How depreciation deduction allowed for tax calculation

How depreciation deduction allowed for tax calculation

Section 22 of Income Tax Ordinance, 2001 explained deduction for depreciation of a person’s depreciable assets used in person’s business in a tax year.

The Federal Board of Revenue (FBR) issued the Income Tax Ordinance, 2001 updated up to June 30, 2021. The Ordinance incorporated amendments brought through Finance Act, 2021.

Following is the text of Section 22 of Income Tax Ordinance, 2001

22. Depreciation.— (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.

(2) Subject to sub-section (3), 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:

Provided that where a depreciable asset is used in the person’s business for the first time in a tax year commencing on or after the 1st day of July, 2020, the depreciation deduction shall be reduced by fifty percent.

(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.

(5) The written down value of a depreciable asset of a person at the beginning of the tax year shall be —

(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.

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.”

(6) Where sub-section (3) applies to a depreciable asset for a tax year, 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.

(7) 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.

(8) Where, in any tax year, a person disposes of a depreciable asset, no depreciation deduction shall be allowed under this section for that year and —

(a) if the consideration received exceeds the written down value of the asset at the time of disposal, the excess shall be 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 asset 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” for that year:

Provided that where a depreciable asset is used in the person’s business for the first time in a tax year commencing on or after the 1st day of July, 2020, depreciation deduction equal to fifty

percent of the rate specified in Part I of the Third Schedule shall be allowed in the year of disposal.

(9) Where sub-section (3) applies, the written down value of the asset for the purposes of sub-section (8) shall be increased by the amount that is not allowed as a deduction as a result of the application of sub-section (3).

(10) 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.

(11) Subject to sub-sections (13) and (14), the rules in Part III of Chapter IV shall apply in determining the cost and consideration received in respect of a depreciable asset for the purposes of this section.

(12) 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.

(13) 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.

(14) 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.

(15) In this section, —

“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:

“Provided that where a depreciable asset is jointly owned by a taxpayer and an Islamic financial institution licensed by the State Bank of Pakistan or Securities and Exchange Commission of Pakistan, as the case may be, pursuant to an arrangement of Musharika financing or diminishing Musharika financing, the depreciable asset shall be treated to be wholly owned by the taxpayer.”

(Disclaimer: The text of above section is only for information. Team PkRevenue.com makes all efforts to provide the correct version of the text. However, the team PkRevenue.com is not responsible for any error or omission.)

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