Court of Appeal upholds TRA’s disallowance of depreciation on exploration expenditure

The Court of Appeal of Tanzania (the Court) delivered its judgment in Commissioner General, Tanzania Revenue Authority v. Beach Petroleum (Tanzania) Ltd., Civil Appeal No. 08A of 2025. In allowing the Tanzania Revenue Authority’s (TRA) appeal against the decision of the Tax Revenue Appeals Tribunal (the Tribunal), the Court held that:

• Depreciation allowance under section 17 of the Income Tax Act, 2004 (the Act) is available where the taxpayer owns the depreciable asset and employs it wholly and exclusively in the production of business income during the relevant year.
• Paragraph 1(3) of the Third Schedule to the Act allows qualifying capital expenditure on natural resource prospecting, exploration and development to be deducted through depreciation, but does not dispense with the conditions under section 17 of the Act.
• A provision in the Schedule that qualifies a section of the Act cannot override the conditions imposed by that section.
• The Tribunal was bound to follow the Court’s earlier interpretation of these provisions in Panafrican Energy Tanzania Ltd. v. Commissioner General, TRA (Civil Appeal No. 192 of 2018) (Panafrican Energy).

The facts

Beach Petroleum (Tanzania) Ltd. (the Respondent) was engaged in petroleum and gas exploration under a Production Sharing Agreement (PSA) with the Government of Tanzania. In carrying out those activities, it incurred expenditure on geological data collection, mapping and drilling preparations to establish the viability of its project and claimed depreciation allowance in determining its taxable income for the year 2015.

Following an audit covering the years of income 2014 to 2016, TRA disallowed the claim on the grounds that the project was still at the pre-production stage, and the assets had not been employed in producing income. TRA consequently issued an agency notice through the Respondent’s bank to recover approximately TZS 6.4 billion, comprising principal tax of approximately TZS 5.2 billion and interest of approximately TZS 1.2 billion.

The Respondent challenged the disallowance before the Tax Revenue Appeals Board (the Board), maintaining that exploration constituted its business and that paragraph 1(3) of the Third Schedule to the Act entitled it to depreciation on expenditure incurred before production commenced. The Board accepted that position, taking account of the Respondent’s exploration activities and taxable income, including USD 10 million received from Woodside Energy (Tanzania) Ltd (Woodside Energy) under a farm-out agreement as settlement for Woodside Energy’s failure to complete the agreement under which it was to acquire petroleum rights under the PSA.

The Tribunal upheld the Board’s decision, finding that paragraph 1(3) of the Third Schedule to the Act allowed the exploration activities to be treated as satisfying the requirement that the assets be employed in the production of income. The Tribunal ordered TRA to refund the amount recovered through the agency notice, prompting TRA to appeal against both that interpretation and the Tribunal’s refusal to follow the Panafrican Energy decision.

Legal analysis

The Court of Appeal framed two issues: (i) whether the Tribunal erred in interpreting section 17 of the Act read with paragraph 1(3) of the Third Schedule to the Act by holding that the Respondent was entitled to depreciation allowance; and (ii) whether the Tribunal breached the doctrine of precedent by disregarding the Court’s earlier authority. TRA maintained that ownership and use of the assets in producing income remained necessary. The Respondent argued that paragraph 1(3) of the Third Schedule to the Act specifically recognised pre-production expenditure in the extractive industry and should prevail over the general requirements of section 17 of the Act.

The Court read the two provisions together, holding that paragraph 1(3) of the Third Schedule to the Act enables qualifying exploration expenditure to be treated as the cost of acquiring an asset, without removing the conditions governing entitlement to depreciation under section 17 of the Act. In particular, treating expenditure as the cost of an asset did not dispense with the requirement that the asset be owned by the taxpayer and employed wholly and exclusively in the production of income.

The Respondent’s argument that paragraph 1(3) of the Third Schedule to the Act operated as a special provision that prevailed over section 17 of the Act as a general provision could not succeed. The Court explained that unlike co-existing sections of a statute, paragraph 1(3) is a provision of a schedule that qualifies its parent section and cannot override section 17 of the Act. Although the paragraph facilitates recovery of capital expenditure through an immediate depreciation deduction, it does not create an exception to section 17’s conditions.

The Court found that the assets had not yet been used, that the expenditure related to establishing the viability of the project, and that the assets were intended for future production. The Board and Tribunal therefore erred in treating the Respondent’s exploration activities as sufficient to satisfy the use requirement merely because those activities constituted business.

The Court also reaffirmed its earlier decision in Panafrican Energy, which had interpreted the same provisions and required compliance with the ownership and use conditions under section 17 of the Act. Although the Tribunal had considered that decision irrelevant, it had not explained any material difference in the facts or legal issues that justified declining to follow it.

The Court accordingly allowed TRA’s appeal and reversed the Tribunal’s decision, upholding the disallowance and TRA’s entitlement to the tax and interest under the agency notice, with costs against the Respondent.

Practical implications for taxpayers

Following this decision, we recommend that companies claiming depreciation under these provisions review whether their supporting records establish ownership of the relevant assets and demonstrate how those assets were employed in producing income during the year of claim. The statutory position for mineral and petroleum operations was subsequently modified. With effect from 1 July 2016, the Finance Act 2016 introduced paragraph 5 of the Third Schedule, creating a separate pooling and depreciation regime for qualifying mineral and petroleum operation expenditure at 20% per year over five years starting from the first year the cost is incurred. The 2016 amendment addresses the interpretation issue considered in the Beach Petroleum appeal.

The decision nevertheless remains a useful reminder that the applicable statutory regime and the ownership and use conditions should be carefully considered, particularly at the pre-production stage.