Q- Explian various types of depreciation allowances. whatare condiions for allowability of depriciation.

DEPRECIATION

Introduction: 

                     The term depreciation has not been defined in the income tax ordinance. therefore, it has to be understood in its usual commercial sense.

  Depreciation means  a gradual and permanent decrease in the value of an asset through wear and tear and obsolescence. In computing the taxable profits of a business  or profession, the income tax law permits the deduction of depreciation subject to certain conditions.

Assets allowable for depreciation;

                                                 According to section 22(1) of the income ordinance 2001," A person shall be allowed a deduction for depreciation of the person's depreciable assets[sec.22(15)]  used in the person's business  in the tax year"

It means only depreciable assets are allowed for depreciation.

Depreciable asset implies any tangible movable property, immovable property(other than unimproved land) or structural improvement to immovable property owned by the 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.

Types of depreciation allowance.
There are four main types of depreciation allowance given in the income ordinance 2001.
1- Normal depreciation allowance
2- Initial depreciation allowance
3- First year allowance.
4- Accelerated Depreciation

1) Normal Depreciation Allowance: (22)
                                                         Normal depreciation is to be calculated at the prescribed rates for various types of assets on the written down value of the depreciable assets.

Depreciation rates specified for the purposes of section 22 shall be -

   

I.	Building (all types).	10%
II.	Furniture (including fittings) and machinery and plant (not otherwise specified), Motor vehicles (all types), ships, technical or professional books..	15%
III.	Computer hardware including printer, monitor and allied items, machinery and equipment used in manufacture of I.T. products aircrafts and aero engines.	30%
IV.	In case of mineral oil concerns the income of which is liable to be computed in accordance with the rules in Part-I of the Fifth Schedule. (a)        Below ground installations (b)        Offshore platform and production installations (c)        A ramp built to provide access to the persons with disabilities not exceeding Rs. 250000 each.                                                1oo%	100%   20%

2-Initial Allowance  (23)  

    (1) A person who places an eligible depreciable asset in service in Pakistan for the first time in a tax year shall be allowed a deduction (initial allowance‖) provided the asset is used by the person for the purposes of his business for the first time or the tax year in which commercial production is commenced,whichever is later.

(2) The amount of the initial allowance of a person shall be computed by
applying the rate specified in Part II of the Third Schedule against the cost of the
asset. Rate of initial allowance is 50 %.

(3) A deduction allowed under this section 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 such institutions and leased to another person shall be deducted only against the leased rental income derived in respect of such assets.]
NOTE; It must be noted that initial allowance for depreciation is not provided in the following  cases
(a) any road transport vehicle not the vehicle is plying for hire;
(b) any furniture, including fittings;
(c) any plant or machinery that has been used previously in
   Pakistan

First Year Allowance.(23A)
The FYA has been provided in order to accelerate the industrial process in rural and under developed areas. Plant, machinery and equipment installed
by any industrial undertaking set up in specified rural and under developed
areas, and owned and managed by a company shall be allowed first year
allowance at the rate of 90% against the cost of the ―eligible depreciable assets‖ put to use after July 1, 2008.

Accelerated depreciation: 23B
 Accelerated depreciation to alternate energy projects.— (1) Any plant,
machinery and equipments installed for generation of alternate energy by an
industrial undertaking set up anywhere in Pakistan and owned and managed by
a company shall be allowed first year allowance in lieu of initial allowance under
section 23, at the rate 90% against the cost of the eligible depreciation assets put to use after first day of July, 2009.

Conditions applicable to depreciation.
1-Asset used partly for business.    sec.22(3))
Where a depreciable asset is used in a tax year partly in derivingincome from business and partly for another use, the deductionallowed for that year shall be restricted to the fair proportionalpart of the amount that would be allowed if the asset was wholly used toderive income from business chargeable to tax.

2-Determination of written down value.           
The written down value of a depreciable asset of a person at thebeginning of the tax year shall be –—
(a) where the asset was acquired in the tax year, the cost of theasset to the person as reduced by any initial allowance inrespect of the asset under section 23; or

(b) in any other case, the cost of the asset to the person asreduced 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.

3-Determination of writtendown value in case asset used partly for business.
Where a depreciable asset is used during a tax year partly for business and partly for another use, the written down value of the asset shall be computed on the basis that the assethas been solely used to derive income from business chargeable to tax.

4-Depreciation allowance not to exceed original cost.
The total deductions allowed to a person during the period ofownership of a depreciable asset under this section and section 23 shall notexceed the cost of the asset.

5-Disposal of asset used for business
Where, in any tax year, a person disposes of a depreciable asset, no
depreciation deduction shall be allowed under this section for that year.

6- Profit or loss on disposl of asset.
1-if the consideration received exceeds the written down value ofthe asset at the time of disposal, the excess shall be chargeable to tax in that year under the head ―Income fromBusiness or

2-if the consideration received is less than the written downvalue 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 tha year.

7-Disposal of asset partly used for business.(Maqsood ahmed , career academy hfd 03333424200)
Where a depreciable asset is not used for the whole of the tax year in deriving incomefrom business chargeable to tax, the written down value of the asset is computed by deducting the total depreciation allowed on asset till its disposal out of the sale proceeds received against the asset.
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8-Depreciation allowance in case of asset owned by leasing company, bank etc.
The depreciation deductions allowed to a leasing company or aninvestment bank or a modaraba or a scheduled bank or a development finance institution in respect of assets owned by such institution and leased to another person shall be deductible only against the lease rental income derived in respect of such assets.

9-Dpreciable allowance in case of immovable property.
         The cost of immovable property or a structural improvement of immovable property shall not  include the cost of land.

10- Cost of depreciable asset exporteed or transfered out of pakistan.
 Where a depreciable asset that has been used by a person inPakistan is exported or transferred out of Pakistan, the person shall be treated ashaving disposed of the asset at the time of the export or transfer for aconsideration received equal to the cost of the asset.