Income Tax Ordinance, 2001 — Section 22: Depreciation

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 3[: Provided that the depreciation expense shall not be allowed for the amount paid for addition of capital assets to a seller in all relevant tax years if the tax deductible under sections 152 or 153 of the Ordinance in respect of those payments has not been deducted and deposited in the treasury, by not adding such amount paid for addition in capital assets in the assets for computation of tax depreciation.]

(2)Subject to 4[sub-section] (3) 5[ ], 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 6[ ] 7[.] 8[ ]

(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 1 Full stop substituted by the Finance Act, 2025. 2 Clause (s) inserted by the Finance Act, 2025. 3 Full stop substituted by colon and thereafter the new proviso added by the Finance Act, 2025. 4 The word “sub-sections” substituted by the Finance Act, 2005. 5 The word, brackets and figure “and (4)” omitted by Finance Act, 2004. 6 Full stop substituted by colon and thereafter the new proviso added through Finance Act, 2020 dated 30th June, 2020 7 Colon substituted by the Finance Act, 2025. 8 Proviso omitted by the Finance Act, 2022. The omitted proviso read as follows: “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.” 69 Chapter III – Tax on Taxable Income part of the amount that would be allowed if the asset 1[was] wholly used to 2[derive] income from business chargeable to tax. 3[ ]

(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. 4[“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. 1 The word “were” substituted by the Finance Act, 2010. 2 The word “derived” substituted by the Finance Act, 2003. 3 Sub-section (4) omitted by the Finance Act, 2004. The omitted sub-section (4) reads as follows: “(4) Where a depreciable asset is not used for the whole of the tax year in deriving income from business chargeable to tax, the deduction allowed under this section shall be computed according to the following formula, namely:– A x B/C where – A is the amount of depreciation computed under sub-section (2) or (3), as the case may be; B is the number of months in the tax year the asset is used in deriving income from business chargeable to tax; and C is the number of months in the tax year.” 4 Inserted by the Finance Act, 2016. 70 Chapter III – Tax on Taxable Income

(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 1[:] 2[ ]

(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 3[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 4[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. 5[(12) The depreciation deductions allowed to a leasing company or an investment bank or a modaraba or a scheduled bank or a development finance 1 Full stop substituted by colon and thereafter the new proviso added through Finance Act, 2020 dated 30th June, 2020 2 Proviso omitted by the Finance Act, 2022. The omitted proviso read as follows: “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.”. 3 The words “written down value” substituted by the Finance Act, 2004. 4 The word “consideration” substituted by the Finance Act, 2004. 5 Sub-section (12) substituted by the Finance Act, 2002. The substituted sub-section (12) read as follows: “(12) The depreciation deductions allowed to a leasing company in respect of assets owned by the company and leased to another person shall be deductible only against the lease rental income derived in respect of such assets.” 71 Chapter III – Tax on Taxable Income 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 1[seven and a half] million rupees; 2[ ]

(b)the cost of immovable property or a structural improvement to immovable property shall not include the cost of the land; 3[(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; 1 The expression “1[two]1[and half]” substituted by the Finance Act, 2022. 2 Proviso omitted by the Finance Act, 2009. The omitted proviso read as follows: “Provided that the prescribed limit of one million rupees shall not apply to passenger transport vehicles, not plying for hire, acquired on or after the first day of July, 2005.” 3 Clause (c) substituted by the Finance Act, 2002. The substituted clause read as follows: “(c) an asset owned by a financial institution or leasing company and leased to another person is treated as used in the financial institution or leasing company’s business; and”. 72 Chapter III – Tax on Taxable Income

(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 1[:] Chapter III – Tax on Taxable Income 1[(4) 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 the leasing company or the investment bank or the modaraba or the scheduled bank or the development finance institution and leased to another person shall be deducted only against the leased rental income derived in respect of such assets.]

(5)In this section, “eligible depreciable asset” means a depreciable asset 2[ ] other than

(a)any road transport vehicle unless the vehicle is plying for hire;

(b)any furniture, including fittings;

(c)any plant or machinery3[that has been used previously in Pakistan]; 4[ ]

(d)any plant or machinery in relation to which a deduction has been allowed under another section of this Ordinance for the entire cost of the asset in the tax year in which the asset is acquired 5[; or

(e)immovable property or structural improvement to the immovable property.] 6 [ ] 7[ ] 1 Sub-section (4) substituted by the Finance Act, 2002. The substituted sub-section (4) read as follows: “(4) A deduction allowed under this section to a leasing company in respect of assets owned by the company and leased to another person shall be deductible only against the lease rental income derived in respect of such assets.” 2 The words and comma “that is plant and machinery,” omitted by the Finance Act, 2003. 3 The words “that is acquired second hand” substituted by the Finance Act.2003 4 The word “or” omitted by the Finance Act, 2022. 5 The full stop substituted with semi colon and the word “or” and thereafter clause (e) added by the Finance Act, 2022. 6 Inserted by the Finance Act, 2008. 7 Section 23A omitted by the Finance Act, 2021. Earlier this omission was made through Tax Laws (Second Amendment) Ordinance, 2021. The omitted section read as follows: “23A. First Year Allowance.— (1) Plant, machinery and equipment installed by any industrial undertaking set up in specified rural and under developed areas 7[or engaged in the manufacturing of cellular mobile phones and qualifying for exemption under clause (126N) of Part I of the Second Schedule] and owned and managed by a company shall be allowed first year allowance in lieu of initial allowance under section 23 at the rate specified in Part II of the Third Schedule against the cost of the “eligible depreciable assets” put to use after July 1, 2008.

(2)The provisions of section 23 except sub-sections (1) and (2) thereof, shall mutatis mutandis apply.

(3)The Federal Government may notify “specified areas” for the purposes of sub-section (1).] 74 Chapter III – Tax on Taxable Income