Assets and Depreciation Chapter- 10
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) 100,000Solution:
Rs.
Salary of engineer (fully engaged in manufacture of plant) 50,000
Raw material purchased for manufacture of plant 5 50,000
Wages to labour (40% portion related to manufacture of plant) 40,000
Total 640,000- 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, 20 22 , Mr. Zahid acquired a machine with loan in foreign currency ($50,000)
equivalent to Rs.4,000,000. On June 30, 20 23 , exchange rate was ($1 = RS. 85). Calculate the
amount of tax depreciation and initial allowance for tax year 20 23.
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.- 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, 202 2 , 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