Depletion allowance

Briefly, the facts were that the respondent company filed its return for tax year 1999-2000 showing gross receipts of Rs.694,187,000 from petroleum sales and claimed depletion allowance of Rs.104,128,050 (15%) under Rule 3, Part I, Fifth Schedule, Income Tax Ordinance, 1979; the assessing officer, under Section 62, held that royalty paid to Government had to be deducted while computing wellhead value/allowance; the Commissioner (Appeals) dismissed the first appeal and the second appeal was also dismissed by the Tribunal

On reference, the High Court held royalty as not deductible for computing depletion allowance, giving rise to the present petitioner for leave to appeal by the Department

Primary question requiring determination before the Supreme Court was as to "Whether, for calculating depletion allowance under Rule 3, Part I of the Fifth Schedule to the Income Tax Ordinance, 1979, the amount of royalty was to be deducted from the wellhead value?"

Held: Merely because the definition of well-head value incorporated by reference the mechanism for calculation of market value that was employed for purposes of calculation of royalty under Rule 38, it did not automatically incorporate within the definition of well-head value the quantum of royalty payable to the Government as a cost that was to be excluded from market value for purposes of determination of well-head value

What the Tribunal had essentially done was to treat the royalty payable by petroleum exploration and production companies as an equity interest of the Government in the value of remaining product which was to be measured under the definition of the well-head value

The definition of well-head value did not allow reading into such definition the exclusion of royalty payable by petroleum exploration and production companies to the Government for purposes of calculation of depletion allowance pursuant to Rule 3, Part I of the Fifth Schedule to the 1979 Ordinance

Thus, the amount of royalty paid by a taxpayer to the Government had to be viewed as a separate component which was entirely independent on its own and was not to be deducted while computing the well-head value

Therefore, impugned judgment of the High Court warranted no interference by the Supreme Court

Present petitions were dismissed, in circumstances.

Briefly, the facts were that the respondent company filed its return for tax year 1999-2000 showing gross receipts of Rs.694,187,000 from petroleum sales and claimed depletion allowance of Rs.104,128,050 (15%) under Rule 3, Part I, Fifth Schedule, Income Tax Ordinance, 1979; the assessing officer, under Section 62, held that royalty paid to Government had to be deducted while computing wellhead value/allowance; the Commissioner (Appeals) dismissed the first appeal and the second appeal was also dismissed by the Tribunal

On reference, the High Court held royalty as not deductible for computing depletion allowance, giving rise to the present petitioner for leave to appeal by the Department

Primary question requiring determination before the Supreme Court was as to "Whether, for calculating depletion allowance under Rule 3, Part I of the Fifth Schedule to the Income Tax Ordinance, 1979, the amount of royalty was to be deducted from the wellhead value?"

Held: Merely because the definition of well-head value incorporated by reference the mechanism for calculation of market value that was employed for purposes of calculation of royalty under Rule 38, it did not automatically incorporate within the definition of well-head value the quantum of royalty payable to the Government as a cost that was to be excluded from market value for purposes of determination of well-head value

What the Tribunal had essentially done was to treat the royalty payable by petroleum exploration and production companies as an equity interest of the Government in the value of remaining product which was to be measured under the definition of the well-head value

The definition of well-head value did not allow reading into such definition the exclusion of royalty payable by petroleum exploration and production companies to the Government for purposes of calculation of depletion allowance pursuant to Rule 3, Part I of the Fifth Schedule to the 1979 Ordinance

Thus, the amount of royalty paid by a taxpayer to the Government had to be viewed as a separate component which was entirely independent on its own and was not to be deducted while computing the well-head value

Therefore, impugned judgment of the High Court warranted no interference by the Supreme Court

Present petitions were dismissed, in circumstances.

Depletion allowance could not be given to person who did not own the asset, i.e. oil or gas reserves which were the property of the State

Taxpayer's assets comprise fixed assets, machinery and equipments in respect of which they were validly entitled to depreciation

In addition to depreciation allowance for their depreciated assets, tax payers had been prized with entitlement to depletion allowance for the asset which only belonged to the State or People of Pakistan

By depletion of oil or gas reserves, the taxpayer did not suffer any loss of their assets

Sine the matter had been decided by the larger Bench of the Appellate Tribunal in favour of the department, the treatment given by the Department was upheld by the Appellate Tribunal.