TAX - Week 11
WEEK 11 plus P10.00 compromise penalty for late
ROXAS V. CTA
G.R. No. L-25043
April 26, 1968
FACTS: Don Pedro Roxas and Dona Carmen
Ayala, Spanish subjects, transmitted to their
grandchildren by hereditary succession the
following properties:
(1) Agricultural lands with a total area of
19,000 hectares, situated in the
municipality of Nasugbu, Batangas
province;
(2) A residential house and lot located at
Wright St., Malate, Manila; and
(3) Shares of stocks in different
corporations.
To manage the said properties, said
grandchildren, namely, Antonio Roxas,
Eduardo Roxas and Jose Roxas, formed a
partnership called Roxas y Compania.
When the Roxas brothers agreed to sell 13,500
hectares of agricultural land to the Government
for distribution to actual occupants, it turned
out that the Government did not have funds to
cover the purchase price, and so a special
arrangement was made for the Rehabilitation
Finance Corporation to advance to Roxas y
Cia. (partnership) the amount of P1.5M as
loan. Collateral for such loan were the lands
proposed to be sold to the farmers. Under the
arrangement, Roxas y Cia. allowed the
farmers to buy the lands for the same price
but by installment, and contracted with the
Rehabilitation Finance Corporation to pay its
loan from the proceeds of the yearly
amortizations paid by the farmers.
In 1953 and 1955 Roxas y Cia. derived from
said installment payments a net gain of
P42,480.83 and P29,500.71. Fifty percent of
said net gain was reported for income tax
purposes as gain on the sale of capital
asset held for more than one year pursuant to
Section 34 of the Tax Code.
Jose Roxas (one of the Roxas brothers) who
stayed at the residential house at Wright St.,
Malate, Manila, paid to Roxas y Cia. rentals
for the house in the sum of P8,000.00 a year.
On June 17, 1958, the CIR demanded from
Roxas y Cia the payment of real estate
dealer's tax for 1952 in the amount of P150.00
payment, and P150.00 tax for dealers of
securities for 1952 plus P10.00 compromise
penalty for late payment.
The assessment for real estate dealer's tax
was based on the fact that Roxas y Cia.
received house rentals from Jose Roxas in
the amount of P8,000.00. Pursuant to Sec. 194
of the Tax Code, an owner of a real estate who
derives a yearly rental income therefrom in the
amount of P3,000.00 or more is considered a
real estate dealer and is liable to pay the
corresponding fixed tax.
The CIR justified his demand for the fixed tax
on dealers of securities against Roxas y Cia.,
on the fact that said partnership made profits
from the purchase and sale of securities.
In the same assessment, the Commissioner
assessed deficiency income taxes against the
Roxas Brothers for the years 1953 and 1955.
The deficiency income taxes resulted from
the inclusion as income of Roxas y Cia. of
the unreported 50% of the net profits for
1953 and 1955 derived from the sale of the
Nasugbu farm lands to the tenants, and the
disallowance of deductions from gross
income of various business expenses and
contributions claimed by Roxas y Cia. and
the Roxas brothers.
For the reason that Roxas y Cia. subdivided its
Nasugbu farm lands and sold them to the
farmers on installment, the Commissioner
considered the partnership as engaged in
the business of real estate, hence, 100% of
the profits derived therefrom was taxed.
The Roxas brothers protested the assessment
but the said protest was denied, thus they
instituted an appeal in the CTA on January 9,
1961.
The Tax Court sustained the assessment
except the demand for the payment of the
fixed tax on dealer of securities and the
disallowance of the deductions for
contributions to the Philippine Air Force Chapel
and Hijas de Jesus' Retiro de Manresa.
Not satisfied, Roxas y Cia. and the Roxas
brothers appealed to the Supreme Court. The
Commissioner of Internal Revenue did not
appeal.
The CIR contended that Roxas y Cia. could be
considered a real estate dealer because it
1
engaged in the business of selling real estate.
Page

ISSUE: WON the gain derived from the sale
of the Nasugbu farm lands an ordinary gain,
hence 100% taxable. -NO
RULING: Roxas y Cia. cannot be
considered a real estate dealer for the sale
in question. Hence, pursuant to Section 34 of
the Tax Code the lands sold to the farmers
are capital assets, and the gain derived
from the sale thereof is capital gain, taxable
only to the extent of 50%.
The sale of Nasugbu farm lands on installment
was an isolated transaction inspite of the fact
that there were hundreds of vendees. Although
they paid for their respective holdings in
installment for a period of ten years, it would
nevertheless not make the vendor Roxas y
Cia. a real estate dealer during the ten-year
amortization period.
The sale of the Nasugbu farm lands to the very
farmers who tilled them for generations was in
obedience to the request and pursuant to the
policy of our Government to allocate lands to
the landless.
The power of taxation is sometimes called
also the power to destroy. Therefore it
should be exercised with caution to minimize
injury to the proprietary rights of a taxpayer. It
does not conform with the sense of justice in
the instant case for the Government to
persuade the taxpayer to lend it a helping hand
and later on to penalize him for duly answering
the urgent call.
WON the deductions for business expenses
and contributions deductible. -NO
(1) Roxas y Cia. deducted from its gross
income the amount of P40.00 for tickets
to a banquet given in honor of Sergio
Osmena and P28.00 for San Miguel
beer given as gifts to various persons.
The deduction were claimed as
representation expenses.
Representation expenses are deductible
from gross income as expenditures
incurred in carrying on a trade or
business under Section 30(a) of the Tax
Code provided the taxpayer proves
that they are reasonable in amount,
ordinary and necessary, and incurred
in connection with his business.
In the case at bar, the evidence does
not show that the expenses were
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incurred in connection with the business
of Roxas y Cia.
(2) The contributions to the Christmas funds
of the Pasay City Police, Pasay City
Firemen and Baguio City Police are not
deductible for the reason that the
Christmas funds were not spent for
public purposes but as Christmas gifts
to the families of the members of said
entities.
Under Section 39(h), a contribution to a
government entity is deductible when
used exclusively for public purposes.
On the other hand, the contribution to
the Manila Police trust fund is an
allowable deduction for said trust fund
belongs to the Manila Police, a
government entity, intended to be used
exclusively for its public functions.
(3) The contributions to a group of civic
spirited citizens, organized by the
Philippines Herald solely for charitable
purposes, is a valid deduction. There is
no question that the members of this
group of citizens do not receive profits,
for all the funds they raised were for
Manila's neediest families. Such a group
of citizens may be classified as an
association organized exclusively for
charitable purposes mentioned in
Section 30(h) of the Tax Code.
(4) The contribution to Our Lady of Fatima
chapel at the Far Eastern University
should be disallowed as deduction, on
the ground that the said university gives
dividends to its stockholders. Located
within the premises of the university, the
chapel in question has not been shown
to belong to the Catholic Church or any
religious organization. On the other
hand, the lower court found that it
belongs to the Far Eastern University,
contributions to which are not deductible
under Section 30(h) of the Tax Code for
the reason that the net income of said
university injures to the benefit of its
stockholders.
ISSUE: WON Roxas y Cia. liable for the
payment of the fixed tax on real estate
dealers. -YES
2
Page
 TAX - Week 11
RULING: Section 194 of the Tax Code, in
considering as real estate dealers owners of
real estate receiving rentals of at least
P3,000.00 a year, does not provide any
qualification as to the persons paying the
rentals.

Real estate dealer" includes any person

engaged in the business of buying, selling,
exchanging, leasing or renting property on his
own account as principal and holding himself
out as a full or part-time dealer in real estate or
as an owner of rental property or properties
rented or offered to rent for an aggregate
amount of three thousand pesos or more a
year.

Therefore, even though the rental income

came from Jose Roxas, one of the partners,
Roxas y Cia. will still be considered as real
estate dealer.

3
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CHINA BANKING CORPORATION vs.
COURT OF APPEALS, COMMISSIONER OF
INTERNAL REVENUE and COURT OF TAX
APPEALS
G.R. No. 125508
July 19, 2000
FACTS: CBC made a 53% equity investment
in the First CBC Capital (Asia) Ltd., a
Hongkong subsidiary engaged in financing and
investment with "deposit-taking" function.
Subsequently, First CBC became insolvent.
CBC wrote-off as being worthless its
investment in First CBC Capital (Asia), Ltd., in
its 1987 Income Tax Return and treated it as a
bad debt or as an ordinary loss deductible from
its gross income.
CIR disallowed the deduction and assessed
petitioner for income tax deficiency. The
disallowance of the deduction was made on
the ground that:
1. The investment should not be classified as
being "worthless" and that, although the
Hongkong Banking Commissioner had
revoked the license of First CBC Capital as
a "deposit-taping" company, the latter could
still exercise, however, its financing and
investment activities.
2. Assuming that the securities had indeed
become worthless, the securities should be
classified as "capital loss," and not as a bad
debt expense there being no indebtedness
to speak of between petitioner and its
subsidiary.
The CTA held that the securities had not
indeed become worthless and ordered
petitioner to pay its deficiency income tax. CA
upheld CTA decision.
ISSUE: Whether the 53% equity investment is
a capital asset such that loss for reason of
securities becoming worthless is classified as
capital loss. – YES
RULING: Subject to certain exceptions, the tax
on income is imposed on the net income
allowing certain specified deductions from
gross income to be claimed by the taxpayer.
Among the deductible items allowed by the
NIRC are bad debts and losses.
HOWEVER, an equity investment is
a capital, not ordinary, asset of the investor
the sale or exchange of which results in either
a capital gain or a capital loss. The gain or the
loss is ordinary when the property sold or
exchanged is not a capital asset.  to being, within the purview of "evidence of
Thus, shares of stock; like the other
securities defined in Section 20(t)  of the NIRC,
would be ordinary assets only to a dealer in
securities or a person engaged in the
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purchase and sale of, or an active trader
(for his own account) in, securities. 
In the hands, however, of another who
holds the shares of stock by way of an
investment, the shares to him would be capital
assets. When the shares held by such
investor become worthless, the loss is
deemed to be a loss from the sale or
exchange of capital assets.
The provision in NIRC conveys that the
loss sustained by the holder of the securities,
which are capital assets (to him), is to be
treated as a capital loss as if incurred from a
sale or exchange transaction.
A capital gain or a capital loss normally
requires the concurrence of two conditions for
it to result:
(1) There is a sale or exchange; and
(2) the thing sold or exchanged is a
capital asset.
When securities become worthless,
there is strictly no sale or exchange but the law
deems the loss anyway to be "a loss from the
sale or exchange of capital assets." 5 A similar
kind of treatment is given, by the NIRC on the
retirement of certificates of indebtedness with
interest coupons or in registered form, short
sales and options to buy or sell property where
no sale or exchange strictly exists. In these
cases, the NIRC dispenses, in effect, with the
standard requirement of a sale or exchange for
the application of the capital gain and loss
provisions of the code.
Capital losses are allowed to be
deducted only to the extent of capital gains,
i.e., gains derived from the sale or
exchange of capital assets, and not from
any other income of the taxpayer.
Here, First CBC Capital (Asia), Ltd., the
investee corporation, is a subsidiary
corporation of petitioner bank whose shares in
said investee corporation are not intended for
purchase or sale but as an investment.
Unquestionably then, any loss therefrom would
be a capital loss, not an ordinary loss, to the
investor.
The exclusionary clause found in the
NIRC does not include all forms of securities
but specifically covers only bonds,
debentures, notes, certificates or other
evidence of indebtedness, with interest
coupons or in registered form, which are the
instruments of credit normally dealt with in the
usual lending operations of a financial
institution. Equity holdings cannot come close
indebtedness" under the second sentence of
the aforequoted paragraph. Verily, it is for a
like thesis that the loss of petitioner bank in
4
its equity investment in the Hongkong
Page
subsidiary cannot also be deductible as a bad
 TAX - Week 11
debt. The shares of stock in question do not
constitute a loan extended by it to its subsidiary
(First CBC Capital) or a debt subject to
obligatory repayment by the latter, essential
elements to constitute a bad debt, but a long
term investment made by CBC.
In sum -
(a) The equity investment in shares of
stock held by CBC of approximately 53% in
its Hongkong subsidiary, the First CBC
Capital (Asia), Ltd., is not an indebtedness,
and it is a capital, not an ordinary, asset.
(b) Assuming that the equity investment
of CBC has indeed become "worthless," the
loss sustained is a capital, not an
ordinary, loss.
(c) The capital loss sustained by CBC
can only be deducted from capital gains if
any derived by it during the same taxable
year that the securities have become
"worthless."

5
Page

ANTONIO FORTA FERRER v. CIR
G.R. No. L-16021
August 31, 1962
Ferrer was the sole proprietor of the "La
Suiza Bakery" on R. Hidalgo, Quiapo, Manila.
He owned this bakery from October 16, 1951
up to September 15, 1955, when he sold the
same to Juan Pons for the sum of
P100,000.00. The assets of the bakery
consisted of accounts receivable raw materials,
wrapping supplies, firewood, unexpired
insurance, good-will, machinery and
equipment, and furniture and fixtures, with a
total book value of P74,321.91. In selling the
bakery, Ferrer spent P5,000.00 for broker's
commission and P1,000.00 for accountant's
fee, or a total of P6,000.00.
After deducting the total book value of
the assets and the incidental expenses from
the gross selling price, Ferrer filed on February
14, 1956 his income tax return, showing a net
profit of P19,678.09 as having been realized
from the sale of the bakery. On the basis of this
amount, he paid P2,439.00 as income tax on
February 15, 1956.
Ferrer later requested the CIR to refund
to him the sum of P2,030.00, claiming that
the bakery was a capital asset which he had
held for more than twelve months, so that
the profit from its sale was a long term
capital gain, and therefore, only 50 per cent
of it was taxable under the National Internal
Revenue Code. When no action was taken by
CIR on his request, Ferrer filed a petition for
refund in the Court of Tax Appeals.
The Tax Court held that the sale of the
bakery did not constitute a sale of a single
asset but of individual assets, some of which
were capital assets while others were ordinary
assets. But since Ferrer failed to show what
portion of the selling price of the bakery was
fairly attributable to each asset, the Tax Court
held that it could not ascertain the capital
and/or ordinary gains taxes properly payable
upon the sale of the business. For this reason,
it denied Ferrer’s claim for refund.
While agreeing with the Tax Court that
the good-will of the business is a capital asset,
Ferrer nevertheless contends that there is
neither factual nor legal basis for concluding
that the good-will of the bakery which he had
acquired for P10,000.00 was sold at the same
price. That whatever profit was made from the
sale came solely from the bakery's good-will
which the Tax Court held to be a capital asset,
only 50 per cent of which was taxable.
Issue: WON the sale of the La Suiza Bakery
was a sale of a capital asset so that the profits
TAX - Week 11
derived from the sale is taxable up to 50 per
cent only. – NO
Ruling: Whether the business is to be
comminuted into its component parts, each
part to be tested against the definition of a
capital assets in the Tax Code.
. . . We have to decide only whether upon the
sale of a going business it is to be comminuted
into its fragments, and these are to be
separately matched against the definition in
Section 117 (a) (1), or whether the whole
business is to be treated as if it were a single
piece of property.
Our law has been sparing in the creation of
juristic entities; it has never, for example, taken
over the Roman "universitas facti" and indeed
for many years it fumbled uncertainly with the
concept of a corporation. One might have
supposed that partnership would have been an
especially promising field in which to raise up
an entity, particularly since merchants have
always kept their accounts upon that basis. Yet
there too our law resisted at the price of great
and continuing confusion; and even when it
might be thought that a statute admitted, if it
did not demand, recognition of the firm as an
entity, the old concepts prevailed. And so, even
though we might agree that under the influence
of the Uniform Partnership Act a partner's
interest in the firm should be treated as
indivisible, and for that reason a "capital asset"
within Section 117 (a) (1), we should be chary
about extending further so exotic a jural
concept. Be that as it may, in this instance the
section itself furnishes the answer. It starts in
the broadest way by declaring that all
"property" is "capital asset", and then makes
three exceptions. The first is "stock in trade . . .
or other property of a kind which would
properly be included in the inventory"; next
comes "property held . . . primarily for sale to
customers"; and finally property "used in the
trade or business of a character which is
subject to . . . allowance for depreciation." In
the face of this language, although it may be
true that a "stock in trade," taken by itself
should be treated as a "universitas facti" by no
possibility can a whole business be so treated;
and the same is true as to any property within
the other exceptions. Congress plaintly did
mean to comminute the elements of a
business; plainly it did not regard the whole as
"capital assets."
The sale of the "La Suiza Bakery" was a sale
not of a single asset but of individual assets
6
that made up the business. And since Ferrer
Page
failed to point out what part of the price he had
 TAX - Week 11
received could be fairly attributed to each
asset, the Tax Court correctly denied his claim.
The Tax Court's finding that Ferrer
acquired and sold the good-will of the bakery
for the same amount is supported by evidence
which has not been rebutted. Indeed, it is
inconceivable how a business, which was
heavily indebted as Ferrer contends, can ever
possess a good-will that can command such a
high price.
Therefore, any profit which Ferrer may
have gained in the same must have come from
the sale of the other assets of the business
which must have been sold for amounts other
than their stated book value.
As the Tax Court held, in order to
ascertain the capital and/or ordinary gains
taxes properly payable on the sale of a
business, including its tangible assets, it is
incumbent upon the taxpayer to show not
only the cost basis of each asset, but also
what portion of the selling price is fairly
attributable to each asset.

7
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CIR vs. FILINVEST DEVELOPMENT
CORPORATION
G.R. No. 163653
July 19, 2011
FACTS: On 29 November 1996, FDC and FAI
entered into a Deed of Exchange with FLI
whereby the former both transferred in favor of
the latter parcels of land appraised at
₱4,306,777,000.00. In exchange for said
parcels which were intended to facilitate
development of medium-rise residential and
commercial buildings, 463,094,301 shares of
stock of FLI were issued to FDC and FAI.
On 3 January 2000, FDC received from the
BIR a Formal Notice of Demand to pay
deficiency income and documentary stamp
taxes, plus interests and compromise
penalties. The deficiency taxes were assessed
on the taxable gain supposedly realized by
FDC from the Deed of Exchange it executed
with FAI and FLI, on the dilution resulting from
the Shareholders’ Agreement FDC executed
with RHPL as well as the "arm’s-length"
interest rate and documentary stamp taxes
imposable on the advances FDC extended to
its affiliates.
On 3 January 2000, FAI similarly received from
the BIR a Formal Letter of Demand for
deficiency income taxes. The said deficiency
tax was also assessed on the taxable gain
purportedly realized by FAI from the Deed of
Exchange it executed with FDC and FLI.
FDC and FAI filed a petition for review with
CTA, alleging, among other matters, that as
previously opined in BIR Ruling No. S-34-046-
97, no taxable gain should have been
assessed from the subject Deed of Exchange
since FDC and FAI collectively gained further
control of FLI as a consequence of the
exchange.
CIR argued that the transfer of property in
question should not be considered tax free
since, with the resultant diminution of its shares
in FLI, FDC did not gain further control of said
corporation. The CIR also argued that FDC
realized taxable gain arising from the dilution of
its shares in FAC as a result of its
Shareholders' Agreement with RHPL.
CTA found that the collective increase of the
equity participation of FDC and FAI in FLI
rendered the gain derived from the exchange
tax-free, the CTA also ruled that the increase
in the value of FDC's shares in FAC did not
result in economic advantage in the absence of
actual sale or conversion thereof.
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Issue: WON the transfer that FDC and FAI
effected in exchange for the shares of stock of
FLI is tax free. -YES
Ruling: Sec. 34(c)- No gain or loss shall also
be recognized if property is transferred to a
corporation by a person in exchange for shares
of stock in such corporation of which as a
result of such exchange said person, alone or
together with others, not exceeding four
persons, gains control of said corporation;
Provided, That stocks issued for services shall
not be considered as issued in return of
property.
The requisites for the non-recognition of gain
or loss under the foregoing provision are as
follows: (a) the transferee is a corporation; (b)
the transferee exchanges its shares of stock
for property/ies of the transferor; (c) the
transfer is made by a person, acting alone or
together with others, not exceeding four
persons; and, (d) as a result of the exchange
the transferor, alone or together with others,
not exceeding four, gains control of the
transferee.
CAB: FDC's 2,579,575,000 shares or 61.03%
control of FLI's 4,226,629,000 outstanding
shares should, therefore, be appreciated in
combination with the 420,877,000 new shares
issued to FAI which represents 9.96% control
of said transferee corporation.
Together FDC's 2,579,575,000 shares
(61.03%) and FAI's 420,877,000 shares
(9.96%) clearly add up to 3,000,452,000
shares or 70.99% of FLI's 4,226,629,000
shares.
Since the term "control" is clearly defined as
"ownership of stocks in a corporation
possessing at least 51% of the total voting
power of classes of stocks entitled to one vote"
under Section 34 (c) (6) [c] of the 1993 NIRC,
the exchange of property for stocks
between FDC FAI and FLI clearly qualify as
a tax-free transaction under paragraph 34 (c)
(2) of the same provision.
Inasmuch as the combined ownership of FDC
and FAI of FLI's outstanding capital stock adds
up to a total of 70.99%, it stands to reason that
neither of said transferors can be held liable for
deficiency income taxes the CIR assessed on
the supposed gain which resulted from the
subject transfer.
8
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CIR V. LANCASTER
G.R. NO. 183408
JULY 12, 2017
FACTS: The BIR issued a Preliminary Notice
Assessment (PAN) to respondent Lancaster
Philippines Inc. after finding out 1) an
overstatement of its purchases for the fiscal
year April 1998 to March 1999; and 2)
noncompliance with the generally accepted
accounting principle of proper matching of cost
and revenue. BIR then disallowed the
tobacco purchases from farmers for
February and March 1998 as deductions
against income for the fiscal year April 1998
to March 1999.
Lancaster averred that:
1) it has used an entire 'tobacco-cropping
season' to determine its total purchases
covering a one-year period from 1 October up
to 30 September of the following year (as
against its fiscal year which is from 1 April up
to 31 March of the following year)
2) that it has been adopting the 6-month timing
difference to conform to the matching concept
(of cost and revenue)
3) and that this has long been installed as part
of the company's system and consistently
applied in its accounting books.
Lancaster maintained that the situation of
farmers engaged in producing tobacco, is
unique in that the costs, i.e., purchases, are
taken as of a different period and posted in the
year in which the gross income from the crop is
realized.
BIR however issued a Final Assessment
Notice (FAN) assessing Lancaster’s deficiency
income tax of P l,496,770.18. Lancaster
protested the same but remained unheeded,
so it filed a petition for review before the CTA
Division. CTA ruled in favor of Lancaster,
ordering the BIR to cancel and withdraw the
deficiency income tax assessment. CTA En
Banc affirmed.
Hence, the petition before the Supreme Court.
ISSUE:
1) Whether Lancaster should follow the crop-
method of accounting
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2) When should Lancaster recognize its
purchases for February and March 1998?
RULING:
1) Yes. An accounting method is a "set of rules
for determining when and how to report income
and deductions." The provisions under
Chapter VIII, Title II of the NIRC cited above
enumerate the methods of accounting that the
law expressly recognizes, to wit:
(1) Cash basis method;
(2) Accrual method;
(3) Installment method;
(4) Percentage of completion method;
(5) Other accounting methods.
Other methods approved by the CIR, even
when not expressly mentioned in the NIRC,
may be adopted if such method would enable
the taxpayer to properly reflect its income.
Section 43 of the NIRC authorizes the CIR to
allow the use of a method of accounting that in
its opinion would clearly reflect the income of
the taxpayer. An example of such method not
expressly mentioned in the NIRC, but duly
approved by the CIR, is the 'crop method of
accounting' authorized under RAM No. 2-95.
The pertinent provision reads:
II. Accounting Methods
F. Crop Year Basis is a method applicable only
to farmers engaged in the production of crops
which take more than a year from the time of
planting to the process of gathering and
disposal. Expenses paid or incurred are
deductible in the year the gross income from
the sale of the crops are realized.
The crop method recognizes that the
harvesting and selling of crops do not fall
within the same year that they are planted
or grown. This method is especially relevant to
farmers, or those engaged in the business of
producing crops who, pursuant to RAM No. 2-
95, would then be able to compute their
taxable income on the basis of their crop year.
On when to recognize expenses as deductions
against income, the governing rule is found in
the second sentence of Subsection F cited
above. The rule enjoins the recognition of the
9
expense (or the deduction of the cost) of crop
Page

production in the year that the crops are sold
(when income is realized).
In the present case, we find it wholly
justifiable for Lancaster, as a business
engaged in the production and marketing of
tobacco, to adopt the crop method of
accounting. A taxpayer is authorized to
employ what it finds suitable for its purpose so
long as it consistently does so, and in this
case, Lancaster does appear to have utilized
the method regularly for many decades
already. Considering that the crop year of
Lancaster starts from October up to September
of the following year, it follows that all of its
expenses in the crop production made
within the crop year starting from October
1997 to September 1998, including the
February and March 1998 purchases
covered by purchase invoice vouchers, are
rightfully deductible for income tax
purposes in the year when the gross
income from the crops are realized.
Pertinently, nothing from the pleadings or
memoranda of the parties, or even from their
testimonies before the CT A, would support a
finding that the gross income from the crops (to
which the subject expenses refer) was actually
realized by the end of March 1998, or the
closing of Lancaster's fiscal year for 1998.
Instead, the records show that the February
and March 1998 purchases were recorded by
Lancaster as advances and later taken up as
purchases by the close of the crop year in
September 1998, or as stated very clearly
above, within the fiscal year 1999.51On this
point, we quote with approval the ruling of the
CTA En Banc, thus:
[Lancaster's] fiscal period is from April 1, 1998
to March 31, 1999. On the other hand, its crop
year is from October 1, 1997 to September 1,
1998. Accordingly, in applying the crop year
method, all the purchases made by the
respondent for October 1, 1997 to September
1, 1998 should be deducted from the fiscal
year ending March 31, 1999, since it is the
time when the gross income from the crops is
realized.
TAX - Week 11
2) It should be deducted in the year in which
gross income from the sale of the crops is
realized.
In essence, the matching concept, which is one
of the generally accepted accounting
principles, directs that the expenses are to be
reported in the same period that related
revenues are earned. It attempts to match
revenue with expenses that helped earn it.
A reading of RAM No. 2-95, however, clearly
evinces that it conforms with the concept that
the expenses paid or incurred be deducted
in the year in which gross income from the
sale of the crops is realized. Put in another
way, the expenses are matched with the
related incomes which are eventually earned.
Nothing from the provision is it strictly required
that for the expense to be deductible, the
income to which such expense is related to be
realized in the same year that it is paid or
incurred. As noted by the CTA, the crop
method is an unusual method of accounting,
unlike other recognized accounting methods
that, by mandate of Sec. 45 of the NIRC,
strictly require expenses be taken in the same
taxable year when the income is 'paid or
incurred, ' or 'paid or accrued, ' depending
upon the method of accounting employed by
the taxpayer.
RAM No. 2-95 is clear-cut on the rule on when
to recognize deductions for taxpayers using the
crop method of accounting. The rule prevails
over any generally accepted accounting
principles (GAAP), including the matching
concept as applied in financial or business
accounting.
In sum, and considering the foregoing
premises, we find no cogent reason to overturn
the assailed decision and resolution of the CT
A. As the CTA decreed, Assessment Notice
LTAID II IT-98-00007, dated 11 October 2002,
in the amount of ₱6,466,065.50 for deficiency
income tax should be cancelled and set aside.
The assessment is void for being issued
without valid authority. Furthermore, there is no
legal justification for the disallowance of
Lancaster's expenses for the purchase of
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tobacco in February and March 1998.
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