Assets and Depreciation Chapter- 10
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: Section 22(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: Section 23(1) and Section 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: Section 22 and Section 75(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: Section 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. 7 ,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 25 years only. (Section 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 20 23 , 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. [(Section 22, 28(1)(B) & Section 23)].