IN THE SUPREME COURT OF PAKISTAN 
(APPELLATE JURISDICTION) 
 
 
PRESENT: MR. JUSTICE MIAN SAQIB NISAR, HCJ 
 
 
MR. JUSTICE UMAR ATA BANDIAL 
 
 
MR. JUSTICE FAISAL ARAB 
 
 
CIVIL APPEALS NO.1590 TO 1598 OF 2006 
(Against 
the 
judgment 
dated 
1.9.2005/22.3.2006/16.2.2006/ 
29.3.2006/8.3.2006/14.4.2006/2.5.2006/5.4.2006/26.4.2006 of the 
High Court of Sindh, Karachi passed in ITR No.13/1999, 133/1997, 
38/1998, 173/1997, 949/1999, 22/1993, 459/1990, 56/1995 & ITC 
No.410/1997) 
 
 
Commissioner of Income Tax Karachi 
 
…Appellant(s) 
(In all cases) 
VERSUS 
 
M/s Khalid Textile Mills  
 
In C.A.1590/2006 
M/s Karachi Electric Supply Corporation 
In C.A.1591/2006 
M/s Gulistan Textile Mills Ltd. 
In C.A.1592/2006 
M/s Gul Ahmed Textile Mills Ltd. 
In C.A.1593/2006 
M/s Faran Sugar Mills Ltd. 
In C.A.1594/2006 
M/s Mehran International Ltd. 
In C.A.1595/2006 
M/s National Printing & Packing Ltd. 
In C.A.1596/2006 
M/s Pfizer Laboratories Ltd. 
In C.A.1597/2006 
M/s Dewan Textile Mills Ltd. 
In C.A.1598/2006 
 
…Respondent(s) 
 
For the appellant(s): 
Dr. Farhat Zafar, ASC 
(In CA No.1590/2006) 
 
Mr. Muhammad Habib Qureshi, ASC 
Raja Abdul Ghafoor, AOR 
(In CAs No.1591 to 1594/2006) 
 
Mr. Muhammad Siddique Mirza, ASC 
(In CA No.1595/2006) 
 
 
For the respondent(s): 
Mr. Iqbal Salman Pasha, ASC 
(In CAs No.1590, 1591, 1593 to 1595, 1597 & 
1598/2006AH32) 
 
Ex-parte 
(In CAs No.1592 & 1596/2006) 
 
 
Dates of hearing: 
7.2.2017 & 8.2.2017 
… 
ORDER 
 
 
MIAN SAQIB NISAR, CJ.- The question before this Court is 
whether tax credit(s) available under Section 107 of the erstwhile 
Income Tax Ordinance, 1979 (the Ordinance) were to be excluded while 
Civil Appeal No.1590 of 2006 etc.  
 
-: 2 :-
computing the actual cost of an asset in order to determine it’s written 
down value for the purposes of calculating depreciation allowance in 
terms of Rule 8(8)(b) of the Third Schedule to the Ordinance. . 
2. 
 
The brief facts (in Civil Appeals No.1590 to 1592 and 1595 to 1597/2006) 
are that the respondents (assessees) are companies (both public and private 
limited) deriving income from various industrial activities. In their returns 
pertaining to various assessment years, they claimed tax credit(s) and 
depreciation allowance under the Ordinance on their plants and 
machinery. 
The assessment orders calculated the depreciation 
allowance after subtracting tax credit(s) from the written down value of 
the assets, thereby curtailing the respondent’s claim of depreciation 
allowance (note:- in Civil Appeal No.1597/2006, in the original assessment order, 
depreciation allowance was calculated without subtracting tax credit. However when the 
original assessment was re-opened under Section 66-A of the Ordinance, Inspecting Assistant 
Commissioner of Income Tax ordered that depreciation allowance be calculated after 
subtracting tax credit from the written down value of the assets, thereby curtailing the 
respondent’s claim of depreciation allowance). The learned High Court passed the 
impugned judgments in Income Tax references (references) in favour of 
the respondents by relying upon Gulshan Spinning Mills Ltd. and 
others Vs. Government of Pakistan and others (2005 PTD 259) (note:- 
in Civil Appeal No.1595/2006, the learned High Court relied upon the impugned judgment 
rendered in Civil Appeal No.1590/2006, i.e. ITR No.13/1999). This Court granted leave 
vide order dated 5.10.2006 to consider the following:- 
 
“(i) 
Whether on the facts and circumstances of this 
case Hon’ble High Court and Income Tax Appellate 
Tribunal was justified in holding that assessee in (sic) 
entitled to depreciation calculated on the W.D.V. of assets 
without reducing there from (sic) the amount of tax credit 
u/s 107 of the Income Tax Ordinance, 1979, despite of 
Civil Appeal No.1590 of 2006 etc.  
 
-: 3 :-
specific provision as laid down under rule 8(8)(b) of 3rd 
Schedule of the Income Tax Ordinance, 1979. 
(ii) 
Whether on the facts and circumstances of this 
case Hon’ble High Court after holding that tax credit u/s 
107 not being in the nature of exemption, allowance and 
deduction, has rightly allowed to exclude tax credit from 
depreciation calculated on the W.D.V. of assets under 
rule 8(8)(b) of 3rd Schedule of the Income Tax Ordinance, 
1979.” 
 
It bears mention that leave in these cases was granted on the basis of 
the leave granting order dated 14.6.2005 passed in Civil Appeal Nos.612 
to 636/2005 and although the noted cases were disposed of vide order 
dated 3.4.2008 that was done on the basis of the parties’ consent. 
Therefore, the aforementioned question of law remains to be determined 
by this Court. 
3. 
 
Learned counsel for the appellant department (in Civil Appeal 
Nos.1591 to 1594/2006) argued that tax credit applicable on plant and 
machinery under Section 107 of the Ordinance fell within the 
expression “value of assistance” received by an assessee from 
Government or any other authority or person appearing in Rule 8(8)(b) 
which (expression) had a wide connotation and the only type of assistance 
it specifically excluded was that of any loan repayable with or without 
interest. He submitted that Rule 8(8)(b) applied to tax credits under 
Section 107 and therefore the impugned judgments were liable to be set 
aside. According to him, when an assessee claimed tax credit at the rate 
of 15% of the assets, the actual cost of the asset to the assesse was 
accordingly reduced, as in terms of Rule 8(7)(b) the written down value 
was to be calculated on the basis of the actual cost to the assessee and 
not the total cost of the asset. His arguments were adopted by the 
Civil Appeal No.1590 of 2006 etc.  
 
-: 4 :-
learned counsel for the appellant in Civil Appeal Nos.1590/2006 and 
1595/2006.  
4. 
 
Learned counsel for the respondents (in Civil Appeal Nos.1590, 
1591, 1593 to 1595, 1597 and 1598/2006) argued that tax credit under Section 
107 was claimed on the actual cost of plant and machinery which was 
to be deducted from the tax payable for the year and not from the 
taxpayer’s income, therefore, tax credit was not a grant, subsidy, 
rebate, commission, deduction or allowance under the Ordinance. 
According to him, the learned High Court rightly held that Rule 8(8)(b) 
was not applicable to tax credits under Section 107. He relied on the 
case of Gulshan Spinning Mills (supra).   
5. 
 
Heard. The relevant portions of Section 107 and Rule 8 (of 
the Third Schedule) of the Ordinance are reproduced as under:- 
 
“107. Tax credit for replacement, balancing and 
modernisation of machinery or plant.- (1) Where an 
assessee being a Pakistani company invests any amount 
in the purchase of plant and machinery for installation at 
any time between the first day of July, 1976 and the 
thirtieth day of June, 1988 or between the first day of 
July, 1990 and the thirtieth day of June, 1991, in an 
industrial undertaking set up in Pakistan and owned by it, 
for 
the 
purposes 
of 
replacement, 
balancing 
or 
modernisation of the machinery and plant already 
installed therein, credit at the rate of fifteen per cent of 
the amount so invested shall be allowed against the tax 
payable by it in the manner hereinafter provided. 
 
Explanation.- As used in this sub-section,- 
 
(a) "amount", in case of plant and machinery acquired on 
lease, means the amount expended by the lessor in the 
purchase of the said plant and machinery; and 
 
(b) "purchase 
of 
plant 
and 
machinery" 
includes 
acquisition of plant and machinery on lease from a 
scheduled bank, a financial institution or a leasing 
Civil Appeal No.1590 of 2006 etc.  
 
-: 5 :-
company on such terms and conditions as may be 
approved by the Central Board of Revenue. 
 
(2) The amount of credit admissible under this section 
shall be deducted from the tax payable by the assessee in 
respect of the income year in which the machinery or 
plant in the purchase of which the amount referred to in 
sub-section (1) is invested is installed. 
 
(3) ………………………………………………………… 
 
(4) The provisions of sub-section (1) and (2) shall also 
apply in the like manner to any plant and machinery 
installed, for the purposes of extension of the industrial 
undertaking:- 
 
(i) 
on or after the first day of July, 1978, and before 
the thirtieth day of June, 1983 in the territories of 
Pakistan; or 
 
(ii) 
on or after the first day of July, 1983, in the 
territories of Pakistan (excluding Talukas of 
Karachi 
and 
Hyderabad, 
and 
Tehsils 
of 
Faisalabad and Lahore, and such adjoining areas 
of Lahore Tehsil as may be notified in this behalf 
by the Federal Government). 
⁞ 
(8) ………………………………………………………… 
 
 
THE THIRD SCHEDULE 
(See Section 23) 
 
RULES 
FOR 
THE 
COMPUTATION 
OF 
DEPRECIATION ALLOWANCE 
 
1. Allowances for depreciation. (1) Where, in any income 
year, any building, machinery, plant or furniture owned 
by an assessee is used for purposes of any business or 
profession carried on by him…an allowance for 
depreciation shall be made in computing the profits and 
gains of the business or profession of the assessee in the 
manner hereinafter provided. 
 
8. Definitions.- For the purpose of this Schedule,- 
(7) "written down value" means- 
 
Civil Appeal No.1590 of 2006 etc.  
 
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(a) 
in the case of a ship or any asset to which sub-rule 
(3) of rule 2 applies,- 
(i) 
for purpose of rule 7, as in sub-clause (b), 
and 
(ii) 
for any other purpose, the actual cost 
thereof to the assessee; and 
(b)  
in the case of other assets,- 
(i)  
where the asset, was acquired in the 
income year, the actual cost thereof to the 
assessee; and 
(ii)  
where the asset, was acquired before the 
income year, the actual cost thereof to the 
assessee as reduced by the aggregate of 
the allowance for depreciation allowed to 
him under this Ordinance or the repealed 
Act in respect of the assessments for 
earlier years. 
 
(8) For the purposes of clause (7),- 
 
(a)  
……………………………; 
 
(b)  
in computing the actual cost of an asset, the 
amount of any grant, subsidy, rebate or 
commission and the value of any assistance (not 
being in the nature of any loan repayable with or 
without interest) received by an assessee from 
Government or any other authority or person and 
any deduction or allowance admissible under this 
Ordinance or the repealed Act shall be excluded; 
⁞ 
(h)  
…………………………………………………… 
 
Explanation……………………………………………” 
 
6. 
 
Chapter X of the Ordinance, particularly Sections 105 to 
107AA, which pertained to tax credits for various types of investments, 
is instructive in this regard. A tax credit is an incentive or relief given to 
the taxpayer, usually for the purposes of promoting certain industries 
or activities. Section 107 of the Ordinance allowed for tax credit at the 
rate of 15% of the amount invested for the replacement, balancing and 
modernization of machinery or a plant against the tax payable. 
Civil Appeal No.1590 of 2006 etc.  
 
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According to Section 107(2) the amount of credit was to be deducted 
from the tax payable by the assessee in respect of the income year in 
which the said machinery or plant was installed. Tax credit was not 
defined in the Ordinance. Black’s Law Dictionary (9th Ed.) defines it as 
“an amount subtracted directly from one’s total tax liability, dollar for dollar, as 
opposed to a deduction from gross income”. P. Ramanatha Aiyar’s Concise Law 
Dictionary (4th Ed.) states, “Tax credit is a legal provision permitting taxpayers to 
deduct specified sums from their tax liability”. The Oxford Advanced Learner’s 
Dictionary of Current English (8th Ed.) provides that tax credit is “money 
that is taken off your total tax bill”. Thus tax credit is an amount which is 
directly offset against or adjusted/deducted from the tax liability and 
not the gross income.  
7. 
 
The 
relevant 
provision 
with 
regard 
to 
depreciation 
allowance was Section 23(1)(v) of the Ordinance according to which for 
the purposes of computing income under the head “income from 
business or profession”, certain allowances and deductions were 
admissible in terms of the Third Schedule in respect of depreciation; 
including First Year Allowance or Reinvestment Allowance or Industrial 
Building Allowance, of any building, machinery, plant, furniture or 
fittings, being the property of the assessee, except depreciation or First 
Year Allowance on assets given on lease which was to be allowed against 
income from lease rentals only, and such depreciation allowance was to 
be computed in terms of the rules in the Third Schedule. In similar 
terms, Rule 1 of the Third Schedule provided that where, in any income 
year, any building, machinery, plant or furniture owned by an assessee 
was used for purposes of any business or profession carried on by him, 
or in any income year commencing on or after the first day of July, 
1982, any machinery or plant was given on lease by the assessee, being 
Civil Appeal No.1590 of 2006 etc.  
 
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a scheduled bank, a financial institution (or such modaraba or leasing company 
as is) approved by the Central Board of Revenue for purposes of the 
Third Schedule, an allowance for depreciation would be made in 
computing the profits and gains of the business or profession of the 
assessee. Rule 2 of the Third Schedule stipulated the various rates at 
which depreciation allowance was admissible, which was a certain 
percentage of the written down value of the asset. Rule 8 of the Third 
Schedule contained the definitions of various words which were “For the 
purpose of this [Third] Schedule” and Clause (7) thereof defined “written 
down value” as reproduced above which was either the actual cost 
thereof to the assessee or the actual cost thereof to the assessee 
reduced by the depreciation allowance for assets acquired before the 
income year in question. The actual cost of the asset to the assessee 
was elucidated and clarified in Clause (8) which began with the phrase 
“For the purposes of clause (7)”. Part (b) thereof stipulated that in 
computing the actual cost of an asset, the following were to be 
excluded:- 
i. 
the amount of any grant, subsidy, rebate or 
commission and the value of any assistance (not being 
in the nature of any loan repayable with or without interest) received 
by an assessee from the Government or any other 
authority or person; and 
ii. 
any deduction or allowance admissible under this 
Ordinance or the repealed Act. 
The word “excluded” needs to be elucidated. According to Chambers 
21st Century Dictionary (2007), “exclude” means “to omit someone or 
something or leave them out of consideration” while “excluding” means “not 
counting; without including”. The Oxford Advanced Learner’s Dictionary of 
Current English (8th Ed.) defines “exclude” as “to deliberately not include 
Civil Appeal No.1590 of 2006 etc.  
 
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[something] in what you are doing or considering”. In the light of the 
aforementioned definitions, exclude essentially means to remove from 
consideration. The implication of this is significant. It means that the 
amount of any grant, subsidy, rebate, or commission, and the value of 
any assistance (not in the nature of any loan repayable with or without interest) 
received by an assessee from the Government or any other authority or 
person, and any deduction or allowance admissible under this 
Ordinance (or the repealed Act) were not to be considered while computing 
the actual cost of an asset. Therefore the interpretation adopted by the 
learned counsel of both the parties to the effect that excluded meant 
deducted or subtracted is absolutely incorrect and misconceived.  
8. 
 
The question is whether tax credit fell within the ambit of 
Rule 8(8)(b) in the Third Schedule of the Ordinance in that it was not to  
be considered while computing the actual cost of an asset. Rule 8(8)(b) 
of the Third Schedule can be bifurcated into two parts as highlighted in 
the preceding paragraph. The first part pertains to the amount of any 
grant, subsidy, rebate or commission and the value of any assistance 
(not being in the nature of any loan repayable with or without interest) received by an 
assessee from Government or any other authority or person. In our view 
tax credit does not fall within the domain of any of the these terms, i.e. 
grant, subsidy, rebate, commission or the value of any assistance by 
dint of the fact that they are not benefits received by an assessee under 
the Ordinance but received otherwise from the Government or any other 
authority or person. It is the second part of Rule 8(8)(b) which related to 
any deduction or allowance admissible under the Ordinance (or the 
repealed Act). We now need to determine whether tax credit fell within the 
second part of Rule 8(8)(b), i.e. was it a deduction or allowance 
admissible under the Ordinance? 
Civil Appeal No.1590 of 2006 etc.  
 
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9. 
 
Section 24 of the Ordinance categorically set out those 
deductions which were not admissible under the Ordinance and 
therefore did not fall within the ambit of Rule 8(8)(b). However various 
types of deductions were allowed under the Ordinance. By way of 
illustration, Sections 18, 20, 23 and 31 pertained to deductions to be 
made whilst computing income under the heads interest on securities, 
income from house property, income from business or profession and 
income from other sources respectively. These were deductions made to 
the total taxable income. According to Section 107(2) of the Ordinance, 
the amount of credit admissible under Section 107 “shall be deducted from 
the tax payable by the assessee…” [Emphasis supplied]. Therefore whilst tax credit 
is undoubtedly a deduction, it is made against the tax payable as 
mentioned in paragraph 6 of this opinion. It is pertinent to note that 
Rule 8(8)(b) did not make any distinction between deductions from the 
taxable income and deductions from the tax payable. The test was only 
that of “any deduction…admissible under the Ordinance” (or the repealed Act) and 
we are of the view that tax credit is a deduction albeit from the tax 
payable [Section 107(2)] and being admissible under the Ordinance (Section 
107) it clearly fell within the ambit of Rule 8(8)(b) of the Third Schedule. 
Therefore, the key question identified in the opening paragraph of this 
opinion is answered in the affirmative, in that, tax credit available 
under Section 107 of the Ordinance did fall within the purview of Rule 
8(8)(b) of the Third Schedule to the Ordinance and thus was to be 
excluded or rather not to be considered while computing the actual cost 
of an asset when determining the written down value thereof for the 
purposes of calculating depreciation allowance. 
Civil Appeal No.1590 of 2006 etc.  
 
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10. 
 
In the case of Gulshan Spinning Mills (supra) relied upon by 
the learned counsel for the respondents and the learned High Court in 
the impugned judgments it was held that:- 
 
“…tax credit is neither an allowance nor deduction 
permissible under the Income Tax Ordinance, 1979, for 
the purpose of determining the total income (assessed 
income). It is not in the nature of exemption as well. 
Anything in the nature of exemption, allowance or 
deduction shall form part of the assessment order and 
this, shall be integral part of the assessment process and 
therefore, shall be allowed in accordance with law 
prevailing in the assessment year. As held above, the tax 
credit under section 107 of the Income Tax Ordinance, is 
not in the nature of exemption, allowance or deduction for 
the purpose of computing the income under the head 
business or profession, therefore, it shall not be a part of 
assessment process/assessment order.” 
 
A perusal of the aforesaid extract makes it clear that the reference to 
tax credit under Section 107 of the Ordinance in the said case was with 
respect to the determination of total taxable income and not the written 
down value of an asset for the purposes of depreciation allowance. The 
issue at hand and the interpretation of Rule 8(8)(b) of the Third 
Schedule was not under consideration in the case of Gulshan Spinning 
Mills (supra).  
11. 
 
In the light of the above, Civil Appeals No.1590 to 1592 and 
1595 to 1597/2006 are dismissed.  
As regards Civil Appeals No.1593, 1594 and 1598/2006, the 
issue involved (particularly before the learned High Court in the tax references) was not 
whether tax credit should be considered while calculating the written 
down value for the purposes of determining depreciation allowance. 
Rather, the moot point was whether the dates of installation of the plant 
and machinery were relevant for the purposes of claiming tax credit 
Civil Appeal No.1590 of 2006 etc.  
 
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under Section 107 of the Ordinance, and not the date of purchase 
thereof. This was the precise issue decided by the learned High Court in 
Gulshan Spinning Mills (supra), however this was neither brought to the 
attention of this Court during the leave granting stage and nor have we 
received any assistance on this point, therefore the leave granting 
order(s) in the noted cases are withdrawn and the petitions are 
accordingly dismissed as no point requiring the grant of leave has been 
made therein. 
 
CHIEF JUSTICE 
 
 
 
JUDGE 
 
 
 
JUDGE 
Announced in open Court 
on 29.3.2017 at Islamabad 
Approved For Reporting 
Waqas Naseer/*