Combinepdf (12) - 211116 - 124747

SECOND DIVISION
[C.T.A. CASE NO. 6356. June 9, 2009.]
METRO, INC., petitioner, vs. COMMISSIONER OF INTERNAL

REVENUE, respondent.
DECISION
CASTAÑEDA, JR., J : p
Before this Court is a Petition for Review praying for the cancellation
and withdrawal of the disputed deficiency tax assessment in the amount of
FIFTY MILLION THIRTY-SIX THOUSAND EIGHT HUNDRED ONE PESOS AND
SEVENTY ONE CENTAVOS (P50,036,801.71) for taxable year 1997.
Petitioner is a domestic corporation organized and existing under the
laws of the Republic of the Philippines, with principal office address at La
Fuerza Compound, Alabang-Zapote Road, Almanza, Las Piñas, Metro Manila.
1
Respondent is the duly appointed Commissioner of Internal Revenue

empowered to perform the duties of said office including, among others, the
power to issue deficiency tax assessments issued against taxpayers, and to
decide assessment protests. He holds office at the 5th Floor, Bureau of
Internal Revenue (BIR) National Office Building, Agham Road, Diliman,
Quezon City.
Petitioner received from Regional Director Lucien E. Sayuno of BIR
Region No. 8 the Final Assessment Notice No. 0000069-97-01-710 dated
January 17, 2001, for alleged deficiency taxes in the total amount of
P50,036,801.71 for taxable year 1997, broken down as follows: 2 IECAaD
I. Deficiency income tax:
CD Technologies Asia, Inc. © 2021 cdasiaonline.com

Taxable net income per return P1,554,126.00
Add: Discrepancy per Audit: –––––––––––––
Undeclared Sales P14,623,102.84
Overclaimed Expense 558,783.00
Disallowed Expenses:
Interest & bank charges P4,886,275.00
Foreign Exchange loss 4,849,619.00
Bad debts 1,016,428.00
Miscellaneous 1,078,915.00
Factory overhead 44,984,730.84 56,815,967.94
–––––––––––––
Taxable Income P71,997,853.78
===========
Tax Due P25,743,192.89
Less: Tax Withheld/paid per return 543,944.00
–––––––––––––
Basic Deficiency Income Tax P25,199,248.89
Add: Surcharge 6,299,812.22
Interest 04-16-98 to 02-12-01 17,790,501.20
Suggested Compromise
25,000.00
Penalty
–––––––––––––
Total Amount Due P49,314,562.31
============
II. Withholding tax on compensation:
Tax Due
January P107,264.72
—
February 81,082.46
November (117,861 -
6,000.00
111,861)
December (127,902.53 -
45,372.10 P239,719.28
82,530.43)
–––––––––
25% Surcharge 59,929.82
Interest 1/11/98 to 2/12/01 184,783.61
Compromise Penalty 16,000.00
––––––––––––
TOTAL ITW on compensation P500,432.71
===========
III. Expanded Withholding Tax (EWT):

Rental P5,997,282.00 5% P299,864.10
Manpower 1,903,423.00 1% 19,034.23
Professional Fees 70,000.00 10% 7,000.00
Commission 430,758.60 5% 21,537.93
Security Services 743,229.00 1% 7,432.29
Repairs & Maint 512,412.00 1% 5,124.12
Advertising & Promotions 403,267.00 1% 4,032.67
–––––––––––
Basic Tax P364,025.34
Less: Payments 301,483.80
–––––––––––
Balance of Tax Due P62,541.54
25% Surcharge 15,635.38
Interest 1/10/98 to
48,209.10
2/12/01
–––––––––––
Total EWT deficiency P138,386.02
==========
IV. Documentary Stamp Tax (DST):
Basis P2,500,000.00
Tax Due at 1% 25,000.00
Surcharge 6,250.00
Interest 03-15-98 to 02-12-
18,170.67
01
–––––––––––
TOTAL DST deficiency P55,420.67
==========
V. Others:
Non filing of Quarterly Income Tax Return
1st Quarter P1,000.00
2nd Quarter 1,000.00
3rd Quarter 1,000.00
No Books of Accounts 25,000.00
––––––––––
Total Amount Due P28,000.00
=========
On February 21, 2001, the Assessment Division of BIR Revenue Region
No. 8 (Makati City) received petitioner's letter dated February 19, 2001,
formally protesting the aforementioned deficiency tax assessments pursuant
to Section 228 of the National Internal Revenue Code (NIRC) of 1997, as
amended; and requested that the same be reconsidered or reinvestigated
for lack of factual and legal bases. 3
On April 23, 2001, petitioner, through its external auditors, submitted
to respondent additional supporting documents to further bolster its
arguments against the subject assessments. 4
On November 19, 2001, petitioner filed the present Petition in
accordance with Section 228 of the NIRC of 1997.
The following are issues 5 stipulated by the parties for this Court's
resolution:
"1. Whether or not Petitioner has undeclared sales in the amount of
P14,632,102.84 for VAT purposes;
2. Whether or not the following expenses were correctly disallowed by
the Respondent: interest and bank charges in the amount of
P4,886,275.00; foreign exchange loss in the amount of
P4,849,619.00; bad debts in the amount of P1,016,428.00;
miscellaneous in the amount of P1,078,915.00; and factory
overhead in the amount of P44,948,730.84;
3. Whether or not Petitioner had overstated its claim of expenses and
deductions against its income for 1997 in the amount of
P558,783.00;
4. Whether or not Petitioner is liable for non-withholding of taxes on
compensation for the months of January and February of taxable
year 1997 amounting to P107,264.72 and P81,082.46,
respectively and under-remitted the amounts of P6,000.00 and
P45,372.10 for the months of November and December of the
same taxable year.
5. Whether or not Petitioner is liable for deficiency expanded
withholding tax for non-withholding of rental, manpower,
professional fees, commissions, security services, repair and
maintenance, advertising and promotions in the aggregate
amount of P138,386.02;
6. Whether or not Petitioner is liable for Documentary Stamp Tax in the
amount of P54,921.23 on the original issuance of shares of stocks
in 1997;
7. Whether or not Petitioner failed to file its quarterly income tax
returns and failed to maintain its Book of Accounts;
8. Whether or not there is factual and legal basis for the deficiency
income tax, withholding tax on compensation, expanded
withholding tax, documentary stamp tax and compromise
penalty for taxable year 1997 covered by FAN No. 0000069-97-
01-710 dated January 17, 2001."
I. DEFICIENCY INCOME TAX
1.1. Undeclared Sales — P14,623,102.84
Respondent alleges that petitioner had undeclared sales amounting to
P14,623,102.84, which amount was lifted from an alleged discrepancy of
purchases amounting to P3,000,000.00. 6 The latter amount represents the
difference of purchases per VAT Returns (P28,183,820.50) and the figure
derived during the investigation (P25,183,820.50). As such, the alleged
understatement resulted in under-declaration of sales, shown as follows: DaHISE
Purchases per VAT Returns P28,183,820.50

Divided by Ratio of Purchases against
20.516%
Sales
––––––––––––––
Sales per Investigation P137,374,831.84
Sales per Income Statement 122,751,729.00
––––––––––––––
Under declared Sales P14,623,102.84
=============
The computation of Ratio of Purchases against Sales is as follows:
Claimed Purchases as per
P25,183,820.50 = 20.516%
Investigation
––––––––––––––––––––––––––––––– –––––––––––––
Claimed Sales per Investigation P122,751,729.00
Petitioner argues that respondent's computation of undeclared sales
was arbitrarily arrived at. The latter could not provide details as to what
might comprise the discrepancy of sales. It is only anchored on the allegation
that the purchases per VAT Returns for taxable year 1997 do not tally with
the figures per investigation.
The Court agrees with petitioner.
Respondent did not refer to any source document that would show
petitioner's claimed purchases under its cost of sales account amounted to
P25,183,820.50. Likewise, it was erroneous on the part of respondent to
compare the alleged purchases of P25,183,820.50 per cost of sales with the
entire amount of P28,183,820.50 purchases per petitioner's VAT Returns,
because the latter figure includes not only purchases relating to petitioner's
cost of sales account but also purchases pertaining to its administrative and
selling expenses. Evidently, the alleged understatement of P3,000,000.00 in
petitioner's purchases that resulted in the alleged under-declaration of
petitioner's sales in the amount of P14,623,102.84 is based on mere
inferences and assumptions. In the case of Collector of Internal Revenue vs.
Alberto D. Benipayo, 7 the Supreme Court ruled that an assessment must be
based on actual facts and should not be based on mere presumptions no
matter how reasonable or logical said presumptions may be. For lack of
factual basis, the deficiency income tax assessment corresponding to the
undeclared sales of P14,623,102.84 should be cancelled.
1.2. Overclaimed Expenses — P558,783.00
Respondent alleges that petitioner overstated its claim of expenses
and deductions against its income in the amount of P558,783.00, computed
as follows:

Per Schedule of Deductions-attached to F/S P36,523,872.00
Less:Deductions per investigation:
Per income statement P28,533,190.00
Foreign Exchange Loss 4,849,619.00
Interest 2,255,423.00
Others 326,857.00 35,965,089.00
––––––––––––– ––––––––––––
Unaccounted
P558,783.00
Expenses/Deductions
===========
Petitioner agrees that the amounts of P36,523,872.00 (total
deductions) and P4,849,619.00 (foreign exchange losses) are traceable to
the amounts declared in the attachments to its 1997 Income Tax Return.
However, as to the other items, petitioner claims that it is at a loss where
respondent picked up the said amounts. There is no indication what
respondent was referring to by "Others" and "Per income statement".
Respondent did not refer to any source document or include a breakdown of
the items and an explanation of what income statement is involved.
Petitioner posits that in the absence of any explanation, these figures are
completely arbitrary.
The Court finds petitioner's arguments untenable.
It must be noted that respondent's basis of the amount of deductions
per investigation totaling to P35,965,089.00 was the Audited Financial
Statements presented by petitioner, specifically, from the Statements of
Income and Unappropriated Retained Earnings. 8 Truly, a reconciliation of
deductible items based on the data found in its Audited Income Statement
and Annual Income Tax Return for taxable year 1997, reveals a discrepancy
or an overclaimed expense amount of P558,783.00. For failure to explain
such discrepancy of P558,783.00, petitioner shall be assessed for the
corresponding deficiency income tax.
1.3. Disallowed Expenses — P56,819,967.94
A substantial portion of the alleged deficiency income tax is attributed
to the disallowance of several deductions. CAHaST
Anent the issue of allowable deductions, it is beyond dispute that a

taxpayer may claim deductions provided that he clearly points to a specific
provision of the statute in which deductions are authorized and proves that
he is entitled to the deductions provided therein. Under the Tax Code of
1977, as amended, 9 Section 29 (a) (1) (A) enumerates allowable deductions
which include "ordinary and necessary trade or business expenses". Thus, in
order to be deductible, an item of expenditure must fall squarely within its
language. 10 It is axiomatic that an expense to be deductible must be: (1)
ordinary and necessary; (2) paid or incurred within the taxable year; and (3)
paid or incurred in carrying on a trade or business. Such expense must be
proven by evidence or records. Mere allegation by a taxpayer that an item of
expense is ordinary and necessary does not justify its deduction. The
foregoing is corroborated by the explanation of the High Tribunal in the case
o f Commissioner of Internal Revenue vs. Atlas Consolidated Mining and
Development Corp., 11 in this wise:
". . . . Ordinarily, an expense will be considered 'necessary' where the
expenditure is appropriate and helpful in the development of the
taxpayer's business. It is 'ordinary' when it connotes a payment which
is normal in relation to the business of the taxpayer and the
surrounding circumstances. The term 'ordinary' does not require that
the payments be habitual or normal in the sense that the same
taxpayer will have to make them often; the payment may be unique or
non-recurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a
deduction depends in each case on the particular facts and the relation
of the payment to the type of business in which the taxpayer is
engaged. The intention of the taxpayer often may be the controlling
fact in making the determination. Assuming that the expenditure is
ordinary and necessary in the operation of the taxpayer's business, the
answer to the question as to whether the expenditure is an allowable
deduction as a business expense must be determined from the nature
of the expenditure itself, which in turn depends on the extent and
permanency of the work accomplished by the expenditure.
xxx xxx xxx
. . . . The burden of proof that the expenses incurred are ordinary and
necessary is on the taxpayer and does not rest upon the Government.
To avail of the claimed deduction under Section 30(a)(1) of the
National Internal Revenue Code, it is incumbent upon the taxpayer to
adduce substantial evidence to establish a reasonably proximate
relation between the expenses to the ordinary conduct of the business
of the taxpayer. A logical link or nexus between the expense and the
taxpayer's business must be established by the taxpayer."
Respondent's verification disclosed that petitioner failed to

substantiate several deductions amounting to P56,815,967.94. Hence, the
same were correctly disallowed as deductions in conformity with the
requisites for the deductibility of ordinary and necessary expenses and in
violation of Section 29 (a) (1) (A) of the Tax Code of 1977, as amended.
Below is the breakdown of the disallowed expense deductions of
P56,815,967.94:
Nature of Expenses/
Deduction Amount
Interest and Bank Charges P4,886,275.00

Foreign Exchange Loss 4,849,619.00
Bad Debts 1,016,428.00
Factory overhead 44,984,730.84
–––––––––––––
Total Disallowed Expense P56,815,967.84
============
1.3.1. Interest and Bank Charges — P4,886,275.00
The disallowed amount of P4,886,275.00 is composed of the following:
Bank Charges P2,018,141.03
Interest Expense 2,868,133.97
––––––––––––
Total P4,886,275.00
===========
The interest expense deducted by petitioner purportedly represents
interests paid on various loans from PCI Bank, Metrobank and Citibank, to
wit: 12
Bank Interest Paid on Loans
PCI Bank P228,268.06 (US$8,668.89)
Citibank 828,227.50 (US$30,032.31)
Metrobank 1,728,917.56
Metrobank (transit
67,338.77
interest)
––––––––––––
P2,852,751.89
Difference due to
exchange
rate valuation 15,382.11
––––––––––––
Total P2,868,134.00
===========
Respondent claims that the interest expense should be disallowed
because petitioner failed to substantiate the said expense claimed against its
gross income. Furthermore, the same was disallowed as deduction for failure
to satisfy the requisites for the deductibility of ordinary and necessary
expense. aTDcAH
Petitioner contends otherwise. It asserts that there are several

supporting documents, marked by the Independent CPA as Exhibits "ZZZZ-
10b-1" to "ZZZZ-10b-32", showing the purposes of the loans for which the
interest was incurred. According to petitioner, the loan was used to pay for
foreign currency or working capital requirements and to pay for the import
cost of goods or services necessary in the production of their goods.
There is no merit in petitioner's contention.
In Delfin Ma. V. Cruz, Jr. vs. The Court of Tax Appeals and The
Commissioner of Internal Revenue, 13 the Court of Appeals ruled that in
order for interest expense to be considered as deduction from gross income,
the foremost requirement is that the obligation must be in writing, to wit:
"Petitioner in this appeal presents a single issue, that is, 'can an
interest payment, where the obligation to pay the same is not
evidenced in writing, be proven by collateral evidence and thus
deductible for income tax purposes?' To which We have a negative,
answer.
Section 30(b) of the Tax Code, as amended, provides:

'Section 30(b). Interest:
1. In general. — That amount of interest paid or accrued within a
taxable year on indebtedness incurred in connection with the
taxpayer's profession, trade or business, except on indebtedness
incurred or continued to purchase or carry obligation the interest
upon which is exempt from taxation as income under this Title.
xxx xxx xxx'
Pursuant to the above-cited provision of the Tax Code, the following
requisites must concur to validly claim deductibility of interest
payment, to wit:
1. There must be an indebtedness;
2. The indebtedness must be that of the taxpayer;
3. The indebtedness must be connected with the business, trade
or profession of the taxpayer;
4. The interest must have been paid or accrued during the
taxable year; and
5. The interest must have been stipulated in writing (Teodoro and
De Leon, The Law on Income Taxation, 1987 Edition, p. 82).
From the foregoing, it may be clearly inferred that for interest payment
to be deductible, the same must be supported by a written agreement
of the indebtedness the term of which stipulate for the payment of an
interest. This is in consonance with Articles 1956 of the Civil Code,
providing that: CaESTA
'Article 1956. No interest shall be due unless it has been

expressly stipulated in writing.'
In other words, the written agreement of the indebtedness is an
indispensable requirement to support a claim of deductibility of interest
payment. For how could a claimant prove concurrence of all the said
requisites without showing the written agreement of the indebtedness.
Mere certification of the alleged creditors as to the existence of the
debt and/or to the payment of the interest thereon cannot dispense
with the requisite of written agreement of the indebtedness. Otherwise,
the law could be easily circumvented."
While petitioner presented bank certifications from Metrobank and

Equitable PCI Bank, 14 and credit advices from Citibank 15 to prove its
interest payments, petitioner failed to submit in evidence a vital document,
which is the loan agreement. The mere certification of the alleged creditor
as to the existence of the debt and/or as to the payment of the interest
thereon cannot dispense with the requisite of presentation of the written
agreement of indebtedness.
Although the promissory notes submitted by petitioner in support of its
other interest payments to Citibank 16 may be considered as valid proofs of
indebtedness, petitioner failed to prove that the corresponding loan
proceeds were used in connection to its business. Petitioner alleged that the
proceeds of the loan were used to pay for its foreign currency or working
capital requirements and to pay for the import cost of goods or services
necessary in the production of its goods; however, no documentary evidence
was submitted to prove such allegation.CDTHSI
Considering that the claimed interest expense of P2,868,133.97 was

not properly substantiated, the same cannot be allowed as deduction from
petitioner's gross income for taxable year 1997.
As to the disallowed bank charges in the amount of P2,018,141.03,
petitioner maintains that this represents service fees and commissions
regularly charged by the banks in the course of its export business
transactions. This amount supposedly included transit interest, service
charges, handling charges, cable charges, DST, duties, chattel mortgage
charges, trust receipt bookings, amendment charges, and Letters of Credit
opening charges, which petitioner paid to Metrobank, Citibank, and PCI Bank
on various dates in 1997. Petitioner further avers that it also paid bank
charges for export proceeds, representing negotiation charges which were
collected by the bank upon presentation of petitioner's export documents.
Since the charges were incurred in remitting or receiving the foreign
currency proceeds of its imports and exports, the same constitutes ordinary
and necessary business expenses which can be deducted from its gross
income.
In order to support its claim, petitioner submitted summaries of the
bank charges for its Metrobank, Citibank, and PCI Bank accounts, 17 as well
as the individual debit/credit memos, bank statements and journal vouchers,
18 which were examined and marked by the Independent CPA.
However, upon verification of the Independent CPA Report and

petitioner's supporting documents, out of the total claimed bank charges of
P2,018,141.03, only the amount of P1,578,330.03 is properly documented
and deductible against petitioner's gross income; while the remaining
amount of P439,811.00 should be disallowed and subjected to deficiency
income tax for the following reasons:

Bank charges per schedule were lesser than the
1.
bank
charges claimed as deduction from gross income
Ref. No. Amount
Claimed Deduction P2,018,141.03
Per Schedule ZZZZ 2a-11 2,017,883.99
––––––––––––
Variance P257.04 P257.04
===========
Bank charges per schedule without supporting
2. 419,101.58
documents
Bank charges with supporting debit/credit memos
3.
dated
1998
Document Exhibit No. Date Amount
Metrobank Credit ZZZZ-10a-
9-Jan-98 P6,224.21
Memo 544
9-Jan-98 9,763.17
Memo 545
9-Jan-98 4,465.00 20,452.38
Memo 546
–––––––– ––––––––––
Total P439,811.00
=========
In sum, out of petitioner's claimed interest and bank charges in the
total amount of P4,886,275.00, only the amount of P1,578,330.03 is a valid
deduction against petitioner's 1997 gross income and the remaining amount
of P3,307,944.97 shall be disallowed. DHaECI
1.3.2. Foreign Exchange Loss — P4,849,619.00

Petitioner's deduction for foreign exchange loss was disallowed by
respondent allegedly for being unsubstantiated and for not being in
accordance with the requisites for the deductibility of ordinary and
necessary expenses in the Tax Code.
On the other hand, petitioner argues that being engaged in the
business of trade, importation and exportation of various goods and
merchandise, it makes use of foreign currencies in its business transactions.
Due to fluctuations in the exchange rate of the Philippine peso against the
US dollar in 1997, petitioner supposedly suffered foreign exchange losses
amounting to P4,849,619.00 on its export and manufacturing operations for
the same year. The said foreign exchange losses were allegedly deducted
from petitioner's 1997 gross income, pursuant to Section 29 (d) (2) of the
Tax Code of 1977, as amended, and Section 96 of Revenue Regulations No.
2, as amended.
The Court finds the disallowance proper.
Pursuant to Section 29 (d) (2) of the Tax Code of 1977, as amended,
the loss resulting from foreign exchange fluctuation ascertained and realized
during the taxable period and not compensated by insurance or otherwise,
except those provided in Section 30 (b) of the same Code, is deductible from
gross income of said taxable period, albeit it may relate to transactions of
prior years. 19
Foreign exchange loss is deductible only if the same had been realized.
Without realization, there can be no loss. There is realization of loss in the
year it is actually sustained. 20 It is sustained during the year in which the
loss occurs as evidenced by the completed transaction and as fixed by
identifiable events occurring in that year. 21 A closed transaction is a taxable
event which has been consummated. 22 Mere fluctuation in the value of the
foreign exchange vis-à-vis the Philippine peso, but short of a closed and
completed transaction, does not result to recognition of deductible loss. 23
In the present case, petitioner was not able to prove that foreign
exchange losses were actually realized/sustained during taxable year 1997.
Based on the Summary of Foreign Exchange Loss for taxable year 1997, 24
Detailed Schedule of Export Sales, 25 and testimony of petitioner's witness,
Ms. Lucy Jimenez, 26 out of the total claimed foreign exchange (forex) loss of
P4,849,619.00, the amount of P1,424,427.56 allegedly pertains to the
difference in forex rates (Philippine peso against US dollar) used at the time
of petitioner's recognition of its export sales and at the time of receipt of the
foreign proceeds thereof. While petitioner's export sales transactions as
indicated in the Detailed Schedule of Export Sales 27 can be traced to the
export sales invoices presented by petitioner, 28 nonetheless, this Court
cannot determine the accuracy of the total peso proceeds thereof. Petitioner
should have submitted the corresponding bank credit/debit memos or advice
slips, bank statements or any other source document wherein the actual
amount of dollar export proceeds it received and the actual foreign
exchange rates used in converting the said proceeds in Philippine peso can
be verified.
As to the remaining claimed foreign exchange loss of P3,425,191.44,
this Court cannot also verify the accuracy thereof based solely on the journal
vouchers submitted by petitioner. 29 Therefore, respondent's disallowance of
foreign exchange losses amounting to P4,849,619.00 as deduction from
petitioner's 1997 gross income is sustained.
1.3.3. Bad Debts — P1,016,428.00
Respondent opines that the bad debt expense should be disallowed for
the amount was not fully substantiated with documents in connection with
the deductibility of deductions, pursuant to Section 29 (e) of the Tax Code of
1977, as amended.
Meanwhile, petitioner submits that given the nature of its business
operation as a manufacturing, importing and exporting concern, the
uncollectibility of certain receivables is a common occurrence; particularly,
with regard to customers who either evade their obligations or otherwise go
into financial distress. Accordingly, petitioner's belief regarding its right to
deduct the bad debts from its gross income is justified under Section 29 (e)
of the Tax Code of 1977, as amended, which provides: IcHTAa
"SEC. 29. Deductions from gross income. —

xxx xxx xxx
(e) Bad Debts. — (1) In general. — Debts due to the taxpayer
actually ascertained to be worthless and charged off within the taxable
year except those not connected with profession, trade or business and
those sustained in a transaction entered into between parties
mentioned under Section 30 (b) of this Code."
In relation thereto, Section 102 of Revenue Regulations No. 2 provides:

30
"SEC. 102. Bad debts. — Where all the surrounding and attending
circumstances indicate that a debt is worthless, and the debt is
charged off on the books of the taxpayer within the year, the same
may be allowed as a deduction in computing net income. There should
accompany the return a statement showing the propriety of any
deduction claimed for bad debts. Before a taxpayer may charge off and
deduct a debt, he must ascertain and be able to demonstrate, with a
reasonable degree of certainty, the uncollectibility of the debt. Any
amount subsequently received on account of a bad debt previously
charged off and allowed as a deduction for income tax purposes must
be included in gross income for the taxable year in which it is received.
In determining whether a debt is worthless, the Commissioner of
Internal Revenue will consider all pertinent evidence, including the
value of the collateral, if any, securing the debt and the financial
condition of the debtor.
Where the surrounding circumstances indicate that a debt is worthless
and uncollectible and that legal action to enforce payment would in all
probability not result in the satisfaction of execution on a judgment, a
showing of those facts will be sufficient evidence of the worthlessness
of the debt for the purpose of deduction. Bankruptcy is generally an
indication of the worthlessness of at least unsecured and unpreferred
debt. Actual determination of worthlessness in bankruptcy is
sometimes possible before and at the other times only when a
settlement in bankruptcy shall have been had. Where a taxpayer
ascertained a debt to be worthless and charged it off on one year, the
mere fact that bankruptcy proceedings instituted against the debtor
are terminated in a later year, confirming the conclusion that the debt
is worthless, will not authorize shifting the deduction to such later year.
If a taxpayer computes his income upon the basis of valuing his notes
or accounts receivable at their fair market value when received, which
may be less than their face value, the amount deductible for bad debts
in any case is limited to such original valuation."
Indeed, bad debt expense is an allowable business expense pursuant

to Section 29 (e) of the Tax Code of 1977, as amended, and amplified by
Section 102 of Revenue Regulations No. 2. But before a receivable can be
written-off and charged against current year's income, a taxpayer must
comply with certain requisites which are determined by the following
guidelines:
1. there is a valid and subsisting debt;
2. the debt must be actually ascertained to be worthless and

uncollectible during taxable year;
3. the debt must be charged off during the taxable year; and
4. the debt must arise from the business or trade of the taxpayer.
Additionally, before a debt can be considered worthless, the taxpayer
must also show that it is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to
prove that he exerted diligent efforts to collect the debts, viz.: (1) sending of
statement of accounts; (2) sending of collection letters; (3) giving the
account to a lawyer for collection; and (4) filing a collection case in court. 31
Petitioner submits that it diligently complied with the above-mentioned
requirements, and the same bad debts were fully documented.
This Court disagrees. IAEcCa
In proving that there is a valid and subsisting debt, the sales invoices
are the best evidence to prove that such transaction exists. Petitioner did not
present such documentary evidence; thus, the Court cannot accept the
correctness, validity and subsistence of the questioned bad debts expense.
Moreover, based on the examination conducted by the Independent CPA,
petitioner was not able to corroborate this expense with any other
supporting documents. The Independent CPA was not able to trace the
alleged expense to the 1996 Income Tax Return or 1996 audited financial
statements for possible set-up of provision for bad debts and it was further
revealed that petitioner does not have any bad debts expense recorded in
its books of account for the year ended December 31, 1997, for the balance
of Bad Debts Account as of December 31, 1997 is zero. Therefore, this Court
believes that the disallowance of bad debts expense in the amount of
P1,016,428.00 made by respondent is proper.
1.3.4. Miscellaneous — P1,078,915.00
Miscellaneous expenses were disallowed because of petitioner's failure
to show the required documents at the time of examination.
Petitioner argues that said miscellaneous expenses are ordinary and
necessary expenses which were incurred in the course of petitioner's trade
or business, and are thus valid deductions.
This Court rules otherwise.
The mere allegation of the taxpayer that an item of expense is ordinary
and necessary does not justify its deduction. 32 Petitioner should have
submitted supporting documents. And based on the examination conducted
by this Court, petitioner failed to present documents in support of said
expenses. In some instances, the disallowed miscellaneous expenses
amounting to P293,375.61, as per schedule 33 were supported by some
vouchers with attached sales invoices or official receipts. But a closer
examination of the invoices and official receipts would reveal that these
were addressed not in the name of the company but to a particular person
certainly not the petitioner in this case; therefore, non-deductible business
expense. The variance of P785,539.39 is unsupported by sales invoices
and/or official receipts. Accordingly, the amount of P1,078,915.00, which
represents petitioner's miscellaneous expense, should be disallowed as
deduction against gross income.
1.3.5. Factory Overhead — P44,984,730.84
Respondent disallowed petitioner's deduction for factory overhead
amounting to P44,984,730.84 due to the latter's failure to substantiate the
same. Petitioner counters that the disallowance is erroneous because its
factory overhead expense is not P44,984,730.84 but only P33,974,357.60,
and said expense is fully substantiated and eligible for deduction.
This Court partially agrees with petitioner.
Since it was not shown how respondent arrived at the factory overhead
amount of P44,984,730.84, this Court is constrained to consider the factory
overhead amount of P33,974,357.60 reflected per petitioner's Schedule of
Cost of Goods Manufactured and Sold for the year 1997. 34 Thus, for
purposes of determining the amount of factory overhead deductible from
petitioner's 1997 gross income, the reference point shall be the amount of
P33,974,357.60 instead of P44,984,730.84. aCcADT
As verified by the Court-commissioned Independent CPA, petitioner's

factory overhead account is broken down as follows:
Amount Per
Account Description Reference No. Schedule
Manufacturing and Packing
Supplies
Office Supplies ZZZZ-5a(1)-3 216,465.47
Manufacturing Supplies ZZZZ-5a(2)-1 664,627.70
Packing Supplies ZZZZ-5a(3)-5 5,456,068.26
Design and Production Dev. ZZZZ-5a(4)-1 4,596.80
Other Supplies ZZZZ-5a(5)-2 470,577.27
Small Tools ZZZZ-5a(6)-1 172,512.10
Subtotal 6,984,847.60
Depreciation and Amortization
Depreciation ZZZZ-5b(1)-2 6,129,112.46
Amortization of Leasehold
ZZZZ-5b(2)-1 142,818.00
Improvements
Subtotal 6,271,930.46
Salaries, Wages and Bonus
13th month pay ZZZZ-5c(1)-2 1,094,818.70
SSS & Medicare
ZZZZ-5c(2)-4 393,471.78
Contributions
Salaries & Wages ZZZZ-5c(3)-3 4,828,115.21
Workmens Compensation ZZZZ-5c(4)-2 7,800.00
Commission ZZZZ-5c(5)-1 64,734.09
Subtotal 6,388,939.78
Shipping and Documentation ZZZZ-5d-3 2,003,864.89
Rental ZZZZ-5e-1 4,031,031.83
Light, Water and Power ZZZZ-5f-2 1,974,386.14
Employee Benefits ZZZZ-5g(1)-2 9,485.00
Dental & Medical ZZZZ-5g(2)-2 95,707.98
Representation ZZZZ-5g(3)-1 210,333.70
Training and Seminar ZZZZ-5g(4)-1 96,192.72
Staff Meeting ZZZZ-5g(5)-1 11,226.81
Subtotal 422,946.21
Repairs and Maintenance
RM-Machinery ZZZZ-5h(1)-1 1,254,275.66
RM-Vehicle ZZZZ-5h(2)-1 139,185.99
RM-others ZZZZ-5h(3)-2 456,367.76
Subtotal 1,849,829.41
Transportation and Trucking
Transportation ZZZZ-5i(1)-5 630,050.96
Gas and Oil ZZZZ-5i(2)-1 220,041.45
Subtotal 850,092.41
Insurance ZZZZ-5j-1 315,210.02
Fumigation ZZZZ-5k-1 77,519.29
Security and Other Services
Security and Services ZZZZ-5l(1)-1 958,543.39
Other Services ZZZZ-5l(2)-1 1,831,398.74
Subtotal 2,789,942.13
–––––––––––
TOTAL 33,960,540.17
=========
It must be noted that the factory overhead of P33,960,540.17 as
indicated in the above schedule is lower by P13,817.43 when compared
against the amount of P33,974,357.60 claimed by petitioner. Such
discrepancy of P13,817.43 shall be disallowed outright.
Petitioner's factory overhead account of P33,960,540.17 included
salaries, wages and bonus in the amount of P6,388,939.78 for which
petitioner submitted check vouchers, journal vouchers and payroll
summaries. 35 However, the preceding documents, being self-serving, do not
prove actual payment of the amount of P6,388,939.78. Neither can the
amount of P6,388,939.78 be traced in the 1997 alphalist of employees
subjected to withholding tax on compensation. 36 Per petitioner's 1997
alphalist, gross salary payments amounted to only P14,456,048.56; while
petitioner's claimed direct labor in the amount of P12,239,144.87, 37
salaries, wages and bonus per Schedular Deductions in the amount of
P7,462,693.00 38 and salaries, wages and bonus under the factory overhead
account of P6,388,939.78 totaled P26,090,777.65. Clearly, petitioner's
claimed salaries, wages and bonus is a lot higher than the actual payments
shown in the 1997 alphalist. For petitioner's failure to explain such
discrepancy, the claimed salaries, wages and bonus in the amount of
P6,388,939.78 should be disallowed.
With reference to petitioner's claimed depreciation and amortization in
the amount of P6,271,930.46, the same is a valid deduction against
petitioner's 1997 gross income. As can be seen in the Schedule of
Depreciation and Amortization attached to petitioner's 1997 Income Tax
Return, 39 the depreciation/amortization of petitioner's equipment, furniture
and fixtures, and leasehold improvements amounted to P10,198,161.00,
from which the amount of P2,653,728.00 was claimed as part of petitioner's
Schedular Deductions against gross income. 40 The remaining amount of
P7,544,433.00 was charged against petitioner's Cost of Goods Manufactured
and Sold. 41 Since respondent did not question petitioner's claimed
depreciation expense in the amount of P2,653,728.00, there is no reason
why the depreciation amount of P6,271,930.46 (included in the depreciation
amount of P7,544,433.00) being claimed by petitioner as part of its factory
overhead account cannot be allowed.
As to petitioner's claimed rental expense in the amount of
P4,031,031.83, this Court finds the same deductible against petitioner's
1997 gross income. Per the 1997 Schedular Deductions, rental expense
charged to petitioner's operations amounted to P1,766,634.00, which when
added to the rental amount of P4,031,031.83 being claimed by petitioner as
part of its factory overhead account, results in a total rental of
P5,797,665.83. Since the total rental payment of P5,997,282.20 per
petitioner's 1997 Alphalist of Payees Subjected to Expanded Withholding Tax
42 is greater than petitioner's claimed rental expense deduction for 1997 in
the amount of P5,797,665.83, it is then safe to conclude that the rental

amount of P4,031,031.83 which formed part of petitioner's factory overhead
account was actually paid and subjected to withholding tax. cTACIa
Regarding petitioner's claimed security services and other services in

the respective amounts of P958,543.39 and P1,831,398.74 or in the sum of
P2,789,942.13, a comparison of the said amounts with those reflected in the
1997 Alphalist of Payees Subjected to Expanded Withholding Tax reveals the
following: 43
Per Total
Per Per Factory
Schedular Claimed
Alphalist Overhead Deductions Deductions Discrepancy
Security
743,229.00 958,543.39 641,112.00 1,599,655.39 (856,426.39)
Services
Other
1,903,423.00 1,831,398.74 - 1,831,398.74 72,024.26
Services
(Manpower)
Based on the above table, petitioner's total claimed deduction for
security services in the amount of P1,599,655.39 (including the amount of
P958,543.39, which formed part of petitioner's factory overhead account) is
greater by P856,426.39, as compared against the amount of P743,229.00
reflected in the alphalist. Since the actual payment for security services as
shown in the alphalist is lower than the total claimed deduction of
P1,599,655.39, the security services of P958,543.39 included under the
factory overhead account shall be disallowed.
As to petitioner's claimed deduction for other services in the amount of
P1,831,398.74, the same is a valid deduction against petitioner's 1997 gross
income considering that the payments per petitioner's alphalist in the
amount of P1,903,423.00 is more than the claimed deduction of
P1,831,398.74.
As to the other expense items included in petitioner's factory overhead
account in the amount of P14,478,695.97, computed as follows:
Total Factory Overhead P33,960,540.17
Less: Salaries, Wages and Bonus 6,388,939.78
Depreciation and
6,271,930.46
Amortization
Rental 4,031,031.83
Security and Other
2,789,942.13
Services
–––––––––––––
Remaining Factory Overhead P14,478,695.97
============
this Court finds that only the amount of P2,092,303.20 is supported by valid
suppliers' invoices and/or official receipts; 44 thus, deductible against
petitioner's 1997 gross income. The balance of P12,386,392.77 shall be
disallowed for petitioner's failure to substantiate the same with proper
documents. IDcTEA
To recapitulate, out of petitioner's claimed factory overhead amount of

P33,974,357.60, only the amount of P14,226,664.23 is deductible from its
1997 gross income; while the balance of P19,747,693.37 shall be disallowed,
as shown below:
Total Claimed Factory Overhead P33,974,357.60
Less: Allowable Deductions
Depreciation and
P6,271,930.46
Amortization
Rental 4,031,031.83
Other Services 1,831,398.74
Other Expense Items 2,092,303.20 14,226,664.23
––––––––––– –––––––––––––
Disallowed Factory Overhead P19,747,693.37
============
Based on the above findings, petitioner is still liable for 1997 deficiency
income tax in the amount of P20,952,015.76, computed as follows:

DEFICIENCY INCOME TAX
Taxable Net Income Per Return P1,554,126.00
Add: Overclaimed Expense 558,783.00
Disallowed Expenses:
Interest & Bank
P3,307,944.97
Charges
Foreign Exchange
4,849,619.00
Loss
Bad Debts 1,016,428.00
Factory Overhead 19,747,693.37 30,000,600.34
–––––––––––– ––––––––––––
Taxable Income P32,113,509.34
===========
Income Tax Due P11,239,728.27
Tax Withheld/Paid Per
Less: Return 543,944.00
––––––––––––
Basic Deficiency Income Tax P10,695,784.27
Add: Surcharge 2,673,946.07
Interest 04-15-98 to 02-
7,582,285.42
12-01
–––––––––––––
Total Deficiency Income Tax P20,952,015.76
============
The compromise penalty of P25,000.00 originally imposed by
respondent is hereby cancelled, as compromise implies mutual agreement,
which is absent in the case under consideration. The imposition of the same
without the conformity of the taxpayer is illegal and unauthorized. 45
II. DEFICIENCY WITHHOLDING TAX ON COMPENSATION
The alleged deficiency withholding tax on compensation was computed
as follows:
Tax Due
January P107,264.72
-
February 81,082.46
November (117,861 -
6,000.00
111,861)
December (127,902.53 -
45,372.10 P239,719.28
82,530.43)
–––––––––
25% Surcharge 59,929.82
Interest 1/11/98 to 2/12/01 184,783.61
––––––––––––
TOTAL ITW on compensation P500,432.71
===========
Respondent avers that the withholding taxes on compensation for the
months of January and February amounting to P107,264.72 and P81,082.46,
respectively, were not actually paid. He further submits that petitioner
under-remitted the amounts of P6,000.00 and P45,372.10 for the months of
November and December 1997.
In contrast, petitioner maintains that it withheld and paid the correct
amounts of withholding tax on compensation for taxable year 1997,
including the months of January, February, November, and December 1997.
With respect to the months of January and February, petitioner argues that
the authority of the BIR to investigate and impute deficiency withholding
taxes has already prescribed pursuant to Section 203 of the Tax Code of
1977, as amended.
This Court finds for petitioner.
Applying the provisions of Section 203 of the Tax Code of 1977, as
amended, the right of respondent to issue deficiency assessment depends
on the date the respective Returns for internal revenue taxes were filed. In
the case of withholding tax on compensation, the Return is required to be
filed within ten (10) days after the end of each month for taxes withheld
during the months of January until November; while the Return for taxes
withheld for the month of December shall be filed on or before January 25 of
the following year, as provided in Section 2 of Revenue Regulations (R.R.)
No. 5-85, as amended by RR Nos. 3-93 and 18-93, as follows: DTIcSH
"Sec. 2. Monthly Return and Remittance of Taxes Withheld. —

Taxes deducted and withheld on:
(i) compensation income;
(ii) income payments subject to the creditable (expanded)
withholding taxes; and
(iii) income subject to final withholding taxes.
shall be remitted within ten (10) days after the end of each calendar
month with the filing of appropriate return. (BIR Form 1743-W).
However, taxes withheld from the last compensation/income payment
for the calendar year (December) shall be remitted on or before the
25th of January of the succeeding year. . . ."
Records show that petitioner filed its January, February, November, and
December 1997 Returns for withholding tax on compensation on the
following dates:
Period
Exhibit No. Date Filed
Covered
(1997)
January ZZZZ-6-1 10-Feb-97

February ZZZZ-6-2 10-Mar-97
November ZZZZ-6-3 10-Dec-97
December ZZZZ-6-4 12-Jan-98
Therefore, respondent had three years within which to issue his 1997
deficiency assessment for the aforementioned withholding tax on
compensation computed either on the day required for filing of the Returns
or on the date when the corresponding Returns were belatedly filed, to wit:
Period Exhibit Date Filed Last Day to Last Day to
Covered No. File Return Issue
1997 Assessment
January ZZZZ-6-1 10-Feb-97 10-Feb-97 10-Feb-00

February ZZZZ-6-2 10-Mar-97 10-Mar-97 10-Mar-00
November ZZZZ-6-3 10-Dec-97 10-Dec-97 11-Dec-00
December ZZZZ-6-4 12-Jan-98 26-Jan-98 46 26-Jan-01
Considering that the Formal Letter of Demand, Assessment Notice and
Details of Discrepancies for 1997 Deficiency Withholding Tax on
Compensation were issued on January 17, 2001, the same were clearly
issued beyond the 3-year period allowed by law, insofar as the months of
January, February, and November 1997 were concerned. After all, an
assessment for deficiency taxes issued after the lapse of three years can no
longer be valid and effective. 47 Only the assessment of deficiency
withholding tax on compensation for the month of December 1997 was
issued within the prescriptive period.
Even though the assessment was issued within the prescriptive period,
the same should be cancelled for there was no under-remittance of
P45,372.10 for the said month. Petitioner's Monthly Remittance Return for
December 1997 shows that it correctly withheld and fully paid the amount of
P127,902.53 and not respondent's alleged amount of P82,530.43, which
actually pertains to withholding tax on compensation for the month of
December 1996. Therefore, the assessment for deficiency withholding tax on
compensation is without merit.
III. DEFICIENCY EXPANDED WITHHOLDING TAX
The alleged deficiency EWT for taxable year 1997 was computed as
follows:

Rental P5,997,282.00 5% P299,864.10
Manpower 1,903,423.00 1% 19,034.23
Professional Fees 70,000.00 10% 7,000.00
Commission 430,758.60 5% 21,537.93
Security Services 743,229.00 1% 7,432.29
Repairs & Maintenance 512,412.00 1% 5,124.12
Advertising &
403,267.00 1% 4,032.67
Promotions
–––––––––––
Basic Tax P364,025.34
Less: Payments 301,483.80
–––––––––––
Balance of Tax Due P62,541.54
Add: 25% Surcharge 15,635.38
Interest 1/10/98
to
2/12/01 48,209.10
Compromise
12,000.00
Penalty
–––––––––––
Total EWT deficiency P138,386.02
==========
Based on the above computation, petitioner has a discrepancy on
expanded withholding tax amounting to P62,541.54, which is further
accounted for as follows: 48 IADaSE
January Return P21,427.21

February Return 29,653.94
Not subject to withholding 9,001.34
Variance: 1743-IR vs
3,209.06
1743W
Unaccounted/Refund (750.01)
–––––––––
Total P62,541.54
=========
As earlier discussed under the assessment of deficiency withholding
taxes on compensation, the alleged deficiency expanded withholding taxes
for the months of January and February are likewise barred by prescription;
hence, null and void.
The variance of P3,209.06 will account for December 1997. Petitioner
remitted the amount of P25,633.41 as indicated in its Monthly Remittance
Return of Income Taxes Withheld for the month of December 1997 49 and
Annual Information Return of Income Tax Withheld on Compensation,
Expanded and Final Withholding Taxes for the Year 1997. 50 Respondent
erroneously picked up the amount of P22,424.35, which actually pertains to
expanded withholding tax for the month of December 1996 51 and compared
it to the amount indicated in the Annual Information Return for the Year
1997, which resulted in a discrepancy of P3,209.06. In view thereof,
petitioner should not be assessed for the discrepancy amount of P3,209.06.
Respondent further considered the variance of P9,001.34, representing
Repairs and Maintenance (P4,968.67) and Advertising and Promotions
(P4,032.67), as subject to the expanded withholding tax. Petitioner, on the
other hand, alleges that it is not compelled by any law or regulation to
withhold tax on the amount of P9,001.34 as it was actually paid to
professional partnerships and not for repairs and maintenance, and
advertising and promotions.
Income payments made to a general professional partnership as a
juridical person is exempt from income tax and consequently, the expanded
withholding tax. Its partners are the ones liable in their individual capacity
for the payment of income tax pursuant to Section 23 of the Tax Code of
1977, as amended. This was elucidated by the Supreme Court in Rufino R.
Tan, et al. vs. Ramon R. del Rosario Jr., as Secretary of Finance and Jose U.
Ong, as Commissioner of Internal Revenue, 52 to wit:
"'Exempt partnerships', upon the other hand, are not similarly
identified as corporations nor even considered as independent taxable
entities for income tax purposes. A general professional partnership is
such an example. Here, the partners themselves, not the partnership
(although it is still obligated to file an income tax return [mainly for
administration and data]), are liable for the payment of income tax in
their individual capacity computed on their respective and distributive
shares of profits. In the determination of the tax liability, a partner does
so as an individual, and there is no choice on the matter. In fine, under
the Tax Code on income taxation, the general professional partnership
is deemed to be no more than a mere mechanism or a flow-through
entity in the generation of income by, and the ultimate distribution of
such income to, respectively, each of the individual partners."
Petitioner however failed to present relevant documents to support the

claimed payment of professional fees to a general professional partnership.
Consequently, the deficiency expanded withholding tax assessment on the
income payment of P9,001.34 shall be upheld. Petitioner is liable to pay
deficiency expanded withholding tax in the amount of P18,218.47, computed
as follows:
Repairs & Maintenance P4,968.67
Advertising & Promotions 4,032.67
––––––––––
Basic Deficiency Expanded
Withholding
Tax P9,001.34
Add: Surcharge P2,250.34
Interest 1/10/98 to
6,966.79 9,217.13
2/12/01
––––––––– ––––––––––
Total Deficiency Expanded
Withholding Tax P18,218.47
=========
IV. DOCUMENTARY STAMP TAX
Respondent assessed petitioner for deficiency DST amounting to
P55,420.67 for failure to file and pay the corresponding documentary stamp
tax due arising from the original issuance of shares of stocks in violation of
Section 175 of the Tax Code of 1977, as amended.
Petitioner, on the other hand, asserted that it had fully paid the DST
due on all of its certificates of stock, including penalties and surcharges.
Petitioner pointed out that respondent's DST assessment was based on the
issuance of P2,500,000.00 worth of shares. This is supposedly the same
amount by which petitioner increased its capital stock on April 1995 from
P1,000,000.00 to P3,500,000.00 as evidenced by the Certificate of Filing of
Certificate of Increase of Capital Stock issued by the Securities and
Exchange Commission. 53 Petitioner argued that since there was no change
in its capital stock requiring payment of DST for taxable year 1997,
respondent's assessment is without legal and factual basis. Moreover,
petitioner allegedly paid the DST on all of its authorized capital stock, as
follows:
No. of Par DST Actually Paid
(with
Date Shares Value Amount
surcharges/penalties)
12/16/1996 1,000 100.00 1,000,000.00 P27,500.00

6/30/1997 25,000 100.00 2,500,000.00 P34,375.00
Petitioner presented BIR Form 2000-A, entitled Corporate Stock
Documentary Stamp Tax (DST) Declaration for Existing Corporation as of
February 28, 1998, Authority to Accept Payment No. 4039929, and BIR Form
2000, entitled Documentary Stamp Tax Declaration, 54 proving payment of
the above DST amounts. Since petitioner paid the DST amount of P34,375.00
(inclusive of surcharges/penalties) for the P2,500,000.00 increase in capital
stock, this Court finds no basis to uphold respondent's deficiency DST
assessment of P55,420.67 and hereby cancels the same. ICHDca
VI. OTHERS
Respondent alleges that petitioner failed to file its Quarterly Income
Tax Returns and failed to maintain Books of Accounts. Such failure warrants
the imposition of compromise penalties in accordance with RR 1-90,
amounting to P28,000.00, broken down as follows:
Non filing of Quarterly Income Tax Return
1st Quarter P1,000.00
2nd Quarter 1,000.00
3rd Quarter 1,000.00
No Books of Accounts 25,000.00
–––––––––
Total Amount Due P28,000.00
========
Based on the verification of the Court-commissioned Independent CPA
on the said assessment, the following observations were noted:
"E. OTHER COMPROMISE PENALTIES

Compromise penalties arose from the alleged non filing of
quarterly income tax for the first three quarters amounting to
P3,000.00 and for having no books of accounts amounting to
P25,000.00.
In this regard, the Company provided us with the no payment
income tax return, duly stamped and received by the BIR, for the
first and second quarters only. Hence, the penalties may be
reduced by P2,000.
On the other hand, the Company was not able to provide return
for the 1st quarter and the existence of its books of account or
any approved permit from the BIR to authorize the Company to
use loose-leaf form."
This Court agrees with the above findings. Petitioner admitted that it
failed to file its Quarterly Income Tax Return for the first quarter of 1997. 55
Petitioner was able to present before this Court its Quarterly Income Tax
Returns only for the second and third quarters of 1997. 56
Likewise, records indicate that petitioner failed to present its books of
accounts or any approved permit from the BIR authorizing the use of loose-
leaf form. The voluminous documents presented and marked before this
Court as Exhibits "ZZZZ-1" to "ZZZZ-17" cannot be considered as sufficient
accounting records or equivalent to the required books of accounts, contrary
to petitioner's assertion. Pursuant to Revenue Regulations V-1, 57 all
corporations, companies, partnerships or persons required by law to pay
internal revenue taxes are required to keep books of accounts in accordance
with the standard accounting system. The said books of accounts shall
consist of a journal and a ledger, or their equivalent, and shall contain all
information necessary for the accurate determination of the internal revenue
taxes on their businesses. The journal may consist of only one book, the
general journal. Its equivalent may consist of several books such as sales
book, purchase book, cash book and such other books as the taxpayer may
find convenient for his business. Such books are also books of original
entries where all the daily transactions, whether cash or otherwise, are
recorded in their chronological order. A journal, in order to comply with the
provisions of the regulations, must contain all the transactions affecting the
business. Every entry in the general journal shall carry a brief but complete
explanation of the nature of the business transaction and be supported by
proper vouchers.
The ledger, like the journal, may consist of one book, the general
ledger. Its equivalent may consists of several ledgers, such as customer's
ledger, creditor's ledger, stock ledger, and such other books as the taxpayer
may find convenient for his business. All entries in the journal must be
posted to the ledger not later than seven days from the date of the
transaction, and shall be classified in the ledger so as to show the assets,
liabilities, capital, and the operating accounts from which a balance sheet,
and a profit and loss statement covering the operation of the business can
be prepared. No entry shall be made in the ledger or its equivalents unless
said entry originates from the journal or its equivalent.
Notwithstanding petitioner's failure to file its Quarterly Income Tax
Return for the first quarter of taxable year 1997 and failure to maintain
books of accounts for taxable year 1997 in violation of Sections 68 and 232
of the Tax Code of 1977, as amended, the compromise penalties imposed by
respondent in the amount of P28,000.00 cannot be sustained. The
compromise penalties incident to the violations are suggested merely in lieu
of criminal prosecution. This is clearly stated under Revenue Memorandum
Order (RMO) No. 1-90, 58 thus:
"III. Guidelines and Instructions
xxx xxx xxx
(5) Since compromise penalties are only amounts suggested in
settlement of criminal liability and may not therefore be imposed or
exacted in the event that a taxpayer refuses to pay the suggested
compromise penalty, the violation shall be referred for criminal action
as heretofore mentioned." AHDcCT
Since there is no showing that petitioner voluntarily entered into a

compromise agreement with respondent, the compromise penalties of
P28,000.00 is likewise cancelled.
In sum, the 1997 assessments for deficiency withholding tax on
compensation in the amount of P500,432.71, deficiency DST in the amount
of P55,420.67, and compromise penalties in the amount of P28,000.00 are
cancelled for reasons stated above. However, the assessments for deficiency
income tax and EWT are sustained in the reduced amounts of
P20,952,015.76 and P18,218.47, respectively, or in the sum of
P20,970,234.23, detailed as follows:
Basic Surcharge Interest Total
Income
P10,695,784.27 P2,673,946.07 P7,582,285.42 P20,952,015.76
Tax
EWT 9,001.34 2,250.34 6,966.79 18,218.47
––––––––––––– –––––––––––– –––––––––––– –––––––––––––
TOTAL P10,704,785.61 P2,676,196.41 P7,589,252.21 P20,970,234.23
==============================================
In addition, petitioner is likewise liable for the twenty percent (20%)

delinquency interest on the total amount of P20,970,234.23 computed from
February 19, 2001 until full payment thereof pursuant to Section 249 (c) (3)
of the Tax Code of 1977, as amended.
However, this Court notes petitioner's Manifestation filed on March 6,
2008 alleging that it availed of the tax amnesty program granted under
Republic Act (RA) No. 9480 and paid the corresponding amnesty tax. Also,
this Court notes that petitioner submitted faithful reproductions of the
following:
1. Exhibit "DDDDD" — Tax Amnesty Payment Form (Acceptance of

Payment Form);
2. Exhibit "FFFFF" — Metrobank's Payment Slip for Companies with
Collection Arrangements dated February 12, 2008 showing
the amount of P100,000.00 as having been paid;
3. Exhibit "HHHHH" — Tax Amnesty Return (BIR Form No. 2116);
4. Exhibit "IIIII" — Annual Income Tax Return (BIR Form No. 1702)
with attachments;
5. Exhibit "EEEEE" — Notice of Availment of Tax Amnesty dated

February 7, 2008; and
6. Exhibit "GGGGG" — Statement of Assets, Liabilities and
Networth as of December 31, 2005.
Inasmuch as petitioner has fully complied with the prescribed

requisites of RA No. 9480 and is deemed a duly qualified tax amnesty
applicant, petitioner shall be entitled to the privileges and immunities under
the said law. Furthermore, the contestability period of one (1) year provided
under Section 4 of RA No. 9480 had already lapsed, hence, the subject tax
deficiencies in the case at bench are extinguished.
WHEREFORE, in light of the foregoing laws and jurisprudence and in
view of the petitioner's availment of the Tax Amnesty under RA No. 9480 the
subject Assessments for Deficiency Taxes are hereby CANCELLED EXCEPT
the Assessment for Deficiency Expanded Withholding Tax inasmuch as
withholding tax is not covered by RA No. 9480. Accordingly, petitioner is
hereby ORDERED TO PAY P18,218.47 plus twenty percent (20%)
delinquency interest from February 19, 2001 until full payment thereof
pursuant to Section 249 (c) (3) of the Tax Code of 1977, as amended.
SO ORDERED. Cdpr
(SGD.) JUANITO C. CASTAÑEDA, JR.

Associate Justice
Erlinda P. Uy and Olga Palanca-Enriquez, JJ., concur.
Footnotes
1. Par. 1, Facts Admitted, Joint Stipulation of Facts and Issues (JSFI), Docket, p. 80.
2. Par. 5, Facts Admitted, JSFI, Docket, pp. 81-82.
3. Par. 6, Facts Admitted, JSFI, Docket, p. 83.
4. Par. 7, Facts Admitted, JSFI, ibid.

5. Issues, JSFI, Docket, pp. 83-84.
6. Exhibit "10-b", BIR Records, p. 357.
7. G.R. No. L-13656, January 31, 1962, 4 SCRA 182.

8. Exhibit "ZZZZ-14-3".
9. The 1977 Tax Code is applicable in the present case as the NIRC of 1997 took
effect only on January 1, 1998.
10. Commissioner of Internal Revenue vs. Atlas Consolidated Mining and
Development Corp., G.R. No. L-26924, January 27, 1981, 102 SCRA 246.
11. Supra.
12. Exhibit "W".
13. CA-G.R. SP No. 25308, April 7, 1992, which affirmed this Court's decision in
Delfin Ma. V. Cruz, Jr. vs. Commissioner of Internal Revenue, (CTA Case No.
3806, June 29, 1990).
14. Exhibits "ZZZZ-10b-31" and "ZZZZ-10b-32".
15. Exhibits "ZZZZ-10b-5", "ZZZZ-10b-26", and "ZZZZ-10b-27".
16. Exhibits "ZZZZ-10b-1 to 4", "ZZZZ-10b-6 to 25", "ZZZZ-10b-28 to 30".
17. Exhibits "CC", "DD", "EE", "FF", and "GG".

18. Exhibits "ZZZZ-10a-1" to "ZZZZ-10a-550".
19. The Coca-Cola Export Corporation vs. Commissioner of Internal Revenue, C.T.A.
Case No. 5238, December 19, 1997.
20. BIR Ruling No. 206-90 dated October 30, 1990.

21. BIR Ruling No. DA-359-03 dated October 10, 2003.
22. Black's Law Dictionary, fifth ed.
23. VAT Ruling No. 239-89 dated September 20, 1989.
24. Exhibit "II".

25. Exhibit "HH".
26. TSN, March 4, 2004.
27. Exhibit "HH".

28. Exhibits "ZZZZ-9-1" to "ZZZZ-9-243".
29. Exhibits "ZZZZ-11-1 to 42".
30. Income Tax Regulations.

31. Collector of Internal Revenue vs. Goodrich International Rubber Co. (No. L-
22265, December 26, 1967, 21 SCRA 1336; cited in Philippine Refining
Company (now known as "Unilever Philippines [PRC], Inc.") vs. Court of
Appeals, Court of Tax Appeals and The Commissioner of Internal Revenue,
G.R. No. 118794, May 8, 1996, 256 SCRA 667.
32. Esso Standard Eastern, Inc. (formerly, Standard-Vacuum Oil Company) vs. The
Commissioner of Internal Revenue, G.R. No. L-28508-9, July 7, 1989, 175
SCRA 149.

34. Exhibit "T-1".

35. Exhibits "ZZZZ-13c(1)-1 to 27", "ZZZZ-13c(2)-1 to 73", "ZZZZ-13c(3)-1 to 95",
"ZZZZ-13c(4)-1 to 39", and "ZZZZ-13c(5)-1 to 5".
36. BIR Records, pp. 50, 55-62.
37. Exhibit "T".

40. Exhibit "ZZZZ-15-8" and Section A of "Exhibit ZZZZ-15-1".

41. Exhibit "ZZZZ-15-9" and Section C of "Exhibit ZZZZ-15-2".
42. BIR Records, p. 51.
43. BIR Records, p. 51.
44. See details attached to this Decision.

45. Commissioner of Internal Revenue vs. Lianga Bay Logging Co., Inc., G.R. No. L-
35266, January 21, 1991, 193 SCRA 86.
46. January 25, 1998 fell on a Sunday.
47. Solid Cement Corp. vs. Liwayway Vinzons-Chato, in her Capacity as the
Commissioner of Internal Revenue, CTA Case No. 5420, May 27, 1999.
48. Docket, p. 38.

52. G.R. Nos. 109289 and 109446 dated October 3, 1994.
53. Exhibit "D".
54. Exhibits "ZZZZ-8-1", "ZZZZ-8-2", and "ZZZZ-8-3".

55. Petitioner's Memorandum, Docket, p. 392.
56. Exhibit "ZZZZ-17-1" and "ZZZZ-17-5".
57. The Bookkeeping Regulations.

58. Not RR 1-90 as erroneously cited by respondent.

FIRST DIVISION
[C.T.A. CASE NO. 8794. September 23, 2016.]

For: Assessment
BONIFACIO GAS CORPORATION , petitioner, vs.

COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
MINDARO-GRULLA, J : p
This resolves the Petition for Review filed on April 7, 2014 by Bonifacio
Gas Corporation pursuant to Section 7 (a) (1) of Republic Act (RA) No. 1125,
otherwise known as "An Act Creating the Court of Tax Appeals," as
amended, 1 as well as Rule 4, Section 3 (a) (1), in relation to Rule 8, Section
4 (a), of the Revised Rules of the Court of Tax Appeals (RRCTA). 2
Petitioner seeks the cancellation and setting aside of the Assessment
Notice No. IT-LA4078/ELA4542-09-13-0153, the Formal Assessment Notice
(FAN), and the Final Decision on Disputed Assessment (FDDA), all issued by
the Commissioner of Internal Revenue, assessing it for alleged deficiency
income tax in the total amount of P504,432.41, inclusive of interest, for
taxable year (TY) 2009. 3
Petitioner Bonifacio Gas Corporation is a domestic corporation existing
under and by virtue of the laws of the Republic of the Philippines. It is duly
registered with the Securities and Exchange Commission (SEC), with
principal office address at 2nd Floor, Bonifacio Technology Centre, 31st St.
corner 2nd Ave., Bonifacio Global City, Taguig City, Metro Manila. 4
On the other hand, respondent is the duly appointed Commissioner of
the Bureau of Internal Revenue (BIR), authorized to perform the duties of his
office, including, among others, the power to decide disputed assessments
or other charges and penalties imposed in relation thereto pursuant to the
provisions of the National Internal Revenue Code (NIRC) of 1997, as
amended. Respondent holds office at the 5th Floor, BIR National Office
Building, Agham Road, Diliman, Quezon City.
On March 16, 2004, petitioner and the Bases Conversion Development
Authority (BCDA) executed a Supply Contract, wherein the former would
supply cold air to the latter. 5 The Supply Contract was later amended on
January 15, 2008. 6
Pursuant to the Letter of Authority No. LOA 2009 00004078 7 dated
May 24, 2010 and Letter of Authority No. Ela201000004542 8 dated
September 8, 2010, the assigned Revenue Officers of Revenue District Office
(RDO) No. 44-Taguig/Pateros conducted a tax audit on petitioner for all
internal revenue taxes covering TY 2009. 9 After the tax audit, respondent
issued a Preliminary Assessment Notice 10 (PAN) on January 15, 2013,
assessing petitioner for alleged deficiency income tax in the amount of
P439,722.08.
Consequently, petitioner disputed the PAN on February 1, 2013. 11
On March 6, 2013, the Assessment Notice No. IT-LA4078/ELA4542-09-
13-0153 12 and the Formal Assessment Notice 13 were issued and received
by petitioner on March 12, 2013, 14 assessing it for basic deficiency income
tax in the amount of P281,181.78 for TY 2009, 15 computed as follows: 16
I. Income Tax
Taxable income/(Loss) per ITR P23,214,054.00

Add: Adjustments/Disallowance
Disallowed Provision for Doubtful Accounts 8,184.00
Adjusted Taxable Income P23,222,238.00
Basic Income Tax Due (30%) P6,966,671.40
Less: Credits Payments
Creditable Income Tax Withheld P1,921,689.00
Add: Payments per Return 5,042,527.20
–––––––––––––
Total 6,964,216.20
Less: Disallowed Creditable Withholding
P278,726.58 6,685,489.62
Tax
Basic Deficiency Income Tax P281,181.78
Petitioner then administratively protested the said assessment on April
5, 2013. 17
On March 6, 2014, petitioner received a copy of the Final Decision on
Disputed Assessment dated February 28, 2014, reiterating the deficiency
income tax assessment against petitioner covering TY 2009 in the amount of
P504,432.21, inclusive of interest computed from April 16, 2010 to April 4,
2014. 18
As a result, petitioner filed the present Petition for Review 19 before this
Court on April 7, 2014.
In the Answer 20 filed through registered mail on June 6, 2014 and
received by the Court on June 17, 2014, respondent raised the following
special and affirmative defenses:
"1. Respondent reiterates and repleads the preceding paragraphs
of the answer as part of her Special and Affirmative Defenses.
2. Verification disclosed that petitioner did not comply with the
requisites of Bad Debts to be deductible, hence the amount of
P8,184.00 was disallowed pursuant to Revenue Regulations No.
25-2005.
3. The amount of P8,184.00 claimed by petitioner as deductible
against the income payments was disallowed for failure to
present any evidence that it resulted from write-off receivables.
4. Verification disclosed that petitioner's creditable withholding VAT
amounting to P278,726.58 was erroneously deducted from the
income tax due. This does not translate to complete compliance
of creditable withholding tax to be deductible, hence, it is
disallowed as tax credit pursuant to Section 2.58.3(B) of Revenue
Regulations No. 2-98, as amended.
5. Assessment are prima facie presumed correct and made in good
faith. The taxpayer has the duty of proving otherwise. In the
absence of proof of any irregularities in the performance of
official duties, an assessment will not be disturbed. (Aban, Law of
Basic Taxation in the Philippines, 1st Edition, p. 109);
6. Finally, Petitioner should be reminded that taxes are important
because it is the lifeblood of the government and so should be
calculated without unnecessary hindrance (Commissioner vs.
Algue, Inc., L-28896, 17 February 1988) . Taxes are enforced
proportional contribution from persons and property levied by
the state, thus, no one is considered entitled to recover that
which he must give up to another- Non videtur quisquam id
capere quod ei necesse est alii restitutere."
Respondent's Pre-Trial Brief 21 and petitioner's Pre-Trial Brief 22 were
filed on August 18, 2014 and August 22, 2014, respectively. Thereafter, the
parties submitted their Joint Stipulation of Facts and Issues 23 on September
11, 2014. In the Resolution issued on September 16, 2014, the Court
approved the same and terminated the pre-trial. 24 Subsequently, the Court
issued the Pre-Trial Order 25 on December 5, 2014.
During trial, petitioner presented Ms. Maribel T. Tinonas and Ms.
Catherine C. Bachoco as its witnesses. Then, petitioner formally offered its
documentary evidence, consisting of Exhibits "P-1" to "P-105-a". The Court
admitted Exhibits "P-1", "P-1-a", "P-2" to "P-12", "P-14" to "P-16", "P-23" to
"P-103", "P104", "P-104-a", "P-105", and "P-105-a", but denied the admission
of Exhibits "P-13", "P-17", "P-18", "P-19", "P-20", "P-21", and "P-22". 26
Petitioner's admitted documentary exhibits are as follows:
Exhibit Description
P-1 Bonifacio Gas Corporation (BGC) Protest Letter dated April 5, 2013
against the 2009 deficiency tax assessment with BIR receiving
stamp
dated April 5, 2013
P-1-a Sub-marking on P-1 referring to the BIR-RR8 Makati Assessment
Division receiving stamp dated April 5, 2013
P-2 Contract entitled "BONIFACIO TECHNOLOGY CENTER (BTC)
AIR-CONDITIONING TERMS AND CONDITIONS" between the
Bases Conversion Development Authority (BCDA) and BGC for
air-conditioning services 16 March 2004
Amendment to the Supply Contract dated January 15, 2008
P-3
between
BGC and BCDA
Certificate of Creditable Tax Withheld at Source (BIR Form No.
P-4
2307)
issued by BCDA to BGC covering the period February 2009 with tax
withheld amounting to P10,108.07
P-5 Certificate of Creditable Tax Withheld at Source (BIR Form No.
2307)
issued by BCDA to BGC covering the period March 2009 with tax
withheld
amounting to P10,108.07
P-6
2307)
issued by BCDA to BGC covering the period April 2009 with tax
withheld
P-7
2307)
issued by BCDA to BGC covering the period May 2009 with tax
withheld
P-8
2307)
issued by BCDA to BGC covering the period June 2009 with tax
withheld
P-9
2307)
issued by BCDA to BGC covering the period July 2009 with tax
withheld
P-10
2307)
issued by BCDA to BGC covering the period August 2009 with tax
P-11
2307)
issued by BCDA to BGC covering the period September 2009 with
tax
P-12
2307)
issued by BCDA to BGC covering the period October 2009 with tax
P-14
2307)
issued by BCDA to BGC covering the period December 2009 with
tax
Certificate of Final Tax Withheld at Source (BIR Form No. 2306)
P-15
issued
by BCDA to BGC covering the period February 2009 with tax
withheld
P-16
issued
by BCDA to BGC covering the period March 2009 with tax withheld
P-23
issued
by BCDA to BGC covering the period October 2009 with tax
withheld
P-24
issued
by BCDA to BGC covering the period November 2009 with tax
withheld
P-25
issued
by BCDA to BGC covering the period December 2009 with tax
withheld
Billing Statement No. 024093 as of Feb. 5, 2009 issued by BGC to
P-26
BCDA
Billing Statement No. 024094 as of Feb. 5, 2009 issued by BGC to
P-27
BCDA
Billing Statement No. 024759 as of Mar. 6, 2009 issued by BGC to
P-28
BCDA
Billing Statement No. 024760 as of Mar. 6, 2009 issued by BGC to
P-29
BCDA
Billing Statement No. 024783 as of April 2, 2009 issued by BGC to
P-30
BCDA
Billing Statement No. 024784 as of April 2, 2009 issued by BGC to
P-31
BCDA
Billing Statement No. 025651 as of May 8, 2009 issued by BGC to
P-32
BCDA
Billing Statement No. 025652 as of May 8, 2009 issued by BGC to
P-33
BCDA
Billing Statement No. 027504 as of June 5, 2009 issued by BGC to
P-34
BCDA
Billing Statement No. 027505 as of June 5, 2009 issued by BGC to
P-35
BCDA
Billing Statement No. 027652 as of July 7, 2009 issued by BGC to
P-36
BCDA
Billing Statement No. 027653 as of July 7, 2009 issued by BGC to
P-37
BCDA
Billing Statement No. 028353 as of Aug. 7, 2009 issued by BGC to
P-38
BCDA
Billing Statement No. 028354 as of Aug. 7, 2009 issued by BGC to
P-39
BCDA
Billing Statement No. 029772 as of Sept. 7, 2009 issued by BGC to
P-40
BCDA
Billing Statement No. 030406 as of October 7, 2009 issued by BGC
P-41
to
BCDA
Billing Statement No. 031313 as of Nov. 10, 2009 issued by BGC to
P-42
BCDA
Billing Statement No. 032003 as of Dec. 9, 2009 issued by BGC to
P-43
BCDA
VAT Official Receipt No. 010198 dated Feb. 18, 2009 issued by BGC
P-44
to
cover receipt of BCDA's payment for the air-conditioning services
net of
withholding taxes
VAT Official Receipt No. 010199 dated Feb. 18, 2009 issued by BGC
P-45
to
net of
withholding taxes
VAT Official Receipt No. 010696 dated March 17, 2009 issued by
P-46
BGC to
net of
withholding taxes
VAT Official Receipt No. 010697 dated March 17, 2009 issued by
P-47
BGC to
net of
withholding taxes
VAT Official Receipt No. 010823 dated April 22, 2009 issued by
P-48
BGC to
net of
withholding taxes
VAT Official Receipt No. 010824 dated April 22, 2009 issued by
P-49
BGC to
net of
withholding taxes
VAT Official Receipt No. 011084 dated May 19, 2009 issued by BGC
P-50
to
net of
withholding taxes
VAT Official Receipt No. 011085 dated May 19, 2009 issued by BGC
P-51
to
net of
withholding taxes
VAT Official Receipt No. 011787 dated June 17, 2009 issued by
P-52
BGC to
net of
withholding taxes
VAT Official Receipt No. 011788 dated June 17, 2009 issued by
P-53
BGC to
net of
withholding taxes
VAT Official Receipt No. 012343 dated July 20, 2009 issued by BGC
P-54
to
net of
withholding taxes
VAT Official Receipt No. 012344 dated July 20, 2009 issued by BGC
P-55 to
net of
withholding taxes
VAT Official Receipt No. 012842 dated August 18, 2009 issued by
P-56
BGC to
net of
withholding taxes
VAT Official Receipt No. 012843 dated August 18, 2009 issued by
P-57
BGC to
net of
withholding taxes
VAT Official Receipt No. 013384 dated Sept. 22, 2009 issued by
P-58
BGC to
net of
withholding taxes
VAT Official Receipt No. 014013 dated Oct. 20, 2009 issued by BGC
P-59
to
net of
withholding taxes
VAT Official Receipt No. 014654 dated Nov. 23, 2009 issued by
P-60
BGC to
net of
withholding taxes
VAT Official Receipt No. 015256 dated Dec. 21, 2009 issued by
P-61
BGC to
net of
withholding taxes
Monthly Value Added Tax Declaration (BIR Form No. 2550M) of BGC
P-62
for
the period/month of January 2009 filed with the BIR
P-63
for
the period/month of February 2009 filed with the BIR
Quarterly Value Added Tax Return (BIR Form No. 2550Q) of BGC for
P-64
the
1st Quarter of 2009 filed with the BIR
P-65
for
the period/month of April 2009 filed with the BIR
P-66
for
the period/month of May 2009 filed with the BIR
Quarterly Value Added Tax Declaration (BIR Form No. 2550Q) of
P-67
BGC
for the period/month of July 2009 filed with the BIR
P-69 for
the period/month of August 2009 filed with the BIR
P-70
the
3rd Quarter of 2009 filed with the BIR
P-71
for
the period/month of October 2009 filed with the BIR
P-72
for
the period/month of November 2009 filed with the BIR
P-73
the
4th Quarter of 2009 filed with the BIR
VAT Summary List of BGC for 1st Quarter of 2009 showing the
P-74
summary
of input and output VAT/VAT exempt sales per revenue source for
the 3
months covered by the taxable quarter
VAT Summary List of BGC for 2nd Quarter of 2009 showing the
P-75
summary
the 3
VAT Summary List of BGC for 3rd Quarter of 2009 showing the
P-76
summary
the 3
VAT Summary List of BGC for 4th Quarter of 2009 showing the
P-77
summary
the 3
Monthly billing schedule for chilled water/air-con services of BGC
P-78
for
January 2009 covering Bonifacio Technology Center (BTC) tenants
showing locator profile, area, core operating hours, factor, number
of days,
amount, overtime charges, VAT and billed amount
P-79
for
February 2009 covering Bonifacio Technology Center (BTC) tenants
of days,
P-80
for
March 2009 covering Bonifacio Technology Center (BTC) tenants
showing
locator profile, area, core operating hours, factor, number of days,
amount,
overtime charges, VAT and billed amount
P-81 Monthly billing schedule for chilled water/air-con services of BGC
for
April 2009 covering Bonifacio Technology Center (BTC) tenants
showing
locator profile, area, core operating hours, factor, number of days,
amount,
P-82
for May
2009 covering Bonifacio Technology Center (BTC) tenants showing
locator
profile, area, core operating hours, factor, number of days, amount,
P-83
for June
locator
P-84
for July
locator
P-85
for
August 2009 covering Bonifacio Technology Center (BTC) tenants
of days,
P-86
for
September 2009 covering Bonifacio Technology Center (BTC)
tenants
of days,
P-87
for
October 2009 covering Bonifacio Technology Center (BTC) tenants
of days,
P-88
for
November 2009 covering Bonifacio Technology Center (BTC)
tenants
of days,
P-89
for
December 2009 covering Bonifacio Technology Center (BTC)
tenants
of days,
Portion of the BIR registered General Ledger of BGC Volume 1
P-90
consisting
of 5 pages showing the G/L Account 700.20500.004 for Output VAT
recorded for the period from Jan. 1, 2009 to Jan. 31, 2009
P-91
consisting
recorded for the period from Feb. 1, 2009 to Feb. 28, 2009
P-92
consisting
recorded for the period from Mar. 1, 2009 to Mar. 31, 2009
P-93
consisting
recorded for the period from April 1, 2009 to April 30, 2009
P-94
consisting
recorded for the period from May 1, 2009 to May 31, 2009
P-95
consisting
recorded for the period from June 1, 2009 to June 30, 2009
P-96
consisting
recorded for the period from July 1, 2009 to July 31, 2009
P-97
consisting
recorded for the period from August 1, 2009 to August 31, 2009
P-98
consisting
recorded for the period from September 1, 2009 to September 30,
2009
P-99
consisting
recorded for the period from October 1, 2009 to October 31, 2009
P-100
consisting
recorded for the period from November 1, 2009 to November 30,
2009
P-101 Portion of the BIR registered General Ledger of BGC Volume 12
consisting
recorded for the period from December 1, 2009 to December 31,
2009
Print out of Annual Income Tax Return (BIR Form No. 1702) of BGC
P-102
for
the taxable year 2009 filed through the Electronic Filing and
Payment
System (EFPS) of the BIR with Filing Reference No.
121000003721499
electronically filed on April 15, 2010 consisting of 10 printed pages
P-103 Reconciliation of FS and ITR dated December 31, 2009 showing the
adjustments or reconciliations made per FS and per ITR covering
taxable
year 2009
P-104 Judicial Affidavit of Maribel T. Tinonas dated September 30, 2014
P-104-a Sub-marking on Exhibit "P-104" pertaining to the printed name and
signature of Maribel T. Tinonas
Judicial Affidavit of Ma. Catherine C. Bachoco dated September 30,
P-105
2014
P-105-a Sub-marking on Exhibit "P-105" pertaining to the printed name and
signature of Ma. Catherine C. Bachoco
On the other hand, respondent's counsel manifested during the
hearing on January 27, 2015 that respondent would no longer be presenting
evidence in this case. 27
The case was declared submitted for decision on October 14, 2015, 28
considering respondent's Memorandum 29 received by the Court on June 25,
2015 and the Records Verification 30 issued by the Court's Judicial Records
Division on October 7, 2015, stating that petitioner failed to file its
Memorandum.
The sole issue stipulated upon by the parties for the Court's
determination is as follows:
"Whether or not petitioner is liable for deficiency income tax
amounting to P504,432.41 inclusive of interest computed from April
16, 2010 until April 4, 2014." 31
The Court shall determine first the timeliness of the filing of the instant
petition.
Section 228 of the National Internal Revenue Code of 1997, as
amended, provides:
"SEC. 228. Protesting of Assessment. — When the
Commissioner or his duly authorized representative finds that proper
taxes should be assessed, he shall first notify the taxpayer of his
findings: Provided, however, That a preassessment notice shall not be
required in the following cases:
xxx xxx xxx
The taxpayers shall be informed in writing of the law and the
facts on which the assessment is made; otherwise, the assessment
shall be void.
Within a period to be prescribed by implementing rules and
regulations, the taxpayer shall be required to respond to said notice.
If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his
findings.
Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation within thirty (30) days
from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60)
days from filing of the protest, all relevant supporting documents
shall have been submitted; otherwise, the assessment shall become
final.
If the protest is denied in whole or in part, or is not acted upon
within one hundred eighty (180) days from submission of documents,
the taxpayer adversely affected by the decision or inaction may
appeal to the Court of Tax Appeals within thirty (30) days from
receipt of the said decision, or from the lapse of the one hundred
eighty (180)-day period; otherwise, the decision shall become final,
executory and demandable."
Based on the foregoing, petitioner had thirty (30) days from receipt of
the FDDA on March 6, 2014 or until April 5, 2014 within which to appeal
before this Court.
Considering that April 5, 2014 fell on a Saturday, petitioner filed this
Petition for Review on the next working day which was April 7, 2014. 32
Thus, the instant petition was timely filed.
The Court shall now determine whether petitioner is liable for alleged
deficiency income tax.
In the FDDA dated February 28, 2014, respondent assessed petitioner
for deficiency income tax in the total amount of P504,432.41, inclusive of the
interest computed from April 16, 2010 to April 4, 2014, for TY 2009. Details
are as follows: 33

Taxable Income/(Loss) per ITR P23,214,054.00
Add: Disallowance/Adjustments
Disallowed provision for Doubtful
8,184.00
Accounts
Adjusted Taxable Income P23,222,238.00
Basic Income Tax Due P6,966,671.40
Less: Tax Credits/Payments
Creditable Income Tax Withheld P1,921,689.00
Add: Payments per return 5,042,527.20
––––––––––––
Total P6,964,216.20
Disallowed Creditable Withholding
Less: 278,726.58 6,685,489.62
Tax
Basic Deficiency Income Tax P281,181.78
Add: Interest (4.16.10 to 4.4.14) 223,250.63
––––––––––––
TOTAL AMOUNT DUE P504,432.41
===========
The deficiency income tax assessment pertains to the disallowance of
the alleged provision for doubtful accounts in the amount of P8,184.00 and
the disallowance of withholding tax credited by petitioner to its income tax
liability for the amount of P278,726.58, covered by Certificates of Final Tax
Withheld at Source issued by the Bases Conversion and Development
Authority, a government-owned and -controlled corporation (GOCC).
The Court shall evaluate the propriety of the items comprising the
assessment, to wit:
I. Disallowed Provision for Doubtful Accounts — P8,184.00
II. Disallowed Creditable Withholding Tax — P278,726.58
I. Disallowed Provision for Doubtful Accounts — P8,184.00
Upon verification, respondent found that the amount of P8,184.00,
representing the Provision for Doubtful Accounts, did not comply with the
requisites for deductibility of bad debts pursuant to Revenue Regulations
(RR) No. 25-02, amending Section 3 of RR No. 05-99. Consequently,
respondent assessed petitioner for such deficiency income tax.
On the other hand, petitioner avers that respondent's computation of
the P8,184.00 disallowance was erroneous because it was arrived at by
subtracting the Reversal of Allowance amounting to P688,324.00, 34 which
was included as part of petitioner's Non-Operating and Taxable Other
I n c o m e , 35 from the Provision for Doubtful Accounts amounting to
P696,508.00, 36 which was claimed as deduction from petitioner's gross
income for taxable year 2009.
Petitioner explains that the Reversal of Allowance was actually an
income item subjected to income tax for 2009. It purportedly does not relate
at all to the 2009 reported Provision for Doubtful Accounts. Instead, it
allegedly pertains to the 2008 Provision for Doubtful Account which was
subjected to income tax in 2009 when the same was eventually collected in
2009.
Further, petitioner contends that the assessment cannot be sustained
because it is based on a mere presumption. The difference between the
Reversal of Allowance and the Provision for Doubtful Accounts has been
concluded by respondent as bad debts, and the same has allegedly failed to
comply with the requisites for deductibility of bad debts. Citing the case of
Collector of Internal Revenue vs. Benipayo, 37 petitioner insists that the
assessment must be based on actual facts and that the correctness of
assessment being a mere presumption cannot be made to rest on another
presumption.
Section 34 (E) (1) of the NIRC of 1997, as amended, states:
"SEC. 34. Deductions from Gross Income. — . . .
xxx xxx xxx
(E) Bad Debts. —
(1) In General. — Debts due to the taxpayer actually
ascertained to be worthless and charged off within the taxable year
except those not connected with profession, trade or business and
those sustained in a transaction entered into between parties
mentioned under Section 36(B) of this Code: Provided, That recovery
of bad debts previously allowed as deduction in the preceding years
shall be included as part of the gross income in the year of recovery
to the extent of the income tax benefit of said deduction."
RR No. 05-99, which implements the afore-quoted law, defines "Bad
Debts" as those debts resulting from the worthlessness or uncollectibility, in
whole or in part, of amounts due the taxpayer by others, arising from money
lent or from uncollectible amounts of income from goods sold or services
rendered.
Pertinent thereto is Section 2 of RR No. 25-02, amending Section 3 of
RR No. 05-99, which has enumerated the following requisites for valid
deduction of bad debts:
"SECTION 2. Amendment. — Section 3 of RR 5-99 on the
requisites for valid deduction of bad debts from gross income is
hereby amended by deleting the penultimate paragraph of the said
Section and should now read as follows:
'Sec. 3. Requisites for valid deduction of bad debts
from gross income. — The requisites for deductibility of
bad debts are:
(1) There must be an existing indebtedness due to the
taxpayer which must be valid and legally demandable;
(2) The same must be connected with the taxpayer's trade,
business or practice of profession;
(3) The same must not be sustained in a transaction entered
into between related parties enumerated under Sec. 36(B)
of the Tax Code of 1997;
(4) The same must be actually charged off the books of
accounts of the taxpayer as of the end of the taxable year;
and
(5) The same must be actually ascertained to be worthless
and uncollectible as of the end of the taxable year.
xxx xxx xxx"
A perusal of petitioner's Annual Income Tax Return 38 (ITR) for TY 2009
shows that petitioner claimed the amount of P696,508.00, 39 representing
Provision for Doubtful Accounts, as deduction from its taxable gross income.
Hence, the said amount purportedly pertains to the deductible bad debts
contemplated under RR No. 05-99, as amended by RR No. 25-02 in relation
to Section 34 (E) (1) of the NIRC of 1997, as amended.
In arriving at the disallowance of P8,184.00, respondent deducted the
amount of P688,324.00 representing Reversal of Allowance for Impairment
L o s s 40 from the claimed amount of P696,508.00 Provision for Doubtful
Accounts. However, the Court finds such deduction erroneous.
Petitioner has admitted that the Reversal of Allowance for Impairment
Loss in the amount of P688,324.00 pertained to 2008 but reported as part of
its taxable income for 2009 when the same was eventually collected in
2009. 41
Apparently, the amount of P688,324.00 represents bad debts written
off and claimed as deduction from petitioner's gross income in 2008, but was
subsequently recovered or collected and reported as part of petitioner's
taxable income in 2009. This tax treatment is in accordance with the "Tax
Benefit Rule" under Section 4 of RR No. 05-99, which states that:
"SECTION 4. Tax Benefit Rule . — The recovery of bad debts
previously allowed as deduction in the preceding year or years shall
be included as part of the taxpayer's gross income in the year of such
recovery to the extent of the income tax benefit of said deduction.
Example: If in the year the taxpayer claimed deduction of bad debts
written-off, he realized a reduction of the income tax due from him on
account of the said deduction, his subsequent recovery thereof from
his debtor shall be treated as a receipt of realized taxable income. . .
."
On the other hand, the Provision for Doubtful Accounts in the amount
of P696,508.00 purportedly pertains to petitioner's claimed deduction for bad
debts written-off during the year 2009, as stated earlier.
The "Provision for Doubtful Accounts" and the "Reversal of Allowance
for Impairment Loss" are two different transactions. The former is an income
item, while the latter is an expense item; which cannot be offset with each
other. The Court opines that to allow the offsetting of the two transactions in
the instant case, would be in effect allowing the bad debts automatically
deductible from the gross income without complying with the requisites for
valid deduction of bad debts in accordance with the above-mentioned law
and regulations.
Nonetheless, while respondent erred in computing for the amount of
bad debts disallowance, this does not mean that the assessment was based
on a mere presumption. Respondent's assessment has factual basis as it
was derived from the figures appearing in petitioner's Audited Financial
Statements and Annual Income Tax Return for TY 2009. Clearly, the
assessment is based on actual facts.
Further, in claiming a deduction from gross income, petitioner has the
burden of proving that the amount of P696,508.00 representing Provision for
Doubtful Accounts complied with the requisites for deductibility as set forth
under RR No. 25-02. Deductions for income tax purposes partake of the
nature of tax exemptions and are strictly construed against the taxpayer,
who must prove by convincing evidence that he is entitled to the deduction
claimed. 42
However, other than the allegation that the assessment was erroneous
and devoid of factual basis, petitioner has failed to present any document
establishing that it has fully complied with the requisites for deductibility of
bad debts in the amount of P696,508.00.
This Court applies by analogy to the instant case the ruling in the case
o f H. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue , 43
where the Supreme Court held that a mere averment that the taxpayer has
incurred a loss does not automatically warrant a deduction from its gross
income, to wit:
"The rule that tax deductions, being in the nature of tax
exemptions, are to be construed in strictissimi juris against the
taxpayer is well settled. Corollary to this rule is the principle that
when a taxpayer claims a deduction, he must point to some specific
provision of the statute in which that deduction is authorized and
must be able to prove that he is entitled to the deduction which the
law allows. An item of expenditure, therefore, must fall squarely
within the language of the law in order to be deductible. A mere
averment that the taxpayer has incurred a loss does not
automatically warrant a deduction from its gross income.
Thus, the disallowance of the allowable deduction of bad debts in the
amount of P696,508.00 is upheld.
II. Disallowed Creditable Withholding Tax — P278,726.58
Respondent's verification disclosed that petitioner's creditable
withholding value-added tax (VAT) amounting to P278,726.58 was
erroneously deducted from the latter's income tax due; thus, the same was
disallowed as tax credit pursuant to Section 2.58.3 (B) of RR No. 02-98, as
amended.
Petitioner explains that the subject withholding VAT pertained to its
income from air-conditioning services rendered to the BCDA, where the latter
withheld five percent (5%) final withholding VAT. Petitioner points out that
the BCDA issued Certificates of Final Tax Withheld at Source or BIR Form No.
2306 as proof of withholding.
The amount of VAT withheld totaling P278,726.58 was admitted by
petitioner to have been erroneously included as tax credits in its 2009
Annual Income Tax Return for having mistakenly thought that such were
creditable income tax withheld by BCDA.
Petitioner also claims that it remitted the entire twelve percent (12%)
output VAT on its gross receipts from air-conditioning services rendered to
the BCDA, notwithstanding that the latter had already withheld a 5% VAT.
According to petitioner, considering the difficulty and even ambiguity in
the treatment of the 5% final withholding VAT under the law and numerous
regulations issued by respondent, the commission of such error in reporting
the said withholding VAT as part of creditable withholding taxes for income
tax purposes, and the said BCDA payments as subject to the full 12% VAT
(which benefited the government), is an honest mistake which petitioner
committed in good faith.
Petitioner points out that no losses were incurred on the part of the
government under these circumstances (i.e., petitioner reporting a full 12%
VAT liability on the BCDA payments without consideration for the 5%
withholding VAT, and petitioner claiming the 5% withholding VAT as credit to
its income tax liability) as it would only be a reclassification from one tax
account to another. On the contrary, the government has allegedly benefited
from the said circumstances; while petitioner suffered a loss by subjecting
the BCDA payments to the full 12% VAT instead of the 5% already withheld
by the BCDA. Petitioner posits that to further impose upon it the deficiency
income tax as a result of the disallowance of the 5% withholding VAT, would
be an oppressive double taxation on the part of petitioner leading to further
undue enrichment on the part of government, which should not be
sanctioned.
The Court finds petitioner's arguments bereft of merit.
Section 114 (C) of the NIRC of 1997, as amended, mandates the
withholding of 5% final VAT on sales to government, to wit:
"SEC. 114. Return and Payment of Value-Added Tax. —
xxx xxx xxx
(C) Withholding of Creditable Value-Added Tax. — The
Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or -controlled corporations
(GOCCs) shall, before making payment on account of each
purchase of goods from sellers and services rendered by
contractors which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold the
value-added tax due at the rate of five percent (5%) of the
gross payment thereof: . . ." (Emphasis supplied)
Section 4.114-2 (a) of RR No. 16-05, as amended by RR No. 04-07,
provides for the proper treatment of the 5% final VAT withheld from sales to
government, viz.:
"SEC. 4.114-2. Withholding of VAT on Government Money
Payments and Payments to Non-Residents. —
(a) The government or any of its political subdivisions,
instrumentalities or agencies including government-owned or
controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods and/or of services taxed at
twelve percent (12%) VAT pursuant to Secs. 106 and 108 of the Tax
Code, deduct and withhold a final VAT due at the rate of five
percent (5%) of the gross payment thereof.
The five percent (5%) final VAT withholding rate shall
represent the net VAT payable of the seller . The remaining
seven percent (7%) effectively accounts for the standard input VAT
for sales of goods or services to government or any of its political
subdivisions, instrumentalities or agencies including GOCCs in lieu of
the actual input VAT directly attributable or ratably apportioned to
such sales. Should actual input VAT attributable to sale to
government exceeds seven percent (7%) of gross payments, the
excess may form part of the sellers' expense or cost. On the other
hand, if actual input VAT attributable to sale to government is less
than seven percent (7%) of gross payment, the difference must be
closed to expense or cost." (Emphasis supplied)
In relation thereto is Section 4.114-3 (h) of RR No. 16-05, which
provides that a Certificate of Final Tax Withheld at Source (BIR Form No.
2306) should be issued to the payee as proof of the VAT withheld by the
government.
Based on the foregoing provisions, the 5% final VAT withholding rate
shall represent the net VAT payable of the seller. The remaining seven
percent (7%) effectively accounts for the standard input VAT for sales of
goods or services to government or any of its political subdivisions,
instrumentalities or agencies including GOCCs, in lieu of the actual input VAT
directly attributable or ratably apportioned to such sales to the Government.
Should actual input VAT exceed the standard input VAT of 7% of gross
payments, the excess may form part of the sellers' expense or cost.
Conversely, if actual input VAT is less than the standard input VAT of 7% of
gross payment, the difference must be treated as taxable income. 44
In other words, the taxpayers shall declare the full 12% VAT on their
gross sales to or receipts from the government under "Sales to Government"
in the filing of the VAT returns. The standard input VAT of 7% shall be
deducted therefrom leaving a net VAT payable of 5%, which is equivalent to
the final VAT withheld. Thus, after deducting the 5% final VAT withheld by
the government under "VAT withheld on Sales to Government," 45 there
remains no amount of output VAT due on the sales to or receipts from the
government.
Based on the foregoing, the law and regulations are clear as to the
reporting of the VAT implications arising from sales of goods or services to
the government and its instrumentalities, including GOCCs such as the
BCDA.
Applying the foregoing provisions to the instant case, the Court finds it
proper that petitioner declared the full 12% VAT on its receipts from the
BCDA, but finds erroneous petitioner's treatment with respect to the 5% final
VAT withheld as tax credit in its 2009 Annual ITR. Therefore, the Court
upholds respondent's assessment on this item.
In sum, petitioner is liable to pay basic deficiency income tax for TY
2009 in the amount of P487,678.98, computed as follows:
Taxable income P23,214,054.00
Add: Adjustments/Disallowance
Disallowed provision for doubtful
696,508.00
accounts
Adjusted taxable income P23,910,562.00
Basic income tax due P7,173,168.60
Less: Credits/Payments
Creditable income tax withheld P1,921,689.00
Add: Payments per return 5,042,527.20
–––––––––––––
Total P6,964,216.20
Disallowed creditable withholding
Less: 278,726.58 6,685,489.62
tax
–––––––––––––
Basic deficiency income tax P487,678.98
===========
WHEREFORE, premises considered, the deficiency income tax
assessment issued by respondent against petitioner for taxable year 2009 is
AFFIRMED. Accordingly, petitioner is ORDERED TO PAY respondent the
amount of SIX HUNDRED NINE THOUSAND FIVE HUNDRED NINETY-
EIGHT PESOS AND 73/100 (P609,598.73) representing basic deficiency
income tax and the twenty-five percent (25%) surcharge imposed under
Section 248 (A) (3) of the NIRC of 1997, as amended, computed as follows:
Basic Tax Deficiency Income
P487,678.98
Tax
Surcharge 121,919.75
–––––––––––
Total P609,598.73
==========
In addition, petitioner is hereby ORDERED TO PAY:
(a) Deficiency interest at the rate of twenty percent (20%) per
annum on the basic deficiency income tax of P487,678.98 computed from
April 15, 2010 until full payment thereof pursuant to Section 249 (B) of the
NIRC of 1997, as amended; and
(b) Delinquency interest at the rate of 20% per annum on the total
amount of P609,598.73 and on the 20% deficiency interest which have
accrued as afore-stated in (a), computed from April 4, 2014 until full
payment thereof pursuant to Section 249 (C) of the NIRC of 1997, as
amended.
SO ORDERED.
(SGD.) CIELITO N. MINDARO-GRULLA

Associate Justice
Erlinda P. Uy, J., concurs.

Roman G. del Rosario, P.J., with Concurring & Dissenting Opinion.
Separate Opinions
DEL ROSARIO, P.J., concurring and dissenting opinion:
I concur in the ponencia insofar as it affirms the deficiency income tax

assessment issued by respondent against petitioner as a result of the
disallowance of petitioner's Provision for Doubtful Accounts and Creditable
Withholding Tax for taxable year 2009. The point of my dissent relates to the
ponencia's computation of the basic deficiency income tax . To be
specific, I am of the view that t h e ponencia's disallowance of
petitioner's Provision for Doubtful Accounts should have been
limited to the amount disallowed by respondent as indicated in the
Final Assessment Notice (FAN).
A perusal of the ponencia reveals the disallowance of petitioner's
"Provision for Doubtful Accounts" in the amount of Php696,508.00 instead
of the amount of Php8,184.00 as originally disallowed by
respondent in the FAN . Said increase in the amount disallowed by the
ponencia resulted in an increase in the basic deficiency income tax
assessment from Php281,181.78 as indicated in the FAN to Php487,678.98
as computed in the ponencia.
Records reveal that the amount of Php8,184.00 represents the
difference between the "Provision for Doubtful Accounts" of Php696,508.00
for 2009 and the "Reversal of Allowance for Impairment Loss" account of
Php688,324.00, which are bad debts written off and claimed as deduction
from petitioner's gross income in 2008 but was subsequently recovered and
reported as part of petitioner's income in 2009.
The ponencia correctly observed that respondent committed a mistake
in computing the bad debts disallowance as the "Provision for Doubtful
Accounts" and the "Reversal of Allowance for Impairment Loss" are two
different accounts which cannot be offset with each other, the former being
an expense item and the latter, an income item. Indeed, offsetting the two
accounts would effectively allow bad debts as automatic deduction from
gross income without complying with the requisites for valid deduction of
bad debts under Section 34 (E) (1) of the National Internal Revenue Code
(NIRC) of 1997, as amended, and Revenue Regulations (RR) No. 05-99, as
amended by RR No. 25-02. I am, however, of the humble opinion that
respondent's mistake in computing the amount of bad debts
disallowance is not sufficient justification for the Court to disallow
the amount of Php696,508.00, which is higher than the amount of
Php8,184.00 disallowed by respondent in the FAN.
In disallowing the amount of Php696,508.00, the ponencia found that
there was a failure on the part of petitioner to present any document that
would establish its compliance with the requisites for deductibility of said
amount as bad debts. To my mind, however, petitioner should not be faulted
for such failure because there is nothing in the FAN which indicates that
petitioner should have substantiated the validity of its deduction of the
amount of Php696,508.00 as bad debts. To insist on requiring petitioner to
do so at this late stage of the proceedings is tantamount to a violation of
petitioner's right to due process. To reiterate, the amount of
Php696,508.00 was not disallowed by respondent in the FAN.
Hence, there was no reason for petitioner to dispute or substantiate
the same before this Court.
Indeed, the power and duty to assess national internal revenue taxes
are lodged with the BIR. 1 This Court has no assessment powers and its
jurisdiction is confined to reviewing on appeal the decision or inaction of the
Commissioner of Internal Revenue on disputed assessment. The case of SMI-
ED Philippines Technology, Inc. vs. Commissioner of Internal Revenue 2 is
instructive, viz.:
"The Court of Tax Appeals has no power to make an
assessment at the first instance. On matters such as tax
collection, tax refund, and others related to the national internal
revenue taxes, the Court of Tax Appeals' jurisdiction is appellate in
nature.
xxx xxx xxx
Tax deficiencies should be subject to assessment
procedures and the rules of prescription. The court cannot be
expected to perform the BIR's duties whenever it fails to do
so either through neglect or oversight. Neither can court
processes be used as a tool to circumvent laws protecting the rights
of taxpayers." (Boldfacing supplied)
While this Court is allowed to make its own determination of the
taxpayer's liability in the process of reviewing the BIR's assessment, any
determination however in excess of what the BIR had assessed
could not simply be included in the computation of tax liability,
without affording the taxpayer the opportunity to dispute the same .
To do so would not only be arrogating unto the Court a duty which rightfully
belongs to the BIR, but more importantly, would necessarily violate the
taxpayer's right to due process — specifically the taxpayer's right to be
informed of the factual basis of the assessment and to submit evidence to
contest the same.
In view of the foregoing, I VOTE to AFFIRM the deficiency income tax
assessment as computed in the FAN, WITH MODIFICATION relating to the
inclusion of the 25% surcharge, 20% deficiency interest and 20%
delinquency interest, which are hereby imposed pursuant to Sections 248 (A)
and 249 (B) and (C) of the NIRC of 1997, as amended.
Footnotes
1. Sec. 7. Jurisdiction. — The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

xxx xxx xxx
(1) Decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue;
xxx xxx xxx
2. Rule 4, Sec. 3. Cases within the jurisdiction of the Court in Division. — The
Court in Division shall exercise:
(a) Exclusive original over or appellate jurisdiction to review by appeal the
following:
xxx xxx xxx
(1) Decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue;
xxx xxx xxx

Rule 8, Sec. 4. Where to appeal; mode of appeal. —
(a) An Appeal from a decision or ruling or the inaction of the
Commissioner of Internal Revenue on disputed assessments or claim for
refund of internal revenue taxes erroneously or illegally collected; the
decision or ruling of the Commissioner of Customs, the Secretary of
Finance, the Secretary of Trade & Industry, the Secretary of Agriculture, and
the Regional Trial Court in the exercise of their original jurisdiction, shall be
taken to the Court by filing before it a petition for review as provided in
Rule 42 of the Rules of Court. The Court in Division shall act on the appeal.
3. Par. I, Pre-Trial Order, Docket, p. 346.
4. Par. 1, Admitted and Stipulated Facts, Joint Stipulation of Fact and Issues (JSFI),
Docket, p. 69.
5. Exhibit "P-2", Docket, pp. 466 to 470.

7. BIR records, p. 2.
9. Par. 3, Admitted and Stipulated Facts, JSFI, Docket, p. 69.

10. BIR records, pp. 580 to 581.


14. Par. 2.01, Petition for Review, Docket, p. 15.

17. Par. 6, Admitted and Stipulated Facts, JSFI, Docket, p. 70; Exhibits "P-1" and
"P-1-a", Docket, p. 465.
19. Docket, pp. 14 to 21.


24. Resolution, Docket, p. 88.
25. Docket, pp. 346 to 359.

26. Resolutions dated April 15, 2015 and August 18, 2015, Docket, pp. 630 to 631
and pp. 653 to 658, respectively.
29. Docket, pp. 645 to 649.

30. Docket, p. 659.
31. Par. II, JSFI, Docket, p. 71; Pre-Trial Order, Docket, p. 348.
32. Docket, p. 14.

33. BIR records, pp. 721 to 722.
34. Other Income (Expense), Reconciliation of FS and ITR, Exhibit "P-103", Docket,
p. 623; Note 14, Audited Financial Statements, BIR records, pp. 171 to 199.
35. Line 20, Annual Income Tax Return, Exhibit "P-102", Docket, pp. 613 to 614.
36. Line 115, Schedule 7, Annual Income Tax Return, Exhibit "P-102", Docket, p.
619.
37. G.R. No. L-13656, January 31, 1962.
39. Line 115, Schedule 7, Exhibit "P-102", Docket, p. 619.

40. Exhibit "P-103", Docket, p. 623; Note 14, Audited Financial Statements, BIR
records, p. 176.
41. Par. 4.02, Petition for Review, Docket, p. 17.
42. Philex Mining Corporation vs. Commissioner of Internal Revenue, G.R. No.
148187, April 16, 2008.
43. G.R. No. 173373, July 29, 2013.

44. Revenue Memorandum Circular (RMC) No. 29-05, Q&A No. 17.
45. Line 23C of Monthly VAT Return (BIR Form No. 2550M) or Line 26D of
Quarterly VAT Return (BIR Form No. 2550Q).
DEL ROSARIO, P.J., concurring and dissenting opinion:

1. Section 2 of the National Internal Revenue Code of 1997 provides:
SEC. 2. Powers and Duties of the Bureau of Internal Revenue. — The Bureau of
Internal Revenue shall be under the supervision and control of the
Department of Finance and its powers and duties shall comprehend the
assessment and collection of all national internal revenue taxes, fees, and
charges, and the enforcement of all forfeitures, penalties, and fines
connected therewith, including the execution of judgments in all cases
decided in its favor by the Court of Tax Appeals and the ordinary courts.
The Bureau shall give effect to and administer the supervisory and police
powers conferred to it by this Code or other laws.
2. G.R. No. 175410, November 12, 2014.

August 27, 2010
BIR RULING NO. 042-10
Section 34 (F); BIR Ruling Nos. 144-97;

DA-031-03; DA-305-2007
Salvador & Associates

Attorneys-at-Law
815-816, Tower One & Exchange Plaza
Ayala Triangle, Ayala Avenue
Makati City
Attention: Attys. Maria Rosario L. Bernardo

Ronald V. Bernas and Adan T. Delamide
Gentlemen :
This refers to your letter dated January 18, 2010 stating that Nestle
Philippines, Inc. (NPI) with Tax Identification No. (TIN) 000-421-786-000 is a
domestic corporation engaged in the manufacture of brand food products
and beverages. NPI proposes to change the useful lives of its assets in
claiming depreciation deduction, both for tax and financial accounting
purposes based on the experience of the technical community and the
feedback received by the Engineering Department of NPI as a result of NPI's
annual review procedures. The proposed changes in useful lives of NPI's
assets and the reasons for the proposed changes are as follows:
Asset Current Proposed Reason for the Change in
Useful Life Useful Life Useful Life
Office Printer 3 5 Based on experience, office

printers are not relatively
affected
by obsolescence compared to
other IT equipment such as
laptops and desktops. The
advent
of emails and portable hard
drive
storages has considerably
lowered
the utilization of office printers.
Ice Cream Freezing 10 15 Based on the review and

and Hardening experience of the technical
Tunnels community, these assets can be
classified as low to medium or
static equipment. Therefore,
they
have longer useful lives as
compared to assets classified as
high speed equipment running
at
100 cycles per minute such as
conveyors, pumps, mixers and
filling machines.
Ice Cream Variable Fixed at 5 To standardize and simplify

Moulds from 3 to 5 classification of moulds.
Electricity 20 15 As compared to standby
electricity generators (EG),
Generating Sets
which
will continue to have a useful
used for prime
life
power generation of 20 years, EG sets used for
regularly prime power generation have
faster wear and tear since the
assets are continuously running
24/7 to provide primary source
of
electricity.
In connection therewith, you are requesting confirmation that NPI can
change the useful life of the assets described above in claiming depreciation
deduction, both for tax and financial accounting purposes, and that NPI can
adopt such change for existing and newly acquired assets starting January 1,
2010. ICHcTD
In reply thereto, please be informed that under Section 34 (F) of 1997

Tax Code, as amended, a reasonable allowance for the exhaustion, wear and
tear (including reasonable allowance for obsolescence) of property used in
trade or business is allowed as depreciation deduction. Section 34 (F) of
1997 Tax Code, as amended, is quoted as follows:
"(F) Depreciation. —
(1) General Rule. — There shall be allowed as a depreciation
deduction a reasonable allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence) of property used in
the trade or business. In the case of property held by one person for
life with remainder to another person, the deduction shall be
computed as if the life tenant were the absolute owner of the
property and shall be allowed to the life tenant. In the case of
property held in trust, the allowable deduction shall be apportioned
between the income beneficiaries and the trustees in accordance
with the pertinent provisions of the instrument creating the trust, or
in the absence of such provisions, on the basis of the trust income
allowable to each.
(2) Use of Certain Methods and Rates. — The term 'reasonable
allowance' as used in the preceding paragraph shall include, but not
limited to, an allowance computed in accordance with rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, under any of the following
methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not
exceeding twice the rate which would have been used
had the annual allowance been computed under the
method described in Subsection (F)(1);
(c) The sum-of-the-years-digits method; and
(d) Any other method which may be prescribed by
the Secretary of Finance upon recommendation of the
Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is
Based. — Where under rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, the
taxpayer and the Commissioner have entered into an agreement in
writing specifically dealing with the useful life and rate of depreciation
of any property, the rate so agreed upon shall be binding on both the
taxpayer and the National Government in the absence of facts and
circumstances not taken into consideration during the adoption of
such agreement. The responsibility of establishing the existence of
such facts and circumstances shall rest with the party initiating the
modification. Any change in the agreed rate and useful life of the
depreciable property as specified in the agreement shall not be
effective for taxable years prior to the taxable year in which notice in
writing by certified mail or registered mail is served by the party
initiating such change to other party to the agreement. CAScIH
Provided, however, That where the taxpayer has adopted such

useful life and depreciation rate for any depreciable asset and
claimed the depreciation expenses as deduction from his gross
income, without any written objection on the part of the
Commissioner or his duly authorized representative, the aforesaid
useful life and depreciation rate so adopted by the taxpayer for the
aforesaid depreciable asset shall be considered binding for purposes
of this Subsection."
In this connection, Section 105, Revenue Regulations No. 2 provides:
"Section 105. Depreciation. — A reasonable allowance for the
exhaustion, wear and tear and obsolescence of property used in the
trade or business may be deducted from gross income. For
convenience, such an allowance will usually be referred to as
depreciation, excluding from the term any idea of a mere reduction in
market value not resulting from exhaustion, wear and tear, or
obsolescence. The proper allowance for such depreciation of any
property used in the trade or business is that amount which should
be set aside for the taxable year in accordance with a reasonable
consistent plan whereby the aggregate of the amount so set aside,
plus the salvage value, will, at the end of the useful life of the
property in business, equal the basis of the property. Due regard
must also be given to expenditures for current upkeep."
Moreover, Section 109, Revenue Regulations No. 2 also states:
"Section 109. Method of computing depreciation allowance. —
The capital sum to be replaced should be charged off over the useful
life of the property, either in equal annual installments or in
accordance with any other recognized trade practice, such as an
apportionment of the capital sum over units of production. Whatever
plan or method of apportionment is adopted must be reasonable and
must have due regard to operating conditions during the taxable
period. While the burden of proof must rest upon the taxpayer to
sustain the deductions taken by him, such deductions must not be
disallowed unless shown by clear and convincing evidence to be
unreasonable. The reasonableness of any claim for depreciation shall
be determined upon the conditions known to exist at the end of the
period for which the return is made. If it develops that the useful life
of the property will be longer or shorter than the useful life as
originally estimated under all the then known facts, the portion of the
cost or other basis of the property not already provided for through
depreciation allowances should be spread over the remaining useful
life of the property as reestimated in the light of the subsequent facts,
and depreciation deductions taken accordingly."
Based on the foregoing, the taxpayer and the Commissioner may agree
on the estimated useful life and rate of depreciation of any property. The
rate so agreed upon shall be binding on both the taxpayer and the BIR.
However, if it develops that the useful life of the property originally
estimated under previous factual conditions is no longer reasonable, the law
allows the taxpayer to lengthen or shorten the useful life of the property in
the light of prevailing factual considerations.
Hence, in BIR Ruling No. DA-031-03 dated February 3, 2003, this Office
allowed the shortening of the depreciable life of a building from 45 to 25
years based on the current net book value of the building, to correspond to
the 25-year lease agreement entered into between the owner of the building
and its lessee.
It has been ruled that the remaining estimated useful life of the assets
is determined as that period of time expressed in years that an asset is
expected to perform in a satisfactory manner the function for which it was
designed and built, assuming normal and reasonable maintenance. The
estimates of remaining life for each item of property had been based, in a
very large measure, upon the observed condition at the time of appraisal
and condition of maintenance, and the consideration of normal rates of
depreciation for the type of property. (BIR Ruling No. 144-97 dated
December 29, 1997) DEacIT
In BIR Ruling No. DA-305-2007 dated May 17, 2007, this Office allowed
NPI to change the useful life of its manual tricycles from 5 years to 3 years in
claiming depreciation deduction, both for tax and financial accounting
purposes, considering the condition of the parts of the assets, the purpose
for which they were designed and built and the company's annual
refurbishment practices.
Based on the foregoing, this Office hereby confirms that NPI can
change the useful life of the assets described above in claiming depreciation
deduction, both for tax and financial accounting purposes, and that NPI can
adopt such change for existing and newly acquired assets starting January 1,
2010.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation, it will be ascertained that the
facts are different, then this ruling shall be considered as null and void.
Very truly yours,
(SGD.) KIM S. JACINTO-HENARES

Commissioner of Internal Revenue

September 8, 2009
BIR RULING [DA-(TAR-010) 496-09]
34 (F); #144-97; DA-037-2006;

DA-031-2003; DA-413-2004; DA-064-
2003
Quiason Makalintal Barot Torres Ibarra & Sison

21ST Floor, Robinsons-Equitable Tower
4 ADB Avenue corner Pedro Poveda Street
1605 Ortigas Avenue, Pasig City
Attention: Atty. Benedict R. Tugonon

and
Suzie A. Fernandez
Gentlemen :
This refers to your letter dated August 25, 2009 requesting in behalf of
your client, RCBC REALTY CORPORATION ("RRC"), for a ruling on the proper
computation of RRC's depreciation expense for tax purposes upon its
adoption of the International Accounting Standards ("IAS") No. 16 for
financial statement purposes beginning January 1, 2006.
It is represented that RRC is a corporation duly organized and existing
under the laws of the Philippines with business address at RCBC Plaza, 6819
Sen. Gil Puyat corner Ayala Avenue, Makati City; that for both financial
accounting and tax purposes, RRC has primarily adopted the straight line
method for depreciating its Property, Plant and Equipment ("PPE") and
traditionally classifies its PPE into the following categories:
Building (depreciating over 50 years)
Building Machinery and Equipment (depreciating over 50 years)

Building Improvements (depreciating over 50 years)
It is further represented that IAS No. 16 which have been adopted in
the Philippines and became effective on January 1, 2005, requires for
financial accounting purposes that "Each part of an item of property, plant
and equipment with cost that is significant in relation to the total cost of the
item shall be depreciated separately"; that to comply with this new
accounting standard, RRC engaged the professional services of an
independent appraiser, Cuervo Appraisers, Inc. ("Cuervo"), to review its fixed
assets records, re-estimate the useful life of each significant and identifiable
PPE component, and re-establish its fixed assets ledger in a format that
would facilitate the preparation of accounts under the new accounting
requirements; that as a result of the work performed by Cuervo, it was found
that the estimated useful lives of building machinery and equipment have
been shortened; that in accordance with the requirements of IAS No. 16, the
change in useful lives of the assets will be applied retrospectively by RRC for
financial statement purposes; that RRC will continue to use the straight line
method of depreciation both for financial accounting and tax purposes. cEAIHa
In reply thereto, please be informed that Section 34 (F) of the Tax Code
of 1997 states that there shall be allowed as a depreciation deduction a
reasonable allowance for the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property used in trade or
business. The term reasonable allowance shall include, but not limited to, an
allowance computed in accordance with the rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the Commissioner,
under any of the following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the
rate which would have been used had the annual allowance been
computed under the method described in Subsection (F) (1);
(c) The sum-of the-years-digit method; and
(d) Any other method which may be prescribed by the Secretary of
Finance upon recommendation of the Commissioner. SIcTAC
The proper allowance for depreciation of any property used in the

trade or business is that amount which should be set aside for the taxable
year in accordance with a reasonable consistent plan whereby aggregate of
the amount so set aside, plus the salvage value, will, at the end of the useful
life of the property in business, equal the basis of the property. Due regard
must be given to expenditures for current upkeep. (Section 105, Revenue
Regulations No. 2)
Moreover, the capital sum to be replaced should be charged off over
the useful life of the property, either in equal annual installments or in
apportionment of the capital sum over units of production. Whatever plan or
method of apportionment is adopted must be reasonable and must have due
regard to operating conditions during the taxable period. While the burden of
proof must rest upon the taxpayer to sustain the deductions taken by him,
such deductions must not be disallowed unless shown by clear and
convincing evidence to be unreasonable. The reasonableness of any claim
for depreciation shall be determined upon the conditions known to exist at
the end of the period for which the return is made. If it develops that the
useful life of the property will be longer or shorter than useful life as
originally estimated under all the then known facts, the portion of cost or
other basis of the property not already provided for through depreciation
allowances should be spread over the remaining useful life of the property
as re-estimated in the light of the subsequent facts, and depreciation
deductions taken accordingly. (Section 109, Revenue Regulations No. 2)
In BIR Ruling No. 144-97 dated December 29, 1997, involving request
by Goodyear Philippines, Inc. ("Goodyear"), for confirmation that it be
allowed to adopt in computing its depreciation expense, the estimated
remaining useful life after rehabilitation of the assets acquired from Sime
Darby Philippines based on the independent study of the Asian Appraisal
Company Inc. ("AACI"), the BIR ruled that "The remaining estimated useful
life of the assets transferred from Sime Darby has been determined as that
period of time, expressed in years, that an asset is expected to perform in a
satisfactory manner the function for which it was designed and built,
assuming normal and reasonable maintenance. The estimates of remaining
life for each item of property had been based, in very large measure, upon
the observed condition at the time of appraisal and condition of
maintenance, and the consideration of normal rates of depreciation for the
type of property. Such being the case, Goodyear may be allowed to adopt in
computing its depreciation expense for both tax and financial accounting
purposes the estimated remaining useful life after rehabilitation of the
assets acquired from Sime Darby and valuated as of October 17, 1996,
based on the independent study of AACI".
Furthermore, in BIR Ruling DA-037-06 we confirmed the request of
Manila Peninsula Hotels Inc. ("MPHI") to compute the depreciation expense
for each component of PPE using the re-estimated useful life determined by
an independent appraiser, to wit: ECTAHc
"In view of the above, MPHI may compute its depreciation

expense for each component of the PPE by dividing the net book
value prior to the application of IAS (e.g., net book value as of
December 31, 2004) by the remaining useful life as re-estimated by
DLS."
In view of the foregoing, RRC may compute its depreciation expense
for each component of the PPE by dividing the net book value prior to the
application of IAS (e.g., net book value as of December 31, 2008) by the
remaining useful life as re-estimated by Cuervo.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation it will be disclosed that the facts
are different, then this ruling shall be considered as null and void. EHaCID
Very truly yours,

By:
(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

February 12, 1988
163 (2) (n) 105-87 043-88
Gentlemen :
This refers to your letter dated November 23, 1987 in behalf of your
client, Printwell, Inc. (PI) requesting opinion as to whether or not the
production of printed boxes and labels are considered manufacturing
activities wherein a 10% sales tax could be billed separately in the invoice.
It is represented that Printwell, Inc. (PI), an export producer registered
with the Board of Investments under P.D. 1789, as amended, is an industrial
packaging printer engaged in the production of printed folding boxes,
cartons and labels for various manufacturing entities; that the basic raw
materials used in the production of said articles are paper and paperboard
imported only upon previous orders and in accordance with the specific size,
shape, grade and kind of material required; that said materials are taxed at
the rate of 10% upon the certification of your client's customers addressed
to the Bureau of the purpose for which said materials are used; that in the
production of printed labels, the manufacturing process likewise varies
depending on the technical specifications and aesthetic features desired by
customers; and that due to the aforesaid circumstances, your client cannot
indiscriminately engage in mass production.
In reply, please be informed that in the light of the Supreme Court
decision in the case of Celestino Co. & Co. vs. Commissioner of Internal
Revenue, 99 Phil. 841, pertinent portion of which is quoted hereunder as
follows:
"MANUFACTURER: FILING ORDERS ACCORDING TO
SPECIFICATIONS DOES NOT ALTER CHARACTER OF ESTABLISHMENT . —
A factory which habitually makes sash, windows and doors, and sells
the goods for public is a manufacturer. The fact that the windows and
doors are made by it only when customers place their orders and
according to such form or combination as suit the fancy of the
purchasers does not alter nature of the establishment."
the fact that printed boxes and labels are specially designed for customers in
accordance with the specifications they give your client does not divert the
latter of its character as a manufacturer of printed boxes, and labels. (BIR
Ruling No. 105-87) Accordingly, the tax that your client may bill separately in
the invoice to customers is the manufacturers sales tax at the rate of 10%
based on the certification of your client's customers that the same are used
as packaging materials of essential articles pursuant to Section 163(2)(n) of
the Tax Code, as amended by Executive Order No. 36.
Pursuant to Section 100 of the Tax Code as amended by E.O. No. 273,
effective January 1, 1988, there shall be levied, assessed and collected on
every sale, barter or exchange of goods, a value-added tax equivalent to
10% of the gross selling price or gross value in money of the goods sold,
bartered or exchanged, such tax to be paid by the seller or transferor.
Accordingly, beginning said date, your client is subject to the 10% VAT.
Very truly yours,
(SGD.) BIENVENIDO A. TAN, JR.

Commissioner

April 24, 1996
Sec. 109 146-94 052-96
Rohm LSI Design Philippines, Inc.

3/F, 116 Building
116 Herrera St.,
Legaspi Village
Makati City
Attention: Mr. Rafael N. V . Mantaring
General Manager
Gentlemen :
This refers to your letter dated February 15, 1995 requesting for
authority to change your method of computing depreciation expense for
your fixed assets from Straight Line Method to Declining Balance, effective
April, 1995. LLjur
It is represented that Rohm LSI Design Philippines, Inc. is engaged in

research and development in the field of Electronics under BOI Certificate of
Registration No. 92-467; that your mother company in Japan, Rohm
Company Ltd. adopted a new method of depreciating their fixed assets from
Straight Line Method to Declining Balance effective April, 1995; and that all
its affiliates and subsidiaries will also be using the said method.
In reply, please be informed that on the basis of the above
representations, Rohm LSI Design Philippines, Inc. is hereby granted
permission to change its method of computing depreciation of its fixed
assets from Straight Line Method to Declining Balance, pursuant to the
provisions of Section 109 of Revenue Regulations No. 2 which provides viz:
"Section 109. Method of Computing Depreciation Allowance. —
period. While burden of proof must rest upon the taxpayer to sustain
the deductions taken by him, such deductions must not be disallowed
unless shown by clear and convincing evidence to be unreasonable.
The reasonableness of any claim for depreciation shall be determined
upon the conditions known to exist at the end of the period for which
the return is made. If it develops that the useful life of the property will
be longer or shorter than the useful life as originally estimated under
all the then known facts, the portion of the cost or other basis of the
property not already provided for through depreciation allowances
should be spread over the remaining useful life of the property as
reestimated in the light of the subsequent facts, and depreciation
deductions taken accordingly. (BIR Ruling No. 146-94, dated
September 28, 1994) LLpr
Very truly yours,
LIWAYWAY VINZONS-CHATO

EN BANC
[G.R. No. L-22492. September 5, 1967.]
BASILAN ESTATES, INC., petitioner, vs. THE COMMISSIONER

OF INTERNAL REVENUE and THE COURT OF TAX APPEALS ,
respondents.
Felix A. Gulfin and Antonio S. Alano for petitioner.

The Solicitor General for respondents.
SYLLABUS
1. NOTICE OF ASSESSMENT, WHEN DEEMED MADE. — Under Section

331 of the Tax Code requiring 5 years within which to assess deficiency
taxes, the assessment is deemed made when notice to this effect is
released, mailed or sent by the Collector of Internal Revenue to the
taxpayer, and it is not required that the notice be received by the taxpayer
within the aforementioned 5-year period (Collector of Internal Revenue vs.
Bautista, L-12250 & L-12259, May 27, 1959)
2. ID.; DEPRECIATION; DEFINITION. — Depreciation is the gradual
diminution in the useful value of tangible property resulting from wear and
tear and normal obsolescence. The term is also applied to amortization of
the value of intangible assets, the use of which in the trade or business is
definitely limited in duration (Jose Aranas, Annotation and Jurisprudence on
the National Internal Revenue Code, as Amended, 2nd Ed., Vol. 1, p. 263).
3. ID.; ID.; WHEN DEPRECIATION COMMENCES. — Depreciation
commences with the acquisition of the property and its owner is not bound
to see his property gradually waste, without making provision out of earnings
for its replacement. It is entitled to see that from earnings the value of the
property invested is kept unimpaired, so that at the end of any given term of
years, the original investment remains as it was in the beginning. It is not
only the right of a company to make such a provision, but it is its duty to its
bond and stockholders, and, in the case of a public service corporation, at
least, its plain duty to the public (Knoxville vs. Knoxville Water Co., 212 U.S.
1, 53 L. Ed. 371). Accordingly, the law permits the taxpayer to recover
gradually his capital investment in wasting assets free from income tax
(Detroit Edison Co. vs. Commissioner, 131 F 2d. 619). Precisely, Section 30(f)
(1) of the Tax Code allows a deduction from gross income for depreciation
but limits the recovery to the capital invested in the asset being depreciated.
4. ID.; BASIS OF DEPRECIATION. — The income tax law does not
authorize the depreciation of an asset beyond its acquisition cost. Hence, a
deduction over and above such cost cannot be claimed and allowed. The
reason is that deduction from gross income are privileges (Palmer vs. State
Commission of Revenue & Taxation, 156 Kan. 690, 135 P. 2d. 899), not
matters of right (Souther Weaving Co. vs. Query, 206 SC 307, 34 SE 2d. 51).
They are not created by implication but upon clear expression in the law
(Gutierrez vs. Collector of Internal Revenue, L-19537, May 20, 1965).
Moreover, the recovery, free of income tax, of an amount more than the
invested capital in an asset will transgress the underlying purpose of a
depreciation allowance. For then what the taxpayer would recover will be,
not only the acquisition cost, but also some profit. Recovery in due time
through depreciation of investment made is the philosophy behind
depreciation allowance; the idea of profit on the investment made has never
been the underlying reason for the allowance of a deduction for depreciation.
5. ID.; TRAVELING EXPENSES; PERIOD WITHIN WHICH TO KEEP
SUPPORTING PAPERS; CASE AT BAR. — Under Section 337 of the National
Internal Revenue Code, receipts and papers supporting traveling expenses
need be kept by the taxpayer for a period of five years from the last entry.
6. ID.; SURTAX ON UNREASONABLY ACCUMULATED PROFITS; TEST TO
DETERMINE REASONABLENESS ACCUMULATION OF PROFITS. — Persuasive
jurisprudence on the matter such as those in the United States from where
our tax law was deprived (Collector of Internal Revenue vs. Binalbagan
Estate, Inc., L-12752, Jan. 30, 1965), has it that: "In order to determine
whether profits were accumulated for the reasonable needs of the business
or to avoid the surtax upon shareholders, the controlling intention of the
taxpayer is that which is manifested at the time of the accumulation, not
subsequently declared intentions which are merely the products of
afterthought (Jacob Mertens, Jr., The Law of Federal Income Taxation, Vol. 7,
Cumulative Supplement, p. 213). In determining whether accumulations of
earnings or profits in a particular year are within the reasonable needs of a
corporation, it is necessary to take unto account prior accumulations, since
accumulations prior to the year involved may have been sufficient to cover
the business needs and additional accumulations during the year involved
would not reasonably be necessary. (Ibid, p. 202).
DECISION
BENGZON, J.P., J : p
A Philippine corporation engaged in coconut industry, Basilan Estate,

Inc. with principal offices in Basilan City, filed on March 24, 1954 its income
tax returns for 1953 and paid an income tax of P8,028. On February 26,
1959, the Commissioner of Internal Revenue, per examiner's report of
February 19, 1959, assessed Basilan Estates, Inc., a deficiency income tax of
P3,912 for 1953 and P86,867.85 as 25% surtax on unreasonably
accumulated profits as of 1953 pursuant to Section 25 of the Tax Code. On
non-payment of the assessed amount, a warrant of distraint and levy was
issued but the same was not executed because Basilan Estate, Inc.
succeeded in getting the Deputy Commissioner of Internal Revenue to order
the Director of the district in Zamboanga City to hold execution and maintain
constructive embargo instead. Because of its refusal to waive the period of
prescription, the corporation's request for reinvestigation was not given due
course, and on December 2, 1960, notice was served the corporation that
the warrant of distraint and levy would be executed.
On December 20, 1960, Basilan Estate, Inc. filed before the Court of
Tax Appeals a petition for review of the Commissioner's assessment,
alleging prescription of the period of assessment and collection; error in
disallowing claimed depreciations, travelling and miscellaneous expenses
and error in finding the existence of unreasonably accumulated profits and
the imposition of 25% surtax thereon. On October 31, 1963, the Court of Tax
Appeals found that there was no prescription and affirmed the deficiency
assessment in toto.
On February 21, 1964, the case was appealed to Us by the taxpayer,
upon the following issues:
1. Has the Commissioner's right to collect deficiency income tax
prescribed?
2. Was the disallowance of items claimed as deductible proper?
3. Have there been unreasonably accumulated profits? If so, should the
25% surtax be imposed on the balance of the entire surplus from 1947-1953,
or only for 1953?
4. Is the petitioner exempt from the penalty tax under Republic Act
1823 amending Section 25 of the Tax Code?
PRESCRIPTION
There is no dispute that the assessment of the deficiency tax was
made on February 26, 1959; but the petitioner claims that it never received
notice of such assessment or if it did, it received the notice beyond the five-
year prescriptive period. To show prescription, the annotation on the notice
(Exhibit 10, No. 52 ACR, p. 54-A of the BIR records) "No accompanying letter
11/25/" is advanced as indicative of the fact that receipt of the notice was
after March 24, 1959, the last date of the five year period within which to
assess deficiency tax, since the original returns were filed on March 24,
1954.
Although the evidence is not clear on this point, We cannot accept this
interpretation of the petitioner, considering the presence of circumstances
that lead Us to presume regularity in the performance of official functions.
The notice of assessment shows the assessment to have been made on
February 26, 1959, well within the five-year period. On the right side of the
notice is also stamped "Feb. 26, 1959" — denoting the date of release,
according to Bureau of Internal Revenue practice. The Commissioner himself
in his letter (Exh. H, p. 84 of BIR records) answering petitioner's request to
lift the warrant of distraint and levy, asserts that notice had been sent to
petitioner. In the letter of the Regional Director forwarding the case to the
Chief of the Investigation Division which the latter received on March 10,
1959 (p. 71 of the BIR records), notice of assessment was said to have been
sent to petitioner. Subsequently, the Chief of the Investigation Division
indorsed on March 18, 1959 (p. 24 of the BIR records) the case to the Chief
of the Law Division. There it was alleged that notice was already sent to
petitioner on February 26, 1959. These circumstances pointing to official
performance of duty must necessarily prevail over petitioner's contrary
interpretation. Besides, even granting that notice had been received by the
petitioner late, as alleged, under Section 331 of the Tax Code requiring five
years within which to assess deficiency taxes, the assessment is deemed
made when notice to this effect is released, mailed or sent by the Collector
to the taxpayer and it is not required that the notice be received by the
taxpayer within the aforementioned five-year period. 1
ASSESSMENT
The questioned assessment is as follows:
Net Income per return P40,142.90
Add: Overclaimed deprecia-
tion P10,500.49
Mis. expenses disallowed 6,759.17
Officer's travelling expenses
disallowed 2,300.40 19,560.06
_________ _________
Net Income per
Investigation P59,702.96
_________
20% tax on P59,702.96 11,940.00
Less: Tax already assessed 8,028.00
________
Deficiency income tax P3,912.00
Add Additional tax of 25% on
P347,507.01 86,876.75
_________
Tax Due & Collectible P90,788.75
=========
The Commissioner disallowed:

Overclaimed depreciation P10,500.49
Miscellaneous expenses 6,759.17
Officer's travelling expenses 2,300.40
DEDUCTIONS
A. Depreciation. — Basilan Estates, Inc. claimed deductions for the
depreciation of its assets up to 1949 on the basis of their acquisition cost. As
of January 1, 1950 it changed the depreciable value of said assets by
increasing it to conform with the increase in cost for their replacement.
Accordingly, from 1950 to 1953 it deducted from gross income the value of
depreciation computed on the reappraised value.
In 1953, the year involved in this case, taxpayer claimed the following
depreciation deduction:
Reappraised assets P47,342.53
New assets consisting of hospital building
and equipment 3,910.45
__________
Total depreciation P51,252.98
__________
Upon investigation and examination of taxpayer's books and papers, the
Commissioner of Internal Revenue found that the reappraised assets
depreciated in 1953 were the same ones upon which depreciation was
claimed in 1952. And for the year 1952, the Commissioner had already
determined, with taxpayer's concurrence, the depreciation allowable on said
assets to be P36,842.04, computed on their acquisition cost at rates fixed by
the taxpayer. Hence, the Commissioner pegged the deductible depreciation
for 1953 on the same old assets at P36,842.04 and disallowed the excess
thereof in the amount of P10,500.49.
The question for resolution therefore is whether depreciation shall be
determined on the acquisition cost or on the reappraised value of the assets.
Depreciation is the gradual diminution in the useful value of tangible
property resulting from wear and tear and normal obsolescense. The term is
also applied to amortization of the value of intangible assets, the use of
which in the trade or business is definitely limited in duration. 2 Depreciation
commences with the acquisition of the property and its owner is not bound
to see his property gradually waste, without making provision out of earnings
for its replacement. It is entitled to see that from earnings the value of the
property invested is kept unimpaired, so that at the end of any given term of
years, the original investment remains as it was in the beginning. It is not
only the right of a company to make such a provision, but it is its duty to its
bond and stockholders, and, in the case of a public service corporation, at
least, its plain duty to the public. 3 Accordingly, the law permits the taxpayer
to recover gradually his capital investment in wasting assets free from
income tax. 4 Precisely, Section 30 (f) (1) which states:
"(1) In general. — A reasonable allowance for deterioration of
property arising out of its use or employment in the business or trade,
or out of its not being used: Provided, that when the allowance
authorized under this subsection shall equal the capital invested by the
taxpayer . . . no further allowance shall be made. . . ."
allows a deduction from gross income for depreciation but limits the
recovery to the capital invested in the asset being depreciated.
The income tax law does not authorize the depreciation of an asset
beyond its acquisition cost. Hence, a deduction over and above such cost
cannot be claimed and allowed. The reason is that deductions from gross
income are privileges, 5 not matters of right. 6 They are not created by
implication but upon clear expression in the law. 7
Moreover, the recovery, free of income tax, of an amount more than
the invested capital in an asset will transgress the underlying purpose of a
depreciation allowance. For then what the taxpayer would recover will be,
not only the acquisition cost, but also some profit. Recovery in due time thru
depreciation of investment made is the philosophy behind depreciation
allowance; the idea of profit on the investment made has never been the
underlying reason for the allowance of a deduction for depreciation.
Accordingly, the claim for depreciation beyond P36,842.04 or in the
amount of P10,500.49 has no justification in the law. The determination,
therefore, of the Commissioner of Internal Revenue disallowing said amount,
affirmed by the Court of Tax Appeals, is sustained.
B. Expenses. — The next item involves disallowed expenses incurred in
1953, broken as follows:
Miscellaneous expenses P6,759.17
Officer's travelling expenses 2,300.40
_________
Total P9,059.57
_________
These were disallowed on the ground that the nature of these

expenses could not be satisfactorily explained nor could the same be
supported by appropriate papers.
Felix Gulfin, petitioner's accountant, explained the P6,759.17 as actual
expenses credited to the account of the president of the corporation incurred
in the interest of the corporation during the president's trip to Manila (pp. 33-
34 of TSN of Dec. 5, 1962); he stated that the P2,300.40 was the president's
travelling expenses to and from Manila; as to the vouchers and receipts of
these, he said the same were made but got burned during the Basilan fire on
March 30, 1962 (p. 40 of same TSN). Petitioner further argues that when it
sent its records to Manila in February, 1959, the papers in support of these
miscellaneous and travelling expenses were not included for the reason that
by February 9, 1959, when the Bureau of Internal Revenue decided to
investigate, petitioner had no more obligation to keep the same since five
years had lapsed from the time these expenses were incurred (p. 41 of same
TSN). On this ground, the petitioner may be sustained for under Section 337
of the Tax Code, receipts and papers supporting such expenses need be kept
by the taxpayer for a period of five years from the last entry. At the time of
the investigation, said five years had lapsed. Taxpayer's stand on this issue
is therefore sustained.
UNREASONABLY ACCUMULATED PROFITS
Section 25 of the Tax Code which imposes a surtax on profits
unreasonably accumulated, provides:
"SEC 25. Additional tax on corporations improperly accumulating
profits or suplus — (a) Imposition of Tax . — If any corporation, except
banks, insurance companies, or personal holding companies, whether
domestic or foreign, is formed or availed of for the purpose of
preventing the imposition of the tax upon its shareholders or members
or the shareholders or members of another corporation, through the
medium of permitting its gains and profits to accumulate instead of
being divided or distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-five per
centum of the undistributed portion of its accumulated profits or
surplus which shall be in addition to the tax imposed by section
twenty-four, and shall be computed, collected and paid in the same
manner and subject to the same provisions of law including penalties,
as that tax."
The Commissioner found that in violation of the abovequoted section,

petitioner had unreasonably accumulated profits as of 1953 in the amount of
P347,507.01, based on the following circumstances (Examiner's Report, pp.
62-68 of BIR records):
1. Strong financial position of the petitioner as of December 31, 1953.
Assets were P388,617.00 while the liabilities amounted to only P61,117.31 or
a ratio of 6:1.
2. As of 1953, the corporation had considerable capital adequate to
meet the reasonable needs of the business amounting to P327,499.69
(assets less liabilities).
3. The P200,000 reserved for electrification of drier and mechanization
and the P50,000 reserved for malaria control were reverted to its surplus in
1953.
4. Withdrawal of shareholders of large sums of money aspersonal
loans.
5. Investment of undistributed earnings in assets having no proximate
connection with the business — as hospital building and equipment worth
P59,794.72.
6. In 1953, with an increase of surplus amounting to P677,232.01, the
capital stock was increased to P500,000 although there was no need for
such increase.
Petitioner tried to show that in considering the surplus, the examiner
did not take into account the possible expenses for cultivation, labor,
fertilization, drainage, irrigation, repair, etc. (pp. 235-237 of TSN of Dec. 7,
1962). As aptly answered by the examiner himself, however, they were
already included as part of the working capital (pp. 237-238 of TSN of Dec.
7, 1962).
In the unreasonable accumulation of P347,507.01 are included
P200,000 for electrification of driers and mechanization and P50,000 for
malaria control which were reserved way back in 1948 (p. 67 of the BIR
records) but reverted to the general fund only in 1953. If there were any
plans for these amounts to be used in further expansion through projects, it
did not appear in the records as was properly indicated in 1948 when such
amounts were reserved. Thus, while in 1948 it was already clear that the
money was intended to go to future projects, in 1953 upon reversion to the
general fund, no such intention was shown. Such reversion therefore gave
occasion for the Government to consider the same for tax purposes. The
P250,000 reverted to the general fund was sought to be explained as later
used elsewhere: "part of it in the Hilano Industries, Inc. in building the
factory site and buildings to house technical men . . . part of it was spent in
the facilities for the waterworks system and for industrialization of the
coconut industry" (p. 117 of TSN of Dec. 6, 1962). This is not sufficient
explanation. Persuasive jurisprudence on the matter such as those in the
United States from where our tax law was derived, 8 has it that "In order to
determine whether profits were accumulated for the reasonable needs of the
business or to avoid the surtax upon shareholders, the controlling intention
of the taxpayer is that which is manifested at the time of the accumulation,
not subsequently declared intentions which are merely the products of
afterthought. 9 The reversion here was made because the reserved amount
was not enough for the projects intended, without any intent to channel the
same to some particular future projects in mind.
Petitioner argues that since it has P560,717.44 as its expenses for the
year 1953, a surplus of P347,507.01 is not unreasonably accumulated. As
rightly contended by the Government, there is no need to have such a large
amount at the beginning of the following year because during the year,
current assets are converted into cash and with the income realized from the
business as the year goes, these expenses may well be taken care of (pp.
238 of TSN of Dec. 7, 1962). Thus, it is erroneous to say that the taxpayer is
entitled to retain enough liquid net assets in amounts approximately equal to
current operating needs for the year to cover "cost of goods sold and
operating expenses" for "it excludes proper consideration of funds
generated by the collection of notes receivable as trade accounts during the
course of the year. 10 In fact, just because the total accumulations are less
than 70% of the annual operating expenses of the year, it does not mean
that the accumulations are reasonable as a matter of law." 11
Petitioner tried to show that investments were made with Basilan
Coconut Producers Cooperative Association and Basilan Hospital (pp. 103-
105 of TSN of Dec. 6, 1962) totalling P59,794.72 as of December 31, 1953.
This shows all the more the unreasonable accumulation. As of December 31,
1953 already P59,794.72 was spent — yet as of that date there was still a
surplus of P347,507.01.
Petitioner questions why the examiner covered the period from 1948-
1953 when the taxable year on review was 1953. The surplus of P347,507.01
was taken by the examiner from the balance sheet of petitioner for 1953. To
check the figure arrived at, the examiner traced the accumulation process
from 1947 until 1953, and petitioner's figure stood out to be correct. There
was no error in the process applied, for previous accumulations should be
considered in determining unreasonable accumulations for the year
concerned. "In determining whether accumulations of earnings or profits in a
particular year are within the reasonable needs of a corporation, it is
necessary to take into account prior accumulations, since accumulations
prior to the year involved may have been sufficient to cover the business
needs and additional accumulations during the year involved would not
reasonably be necessary. 12
Another factor that stands put to show unreasonable accumulation is

the fact that large amounts were withdraw by or advanced to the
stockholders. For the year 1953 alone these totalled P197,229.26. Yet the
surplus of P347,507.01 was left as of December 31, 1953. We find
unacceptable petitioner's explanation that these were advances made in
furtherance of the business purposes of the petitioner. As correctly held by
the Court of Tax Appeals, while certain expenses of the corporation were
credited against these amounts, the unspent balance was retained by the
stockholders without refunding them to petitioner at the end of each year.
These advances were in fact indirect loans to the stockholders indicating the
unreasonable accumulation of surplus beyond the needs of the business.
ALLEGED EXEMPTION
Petitioner wishes to avail of the exempting proviso in Sec. 25 of the
Internal Revenue Code as amended by R.A. 1823, approved June 27, 1957,
whereby accumulated profits or surplus if invested in any dollar-producing or
dollar-earning industry or in the purchase of bonds issued by the Central
Bank may not be subject to the 25% surtax. We have but to point out that
the unreasonable accumulation was in 1953. The exemption was by virtue of
Republic Act 1823 which amended Sec. 25 only on June 22, 1957 — more
than three years after the period covered by the assessment.
In resume, Basilan Estates Inc. is liable for the payment of deficiency
income tax and surtax for the year 1953 in the amount of P88,977.42,
computed as follows:
Net income per return P40,142.90
Add: Overclaimed depreciation 10,500.49
_________
Net income per finding P50,643.39
__________
20% tax on P50,643.39 10,128.67
Less: tax already assessed 8,028.00
_________
Deficiency income tax 2,100 67
Add: 25% surtax on P347,507.01 86,876.75
_________
Total tax due and collectible 88,977.42
_________
WHEREFORE, the judgment appealed from is modified to the extent
that petitioner is allowed its deductions for travelling and miscellaneous
expenses, but affirmed insofar as the petitioner is liable for P2,100.67 as
25% deficiency income tax for 1953 and P86,876.75 as 25% surtax on the
unreasonably accumulated profit of P347,507.01. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez,
Ruiz Castro, Angeles and Fernando, JJ., concur.

Footnotes
1. Collector of Internal Revenue vs. Bautista, L-12250 & L-12259, May 27, 1959.
2. Jose Arañas, Annotations and Jurisprudence on the National Internal Revenue
Code, as Amended, Second Ed., Vol. 1, p. 263.
3. Knoxville vs. Knoxville Water Co., 212 U.S. 1, 53 L. ed. 371.
4. Detroit Edison Co. vs. Commissioner, 131 F (2d) 619 (CCA 6th, 1942), Aff'd 319
U.S. 98, 87 L. ed. 1286, 63 S.Ct. 902.
5. Palmer vs. State Commission of Revenue & Taxation, 156 Kan. 690, 135 P. 2d.
899.
6. Southern Weaving Co. vs. Query, 206 SC 307, 34 SE 2d 51.
7. See Gutierrez vs. Collector of Internal Revenue, L-19537, May 20, 1965.
8. Collector of Internal Revenue vs. Binalbagan Estate, Inc., L- 12752, Jan. 30,
1965.
9. Jacob Mertens, Jr., The Law of Federal Income Taxation, Vol. 7, Cumulative
Supplement, p. 213.
10. Ibid., p. 229.
11. Ibid., p. 222.

12. Ibid., p. 202.

[C.T.A. CASE NO. 1916. October 31, 1970.]
MANILA GAS CORPORATION, petitioner, vs. COMMISSIONER

OF INTERNAL REVENUE, respondent.
DECISION
From a decision of respondent dated July 19, 1967, requiring petitioner

to pay the sum of P83,534.56, representing deficiency income tax for 1963,
inclusive of interest, an appeal was taken to this Court. LexLib
The facts, briefly stated, are as follows:

Petitioner, a government-owned and controlled corporation, is a
grantee of a franchise (Act No. 2039) to construct, maintain and operate a
gas system for the furnishing of gas for heat, lighting and power in the city of
Manila and the province of Rizal.
For the year 1963, petitioner filed its franchise tax return declaring
therein gross earnings in the amount of P3,536,113.42, including the
proceeds from the sale of residuals, and paid the corresponding tax thereon
in the amount of P88,402.84. Petitioner also filed its income tax return for
the same year, claiming a deduction for depreciation of its steel cylinders at
the rate of 10% per annum.
Under date of July 19, 1967, respondent assessed and demanded from
petitioner the sum of P83,534.56 as deficiency income tax for 1963 plus
interest, computed as follows:
ACR-600307-66/63
Net income per return P101,942.13

Add: Unallowable deduction &
additional income:
1. Income from sale of
Oil Tar & Industrial
Insecticide (not
covered by franchise) P225,016.66
2. Depreciation of
steel cylinders 10,958.00 P235,974.66
————— —————
Net income per investigation P337,916.79
—————
Tax due thereon P93,375.00
Less:Amount already assessed 22,583.00
—————
Balance P70,792.00
Add: ½ mo. int. fr. 4-16-64 to 4-16-67 12,742.56
—————
TOTAL AMOUNT DUE & COLLECTIBLE P83,534.56
=========
On August 21, 1967, petitioner protested the assessment and
requested that the same be reconsidered. Said request was granted by
respondent in a letter dated October 19, 1967, conditioned on petitioner's
execution of a waiver of the defense of prescription. Acceding to the request
of respondent, petitioner executed the corresponding waiver. Subsequently,
petitioner addressed a letter to respondent containing arguments in support
of the request for reconsideration, but respondent denied the same and
reiterated his demand for the 1963 deficiency income tax, plus interest.
From the said decision, petitioner appealed to this Court.
The issues presented for our determination are as follows:
1. Whether or not the income realized from the sale of (residuals)
oil tar and industrial insecticide is subject to franchise tax, and,
therefore exempt from the payment of income tax; and LibLex
2. Whether or not respondent's disallowance of the deduction

claimed by petitioner for depreciation of its steel cylinders at the rate
of 10% per annum is justified.
Petitioner claims that the income it realized from the sale of oil tar and
industrial insecticide forms part of its gross receipts subject to franchise tax
under Sections 9 and 10 of its charter (Act No. 2039) which read:
"Section 9. The grantee shall annually on the fifth day of January
of each year pay to the city of Manila and to the municipalities of the
Province of Rizal in which gas is sold, two and one-half per centum of
the gross receipts within said city and municipalities, respectively,
during the preceding year. Said payment shall be in lieu of all taxes,
Insular, provincial and municipal, except taxes on the real estate,
buildings, plant, machinery, and other personal property belonging to
the grantee.
"Section 10. The grantee shall keep a record of all gas and other
products sold and collections made. The books and accounts of the
grantee shall be kept in the city of Manila and shall be subject to
inspection and audit by the proper municipal authorities and the Insular
Auditor."
Petitioner contends that oil tar and industrial insecticide are by-
products resulting from the manufacture of gas, the proceeds from the sales
of which are subject to franchise tax under Section 10 of its charter.
Accordingly, it is alleged that the proceeds from the sales of said articles are
exempt from income tax.
The word "by-products" refers to those materials which in the
cultivation or manufacture of any given commodity remain over, and which
possess or can be brought to possess a market value of their own (Phil.
Manufacturing Co. v. Meer, 76 Phil. 436). Admittedly, the oil tar and
industrial insecticide are by-products that result in the process of
manufacturing gas as authorized by the charter of petitioner. Petitioner does
not manufacture oil tar and industrial insecticide for sale as an independent
business. It follows that the sale of said by-products is not taxable
independently of petitioner's principal business. (See Macondray v.
Sarmiento, 90 Phil. 709; Ah Nam v. City of Manila, 109 Phil. 808.) The
proceeds of the sales of such by-products are, therefore, part of petitioner's
gross receipts in the operation of its franchise which are subject to franchise
tax; hence, exempt from income tax.
As regards the rate of depreciation applicable to steel cylinders used
as containers of gas sold by petitioner, respondent claims that since the
estimated economic usefulness of steel cylinders fixed in Bulletin "F" of the
U.S. Internal Revenue Service is 25 years, the said steel cylinders should be
depreciated at an annual depreciation rate of 4%.
On the other hand, petitioner contends that the depreciation rate of
10% per annum is based upon the literature from the manufacturers of the
steel cylinders which requires users of such cylinders to have them tested
every ten years because experience shows that several cylinders are no
longer fit for use after ten years of use. In view of this instruction of the
manufacture of the cylinders the economic usefulness of the cylinders has
been estimated at 10 years. LLphil
Section 30(f) of the National Internal Revenue Code allows deduction

from gross income of the amount representing depreciation of property used
in the trade or business which has an estimated useful life of more than one
year. The amount deductible by way of depreciation is that amount which
should be set aside for the taxable year in accordance with a reasonable
consistent plan whereby the aggregate of the amount so set aside, plus the
salvage value, will, at the end of the useful life of the property in business,
equal the basis (generally the cost) of the property. (Sec. 105, Rev. Regs. No.
2.)
The Income Tax Regulations (Rev. Regs. No. 2) provides for the
methods of computing depreciation allowance as follows:
Section 109. Method of Computing Depreciation Allowance. —
period. While the burden of proof must rest upon the taxpayer to
sustain the deductions taken by him, such deductions must not be
disallowed unless shown by clear and convincing evidence to be
unreasonable. The reasonableness of any claim for depreciation shall
be determined upon the conditions known to exist at the end of the
period for which the return is made. If it develops that the useful life of
the property will be longer or shorter than the useful life as originally
estimated under all the then known facts, the portion of the cost or
other basis of the property not already provided for through
depreciation allowances should be spread over the remaining useful
life of the property as reestimated in the light of the subsequent facts,
and depreciation deductions taken accordingly.
The amount of the annual deduction for depreciation is ordinarily

dependent upon the expected useful life of the asset. And this is determined
in the first instance by the taxpayer himself because of his experience in the
use of depreciable property in his business. The determination of the
estimated useful life of depreciable property by the taxpayer should not be
lightly disregarded unless patently shown to be incorrect. In this case,
petitioner estimated that the useful life of said steel cylinders is normally ten
years in line with the instructions contained in the literature furnished by the
manufacturers, and in view of its experience that several steel cylinders
became unserviceable after ten years. On the other hand, respondent relies
solely on the estimated useful life of steel cylinders as shown in Bulletin "F"
of the U.S. Internal Revenue Service.
It is true that the estimated useful life of property shown in Bulletin "F"
is generally conceded to be reasonable as in fact the same has been
resorted to and applied in this jurisdiction (see Zamora v. Collector, G.R. Nos.
L-15290, L-15280, L-15289 & L-15281, May 31, 1963), but is not conclusive.
cdrep
Bulletin "F", issued by the Treasury Department in January, 1931,

and revised in January, 1942, lists the probable useful life of several
hundred items. The useful life figures given in the Treasury's table may
not be used arbitrarily. The question in every case is one of fact to be
determined in the light of the experience of the property under
consideration and all other pertinent evidence. The Commissioner will
not disturb depreciation deduction unless there is clear and convincing
basis for a change. (PH Federal Tax Handbook, 1955 ed., Par. 2011; see
also Sec. 109, Rev. Regs. No. 2.)
Petitioner has shown, and respondent has not disputed, the fact that
several of such steel cylinders were discarded after ten years, and although
sums were still serviceable after ten years is no reason why said steel
cylinders should all be depreciated for a period in excess of 10 years.
Petitioner could not ascertain from the start what cylinders would last 10
years and those which would last more than that period. Again, while a
taxpayer is permitted to use different methods of depreciation appropriate to
different classes of property, he is required to use a consistent method with
regard to each class. (PH Federal Tax Handbook, 1955 ed., Par. 2005.) We
find no sufficient justification to sustain respondent as regards the
depreciation deduction allowable for said steel cylinders.
In view of the foregoing, the decision appealed from is hereby
reversed. Without pronouncement as to costs. cdasia
SO ORDERED.
ROMAN M. UMALI
Presiding Judge
WE CONCUR:
ESTANISLAO R. ALVAREZ
Associate Judge
RAMON L. AVANCEÑA
Associate Judge

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SECOND DIVISION

[C.T.A. CASE NO. 6356. June 9, 2009.]

METRO, INC., petitioner, vs. COMMISSIONER OF INTERNAL

Respondent is the duly appointed Commissioner of Internal Revenue

I. Deficiency income tax:

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III. Expanded Withholding Tax (EWT):

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Purchases per VAT Returns P28,183,820.50

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Anent the issue of allowable deductions, it is beyond dispute that a

Respondent's veriﬁcation disclosed that petitioner failed to

Interest and Bank Charges P4,886,275.00

Petitioner contends otherwise. It asserts that there are several

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'Article 1956. No interest shall be due unless it has been

While petitioner presented bank certiﬁcations from Metrobank and

Considering that the claimed interest expense of P2,868,133.97 was

However, upon veriﬁcation of the Independent CPA Report and

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1.3.2. Foreign Exchange Loss — P4,849,619.00

"SEC. 29. Deductions from gross income. —

In relation thereto, Section 102 of Revenue Regulations No. 2 provides:

Indeed, bad debt expense is an allowable business expense pursuant

2. the debt must be actually ascertained to be worthless and

As veriﬁed by the Court-commissioned Independent CPA, petitioner's

the amount of P5,797,665.83, it is then safe to conclude that the rental

Regarding petitioner's claimed security services and other services in

To recapitulate, out of petitioner's claimed factory overhead amount of

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"Sec. 2. Monthly Return and Remittance of Taxes Withheld. —

January ZZZZ-6-1 10-Feb-97

January ZZZZ-6-1 10-Feb-97 10-Feb-97 10-Feb-00

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January Return P21,427.21

Petitioner however failed to present relevant documents to support the

12/16/1996 1,000 100.00 1,000,000.00 P27,500.00

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Since there is no showing that petitioner voluntarily entered into a

In addition, petitioner is likewise liable for the twenty percent (20%)

1. Exhibit "DDDDD" — Tax Amnesty Payment Form (Acceptance of

3. Exhibit "HHHHH" — Tax Amnesty Return (BIR Form No. 2116);

5. Exhibit "EEEEE" — Notice of Availment of Tax Amnesty dated

Inasmuch as petitioner has fully complied with the prescribed

(SGD.) JUANITO C. CASTAÑEDA, JR.

4. Par. 7, Facts Admitted, JSFI, ibid.

7. G.R. No. L-13656, January 31, 1962, 4 SCRA 182.

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17. Exhibits "CC", "DD", "EE", "FF", and "GG".

20. BIR Ruling No. 206-90 dated October 30, 1990.

24. Exhibit "II".

27. Exhibit "HH".

30. Income Tax Regulations.

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34. Exhibit "T-1".

37. Exhibit "T".

40. Exhibit "ZZZZ-15-8" and Section A of "Exhibit ZZZZ-15-1".

44. See details attached to this Decision.

51. Exhibit "ZZZZ-6-6".

54. Exhibits "ZZZZ-8-1", "ZZZZ-8-2", and "ZZZZ-8-3".

57. The Bookkeeping Regulations.

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[C.T.A. CASE NO. 8794. September 23, 2016.]