Tax Book 2023

Assets and Depreciation Chapter- 10

(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 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.

Example 2: In tax year 20 20 , 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) 300,000 nil 300 ,000

900,000 500 ,000 1, 400 ,000

Tax depreciation @ (15% and 10%) 135,000 50 , 000 185 , 000

Closing WDV 765,000 450,0 00 1, 215 , 000