CTA Case No. 4028

DECISION -

CTA CASE NO. 928 For the years 1975 and 1974, petitioner filed on time its income tax returns as well as the quarterly income tax returns (Exhs. B, BH-1 to B-6~-a; C, C1 to C-63 pp. 4-23, Folder II, BIR records). Upan verification of its income tax returns for those years, respondent’s examiners reported the following discrepancies, among others, to wits:

1. Additional Faid-in-Capital _ Be FOL IF9 WOO

2. Double Deduction of Shipping Cost - 14,416,678.00

3. Taxes, Licenses and Fees aad 12,135.00 1976 Tax Year

1. Crushing Plant Cast _ Fo 169,007.20 Mining Costs _ 1,054,825.10 Drilling Costs - woh AZO O7F «AL Total Charges ~ P 2,674, 911.41

(3) Accelerated Depreciation - POl, 282,871.00 (4) Unrecorded/Underrecorded Sale of Power _ FP 992,141.93

(9) Unrecorded other income (Commissions) _ Fo 407,730.00

(5) Loss on Disposal of Assets ~ Fo 439,752.13 are:

Also allegedly disc losed in the i nvestigation a) the failu re to withhold the 15% tax- at-source on interest on loans from Mits ubishi Metal Corporation, a non - resident foreign corporation and b) 15% d e fi cienc y interest on quarterly basis on the income tax due for the first 3 quarters of 1975. (E:·:h. E, pp • .l.l.B··-1.:28, Folde r II, BIR n ::'<::ords ). On the basis the reof, a deficiency assessment 1 et ter- with asse~;smen t notices for 1975 and 1976 dated December 1.9, 1980 was issued against petitioner as foll o ws : 1975 1976 1975 J!l. J 976 1st , 2nd J!~.

3rd quar-t er of 1975 De!"f iciency Incon£:? Tm: DE>ficiency Inc011e Ta:-: De•·ficier1c y W.i. t.ht-olding Deficiency Corporate !1.tater·l y IncD~n£:? Ta:-:

TOT~- DEFICIENCY

F'13, 6.13 , 233. :?B 32,694,406.1::1.)

2,.1.69,252.68 (E:-:h. D, pp. 168- 180, Folder II, BIR r·ecor·ds) On February 11, 1981, petitioner protested the assessment (E>:h.

H, pp.

203-214), Folder II, BIR records) but the same was denied by respondent in a 138 • •

- 4 -· letter dated December 11~ 1985 (E:-:h.

I-1, pp.

227-230~ Folder II, BIR record s ) . Hence, this appeal.

The question raised is whether or not the defi ciency l iabi l ity in the amount of F'49,603,025.l.5 assessed by against petitioner is proper. Set forth are the i terns in controversy and accordingly discussed. Admit1 8dly, petitione r was f ormed as a result of the m e 1"· ge1~ of three original mining corporations, namely, IXL, Antamok and Masbate Gold Mines whose sharehol ders were required to exchange their old s hares for- equivalf?nt s hares in the neN corpor·a tion.

It appears, how ever~ that not all the stockholder surrendered their certificates. These / Llnsurrendered or unconverted shares were then put up for sale by petitioner and as of 1975, the proceed s thereof as well as the cash dividends earned amounted to P12,961,999.00 which petitioner treated as non - ta:-:ab 1 e add i tiona 1 paid-in c;a pi ta 1 139 - . .....

--

- 5 - on the ground that said amount is nothing more than the participation or equity of numerous unknown stockholders, up to the year in quest ion. Respondent, on the other hand, determined that the amount i s part of pet.i tioner' s gross income taxable under the l aw. We agree with res pondent. / wh i l1e pE>t.i. t.Lon er· ;:.~r- q u E! cl th,::\t ~; aid amount is merely the parti c ipation or equity of unknown stockholders, ye t , it cannot be denied that cash flow from the disposition of those unconverted shares which benef i t!?d petitioner-.

It must be noted that the gr·o ss income which is required to be repor-ted is income in th E~ br-oad sense less income which is by s t atutory definition or otherwise e>:empt fr-or.

ta:·: imposed by l a ~-.!

(See Sec. 36 , Rev.

Regs • No .

2 ) • Mor-eover , "gross income" as defined in Section 29 (a) of the Na tiona 1 In ter-n a 1 Revenue Code inc 1 udes gains, pr .. o ·f .its, and income derived from salaries, wages , or c ompensation for personal services of whatever kind and in whatever form paid, or fr-om professions, vocations, trades, businesses , commerce, sales, or dealings in ..

140

- 6 -- property, whether real or pe r sonal, growing out of the ownership or use of or interest in s uch property; also from interests~ rents, dividends, securities, or transactions or any business carried on for gain or profits~ and income derived from any sourc:e whatever .

The a mount of P1 2 ,961, 999.00 s hould therefore be taxable as part of petitioner's gros s inc:ome. ( b J Do u_~l.~ __ _s!.. e gy._<:;_ t i .!l.R~ __ Qf_~.!Jj,_p_p_i..rul.. ~-qst_~. - P14,416,678.00 Petitioner claimed cos t s as special deduction under- f\epub 1 ic Act No.

5186 in re 1 a tion to F'. D. No.

66 7.

Res pondent, however , disallowed the amount allegE!d 1 y ·for l ack of sufficient justification.

On the basis of the unrefuted testimony of petitioner's wi tnt?ss dur-ing the hearing of September 17, 1986 (t.s.n., pp.

17-21) and the evidence presented (Exhs.

0 to 0 - 4

& Q)

which indicate that petitioner tr-ansported its products on board vessels of Philippine registry, we are convinced that it has adequately justified the deduction.

As cc.~n be gleaned from the records, 141 -

DECISION —-

petitioner is a registered enterprise, and as such, it as allowed double deduction far shipping cost incurred ain commection with exportation of its products, when shincwents are made an board vessels of Fhilippine registry under Gection 9a), Republic Act No. $1863 Section =, F.D. Na. 667, The amount of F1l4,416,678.00 should therefore be allowed as special deductian.

(cd) Taxes, Licenses and Fees ~ P12,135.00 Petibtdaner claimed this amount as deductible business expense under mineral claims hut was disallowed by respandent treating the game as pre- operating expense which sheuld be capitalized.

To our mind, the fact that said amount was charged under mineral claims is of moa consequence, hecause as a general rule, all taxes are deductible except those with respect toa which the law does not permit deduction. MOreaver » it has been established by evidence that during the year in question, petitioner Was no longer at its axploratory or deve lopment stage buat already wisting (See t.a.m., ff. 36, Sept. 17, 19863 Exhs.

Jota d-i & Hee). The amount of FLiS,t35.00 should 142

DECISION ~

be allowed as deductible expense.

Rez 1976 Deficiency Income Tax

(a) Various costs centers — P2,694,511.41 It appears that petitioner charged this amount to costs centers which cansist of:

Crushing plant casts - F 169,007.20 Mining casts ~ 1,094,825.10 Drilling costs A AZO, O79 AL TOTAL ~ P2,694,511.41 Respondent disallowed the total amount claimed on the ground that petitioner’s entries resulted in a double take-up af the item, i.e., first, a charge to particular cost centers, and secand, a charge to freight an andling account.

In assailing said disallowance, petitioner presented a series of entries made in the following journal vouchers toa show that there was no double deductian — JV 12-294 (Exh. F) Various cost centers ~ P2,694,511.41 Materials and supplies — P2,694,011 41 To char ye end-users for customs duties declined by the BOI.

JV 12-295

Cost of sale, copper ~— F2,694,911.41 Copper concentrates -— cast Fe, 694,511.41 143

To take up acdjuetment an cost of sales, copper Dac. °76 JV VeeSLS (Exh. Fed) Materials & Supplies Inventory Cost af ~ FD O94, 511.41 COR per” sales JV Ue 14 Copper concentueake - covet ode, Cost crf sales-capper

JV 12-974

Freight and handling ~ F2,694,511.,41 Materials & Supplies Tovertory To transfer be currenk accent allextation of custows cuties from inventary account when it should have been to freight and handling accawit.

and argued that respandent erred Fre O94, 511.41 Pe, 694,511.41 Pe OP4, S11. AL in failing consider JY 12-312 as part of the investigation.

We disagree, While petitioner has series of entries made in the careful examination thereof, however , disclosed some apparently made in left-hand oriqgainad was a) On the upper Exh. F-4, the Freight & Handling" and substituted with Supply Inventary” and - 44 presented journal particularly material different handwriting, CoOrn er the foregoing vouchers, Exh.

alterations, thus:

aft entry oo cancelled "Material & Pi,

DECISION -—

b) €hy thew Since mo the material ar ineffective asa be disregarded of F2,694,511.44 (bd) Taxes, Cansidering the premised on item far L745 likewise rule be allowed Co) Respondent that petitioner Internal Revenue depreciable contention wag, evidence which 6&, 1975, Investment toe original fount instructian Mr.

substituted 12-294, explanation Alterations, ancl which that a deductible Accelerated depreciation disallowed assets ehoaecd Incentive notation - charges af JV of Mr. F.T.

Cajoles" was with "To "To relocate 12-294 per Tacandong cancelled and reverse JV iu was offered by petitioner we find the evidence reversing entry, Hance, it should the disallowance of the amount austained.

License and Fees ~ P6,506.00 that this digallowance WAS same ground that for similar the Court ais allowing, we the amount af F6,806.00 should for 1976.

Bx Perse ~ Pé1, 282,871.00 this item cantending failed to natify the Bureau of and furnish it with the list of to be depreciated. This however, helied by petitioner’s that ain oa letter date January af which was acknowledged by the Group, Bureau arf Internal

DECISION ~

CTA CASE NO. 40728 Revenue, petitioner informed the said office that beginning the calendar year 19738, it will avail of the accelerated depreciation incentive haneafit under Section 7 Cb) af Republic Act Na. S186 by depreciating its fixed assets twice as much as the normal rate of depreciation (Exh. @). In short, petitioner @xercised its option for allowance af accelerated depreciation under Section 7(b) of Republic Act No, SL@6 and camplied with the requirement thereof.

The amount af F461,282,871.00 shauld therefore be allowed,

(d) Income from sale of Power — P9I52,141.93 In ats 976 income tax return, petitioner reported the amount af P42,458,00 fram the sale of power (Exh. Reo, op. 3, Folder II, BIR records). In explaining how this was arrived at, petitioner presented the entries in the trial balance print out allegedly taken from its Cebu office to show that from the gale of power in the sum = of P4,952,218.98, the cost of power in the amount of F4,949,760.93 i8 deducted and the difference, which is F43,457.69., is the amount it reflected in the return.

146

-- 12 - Re s pcmdE!n t.

c:n thl'?

otht::> t'' h.3.nd ~ i.n sd.s t s that thl?

thr2 tot ." 1 ,:;~. mount of P995~599.58 was realized~ h ence~ the unreported income.

He mai n tai n s thc::\t a~:;

<:\SCE-~t" ta.i.ned by the exa min ers~ the cost of po we r was P3,696~619.00~ and since petitioner c laims the sum of P 4~ 548,760.93 a mu r.: h biqg r:> r..

.:3mnu r1 t w.i thou t pr .. es£~ n t .i.ng s aid c osts wrong, the pt·-esumpt: ion cor rectness of the assessme nt applies.

We agree with respond e nt. The nJle is well s ettled that the Commi ssioner's assessme nt is presumptively correct and the burden of proof i s on t h e part of the taxpayer to s how the con tra ry. Thus, it has been r-e peatE?dly ~:;t .• ::\ t.Pd that thE~ but"d!?n of proo ·f is on the taxpayer contesting the validity o r correctness of an p rove not o nly that the Commi ssi oner i ~:;;

1-'J n:mq but hF.?

( ta:·: P•" yer) .i. s r i<;J h t ( Lino Gutierrez v s . Collector of Internal Revenue , C.T.A. Case No. 504, Ja n uary 28, 1962 ; Ta n Guan vs. Court of Tax Appeals, L-23676 , Apri l 27 , 1967, 1 '.'9 SCRA '.'90.3).

I n o t. h E? r- wo n:t s, the

t. .3. :·:payer" .i s required to do mor e t han come forward wit h the best ' 147 -~ Js evidence obtainable to overcome the presumption. Conformably to the doctrine therefore, the unreported income fram the sale of power in the case at bar, in the amount of POSS, 141.93 as found by respondent should be upheld.

(ed) Other income Cunreported}) — P407,730.00 As a result of the waiver by Hongkong Shanghai Banking Corporation af the commission in the sum of P407,730,.00 due it from petitioner for the period 1971-1973 and on the theary that said commission was previoucly booked as expense respondent asserts that it should be credited back toa income = and returned for tax purposes in 1976.

However, a careful study of the evidence on record failed to show that such cammission expense ‘ hdl nt rewvnpa? he Mode Ae perm was deducted in \1976 as pointed aut by petitioner w+ “e , IV GY (See t.5.n., pp. 2-44; Exhs. B & CC). Since the ( Col a imputation of this inceme would form part of the tA assessment which will determine the tax liability of the taxpayer, it must be based on actual facts and not on mere assertion, though logical it maybe.

The amount of F407,720,00 should not therefore be considered as unreported income.

148

.... 14 (f.J l,g$_ _~ <?TJ.. ... <:!..!...!:EP..f:..l.S.:~}. - P439,752.13 Re s pono :. nt di sa llowed this deduction mainly for the reason that it arose from the demolition of the main office~ bodega or building to give way for the erection of another structure, so that the expense s hould be capita li zed . As explained by petitioner's witness during the hearing of this case on September 17, 1986: Q.

Th€:~ lo":\~;;t item in .1976 is loss on This dispo s al.

Please e x plain to the Court what i s thi s amount? rle-?cluc:t.ion in assets w.=:\s E:·:~:~miner.

d .i s pos .:J\ l d .i. s;a J. J. ow e-?d of f i :-:ed by thl:> Acc:ording to the m whe n these old buildings were to be demolished to give w ~y to new c:on s truct.i.i.m, that cost s hould be taken up as part of the new In thi s cas~;:!, thE?SE!

uld building~;.;

,:-.ncl bodE~gas Wf'?r .. e df:~ mol. ishE~d a fte1·· t.he const.r·uction of ne1--1 buildings which were not intended to gi ve way to new ~s tructures.

Q.

Ynu d :i.d not. con stn .. 1c t a new off ice building and bodgega? A.

That .i~:;

r· i .. LJilt. , ~ ;: i . r · .

ll.

vJh a t.

.iS t h E?

d e mo l ition ,3.nd bodecJa";' reason for the o ·f t.hF.! old building 149 Yes.

The old office building and bodega were demolished hecause af deafening noise from Dasscan Rall Millis situated nearby. They decided to vacate this and transfer to some other place.

What ia the Sivity canducted in this Dasscan?

They are crushing ores, Crushing ares?

Yes, Sir.

What machineries are they using? Crushing balig ..., What obher items constitute this loss an disposal?

We alse have aggregate plant of original verlue of FL, O82 ,499, 25. The iran reca~ verecd fram this, wei ocuk and valued at fair market value whieh were credited to the department which made use af this scrap iron, Sa this old plant was not replaced with a new plant’?

No, sir.

How about equipment, pick-up. This item 9S5. What is that?

Net hack value of pick-up due to wear and tear.

So blis was mo Pemaqcur nagect?

150

A. Yes, ir.

Q. How did you treat it?

AY. The met value was written off. (. Decluc hed?

AY Yes, sir.

QQ. How about this machine shap- and foundry equipment?

fe Tnese were equipment mo longer on operation aor existent.

This was reported by the department which used these machineries.

(t.8-9., pp. 44-47, hearing of September 17, 1986).

Considering that the testimony was nat cantradicted by respondent, the amount of F439,752,.13 should be allowed as losses.

Rez 5% Withholding Tax At Source, 1975 and 1976- P2,169,252.68 The questian involved regarding this particular item, is whether ar not interest income derived from Laan extended ta petitioner by Mitsubishi Meta k Carporation is exempt fram withholding tax pursuant to Section 29(b)(7)(a) of the National Internal Revenue Code.

As said question is the same as that resalved in Mitsubishi Metal Corpearation and Atlas

DECISION -—

Consolidated Mining & Development Corporation vs. Commissioner of Internal Revenue, CTA Case No, 2&8Q7, April ft £5 y @280, where this Court held that interest payments made hy Atlas Mining Re Development Corporation on the loans abtained fram Mitsubishi Metal Corporation are exempt from withholding tax oat source since the actual and Ultimate creditor is the Export-Import Bank of Japan, on the same vein, we rule that the interest inceme ain the emount of FS,169,252,.68 in the case at bar, should likewise be axempt from the withholding tax at source.

Rez 1975 Deficiency - Pi,126,132.59 This deficiency for the first, second and third gquarkere af Lee pas ae ondearnt segemel ly re¢ due to the change an the expansion reinvestment @liowance granted to petitioner under Republic Act No. Si86 from & pioneer status which is allowed 75% deduction to a non-pioneer status which is allowed 27+ 728% deduction. Gince petitioner, according ta respondent, availed of the full 73% rate instead of S777" %, it overshot the allowable deduction, hence, the deficier "yy.

152

We agree.

From its quarterly and final incame tax returns for i970 and the evidence presented, it appears that petitioner deducted the amount of F146,9887,470,00 a8 expansion reinvestment allowance which is equivalent to YASA of its investment of PLP BI, P SO, OO dry thee cep preg amedter project. atherwise knawn ag PASAR, a planeer praject. Samehow. sa dc project was discontinued, and petitioner shifted its investment to the Carmen project, & nan-pilanger Ore « Thus . upon investigation, respondent’ s examiners disallowed the deductian of the full 7OZ.

While pei tioner ASSerts that the recammendalion was mat approved by respondent and the Fiscal Incentive Review Board (FIRB), the records however, showed otherwise. It appears that the Board of Investment (BOT) reduced petitioner’s reinvestment allowance for 1975 to F72,4435,735,00, equivalent to 2727°"% af its investment which was shifted to the Carmen project (pp. 89 & 90, Folder Il, BIR records). The reductian was also passed upon by the Fiscal Incentive Review Board (Exh. 2,

p. 148, Folder I1, BIR records).

In view thereof, we are of the recomputation of petitioner's tax for the first, second and 1975 in order and the Accardingly , petitioner's tax for 1975 and 1976, as well corporate quarterly aincome tax second and third quarters of L975 fool lewis s Net income per return Add: Additianal inceyne: Additional paid in capital Net income per decision Income tax due thereon Less: Amount paid Act: L444 ink. fr.

to Bed?

TOTAL AMOUNT DUE & COLWECTIRLE

Ao LS Fey Net ancone per return Add: Disallowances/Additional Income Various casts Income fron sale cf power Pt, O94, S11. 41 Fe Pee LAL Inceme tax due thereon Less: Amant paid Balance of tax due 154 ‘thie quarterly deficiency for persuasion th inca third quarters inco the deficien the firs are camputed

4 6824 C

FE 7, 228,708.00 Fo 44846, 700,00 14.00 “Tt at me af deficiency assessment of me cy

DECISION -—

Add: 14% int. fie. 4015-77 Taxable income per Gecision Corporate quarterly income tax due thereon 10,574, 300,00) Leas: Amount paic Ps, B49 6172.00 OZ allowance to 4-15-74 Total

AMOUNT STTL DUE & COLLECT TELE

2 Taxable income per decision Corporate quarterly income tax due thereon Less: Amount paid F Oo 20% allowance for errors 805,986.00 ana ERIE, PBS OK) Add: 1S4 int. fr. 8-30-74 to 4-15-76 _. OO, 74 AS Total Fo 3,524,697.13 Less: Amount already assessed ig eect PA OO

AMOUNT STILL DUE & COLLECTIBLE F

F AA ed B27 OO Fa 4,029 F29.00 Taxable income per decision Corporate quarterly income tan due thereon Less: Ammunt paid F ane ina for errors “conn ote PBT 2 OO) Balance 150 -- ? l {-'!<:ld :

l~:i:l.. 'nl·.. . fr- , .1.1. ·-<X>-·-? ~i to · 1 ... l ~5 .. ·-7 6 T n t a 1 Less :

f.~lc::>LU 'l t a l n~ady asse<.::iSf.?<::l Pt-r.J. .. NT E1T I L.L. DLE 1!.( CCLL.ECT I H .. .E

WHEREFORE, petitioner Atlas Consolidated Mining & Developme nt Corporation, is hereby ordered to pay to respondent Commissioner of Internal Revenue the aggregate amount of P9,409,033. 77 as deficiency income tax for the years 1975 and 1976 deficiency corporate quarter! y income tax for the first, second and third quarters of 1975, plus surcharges and interest incident to delinquency pursuant to the pr·ovisions of Section 51 (e)(2)( 3 ) of the National Internal Revenue Code , as amended.

WE CONCUR:

AMANTE ILLER F·r-e<:; .i.d:i. 1q ,Ju. c:l c! t·:-~ (on l E?,:~v P) CONSTANTE C. ROAQUIN A!ssoc.i.,::\t€·?

Ju.c:ltJf:?

~~ A s~-:;oc ia te Judqe 156 --

CR

I~TIFICATIO N

I c f:? t'" t ,;_ ·f y Wc\S reached after due con s ultation among the me mbers of the Court of Ta >:

in accordance with SE:.>ction .t :.::.~ Al-- ti c::tE~ VIII of thP Cor l ~:; titutiCJn. AMANTE ILLER F'r · !~ s .i. ding ,Jud !.;J e CCJurt CJf Tax Appea l s 157