Repoblic of the Philippines Gourt of Tax Appeals, et al. vs. = Commissioner of Internal

IUU'UJSLIC OP THS PHJL1PP1N1a

Q)URI' OF TAX APPBAU

C<NSOLIDATE) MI ESs. INCo :t

Petitioner a

, - versus -

COMMISSIONER OF

INTEru~AL

REVENUE , Re spondent.

C<NSOLIDATED MINES ~ INCo, Petitioner, .. versus -

CCMMISSIO ER OF INTE

AL

REVENUE _.

e~pondento

X -

- • w • • • • ~ • - •

~ X

C. I . A. CASE NOo. 565 C. I . A. CASE NO. 578 AMENDED os::asrrn This is in connection with the motion filed by the petitioner on June 161 1961, seeking the reconsi- deration of the decision of this Court dated May 6 ~ 1961~ insofar as the same sustains the ruling of the Commissioner of Internal Revenue on (1) t he participa- tion of Benguet onsolidated Mining Coo on the net Ac- counts Receivao e at t e end of ach year;

(2) the mine deple ion ovc charged;

( ) t he depreciation dis- allowances;

and ( 4) certain disallowed miscellaneous expenses for the years 1954 and 1956o

Let

s first consider the - PAR ICIPATIQ~ f BE GUET C

OLID

ED.- I ING C ,. Cl'J THE NET ACCOONT~ RECEIVABlE .... In our decision of May 6~ 1961:t which is the sub- ject of the present motion for reconsideration, we held that. under paragraphs X and XIV of the operating agree• ment , Exhibit L, which we quoted in full in said deci• sion, 'there is nothing therein which could have pre- AIVU:::J:ojU :eD DECISICN - C. T. Ao CASES NOSo 565 & 578 - 2 ...

vented the petitioner from deducting at the end of each calendar year the share of Benguet Consolidated Mining Co. on the accounts receivable"o After hearing the oral arguments on the motion for reconsideration of counsel for the petitioner, Attyo Claudio Teehankee» and considering the amount involved in t hese cases 1 in justice to the petitioner. we again carefully scrutinized the records of thes cases$ and we found in the second upplemental Agree• ment, Exhibit L- 2, made and enter ed into by and bet- ween the petitioner and Benguet Consolidated Mining Co., on October 2, 19412 that paragraph 3 thereof states in part as follows& flit being further stipulatedt understood and agreed that Parso IV and X of said Agree• ment remain in full force and effect; so that when the cash receipts equal the aforesaid ex- penditures. advances and disbursements 1 the division of the profits shall be on a share alike basisa it being understood t hat BENGUEI shall always be ent itled t o retain all cash receipts until fully reimbur sed for all its expenditures. advances and disbursements under Par. IV. and t hat BENGUET and CONSOLIDATED shall share only in the excess of said cash recei ts over and above said o erat n itures, advances and isbursements o any na- ~ whatever as may be made in order to carry out the terms of the Agreement and the Supple- ment thereto4 (Underscoring suppliedo) Interpreting and applying the above quoted stipu- lation embodied in the second Supplemental Agreement, Exhibit L- 2, to the case at bar, which we believe i s controlling being the latest agreement of the parties to the operating contract we are of the opinion and so hold that the petitioneris stand is well takeno

Notwith•

~~~ED DECISION •

C.I.A. CASES NCSo 565 & 578 standing the fact that the petitioner files its income tax returns on the basis of accrued income and expenses. ' it need not accrue the share of Benguet Consolidated ining Co.~ in the outstanding accounts receivable at the end of each year for the reason that no such ex- pense has as yet been incurred.

~under the accrual basis 1 usually as soon as legal title has passed to buyer or seller and the legitimacy of the transaction i§ re- cognized. record of it is made on the books. Thus the liability for all purchases--whether of assets or services--is entered on the books as soon as the transactions have been checked and their propriety acknowledged.

Similarly.

as soon as goods or services have been sold1 and usually 6 have been delivered, i.e., as soon as a le all rce le c a· a a· he ur- chaser or custo e a~ arisen, formal entry of the transaction is rna e on the books.

Under

this method of accounting, the books are at all times more complete o o o 11 ( ixon 1 Ac- countants' Handbooki 4th Edition, Po 5.10. citing Ke~tert dvanced Accounting; underscor- ing supplied. J At the end of each calendar year, Benguet Conso- lidated Nining Co., as operator, has not earned its share on the uncollected accounts receivable because their operating contract., as supplemented by Exhibit L- 2, e;xpressly provid s that the operator shall share only on the excess of the cash receipts, or collections, over the disbursement.

o that , only after the accounts receivable are actually collected, and the expenditures pertinent thereto are deducted , shall Benguet Consolidated ining Co. have any claim on them.

If Benguet Consoli-

dated Mining Co. has no legally enforceable claim on the outstanding accounts receivable at the end of each ca~ lendar year, it follows that there is no need for the AM.El\IDED DECISICN ...

.

C.I.A. CASES NOSo 565 & 578 ... 4 - petitioner to set up as an accrual,. or an accrued ex~ pense~ Benguet Consolidated Mining Coo 1 s participation thereino e wish to state 1 however. that, forgetting for a moment the above quoted provisions of the second Sup~ plemental Agreement of October 2, 1941 1 Exhibit 1•2• we still entertain the same view which we expressed in our original decision of May 6, 196lt with regard to the interpretation and construction of paragraphs X and

XIV of Exhibit Lo

Said Exhibit L speaks of "gross in- come" which may include accounts receivable, while Ex~ hibit L-2 mentions only ucash receipts 11 which can only mean actual collections in moneyJ and not in any way include accounts receivableo And we also wish to add that the petitioner failed to point out paragraph 3 of the second Supplemental Agree~ ment as its source of authority in not deducting in its income tax returns the participation of Benguet Conso- ' lidated Mining Coo in the accounts receivable at the end of each years and on the contrary. the petitioner con• sistently relied solely on said paragraphs X and XIV of Exhibit L.

{Pp. 13-14. Memorandum for the Petitioner ; PPo 86-87, CIA reco in Case No. 565; PPo l8Ml9v Motion f~r Reconsideration; PP~ 189•1901 CIA rec. in Case Noo 565o) With regard to the other grounds relied upon by the petitioner in its motion for reconsideration. we AMENDED DECISIOO ...

C,I,Ao GASES NOS, 565 ~ 578 find the same without merito Howe ver~ as correctly stated by the petitioner. a clerical error was com~ mitted in the itemization of the total amount of ~2.646,878o44 on page 9 of the decision. The item ~ ' "Cost of Masinloc Chromite Field , o o 2~'515~CX)()o00" was inadvertently omittedo .. But this omission did not in any way affect our finding that the total amount de• pletable is 2,646~878o44Q In resume~ the petitioner is liable for the pay- ment of the amounts of 79~812o93, ¥51~528o24• and ¥7ly392o821 as deficiency income taxes for the years " 1953.~~ 1954 and 1956.~ or a total sum of ~202~ 733~99. re-computed as follows& 1953 - Net income as per audited return 00000000 Unallowable deductions & additional incomel · Depletion overcharged ooooo 191 1 184ol9 Depreciation adjustment o•• 93,8629 96 Total adjustments oo•ooooooo~•••oooooo••• 285.047,15 Net income as per investigation ouotfocHto ~ l5,47e,764,04 Income tax due thereon ••• ~oooooooooo•o•o Less amount already assessed oooo•oaooaoo

DEFICIENCY TAX DUE

1954 - Net income as per audited return Unallowable deductions & additional income a Depletion overcharged ooooo 158~669,58 Depreciation adjustment ••• 11.878,12 Miscellaneous expenses oooo 13,481,20 79,812,93 3.~~320,307 168 Total adjustments •ooo••••••oooooo:aooo•• l84,028o90 Net income as per investigation , • ,. ..... o ¥3,504 2336,58

AMENDED DECISIQ\J -

C.I.A. CASES NOS. 565 .& 578 .. 6 - Income tax due thereon •••~oooooooooooo• Less amount already assessed ••••••••••• DEFICIENCY TAX DUE o o o •• o.,. • o co •. o • ~ =====5=16 ,:::5=:28==::•::2::

4 1956 - Net income as per audited return Unallowable deductions & additional income:

Depletion overcharged •• • :' 237,386.10 Miscellaneous expenses ...

17.590 , 00 Total adjustments •••cooooo••••••.,o•oo• 254,976.10 Net income as per investigation ., •• o • . o. Pll 1 759.460o07 Income tax due thereon •••ooooooooooooo ~ 3 ,284.~648.82 Less amount already assessed uoH·••••o 3 1 213,256.00 TOfAL DEFICIENCY TAX DUE o o o o. o iC 202~ 733.99 :=:::::::::::::::::::::::::::::::

WHEREFORE1 petitioner Consolidated Mines,. Inc o »= is hereby ordered to pay the respondent Commissioner of Internal Revenue 1 the amounts of ~79,812o 93., it51 1 528. 24. and ¥71,392.82• as deficiency income taxes for the years 1953,~, 1954 and 1956, respectively, or the total sum of ~202.733 .99. If not paid in full withul thirty (30) days from the date this amended decision becomes final and executory,, the 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 month.., computed from the date this amended decision becomes

AMENDED DECISIO'J ~

C. ToAo CASE.

OSQ 565 '& 578

final, until it is .paido No costso

0 ORDEREDo

Manila, August 71 l96lo E ca u a