CHAPTER 3 – GROSS INCOME
" The Chapter on
Subject: Insurance Law
EL ORIENTE FABRICA DE TABACOS, INC. VS.
JUAN POSADAS, COLLECTOR OF INTERNAL
REVENUE, G.R. No. 34774, September 21, 1931
Topic: Insurable Interest in life and health (Section 10)
Facts:
Insurer: Manufacturers Life Insurance Co., of Toronto,
Canada, thru its local agent E.E. Elser
Insured: A. Velhagen (manager of El Oriente)
Beneficiary: El Oriente Fabrica de Tabacos, Inc.
El Oriente, in order to protect itself against the
loss that it might suffer by reason of the death of its
manager, whose death would be a serious loss to El
Oriente procured from the Insurer an insurance policy on
the life of the said manager for the sum of 50,000 USD
with El Oriente as the designated sole beneficiary. The
insured has no interest or participation in the proceeds of
said life insurance policy.
El Oriente charged as expenses of its business all
the said premiums and deducted the same from its gross
incomes as reported in its annual income tax returns,
which deductions were allowed by Posadas (Collector of
Internal Revenue) upon showing by El Oriente that such
premiums were legitimate expenses of the business.
Upon the death of the manager, El Oriente
received all the proceeds of the life insurance policy
together with the interest and the dividends accruing
thereon, aggregating P104,957.88. Posadas assessed and
levied the sum of P3,148.74 as income tax on the proceeds
of the insurance policy, which was paid by El Oriente
under protest. El Oriente claiming exemption under
Section 4 of the Income Tax Law.
Issue:
Whether or not the proceeds of insurance taken
by a corporation on the life of an important official to
indemnify it against loss in case of his death, are taxable
as income under the Philippine Income Tax Law?
Ruling:
The Income Tax Law for the Philippines is Act No. 2833,
as amended. In chapter I On Individuals, is to be found
section 4 which provides that, "The following incomes
shall be exempt from the provisions of this law: (a) The
proceeds of life insurance policies paid to beneficiaries
upon the death of the insured ... .
Corporations does not provide as above. It is certain that
the proceeds of life insurance policies are exempt. It is not
so certain that the proceeds of life insurance policies paid
to corporate beneficiaries upon the death of the insured
are likewise exempt.
The situation will be better elucidated by a brief reference
to laws on the same subject in the United States. The
Income Tax Law of 1916 extended to the Philippine
Legislature, when it came to enact Act No. 2833, to copy
the American statute. Subsequently, the Congress of the
United States enacted its Income Tax Law of 1919, in
which certain doubtful subjects were clarified. Thus, as to
the point before us, it was made clear, when not only in
the part of the law concerning individuals were
exemptions provided for beneficiaries, but also in the part
concerning corporations, specific reference was made to
the exemptions in favor of individuals, thereby making
the same applicable to corporations. This was
authoritatively pointed out and decided by the United
States Supreme Court in the case of United States vs.
Supplee-Biddle Hardware Co. ( [1924], 265 U.S., 189),
which involved facts quite similar to those before us.
To quote the exact words in the cited case of Chief Justice
Taft delivering the opinion of the court:
It is earnestly pressed upon us that proceeds of life
insurance paid on the death of the insured are in fact
capital, and cannot be taxed as income … that proceeds
of a life insurance policy paid on the death of the insured
are not usually classed as income.
Considering, therefore, the purport of the stipulated facts,
considering the uncertainty of Philippine law, and
considering the lack of express legislative intention to tax
the proceeds of life insurance policies paid to corporate
beneficiaries, particularly when in the exemption in favor
of individual beneficiaries in the chapter on this subject,
the clause is inserted "exempt from the provisions of this
law," we deem it reasonable to hold the proceeds of the
life insurance policy in question as representing an
indemnity and not taxable income.
The foregoing pronouncement will result in the judgment
being reversed and in another judgment being rendered in
favor of El Oriente.
MARIA CARLA PIROVANO, etc., et al. v. THE
COMMISSIONER OF INTERNAL REVENUE. G.R.
No. L-19865. July 31, 1965
FACTS:
De la Rama Steamship Co. insured the life of Enrico
Pirovano, who was then its President and General
Manager until the time of his death. The Company then
received the total sum of P643,000.00 as proceeds of the
said life insurance policies. The Company renounced all
its rights on the money in favor of the decendent's
children.
After a case that marred Estefania Pirovano, the guardian
and the Company (see Pirovano vs. De la Rama
Steamship Co., 96 Phil. 335.), the Company paid in favor
of the children.
The CIR then assessed donees' gift tax against Pirovano
and donor's tax against the Company. Pirovano contested
with the CIR which she lost and thus appealed with the
CTA.
The CTA held that donees' gift tax were correctly
assessed.
ISSUE: Whether Pirovano should pay the donees' gift tax.
RULING:
YES. Pirovano contends that the Court itself declared that
the donation was renumenatory and not simple and it was
made for a full and adequate compensation for the
valuable services by decedent to the Company; hence, the
donation does not constitute a taxable gift under the
provisions of Section 108 of the National Internal
Revenue Code (old law).
The Court states that it is a donation; that the
consideration for the donation was, therefore, the
company's gratitude for his services, and not the services
themselves and whether the donation was simple or
renumenatory, it was still a gift taxable under the law.
MA. ISABEL T. SANTOS v. SERVIER
PHILIPPINES, GR No. 166377, 2008-11-28
FACTS:
Petitioner Ma. Isabel T. Santos was the Human Resource
Manager of respondent Servier Philippines, Inc.
While having dinner, petitioner... complained of stomach
pain, then vomited. Eventually, she was brought to the
hospital known as Centre Chirurgical de L'Quest where
she fell into coma for 21 days... at the Intensive Care Unit
(ICU) for 52 days.
probable cause of her sudden attack was "alimentary
allergy," as she had recently ingested a meal of mussels
which resulted in a concomitant uticarial eruption.
Petitioner's hospitalization expenses, as well as those of
her husband and son, were paid by respondent
She was then confined at the St. Luke's Medical Center...
for rehabilitation.[8] During the period of petitioner's
rehabilitation, respondent continued to pay the former's
salaries; and to assist her in paying her hospital bills.
Petitioner's... physician concluded that the former had not
fully recovered mentally and physically. Hence,
respondent was constrained to terminate petitioner's
services effective August 31, 1999... respondent offered a
retirement package
Of the promised retirement benefits amounting to
P1,063,841.76, only P701,454.89 was released to
petitioner's husband, the balance thereof was withheld
allegedly for taxation purposes.
Petitioner, represented by her husband, instituted the
instant case for unpaid salaries; unpaid separation pay;
unpaid balance of retirement package plus interest;
insurance pension for permanent disability; educational
assistance for her son; medical assistance;
reimbursement... of medical and rehabilitation expenses;
moral, exemplary, and actual damages, plus attorney's
fees.
ISSUES:
the only issue proper for determination is the propriety of
deducting P362,386.87 from her... total benefits, for
taxation purposes.
whether these benefits are taxable.
whether the retirement benefits are taxable.
RULING:
On the basis of the above-mentioned retirement plan,
respondent offered the petitioner a retirement package
which consists of retirement plan benefits, insurance
pension, and educational assistance. The amount of
P1,063,841.76 represented the disability... retirement
benefit provided for in the plan... the receipt of retirement
benefits does not bar the retiree from receiving separation
pay. Separation pay is a statutory right designed to
provide the employee with the... wherewithal during the
period that he/she is looking for another employment. On
the other hand, retirement benefits are intended to help the
employee enjoy the remaining years of his life, lessening
the burden of worrying about his financial support, and
are a form of... reward for his loyalty and service to the
employer... they are not mutually exclusive.

only true if there is no specific prohibition against the
payment of both benefits in the retirement plan and/or in
the Collective Bargaining Agreement (CBA)
In the instant case, the Retirement Plan bars the petitioner
from claiming additional benefits on top of that provided
for in the Plan.
Section 2, Article XII of the Retirement Plan provides:
Section 2. NO DUPLICATION OF BENEFITS
There being such a provision,... petitioner is entitled only
to either the separation pay under the law or retirement
benefits under the Plan, and not both.
We answer in the affirmative.
Thus, for the retirement benefits to be exempt from the
withholding tax, the taxpayer is burdened to prove the
concurrence of the following elements: (1) a reasonable
private benefit plan is maintained by the employer; (2) the
retiring official or employee has been in the... service of
the same employer for at least ten (10) years; (3) the
retiring official or employee is not less than fifty (50)
years of age at the time of his retirement; and (4) the
benefit had been availed of only once.
Petitioner was qualified for disability retirement...
petitioner was only 41 years of age; and had been in the
service for more or less eight (8) years.
The above provision is not applicable for failure to...
comply with the age and length of service requirements.
INTERCONTINENTAL BROADCASTING
CORPORATION (IBC) VS. AMARILLA, G.R. No.
162775, October 27, 2006
FACTS:
Petitioner IBC employed the following persons at its
Cebu station: Candido C. Quiñones, Jr., Corsini R.
Lagahit, as Studio Technician, Anatolio G. Otadoy, as
Collector, and Noemi Amarilla, as Traffic Clerk. On
March 1, 1986, the government sequestered the station,
including its properties, funds and other assets, and took
over its management and operations from its owner,
Roberto Benedicto. On November 3, 1990, the
Presidential Commission on Good Government (PCGG)
and Benedicto executed a Compromise Agreement,
where Benedicto transferred and assigned all his rights,
shares and interests in petitioner station to the
government.
The four (4) employees retired from the company and
received, on staggered basis, their retirement benefits
under the 1993 Collective Bargaining Agreement (CBA)
between petitioner and the bargaining unit of its
employees. In the meantime, a P1,500.00 salary increase
was given to all employees of the company, current and
retired, effective July 1994. However, when the four
retirees demanded theirs, petitioner refused and instead
informed them via a letter that their differentials would be
used to offset the tax due on their retirement benefits in
accordance with the National Internal Revenue Code
(NIRC).
The four retirees filed separate complaints which averred
that the retirement benefits are exempt from income tax
under Article 32 of the NIRC.
For its part, petitioner averred that under Section 21 of the
NIRC, the retirement benefits received by employees
from their employers constitute taxable income. While
retirement benefits are exempt from taxes under Section
28(b) of said Code, the law requires that such benefits
received should be in accord with a reasonable retirement
plan duly registered with the Bureau of Internal Revenue
(BIR). Since its retirement plan in the 1993 CBA was not
approved by the BIR, complainants were liable for
income tax on their retirement benefits.
In reply, complainants averred that the claims for the
retirement salary differentials of Quiñones and Otadoy
had not prescribed because the said CBA was
implemented only in 1997. They pointed out that they
filed their claims with petitioner on April 3, 1999. They
maintained that they availed of the optional retirement
because of petitioner’s inducement that there would be no
tax deductions. Petitioner countered that under Sections
72 and 73 of the NIRC, it is obliged to deduct and
withhold taxes determined in accordance with the rules
and regulations to be prepared by the Secretary of
Finance.
The NLRC held that the benefits of the retirement plan
under the CBAs between petitioner and its union
members were subject to tax as the scheme was not
approved by the BIR. However, it had also been the
practice of petitioner to give retiring employees their
retirement pay without tax deductions and there was no
justifiable reason for the respondent to deviate from such
practice.
ISSUES:
1. Whether the retirement benefits of respondents are part
of their gross income.
2. Whether petitioner is estopped from reneging on its
agreement with respondent to pay for the taxes on said
retirement benefits.
RULING:
1. Yes. Under the NIRC, the retirement benefits of
respondents are part of their gross income subject to taxes.
Thus, for the retirement benefits to be exempt from the
withholding tax, the taxpayer is burdened to prove the
concurrence of the following elements: (1) a reasonable
private benefit plan is maintained by the employer; (2) the
retiring official or employee has been in the service of the
same employer for at least 10 years; (3) the retiring
official or employee is not less than 50 years of age at the
time of his retirement; and (4) the benefit had been availed
of only once. Respondents were qualified to retire
optionally from their employment with petitioner.
However, there is no evidence on record that the 1993
CBA had been approved or was ever presented to the BIR;
hence, the retirement benefits of respondents are taxable.
Under Section 80 of the NIRC, petitioner, as employer,
was obliged to withhold the taxes on said benefits and
remit the same to the BIR. However, the Court agrees
with respondents’ contention that petitioner did not
withhold the taxes due on their retirement benefits
because it had obliged itself to pay the taxes due thereon.
This was done to induce respondents to agree to avail of
the optional retirement scheme.
2. Yes. Petitioner is estopped from doing so. It must be
stressed that the parties are free to enter into any contract
stipulation provided it is not illegal or contrary to public
morals. When such agreement freely and voluntarily
entered into turns out to be advantageous to a party, the
courts cannot “rescue” the other party without violating
the constitutional right to contract. Courts are not
authorized to extricate the parties from the consequences
of their acts.
An agreement to pay the taxes on the retirement benefits
as an incentive to prospective retirees and for them to
avail of the optional retirement scheme is not contrary to
law or to public morals. Petitioner had agreed to shoulder
such taxes to entice them to voluntarily retire early, on its
belief that this would prove advantageous to it.
Respondents agreed and relied on the commitment of
petitioner. For petitioner to renege on its contract with
respondents simply because its new management had
found the same disadvantageous would amount to a
breach of contract.
The well-entrenched rule is that estoppel may arise from
a making of a promise if it was intended that the promise
should be relied upon and, in fact, was relied upon, and if
a refusal to sanction the perpetration of fraud would result
to injustice. The mere omission by the promisor to do
whatever he promises to do is sufficient forbearance to
give rise to a promissory estoppel.
CIR VS MITSUBISHI, GR No L-54908, January 22,
1990
FACTS:
Atlas Consolidated Mining and Dev Corp (Atlas) entered
into a loan and sales contract with Mitsubishi, a Japanese
corp licenses to engage in business in the Phils., for
purposes of the projected expansion of the productive
capacity of Atlas.
Mitsubishi agreed to extend a loan to Atlas for the
installation of a new concentrator for copper production
and Atlas to sell to Mitsubishi all the copper concentrates
produced for 15 years.
Mitsubishi applied for a loan with Export-Import Bank of
Japan (Eximbank) for purpose of its obligation under said
contract. Pursuant to the contract between Atlas and
Mitsubishi, interest payments were made by Atlas to
Mitsubishi for the years 1974-75. The corresponding
15% tax thereon in the amount of P1,971,595.01 was
withheld pursuant to sec. 24(b)(1) and sec. 53 (b)(2) of
NIRC, as amended by PD 131, and duly remitted to the
government.
Private respondent filed a claim for the tax credit
requesting the sum of P1,971,595.01 be applied against
their existing and future tax liabilities. It was later noted
by respondent CTA that Mitsubishi executed a waiver and
disclaimer of its interest in the claim for tax credit in favor
of Atlas.
Mitsubishi filed a petition for review with respondent
court on the ground that Mitsubishi was a mere agent of
Eximbank, which is a financing institution owned,
controlled and financed by the Japanese Government.
Such government status of Eximbank, if it may be so
called, is the basis for private respondents claim for
exemption from paying the tax on the interest payment on
the loan. It was further claimed that the interest payments
on the loan from the consortium of Japanese banks were
likewise exempt because loan supposedly came from or
were fniancé by Eximbank. Relying on the provision of
sec. 29(b)(7)(A) NIRC.
CTA promulgated its decision ordering petitioner to grant
a tax credit in favor of Atlas and the court declared that
all papers and documents pertaining to the loan obtained
by Mitsubishi from Eximbank shows that this was the
same amount given to Atlas. It also observed that the
money for the loan from the consortium of private
Japanese banks originated from Eximbank. From these,
respondent court concluded that the ultimate creditor of
Atlas was Eximbank. Mitsubishi was acting as a mere
“arranger or conduit through which the loan flowed from
the creditor Eximbank to the debtor Atlas.
ISSUE:
1) WON the interest income from the loan extended to
Atlas by Mitsubishi is excludible from gross income
taxation pursuant to sec. 29(b)(7)(A), NIRC and
therefore, exempt from withholding tax.
2) WON Mitsubishi is a mere conduit of Eximbank which
will then be considered as the creditor whose investment
in the Phils. On loans are exempt from taxes.
HELD:
1) NO
The signatories on the loans and sales contract were
Mitsubishi and Atlas, nowhere in the contract can it be
inferred that Mitsubishi acted for and behalf of Eximbank
of Japan nor of any entity, private or public, for that
matter. When Mitsubishi obtained the loan of USD 20M
from Eximbank of Japan said amount ceased to be the
property of the bank and become property of Mitsubishi.
Mitsubishi and not Eximbank is the sole creditor of Atlas,
the former being the owner of the USD 20M upon
completion of its loan contract with Eximbank of Japan.
The interest income of the loan paid by Atlas to
Mitsubishi is therefore entirely different from the interest
income paid by Mitsubishi to Eximbank of Japan. What
was the subject of the 15% withholding tax is not the
interest income paid by Mitsubishi to Eximbank, but the
interest income earned by Mitsubishi from the loan to
Atlas.
2) NO
When Mitsubishi secured the loan, it was in its own
independent capacity as a private entity and not as a
conduit of the consortium of Japanese banks or the
Eximbank of Japan. While loans were secured by
Mitsubishi primarily “as a loan to and in consideration for
importing copper concentrates from Atlas, the fact
remains that it was a loan by Eximbank of Japan to
Mitsubishi and not to Atlas.
CHAPTER 9- INCOME TAX RULES ON
DEALINGS IN PROPERTY
CAPITAL GAINS FROM SALE OR OTHER
DISPOSITION OF REAL PROPERTY
SMI-ED TECHNOLOGY V. CIR
G.R. No. 175410
November 12, 2014
Doctrines:
 In an action for the refund of taxes allegedly
erroneously paid, the Court of Tax Appeals may
determine whether there are taxes that should
have been paid in lieu of the taxes paid.
Determining the proper category of tax that
should have been paid is not an assessment. It is
incidental to determining whether there should be
a refund.
 A Philippine Economic Zone Authority (PEZA)-
registered corporation that has never
commenced operations may not avail the tax
incentives and preferential rates given to PEZA-
registered enterprises. Such corporation is
subject to ordinary tax rates under the National
Internal Revenue Code of 1997.
Facts:
 SMI-Ed Philippines is a PEZA-registered
corporation authorized "to engage in the business
of manufacturing ultra high-density
microprocessor unit package."
 After its registration on June 29, 1998, SMI-Ed
Philippines constructed buildings and purchased
machineries and equipment.
 SMI-Ed Philippines "failed to commence
operations." Its factory was temporarily closed,
effective October 15, 1999. On August 1, 2000, it
sold its buildings and some of its installed
machineries and equipment to Ibiden Philippines,
Inc., another PEZA-registered enterprise. SMI-
Ed Philippines was dissolved on November 30,
2000.
 In its quarterly income tax return for year 2000,
SMI-Ed Philippines subjected the entire gross
sales of itsproperties to 5% final tax on PEZA
registered corporations. SMI-Ed Philippines paid
taxes amounting to P44,677,500.00.
 On February 2, 2001, after requesting the
cancellation of its PEZA registration and
amending its articles of incorporation to shorten
its corporate term, SMI-Ed Philippines filed an
administrative claim for the refund of
P44,677,500.00 with the Bureauof Internal
Revenue (BIR). SMIEd Philippines alleged that
the amountwas erroneously paid.
 The BIR did not act on SMI-Ed Philippines’
claim, which prompted the latter to file a petition
for review before the Court of Tax Appeal.
 CTA denied SMI-ED claim for refund. It held
that:
1. fiscal incentives given to PEZA-registered
enterprises may be availed only by PEZA-
registered enterprises that had already
commenced operations. Since SMI-Ed
Philippines had not commenced operations, it
was not entitled to the incentives of either the
income tax holiday or the 5% preferential tax
rate. Payment of the 5% preferential tax
amounting to P44,677,500.00 was erroneous.
2. It found that the properties sold by SMI-ED
were capital assets under Section 39(A)(1) of
the National Internal Revenue Code of 1997,
hence it subjected the sale of SMIEd
Philippines’ assets to 6% capital gains tax. It
was found liable for capital gains tax
amounting to P53,613,000.00.20. Therefore,
SMIEd Philippines must still pay the balance
of P8,935,500.00 as deficiency tax.
 SMI-ED filed a peitition for review with the CTA
en banc.
 CTA en banc affirmed the CTA second division.
 SMI-Ed Philippines filed a petition for review
before the Supreme Court praying for the grant of
its claim for refund and the reversal of the Court
of Tax Appeals En Banc’s decision.
SMI-ED’s Arguments:
 It argued that the Court of Tax Appeals Second
Division erroneously assessed the 6% capital
gains tax on the sale of SMI-Ed Philippines’
equipment, machineries, and buildings. It also
argued that the Court of Tax Appeals Second
Division cannot make an assessment at the first
instance. Even if the Court of Tax Appeals
Second Division has such power, the period to
make an assessment had already prescribed.

Issues w/ Ruling:
1. WON CTA En Banc grievously erred and
acted beyond its jurisdiction when it assessed
for deficiency tax in the first instance- NO
The term "assessment" refers to the determination of
amounts due from a person obligated to make payments.
In the context of national internal revenue collection, it
refers the determination of the taxes due from a taxpayer
under the National Internal Revenue Code of 1997. The
power and duty to assess national internal revenue taxes
are lodged with the BIR.
The Court of Tax Appeals has no powerto 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.
Based on the law, the following must be present for the
Court of Tax Appeals to have jurisdiction over a case
involving the BIR’s decisions or inactions:
a) A case involving any of the following:
i. Disputed assessments;
ii. Refunds of internal revenue taxes,
fees, or other charges, penalties in
relation thereto; and
iii. Other matters arising under the
National Internal Revenue Code of 1997.
b) Commissioner of Internal Revenue’s decision
or inaction in a case submitted to him or her
Thus, the BIR first has to make an assessment of
the taxpayer’s liabilities. When the BIR makes the
assessment, the taxpayer is allowed to dispute that
assessment before the BIR. If the BIR issues a decision
that is unfavorable to the taxpayer or if the BIR fails to act
on a dispute brought by the taxpayer, the BIR’s decision
or inaction may be brought on appeal to the Court of Tax
Appeals. The Court of Tax Appeals then acquires
jurisdiction over the case.
When the BIR’s unfavorable decision is brought
on appeal to the Court of Tax Appeals, the Court of Tax
Appeals reviews the correctness of the BIR’s assessment
and decision. In reviewing the BIR’s assessment and
decision, the Court of Tax Appeals had to make its own
determination of the taxpayer’s tax liabilities. The Court
of Tax Appeals may not make such determination before
the BIR makes its assessment and before a dispute
involving such assessment is brought to the Court of Tax
Appeals on appeal.
In this case, the Court of Tax Appeals’ jurisdiction
was acquired because petitioner brought the case on
appeal before the Court of Tax Appeals after the BIR
had failed to act on petitioner’s claim for refund of
erroneously paid taxes. The Court of Tax Appeals did
not acquire jurisdiction as a result of a disputed
assessment of a BIR decision.
As earlier established, the Court of Tax Appeals has
no assessment powers. In stating that petitioner’s
transactions are subject to capital gains tax, however, the
Court of Tax Appeals was not making an assessment. It
was merely determining the proper category of tax that
petitioner should have paid, in view of its claim that it
erroneously imposed upon itself and paid the 5% final tax
imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that
petitioner should have paid is an incidental matter
necessary for the resolution of the principal issue, which
is whether petitioner was entitled to a refund.
The issue of petitioner’s claim for tax refund is
intertwined with the issue of the proper taxes that are due
from petitioner. A claim for tax refund carries the
assumption that the tax returns filed were correct. If the
tax return filed was not proper, the correctness of the
amount paid and, therefore, the claim for refund become
questionable. In that case, the court must determine if a
taxpayer claiming refund of erroneously paid taxes is
more properly liable for taxes other than that paid.
In this case, petitioner’s claim that it erroneously paid the
5% final tax is an admission that the quarterly tax return
it filed in 2000 was improper. Hence, to determine if
petitioner was entitled to the refund being claimed, the
Court of Tax Appeals has the duty to determine if
petitioner was indeed not liable for the 5% final tax and,
instead, liable for taxes other than the 5% final tax. As in
South African Airways, petitioner’s request for refund
can neither be granted nor denied outright without such
determination.
Any liability in excess of the refundable amount,
however, may not be collected in a case involving solely
the issue of the taxpayer’s entitlement to refund. The
question of tax deficiencyis distinct and unrelated to the
question of petitioner’s entitlement to refund. 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.
2. WON SMI-ED is entitled to the benefits given
to PEZA-registered enterprises including the
5% preferential tax rate.
NO. This is because it never began its operation.
Essentially, the purpose of Republic Act No.
7916 is to promote development and encourage
investments and business activities that will generate
employment. Giving fiscal incentives to businesses is one
of the means devised to achieve this purpose. It comes
with the expectation that persons who will avail these
incentives will contribute to the purpose’s achievement.
Hence, to avail the fiscal incentives under Republic Act
No. 7916, the law did not say that mere PEZA registration
is sufficient.
The fiscal incentives and the 5% preferential tax rate
are available only to businesses operating within the
Ecozone. A business is considered in operation when it
starts entering into commercial transactions that are not
merely incidental to but are related to the purposes of the
business. It is similar to the definition of "doing business,"
as applied in actions involvingthe right of foreign
corporations to maintain court actions. The terms "doing"
or "engaging in" or "transacting" business": impl[y] a
continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose
and object of its organization. Petitioner never started its
operations since its registration on June 29, 199863
because of the Asian financial crisis. It is not entitled to
the preferential tax rate of 5% on gross income in lieu of
all taxes. Because petitioner is not entitled to a
preferential rate, it is subject to ordinary tax rates under
the National Internal Revenue Code of 1997.
3. WON CTA erred in imposing the capital gains
tax on the sale of SMI-Ed’s buildings,
equipments, and machineries-
Withe respect to the sale of buildings and and
land, wala nasayup ang CA
With respect to the sale of machineries and
equipments, nasayup ang CA
For petitioner’s properties to be subjected to
capital gains tax, the properties must form part of
petitioner’s capital assets. The properties involved in this
case include petitioner’s buildings, equipment, and
machineries. They are not among the exclusions
enumerated in Section 39(A)(1) of the National Internal
Revenue Code of 1997. None of the properties were used
in petitioner’s trade or ordinary course of business
because petitioner never commenced operations. They
were not part of the inventory. None of themwere stocks
in trade. Based on the definition of capital assets under
Section 39 of the National Internal Revenue Code of
1997, they are capital assets.
As regards machineries and equipments, these
should not be subjected to the capital gains tax since these
are not real properties. Only the presumed gain from the
sale of petitioner’s land and/or building may be subjected
to the 6% capital gains tax. The income from the sale of
petitioner’s machineries and equipment is subject to the
provisions on normal corporate income tax.
To determine, therefore, if petitioner is entitled to refund,
the amount of capital gains tax for the sold land and/or
building of petitioner and the amount of corporate income
tax for the sale of petitioner’s machineries and equipment
should be deducted from the total final tax paid.
Petitioner indicated, however, in its March 1,
2001 income tax return for the 11-month period ending on
November 30, 2000 that it suffered a net loss of
P2,233,464,538.00.69 This declaration was made under
the pain of perjury. The BIR did not make a deficiency
assessment for this declaration. Neither did the BIR
dispute this statement in its pleadings filed before this
court. There is, therefore, no reason todoubt the truth that
petitioner indeed suffered a net loss in 2000. Since
petitioner had not started its operations, it was also not
subject to the minimum corporate income tax of 2% on
gross income. Therefore, petitioner is not liable for any
income tax.
4. WON the government can still collect for the
deficiency taxes (kay 5% preferential tax rate
raman tu ya gibayran when it should have
been 6% capital gains tax rate)- NOT
ANYMORE
Section 203 of the National Internal Revenue Code of
1997 provides that as a general rule, the BIR has three (3)
years from the last day prescribed by law for the filing of
a return to make an assessment. If the return is filed
beyond the last day prescribed by law for filing, the three-
year period shall run from the actual date of filing.
 This court said that the prescriptive period to make an
assessment of internal revenue taxes is provided
"primarily to safeguard the interests of taxpayers from
unreasonable investigation."71 This court explained in
Commissioner of Internal Revenue v. FMF Development
Corporation72 the reason behind the provisions on
prescriptive periods for tax assessments: Accordingly, the
government must assess internal revenue taxes on time so
as not to extend indefinitely the period of assessment and
deprive the taxpayer of the assurance that it will no longer
be subjected to further investigation for taxes after the
expiration of reasonable period of time.
Thus, the law on prescription, being a remedial measure,
should be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law on
prescription should perforce be strictly construed.
The BIR had three years from the filing of petitioner’s
final tax return in 2000 to assess petitioner’s taxes.
Nothing stopped the BIR from making the correct
assessment. The elevation of the refund claim with the
Court of Tax Appeals was not a bar against the BIR’s
exercise of its assessment powers.
The BIR, however, did not initiate any assessment for
deficiency capital gains tax.78 Since more than a decade
have lapsed from the filing of petitioner's return, the BIR
can no longer assess petitioner for deficiency capital gains
taxes, if petitioner is later found to have capital gains tax
liabilities in excess of the amount claimed for refund.
The Court of Tax Appeals should not be expected to
perform the BIR's duties of assessing and collecting taxes
whenever the BIR, through neglect or oversight, fails to
do so within the prescriptive period allowed by law.
DISPOSITION:
 BIR is ordered to refund petitioner SMI-Ed
Philippines Technology, Inc. the amount of 5%
final tax paid to the BIR, less the 6% capital gains
tax on the sale of petitioner SMI-Ed Philippines
Technology, Inc. 's land and building.
 In view of the lapse of the prescriptive period for
assessment, any capital gains tax accrued from
the sale of its land and building that is in excess
of the 5% final tax paid to the Bureau of Internal
Revenue may no longer be recovered from
petitioner SMI-Ed Philippines Technology, Inc.
SUPREME TRANSLINER V. BPI FAMILY
SAVINGS BANK, GR NO. 165617, 2011-02-25
Facts:
Supreme Transliner, Inc. represented by its Managing
Director, Moises C. Alvarez, and Paulita S. Alvarez,
obtained a loan in the amount of P9,853,000.00 from BPI
Family Savings Bank with a 714-square meter lot covered
by Transfer Certificate of Title No.
T-79193 in the name of Moises C. Alvarez and Paulita S.
Alvarez, as collateral.
Non-payment of the loan, the mortgage was
extrajudicially foreclosed and the property was sold to the
bank as the highest bidder
Before the expiration of the one-year redemption period,
the mortgagors notified the bank of their intention to
redeem the property.
the mortgagors filed a complaint against the bank to
recover the allegedly unlawful and excessive charges
totaling P5,331,237.77, with prayer for damages and
attorney's fees... the bank asserted that the redemption
price reflecting the stipulated interest, charges and/or
expenses, is valid, legal and in accordance with
documents duly signed by the mortgagors. The bank
further... contended that the claims are deemed waived
and the mortgagors are already estopped from questioning
the terms and conditions of their contract.
According to the trial court, plaintiffs-mortgagors are
estopped from questioning the correctness of the
redemption price as they had freely and voluntarily signed
the letter-agreement prepared by the defendant bank
Issues:
whether the foreclosing mortgagee should pay capital
gains tax upon execution of the certificate of sale, and if
paid by the mortgagee, whether the same should be
shouldered by the redemptioner.
Ruling:
NO. It is clear that in foreclosure sale there is no actual
transfer of the mortgaged real property until after the
expiration of the one-year period and title is consolidated
in the name of the mortgagee in case of non-redemption.
This is because before the period expires there is yet no
transfer of title and no profit or gain is realized by the
mortgagor.
Coming now to the issue of capital gains tax, we find
merit in petitioners-mortgagors' argument that there is no
legal basis for the inclusion of this charge in the
redemption price.
Every sale or exchange or... other disposition of real
property classified as capital asset under Section
34(a)[17] of the Tax Code shall be subject to the final
capital gains tax.
The term sale includes pacto de retro and other forms of
conditional sale.
These conditional sales "necessarily include mortgage
foreclosure sales (judicial and extrajudicial foreclosure
sales)."... in foreclosure sale, there is no actual transfer of
the mortgaged real property until after the expiration of
the one-year redemption period as provided in Act No.
3135 and title thereto is consolidated in the name of the
mortgagee in case of... non-redemption.
In the interim, the mortgagor is given the option whether
or not to redeem the real property. The issuance of the
Certificate of Sale does not by itself transfer ownership.
RR No. 4-99
SEC. 3. CAPITAL GAINS TAX. -
(1) In case the mortgagor exercises his right of redemption
within one year from the issuance of the certificate of sale,
no capital gains tax shall be imposed because no capital
gains has been derived by the mortgagor and no sale or
transfer of real property was... realized.
Considering that herein petitioners-mortgagors exercised
their right of redemption before the expiration of the
statutory one-year period, petitioner bank is not liable to
pay the capital gains tax due on the extrajudicial
foreclosure sale.
There was no actual transfer of title from the owners-
mortgagors to the foreclosing bank. Hence, the inclusion
of the said charge in the total redemption price was
unwarranted and the corresponding amount paid by the
petitioners-mortgagors should be returned to them.
HELVERING V. CHESTER N. WEAVER CO., 305
U.S. 293 (1938)
Syllabus
Payments received by a corporation as a stockholder in
another corporation, upon the latter's complete
liquidation, are to be treated as payments upon a sale or
exchange of the stock under § 23 (r)(1) of the Revenue
Act of 1932, which allows the deduction of losses from
sales or exchanges of stock, not held for more than two
years, only to the extent of the gains from such sales or
exchanges. P. 305 U. S. 295.
Section 23(f) provides that losses sustained by
corporations during the taxable year shall be allowed as
deductions in computing net income, subject to the
limitations provided in subsection (r); subsection (r)(1)
declares that losses from "sales or exchanges" of stock
which are not "capital assets" (as defined in § 101, i.e.,
property held by the taxpayer for more than two years)
shall be allowed only to the extent of the gains from such
sales or exchanges. Sections 115 and 112 accord to losses
on liquidation the same recognition accorded by § 23(r)
to losses upon sales. Cf. White v. United States, ante, p.
305 U. S. 281. P. 305 U. S. 295. 97 F.2d 31 reversed.
PHILIPS v. COMMISSIONER OF INTERNAL
REVENUE.
Theodore B. Benson and Charles E. Foster, Jr., both of
Washington, D. C., for petitioner.
Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key
and Edward M. English, Sp. Assts. to Atty. Gen., for
respondent.
This is a petition to review a decision of the Board of Tax
Appeals upholding the Commissioner's ruling that a loss
which the petitioner sustained in the year 1935 was a loss
from the sale or exchange of a capital asset and, therefore,
deductible for income tax purposes to the extent of $2,000
only under Section 117(d) of the Revenue Act of 1934, 26
U.S.C. A.Int.Rev.Acts, page 708, and not, as the
petitioner contended, an ordinary loss deductible to its full
extent under Section 23(e) (2), 26 U.S.C.A.Int.Rev.Code,
§ 23 (e) (2).
Prior to 1935 the petitioner had acquired title to a parcel
of real estate subject to a mortgage made by a prior owner
which the petitioner had reduced by payments on account
to $18,000. The petitioner had failed to pay the taxes
levied on the property for the years 1932, 1933 and 1934,
for which he was personally liable under Pennsylvania
law, and on February 4, 1935 he was notified by counsel
for the mortgagee that unless he arranged to pay these
taxes, proceedings under the default clause of the
mortgage would be taken. On March 15, 1935 the
mortgagee's daughter, under authority from her mother,
proposed to the petitioner to pay the taxes which he owed
in consideration of his conveyance of the property to her.
On the next day the petitioner and his wife did convey the
property to the mortgagee's daughter and her husband in
consideration of the payment by the grantees of the said
taxes and subject to the lien of the said mortgage.
It is the contention of the petitioner that this transaction
was not a sale or exchange and that the loss resulting from
it was, therefore, not a loss from a sale or exchange but an
ordinary loss incurred in a transaction entered into for
profit within the meaning of Section 23(e) of the Revenue
Act. We think that the Board of Tax Appeals properly
held the transaction to be a sale or exchange. In
Commissioner v. Freihofer, 3 Cir., 102 F.2d 787, 125
A.L.R. 761, this court held that the words "sale" and
"exchange" as used in Section 117 connote voluntary
action by the owner and a consideration. In the present
case the petitioner's conveyance was voluntary. Even
though it was made under threat of foreclosure, the
petitioner had a choice and his exercise of this choice was
his voluntary act. Pender v. Commissioner, 4 Cir., 110
F.2d 477. Likewise he received a valuable consideration,
relief from his personal liability to pay three years taxes.
The elements of a sale were thus present.
*722 The petitioner contends in this court that in any
event he should be permitted to deduct the three years
taxes which he owed and which his grantees paid in 1935.
This question was not raised before the Board, however,
and we may not consider it. General Utilities Co. v.
Helvering, 296 U.S. 200, 56 S. Ct. 185, 80 L. Ed. 154;
Covington v. Commissioner of Internal Revenue, 5 Cir.,
103 F.2d 201; Kottemann v. Commissioner of Internal
Revenue, 9 Cir., 81 F.2d 621. The decision is affirmed.
5. The view that the loss in this case may not be treated as
a loss from a sale because, by the state law, the vendor in
a land contract may declare a forfeiture upon default
cannot be sustained, since it does not appear from the
record that the contract in this case contained a forfeiture
clause, nor that there was in fact a forfeiture apart from
the foreclosure sale. P. 311 U. S. 512. 108 F.2d 753
reversed.
Certiorari, 310 U.S. 619, to review the affirmance of a
decision of the Board of Tax Appeals redetermining a
deficiency in income tax.
KIESELBACH V. COMMISSIONER, 317 U.S. 399
(1943)
Syllabus
Title to real property in the City of New York was taken
by the City, together with the possession and the right to
all after-accruing rents, by a proceeding in condemnation
under § 976 of the Greater New York Charter. Several
months later, the final decree awarded the former owners,
as just compensation, the value of the property on the day
of taking, with interest thereon from that date till the date
of payment.

HELVERING V. HAMMEL, 311 U.S. 504 (1941) Held: that the part of the award designated as "interest,"
although it was part of the "just compensation" that must
Syllabus be paid the owner to justify the taking, was not a part of
the sale price of a capital asset under § 117(a) of the
1. A loss sustained by an individual taxpayer upon the
Revenue Act of 1936, and was taxable as income under §
foreclosure sale of an interest in real estate which he had
22 of that Act. P. 317 U. S. 403. 127 F.2d 359 affirmed.
acquired for profit held, in computing taxable income
under the Revenue Act of 1934, deductible only to the Page 317 U. S. 400
limited extent allowed by §§ 23(j) and 117(d) for losses
from "sales" or exchanges of capital assets, and not in full Certiorari, post, p. 612, to review a judgment which
under § 23(e)(2). Pp. 311 U. S. 505, 311 U. S. 510. reversed a decision of the Board of Tax Appeals, 44
B.T.A. 279, overruling a deficiency income tax
2. The language, the purpose, and the legislative history assessment.
of the provisions of the Revenue Act of 1934 relating to
capital gains and losses support the view that no
distinction was intended between losses from forced sales
and losses from voluntary sales of capital assets. P. 311
U. S. 510.
3. Courts are not free to reject the literal or usual meaning
of the words of a statute when adoption of that meaning
will not lead to absurd results nor thwart the obvious
purpose of the statute. P. 311 U. S. 510.
4. In this case, the foreclosure sale, and not the decree of
foreclosure, was the definitive event which established
the loss within the meaning and for the purpose of the
Revenue Act. P. 311 U. S. 512.
CHAPTER 6 – pp. 127-154
ALLOWABLE DEDUCTIONS FROM GROSS
INCOME
MARCELO STEEL CORPORATION VS.
COLLECTOR OF INTERNAL REVENUE
NATURE:
Petition to review under section 18, Republic Act No.
1125, a judgment of the Court of Tax Appeals upholding
the assessment made by the respondent for income tax due
during the years 1952 and 1953 from the petitioner.
FACTS:
Petitioner Marcelo Steel Corporation is a corporation duly
organized and existing under and by virtue of the laws of
the Philippines, with offices at Malabon, Rizal. It is
engaged in three (3) industrial activities, namely, (1)
manufacture of wire fence, (2) manufacture of nails, and
(3) manufacture of steel bars, rods and other allied steel
products. The manufacture of nails and the manufacture
of steel bars, rods and other allied steel products, enjoyed
the benefits of tax exemption under Republic Act No. 35,
which provides:
“SECTION 1. Any person, partnership, company, or
corporation who or which shall engage in a new and
necessary industry shall, for a period of four years from
the date of the organization of such industry, be entitled
to exemption from the payment of all internal revenue
taxes directly payable by such person, partnership,
company, or corporation in respect to said industry.
SEC. 2. The President of the Philippines, shall, upon
recommendation of the Secretary of Finance, periodically
determine the qualifications that the industries should
possess to be entitled to the benefits of this Act.
SEC. 3. This Act shall take effect upon its approval.
(Approved, September 30, 1946.)”
On May 21, 1953, the petitioner filed an income tax return
for the years 1952 and 1953 which did not reflect the
financial results of its tax exempt business activities but
those realized solely from its business of manufacturing
wire fence.
On October 1, 1954, the petitioner filed amended income
tax returns for taxable years 1952 and 1953, showing that
it suffered a net loss of P871,407.37 in 1952, and
P104,956.29 in 1953. The said losses were arrived at by
consolidating the gross income and expenses and/or
deductions of the petitioner in all its business activities,
On October 1, 1954, the petitioner, claiming that instead
of earning the net income shown in its original income tax
returns for 1952 and 1953, it sustained the losses shown
in its amended income tax returns for the same years, filed
its request for refund of the income taxes which it
allegedly erroneously paid to the respondent.
CTA:
The petitioner cannot deduct from the profits realized
from its taxable industries, the losses sustained by its tax
exempt business activities, . . . "
CASE FOR THE PETITIONER:
Since it is a corporation organized with a single capital
that answers for all its financial obligations including
those incurred in the tax-exempt industries, the gross
income derived from both its taxable or non-exempt and
tax- exempt industries, and the allowable deductions from
said incomes, should be consolidated and its income tax
liability should be based on the difference between the
consolidated gross incomes and the consolidated
allowable deductions. It relies on the provisions of section
24, Commonwealth Act No. 466, as amended, and of
section 30, subsection (d), paragraph (2), of the same Act
ISSUE:
WON the petitioner may be allowed to deduct from the
profits realized from its taxable business activities, the
losses sustained by its tax exempt industries
RULING:
No. The purpose or aim of Republic Act No. 35 is to
encourage the establishment or exploitation of new and
necessary industries to promote the economic growth of
the country. It is a form of subsidy granted by the
Government to courageous entrepreneurs staking their
capital in an unknown venture. An entrepreneur engaging
in a new and necessary industry faces uncertainty and
assumes a risk bigger than one engaging in a venture
already known and developed. Like a settler in an
unexplored land who is just blazing a trail in a virgin
forest, he needs all the encouragement and assistance
from the Government. He needs capital to buy his
implements, to pay his laborers and to sustain him and his
family.
Comparable to the farmer who has just planted the seeds
of fruit bearing trees in his orchard, he does not expect an
immediate return on his investment. Usually loss is
incurred rather than profit made. It is for these reasons that
the law grants him tax exemption — to lighten onerous
financial burdens and reduce losses. However these may
be, Republic Act No. 35 has confined the privilege of tax 5. P. C. Teodorolawphil 650.00
exemption only to new and necessary industries. It did not
6. Ordnance Service, P.A. 386.42
intend to grant the tax exemption benefit to an
entrepreneur engaged at the same time in a taxable or non- 7. Ordnance Service, P.C. 796.26
exempt industry and a new and necessary industry, by
allowing him to deduct his gains or profits derived from 8. National land Settlement Administration 3,020.76
the operation of the first from the losses incurred in the 9. National Coconut Corporation 644.74
operation of the second. Unlike a new and necessary
industry, a taxable or non-exempt industry is already a 10. Interior Caltex Service Station 1,505.87
going concern, deriving profits from its operation, and
11. San Juan Auto Supply 4,530.64
deserving no subsidy from the Government. It is but fair
that it be required to give to the Government a share in its 12. P A C S A 45.36
profits in the form of taxes.
13. Philippine Naval Patrol 14.18
The fact that the petitioner is a corporation organized with
a single capital that answers for all its financial 14. Surplus Property Commission 277.68
obligations including those incurred in the tax exempt 15. Alverez Auto Supply
industries is of no moment. The intent of the law is to treat 285.62
taxable or non-exempt industries as separate and distinct
from new and necessary industries which are tax- exempt 16. Lion Shoe Store 1,686.93
for purposes of taxation.
17. Ruiz Highway Transit 2,350.00
DISPOSITIVE:
18. Esquire Auto Seat Cover 3,536.94
The judgment under review is affirmed, with costs against
TOTAL
the petitioner.
P50,455.41*
COLLECTOR V GOODRICH INTERNATIONAL
ISSUE:
RUBBER CO. (G.R. No. L-22265)
Whether or not these bad debts are properly deducted.
FACTS:
HELD:
Goodrich claimed for deductions based upon receipts
issued, not by entities in which the alleged expenses had The claim for deduction for debt numbers 1-10 is
been incurred, but by the officers of Goodrich who REJECTED. Goodrich has not established either that the
allegedly paid for them. debts are actually worthless or that it had reasonable
grounds to believe them to be so.
The Commissioner disallowed deductions in the amount
of P50,455.41 (for the year 1951) for bad debts and NIRC permits the deduction of debts “actually
P30,188.88 (for year 1952) for representation expenses. ascertained to be worthless within the taxable year”
obviously to prevent arbitrary action by the taxpayer, to
Goodrich appealed from the said assessment to the Court
unduly avoid tax liability.
of Tax Appeals (CTA) which allowed the deduction for
bad debts but disallowing the alleged representation The requirement of ascertainment of worthlessness
expenses. CTA amended its decision allowing the require proof of 2 facts:
deduction of representation expenses.
1. That the taxpayer did in fact ascertain the debt to be
The Government appealed to the SC. The alleged bad worthless
debts are the following:
2. That he did so, in good faith.
1. Portillo's Auto Seat Cover 630.31
Good faith on the part of the taxpayer is not enough. He
2. Visayan Rapid Transit must also how that he had reasonably investigated the
17,810.26 relevant facts and had drawn a reasonable inference from
the information obtained by him. In the case, Goodrich
3. Bataan Auto Seat Cover 373.13
has not adequately made such showing.
4. Tres Amigos Auto Supply 1,370.31
The payments made, after being characterized as bad letters; (3) giving the account to a lawyer for
debts, merely stresses the undue haste with which the collection; and (4) filing a collection case in court.
same had been written off. Goodrich has not proven that  The only evidentiary support given by PRC for its
said debts were worthless. There was no evidence that the aforesaid claimed deductions was the explanation or
debtors can not pay them. justification posited by its financial adviser or
accountant. Not a single document was offered to
SC held that the claim for bad debts are allowed but only show that the Remoblas Store and CM Variety Store
up to P22,627.35. (those from Debts 11-18) were burned, even just a police report or an affidavit
attesting to such loss by fire. The account of Tomas
Store in the amount of P16,842.79 is uncollectible,
claims petitioner PRC, since the owner thereof was
REFINING COMPANY V. CA
murdered and left no visible assets which could
satisfy the debt. Withal, just like the accounts of the
Lessons Applicable: deductibility of bad debts, penalties
two other stores just mentioned, petitioner again
of 25% surcharge, interest of 20, civil penalties are
failed to present proof of the efforts exerted to collect
compensatory (not penal), civil penalties and interest are
the debt, other than the aforestated asseverations of
automatic
its financial adviser. The accounts of Aboitiz
Shipping Corporation and J. Ruiz Trucking in the
FACTS:
amounts of P89,483.40 and P69,640.34, respectively,
both of which allegedly arose from the hijacking of
 Petitioner Philippine Refining Company (PRC) was
their cargo and for which they were given 30%
assessed by respondent Commissioner of Internal
rebates by PRC, are claimed to be uncollectible.
Revenue (Commissioner) to pay a deficiency tax for
Again, petitioner failed to present an iota of proof, not
the year 1985 in the amount of P1,892,584
even a copy of the supposed policy regulation of PRC
 PRC protested that the amounts are bad debts and
that it gives rebates to clients in case of loss arising
interest expense which are allowable and legl
from fortuitous events or force majeure, which
deductions. But, CIR ignored it and issued a warrant
rebates it now passes off as uncollectible debts.
of garnishment against PRC's deposits at City Trust
 Findings of the CTA having recognized expertise will
Bank.
not ordinarily be reviewed absent a showing of gross
 PRC filed a Petition for Review with the CTA who
error or abuse on its part.
reversed the interest expense disallowance but
maintained the 13 bad debts disallowance.
2. YES.
 PRC elevated the case to CA who dismissed the case
for failing to satisfy the requirements of
 Sec. 248 and 249 of the tax code clearly provides that
worthlessness of a debt:
civil penalty is imposed in case of failure to pay the
 (1) there is a valid and subsisting debt
tax within the prescribed time for its payment and
 (2) debt must be actually ascertained to be worthless
deficiency tax or any surcharge or interest on the due
and uncollectible during the taxable year
date appearing in the notice and demand of the
 (3) debt must be charged off during the taxable year
commissioner. Thus, penalties of 25% surcharge and
 (4) debt must arise from the business or trade of the
interest of 20% shall accrue from April 11, 1989.
taxpayer
 Tax laws imposing penalties for delinquencies, so we
 (5) uncollectible even in the future
have long held, are intended to hasten tax payments
 (6) exerted diligent effort to collect
by punishing evasions or neglect of duty in respect
thereof. If penalties could be condoned for flimsy
ISSUES:
reasons, the law imposing penalties for delinquencies
1. W/N bad debts requirements are met to be deductible
would be rendered nugatory, and the maintenance of
as assessed by the CA
the Government and its multifarious activities will be
2. W/N PRC should be liable for penalties and interests
adversely affected.
HELD: petition at bar is DENIED
BASILAN ESTATES, INC. v. CIR
G.R. No. L-22492 September 5, 1967
1. NO.
Doctrine:
 Furthermore, there are steps outlined to be
The income tax law does not authorize the depreciation of
undertaken by the taxpayer to prove that he exerted
an asset beyond its acquisition cost. Hence, a deduction
diligent efforts to collect the debts, viz: (1) sending of
over and above such cost cannot be claimed and allowed.
statement of accounts; (2) sending of collection
The reason is that deductions from gross income are acquisition cost, but also some profit. Recovery in due
privileges, not matters of right. They are not created by time thru depreciation of investment made is the
implication but upon clear expression in the law. philosophy behind depreciation allowance; the idea of
profit on the investment made has never been the
FACTS: underlying reason for the allowance of a deduction for
depreciation.
Basilan Estates, Inc. claimed deductions for the
depreciation of its assets 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.

CIR disallowed the deductions claimed by petitioner,

consequently assessing the latter of deficiency income
taxes.

ISSUE:
Whether or not the depreciation shall be determined on
the acquisition cost rather than the reappraised value of
the assets

HELD:

Yes. The following tax law provision allows a deduction

from gross income for depreciation but limits the recovery
to the capital invested in the asset being depreciated:

(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. . . .

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, not matters of right. They are not created by
implication but upon clear expression in the law
[Gutierrez v. Collector of Internal Revenue, L-19537,
May 20, 1965].

Depreciation is the gradual diminution in the useful value

of tangible property resulting from wear and tear and
normal obsolescense. It 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.

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