CIR vs.

Isabela Cultural Corporation

Post under case digests, Taxation at Friday, March 02, 2012 Posted by Schizophrenic Mind

Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice for deficiency
income tax and expanded withholding tax from BIR. It arose from the disallowance of ICC’s claimed expense for
professional and security services paid by ICC; as well as the alleged understatement of interest income on the
three promissory notes due from Realty Investment Inc. The deficiency expanded withholding tax was allegedly due
to the failure of ICC to withhold 1% e-withholding tax on its claimed deduction for security services.

ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it brought the case
to CTA, which held that it is unappealable, since the final notice is not a decision. CTA’s ruling was reversed by CA,
which was sustained by SC, and case was remanded to CTA. CTA rendered a decision in favor of ICC. It ruled that the
deductions for professional and security services were properly claimed, it said that even if services were rendered
in 1984 or 1985, the amount is not yet determined at that time. Hence it is a proper deduction in 1986. It likewise
found that it is the BIR which overstate the interest income, when it applied compounding absent any stipulation.
Petitioner appealed to CA, which affirmed CTA, hence the petition.

Issue: Whether or not the expenses for professional and security services are deductible.

Held: No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must have been
paid or incurred during the taxable year. This requisite is dependent on the method of accounting of the taxpayer.
In the case at bar, ICC is using the accrual method of accounting. Hence, under this method, an expense is
recognized when it is incurred. Under a Revenue Audit Memorandum, when the method of accounting is accrual,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be
claimed in the succeeding year.

The accrual of income and expense is permitted when the all-events test has been met. This test requires: 1) fixing
of a right to income or liability to pay; and 2) the availability of the reasonable accurate determination of such
income or liability. The test does not demand that the amount of income or liability be known absolutely, only that
a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy.

From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees charged by the firm. They cannot give as an excuse the
delayed billing, since it could have inquired into the amount of their obligation and reasonably determine the
amount.