INCOME

FROM
BUSINESS
"CONTENTS"
• Depreciable assets and Depreciation
• Intangibles
• Pre-commencement expenditures
• Assets
"DEPRECIABLE ASSET" SEC 22 (15)
Means:
• any tangible movable property
• immovable property (other than unimproved land)
• structural improvement to immovable property
that –
a. has a useful life exceeding one year
b. is lose value as result of normal wear and tear or obsolescence
c. is wholly or partly used in deriving business income
but does not include any of the above assets for which entire cost is allowed under any other
provision of ITO 2001
"DEPRECIABLE ASSET" SEC 22 (15)
Where the depreciable asset
i. jointly owned by taxpayer and Islamic Financial Institution licensed by SBP or SECP
ii. under Musharika
iii. depreciable asset treated as wholly owned by the taxpayer
"STRUCTURAL IMPROVEMENT" SEC 22 (15)
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
"DEPRECIATION" SEC 22 (1-14) 3RD SCH (PI)
Depreciation deduction:

• Wholly used = (Rate * WDV at the beginning of the year)

• Partly used = (Rate * WDV at the beginning of the year) * business proportion
• In the year of acquisition, full year depreciation is allowed as deduction
• In the year of disposal, no depreciation deduction is allowed
• Total depreciation deductions shall not exceed cost
• Depreciation deductions of leased assets owned by LC / IB / modaraba / SB / DFI
deductible only against lease rentals income
"DEPRECIATION" SEC 22 (1-14) 3RD SCH (PI)
WDV at the beginning of the year (for depreciation purposes):

Wholly used:
• Asset acquired = cost – initial allowance
• In other cases = cost – initial allowance – depreciation deductions
• Exempt income = WDV is reduced by depreciation deductions which are assumed as
allowed in period when income was exempt

Partly used:
WDV computed as asset is solely used for business:
cost – total depreciation (both business and other purpose)
"DEPRECIATION" SEC 22 (1-14) 3RD SCH (PI)
+Gain / - loss on disposal of asset: consideration received – WDV of the asset
• Partly used: WDV shall be increased by depreciation deductions not allowed: cost –
business depreciation
• Consideration received on disposal of passenger transport vehicle not plying for hire:
(amount received*Limited cost/ Actual cost)
• If consideration received on disposal of immovable property exceeds cost, treat
consideration as cost (Gain = depreciation)
• Land is treated as capital asset and not depreciable asset. Its gain / loss is covered under
the head capital gains
• If depreciable asset is exported or transferred out of Pakistan, consideration equals to cost
(Gain = depreciation)
"DEPRECIATION" SEC 22 (1-14) 3RD SCH (PI)
Determination of cost
Cost of passenger transport vehicle not plying for hire not exceed Rs 7.5 million
Cost of immovable property / structural improvement to immovable property not include cost
of land
Assets owned by LC / IB / modaraba / SB / DFI and leased to another treated as used by them
"DEPRECIATION" SEC 22 (1-14) 3RD SCH (PI)
Depreciation Rates:
Buildings 10%
F&F, P&M, vehicles, ships, books 15%
Computer hardware 30%
Mach & Equip for manufacture of IT products, aircrafts and aero engines 30%
"AUTUMN 2017– Q 3 (C) & (D)"
Question

a) Sarwar Enterprises sold an immovable property for Rs. 50 million. The cost of the
immovable property was Rs. 30 million. Tax depreciation of Rs. 6 million had been
allowed on the immovable property up to the tax year 2016. (2.5)

b) Shams Industries Limited (SIL) sold and exported one of its plants to a Nigerian
Company. The sale proceeds received in SIL’s account amounted to Rs. 25 million. The
cost and tax written down value of the plant was Rs. 20 million and Rs. 7 million
respectively. (2.5)
"AUTUMN 2017– Q 3 (C) & (D)"
Answer
"SPRING 2018 – Q 2 (B)"
Question
Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss under correct head
of income for tax year 20X8, in each of the following cases:
Shaoor is the sole proprietor of Shaoor Enterprises (SE). On 31 January 20X8 SE sold a factory building
including land for Rs. 10 million. At the time of disposal, the fair market values of the land and building
were Rs. 3 million and Rs. 5 million respectively.
The land and building were acquired on 1 July 20X6 at a cost of Rs. 2 million and Rs. 6 million respectively.
The tax WDV of the building on 1 July 20X7 was Rs. 5.4 million.
(05)
Note: Land falls under the definition of capital asset.
"SPRING 2018 – Q 2 (B)"
Answer
"SPRING 2019 – Q 3(B)(I)"
Question
Following transactions pertain to Salam Limited (SL) which took place during the tax year 20X9:
A machine costing Rs. 1,800,000, being used in SL’s Karachi factory was transferred to its subsidiary in
Ghana. The fair market value and tax written down value of the machine on the date of transfer were Rs.
2,500,000 and Rs. 600,000 respectively.
Required:
Explain the taxability of the above transactions. (2)
"SPRING 2019 – Q 3(B)(I)"
Answer
"AUTUMN 2019 – Q 5(B)"
Question
During the tax year 20X9, Salman Shahid sold the following assets:
(i) A vehicle used by manager-in-charge of his garment factory for Rs. 2.8 million. The vehicle was
purchased for Rs. 3.1 million in tax year 20X6. (03)
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute under the appropriate head of income, the
amount to be included in the taxable income of Salman Shahid for the tax year 20X9.
"AUTUMN 2019 – Q 5(B)"
Answer
"INITIAL ALLOWANCE" SEC 23, 3RD SCH (PII)
• Conditions:
i. eligible depreciable asset
ii. into service in Pakistan
iii. for the first time in a tax year
• Year: allowed in the year of use or commercial production commenced, later of
• Allowance: Rate * cost of asset
• Initial allowance of leased assets owned by LC / IB / modaraba / SB / DFI shall be
deductible only against lease rentals income
"INITIAL ALLOWANCE" SEC 23, 3RD SCH (PII)
• “Eligible depreciable asset” means depreciable asset other than –
i. Road transport vehicle not plying for hire
ii. Furniture & fittings
iii. Plant & machinery previously used in Pakistan
iv. Plant & machinery for which entire cost is allowed
v. immovable property or structural improvement to the immovable property
• Rate:
Plant & machinery 25%
"INTANGIBLES" SEC 24
“Intangible” any patent, invention, design or model, secret formula or
process, copyright, trade mark, scientific or technical knowledge,
computer software, motion picture film, export quotas, franchise, license,
intellectual property, or other like property or right, contractual rights
and any expenditure that provides an advantage or benefit for a period of
more than one year (other than expenditure incurred to acquire a
depreciable asset or unimproved land)
“cost” any expenditure incurred in –
i. Acquiring / creating the intangible
ii. Improving / renewing the intangible
"INTANGIBLES" SEC 24
• No amortization deduction allowed for asset whose entire cost is allowed
under any other provision of ITO 2001
Amortization deduction:
• Wholly used = cost / normal useful life in years
• Treat normal useful life 25 years where useful life not ascertainable
• Partly used: (cost / normal useful life) * business proportion
• Intangible not used for the complete tax year:
amortization deduction * no of days used / total days in TY)
• Intangible asset available for use (including not working day) considered
as used on that day
• Total amortization deductions shall not exceed cost
• No amortization deduction is allowed in the year of disposal
• +Gain / - loss on disposal of asset:
consideration received – WDV of the asset
• Partly used: consideration received – WDV of the asset (cost – total
amortizations i.e. business & non-business)
"PRE-COMMENCEMENT EXPENDITURE"
SEC 25, 3RD SCH (PIII)
“Pre-commencement expenditure” means any expenditure
• Incurred before the commencement of a business
• Wholly & exclusively to derive income chargeable to tax
Including:
• Cost of feasibility studies
• Construction of prototypes
• Trial production activities
But does not include expenditure in acquiring –
• Land
• Depreciable asset
• Intangible
Deduction allowed: 20% on straight line basis
• Total deductions shall not exceed total expenditure
• No deduction allowed for expenditure where entire cost is allowed under
any other provision of ITO 2001
"DISPOSAL OF ASSETS" SEC 75
• Disposed off at the time owner parts with the ownership of the asset, which
includes:
i. Sold, exchanged, transferred or distributed
ii. Cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered
• Transmission by succession or under a will at the time transmitted
• Application of business asset to personal use at the time so applied
• Where business assets is discarded or ceased to be used in business
• Disposal includes partial disposal
• “business asset” asset wholly / partly for business use, including stock and
depreciable asset
• “personal asset” asset wholly for personal use
"AUTUMN 2014 – Q 4"
Question
In Income Tax Ordinance, 2001 the term “disposal” has a wider connotation than sale because it includes
exchange, relinquishment, and extinguishment.
List the situations under which an asset owned by a person shall be treated to have been disposed of. (05)
"AUTUMN 2014 – Q 4"
Answer
Under the following situations an asset shall be treated to have been disposed off:
a) A person who holds an asset shall be treated as having made a disposal of the asset
at the time the person parts with the ownership of the asset, including when the asset
is:
i. sold , exchanged ,transferred or distributed; or
ii. cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered.
b) The transmission of an asset by succession or under a will shall be treated as a
disposal of the asset by the deceased at the time asset is transmitted.
c) The application of a business asset to personal use shall be treated as a disposal of
the asset by the owner of the asset at the time the asset is so applied.
d) Where a business asset is discarded or ceases to be used in business, it shall be
treated to have been disposed of.
e) 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.
"SPRING 2017 – Q 2 (A)"
Question
Explain the term ‘disposal of assets’ as referred to in the Income Tax Ordinance, 2001. (05)
"SPRING 2017 – Q 2 (A)"
Answer
Under the following situations an asset shall be treated to have been disposed off:
a) A person who holds an asset shall be treated as having made a disposal of the asset
at the time the person parts with the ownership of the asset, including when the asset
is:
i. sold , exchanged ,transferred or distributed; or
ii. cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered.
b) The transmission of an asset by succession or under a will shall be treated as a
disposal of the asset by the deceased at the time asset is transmitted.
c) The application of a business asset to personal use shall be treated as a disposal of
the asset by the owner of the asset at the time the asset is so applied.
d) Where a business asset is discarded or ceases to be used in business, it shall be
treated to have been disposed of.
e) 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.
"ACQUISITION OF ASSETS" SEC 75
• Acquired asset at the time the person begins to own the asset
• At the time the person in granted any right
• Application of personal asset to business use at the time so applied
"PURCHASE OF ASSETS THROUGH
BANKING CHANNEL" SEC 75A
No person shall purchase
• immovable property having fair market value greater than Rs 5 million; or
• any other asset having fair market value more than Rs 1 million,

Otherwise than by a
• crossed cheque drawn on a bank or
• through crossed demand draft or
• crossed pay order or
• any other crossed banking instrument showing transfer of amount from one bank
account to another bank account.
"PURCHASE OF ASSETS THROUGH
BANKING CHANNEL" SEC 75A
In case of immoveable property, fair market value means the higher of:
• value notified by the Board us 68(4) or
• value fixed by the provincial authority for the purposes of stamp duty

In case the transaction is not undertaken in the manner specified above:

(a) such asset shall not be eligible for any allowance us 22, 23, 24 and 25 of this
Ordinance;
(b) such amount shall not be treated as cost us 76 of this Ordinance for computation
of any gain on sale of such asset; and
(c) Such person shall pay a penalty of 5% of the FBR value or DC rate whichever is
higher, in case of immovable property.
"SPRING 2022 – Q 2(A)(I)"
Question
Under the provisions of the Income Tax Ordinance, 2001 discuss the tax implication/treatment in each of the
following independent matters:
(i) Purchase of immovable property in cash. (03)
"SPRING 2022 – Q 2(A)(I)"
Answer
In case any immovable property having fair market value (FBR value or DC rate whichever is higher) greater
than five million rupees is purchased in cash, then it will have following implications:
• Such asset shall not be eligible for initial allowance or depreciation.
• Such amount shall not be treated as cost for computation of any gain on disposal (sale value will be
treated as capital gain).
• Such person shall pay a penalty of 5% of the FBR value or DC rate whichever is higher.
"COST" SEC 76
Cost of an asset:
i. Consideration given (FMV of kind consideration + cash and cash equivalent)
ii. Incidental expenditure in acquiring or disposing of the asset
iii. Any expenditure to improve or alter the asset
• FMV of personal asset when applied to business use
• Constructed asset includes total cost of construction + expenditure on acquisition, alteration,
improvement or disposal
• Asset acquired with a foreign loan, increase / decrease is added / reduced to the cost
Note: Account for person’s position under an hedging arrangement relating to the loan.
• Where part disposal, cost apportioned with respect to their FMV at the time of acquisition
• Derivation of chargeable income + amount paid
• Derivation of exempt income + amount paid
• The cost excludes grant, subsidy, rebate, commission or any other assistance except to the extent the
amount is chargeable to tax.
"AUTUMN 2015 – Q 2"
Question
Under the provisions of the Income Tax Ordinance, 2001 what would be the cost of an asset
for the purpose of depreciation deduction in each of the following circumstances?
a) Mr. Aamir acquired a new machine partly in exchange for an old machine. He paid
freight to bring the old machine to the seller’s location and also purchased cooling
equipment which was attached to the new machine for its smooth functioning. (04)
Answer
The cost of new machine purchased by Mr. Aamir in exchange for an old machine shall be
the sum of the following amounts:
i. the total cash given for the new machine;
ii. the fair market value of the old machine as determined at the time the asset is acquired;
iii. any incidental expenditure incurred in acquiring new machine and disposing of the old
exchanged machine. Such as freight given in this case; and
iv. any expenditure incurred to alter or improve the new machine. For instance purchase of
cooling equipment given in this case.
 "AUTUMN 2015 – Q 2"
Question
Under the provisions of the Income Tax Ordinance, 2001 what would be the cost of an asset for
the purpose of depreciation deduction in each of the following circumstances?
b) Mr. Saulat acquired production machinery by utilizing a loan repayable in euro. The loan is
expressed in rupees and is repayable in two years’ time. Mr. Saulat also received 20% subsidy on
such machinery from the Provincial Government. (04)
Answer
In determining the cost of production machinery, the actual amount spent by Mr. Saulat shall be
reduced by the amount of subsidy received by him on acquisition of such machinery, unless such
amount of subsidy is chargeable to tax.
Since Mr. Saulat has purchased the machinery with a loan repayable in euro and before full and
final repayment of the loan, if there is an increase or decrease in the loan liability, in terms of
rupee, due to exchange rate fluctuation, the amount by which the liability is increased or reduced
shall be added to or reduced from the cost of the asset, as the case may be.
However, difference if any, on account of foreign currency fluctuation, shall be taken into
account in the year of occurrence for the purposes of depreciation.
"AUTUMN 2015 – Q 2"
Question
Under the provisions of the Income Tax Ordinance, 2001 what would be the cost of an asset for the purpose
of depreciation deduction in each of the following circumstances?
c) On 1 July 2015 Mr. Talha started using his personal computer for business purposes. He also had to
upgrade the operating system to comply with his business needs. (02)
Answer
Cost of an asset:
• The cost of personal computer shall be its fair market value on 1 July 2015, the date on which Mr. Talha
started using it for business purposes plus
• cost incurred by him on its up-gradation.
"AUTUMN 2015 – Q 2"
Question
Under the provisions of the Income Tax Ordinance, 2001 what would be the cost of an asset for the purpose
of depreciation deduction in each of the following circumstances?
d) Mr. Rahi constructed a furnace for his factory in Korangi Industrial Area. (02)
Answer
Cost of an asset:
The cost of the furnace shall be the sum of the following:
i. the total cost incurred by Mr. Rahi for the construction of the furnace;
ii. any incidental expenditure incurred by Mr. Rahi for acquiring of the asset; and
iii. any expenditure incurred to alter or improve the asset.
"AUTUMN 2019 – Q 3(D)"
Question
Respond to the following independent scenarios, under the provisions of the Income Tax Ordinance, 2001:
Shahbaz has acquired machinery for his new factory against a loan repayable in USD. Discuss what would
be the cost of machinery for the purpose of depreciation deduction. (02)
"AUTUMN 2019 – Q 3(D)"
Answer
Since Shahbaz has purchased the machinery with a loan repayable in USD and before full and final
repayment of the loan, if there is an increase or decrease in the loan liability, in terms of rupee, due to
exchange rate fluctuation, the amount by which the liability is increased or reduced shall be added to or
reduced from the cost of the asset, as the case may be.
However, difference if any, on account of foreign currency fluctuation, shall be taken into account in the
year of occurrence for the purposes of depreciation.
"SPRING 2022 – Q 2(B)"
Question
For the purpose of this part of the question, assume that the date today is 31 August 2022.
During the year ended 30 June 2022, Faster & Co. (FC) started a new project. Following information is available:
• Incurred Rs. 5 million on feasibility study of the project.
• Obtained a 3% loan of AED 2 million from a UAE bank on 1 January 2022 for the purchase of plant and
machinery. The interest is payable annually and principal amount is repayable at the end of third year.
• Installed the plant and machinery at a cost of Rs. 150 million on 14 March 2022.
The exchange rates of 1 AED to PKR on different dates are as follows:

Required
Compute the amount of allowable deduction in determining the taxable income of FC
for tax year 2022. (04)
"SPRING 2022 – Q 2(B)"
Answer
"CONSIDERATION RECEIVED" SEC 77
• Higher of:
i. Consideration received (FMV of kind consideration + cash and cash equivalent)
ii. FMV of the asset
• Lost or destroyed asset, consideration received under:
i. Insurance policy, indemnity or other agreement
ii. Settlement
iii. Judicial decision
• FMV of business asset when applied to personal use, discarded or ceased to business use
• In case of leased asset, amount received by the lessor (provided residual value + lease payments not
less than cost)
• Two or more assets disposed in single transaction and consideration of each asset not specified, total
consideration apportioned at respective FMV at the time of disposal transaction.
"AUTUMN 2015 – Q 2"
Question
Under the provisions of the Income Tax Ordinance, 2001 what would be the cost of an asset
for the purpose of depreciation deduction in each of the following circumstances?
b) Mr. Saulat acquired production machinery by utilizing a loan repayable in euro. The loan
is expressed in rupees and is repayable in two years’ time. Mr. Saulat also received 20%
subsidy on such machinery from the Provincial Government. (04)
Answer
In determining the cost of production machinery, the actual amount spent by Mr. Saulat shall
be reduced by the amount of subsidy received by him on acquisition of such machinery,
unless such amount of subsidy is chargeable to tax.
Since Mr. Saulat has purchased the machinery with a loan repayable in euro and before full
and final repayment of the loan, if there is an increase or decrease in the loan liability, in
terms of rupee, due to exchange rate fluctuation, the amount by which the liability is
increased or reduced shall be added to or reduced from the cost of the asset, as the case may
be.
However, difference if any, on account of foreign currency fluctuation, shall be taken into
account in the year of occurrence for the purposes of depreciation.
"AUTUMN 2019 – Q 5(B)"
Question
During the tax year 20X9, Salman Shahid sold the following assets:
(ii) A machine for Rs. 350,000 on 1 June 20X9, which he had imported from Malaysia for Rs. 1,900,000
on 1 May 20X9, to start a new business. The machine was badly damaged during the shipment from
Malaysia, rendering it unfit for use. He received insurance claim of Rs. 1,840,000 as damages on 15
May 20X9. Charges incurred in connection with the submission of claim with insurance company were
Rs. 38,000. (03)
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute under the appropriate head of income,
the amount to be included in the taxable income of Salman Shahid for the tax year 20X9.
"AUTUMN 2019 – Q 5(B)"
Answers