ARGUMENT

Undeclared Purchases

Respondent states that comparison of petitioner's purchases per books and RELIEF
shows a difference which should also be added to the computation of income.

Petitioner asserts that undeclared purchases, if any, would not result to deficiency
income tax.

COURT’S DECISION

The deficiency income tax assessments on the alleged undeclared purchases are
cancelled.

DISCUSSION

Under the National Internal Revenue Code, order for a taxpayer to be validly assessed
for deficiency income tax, the following elements should be present: a) clear proof of gain or
profit, b) the gain or profit was received by the taxpayer, actually or constructively, and c) the
income is not exempted by law or treaty from income tax. Income tax is assessed on income
received from any property, activity or service. Such being the case, in the imposition of income
tax, it is not there is an undeclared purchase but only when there as an income and such
income was received or realized by the taxpayer.

Assuming that there is undeclared income, there are also payments or expenses which
were unreported. If this is the case, the undeclared income would be effectively offset with the
consideration of the related expenses. Furthermore, for income tax purposes, a taxpayer is free
to deduct from its gross income a lesser amount or not claim any deduction at all. What is
prohibited by tax law is to claim any deduction beyond the amount authorized therein. Hence
even granting that there is an undeclared purchase, the same is not prohibited by law.

Even when taxable income is imputed on the amount of Php88,285.29 as undeclared

purchases, the petitioner is also entitled to claim the corresponding deduction in the same
amount in the nature of direct cost or operating expense. In effect there is no gain or profit
resulted from the transaction which can be subjected to the imposition of income tax.