BIR Ruling

April 17, 1967 2nd Indorsement Returned to the Revenue Operations Head (Assessment), the inquiry of Group Supervisor Pablito J. Enano as to the correct computation, for income tax purposes, of a depletion allowance by taxpayers making use of the itemized deduction. LLpr Section 30(g) of the Tax Code as amended by Republic Act No. 2698 provides that the depletion allowance at the percentages mentioned in subsections (A), (B) and (C) thereof, should be based on the gross income. On oil or gas wells the percentage depletion allowance is fixed at 27 1/2% of gross income while on mines, the percentage depletion allowance varies in accordance with the class of minerals. In both cases, the total percentage depletion allowance shall in no case exceed 50% of the net income or not profit, whichever is lower. (Gen. Cir. No. V-332 dated Jan. 6, 1961) Under Section 30(g) of the Tax Code, as amended, "gross income" means the gross income from the property or the amount remaining after deducting therefrom rents or royalties paid or incurred by the taxpayer in respect to the property. And "gross income from the property" means, in the case of mines, the gross income from mining. (Ibid) For example, in the case of oil and gas wells, the percentage depletion is 27 1/2% of the gross income, i.e., after an amount equal to the rents or royalties paid or incurred by the taxpayer has been deducted from such gross income. However, such depletion allowance of 27 1/2% should not "exceed fifty per centum of the net income or of the net profit, whichever is lower". In other words, if 27 1/2% of gross income is more than 50% of the net income, or of the net profit, such depletion allowance should be reduced correspondingly to only 50% of the net income or of the net profit, whichever is lower. The use of the conjunction "or" between "net income" and "net profit" does not indicate that the two terms can be used interchangeably; otherwise, the phrase "whichever is lower" would be meaningless. Thus, "net income" must be interpreted in accordance with the definition in Section 28 of the Tax Code, while "net profit" may be lower than the net income, considering that the net profit may result even after income tax has been deducted from the gross income. prll In fine, before a taxpayer who is making use of the itemized deduction can deduct a depletion allowance from his total gross income or income from all sources including those from mining or oil and gas wells, the same should first be computed based on gross income as contemplated in Section 30(g) of the Tax Code, as amended. The depletion allowance thus computed should not, however, exceed 50% of the net income or of the net profit, whichever is lower. Be guided accordingly. (SGD.) MISAEL P. VERA Commissioner of Internal Revenue