DEPUTY COMMISSIONER OF INCOME TAX, ISLAMABAD vs MARI GAS COMPANY LIMITED, ISLAMABAD

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DEPUTY COMMISSIONER OF INCOME TAX, ISLAMABAD VS MARI GAS COMPANY LIMITED, ISLAMABAD. S.62 & Fifth Sched., Part I, R.3---Pakistan Petroleum (Exploration and Production) Rules, 1986, Rr.2(k), 36(1) & 38---Depletion allowance---Well-head value---Royalty---Whether royalty paid to Government is deductible while computing well-head value---Determination. Depletion allowance equal to 15% of gross receipts representing well-head value---Computation---Scope. 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 petition 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.

DEPUTY COMMISSIONER OF INCOME TAX, ISLAMABAD vs MARI GAS COMPANY LIMITED, ISLAMABAD — 2026 SCMR 566 SUPREME-COURT

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