ALLOWANCE [Rule-121

CONDITIONS APPLICABLE TO DEPRECIATION

information:
is conditional upon the following
An allowance for depreciation
asset has been used during the tax year; and
1. The
Rule-12 of the Income Tax Rules, 2002 and the
2 The particulars prescribed in
information and documents required by
the Commissioner of Income Tax are duly
furnished.
Particulars Required to be Furnished (Rule-12]
in of an asset:
The following particulars should be furnished to the tax authorities respect
1. Description of the asset (depreciable asset or intangible) in respect of which
depreciation is claimed.

2. The part allocable to business, if the asset has not been used wholly for the business.

3 The date of acquisition.

4. WDV of the asset at the beginning
of the tax year.
5 Amount of the capital expenditure incured on:
i) Additions; ii) Alteration;
ii) Improvements; and/or iv) Extensions.
6 Sale proceeds of any asset which has been
disposed off.
7 WDV of the asset disposed off during the tax year.
8. Total value of each asset, on which depreciation is allowable, shall be determined as
below:
WDV at the beginning of tax year
XXX
Add: Capital expenditure during the tax
year XXX XXX
Less: Initial depreciation allowed, if any XXX
XXX
 Example: 10.14

aomoany purchased a
AC machine for Rs.
ethe toamount be allowed 400,000 onthe first day of the
as
depreciation onmachine for the tax tax vear.
Answer: year.
Cost of the machine
Initial depreciation as per Third Schedule Rs. 400,000
WDV for nomal depreciation (400,000 x 25%)
100,000
Normal depreciation: Total (300,000 x 15%) 300.000
Less: Reduction in depreciation (50% of 45,000
45,000) 22.500 22.500
Total depreciation for the year:
Initial depreciation
Normal depreciation 100,000
Total 22.500
122.500
9 Prescribed rate of depreciation stating separately the rate for
) Initial depreciation (also first year allowance & accelerated depreciation); and
ii) Normal depreciation.
10 Nomal useful life for each intangible.
11 Amount of depreciation allowable on account of:
i) Initial depreciation, first year allowance or accelerated depreciation;
ii) Normal depreciation; and
iil) Amortization.
12 Total depreciation and amortization allowed for the tax year.
at the end of the tax
13. The WDV of each depreciable asset and the cost of intangible
life.
year along with its remaining nomal useful
YEAR
PARTICULARS FOR ASSETS DISPOSED DURING THE
the tax year,
1. Sale proceeds of the assets disposed off during
of such assets which were disposed off during
2 WDV at the beginning of the tax year
the tax year, and
3. The excess or deficit on the disposal of assets.

GENERAL PROVISIONS
allowance shall not exceed the original cost of the
1.
1. The total amount of the depreciation depreciation allowable under the Income Tax
maximum
asset. In other words, the
the cost of the asset. [22(7)]
Ordinance is restricted upto
an asset at any time during
the tax year, no depreciation
2. Where taxpayer disposes off
for the year of disposal. [22(8)]
allowance shall be deductible

ASSET (22(8)]
GAIN OR LOSS ON DISPOSAL OF or loss
be taken as profit
an asset shall respectively
deficit on the disposal of
Any gain or
to the profit and loss
account.
rom the business and be charged
Synopsis of Taxes
Income Tax - Assets & Depreciation
[10-234)
Example: 10.15
Riaz Limited has the following assets at the start of the tax year:

Class of Assets WDV as Per Tax Records

Land Rs. 8,000,000
Building 15,000,00o
Plant& Machinery 20,000,000
Motor Vehicle 2,500,000
Computers 450,000
Furniture 100,000
During the tax year the company disposed of the following assets:
Assets WDV Sale Proceeds
Motor Vehicles Rs. 100,000 Rs. 120,000
Computers 75,000 64,000
Furniture 10,000 6,000
The company also purchased the following assets during the
yea
Office Furniture Rs. 20,0000
Computer 50,000
Required: Compute the amount of depreciation allowance for the tax year and the amount
of gain or loss from the disposal
of assets.
Answer:
Depreciation Allowance for the Year:
Assets WDV WDV for
Addition Deletion Rate Depreciation
Land
Beginning Deprecation Allowance_
8,000,000 8,000,000
Buildings 15,000,000 15,000,000 10% 1,500,000
Plant & Machinery 20,000,000 20,000,000 15% 3.000,000
Motor Vehicles
2,500,000 100,000 2,400,0000 15% 360,000
Computers 450,000 50,000 75,000 425,000 30% 120,000
Furniture 100,000 20,000 10,000 110,000 15% 15,000
Total 46,050,000
70,000 185,000 45,935,000 4,995,000
Depreciation on Assets Used First Time in the Tax Year:
Computer
Acquired in previous years (450,000 75,000) 30%
=
112,500
Acquired during the year 50,000 @ 30% = 15,000 less 50%7.500 120,000
Furniture:2
Acquired in previous years =
(100,000 10,000) @ 15% 13,500
Acquired during the year 20,000 15% 3,000 less 50%
=
1.500 15,000
Gain or Loss on Disposal of Assets:
Assets (1) Sale Proceeds (2) WDV (3) Gain(Lose)= (2)-(3)
Motor Vehicle 120,000 100,000 20,000
Computers 64,000 75,000 (11,000)
Furnituree 6,000 (4,000)
10,000
Total 190,000 185,000 5,000
WRITTEN DOWN VALUE (WDV) [22(5)]|
The WDV of the assets shall be determined in the light of the following principles:
Asset Acquired During the Tax Year
Where an asset is acquired during the tax year, its WDV shall be computed as below
Total cost of the asset XXX
Less: Initial allowance, first year allowance or accelerated depreciation, if any XXX
WDV at the beginning of the tax year XXX
Example: 10.16
A company purchased a new machine on the first day of its tax year for Rs. 100,000.
Compute WDV of the asset at the beginning of the tax year and the total amount to be
allowed as depreciation.
Cost of the machine Rs. 100,000
Less: Initial allowance (@25% of cost) 25,000
WDV at the beginning of tax year 75,000
Less: Depreciation allowance (@15% ofWDV) =
11,250
Less: Reduction for first time use (50% of 11,250) 5.625 5.625
WDV at the end of the tax year 69,375
Depreciation allowed for the year:
Initial allowance 25,000
Normal depreciation 5.625
Total 30.625
WDV of any Asset Which is Partly Used for Business [22(6)]
Where an asset is partly used for business and partly for another use, the WDV for
depreciation purposesshall be computed on the basis that thee asset has been solely used
for business.
Example: 10.17
the already discussed example under the title "Asset Partly Used for Business"
Considering
(Example 10-11) the WDV for second tax year shall be computed as below
Cost of the building (1/4 the being used for Business) Rs. 4,000,000
Total depreciation (@ 10% of WDV) for first year 400.000
SynopsiS of 1aes

(and at the beginning of the second year) 3,600,000

WDV at the end of first year
Total depreciation (@ 10% of WDV)
for second year 360.000
WDV at the end of second year 3,240,000
deduction
Total depreciation allowed as
For first tax year (1/4th of Rs. 400,000) Rs. 100,000
i)
For second tax year (1/4th of Rs. 360,000) 90.000 190,000
Depreciation not allowed as deduction
i) For first tax year (Rs. 400,000 - Rs. 100,000) Rs. 300,000
i) For second tax year (Rs. 360,000- Rs. 90,000) 270.000 570,000
Gain or Loss on Disposal of an Asset which is Partly Used for Business [22(9)]
The gain or loss on disposal of an asset is computed by deducting the WDV out of the
consideration received against the asset. In case of an asset which is partly used for
business, the WDV may be computed in any of the following ways:
1 Cost of the asset XXX
Less: Total depreciation allowed on asset till its disposal XXX XXX
OR
2 WDV computed for depreciation purpose XXX
Add: Total depreciation not allowed XXX XXX
Example: 10.18
Assume that the building discussed in earlier Example 10.17 is disposed off
during the third
year for Rs.3,900,000. The gain or loss its disposal shall be computed
on as below
Disposal consideration 3,900,00o
Less:WDV at the time of disposal (4,000,000-190,000) OR
Gain on disposal
(3,240,000+570,000) 3,810,000
90.000
Asset Acquired Prior to the Tax Year
Where an asset was acquired at any time before the tax
as per the
year, the WDV shall be detemined
following:
Actual cost of the asset at the time of
Less: Total depreciation (nomal and
acquisition. XXX
special) allowed before the tax year. XXX
WDV at the beginning of the tax year.
XXX