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Charge of Depreciation on Idle Fixed Assets
05-22-2010, 10:32 PM,
Charge of Depreciation on Idle Fixed Assets
We had claim the depreciation on assets of a public listed company remainder Idle during the tax year with reference to rules of SECP. As we had not charged depreciation on fixed assets remainder idle during the year and SECP had notified us that non charge of depreciation on fixed assets is contravention of Para 2 of TR-11 read with IAS-16.

According to IAS-16
"Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is idle".

The issue regarding charge of depreciation on property, plant and equipment, which are idle further, elaborated in TR-11 Para 2.2 which are being reproduced here under;

“Property, plant and equipment in a business include assets in use and hold with reasonable expectation of these being used. Depreciation should, therefore, normally be charged on all fixed assets. Idle, reserve or stand-by assets should also continue to be depreciated, subject to the periodical review paragraph 41 to 52 of IAS 16".

But the tax officer, during course of assessment, disallowed our claim of depreciation on idle fixed assets and added back the amount claimed against depreciation in our income with observation that depreciation is only permissible in the light of provision of section 22 of the Income Tax Ord., 2001 read with 3rd schedule to the I. Tax Ord., 2001 and observed that section 22(1) of the ordinance clearly lays down fundamental principle for the claim of such exp.

The reason behind raise of above issue is that whether any one can guide me about any reference in our Income Tax Law through which I can justify my claim of depreciation on idle fixed assets is correct.

I shall be grateful to the person who will help me in this regard. As I have to submit my explanation by 25th of May, 2010.

05-29-2010, 06:34 AM,

Section 22(1) states that the asset being used in the business will be entitled to have a deprciation on it, further more the depriciation on the assets will be allowed keeping in view the production capacity & usagae of assets not merely the possession in many cases, such as new machinary imported will be expected to increase the production & if the production is not increased no such deduction will be allowed unless the new machinary is proven as the replacement of old machinary/asset

Since you have quoted SECP & IAS16 are in complete agreement about the depriciation policy of assets, it is very clear that tax calculations are normaly not in line, while calculating thetaxable income, to IAS/IFRS & Corporate laws


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