~ Pale É Rrfuric of THF Prilippin'Gs “Court of Tax Appeals Qi:Zon City Peanardel Hbamanos, Inc, at vs. CTA Cage No, 1389 THR Commissioner of Internal Revenub, XE7-- EE

DECISION

Thies is an appeal from the decision of the respontent Commissioner of Internal Revenue, dated March 26, 1963 (pp. 60661, BIR rec.) assessing and demanding from petitioner Fernandez ‘ermance, Inte, deficienay income tax for the year 1957, in the sum of *38,91%.76, plus surcharge and in- terest, .

Petitioner, a domestic corporstion, filed its " income tax return for the year 1997 on April 30, 1958 (Exhe. 4 & Amt, poe 6-10, BIR rec.). On Auge ust 17, 1962, respondent assessed against the peti- tioner deficiency income tax in the amount of #36,918.= 76, computed as follows:

"Res Gnas per, petewe. eee, £29,178 .70 “t)) Net loss claimed on Kasbaduptrt 69,547.33 (2 ge ne ey Contra cae tales tions . «+s tet incone por investigation»: Eiggagase Tax due thereon «2. 12s ee eee , ° Balance celiac +a ss 6 Addt interest fron ceed) te Graben ss co a Saleh TOTAL AMOUNT DUK @ COLLACTIBLE. . . «f36,998,76° 169 a eee a - ee ee Cth Chas 10, 1369 2 (Exh. Gy ppe 2526, SIR rec,) On September 17, 1962, petitioner requested for @ period of 30 days within which to contest the said assessment (p. 32, BIA ree.). As us condition for the grant thereof, respondent required petitioner to sign ae weiver of the defense of preseription (p. 33, BIR ree.). On October 17, 1962, petitioner wrote another letter to the respondent esking that the deficieney income tax assessment be reconsidered and withdrawn (pp. “~s1, BIR rec.). Petitioner, through its Managing Director, on VYebruary 1%, 1963 signed a weiver of the defense of prescription to expire on December 31, 1963 (pp. “6047, BIR ree.). On March 26, 1963, respondent rendered his deaision denying petitioner's request ‘or reconsideration and reitera- teé his demand of #36,918.76 as deficiency income tex (ops 60-61, BIR ree.). Petitioner filed the ; instant petition for review on May 8, 1963, alleging that respondent has no legal or factual basis to assess the deficiency income tex in question and that the right of the Goverment. to collect the same has already preseribed.

Two iesues have been raised by the parties, tc wit: (1) whether or not the right of the Government te_sollect the deficiency income tax in question hss already preseribed; and in the negative, (2) whether or not the respondent is justified in disallowing the claimed deductions in the total amount of P136,028 95.

» 170

DRCISION -

_ CTA CASE BO, 1389 3 / In ites petition for review, petitioner contends that the right of the Government to collect the @lleged deficiency income tax has already pres- cribed. Wowever, in its memorandum, petitioner aid not touch the issue of prescription and we conclude that it has abandoned such defense. ‘Nonetheless, ve hold thet the right of the Government te collect the Geficieney income tax has not yet preseribed. The records show that petitioner filed its income tax return for the year 1957 on April 30, 1958 (p. 6, BIR rec.). The deficieney income tax was assessed on August 17, 1962 (pp. 25-26, BIN rea.) which ves within the S-year period from the filing of the return as required by law (Sec, 331, Reverme Code). Under Section 332(c) of the Revarme Code, the Govern- nent has another five years from the date of assess - ment, 1e@ey from August 17, 1962, within which to collect the said tax. ‘The collection thereof was commenced on May &, 1963 when the petitioner filed ite petition for review which ts deened « "judicial action” for the collection of the deficiency income tax (Mannel . Sunge v. Comm. of Int. fev., CTA Case 676, Oct. 25, 1961; Fernandes Neruanos, Ine. vs Comm, of Int. Hev., CTA Case 787, June 10, 1963). Clearly, therefore, the right of the Government te collect the deficiency income tax has not yet pres- eribed.

171 We will now proceed to the disputed items, During the year 1957, petitioner claimed an alleged loss in the sus of *89,5%7.33 in the operation of its Nactendsa Palupiri, fespondent disallowed this item om the following grounds: (1) that petitioner 4id not make any distinetion between ordinary and necessary expenses and capital expenses; (2) thet the operation of the hacienda is a mere device te siphen off the earnings of the petitioner and to decrease its income tex liability; and (3) that petitioner is not consistent in its method of reporting income.

This Court in a previous case had occasion to pass vpon the same issue in regerd to losses sus- tained by petitioner in the operation of ‘acienda Dalupiri,.

“¥Yrom the yore ree we are con- vineed that the Nacienda Dalupiri wes operated by petitioner for business and not for pleasure. it was sainly @ cattle farm, slthonugh a few race horses were also raised. It does not « thet the farm was ays peti for enterteinnent activities, or other non- HOB. Therefore, it it is entitled expenses and losses in con- = with the i of said (See 1955 « Taxes, Per.

"3s 13,8635 ehting G. C.K 21103, CB 193%

Ty Ds

“Section 100 of Nevenne lecula- tione So. 2, otherwise known as the Income Tax Negula authorizes farmers to determine Pr gross in- come on the basis of inventortes, ‘said regulations provides: ‘ "172 ‘If gross income is ascertained CTA CASE NO, 1389

DECISION «

4. st ab Bt, aie f i ee if bs jt if 3 tga) Race 5 ul 523 0h fan Hill ae ie faldlae 2 173 ine —— aR basis method pf reporting income and expenses in the acerual method with respect to its mine opers- tions. This method of accounting, otherwise known as the hybrid wethod, follewed by petitioner is not the operation of the Mecienda Delupiri and used

DECISION «

CTA CASE HO, 1389 6 without justification.

may erual s and his personal income on the cash basis.” (See Mertens, Law of

Federel Income

Revision, Yol. 28 ha 26.)

-- The last disputed item refers to the disallowance of the sum of 46,461.62 which allegedly represented 1/5 of the cost of thé “contractual right" over certain mines which petitioner had sequired.

it appears that the -olawan Manganese Nines, Ines, during a special meeting of its Hoard of Direct- ors on January 19, 1956, approved a resolution, the pertinent pertions of which read as follows: | 7 "RESOLVED, as it fis hereby re- . solved, that corporation's current assets composed of ores, fuel and ofl, materials and GB, spare parts

DECISION =

CTA CASE NO, 1389 7 On March 29, 1956, petitioner's corporation aeeepted the above-offer of transfer, thus: “whereas, the —— Manganese Mines, Ince, due to, 4 es hes decid tion on January 1, 1956 and in order to satisfy ee Al least M ae tte indebted

THOUSAND EIGHT HUNDRED RIGHTY FIVE PESOS

& 23/100 Colalea 885.23) 5° (Szh. Bt, pe Petitioner determined the cost of the mines at #242,408.10 by ad@ing the value of the contractual rights (#100,000,00) and the value of its mining Claims (®142,406.10), Respondent disallowed the deduction on the following grounds: (1) that the Palawan Manganese "ines, Inc. could not transfer 242,408.10 worth of assets to petitioner because the balance sheet of the said corporation for 1955 shows. thet it had only current essets worth 997,636.96; and (2) thet the slleged amortization of “eontract- wel rights" is not allowed by the Revenue Code, The law in point is Section 30(¢)(1)(B) of the Revenue Code, before its amendment by Republic Act No. 2698, which provided in parts .

175

DECISION -

CTA CASE NO. 1389 e "(e) Depletion of of] and cas wells and pines:

"(14) —x x Xx (3B) in the case mines, a reason- able allowance for depletion thereof not te exceed market value in the _— of the product ropes +6 ages s been sold during the year of which ther return and computation are made. The allowances be made under rules and regule~ prescribed the ’ t when the tal in- vested, x x x no further a nee / shall be made.”

actually transferred to the petitioner in 1956, the latter cannot just deduct one-fifth (1/5) of said amount from its gross incowe for the year 1957 because such deduction in the form of depletion charge was not sanctioned by Section 30(¢)(1)(8) of the Reverme Code, as above-quoted.

The depletion formula applicable to petitioner in computing the unit depletion charge or the rate of depletion per unit, i.e., ton, feet, ete., is as follows: = | .

Cost of Mine Property © Rete of Depletion per CTA Case Hos, 565 4 578, May 6, 1961.)

The sole basis of petitioner in claiming the amount of ©48,481.62 as a deduction was the memorandum of its mining engineer (Exh. I, pps 31-32, CTA ree), who stated that the ore reserves of the busuenga Mines (Mines transferred by the Palawan Manganese Wines, Inc. to the petitioner) would be exhausted in five (5) years, hence, the claim for #48,481.62 or one-fifth (1/5) of the alleged cost of the mines corresponding to the year 1957 and every year there~ after for a period of 5 years. ‘the said semorandum merely showed the estimated ore reserves of the sines and its probable selling price. No evidence what- soever was presented to show the product uined and for how much they were sold during the year for which the return and computation were made. This is necessery in order to determine the azount of de- pletion that ean be legally deducted from petitioner's gross income, The method employed by petitioner in -gaking an outright deduction of 1/5 of the cost of the mines is not authorized under Section 30(g)(1)(5) of the Revenue Code. lespondent's disallowance of the alleged “eontrsctusl rights" amounting to P4E,481.62 mst therefore be sustained, In view thereof, we find petitioner liable for éeficiency income tax for the year 1957 in the amcunt of °9,696.00, computed as follows: by pee uetame «2 ss 5 os © M1787 © gat Wo Aleve » 477

Se ’

DECISION «

CTA CASE RO, 1389 10 Net Imcome .. ss ccee2cees Income tax due thereon . « « « « eo32e Less: Amount already assessed .

DRFICIENCY TAX DUE. . . » « £.9,696,00

WHEREFORE, the assessment appeajed from is hereby modified. Petitioner is hereby ordered to pay to respondent the amount of #9,696.00 as deficiency income tax for the year 1957, plus the corresponding interest provided in Section 51 of the Hevenue Code. If the deficiency tax is not paid in full within thirty (30) days from the date this decision becomes final and exeeutory, petitioner shall pay a surcharge of five per cent (5%) of the unpaid amount, plus interest at the rate of one per cent (1%) a sonth, computed from the date this decision becomes final until paid, provided that the aaximum amount that may be collected as interest shall not exceed the amount corresponding to a period of three (3) years. Witheut pronouncement as to costs. — _ $0 ORDERED, | Quezon City, August 2, 1965.

jour 6 Oa

Associate Jndge

I CONCUR:

dadge Afurong Cia sot take oart.

178