of Pakistan.

Para of Chapter 11 is applicable for working capital loan

- Where a depreciable asset is acquired as a result of waiver of debt owed to

the taxpayer then the cost shall be equal to the debt waived and not the FMV of
the asset.
Q.12.1 [Q.2(a) Dec 2017 ICAP CFAP]
Pakiza Ltd (PL) established a new factory on 1.7.20X1 in Badin where the Government
has allowed 1 year tax exemption.
PL imported machinery at a cost of Rs.8,200,000 from Japan.
PL received a Provincial grant of Rs.1,000,000 against installation charges of the
machinery in Badin whereas actual expenditure on installation amounted to Rs.700,000.
Transportation cost of Rs.200,000 was paid for bringing the machinery to the factory.
During installation, one of the parts was damaged which had to be replaced at a cost of
Rs.45,000.
PL also paid a premium of Rs.50,000 for insuring the machinery against fire and theft.
A cost of Rs.5,000,000 was incurred towards construction of building and Rs.1,200,000
for the acquisition of furniture and fittings.
The factory was completed by the end of June 20X2 and commercial production started.
Required: Compute tax depreciation which PL may claim as deduction in computing its
taxable income for the year ended 30.6.20X3. (Marks 6)
h) Exchange difference in making payment of liability in foreign currency against an
asset shall be added to or deducted from the cost / WDV of asset in the year of
occurrence including the effect of hedging arrangement relating to the loan.

Q.3 Dec 2005 ICAP CFAP:

Mr. Sheryar, CFO of a manufacturing company, is analyzing tax implications o
term foreign currency loan for company’s modernization and expansion of
manufacturing facility. You have been informed that no coverage is available
company against foreign currency fluctuation.

Write a letter to Mr. Sheryar advising him the tax implications associated with
exchange fluctuation on foreign currency loan. (Marks 5)
 Q.12.2 [Q.2(a) June 2006 ICAP CFAP]
Shah Jahan Ltd has acquired plant and machinery which was partly financed through a
loan denominated in a foreign currency. The financial details along with repayment
schedule and exchange rates are given below:
Cost of plant acquired in January 20X2 Rs.15,000,000
Grant paid by the Govt. directly to the supplier Rs.750,000
Foreign currency debt obtained to finance the
purchase of plant on 1.1.20X2 USD 200,000

Repayment schedule:
1.1.20X3 USD 60,000
1.1.20X4 USD 60,000
1.1.20X5 USD 80,000
 Exchange rates of US$ to Rupee had been as follows:
Rs.
1.1.20X2 57.00
30.6.20X2 57.25
1.1.20X3 56.95
30.6.20X3 57.50
1.1.20X4 58.00
30.6.20X4 57.00
1.1.20X5 58.50
30.6.20X5 59.00
Required: Compute the depreciation allowable for the tax years 20X2, 20X3, 20X4
and 20X5. (Marks 9)
Note: Rates of Depreciation for plant are 25% for initial allowance and 15% for normal
depreciation.
 Answer to Q.12.2 [Q.2(a) June 2006 ICAP CFAP]:
Tax year 20X2
Cost $200,000 x 57 11,400,000
PKR (3,600,000 – 750,000 govt. grant) 2,850,000
14,250,000
Initial allowance @ 25% 3,562,500
Normal dep @ 15% 1,603,125 5,165,625
Closing WDV 9,084,375
Tax year 20X3
Opening tax WDV 9,084,375
Less: Exchange gain $60,000 x (57 – 56.95) 3,000
Amount eligible for normal dep 9,081,375
Normal dep @ 15% 1,362,206
Closing WDV 7,719,169
Tax year 20X4
Opening tax WDV 7,719,169
Add: Exchange loss $60,000 x (57 – 58) 60,000
Amount eligible for normal dep 7,779,169
Normal dep @ 15% 1,166,875
Closing WDV 6,612,294

Tax year 20X5

Opening tax WDV 6,612,294
Add: Exchange loss $80,000 x (57 – 58.50) 120,000
Amount eligible for normal dep 6,732,294
Normal dep @ 15% 1,009,844
Closing WDV 5,722,450
(i) Where the acquisition of an asset 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.

Similarly where the acquisition of an asset is the derivation of an amount exempt from tax,
cost of the asset shall be the amount so exempt plus any amount paid by the person for the
asset.

Example: Purchase of a paper cutting machine by an individual publisher to be used in

printing business:
Price actually paid 75,000
Non-cash benefit given
Printed stationery given
(FMV of stock in trade: Taxable income) 15,000
Agricultural produce given
(FMV of personal asset: Exempt income) 10,000
Cost for tax depreciation purpose 100,000
Cars
 j) Cars:

– Maximum allowable cost of one car is Rs.7.5 million from the tax year 2023
onward.
– If a car, having original cost in excess of maximum cost, is subsequently
disposed off then sale proceed shall also be reduced proportionately as under:
Restricted Cost x sale proceed = Proportionate sale proceed
Original Cost

Section 22(13)(a) and 22(10)

History of maximum allowable cost of one car from the tax year 1991 is as under:
With effect from Maximum
Assessment year allowable cost
1991 250,000
1993 600,000
2002 750,000
2003 1,000,000
2006 to 2009 No limit
2010 1,500,000
2013 to 2022 2,500,000
Example 1: Mr. A purchased a car of Rs.2,800,000 (restricted cost Rs.2,500,000) in the
tax year 2021 for his business and sold this car in the tax year 2024 for Rs.2,650,000.
Calculate tax depreciation for the tax years 2021 to 2023 and tax gain or loss on
disposal of the car in the tax year 2024.
Answer 1:
Cost of the car Rs.2,800,000
Cost restricted to 2,500,000
Tax depreciation @ 15% in the tax year 2021 375,000
2,125,000
Tax depreciation @ 15% in the tax year 2022 318,750
1,806,250
Tax depreciation @ 15% in the tax year 2023 270,937
Opening tax WDV for the tax year 2024 1,535,313
Sale proceed (2,500,000 / 2,800,000) x 2,650,000 2,366,071
Tax gain on disposal of car in the tax year 2024 830,758
Example 2: Mr. A purchased a car of Rs.1,400,000 few years back when the restricted
cost was Rs.1,000,000 and sold this car during the tax year 2024 for Rs.600,000.
Opening tax WDV for the tax year 2024 was Rs.377,150. Calculate tax gain or loss on
disposal of car.

Answer:
Opening tax WDV 377,150
Sale proceed (1,000,000 / 1,400,000) x 600,000 428,571
Tax gain on disposal of car 51,421
k) Definition of consideration received

i) Normal case: Actual sale proceed or FMV whichever is higher.

ii) Consideration received in kind: FMV

(iii) Non-arm’s length transaction:

FMV at the time of disposal. The purchaser shall be treated to have acquired the said
asset at the same FMV and not at the cost paid by him.
FBR brochure 10:
Arm’s length transaction means a transaction between two parties who
are:
- Not related
- Not on close terms
- Not involved in a confidential relationship
- Presumed to have roughly equal bargaining powers
- Knowledgeable about the deal; and
- Willing to undertake the deal
Q.4(b) June 2009 ICAP CFAP
When an asset is disposed of in a non-arms length transaction, how would you determine
the consideration:
(i) received by a seller; and
(ii) paid by a buyer. (Marks 3)
iv) Asset is destroyed or lost: Scrap value along with
any compensation, indemnity or damages received under
an insurance policy, agreement, settlement or judicial
decision.
Portion of Q.1 Dec 2014 ICAP CFAP
Sales include insurance compensation of Rs.5m received from Big Insurance
Ltd against the loss of one of BL’s factory buildings which was destroyed by
fire due to short circuit. This building was constructed few years ago at a cost
of Rs.6m. The a/c and tax WDV of the building when it caught fire were
Rs.5.347m and Rs.4.374m respectively. However, no depreciation on this
building was charged in the books for the year.

Tax Treatment
(1) Insurance compensation is sale proceed and tax gain on disposal Rs.5m –
4.374m = Rs.626,000 is to be added in a/c profit
(2) Insurance compensation is not income and should not have been credited
to sales and therefore need to be deducted from a/c profit
v) Sale of an asset by an approved leasing entity: Residual value
on maturity or on pre-mature termination of lease subject to the condition
that residual value plus other lease amounts are not less than original cost
of asset.

After purchase of an asset on maturity or pre-mature termination of lease

the purchaser is entitled to claim tax depreciation on residual value or
bargain purchase price.
vi) Export or transferred outside Pakistan of depreciable
asset after use in Pakistan: Original cost of the asset.
In this case gain on disposal shall be equal to
depreciation allowed.
Actual sale proceed
Cost 100,000
Tax Dep 70,000 18,000
WDV before disposal 30,000 210,000
SP 100,000
Tax gain 70,000
vi) Consideration received on disposal of immovable property:
Where the consideration received exceeds the cost of immovable
property, the consideration received shall be treated as cost of the
property.

Note for students:

A building used for business purpose is a depreciable asset and
as per section 22(8) gain on disposal of a depreciable asset is
taxable under the head business and therefore separate tax rates
for gain on disposal of building under the head capital gain are
not applicable in this case.
Example: Tax Year 20X8
Mr. Z purchased a factory building for his business for Rs.800,000 and up to 30.6.2023
he has claimed tax depreciation of Rs.563,804 on the building. On 31.7.2023 he sold his
factory building for Rs.2,800,000. Calculate tax gain or loss on disposal of the factory
building for the tax year 2024.
Answer:
Sale proceed of building 2,800,000
Cost of building 2,800,000
Less: Tax depreciation up to 30.6.2023 563,804
Tax WDV 2,236,196
Tax gain on disposal 563,804

In this case gain, if any, shall not exceed depreciation allowed and therefore
consideration received in excess of original cost shall be exempt.
Q.3(b) Sept 2009 ICAP CAF:
Required: Compute the tax gain or loss on disposal of each of the
following cases: (Marks 6)
During the tax year 20X2, Ishaq Enterprise disposed off the following
assets:
(i) an immovable property was sold for Rs.200 million. The cost of
immovable property was Rs.100 million. Tax depreciation of Rs.10 million
had been allowed on the immovable property before its disposal.
Answer:
Sale proceed 200
Cost 200
Less: tax depreciation 10
Tax WDV 190
Tax gain on disposal 10
(ii) a plant was exported to Nepal. The export proceeds Rs.28
million. The cost and tax WDV of the plant was Rs.25 million and
Rs.18 million respectively.
Answer:
Sale proceed 25
Tax WDV 18
Tax gain on disposal 7
(iii) three trucks were disposed off for Rs.2.5 million. They were acquired in tax
year 20X1. The tax WDV of trucks at the beginning of tax year 20X2 was Rs.2.4
million. The trucks were being used partly i.e. 60% for business purposes. The rate
of depreciation for tax purposes is 20% [ignore initial allowance].

Answer:
20X1 Cost 3,000,000
Tax dep @ 20% 600,000 Allowed 360,000
WDV 2,400,000

20X2 WDV 2,400,000

Add: Dep disallowed 240,000
Total WDV 2,640,000
Sale proceed 2,500,000
Tax loss on disposal 140,000
Now solve Q.12.3 of the book
NO GAIN NO LOSS TRANSACTIONS – section 79 (i.e. non-recognition rules)
(a) No gain or loss shall arise in the following transactions and the transferee shall be
treated to have acquired the asset at the cost equal to the cost of asset for the transferor
at the time of disposal:
i. Between spouses under an agreement to live apart
ii. Gift to a relative
iii. Transmission of an asset on the death of a person
iv. By a company to its shareholders on its liquidation or by an AOP to its members on its
dissolution where the assets are distributed to the members in accordance with their
interests in the capital of AOP [In the case of para iv, the recipient of the capital asset
must be a resident person in the relevant tax year. Otherwise non-recognition rule shall
not apply.]
Definition of relative as per section 85(5):
“relative” in relation to an individual, means –
(a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the
individual, or of a spouse of the individual; or
(b) a spouse of the individual or of any person specified in clause (a).
(b) Where an asset is disposed off on compulsory basis under any law and the
consideration received is reinvested in another asset of a like kind within one year of
disposal then the cost of replacement asset shall be the cost of asset disposed off +
consideration given for replacement asset in excess of consideration received for the asset
disposed off.
Example:
Cost of a particular equipment ‘Y’ disposed off on
2.7.20X7 under the law 500,000
Tax depreciation allowed 220,000
Tax WDV of equipment ‘Y’ 280,000
Sale proceed of equipment ‘Y’ received 900,000
Another similar equipment ‘Z’ was acquired on 25.7.20X7 980,000

Tax treatment in the tax year 20X8:

- Tax WDV of Y shall be deducted from opening tax WDV of plant and machinery
- Cost of equipment Z for tax depreciation purpose shall be 580,000 i.e. 500,000 + (980,000 –
900,000)
Example:
Cost of a particular equipment ‘Y’ disposed off on
2.7.20X7 under the law 500,000
Tax depreciation allowed 220,000
Tax WDV of equipment ‘Y’ 280,000
Sale proceed of equipment ‘Y’ received 900,000
Another similar equipment ‘Z’ was acquired on 25.7.20X7 980,000
Tax treatment in the tax year 20X8:
- Tax WDV of Y shall be deducted from opening tax WDV of plant and machinery
- Cost of equipment Z for tax depreciation purpose shall be 580,000 i.e. 500,000 + (980,000 –
900,000)
Compare if the new asset is not a similar asset:
Non-recognition rule Applicable NA
Cost of Z 580,000 980,000
Tax gain on Y nil 620,000
Tax dep on Z 210,250 355,250
Net effect in the tax year 20X8 exp 210,250 gain 264,750
Closing tax WDV (future tax dep) 369,750 624,750
580,000 360,000
c) Transfer of depreciable asset or intangible between wholly-owned companies
– S 97

No gain or loss shall arise where a company (the transferor) transfers a depreciable asset
or intangible to another company (the transferee) and both the companies belong to a
wholly-owned group i.e.
- one company beneficially holds all the issued shares of the other company; or
- a third company beneficially holds all the issued shares in both companies.

Tax WDV of the asset shall be treated as cost for the transferee and any unabsorbed
depreciation or unabsorbed amortization in the hands of the transferor in this respect shall
be used by the transferee company.
Certain special cases:
(1) Cost of an asset owned by more than one person in the hands of each co-owner is
their cost of acquiring and not the cost of asset itself. In a special case, equal co-owners
may have different costs e.g. cost of office building for Mr. A is Rs.1 million. After one year
Mr. A sold 50% of building to Mr. B for Rs.800,000. Part of an asset disposed off shall be
considered as disposal of asset. Now the cost of 50% for Mr. A is Rs.500,000 and for Mr.
B Rs.800,000.

(2) Cost of a depreciable asset acquired with some thing else in a single transaction shall
be restricted to FMV e.g. a photocopy machine having FMV of Rs.70,000 is purchased at
Rs.80,000 due to 6 months service and maintenance contract. In this case, depreciable
amount would be Rs.70,000 and the balance shall be allowed as revenue expenditure.
Certain special cases:
(3) Cost of two or more assets acquired in a single transaction is apportioned in proportion
to their FMV at the time of acquisition e.g.

Cost of furniture and computer 100,000

FMV at the time of acquisition:
Furniture 70,000
Computer 50,000

Therefore cost for tax depreciation purpose:

Furniture 58,333
Computer 41,667
Question 16 [Q.2(b) March 2018]
Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or
loss under correct head of income for tax year 20X8, in the following case:

Shaoor is the sole proprietor of Shaoor Enterprises (SE).

On 31.1.20X8 SE sold a factory building including land for Rs.10 million.
At the time of disposal, the fair market values of the land and building were Rs.3
million and Rs.5 million respectively.

The land and building were acquired on 1.7.20X6 at a cost of Rs.2 million and Rs.6
million respectively.
The tax WDV of the building on 1.7.20X7 was Rs.5.4 million. (Marks 5)
 FMV Sale value
Land 3,000,000 3,750,000
Building 5,000,000 6,250,000
8,000,000 10,000,000

Capital gain: sale of land

Sale value of land 3,750,000
Cost of land 2,000,000
Capital gain 1,750,000

Business income: sale of building

Sale value of building 6,250,000
Cost of building 6,250,000
Tax dep 6,000,000 – 5,400,000 600,000 5,650,000
Tax gain on disposal 600,000
 AMORTIZATION OF
INTANGIBLES – S 24
 AMORTIZATION OF INTANGIBLES – S 24
a) Intangible means any patent, invention, design, secret formula, copyright, trade
mark, scientific or technical knowledge, computer software, motion picture film, export
quota, franchise licence or like property or right and any expenditure that provides an
advantage for a period of more than one year. Self-generated goodwill shall not be
treated as intangible asset.

Portion of Q.1 Dec 2014 ICAP CFAP

Admn expenses include Rs.480,000 which was incurred in relation to an
advertising campaign launched prior to the introduction of a new product
line in an effort to enhance public
awareness.
Treatment
Rs.480,000 is intangible and needs to be amortized
 AMORTIZATION OF INTANGIBLES – S 24

b) Where an intangible is used for business purpose an amortization

deduction in a tax year is allowable as under:
Cost of intangible
Normal useful life in whole years

Where an intangible does not have an ascertainable useful life then the
same shall be treated as 25 years.
c) If an intangible is used partly for business purpose and partly for other use in a
tax year then amortization deduction shall be allowed proportionately.
Example: Mr. A acquired an intangible on 1 July at a cost of Rs.500,000 which is
used 60% for his business and 40% for other use. Useful life of the intangible is
estimated to be 8 years. Calculate amortization deduction allowable for the year.
Answer:
Cost of the intangible on 1 July 500,000
Amortization for the year (500,000 / 8) 62,500
Closing WDV 437,500
Amortization deduction allowable for the
tax year 60% of 62,500 37,500
d) If an intangible is not available for use for the whole tax year then amortization
deduction shall be calculated proportionately based on number of days available for
use divided by number of days in the tax year.

Example: Mr. A acquired an intangible on 1 March at Rs.300,000 with

estimated useful life of 12 years and there was no other use. Calculate the
amount of amortization he can claim as tax deductible for the year ended
30th June.

Answer:
Cost of intangible 300,000
Less: Amortization (300,000 / 12) x (122 / 365) 8,356
Closing WDV 291,644
e) Amortization deduction is not allowed in the year of disposal of
intangible. Any gain or loss on such disposal shall be considered for tax
purpose and shall be calculated by deducting tax WDV from consideration
received.
PRE-COMMENCEMENT
EXPENDITURES – S 25
 PRE-COMMENCEMENT EXPENDITURES – S 25
a) Pre-commencement expenditures that were not allowed as tax
expense shall be amortized @ 20% on straight line basis and amortization
shall be allowed as a tax deduction.

(b) Pre-commencement expenditure means any expenditure incurred

before the commencement of business (i.e. before the commencement of
commercial production) exclusively for business purpose including the
cost of feasibility studies, prototypes and trial production activities (net of
sale proceed of trial production, if any) but excluding cost of land,
depreciable assets and intangibles.
Payments to establish a business entity: A portion of pre-commencement
expenditures is not allowable tax expense which relates to establishment of business
entity as under:
(a) Expenditures paid to establish a business entity are not allowable deduction for tax
purpose e.g. company incorporation expenses [normally termed as preliminary expense]
and shares issue expenses. Even if a company amortizes preliminary expense it shall be
added back to the accounting profit while determining taxable profit.
Likewise, charges for drafting of partnership deed and registration of firm are not
allowable tax expense
On the other hand, Debentures etc issue exp are allowable
Exception is amalgamation – section 20(3)
Legal and financial advisory and other admn cost is allowable.

(b) Premium or discount on issue of shares is not considered for tax purpose. However, if
any interest bearing security is issued at premium or redeemed at discount it shall be
taxable income and if any interest bearing security is issued at discount or redeemed at
premium it shall be an allowable tax deduction as the same are included in the definition
of profit on debt given in the Ordinance.
(a) Expenditures paid to establish a business entity are not allowable deduction for tax
purpose e.g. company incorporation expenses [normally termed as preliminary expense]
and shares issue expenses. Even if a company amortizes preliminary expense it shall be
added back to the accounting profit while determining taxable profit. Debentures etc issue
exp are allowable
Portion of Q.1 Dec 2014 ICAP CFAP
Admn expenses include legal fees of Rs.50,000 and Rs.125,000 which were
paid in connection with the filing of statements with Stock Exchange and
increase in authorized capital respectively.

Treatment
Rs.50,000 is admissible
Rs.125,000 is inadmissible
Now solve Q.12.4 and Q.12.5