Explain Depreciation & Discuss Rules for Depreciation Allowance under Income Tax Ordinance 2001
Question: EXPLAINS DEPRECIATION WHAT ARE THE CONDITIONS RULES WHICH ARE LAID DOWN UNDER THE ORDINANCE FOR DEPRECIATION ALLOWANCE?
Answer : DEPRECIATION
A gradual decrease in value of asset due to use or wear and dear is known as depreciation. Generally the term depreciation also includes amortization and depletion.
According to section 20(2) of income tax ordinance 2001,
Where a person acquires depreciable assets or intangible assets with a useful life of more than one year or incurs per-commencement expenditure, he must charge depreciation or deplete the asset as per section 22, 23, 24 and 25.
While calculating the income under the head “income from business” depreciation is allowed as deduction if it calculated according to the provisions of 3rd schedule of income tax ordinance 2001.
Accounting depreciation v/s Tax depreciation
Any depreciation charged to profit and loss account without considering the provision of 3rd schedule is known as accounting depreciation. It will be added back in the profit to reach at taxable profit.
Depreciation which is computed considering the provision of 3rd schedule of income tax ordinance is termed as tax depreciation or statutory depreciation.
Kinds of depreciation allowance
Initial allowance for depreciation is allowed only on depreciable assets. It will be allowed when the asset is used for the first time or latter in the tax year in which commercial production is started.
Normal depreciation
Normal depreciation of a depreciable asset is calculated at prescribed rate on its written down value. Following are the rates for normal depreciation.
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Answer : DEPRECIATION
A gradual decrease in value of asset due to use or wear and dear is known as depreciation. Generally the term depreciation also includes amortization and depletion.
- Depreciation of fixed tangible asset such as building, plant and machinery.
- Amortization of intangible assets such as copy right, patent rights
- Depletion of wasting assets such as mines.
According to section 20(2) of income tax ordinance 2001,
Where a person acquires depreciable assets or intangible assets with a useful life of more than one year or incurs per-commencement expenditure, he must charge depreciation or deplete the asset as per section 22, 23, 24 and 25.
While calculating the income under the head “income from business” depreciation is allowed as deduction if it calculated according to the provisions of 3rd schedule of income tax ordinance 2001.
Accounting depreciation v/s Tax depreciation
Any depreciation charged to profit and loss account without considering the provision of 3rd schedule is known as accounting depreciation. It will be added back in the profit to reach at taxable profit.
Depreciation which is computed considering the provision of 3rd schedule of income tax ordinance is termed as tax depreciation or statutory depreciation.
Kinds of depreciation allowance
- Initial allowance for depreciation
- Normal depreciation
Initial allowance for depreciation is allowed only on depreciable assets. It will be allowed when the asset is used for the first time or latter in the tax year in which commercial production is started.
Normal depreciation
Normal depreciation of a depreciable asset is calculated at prescribed rate on its written down value. Following are the rates for normal depreciation.
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Rules / Provision / Conditions for allow ability of Depreciation
Depreciation is an admissible expense of the business. However following provisions must be considered while computing the depreciation.- Asset must be of depreciable nature
- Tangible moveable property……plant, vehicles, aircraft etc.
- Immoveable property………factory hotel, hospitals etc.
- Structural improvement…….. Factory, bridges airport etc.
- Uses for business or profession
- Assets must be owned by the taxpayer
- Rate of depreciation
- Determination of written down value
- Newly purchased assets
- In other cases
- Assets partial used for business and partial private purpose
- Depreciation of asset of leasing company
- Immovable property and depreciation
- Asset not used for the whole year
- Allowance should not exceeding from original cost
- Used in income year
- Disposal of assets and depreciation
- Gain or loss on disposal of asset
- Particulars of assets
- Asset with useful life up to one year
- Depreciation of business exempt from tax
- Amortization of intangible
- Depletion of Natural Resources
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