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Cases for Income Taxation

1 Vicente Madrigal and Susan Paterno v James Rafferty, 38 Phil 4144 Conwi v Court of Appeals, 213 SCRA 836 Consolidated Mines Inc v CTA, 157 Phil 60816 CIR v Tours Specilists, Inc, 183 SCRA 40221 CIR v Javier, GR no 78953, July 31, 199125 Roxas v CTA, 23 SCRA 27629 Fisher v Trinidad, 43 Phil 97330 Limpan Investment Corpv CIR, GR L-21570, July 26, 1966

August 7, 1918VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants, vs. JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy Collector of Internal Revenue, defendants-appellees.MALCOLM, J.:

This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference to the Civil Code, a law of Spanish origin.

STATEMENT OF THE CASE.

Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage was contracted under the provisions of law concerning conjugal partnerships (sociedad de gananciales). On February 25, 1915, Vicente Madrigal filed sworn declaration on the prescribed form with the Collector of Internal Revenue, showing, as his total net income for the year 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent his income for the year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife Susana Paterno, and that in computing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into two equal parts, one-half to be considered the income of Vicente Madrigal and the other half of Susana Paterno. The general question had in the meantime been submitted to the Attorney-General of the Philippine Islands who in an opinion dated March 17, 1915, held with the petitioner Madrigal. The revenue officers being still unsatisfied, the correspondence together with this opinion was forwarded to Washington for a decision by the United States Treasury Department. The United States Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus decided against the claim of Madrigal.

After payment under protest, and after the protest of Madrigal had been decided adversely by the Collector of Internal Revenue, action was begun by Vicente Madrigal and his wife Susana Paterno in the Court of First Instance of the city of Manila against Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally collected by the defendants from the plaintiff, Vicente Madrigal, under the provisions of the Act of Congress known as the Income Tax Law. The burden of the complaint was that if the income tax for the year 1914 had been correctly and lawfully computed there would have been due payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts of a total of P5,842.18 instead of P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result that plaintiff Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sum lawfully due and payable.

The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and the stipulation, sets forth the basis of defendants' stand in the following way: The income of Vicente Madrigal and his wife Susana Paterno of the year 1914 was made up of three items: (1) P362,407.67, the profits made by Vicente Madrigal in his coal and shipping business; (2) P4,086.50, the profits made by Susana Paterno in her embroidery business; (3) P16,687.80, the profits made by Vicente Madrigal in a pawnshop company. The sum of these three items is P383,181.97, the gross income of Vicente Madrigal and Susana Paterno for the year 1914. General deductions were claimed and allowed in the sum of P86,879.24. The resulting net income was P296,302.73. For the purpose of assessing the normal tax of one per cent on the net income there were allowed as specific deductions the following: (1) P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the specific exemption granted to Vicente Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 was the sum upon which the normal tax of one per cent was assessed. The normal tax thus arrived at was P2,716.15.

The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the Income Tax Law. The trial court in an exhausted decision found in favor of defendants, without costs.

ISSUES.

The contentions of plaintiffs and appellants having to do solely with the additional income tax, is that is should be divided into two equal parts, because of the conjugal partnership existing between them. The learned argument of counsel is mostly based upon the provisions of the Civil Code establishing the sociedad de gananciales. The counter contentions of appellees are that the taxes imposed by the Income Tax Law are as the name implies taxes upon income tax and not upon capital and property; that the fact that Madrigal was a married man, and his marriage contracted under the provisions governing the conjugal partnership, has no bearing on income considered as income, and that the distinction must be drawn between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting from the relation of marriage.

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DECISION.

From the point of view of test of faculty in taxation, no less than five answers have been given the course of history. The final stage has been the selection of income as the norm of taxation. (See Seligman, "The Income Tax," Introduction.) The Income Tax Law of the United States, extended to the Philippine Islands, is the result of an effect on the part of the legislators to put into statutory form this canon of taxation and of social reform. The aim has been to mitigate the evils arising from inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to pay. To carry out this idea, public considerations have demanded an exemption roughly equivalent to the minimum of subsistence. With these exceptions, the income tax is supposed to reach the earnings of the entire non-governmental property of the country. Such is the background of the Income Tax Law.

Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of wealth. (See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." (London County Council vs. Attorney-General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax, second edition [1915], Chapter IV; Black on Income Taxes, second edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and Towne vs.Eisner, decided by the United States Supreme Court, January 7, 1918.)

A regulation of the United States Treasury Department relative to returns by the husband and wife not living apart, contains the following:

The husband, as the head and legal representative of the household and general custodian of its income, should make and render the return of the aggregate income of himself and wife, and for the purpose of levying the income tax it is assumed that he can ascertain the total amount of said income. If a wife has a separate estate managed by herself as her own separate property, and receives an income of more than $3,000, she may make return of her own income, and if the husband has other net income, making the aggregate of both incomes more than $4,000, the wife's return should be attached to the return of her husband, or his income should be included in her return, in order that a deduction of $4,000 may be made from the aggregate of both incomes. The tax in such case, however, will be imposed only upon so much of the aggregate income of both shall exceed $4,000. If either husband or wife separately has an income equal to or in excess of $3,000, a return of annual net income is required under the law, and such return must include the income of both, and in such case the return must be made even though the combined income of both be less than $4,000. If the aggregate net income of both exceeds $4,000, an annual return of their combined incomes must be made in the manner stated, although neither one separately has an income of $3,000 per annum. They are jointly and separately liable for such return and for the payment of the tax. The single or married status of the person claiming the specific exemption shall be determined as one of the time of claiming such exemption which return is made, otherwise the status at the close of the year."

With these general observations relative to the Income Tax Law in force in the Philippine Islands, we turn for a moment to consider the provisions of the Civil Code dealing with the conjugal partnership. Recently in two elaborate decisions in which a long line of Spanish authorities were cited, this court in speaking of the conjugal partnership, decided that "prior to the liquidation the interest of the wife and in case of her death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither a legal nor an equitable estate, and does not ripen into title until there appears that there are assets in the community as a result of the liquidation and settlement." (Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)

Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Susana Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, Susana Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from her husband's property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax. Moreover, the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and wife are only entitled to the exemption of P8,000 specifically granted by the law. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax Law must be given effect.

The point we are discussing has heretofore been considered by the Attorney-General of the Philippine Islands and the United States Treasury Department. The decision of the latter overruling the opinion of the Attorney-General is as follows:

TREASURY DEPARTMENT, Washington.

Income Tax.

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FRANK MCINTYRE,Chief, Bureau of Insular Affairs, War Department,Washington, D. C.

SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of correspondence "from the Philippine authorities relative to the method of submission of income tax returns by marred person."

You advise that "The Governor-General, in forwarding the papers to the Bureau, advises that the Insular Auditor has been authorized to suspend action on the warrants in question until an authoritative decision on the points raised can be secured from the Treasury Department."

From the correspondence it appears that Gregorio Araneta, married and living with his wife, had an income of an amount sufficient to require the imposition of the net income was properly computed and then both income and deductions and the specific exemption were divided in half and two returns made, one return for each half in the names respectively of the husband and wife, so that under the returns as filed there would be an escape from the additional tax; that Araneta claims the returns are correct on the ground under the Philippine law his wife is entitled to half of his earnings; that Araneta has dominion over the income and under the Philippine law, the right to determine its use and disposition; that in this case the wife has no "separate estate" within the contemplation of the Act of October 3, 1913, levying an income tax.

It appears further from the correspondence that upon the foregoing explanation, tax was assessed against the entire net income against Gregorio Araneta; that the tax was paid and an application for refund made, and that the application for refund was rejected, whereupon the matter was submitted to the Attorney-General of the Islands who holds that the returns were correctly rendered, and that the refund should be allowed; and thereupon the question at issue is submitted through the Governor-General of the Islands and Bureau of Insular Affairs for the advisory opinion of this office.

By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be administered as in the United States but by the appropriate internal-revenue officers of the Philippine Government. You are therefore advised that upon the facts as stated, this office holds that for the Federal Income Tax (Act of October 3, 1913), the entire net income in this case was taxable to Gregorio Araneta, both for the normal and additional tax, and that the application for refund was properly rejected.

The separate estate of a married woman within the contemplation of the Income Tax Law is that which belongs to her solely and separate and apart from her husband, and over which her husband has no right in equity. It may consist of lands or chattels.

The statute and the regulations promulgated in accordance therewith provide that each person of lawful age (not excused from so doing) having a net income of $3,000 or over for the taxable year shall make a return showing the facts; that from the net income so shown there shall be deducted $3,000 where the person making the return is a single person, or married and not living with consort, and $1,000 additional where the person making the return is married and living with consort; but that where the husband and wife both make returns (they living together), the amount of deduction from the aggregate of their several incomes shall not exceed $4,000.

The only occasion for a wife making a return is where she has income from a sole and separate estate in excess of $3,000, but together they have an income in excess of $4,000, in which the latter event either the husband or wife may make the return but not both. In all instances the income of husband and wife whether from separate estates or not, is taken as a whole for the purpose of the normal tax. Where the wife has income from a separate estate makes return made by her husband, while the incomes are added together for the purpose of the normal tax they are taken separately for the purpose of the additional tax. In this case, however, the wife has no separate income within the contemplation of the Income Tax Law.

Respectfully,

DAVID A. GATES.Acting Commissioner.

In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax Law was drafted by the Congress of the United States and has been by the Congress extended to the Philippine Islands. Being thus a law of American origin and being peculiarly intricate in its provisions, the authoritative decision of the official who is charged with enforcing it has peculiar force for the Philippines. It has come to be a well-settled rule that great weight should be given to the construction placed upon a revenue law, whose meaning is doubtful, by the department charged with its execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903], 2 Phil., 630; Government of the Philippine Islands vs. Municipality of Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.) We conclude that the judgment should be as it is hereby affirmed with costs against appellants. So ordered.

G.R. No. 48532 August 31, 1992HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP, LEANDRO G. SANTILLAN, and JAIME A. SOQUES, petitioners, 

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vs. THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 48533 August 31, 1992ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DY-LIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP and JAIME A. SOQUES, petitioners, vs. THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents. 

NOCON, J.:

Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax Appeals, promulgated September 26, 1977 1 denying petitioners' claim for tax refunds, and order the Commissioner of Internal Revenue to refund to them their income taxes which they claim to have been erroneously or illegally paid or collected.

As summarized by the Solicitor General, the facts of the cases are as follows:

Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing Corporation, with offices at Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is a subsidiary of Procter & Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners were assigned, for certain periods, to other subsidiaries of Procter & Gamble, outside of the Philippines, during which petitioners were paid U.S. dollars as compensation for services in their foreign assignments. (Paragraphs III, Petitions for Review, C.T.A. Cases Nos. 2511 and 2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A. Case No. 2511 filed their income tax returns for the year 1970, they computed the tax due by applying the dollar-to-peso conversion on the basis of the floating rate ordained under B.I.R. Ruling No. 70-027 dated May 14, 1970, as follows:

From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00;

From February 21 to December 31, 1970 at the conversion rate of P6.25 to U.S. $1.00

Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate in converting their dollar income for 1971 to Philippine peso. However, on February 8, 1973 and October 8, 1973, petitioners in said cases filed with the office of the respondent Commissioner, amended income tax returns for the above-mentioned years, this time using the par value of the peso as prescribed in Section 48 of Republic Act No. 265 in relation to Section 6 of Commonwealth Act No. 265 in relation to Section 6 of Commonwealth Act No. 699 as the basis for converting their respective dollar income into Philippine pesos for purposes of computing and paying the corresponding income tax due from them. The aforesaid computation as shown in the amended income tax returns resulted in the alleged overpayments, refund and/or tax credit. Accordingly, claims for refund of said over-payments were filed with respondent Commissioner. Without awaiting the resolution of the Commissioner of the Internal Revenue on their claims, petitioners filed their petitioner for review in the above-mentioned cases.

Respondent Commissioner filed his Answer to petitioners' petition for review in C.T.A. Case No. 2511 on July 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed on August 7, 1974.

Upon joint motion of the parties on the ground that these two cases involve common question of law and facts, that respondent Court of Tax Appeals heard the cases jointly. In its decision dated September 26, 1977, the respondent Court of Tax Appeals held that the proper conversion rate for the purpose of reporting and paying the Philippine income tax on the dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71. Accordingly, the claim for refund and/or tax credit of petitioners in the above-entitled cases was denied and the petitions for review dismissed, with costs against petitioners. Hence, this petition for review oncertiorari. 2

Petitioners claim that public respondent Court of Tax Appeals erred in holding:

1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.

2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes in the prevailing free market rate of exchange and not the par value of the peso; and

3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes into Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the rate used.

Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as follows:

At the outset, it is submitted that the subject matter of these two cases are Philippine income tax for the calendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case No. 2594) and, therefore, should be governed by the provisions of the National Internal Revenue Code and its implementing

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rules and regulations, and not by the provisions of Central Bank Circular No. 42 dated May 21, 1953, as contended by petitioners.

Section 21 of the National Internal Revenue Code, before its amendment by Presidential Decrees Nos. 69 and 323 which took effect on January 1, 1973 and January 1, 1974, respectively, imposed a tax upon the taxable net income received during each taxable year from all sources by a citizen of the Philippines, whether residing here or abroad.

Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their employment. Thus, in their tax returns for the period involved herein, they gave their legal residence/address as c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes "A" to "A-8" and Annexes "C" to "C-8", Petition for Review, CTA Nos. 2511 and 2594).

Petitioners being subject to Philippine income tax, their dollar earnings should be converted into Philippine pesos in computing the income tax due therefrom, in accordance with the provisions of Revenue Memorandum Circular No. 7-71 dated February 11, 1971 for 1970 income and Revenue Memorandum Circular No. 41-71 dated December 21, 1971 for 1971 income, which reiterated BIR Ruling No. 70-027 dated May 4, 1970, to wit:

For internal revenue tax purposes, the free marker rate of conversion (Revenue Circulars Nos. 7-71 and 41-71) should be applied in order to determine the true and correct value in Philippine pesos of the income of petitioners. 3

After a careful examination of the records, the laws involved and the jurisprudence on the matter, We are inclined to agree with respondents Court of Tax Appeals and Commissioner of Internal Revenue and thus vote to deny the petition.

This basically an income tax case. For the proper resolution of these cases income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. 4 Income can also be though of as flow of the fruits of one's labor. 5

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign exchange transactions. For a foreign exchange transaction is simply that — a transaction in foreign exchange, foreign exchange being "the conversion of an amount of money or currency of one country into an equivalent amount of money or currency of another." 6 When petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and were ALSO spending in said currency. There was no conversion, therefore, from one currency to another.

Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of petitioner fell under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7

The issue now is, what exchange rate should be used to determine the peso equivalent of the foreign earnings of petitioners for income tax purposes. Petitioners claim that since the dollar earnings do not fall within the classification of foreign exchange transactions, there occurred no actual inward remittances, and, therefore, they are not included in the coverage of Central Bank Circular No. 289 which provides for the specific instances when the par value of the peso shall not be the conversion rate used. They conclude that their earnings should be converted for income tax purposes using the par value of the Philippine peso.

Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products, receipts of sale of foreign exchange or foreign borrowings and investments but not income tax. He also claims that he had to use the prevailing free market rate of exchange in these cases because of the need to ascertain the true and correct amount of income in Philippine peso of dollar earners for Philippine income tax purposes.

A careful reading of said CB Circular No. 289 8 shows that the subject matters involved therein are export products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing and investments — nothing by way of income tax payments. Thus, petitioners are in error by concluding that since C.B. Circular No. 289 does not apply to them, the par value of the peso should be the guiding rate used for income tax purposes.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It was a definite amount of money which came to them within a specified period of time of two yeas as payment for their services.

Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:

Sec. 21. Rates of tax on citizens or residents. — A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every individual, whether a citizen of the Philippines residing therein or abroad or an alien residing in the Philippines, determined in accordance with the following schedule:

xxx xxx xxx

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And in the implementation for the proper enforcement of the National Internal Revenue Code, Section 338 thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively enforce its provisions. 9

Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the authority given to the Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And these are presumed to be a valid interpretation of said code until revoked by the Secretary of Finance himself. 12

Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that they are citizens of the Philippines, and their income, within or without, and in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.

Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of exchange prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for respondent Commissioner to refund any taxes to petitioner as said Revenue Memorandum Circulars, being of long standing and not contrary to law, are valid. 13

Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the government" and one of the duties of a Filipino citizen is to pay his income tax.

WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent Court of Tax Appeals of petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is AFFIRMED. Costs against petitioners. SO ORDERED.

G.R. Nos. L-18843 and L-18844 August 29, 1974CONSOLIDATED MINES, INC., petitioner, vs. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. Nos. L-18853 & L-18854 August 29, 1974COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CONSOLIDATED MINES, INC., respondent. MAKALINTAL, C.J.:p

These are appeals from the amended decision of the Court of Tax Appeals dated August 7, 1961, in CTA Cases No. 565 and 578, both entitled "Consolidated Mines, Inc. vs. Commissioner of Internal Revenue," ordering the Consolidated Mines, Inc., hereinafter referred to as the Company, to pay the Commissioner of Internal Revenue the amounts of P79,812.93, P51,528.24 and P71,392.82 as deficiency income taxes for the years 1953, 1954 and 1956, respectively, or the total sum of P202,733.99, plus 5% surcharge and 1% monthly interest from the date of finality of the decision.

The Company, a domestic corporation engaged in mining, had filed its income tax returns for 1951, 1952, 1953 and 1956. In 1957 examiners of the Bureau of Internal Revenue investigated the income tax returns filed by the Company because on August 10, 1954, its auditor, Felipe Ollada claimed the refund of the sum of P107,472.00 representing alleged overpayments of income taxes for the year 1951. After the investigation the examiners reported that (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Company's mines, although for income tax purposes the Company had reported income and expenses on the accrual basis; (2) depletion and depreciation expenses had been overcharged; and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated; and that (B) for the year 1956 (1) the Company had overstated its claim for depletion; and (2) certain claims for miscellaneous expenses were not duly supported by evidence.

In view of said reports the Commissioner of Internal Revenue sent the Company a letter of demand requiring it to pay certain deficiency income taxes for the years 1951 to 1954, inclusive, and for the year 1956. Deficiency income tax assessment notices for said years were also sent to the Company. The Company requested a reconsideration of the assessment, but the Commissioner refused to reconsider, hence the Company appealed to the Court of Tax Appeals. The assessments for 1951 to 1954 were contested in CTA Case No. 565, while that for 1956 was contested in CTA Case No. 578. Upon agreement of the parties the two cases were heard and decided jointly.

On May 6, 1961 the Tax Court rendered judgment ordering the Company to pay the amounts of P107,846.56, P134,033.01 and P71,392.82 as deficiency income taxes for the years 1953, 1954 and 1956, respectively. The Tax Court nullified the assessments for the years 1951 and 1952 on the ground that they were issued beyond the five-year period prescribed by Section 331 of the National Internal Revenue Code.

However, on August 7, 1961, upon motion of the Company, the Tax Court reconsidered its decision and further reduced the deficiency income tax liabilities of the Company to P79,812.93, P51,528.24 and P71,382.82 for the years 1953, 1954 and 1956, respectively. In this amended decision the Tax Court subscribed to the theory of the Company that Benguet Consolidated Mining Company, hereafter referred to as Benguet, had no right to share in "Accounts Receivable," hence one-half thereof may not be accrued as an expense of the Company for a given year.

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Both the Company and the Commissioner appealed to this Court. The Company questions the rate of mine depletion adopted by the Court of Tax Appeals and the disallowance of depreciation charges and certain miscellaneous expenses (G.R. Nos. L-18843 & L-18844). The Commissioner, on the other hand, questions what he characterizes as the "hybrid" or "mixed" method of accounting utilized by the Company, and approved by the Tax Court, in treating the share of Benguet in the net profits from the operation of the mines in connection with its income tax returns (G.R. Nos. L-18853 & L-18854).

With respect to methods of accounting, the Tax Code states:

Sec. 38. General Rules. The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer but if no such method of accounting has been so employed or if the method employed does not clearly reflect the income the computation shall be made in accordance with such methods as in the opinion of the Commissioner of Internal Revenue does clearly reflect the income ...

Sec. 39. Period in which items of gross income included. — The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the methods of accounting permitted under section 38, any such amounts are to be properly accounted for as of a different period ...

Sec. 40. Period for which deductions and credits taken. — The deductions provided for in this Title shall be taken for the taxable year in which "paid or accrued" or "paid or incurred" dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions should be taken as of a different period ...

It is said that accounting methods for tax purposes 1 comprise a set of rules for determining when and how to report income and deductions. The U.S. Internal Revenue Code 2 allows each taxpayer to adopt the accounting method most suitable to his business, and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayer's books, provided that the method clearly reflects income. 3

The Company used the accrual method of accounting in computing its income. One of its expenses is the amount-paid to Benguet as mine operator, which amount is computed as 50% of "net income." The Company deducts as an expense 50% of cash receipts minus disbursements, but does not deduct at the end of each calendar year what the Commissioner alleges is "50% of the share of Benguet" in the "accounts receivable." However, it deducts Benguet's 50% if and when the "accounts receivable" are actually paid. It would seem, therefore, that the Company has been deducting a portion of this expense (Benguet's share as mine operator) on the "cash & carry" basis. The question is whether or not the accounting system used by the Company justifies such a treatment of this item; and if not, whether said method used by the Company, and characterized by the Commissioner as a "hybrid method," may be allowed under the aforequoted provisions of our tax code. 4

For a proper understanding of the situation the following facts are stated: The Company has certain mining claims located in Masinloc, Zambales. Because it wanted to relieve itself of the work and expense necessary for developing the claims, the Company, on July 9, 1934, entered into an agreement (Exhibit L) with Benguet, a domestic anonymous partnership engaged in the production and marketing of chromite, whereby the latter undertook to "explore, develop, mine, concentrate and market" the pay ore in said mining claims.

The pertinent provisions of their agreement, as amended by the supplemental agreements of September 14, 1939 (Exhibit L-1) and October 2, 1941 (Exhibit L-2), are as follows:

IV. Benguet further agrees to provide such funds from its own resources as are in its judgment necessary for the exploration and development of said claims and properties, for the purchase and construction of said concentrator plant and for the installation of the proper transportation facilities as provided in paragraphs I, II and III hereof until such time as the said properties are on a profit producing basis and agrees thereafter to expand additional funds from its own resources, if the income from the said claims is insufficient therefor, in the exploration and development of said properties or in the enlargement or extension of said concentration and transportation facilities if in its judgment good mining practice requires such additional expenditures. Such expenditures from its own resources prior to the time the said properties are put on a profit producing basis shall be reimbursed as provided in paragraph VIII hereof. Expenditures from its own resources thereafter shall be charged against the subsequent gross income of the properties as provided in paragraph X hereof.

VII. As soon as practicable after the close of each month Benguet shall furnish Consolidated with a statement showing its expenditures made and ore settlements received under this agreement for the preceding month which statement shall betaken as accepted by Consolidated unless exception is taken thereto or to any item thereof within ten days in writing in which case the dispute shall be settled by agreement or by arbitration as provided in paragraph XXII hereof.

VIII. While Benguet is being reimbursed for all its expenditures, advances and disbursements hereunder as evidenced by said statements of accounts, the net profits resulting from the operation of the aforesaid claims or properties shall be divided ninety per cent (90%) to Benguet

8

and ten per cent (10%) to Consolidated. Such division of net profits shall be based on the receipts, and expenditures during each calendar year, and shall continue until such time as the ninety per cent (90%) of the net profits pertaining to Benguet hereunder shall equal the amount of such expenditures, advances and disbursements. The net profits shall be computed as provided in Paragraph X hereof.

X. After Benguet has been fully reimbursed for its expenditures, advances and disbursements as aforesaid the net profits from the operation shall be divided between Benguet and Consolidated share and share alike, it being understood however, that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreement.

XIII. It is understood that Benguet shall receive no compensation for services rendered as manager or technical consultants in connection with the carrying out of this agreement. It may, however, charge against the operation actual additional expenses incurred in its Manila Office in connection with the carrying out of the terms of this agreement including traveling expenses of consulting staff to the mines. Such expenses, however, shall not exceed the sum of One Thousand Pesos (P1,000.00) per month. Otherwise, the sole compensation of Benguet shall be its proportion of the net profits of the operation as herein above set forth.

XIV. All payments due Consolidated by Benguet under the terms of this agreement with respect to expenditures made and ore settlements received during the preceding calendar month, shall be payable on or before the twentieth day of each month.

There is no question with respect to the 90%-10% sharing of profits while Benguet was being reimbursed the expenses disbursed during the period it was trying to put the mines on a profit-producing basis. 5 It appears that by 1953 Benguet had completely recouped said advances, because they were then dividing the profits share and share alike. .

As heretofore stated the question is: Under the arrangement between the Company and Benguet, when did Benguet's 50% share in the "Accounts Receivable accrue? 6

The following table (summary, Exhibit A, of examiner's report of January 28, 1967, Exh. 8) prepared for the Commissioner graphically illustrates the effect of the inclusion of one-half of "Accounts Receivable" as expense in the computation of the net income of the Company:

SUMMARY: 1951 1952 1953 1954

Original share of Benguet

1,313,640.26 3,521,751,94 2,340,624.59 2,622,968.58

Additional share of Rec'bles

383,829.87 677,504.76 577,394.66 282,724.76

Total share of Benguet

1,697,470.13 4,199,256.70 2,918,009.25 2,905,693.34

Less: Receipts due from prior year operation

269,619.00 383,829.87 677,504.76 577,384.66

Share of Benguet as adjusted (Acc'rd)

1,427,851.13 3,815,426.83 2,240,504.49 2,328,308.68

Less: Participation of Benguet already deducted

1,313,640.26 3,521,751.94 2,340,624.59 2,622,968.58

Additional Expense (Income)

114,210.87 293,674.89 (100,120.10) (294,659.90)

In the aforesaid table "Additional share on Rec'bles" is one-half of "Total Rec'bles minus "Total Payables." It indicates, from the Commissioner's viewpoint, that there were years when the Company had been overstating its income (1951 and 1952) and there were years when it had been understating its income (1953 and 1954). 7 The Commissioner is not interested in the taxes for 1951 and 1952 (which had prescribed anyway) when the Company had overstated its income, but in those for 1953 and 1954, in each of which years the amount of the "Accounts Receivable" was less than that of the previous year, and the Company, therefore, appears to have deducted, as expense, compensation to Benguet bigger (than what the Commissioner claims is due) by one-half of the

9

difference between the year's "Accounts Receivable" and the previous year's "Accounts Receivable," thus apparently understating its income to that extent.

According to the agreement between the Company and Benguet the net profits "shall be computed by deducting from gross income all operating expenses and all expenses of any nature whatsoever." Periodically, Benguet was to furnish the Company with the statement of accounts for a given month "as soon as practicable after the close" of that month. The Company had ten days from receipt of the statement to register its objections thereto. Thereafter, the statement was considered binding on the Company. And all payments due the Company "with respect to the expenditures made and ore settlements received during the calendar month shall be payable on or before the twentieth of each month."

The agreement does not say that Benguet was to share in "Accounts Receivable." But may this be implied from the terms of the agreement? The statement of accounts (par. VIII) and the payment part (XIV) that Benguet 8must make are both with respect to "expenditures made and ore settlements received." "Expenditures" are payments of money. 9 This is the meaning intended by the parties, considering the provision that Benguet agreed to "provide such funds from its own resources, etc."; and that "such expenditures from its own resources" were to be reimbursed first as provided in par. VIII, and later as provided in par. X. "Settlement" does not necessarily mean payment or satisfaction, though it may mean that; it frequently means adjustment or arrangement. 10 The term "settlement" may be used in the sense of "payment," or it may be used in the sense of "adjustment" or "ascertainment," or it may be used in the sense of "adjustment" or "ascertainment of a balance between contending parties," depending upon the circumstances under which, and the connection in which, use of the term is made. 11 In the term "ore settlements received," the word "settlement" was not used in the concept of "adjustment," "arrangement" or "ascertainment of a balance between contending parties," since all these are "made," not "received." "Payment," then, is the more appropriate equivalent of, and interchangeable with, the term "Settlement." Hence, "ore settlements received" means "ore payments received," which excludes "Accounts Receivable." Thus, both par. VIII and par. XIV refer to "payment," either received or paid by Benguet.

According to par. X, the 50-50 sharing should be on "net profits;" and "net profits" shall be computed "by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of the agreement." The term "gross profit" was not defined. In the accrual method of accounting "gross income" would include both "cash receipts" and "Accounts Receivable." But the term "gross income" does not carry a definite and inflexible meaning under all circumstances, and should be defined in such a way as to ascertain the sense in which the parties have used it in contracting. 12 According to par. VIII 13 the "division of net profits shall be based on the receipts and expenditures." The term "expenditures" we have already analyzed. As used, receipts" means "money received." 14 The same par. VIII uses the term "expenditures, advances and disbursements." "Disbursements" means "payment," 15 while the word "advances" when used in a contract ordinarily means money furnished with an expectation that it shall be returned. 16 It is thus clear from par. VIII that in the computation of "net profits" (to be divided on the 90%-10% sharing arrangement) only "cash payments" received and "cash disbursements" made by Benguet were to be considered. On the presumption that the parties were consistent in the use of the term, the same meaning must be given to "net profits" as used in par. X, and "gross income," accordingly, must be equated with "cash receipts." The language used by the parties show their intention to compute Benguet's 50% share on the excess of actual receipts over disbursements, without considering "Accounts Receivable" and "Accounts Payable" as factors in the computation. Benguet then did not have a right to share in "Accounts Receivable," and, correspondingly, the Company did not have the liability to pay Benguet any part of that item. And a deduction cannot be accrued until an actual liability is incurred, even if payment has not been made. 17

Here we have to distinguish between (1) the method of accounting used by the Company in determining its net income for tax purposes; and (2) the method of computation agreed upon between the Company and Benguet in determining the amount of compensation that was to be paid by the former to the latter. The parties, being free to do so, had contracted that in the method of computing compensation the basis were "cash receipts" and "cash payments." Once determined in accordance with the stipulated bases and procedure, then the amount due Benguet for each month accrued at the end of that month, whether the Company had made payment or not (see par. XIV of the agreement). To make the Company deduct as an expense one-half of the "Accounts Receivable" would, in effect, be equivalent to giving Benguet a right which it did not have under the contract, and to substitute for the parties' choice a mode of computation of compensation not contemplated by them. 18

Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct in not accruing said one-half as a deduction. The Company was not using a hybrid method of accounting, but was consistent in its use of the accrual method of accounting. The first issue raised by the Company is with respect to the rate of mine depletion used by the Court of Tax Appeals. The Tax Code provides that in computing net income there shall be allowed as deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made [Sec. 30(g) (1) (B)]. 19

The formula 20 for computing the rate of depletion is:

Cost of Mine Property ---------------------- = Rate of Depletion Per Unit Estimated ore Deposit of Product Mined and sold

The Commissioner and the Company do not agree as to the figures corresponding to either factor that affects the rate of depletion per unit. The figures according to the Commissioner are:

10

P2,646,878.44 (mine cost) P0.59189 (rate of ------------------------- = depletion per ton)4,471,892 tons (estimated ore deposit)

while the Company insists they are:P4,238,974.57 (mine cost) P1.0197 (rate of ------------------------- - = depletion per ton)4,156,888 tons (estimatedore deposit)

They agree, however, that the "cost of the mine property" consists of (1) mine cost; and (2) expenses of development before production. As to mine cost, the parties are practically in agreement — the Commissioner says it is P2,515,000 (the Company puts it at P2,500,000). As to expenses of development before production the Commissioner and the Company widely differ. The Company claims it is P1,738,974.56, while the Commissioner says it is only P131,878.44. The Company argues that the Commissioner's figure is "a patently insignificant and inadequate figure when one considers the tens of millions of pesos of revenue and production that petitioner's chromite mine fields have finally produced."

As an income tax concept, depletion is wholly a creation of the statute 21 — "solely a matter of legislative grace." 22Hence, the taxpayer has the burden of justifying the allowance of any deduction claimed. 23 As in connection with all other tax controversies, the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer, and this is true with respect to the value of the property constituting the basis of the deduction. 24 This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of evidence. 25

As proof that the amount spent for developing the mines was P1,738,974.56, the Company relies on the testimony of Eligio S. Garcia and on Exhibits 1, 31 and 38.

Exhibit I is the Company's report to its stockholders for the year 1947. It contains the Company's balance sheet as of December 31, 1946 (Exhibit I-1). Among the assets listed is "Mines, Improvement & Dev." in the amount of P4,238,974.57, which, according to the Company, consisted of P2,500,000, purchase price of the mine, and P1,738,974.56, cost of developing it. The Company also points to the statement therein that "Benguet invested approximately P2,500,000 to put the property in operation, the greater part of such investment being devoted to the construction of a 25-kilometer road and the installation of port facilities." This amount of P2,500,000 was only an estimate. The Company has not explained in detail in what this amount or the lesser amount of P1,738,974.56 consisted. Nor has it explained how that bigger amount became P1,738,974.56 in the balance sheet for December 31, 1946.

According to the Company the total sum of P4,238,974.57 as "Mines, Improvement & Dev." was taken from its pre-war balance sheet of December 31, 1940. As proof of this it cites the sworn certification (Exhibit 38) executed on October 25, 1946 by R.P. Flood, in his capacity as treasurer of the Company, and attached to other papers of the Company filed with the Securities and Exchange Commission in compliance with the provisions of Republic Act No. 62 (An Act to require the presentation of proof of ownership of securities and the reconstruction of corporate and partnership records, and for other purposes). In said certification there are statements to the effect that "the Statement of Assets & Liabilities of Consolidated Mines, Incorporated, submitted to the Securities & Exchange Commission as a requirement for the reconstitution of the records of the said corporation, is as of September 4, 1946;" and that "the figure P4,238,974.57 representing the value of Mines, Improvements and Developments appearing therein, was taken from the Balance Sheet as of December 31, 1940, which is the only available source of information of the Corporation regarding the above and consequently the undersigned considers the stated figure to be only an estimate of the value of those items at the present time. "This figure, the Company claims, is based on entries made in the ordinary and regular course of its business dating as far back as before the war. The Company places reliance on Sec. 39, Rule 130, Revised Rules of Court (formerly Sec. 34, Rule 123), which provides that entries made at, or near the time of the transactions to which they refer, by a person deceased, outside of the Philippines or unable to testify, who was in a position to know the facts therein stated, may be received as prima facie evidence, if such person made the entries in his professional capacity or in the performance of duty and in the ordinary or regular course of business or duty."

Note that Exhibit 38 is not the "entries," covered by the rule. The Company, however, urges, unreasonably, we think, that it should be afforded the same probative value since it is based on such "entries" meaning the balance sheet of December 31, 1940, which was not presented in evidence. Even with the presentation of said balance sheet the Company would still have had to prove (1) that the person who made the entry did so in his professional capacity or in the performance of a duty; (2) that the entry was made in the ordinary course of business or duty; (3) that the entry was made at or near the time of the transaction to which it related; (4) that the one who made it was in a position to know the facts stated in the entry; and (5) that he is dead, outside the Philippines or unable to testify 26

A balance sheet may not be considered as "entries made in the ordinary course of business," which, according to Moran:

means that the entries have been made regularly, as is usual, in the management of the trade or business. It is essential, therefore, that there be regularity in the entries. The entry which is being introduced in evidence should appear to be part of a group of regular entries. ... The regularity of the entries maybe proved by the form in which they appear in the corresponding book. 27

11

A balance sheet, as that word is uniformly used by bookkeepers and businessmen, is a paper which shows "a summation or general balance of all accounts," but not the particular items going to make up the several accounts; and it is therefore essentially different from a paper embracing "a full and complete statement of all the disbursements and receipts, showing from what sources such receipts were derived, and for what and to whom such disbursements or payments were made, and for what object or purpose the same were made;" but such matters may find an appropriate place in an itemized account. 28 Neither can it be said that a balance sheet complies with the third requisite, since the entries therein were not made at or near the time of the transactions to which they related.

In order to render admissible books of account it must appear that they are books of original entry, that the entries were made in the ordinary course of business, contemporaneously with the facts recorded, and by one who had knowledge of the facts. San Francisco Teaming Co v Gray (1909) 11 CA 314, 104 P 999. See Brown v Ball (1932) 123 CA 758, 12 P2d 28, to the effect that the books must be kept in the regular course of business. 29

A "ledger" is a book of accounts in which are collected and arranged, each under its appropriate head, the various transactions scattered throughout the journal or daybook, land is not a "book of original entries," within the rule making such books competent evidence. First Nat. Building Co. v. Vanderberg, 119 P 224, 227; 29 Okl. 583. 30

Code Iowa, No. 3658, providing that "books of account" are receivable in evidence, etc., means a book containing charges, and showing a continuous dealing with persons generally. A book, to be admissible, must be kept as an account book, and the charges made in the usual course of business. Security Co. v. Graybeal, 52 NW 497, 85 Iowa 543, 39 Am St Rep 311. 31

Books of account may therefore be admissible under the rule. In tax cases, however, this Court appears not to place too high a probative value on them, considering the statement in the case of Collector of Internal Revenue v. Reyes 32 that "books of account do not prove per se that they are veracious; in fact they may be more consistent than truthful." Indeed, books of account may be used to carry out a plan of tax evasion. 33

At most, therefore, the presentation of the balance sheet of December 31, 1940 would only prove that the figure P4,238,974.57 appears therein as corresponding to mine cost. But the Company would still need to present proof to justify its adoption of that figure. It had burden of establishing the components of the amount of P1,738,974.57: what were the particular expenses made and the corresponding amount of each, so that it may be determined whether the expenses were actually made and whether the items are properly part of cost of mine development, or are actually depreciable items.

In this connection we take up Exhibit 31 of the Commissioner. This is the memorandum of BIR Examiner Cesar P. Aguirre to the Chief of the Investigating Division of the Bureau of Internal Revenue. According to this report "the counsel of the taxpayer alleges that the cost of Masinloc Mine properties and improvement is P4,238,974.56 instead of P2,646,879.44 as taken up in this report," and that the expenses as of 1941 were as follows:

Assets subject to:

1941

1. Depletion P2,646,878.44

2. 10 years depreciation 1,188,987.76

3. 3 years depreciation 78,283.75

4. 20 years depreciation 9,143.63

5. 10% amortization 171,985.00

Less: Cost Chromite Field P4,085,277.58

Expenses by operator 2,515,000.00 P1,570,277.58

The examiner concluded that "in the light of the figures listed above, the counsel for the taxpayer fairly stated the amount disbursed by the operator until the mine property was put to production in 1939." The Company capitalizes on this conclusion, completely disregarding the examiner's other statements, as follows:

The counsel, however, is not aware of the fact that the expenses made by the operator are those which are depreciable and\or amortizable instead of depletable expenditures. The first post-war Balance Sheet (12/31/46) of the taxpayer shows that its Mines, Improvement & Dev. is P4,328,974.57. Considering the expenditures incurred by Benguet Consolidated as of 1941 (P1,570,277.58); the rehabilitation expenses in 1946 (P211,223.72); and the cost of the Masinloc Chromite Field, the total cost would only be P4,296,501.30. Of the total expenditure of P1,570,277.58 as of 1941, P1,438,389.124 were spent on depreciable and/or amortizable expenses and P131,878.44 were made for the direct improvement of the mine property.

12

In as much as the expenditure of the operator as of 1941 and the cost of the mine property were taken up in the account Mines, Improvement & Rehabilitation in 1946, all its assets that were rightfully subject to depletion was P2,646,878.44.

Because of the above qualification a large part of the amount spent by the operator 34 may not be allowed for purpose of depletion deduction, 35 depletion being different from depreciation. 36

The Company's balance sheet for December 31, 1947 lists the "mine cost" of P2,500,000 as "development cost" and the amount of P1,738,974.37 as "suspense account (mining properties subject to war losses)." The Company claims that its accountant, Mr. Calpo, made these errors, because he was then new at the job. Granting that was what had happened, it does not affect the fact that the, evidence on hand is insufficient to prove the cost of development alleged by the Company.

Nor can we rely on the statements of Eligio S. Garcia, who was the Company's treasurer and assistant secretary at the time he testified on August 14, 1959. He admitted that he did not know how the figure P4,238,974.57 was arrived at, explaining: "I only know that it is the figure appearing on the balance sheet as of December 31, 1946 as certified by the Company's auditors; and this we made as the basis of the valuation of the depletable value of the mines." (p. 94, t.s.n.)

We, therefore, have to rely on the Commissioner's assertion that the "development cost" was P131,878.44, broken down as follows: assessment, P34,092.12; development, P61,484.63; exploration, P13,966.62; and diamond drilling, P22,335.07.

The question as to which figure should properly correspond to "mine cost" is one of fact. 37 The findings of fact of the Tax Court, where reasonably supported by evidence, are conclusive upon the Supreme Court. 38

As regards the estimated ore deposit of the Company's mines, the Company's figure is "4,156,888 tons," while that of the Commissioner is the larger figure "4,471,892 tons." The difference of 315,004 tons was due to the fact that the Commissioner took into account all the ore that could probably be removed and marketed by the Company, utilizing the total tonnage shipped before and after the war (933,180 tons) and the total reserve of shipping material pegged at 3,583,712 tons. On the other hand the Company's estimate was arrived at by taking into consideration only the quantity shipped from solid ore namely, 733,180 tons (deducting from the total tonnage shipped before and after the war an estimated float of 200,000 tons), and then adding the total recoverable ore which was assessed at 3,423,708 tons.

The above-stated figures were obtained from the report 39 of geologist Paul A. Schaeffer, who had been earlier commissioned by the Company to conduct a study of the metallurgical possibilities of the Company's mines. In order to have a fair understanding of how the contending parties arrived at their respective figures, We quote a pertinent portion of the geologist's report:

Milling Data

Ore mined before the war ............... 336,850 tons

Ore mined after the war ............... 1,779,350 tons

Total ........................................... 2,116,200 tons

x Ore shipped before the war ......... 337,611 tons

xx Ore shipped after the war ............ 595,569 tons

Total ................................................ 933,180 tons

Less an estimated float of .................. 200,000 tons

Total shipped from solid ore .............. 733,180 tons

Proportion shipped 733,180 -------- = ----------- mined 2,116,200

or approximately 35% of mine ore is shipped.

Dumps

Material on dumps now total 383,346 tons. Using the above tonnage for ore shipped from mining (excluding float) there should have been a total of 1,383,020 tons of waste produced of which almost 1,000,00 tons has been removed from the mining area of the hill. I believe that half still remains as alluviuma long the three principal intermittent creeks which head in the mining area, and the remaining half million has washed into the river. Of course this is pure speculation.

13

x — much was float material, probably about one half, leaving about 170.000 tons mined from the hill.

xx — some float included.

xxx xxx xxx

Ore Reserve

The A and B ore is considered sufficiently developed by drilling and tunnels to constitute the ore reserve. C ore must be checked by drilling.

Tons

A . . . . . . . . . . . . . 7,729,800 B . . . . . . . . . . . . . 1,780,500 Total . . . . . . . . . . 9,510,300 C . . . . . . . . . . . . . 2,212,00 Grand Total . . . . 11,722,300

Therefore, the total ore reserve may be considered to be 9,510,300 tons. Based on past experience 35% is shipping ore.

With the present mill there is considerably more recovery. The ore is mined selectively (between dikes). The results are about as follows:

Of 1,500 tons mined, 500 tons are sorted and shipped direct, the remaining 1,000 tons going to the mill from which 250 tons ore recovered for shipment. Thus 50% of the selectively mined ore is recovered.

Thus for the reserve tonnage:

Total reserve . . . . . . . . . . . . . . . 9,510,300 Less 20% dike material . . . . . . . 1,902,060 7,608,240 Less 10% low grade ore . . . . . . 760,8246,847,416 x .50 =

Total recoverable ore . . . . . . . . . . 3,423,708 tons

It is probable that 30% of the dump material could be recovered by milling. So adding to the above 115,004 ore recoverable from the dumps, we get a total reserve of shipping material of 3,538,712 tons. With the sink float section added to the mill this should be increased by perhaps 20%.

On the basis of the above report the Company faults the Tax Court is sustaining the Commissioner's estimate of the ore deposit. While the figures corresponding to the total gross tonnage shipped before and after the war have not been assailed as erroneous, the Company maintains that the estimated float 40 of 200,000 tons as reported in the geologist's study should have been deducted therefrom, such that the combined total of the ore shipped should have been placed at a net of 733,180 tons instead of 933,180 tons. The other figure the Company assails as having been improperly included by the Commissioner in his statement of ore reserve refers to the "Recoverable ore from dump material — 115,004 tons." The Company's argument in this regard runs thus:

... This apparently was included by respondent by virtue of the geologist's report that "it is probable that 30% of the dump material should be recovered by milling." Actually, however, such recovery from dump or waste material is problematical and is merely a contingency, and hence, the item of 115,004 tons should not be included in the statement of the ore reserves. Taking out these two items improperly and erroneously included in respondent Commissioner of Internal Revenue's examiner's report, to wit, float or waste material of 200,060 tons and supposedly recoverable ore from dump materials of 115,004 tons, totaling 315,004 tons, from the total figure of 4,471,892 tons given by him, the figure of 4,156.888 tons results as the proper statement of the total estimated ore as correctly used by petitioner in its statement of ore reserves for purposes of depletion. 41

We agree with the Company's observation on this point. The geological report appears clear enough: the estimated float of 200,000 tons consisting of pieces of ore that had broken loose and become detached by erosion from their original position could hardly be viewed as still forming part of the total estimated ore deposit. Having already been broken up into numerous small pieces and practically rendered useless for mining purposes, the same could not appreciably increase the ore potentials of the Company's mines. As to the 115,004 tons which geologist Paul A. Schaeffer believed could still be recovered by milling from the material on dumps, there are no sufficient data on which to affirm or deny the accuracy of the said figure. It may, however, be taken as correct, considering that it came from the Company's own commissioned geologist and that by the Company's own

14

admission 42 by 1957 it had mined and sold much more than its original estimated ore deposit of 4,156,888 tons. We think that 4,271,892 tons 43 would be a fair estimate of the ore deposit in the Company's mines.

The correct figures therefore are:P2,515,000.00 (mine cost proper) + P131,878.44 (development cost)   4,271,892 (estimated ore deposit)

or

P2,646,878.44 (mine cost) = P0.6196 (rate of depletion 4,271,892 (estimated ore per ton)deposit)

In its second assigned error, the Company questions the disallowance by the Tax Court of the depreciation charges claimed by the Company as deductions from its gross income 44 The items thus disallowed consist mainly of depreciation expenses for the years 1953 and 1954 allegedly sustained as a result of the deterioration of some of the Company's incomplete constructions.

The initial memorandum 45 of the BIR examiner assigned to verify the income tax liabilities of the Company pursuant to the latter's claim of having overpaid its income taxes states the basic reason why the Company's claimed depreciation should be disallowed or re-adjusted, thus: since "..., up to its completion (the incomplete asset) has not been and is not capable of use in the operation, the depreciation claimed could not, in fairness to the Government and the taxpayer, be considered as proper deduction for income tax purposes as the said asset is still under construction." Vis-a-Vis the Commissioner's consistent position in this regard the company simply repeatedly requested for time 46 — in view of the alleged voluminous working sheets that had to be re-evaluated and recomputed to justify its claimed depreciation items within which to submit a separate memorandum in itemized form detailing the Company's objections to the items of depreciation adjustments or disallowances for the years involved. Strangely enough, despite the period granted, the record is bare that the Company ever submitted its itemized objection as proposed. Inasmuch as the taxpayer has the burden of justifying the deductions claimed for depreciation, the Company's failure to discharge the burden prevents this Court, from disturbing the Commissioner's computation. For taxation purposes the phrase "out of its not being used," with reference to depreciation allowable on assets which are idle or the use of which is temporarily suspended, should be understood to refer only to property that has once been used in the trade or business, not to property that has never been actually devoted to the taxpayer's business, particularly incomplete assets that have yet to be used. .

The Company's third assigned error assails the Court of Tax Appeals in not allowing the deduction from its gross income of certain miscellaneous business expenditures in the course of its operation for the years 1954 and 1956. For 1954 the deduction claimed amounted to P38,081.20, of which the Court allowed P25,600.00 and disallowed P13,481.20, 47 "for lack of any supporting paper or evidence." For the year 1956 the claim amounted to P20,050.00 of which the Court allowed P2,460.00, representing the one-month salary Christmas bonus given to some of the employees, and upheld the disallowance of P17,590.00 on the ground that the Company "failed to prove substantially that said expenses were actually incurred and are legally deductible expenses."

Regarding the disallowed amount of P13,481.20 the year 1954, the Company submits that it consisted of expenses supported by "vouchers and cancelled checks evidencing payments of these amounts," and were necessary and ordinary expenses of business for that year. On the disallowance by the Tax Court of the sum of P17,590.00 out of a total deduction for miscellaneous expenses for 1956 among to P20,050.00, the Company advances the same argument, namely, that the amount consisted of normal and regular expenses for that year as evidenced by vouchers and cancelled checks.

These vouchers and cancelled checks of the Company, however, only show that the amounts claimed had indeed been spent, and confirm the fact of disbursement, but do not necessarily prove that the expenses for which they we're disbursed are deductible items. In the case of Collector of Internal Revenue vs. Goodrich International Rubber Co. 48 this Court rejected the taxpayer's similar claim for deduction of alleged representation expenses, based upon receipts issued not by the entities to which the alleged expenses but by the officers of taxpayer corporation who allegedly paid them. It was there stated:

If the expenses had really been incurred, receipts or chits would have been issued by the entities to which the payments have been made, and it would have been easy for Goodrich or its officers to produce such receipts. These receipts issued by said officers merely attest to their claim that they had incurred and paid said expenses. They do not establish payment of said alleged expenses to the entities in which the same are said to have been incurred.

In the case before Us, except for the Company's own vouchers and cancelled checks, together with the Company treasurer's lone and uncorroborated testimony regarding the purpose of said disbursements, there is no other supporting evidence to show that the expenses were legally deductible items. We therefore affirm the Tax Court's disallowance of the same.

In resume, this Court finds:

(1) that the Company was not using a "hybrid" method of accounting in the preparation of its income tax returns, but was consistent in its use of the accrual method of accounting;

15

(2) that the rate of depletion per ton of the ore deposit mined and sold by the Company is P0.6196 per ton 49 not P0.59189 as contended by the Commissioner nor P1.0197 as claimed by the Company;

(3) that the disallowance by the Tax Court of the depreciation charges claimed by the Company is correct in view of the latter's failure to itemize and/or substantiate with definite proof that the Commissioner's own method of determining depreciation is unreasonable or inaccurate;

(4) that for lack of supporting evidence to show that the Company's claimed expenses were legally deductible items, the Tax Court's disallowance of the same is affirmed.

As recomputed then, the deficiency income taxes due from the Company are as follows:

1953

Net income as per audited return _________________ P5,193,716.89Unallowable deductions & additional income

Depletion overcharged _________________________ P178,477.04 Depreciation adjustment ________________________ 93,862.96

Total adjustments _____________________________ 272,340.00 Net income as per investigation ___________________ 5,466,056.89 Income tax due thereon 50 _______________________ 1,522,495.92 Less amount already assessed ____________________ 1,446,241.00 DEFICIENCY TAX DUE ______________________ 76,254.92

1954

Net income as per audited return _________________ P3,320,307.68 Unallowable deductions & additionalincome Depletion overcharged _________________________ P147,895.72 Depreciation adjustment ________________________ 11,878.12 Miscellaneous expenses ________________________ 13,481.20

Total adjustments _____________________________ 173,255.04 Net income as per investigation ___________________ 3,493,562.72 Income tax due thereon _________________________ 970,197.56 Less amount already assessed ____________________ 921,686.00 DEFICIENCY TAX DUE ______________________ 48,511.56

1956

Net income as per audited return _________________ P11,504,483.97 Unallowable deductions & additional income Depletion overcharged _________________________ P221,272.98 Miscellaneous expenses ________________________ 17,590.00 Total adjustments _____________________________ 238,862.98 Net income as per investigation __________________ 11,743,346.95 Income tax due thereon ________________________ 3,280,137.14 Less amount already assessed ___________________ 3,213,256.00 DEFICIENCY TAX DUE ______________________ 66,881.14 TOTAL DEFICIENCY TAXES DUE _____________ 191,647.62

WHEREFORE, the appealed decision is hereby modified by ordering Consolidated Mines, Inc. to pay the Commissioner of Internal Revenue the amounts of P76,254.92, P48,511.56 and P66,881.14 as deficiency income taxes for the years 1953, 1954 and 1956, respectively, or the total sum of P191,647.62 under the terms specified by the Tax Court, without pronouncement as to costs.

G.R. No. L-66416 March 21, 1990COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOURS SPECIALISTS, INC., and THE COURT OF TAX APPEALS, respondents.GUTIERREZ, JR., J.:

This is a petition to review on certiorari the decision of the Court of Tax Appeals which ruled that the money entrusted to private respondent Tours Specialists, Inc., earmarked and paid for hotel room charges of tourists, travelers and/or foreign travel agencies does not form part of its gross receipts subject to the 3% independent contractor's tax under the National Internal Revenue Code of 1977.

We adopt the findings of facts of the Court of Tax Appeals as follows:

For the years 1974 to 1976, petitioner (Tours Specialists, Inc.) had derived income from its activities as a travel agency by servicing the needs of foreign tourists and travelers and Filipino "Balikbayans" during their stay in this country. Some of the services extended to the tourists consist of booking said tourists and travelers in local hotels for their lodging and board needs;

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transporting these foreign tourists from the airport to their respective hotels, and from the latter to the airport upon their departure from the Philippines, transporting them from their hotels to various embarkation points for local tours, visits and excursions; securing permits for them to visit places of interest; and arranging their cultural entertainment, shopping and recreational activities.

In order to ably supply these services to the foreign tourists, petitioner and its correspondent counterpart tourist agencies abroad have agreed to offer a package fee for the tourists. Although the fee to be paid by said tourists is quoted by the petitioner, the payments of the hotel room accommodations, food and other personal expenses of said tourists, as a rule, are paid directly either by tourists themselves, or by their foreign travel agencies to the local hotels (pp. 77, t.s.n., February 2, 1981; Exhs. O & O-1, p. 29, CTA rec.; pp. 2425, t.s.n., ibid) and restaurants or shops, as the case may be.

It is also the case that some tour agencies abroad request the local tour agencies, such as the petitioner in the case, that the hotel room charges, in some specific cases, be paid through them. (Exh. Q, Q-1, p. 29 CTA rec., p. 25, T.s.n., ibid, pp. 5-6, 17-18, t.s.n., Aug. 20, 1981.; See also Exh. "U", pp. 22-23, t.s.n., Oct. 9, 1981, pp. 3-4, 11., t.s.n., Aug. 10, 1982). By this arrangement, the foreign tour agency entrusts to the petitioner Tours Specialists, Inc., the fund for hotel room accommodation, which in turn is paid by petitioner tour agency to the local hotel when billed. The procedure observed is that the billing hotel sends the bill to the petitioner. The local hotel identifies the individual tourist, or the particular groups of tourists by code name or group designation and also the duration of their stay for purposes of payment. Upon receipt of the bill, the petitioner then pays the local hotel with the funds entrusted to it by the foreign tour correspondent agency.

Despite this arrangement, respondent Commissioner of Internal Revenue assessed petitioner for deficiency 3% contractor's tax as independent contractor by including the entrusted hotel room charges in its gross receipts from services for the years 1974 to 1976. Consequently, on December 6, 1979, petitioner received from respondent the 3% deficiency independent contractor's tax assessment in the amount of P122,946.93 for the years 1974 to 1976, inclusive, computed as follows:

1974 deficiency percentage tax

per investigation P 3,995.63

15% surcharge for late payment 998.91

—————

P 4,994.54

14% interest computed by quarters

up to 12-28-79 3,953.18 P 8,847.72

1975 deficiency percentage tax

per investigation P 8,427.39

25% surcharge for late payment 2,106.85

—————

P 10,534.24

14% interest computed by quarters

up to 12-28-79 6,808.47 P 17,342.71

1976 deficiency percentage

per investigation P 54,276.42

25% surcharge for late payment 13,569.11

—————

P 67,845.53

14% interest computed by quarters

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up to 12-28-79 28,910.97 P 96,756.50

————— —————

Total amount due P 122,946.93=========

In addition to the deficiency contractor's tax of P122,946.93, petitioner was assessed to pay a compromise penalty of P500.00.

Subsequently on December 11, 1979, petitioner formally protested the assessment made by respondent on the ground that the money received and entrusted to it by the tourists, earmarked to pay hotel room charges, were not considered and have never been considered by it as part of its taxable gross receipts for purposes of computing and paying its constractor's tax.

During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant and in charge of the Accounting Department of petitioner, had testified, her credibility not having been destroyed on cross examination, categorically stated that the amounts entrusted to it by the foreign tourist agencies intended for payment of hotel room charges, were paid entirely to the hotel concerned, without any portion thereof being diverted to its own funds. (t.s.n., Feb. 2, 1981, pp. 7, 25; t.s.n., Aug. 20, 1981, pp. 5-9, 17-18). The testimony of Serafina Sazon was corroborated by Gerardo Isada, General Manager of petitioner, declaring to the effect that payments of hotel accommodation are made through petitioner without any increase in the room charged (t.s.n., Oct. 9, 1981, pp. 21-25) and that the reason why tourists pay their room charge, or through their foreign tourists agencies, is the fact that the room charge is exempt from hotel room tax under P.D. 31. (t.s.n., Ibid., pp. 25-29.) Witness Isada stated, on cross-examination, that if their payment is made, thru petitioner's tour agency, the hotel cost or charges "is only an act of accomodation on our (its) part" or that the "agent abroad instead of sending several telexes and saving on bank charges they take the option to send money to us to be held in trust to be endorsed to the hotel." (pp. 3-4, t.s.n.Aug. 10, 1982.)

Nevertheless, on June 2, 1980, respondent, without deciding the petitioner's written protest, caused the issuance of a warrant of distraint and levy. (p. 51, BIR Rec.) And later, respondent had petitioner's bank deposits garnished. (pp. 49-50, BIR Rec.)

Taking this action of respondent as the adverse and final decision on the disputed assessment, petitioner appealed to this Court. (Rollo, pp. 40-45)

The petitioner raises the lone issue in this petition as follows:

WHETHER AMOUNTS RECEIVED BY A LOCAL TOURIST AND TRAVEL AGENCY INCLUDED IN A PACKAGE FEE FROM TOURISTS OR FOREIGN TOUR AGENCIES, INTENDED OR EARMARKED FOR HOTEL ACCOMMODATIONS FORM PART OF GROSS RECEIPTS SUBJECT TO 3% CONTRACTOR'S TAX. (Rollo, p. 23)

The petitioner premises the issue raised on the following assumptions:

Firstly, the ruling overlooks the fact that the amounts received, intended for hotel room accommodations, were received as part of the package fee and, therefore, form part of "gross receipts" as defined by law.

Secondly, there is no showing and is not established by the evidence. that the amounts received and "earmarked" are actually what had been paid out as hotel room charges. The mere possibility that the amounts actually paid could be less than the amounts received is sufficient to destroy the validity of the ruling. (Rollo, pp. 26-27)

In effect, the petitioner's lone issue is based on alleged error in the findings of facts of the respondent court.

The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding on this Court and absent strong reasons for this Court to delve into facts, only questions of law are open for determination. (Nilsen v. Commissioner of Customs, 89 SCRA 43 [1979]; Balbas v. Domingo, 21 SCRA 444 [1967]; Raymundo v. De Joya, 101 SCRA 495 [1980]). In the recent case of Sy Po v. Court of Appeals, (164 SCRA 524 [1988]), we ruled that the factual findings of the Court of Tax Appeals are binding upon this court and can only be disturbed on appeal if not supported by substantial evidence.

In the instant case, we find no reason to disregard and deviate from the findings of facts of the Court of Tax Appeals.

As quoted earlier, the Court of Tax Appeals sufficiently explained the services of a local travel agency, like the herein private respondent, rendered to foreign customers. The respondent differentiated between the package fee — offered by both the local travel agency and its correspondent counterpart tourist agencies abroad and the requests made by some tour agencies abroad to local tour agencies wherein the hotel room charges in some specific cases, would be paid to the local hotels through them. In the latter case, the correspondent court found as

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a fact ". . . that the foreign tour agency entrusts to the petitioner Tours Specialists, Inc. the fund for hotel room accommodation, which in turn is paid by petitioner tour agency to the local hotel when billed." (Rollo, p. 42) The following procedure is followed: The billing hotel sends the bill to the respondent; the local hotel then identifies the individual tourist, or the particular group of tourist by code name or group designation plus the duration of their stay for purposes of payment; upon receipt of the bill the private respondent pays the local hotel with the funds entrusted to it by the foreign tour correspondent agency.

Moreover, evidence presented by the private respondent shows that the amounts entrusted to it by the foreign tourist agencies to pay the room charges of foreign tourists in local hotels were not diverted to its funds; this arrangement was only an act of accommodation on the part of the private respondent. This evidence was not refuted.

In essence, the petitioner's assertion that the hotel room charges entrusted to the private respondent were part of the package fee paid by foreign tourists to the respondent is not correct. The evidence is clear to the effect that the amounts entrusted to the private respondent were exclusively for payment of hotel room charges of foreign tourists entrusted to it by foreign travel agencies.

As regards the petitioner's second assumption, the respondent court stated:

. . . [C]ontrary to the contention of respondent, the records show, firstly, in the Examiners' Worksheet (Exh. T, p. 22, BIR Rec.), that from July to December 1976 alone, the following sums made up the hotel room accommodations:

July 1976 P 102,702.97

Aug. 1976 121,167.19

Sept. 1976 53,209.61

—————

P 282,079.77

=========

Oct. 1976 P 71,134.80

Nov. 1976 409,019.17

Dec. 1976 142,761.55

—————

622,915.51

—————

Grand Total P 904,995.29

=========

It is not true therefore, as stated by respondent, that there is no evidence proving the amounts earmarked for hotel room charges. Since the BIR examiners could not have manufactured the above figures representing "advances for hotel room accommodations," these payments must have certainly been taken from the records of petitioner, such as the invoices, hotel bills, official receipts and other pertinent documents. (Rollo, pp. 48-49)

The factual findings of the respondent court are supported by substantial evidence, hence binding upon this Court.

With these clarifications, the issue to be threshed out is as stated by the respondent court, to wit:

. . . [W]hether or not the hotel room charges held in trust for foreign tourists and travelers and/or correspondent foreign travel agencies and paid to local host hotels form part of the taxable gross receipts for purposes of the 3% contractor's tax. (Rollo, p. 45)

The petitioner opines that the gross receipts which are subject to the 3% contractor's tax pursuant to Section 191 (Section 205 of the National Internal Revenue Code of 1977) of the Tax Code include the entire gross receipts of a taxpayer undiminished by any amount. According to the petitioner, this interpretation is in consonance with B.I.R. Ruling No. 68-027, dated 23 October, 1968 (implementing Section 191 of the Tax Code) which states that the 3% contractor's tax prescribed by Section 191 of the Tax Code is imposed of the gross receipts of the contractor, "no deduction whatever being allowed by said law." The petitioner contends that the only exception to this rule is

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when there is a law or regulation which would exempt such gross receipts from being subjected to the 3% contractor's tax citing the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (108 Phil. 821 [1960]). Thus, the petitioner argues that since there is no law or regulation that money entrusted, earmarked and paid for hotel room charges should not form part of the gross receipts, then the said hotel room charges are included in the private respondent's gross receipts for purposes of the 3% contractor's tax.

In the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (supra), the Commissioner appealed two decisions of the Court of Tax Appeals disapproving his levy of amusement taxes upon the Manila Jockey Club, a duly constituted corporation authorized to hold horse races in Manila. The facts of the case show that the monies sought to be taxed never really belonged to the club. The decision shows that during the period November 1946 to 1950, the Manila Jockey Club paid amusement tax on its commission but without including the 5-1/2% which pursuant to Executive Order 320 and Republic Act 309 went to the Board of Races, the owner of horses and jockeys. Section 260 of the Internal Revenue Code provides that the amusement tax was payable by the operator on its "gross receipts". The Manila Jockey Club, however, did not consider as part of its "gross receipts" subject to amusement tax the amounts which it had to deliver to the Board on Races, the horse owners and the jockeys. This view was fully sustained by three opinions of the Secretary of Justice, to wit:

There is no question that the Manila Jockey, Inc., owns only 7-1/2% of the total bets registered by the Totalizer. This portion represents its share or commission in the total amount of money it handles and goes to the funds thereof as its own property which it may legally disburse for its own purposes. The 5% does not belong to the club. It is merely held in trust for distribution as prizes to the owners of winning horses. It is destined for no other object than the payment of prizes and the club cannot otherwise appropriate this portion without incurring liability to the owners of winning horses. It cannot be considered as an item of expense because the sum used for the payment of prizes is not taken from the funds of the club but from a certain portion of the total bets especially earmarked for that purpose.

In view of all the foregoing, I am of the opinion that in the submission of the returns for the amusement tax of 10% (now it is 20% of the "gross receipts", provided for in Section 260 of the National Internal Revenue Code), the 5% of the total bets that is set aside for prizes to owners of winning horses should not be included by the Manila Jockey Club, Inc.

The Collector of the Internal Revenue, however had a different opinion on the matter and demanded payment of amusement taxes. The Court of Tax Appeals reversed the Collector.

We affirmed the decision of the Court of Tax Appeals and stated:

The Secretary's opinion was correct. The Government could not have meant to tax as gross receipt of the Manila Jockey Club the 1/2% which it directs same Club to turn over to the Board on Races. The latter being a Government institution, there would be double taxation, which should be avoided unless the statute admits of no other interpretation. In the same manner, the Government could not have intended to consider as gross receipt the portion of the funds which it directed the Club to give, or knew the Club would give, to winning horses and jockeys — admittedly 5%. It is true that the law says that out of the total wager funds 12-1/2% shall be set aside as the "commission" of the race track owner, but the law itself takes official notice, and actually approves or directs payment of the portion that goes to owners of horses as prizes and bonuses of jockeys, which portion is admittedly 5% out of that 12-1/2% commission. As it did not at that time contemplate the application of "gross receipts" revenue principle, the law in making a distribution of the total wager funds, took no trouble of separating one item from the other; and for convenience, grouped three items under one common denomination.

Needless to say, gross receipts of the proprietor of the amusement place should not include any money which although delivered to the amusement place has been especially earmarked by law or regulation for some person other than the proprietor. (The situation thus differs from one in which the owner of the amusement place, by a private contract, with its employees or partners, agrees to reserve for them a portion of the proceeds of the establishment. (See Wong & Lee v. Coll. 104 Phil. 469; 55 Off. Gaz. [51] 10539; Sy Chuico v. Coll., 107 Phil., 428; 59 Off. Gaz., [6] 896).

In the second case, the facts of the case are:

The Manila Jockey Club holds once a year a so called "special Novato race", wherein only "novato" horses, (i.e. horses which are running for the first time in an official [of the club] race), may take part. Owners of these horses must pay to the Club an inscription fee of P1.00, and a declaration fee of P1.00 per horse. In addition, each of them must contribute to a common fund (P10.00 per horse). The Club contributes an equal amount P10.00 per horse) to such common fund, the total amount of which is added to the 5% participation of horse owners already described herein-above in the first case.

Since the institution of this yearly special novato race in 1950, the Manila Jockey Club never paid amusement tax on the moneys thus contributed by horse owners (P10.00 each) because it entertained the belief that in accordance with the three opinions of the Secretary of Justice herein-above described, such contributions never formed part of its gross receipts. On the inscription fee of the P1.00 per horse, it paid the tax. It did not on the declaration fee of P1.00 because it was imposed by the Municipal Ordinance of Manila and was turned over to the City officers.

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The Collector of Internal Revenue required the Manila Jockey Club to pay amusement tax on such contributed fund P10.00 per horse in the special novato race, holding they were part of its gross receipts. The Manila Jockey Club protested and resorted to the Court of Tax Appeals, where it obtained favorable judgment on the same grounds sustained by said Court in connection with the 5% of the total wager funds in the herein-mentioned first case; they were not receipts of the Club.

We resolved the issue in the following manner:

We think the reasons for upholding the Tax Court's decision in the first case apply to this one. The ten-peso contribution never belonged to the Club. It was held by it as a trust fund. And then, after all, when it received the ten-peso contribution, it at the same time contributed ten pesos out of its own pocket, and thereafter distributed both amounts as prizes to horse owners. It would seem unreasonable to regard the ten-peso contribution of the horse owners as taxable receipt of the Club, since the latter, at the same moment it received the contribution necessarily lost ten pesos too.

As demonstrated in the above-mentioned case, gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code.

Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent do not form part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent. The private respondent never benefited from their payment to the local hotels. As stated earlier, this arrangement was only to accommodate the foreign travel agencies.

Another objection raised by the petitioner is to the respondent court's application of Presidential Decree 31 which exempts foreign tourists from payment of hotel room tax. Section 1 thereof provides:

Sec. 1. — Foreign tourists and travelers shall be exempt from payment of any and all hotel room tax for the entire period of their stay in the country.

The petitioner now alleges that P.D. 31 has no relevance to the case. He contends that the tax under Section 191 of the Tax Code is in the nature of an excise tax; that it is a tax on the exercise of the privilege to engage in business as a contractor and that it is imposed on, and collectible from the person exercising the privilege. He sums his arguments by stating that "while the burden may be shifted to the person for whom the services are rendered by the contractor, the latter is not relieved from payment of the tax." (Rollo, p. 28)

The same arguments were submitted by the Commissioner of Internal Revenue in the case of Commissioner of Internal Revenue v. John Gotamco & Son., Inc. (148 SCRA 36 [1987]), to justify his imposition of the 3% contractor's tax under Section 191 of the National Internal Revenue Code on the gross receipts John Gotamco & Sons, Inc., realized from the construction of the World Health Organization (WHO) office building in Manila. We rejected the petitioner's arguments and ruled:

We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the respondent court:

"In context, direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them; while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. (Pollock v. Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39 Law. ed. 759). The contractor's tax is of course payable by the contractor but in the last analysis it is the owner of the building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO because, although it is payable by the petitioner, the latter can shift its burden on the WHO. In the last analysis it is the WHO that will pay the tax indirectly through the contractor and it certainly cannot be said that 'this tax has no bearing upon the World Health Organization.'"

Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner of Internal Revenue, et al., (127 Phil. 461) the 3% contractor's tax falls directly on Gotamco and cannot be shifted to the WHO. The Court of Tax Appeals, however, held that the said case is not controlling in this case, since the Host Agreement specifically exempts the WHO from "indirect taxes." We agree. The Philippine Acetylene case involved a tax on sales of goods which under the law had to be paid by the manufacturer or producer; the fact that the manufacturer or producer might have added the amount of the tax to the price of the goods did not make the sales tax "a tax on the purchaser." The Court held that the sales tax must be paid by the manufacturer or producer even if the sale is made to tax-exempt entities like the National Power Corporation, an agency of the Philippine Government, and to the Voice of America, an agency of the United States Government.

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The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates taxes which, although not imposed upon or paid by the Organization directly, form part of the price paid or to be paid by it.

Accordingly, the significance of P.D. 31 is clearly established in determining whether or not hotel room charges of foreign tourists in local hotels are subject to the 3% contractor's tax. As the respondent court aptly stated:

. . . If the hotel room charges entrusted to petitioner will be subjected to 3% contractor's tax as what respondent would want to do in this case, that would in effect do indirectly what P.D. 31 would not like hotel room charges of foreign tourists to be subjected to hotel room tax. Although, respondent may claim that the 3% contractor's tax is imposed upon a different incidence i.e. the gross receipts of petitioner tourist agency which he asserts includes the hotel room charges entrusted to it, the effect would be to impose a tax, and though different, it nonetheless imposes a tax actually on room charges. One way or the other, it would not have the effect of promoting tourism in the Philippines as that would increase the costs or expenses by the addition of a hotel room tax in the overall expenses of said tourists. (Rollo, pp. 51-52)

WHEREFORE, the instant petition is DENIED. The decision of the Court of Tax Appeals is AFFIRMED. No pronouncement as to costs. SO ORDERED.

G.R. No. 78953 July 31, 1991COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.SARMIENTO, J.:p

Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote in his income tax return that a sum of money that he erroneously received and already spent is the subject of a pending litigation and there did not declare it as income is liable to pay the 50% penalty for filing a fraudulent return.

This question is the subject of the petition for review before the Court of the portion of the Decision 1 dated July 27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in his capacity as Commissioner of Internal Revenue," which orders the deletion of the 50% surcharge from Javier's deficiency income tax assessment on his income for 1977.

The respondent CTA in a Resolution 2 dated May 25, 1987, denied the Commissioner's Motion for Reconsideration 3 and Motion for New Trial 4 on the deletion of the 50% surcharge assessment or imposition.

The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA and incorporated in the assailed decision now under review, read as follows:

xxx xxx xxx

2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein), received from the Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is Mellon Bank, N.A.

3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First Instance of Rizal (now Regional Trial Court), (docketed as Civil Case No. 26899), against the petitioner (private respondent herein), his wife and other defendants, claiming that its remittance of US$1,000,000.00 was a clerical error and should have been US$1,000.00 only, and praying that the excess amount of US$999,000.00 be returned on the ground that the defendants are trustees of an implied trust for the benefit of Mellon Bank with the clear, immediate, and continuing duty to return the said amount from the moment it was received.

4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with the then Circuit Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private respondent herein) and his wife with the crime of estafa, alleging that they misappropriated, misapplied, and converted to their own personal use and benefit the amount of US$999,000.00 which they received under an implied trust for the benefit of Mellon Bank and as a result of the mistake in the remittance by the latter.

5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax Return for the taxable year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88 and stating in the footnote of the return that "Taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation."

6. That on or before December 15, 1980, the petitioner (private respondent herein) received a letter from the acting Commissioner of Internal Revenue dated November 14, 1980, together with income assessment notices for the years 1976 and 1977, demanding that petitioner (private respondent herein) pay on or before December 15, 1980 the amount of P1,615.96 and P9,287,297.51 as deficiency assessments for the years 1976 and 1977 respectively. . . .

22

7. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of Internal Revenue that he was paying the deficiency income assessment for the year 1976 but denying that he had any undeclared income for the year 1977 and requested that the assessment for 1977 be made to await final court decision on the case filed against him for filing an allegedly fraudulent return. . . .

8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to his December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous remittance which you were able to dispose, is definitely taxable." . . . 5

The Commissioner also imposed a 50% fraud penalty against Javier.

Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals on December 10, 1981.

The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the concluding portion:

We note that in the deficiency income tax assessment under consideration, respondent (petitioner here) further requested petitioner (private respondent here) to pay 50% surcharge as provided for in Section 72 of the Tax Code, in addition to the deficiency income tax of P4,888,615.00 and interest due thereon. Since petitioner (private respondent) filed his income tax return for taxable year 1977, the 50% surcharge was imposed, in all probability, by respondent (petitioner) because he considered the return filed false or fraudulent. This additional requirement, to our mind, is much less called for because petitioner (private respondent), as stated earlier, reflected in as 1977 return as footnote that "Taxpayer was recipient of some money received from abroad which he presumed to be gift but turned out to be an error and is now subject of litigation."

From this, it can hardly be said that there was actual and intentional fraud, consisting of deception willfully and deliberately done or resorted to by petitioner (private respondent) in order to induce the Government to give up some legal right, or the latter, due to a false return, was placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974, 56 (sic) SCRA 519), because petitioner literally "laid his cards on the table" for respondent to examine. Error or mistake of fact or law is not fraud. (Insular Lumber vs. Collector, L-7100, April 28, 1956.). Besides, Section 29 is not too plain and simple to understand. Since the question involved in this case is of first impression in this jurisdiction, under the circumstances, the 50% surcharge imposed in the deficiency assessment should be deleted. 7

The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the matter to us, by the present petition, raising the main issue as to:

WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY? 8

On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not appeal the decision which held him liable for the basic deficiency income tax (excluding the 50% surcharge for fraud)." However, he submitted in the samememorandum "that the issue may be raised in the case not for the purpose of correcting or setting aside the decision which held him liable for deficiency income tax, but only to show that there is no basis for the imposition of the surcharge." This subsequent disavowal therefore renders moot and academic the posturings articulated in as Comment 10 on the non-taxability of the amount he erroneously received and the bulk of which he had already disbursed. In any event, an appeal at that time (of the filing of the Comments) would have been already too late to be seasonable. The petitioner, through the office of the Solicitor General, stresses that:

xxx xxx xxx

The record however is not ambivalent, as the record clearly shows that private respondent is self-convinced, and so acted, that he is the beneficial owner, and of which reason is liable to tax. Put another way, the studied insinuation that private respondent may not be the beneficial owner of the money or income flowing to him as enhanced by the studied claim that the amount is "subject of litigation" is belied by the record and clearly exposed as a fraudulent ploy, as witness what transpired upon receipt of the amount.

Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK for the amount of private respondent's wife was $999,000.00 after opening a dollar account with Prudential Bank in the amount of $999,993.70, private respondent and his wife, with haste and dispatch, within a span of eleven (11) electric days, specifically from June 3 to June 14, 1977, effected a total massive withdrawal from the said dollar account in the sum of $975,000.00 or P7,020,000.00. . . . 11

In reply, the private respondent argues:

xxx xxx xxx

23

The petitioner contends that the private respondent committed fraud by not declaring the "mistaken remittance" in his income tax return and by merely making a footnote thereon which read: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation." It is respectfully submitted that the said return was not fraudulent. The footnote was practically an invitation to the petitioner to make an investigation, and to make the proper assessment.

The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50 F [2d] 782), that is, it must be stronger than the "mere preponderance of evidence" which would be sufficient to sustain a judgment on the issue of correctness of the deficiency itself apart from the fraud penalty. (Frank A. Neddas, 40 BTA 672). The following circumstances attendant to the case at bar show that in filing the questioned return, the private respondent was guided, not by that "willful and deliberate intent to prevent the Government from making a proper assessment" which constitute fraud, but by an honest doubt as to whether or not the "mistaken remittance" was subject to tax.

First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case" was given very, very wide publicity by media; and only one who is not in his right mind would have entertained the idea that the BIR would not make an assessment if the amount in question was indeed subject to the income tax.

Second, as the respondent Court ruled, "the question involved in this case is of first impression in this jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the United States, the authorities are not unanimous in holding that similar receipts are subject to the income tax. It should be noted that the decision in the Rutkin case is a five-to-four decision; and in the very case before this Honorable Court, one out of three Judges of the respondent Court was of the opinion that the amount in question is not taxable. Thus, even without the footnote, the failure to declare the "mistaken remittance" is not fraudulent.

Third, when the private respondent filed his income tax return on March 15, 1978 he was being sued by the Mellon Bank for the return of the money, and was being prosecuted by the Government for estafa committed allegedly by his failure to return the money and by converting it to his personal benefit. The basic tax amounted to P4,899,377.00 (See p. 6 of the Petition) and could not have been paid without using part of the mistaken remittance. Thus, it was not unreasonable for the private respondent to simply state in his income tax return that the amount received was still under litigation. If he had paid the tax, would that not constitute estafa for using the funds for his own personal benefit? and would the Government refund it to him if the courts ordered him to refund the money to the Mellon Bank? 12

xxx xxx xxx

Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code), a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has been made on the basis of the return filed before the discovery of the falsity or fraud.

We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation that it was an "error or mistake of fact or law" not constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally "laid his cards on the table." 13

In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return was discussed in this manner:

. . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under the inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good faith.

Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. 15

A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not be, Rick v. U.S., App. D.C., 161 F. 2d 897, 898. 16

In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The government

24

was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified by the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by spending most of the money he received, but the records lack a clear showing of fraud committed because he did not conceal the fact that he had received an amount of money although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge imposed as fraud penalty by the petitioner against the private respondent in the deficiency assessment should be deleted.

WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is AFFIRMED. No costs. SO ORDERED.

G.R. No. L-25043             April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as judicial co-guardians of JOSE ROXAS, petitioners, vs. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

BENGZON, J.P., J.:

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 above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania.

AGRICULTURAL LANDS

At the conclusion of the Second World War, the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels which they actually occupied. For its part, the Government, in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings. Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses.

It turned out however 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. the amount of P1,500,000.00 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.

RESIDENTIAL HOUSE

During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate, Manila, which they inherited from their grandparents. After Antonio and Eduardo got married, they resided somewhere else leaving only Jose in the old house. In fairness to his brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.

ASSESSMENTS

On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for late 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

25

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 Commissioner of Internal Revenue 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, as follows:

1953 1955Antonio Roxas P7,010.00 P5,813.00Eduardo Roxas 7,281.00 5,828.00Jose Roxas 6,323.00 5,588.00

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 following deductions were disallowed:

ROXAS Y CIA.:

1953

Tickets for Banquet in honor of           S. Osmeña

P 40.00

Gifts of San Miguel beer 28.00

Contributions to —

Philippine Air Force Chapel 100.00

Manila Police Trust Fund 150.00

Philippines Herald's fund for Manila's neediest families 100.00

1955

Contributions to Contribution to           Our Lady of Fatima Chapel, FEU 50.00

ANTONIO ROXAS:

1953

Contributions to —

Pasay City Firemen Christmas Fund 25.00

Pasay City Police Dept. X'mas fund 50.00

1955

Contributions to —

Baguio City Police Christmas fund 25.00

Pasay City Firemen Christmas fund 25.00

Pasay City Police Christmas fund 50.00

EDUARDO ROXAS:

1953

Contributions to —

Hijas de Jesus' Retiro de Manresa 450.00

Philippines Herald's fund for Manila's neediest families 100.00

26

1955

Contributions to Philippines           Herald's fund for Manila's           neediest families 120.00

JOSE ROXAS:

1955

Contributions to Philippines           Herald's fund for Manila's           neediest families 120.00

The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal and rendered judgment on July 31, 1965 sustaining 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. The Tax Court's judgment reads:

WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the respondent Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00 and P11,857.00, respectively, as deficiency income taxes for the years 1953 and 1955, plus 5% surcharge and 1% monthly interest as provided for in Sec. 51(a) of the Revenue Code; and modified with respect to the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real estate dealer's tax. With costs against petitioners.

Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of Internal Revenue did not appeal.

The issues:

(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100% taxable?

(2) Are the deductions for business expenses and contributions deductible?

(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?

The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real estate dealer because it engaged in the business of selling real estate. The business activity alluded to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-occupants on installment. To bolster his stand on the point, he cites one of the purposes of Roxas y Cia. as contained in its articles of partnership, quoted below:

4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella en el futuro, alquilandoles por los plazos y demas condiciones, estime convenientes y vendiendo aquellas que a juicio de sus gerentes no deben conservarse;

The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal Revenue cannot be favorably accepted by Us in this isolated transaction with its peculiar circumstances in spite 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.

It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's gratitude.

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 must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. It does not conform with Our 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.

In fine, 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%.

27

DISALLOWED DEDUCTIONS

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 such link between the expenses and the business of Roxas y Cia. The findings of the Court of Tax Appeals must therefore be sustained.

The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern University.

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. For this reason, the disallowance must be sustained. 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.

The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the ground that the Philippines Herald is not a corporation or an association contemplated in Section 30 (h) of the Tax Code. It should be noted however that the contributions were not made to the Philippines Herald but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes. 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.

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far Eastern University 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. The disallowance should be sustained.

Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because although it earned a rental income of P8,000.00 per annum in 1952, said rental income came from Jose Roxas, one of the partners. 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. The law, which states: 1äwphï1.ñët

. . . "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: . . . (Emphasis supplied) .

is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point is sustained.1äwphï1.ñët

To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively, computed as follows: *

ANTONIO ROXAS

Net income per return P315,476.59

Add: 1/3 share, profits in Roxas y Cia.

P 153,249.15

Less amount declared 146,135.46

Amount understated P 7,113.69

Contributions disallowed 115.00

P 7,228.69

Less 1/3 share of contributions amounting to P21,126.06 disallowed from partnership but allowed to partners 7,042.02 186.67

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Net income per review P315,663.26

Less: Exemptions 4,200.00

Net taxable income P311,463.26

Tax due 154,169.00

Tax paid 154,060.00

Deficiency P 109.00==========

EDUARDO ROXAS

Net income per return P 304,166.92

Add: 1/3 share, profits in Roxas y Cia

P 153,249.15

Less profits declared 146,052.58

Amount understated P 7,196.57

Less 1/3 share in contributions amounting to P21,126.06 disallowed from partnership but allowed to partners 7,042.02 155.55

Net income per review P304,322.47

Less: Exemptions 4,800.00

Net taxable income P299,592.47

Tax Due P147,250.00

Tax paid 147,159.00

Deficiency P91.00==========

=

JOSE ROXAS

Net income per return P222,681.76

Add: 1/3 share, profits in Roxas y Cia.

P153,429.15

Less amount reported 146,135.46

Amount understated 7,113.69

Less 1/3 share of contributions disallowed from partnership but allowed as deductions to partners 7,042.02 71.67

Net income per review P222,753.43

Less: Exemption 1,800.00

Net income subject to tax P220,953.43

Tax due P102,763.00

Tax paid 102,714.00

Deficiency P 49.00==========

=

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WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay the sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas are ordered to pay the respective sums of P109.00, P91.00 and P49.00 as their individual deficiency income tax all corresponding for the year 1955. No costs. So ordered.

G.R. No. L-21186             February 27, 1924FREDERICK C. FISHER, plaintiff-appellee, vs. WENCESLAO TRINIDAD, Collector of International Revenue, defendant-appellant.

STATEMENT

October 19, 1920, the plaintiff, a resident of the City of Manila, filed a complaint against the defendant as Collector of Internal Revenue, in which he alleged that he was a shareholder in the Philippine-American Drug Company, a domestic corporation; that in the year 1919, he received from the drug company certificates of shares of the par value of P24,800, as his proportionate share of a stock dividend, duly and lawfully declared by the company; that the defendant erroneously and unlawfully, and against the will and protest of the plaintiff, required him to pay an income tax on such stock dividend in the amount of P899.91; that plaintiff paid the tax under protest, and made a written demand upon the defendant for its return, which was refused, and plaintiff prays for judgment for the amount, with interest and costs.

A demurrer was filed to the complaint upon the ground that it "does not state facts sufficient to constitute a cause of action," which was sustained by the trial court, and the plaintiff, refusing to plead further, the complaint was dismissed. From which ruling the plaintiff appealed to this court where the decision of the lower court was reversed by this court,1 and the case was remanded to the lower court for further proceedings not inconsistent with the opinion.

The defendant filed an answer, denying all of the material allegations of the complaint, and as a further and special defense, alleged that the stock dividend in question "represented and was declared and paid out of the earnings and profits earned by and accrued to the said Philippine-American Drug Company since March 1, 1913, and distributed by said corporation among its stockholders;" that the par value of the stock "did not exceed the amount of the earnings and profits actually earned by the corporation;" and that by reason thereof the defendant levied the tax in question, which was paid under protest.

The case was tried and submitted upon an agreed statement of facts, and the court rendered judgment in favor of the plaintiff for the amount of P899.91, without interest and costs, from which decision the defendant appeals, contending:

I. The court below erred in holding that the Philippine Legislature had no power to tax a stock dividend as income in an income tax law.

II. The court below erred in not passing on the constitutional question raised.

III. The court below erred in rendering judgment for the plaintiff.

JOHNS, J.:

December 14, 1923, after the appeal was perfected, the plaintiff wrote the defendant a letter in which he said:

Please be advised that I hereby withdraw the protest heretofore made by me on the 30th day of March, 1920, in connection with income tax in the amount of P899.91 assessed by you on shares of the Philippine-American Drug Company of the par value of P24,800.

This was later confirmed by another letter addressed to this court stating in substance that the plaintiff had withdrawn and did not rely upon his protest because he had since sold the stock in question. Notwithstanding that fact, the Attorney-General insists upon a decision by this court on the merits, and in particular as to the constitutionality of the law and the legal right of the defendant to levy and collect the tax in question.

The plaintiff contends that the record now presents a moot case, and for such there is nothing left for this court to decide. That contention must be sustained. The payment of the money under protest was the basis of plaintiff's action, without which it could not be sustained. His protest is now withdrawn. The legal effect of it is to withdraw his complaint and to place the whole matter in the same position as if no protest had ever been made. It must be conceded that in the absence of a protest the action could not be maintained. In other words, the plaintiff is now in court seeking to recover money which was not paid under protest. It is true that the plaintiff obtained judgment against the defendant in the lower court, but in legal effect the withdrawal of the protest was a waiver of all of plaintiff's rights under that judgment. For such reason, there is nothing left for this court to decide.

Without passing upon the merits of the question involved or the constitutionality of the act or the right of the defendant to levy the tax in question, the judgment of the lower court is reversed, and plaintiff's complaint is dismissed, with judgment for costs in both this and the lower court against the plaintiff and in favor of the defendant. So ordered.

G.R. No. L-21570             July 26, 1966

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LIMPAN INVESTMENT CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.REYES, J.B.L., J.:

Appeal interposed by petitioner Limpan Investment Corporation against a decision of the Court of Tax Appeals, in its CTA Case No. 699, holding and ordering it (petitioner) to pay respondent Commissioner of Internal Revenue the sums of P7,338.00 and P30,502.50, representing deficiency income taxes, plus 50% surcharge and 1% monthly interest from June 30, 1959 to the date of payment, with cost.

The facts of this case are:

Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in the business of leasing real properties. It commenced actual business operations on July 1, 1955. Its principal stockholders are the spouses Isabelo P. Lim and Purificacion Ceñiza de Lim, who own and control ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the board is the same Isabelo P. Lim.1äwphï1.ñët

Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all of which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim.

Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes of P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the sums of P657.00 and P2,220.00.

Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an investigation of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they discovered and ascertained that petitioner had underdeclared its rental incomes by P20,199.00 and P81,690.00 during these taxable years and had claimed excessive depreciation of its buildings in the sums of P4,260.00 and P16,336.00 covering the same period. On the basis of these findings, respondent Commissioner of Internal Revenue issued its letter-assessment and demand for payment of deficiency income tax and surcharge against petitioner corporation, computed as follows:

90-AR-C-348-58/56

Net income per audited return P 3,287.81

Add: Unallowable deductions:

Undeclared Rental Receipt

(Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00

Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . . 4,260.00 P24,459.00

Net income per investigation P27,746.00

Tax due thereon P5,549.00

Less: Amount already assessed 657.00

Balance P4,892.00

Add: 50% Surcharge 2,446.00

DEFICIENCY TAX DUE P7,338.00

90-AR-C-1196-58/57

Net income per audited return P11,098.00

Add: Unallowable deductions:

Undeclared Rental Receipt (Sched. A) . . . . . . . . P81,690.00

Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . 16,338.00 P98,028.00

Net income per investigation P109,126.00

Tax due thereon P22,555.00

Less: Amount already assessed 2,220.00

Balance 20,335.00

Add: 50% Surcharge 10,167.50

DEFICIENCY TAX DUE P30,502.50

Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the above assessment but the latter denied said request and reiterated its original assessment and demand, plus 5% surcharge and the 1% monthly interest from June 30, 1959 to the date of payment; hence, the corporation filed its petition for review before the Tax Appeals court, questioning the correctness and validity of the above assessment

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of respondent Commissioner of Internal Revenue. It disclaimed having received or collected the amount of P20,199.00, as unreported rental income for 1956, or any part thereof, reasoning out that 'the previous owners of the leased building has (have) to collect part of the total rentals in 1956 to apply to their payment of rental in the land in the amount of P21,630.00" (par. 11, petition). It also denied having received or collected the amount of P81,690.00, as unreported rental income for 1957, or any part thereof, explaining that part of said amount totalling P31,380.00 was not declared as income in its 1957 tax return because its president, Isabelo P. Lim, who collected and received P13,500.00 from certain tenants, did not turn the same over to petitioner corporation in said year but did so only in 1959; that a certain tenant (Go Tong) deposited in court his rentals amounting to P10,800.00, over which the corporation had no actual or constructive control; and that a sub-tenant paid P4,200.00 which ought not be declared as rental income.

Petitioner likewise alleged in its petition that the rates of depreciation applied by respondent Commissioner of its buildings in the above assessment are unfair and inaccurate.

Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer, Vicente G. Solis, who admitted that it had omitted to report the sum of P12,100.00 as rental income in its 1956 tax return and also the sum of P29,350.00 as rental income in its 1957 tax return. However, with respect to the difference between this omitted income (P12,100.00) and the sum (P20,199.00) found by respondent Commissioner as undeclared in 1956, petitioner corporation, through the same witness (Solis), tried to establish that it did not collect or receive the same because, in view of the refusal of some tenants to recognize the new owner, Isabelo P. Lim and Vicenta Pantangco Vda. de Lim, the former owners, on one hand, and the same Isabelo P. Lim, as president of petitioner corporation, on the other, had verbally agreed in 1956 to turn over to petitioner corporation six per cent (6%) of the value of all its properties, computed at P21,630.00, in exchange for whatever rentals the Lims may collect from the tenants. And, with respect to the difference between the admittedly undeclared sum of P29,350.00 and that found by respondent Commissioner as unreported rental income, (P81,690.00) in 1957, the same witness Solis also tried to establish that petitioner corporation did not receive or collect the same but that its president, Isabelo P. Lim, collected part thereof and may have reported the same in his own personal income tax return; that same Isabelo P. Lim collected P13,500.00, which he turned over to petitioner in 1959 only; that a certain tenant (Go Tong deposited in court his rentals (P10,800.00), over which the corporation had no actual or constructive control and which were withdrawn only in 1958; and that a sub-tenant paid P4,200.00 which ought not be declared as rental income in 1957.

With regard to the depreciation which respondent disallowed and deducted from the returns filed by petitioner, the same witness tried to establish that some of its buildings are old and out of style; hence, they are entitled to higher rates of depreciation than those adopted by respondent in his assessment.

Isabelo P. Lim was not presented as witness to corroborate the above testimony of Vicente G. Solis.

On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the investigation of the 1956 and 1957 income tax returns of petitioner corporation, testified for the respondent that he personally interviewed the tenants of petitioner and found that these tenants had been regularly paying their rentals to the collectors of either petitioner or its president, Isabelo P. Lim, but these payments were not declared in the corresponding returns; and that in applying rates of depreciation to petitioner's buildings, he adopted Bulletin "F" of the U.S. Federal Internal Revenue Service.

On the basis of the evidence, the Tax Court upheld respondent Commissioner's assessment and demand for deficiency income tax which, as above stated in the beginning of this opinion, petitioner has appealed to this Court.

Petitioner corporation pursues, the same theory advocated in the court below and assigns the following alleged errors of the trial court in its brief, to wit:

I. The respondent Court erred in holding that the petitioner had an unreported rental income of P20,199.00 for the year 1956.

II. The respondent Court erred in holding that the petitioner had an unreported rental income of P81,690.00 for the year 1957.

III. The respondent Court erred in holding that the depreciation in the amount of P20,598.00 claimed by petitioner for the years 1956 and 1957 was excessive.

and prays that the appealed decision be reversed.

This appeal is manifestly unmeritorious. Petitioner having admitted, through its own witness (Vicente G. Solis), that it had undeclared more than one-half (1/2) of the amount (P12,100.00 out of P20,199.00) found by the BIR examiners as unreported rental income for the year 1956 and more than one-third (1/3) of the amount (P29,350.00 out of P81,690.00) ascertained by the same examiners as unreported rental income for the year 1957, contrary to its original claim to the revenue authorities, it was incumbent upon it to establish the remainder of its pretensions by clear and convincing evidence, that in the case is lacking.

With respect to the balance, which petitioner denied having unreported in the disputed tax returns, the excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the lands and only later transferred or disposed of the ownership of the buildings existing thereon to petitioner corporation, so as to justify the alleged verbal agreement whereby they would turn over to petitioner corporation six percent (6%) of the value of its

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properties to be applied to the rentals of the land and in exchange for whatever rentals they may collect from the tenants who refused to recognize the new owner or vendee of the buildings, is not only unusual but uncorroborated by the alleged transferors, or by any document or unbiased evidence. Hence, the first assigned error is without merit.

As to the second assigned error, petitioner's denial and explanation of the non-receipt of the remaining unreported income for 1957 is not substantiated by satisfactory corroboration. As above noted, Isabelo P. Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax return submitted in court to establish that the rental income which he allegedly collected and received in 1957 were reported therein.

The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is deemed to have constructively received such rentals in 1957. The payment by the sub-tenant in 1957 should have been reported as rental income in said year, since it is income just the same regardless of its source.

On the third assigned error, suffice it to state that this Court has already held that "depreciation is a question of fact and is not measured by theoretical yardstick, but should be determined by a consideration of actual facts", and the findings of the Tax Court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion (Commissioner of Internal Revenue vs. Priscila Estate, Inc., et al., L-18282, May 29, 1964), and petitioner has not shown any arbitrariness or abuse of discretion in the part of the Tax Court in finding that petitioner claimed excessive depreciation in its returns. It appearing that the Tax Court applied rates of depreciation in accordance with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this Court pronounced as having strong persuasive effect in this jurisdiction, for having been the result of scientific studies and observation for a long period in the United States, after whose Income Tax Law ours is patterned (M. Zamora vs. Collector of internal Revenue & Collector of Internal Revenue vs. M. Zamora; E. Zamora vs. Collector of Internal Revenue and Collector of Internal Revenue vs. E. Zamora, Nos. L-15280, L-15290, L-15289 and L-15281, May 31, 1963), the foregoing error is devoid of merit.

Wherefore, the appealed decision should be, as it is hereby, affirmed. With costs against petitioner-appellant, Limpan Investment Corporation.