Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-22265 December 22, 1967

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
GOODRICH INTERNATIONAL RUBBER CO., respondent.

Manuel O. Chan for respondent.

Manuel O. Chan for respondent.

CONCEPCION, C.J.:

Appeal by the Government from a decision of the Court of Tax Appeals, setting aside the assessments made by the
Commissioner of Internal Revenue, in the sums of P14,128.00 and P8,439.00, as deficiency income taxes allegedly
due from respondent Goodrich International Rubber Company hereinafter referred to as Goodrich for the years
1951 and 1952, respectively.

These assessments were based on disallowed deductions, claimed by Goodrich, consisting of several alleged bad
debts, in the aggregate sum of P50,455.41, for the year 1951, and the sum of P30,138.88, as representation
expenses allegedly incurred in the year 1952. Goodrich had appealed from said assessments to the Court of Tax
Appeals, which, after appropriate proceedings, rendered, on June 8, 1963, a decision allowing the deduction for bad
debts, but disallowing the alleged representation expenses. On motion for reconsideration and new trial, filed by
Goodrich, on November 19, 1963, the Court of Tax Appeals amended its aforementioned decision and allowed said
deductions for representation expenses. Hence, this appeal by the Government.

The alleged representation expenses are:

1. Expenses at Elks Club P10,959.21

2. Manila Polo Club 4,947.35

3. Army and Navy Club 2,812.95

4. Manila Golf Club 4,478.45

5. Wack Wack Golf Club, Casino Espaol, 6,940.92

etc.

TOTAL P30,138.88

The claim for deduction thereof is based upon receipts issued, not by the entities in which the alleged expenses had
been incurred, but by the officers of Goodrich who allegedly paid them.

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

The alleged bad debts are:

 1. Portillo's Auto Seat Cover P630.31

2. Visayan Rapid Transit 17,810.26

3. Bataan Auto Seat Cover 373.13

4. Tres Amigos Auto Supply 1,370.31

5. P. C. Teodoro lawphil 650.00

6. Ordnance Service, P.A. 386.42

7. Ordnance Service, P.C. 796.26

8. National land Settlement Administration 3,020.76

9. National Coconut Corporation 644.74

10. Interior Caltex Service Station 1,505.87

11. San Juan Auto Supply 4,530.64

12. P A C S A 45.36

13. Philippine Naval Patrol 14.18

14. Surplus Property Commission 277.68

15. Alverez Auto Supply 285.62

16. Lion Shoe Store 1,686.93

17. Ruiz Highway Transit 2,350.00

18. Esquire Auto Seat Cover 3,536.94

TOTAL P50,455.41*

The issue, in connection with these debts is whether or not the same had been properly deducted as bad debts for
the year 1951. In this connection, we find:

Portillo's Auto Seat Cover (P730.00):

This debt was incurred in 1950. In 1951, the debtor paid P70.00, leaving a balance of P630.31. That same year, the
account was written off as bad debt (Exhibit 3-C-4). Counsel for Goodrich had merely sent two (2) letters of demand
in 1951 (Exh. B-14). In 1952, the debtor paid the full balance (Exhibit A).

Visayan Rapid Transit (P17,810.26):

This debt was, also, incurred in 1950. In 1951, it was charged off as bad debt, after the debtor had paid P275.21. No
other payment had been made. Taxpayer's Accountant testified that, according to its branch manager in Cebu, he
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had been unable to collect the balance. The debtor had merely promised and kept on promising to pay. Taxpayer's
counsel stated that the debtor had gone out of business and became insolvent, but no proof to this effect. was
introduced.

Bataan Auto Seat Cover (P373.13):

This is the balance of a debt of P474.13 contracted in 1949. In 1951, the debtor paid P100.00. That same year, the
balance of P373.13 was charged off as bad debt. The next year, the debtor paid the additional sum of P50.00.

Tres Amigos Auto Supply (P1,370.31):

This account had been outstanding since 1949. Counsel for the taxpayer had merely sent demand letters (Exh. B-13)
without success.

P. C. Teodoro (P650.00):

In 1949, the account was P751.91. In 1951, the debtor paid P101.91, thus leaving a balance of P650.00, which the
taxpayer charged off as bad debt in the same year. In 1952, the debtor made another payment of P150.00.

Ordinance Service, P.A. (P386.42):

In 1949, the outstanding account of this government agency was P817.55. Goodrich's counsel sent demand letters
(Exh. B-8). In 1951, it paid Goodrich P431.13. The balance of P386.42 was written off as bad debt that same year.

Ordinance Service, P.C. (P796.26):

In 1950, the account was P796.26. It was referred to counsel for collection. In 1951, the account was written off as a
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debt. In 1952, the debtor paid it in full.

National Land Settlement Administration (P3,020.76):

The outstanding account in 1949 was P7,041.51. Collection letters were sent (Exh. B-7). In 1951, the debtor paid
P4,020.75, leaving a balance of P3,020.76, which was written off, that same year, as a bad debt. This office was
under liquidation, and its Board of Liquidators promised to pay when funds shall become available.

National Coconut Corporation (P644.74):

This account had been outstanding since 1949. Collection letters were sent (Exh. B-12) without success. It was
written off as bad debt in 1951, while the corporation was under a Board of Liquidators, which promised to pay upon
availability of funds. In 1961, the debt was fully paid.

Interior Caltex Service Station (P1,505.87):

The original account was P2,705.87, when, in 1950, it was turned over for collection to counsel for Goodrich (p. 156,
CTA Records). Counsel began sending letters of collection in April 1950. Interior Caltex made partial payments, so
that as of December, 1951, the balance outstanding was P1,505.87. The debtor paid P200, in 1952; P113.20, in
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1954; P750.00, in 1961; and P300.00.00 in 1962. The account had been written off as bad debt in 1951.

The claim for deduction of these ten (10) debts should be rejected. Goodrich has not established either that the debts
are actually worthless or that it had reasonable grounds to believe them to be so in 1951. Our statute permits the
deduction of debts "actually ascertained to be worthless within the taxable year," obviously to prevent arbitrary action
by the taxpayer, to unduly avoid tax liability.

The requirement of ascertainment of worthlessness requires proof of two facts: (1) that the taxpayer did in fact
ascertain the debt to be worthlessness, in the year for which the deduction is sought; and (2) that, in so doing, he
acted in good faith.1

Good faith on the part of the taxpayer is not enough. He must show, also, that he had reasonably investigated the
relevant facts and had drawn a reasonable inference from the information thus obtained by him. 2 Respondent herein
has not adequately made such showing.
The payments made, some in full, after some of the foregoing accounts had been characterized as bad debts, merely
stresses the undue haste with which the same had been written off. At any rate, respondent has not proven that said
debts were worthless. There is no evidence that the debtors can not pay them. It should be noted also that, in
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violation of Revenue Regulations No. 2, Section 102, respondent had not attached to its income tax returns a
statement showing the propriety of the deductions therein made for alleged bad debts.

Upon the other hand, we find that the following accounts were properly written off:

San Juan Auto Supply (P4,530.64):

This account was contracted in 1950. Referred, for collection, to respondent's counsel, the latter secured no payment.
In November, 1950, the corresponding suit for collection was filed (Exh. C). The debtor's counsel was allowed to
withdraw, as such, the debtor having failed to meet him. In fact, the debtor did not appear at the hearing of the
case. Judgment was rendered in 1951 for the creditor (Exh. C-2). The corresponding writ of execution (Exh. C-3)
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was returned unsatisfied, for no properties could be attached or levied upon.

PACSA (P45.36),

Philippine Naval Patrol (P14.18),

Surplus Property Commission (P277.68),

Alvarez Auto Supply (P285.62):

These four (4) accounts were 2 or 3 years old in 1951. After the collectors of the creditor had failed to collect the
same, its counsel wrote letters of demand (Exhs. B-10, B-11, B-6 and B-2) to no avail. Considering the small amounts
involved in these accounts, the taxpayer was justified in feeling that the unsuccessful efforts therefore exerted to
collect the same sufficed to warrant their being written off.3

Lion Shoe Store (P11,686.93),

Ruiz Highway Transit (P2,350.00), and

Esquire Auto Seat Cover (P3,536.94):

These three (3) accounts were among those referred to counsel for Goodrich for collection. Up to 1951, when they
were written off, counsel had sent 17 Letters of demand to Lion Shoe Store (Exh. B); 16 demand letters to Ruiz
Highway Transit (Exh. B-1); and 6 letters of demand to Esquire Auto Seat Cover (Exit. B-5) In 1951, Lion Shoe Store,
Ruiz Highway Transit, and Esquire Auto Seat Cover had made partial payments in the sums of P1,050.00, P400.00,
and P300.00 respectively. Subsequent to the write-off, additional small payments were made and accounted for as
income of Goodrich. Counsel interviewed the debtors, investigated their ability to pay and threatened law suits. He
found that the debtors were in strained financial condition and had no attachable or leviable property. Moreover, Lion
Shoe Store was burned twice, in 1948 and 1949. Thereafter, it continued to do business on limited scale. Later; it
went out of business. Ruiz Highway Transit, had more debts than assets. Counsel, therefore, advised respondent to
write off these accounts as bad debts without going to court, for it would be "foolish to spend good money after bad."

The deduction of these eight (8) accounts, aggregating P22,627.35, as bad debts should be allowed.

WHEREFORE, the decision appealed from should be, as it is hereby, modified, in the sense that respondent's
alleged representation expenses are totally disallowed, and its claim for bad debts allowed up to the sum of
P22,627.35 only. Without special pronouncement as to costs. It is so ordered.

Reyes, J.B.L., Dizon, Makalintal, Bengzon, JJ., Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.

FACTS:
Goodrich claimed for deductions based upon receipts issued, not by entities in which alleged expenses had been incurred but by
the officers of Goodrich who allegedly paid for them. The CIR disallowed deductions in the amount of P50,455.41 for 1951 for
bad debts and P30,188.88 for 1952 for representation expenses. Goodrich appealed from the said assessment to the CTA which
allowed the deductions.

Issue:

Whether or not these bad debts are properly deducted.

Held:

The claim for deduction for debt numbers 1-10 is REJECTED. Goodrich has not established either that the debts are actually worthless or that
it had reasonable grounds to believe them to be so.

NIRC permits the deduction of debts actually ascertained to be worthless within the taxable year obviously to prevent arbitrary action by the
taxpayer, to unduly avoid tax liability.

The requirement of ascertainment of worthlessness require proof of 2 facts:

1. That the taxpayer did in fact ascertain the debt to be worthless

2. That he did so, in good faith.

Good faith on the part of the taxpayer is not enough. He must also how that he had reasonably investigated the relevant facts and had drawn a
reasonable inference from the information obtained by him. In the case, Goodrich has not adequately made such showing.

The payments made, after being characterized as bad debts, merely stresses the undue haste with which the same had been written off.
Goodrich has not proven that said debts were worthless. There was no evidence that the debtors can not pay them.

SC held that the claim for bad debts are allowed but only up to P22,627.35. (those from Debts 11-18)

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-15290 May 31, 1963

MARIANO ZAMORA, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

-----------------------------

G.R. No. L-15280 May 31, 1963

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
MARIANO ZAMORA, respondent.

-----------------------------

G.R. No. L-15289 May 31, 1963

ESPERANZA A. ZAMORA, as Special Administratrix of Estate of FELICIDAD ZAMORA, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

-----------------------------

G.R. No. L-15281 May 31, 1963

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ESPERANZA A. ZAMORA, as Special Administratrix, etc. respondent.

Office of the Solicitor General for petitioner.

Rodegelio M. Jalandoni for respondents.

PAREDES, J.:

In the above-entitled cases, a joint decision was rendered by the lower court because they involved practically the
same issues. We do so, likewise, for the same reason.

Cases Nos. L-15290 and L-15280

Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his income tax returns the years
1951 and 1952. The Collector of Internal Revenue found that he failed to file his return of the capital gains derived
from the sale of certain real properties and claimed deductions which were not allowable. The collector required him
to pay the sums of P43,758.50 and P7,625.00, as deficiency income tax for the years 1951 and 1952, respectively
(C.T.A. Case No. 234, now L-15290). On appeal by Zamora, the Court of Tax Appeals on December 29, 1958,
modified the decision appealed from and ordered him to pay the reduced total sum of P30,258.00 (P22,980.00 and
P7,278.00, as deficiency income tax for the years 1951 and 1952, respectively), within thirty (30) days from the date
the decision becomes final, plus the corresponding surcharges and interest in case of delinquency, pursuant to
section 51(e), Int. Revenue Code. With costs against petitioner.

Having failed to obtain a reconsideration of the decision, Mariano Zamora appealed (L-15290), alleging that the Court
of Tax Appeals erred

(1) In dissallowing P10,478.50, as promotion expenses incurred by his wife for the promotion of the Bay
View Hotel and Farmacia Zamora (which is of P20,957.00, supposed business expenses):

(2) In disallowing 3-% per annum as the rate of depreciation of the Bay View Hotel Building;

(3) In disregarding the price stated in the deed of sale, as the costs of a Manila property, for the purpose of
determining alleged capital gains; and

(4) In applying the Ballantyne scale of values in determining the cost of said property.

The Collector of Internal Revenue (L-15280) also appealed, claiming that the Court of Tax Appeals erred

(1) In giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real
property in question during the Japanese occupation, partly in Philippine currency and partly in Japanese
war notes, and

(2) In not holding that Mariano Zamora is liable for the payment of the sums of P43,758.00 and P7,625.00 as
deficiency income taxes, for the years 1951 and 1952, plus the 5% surcharge and 1% monthly interest, from
the date said amounts became due to the date of actual payment.
 Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by
this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not
covered by this stipulation of facts.
1wph1.t

Cases Nos. L-15289 and L-15281

Mariano Zamora and his deceased sister Felicidad Zamora, bought a piece of land located in Manila on May 16,
1944, for P132,000.00 and sold it for P75,000.00 on March 5, 1951. They also purchased a lot located in Quezon City
for P68,959.00 on January 19, 1944, which they sold for P94,000 on February 9, 1951. The CTA ordered the estate
of the late Felicidad Zamora (represented by Esperanza A. Zamora, as special administratrix of her estate), to pay
the sum of P235.50, representing alleged deficiency income tax and surcharge due from said estate. Esperanza A.
Zamora appealed and alleged that the CTA erred:

The Commissioner of Internal Revenue likewise appealed from the decision, claiming that the lower court erred:

(1) In giving credence to the uncorroborated testimony of Mariano Zamora that he bought the real property
involved during the Japanese occupation, partly in genuine Philippine currency and partly in Japanese war
notes; and

(2) In not holding that Esperanza A. Zamora, as administratrix, is liable for the payment of the sum of
P613.00 as deficiency income tax and 50% surcharge for 1951, plus 50% surcharge and 1% monthly
interest from the date said amount became due, to the date of actual payment.

It is alleged by Mariano Zamora that the CTA erred in disallowing P10,478.50 as promotion expenses incurred by his
wife for the promotion of the Bay View Hotel and Farmacia Zamora. He contends that the whole amount of
P20,957.00 as promotion expenses in his 1951 income tax returns, should be allowed and not merely one-half of it or
P10,478.50, on the ground that, while not all the itemized expenses are supported by receipts, the absence of some
supporting receipts has been sufficiently and satisfactorily established. For, as alleged, the said amount of
P20,957.00 was spent by Mrs. Esperanza A. Zamora (wife of Mariano), during her travel to Japan and the United
States to purchase machinery for a new Tiki-Tiki plant, and to observe hotel management in modern hotels. The
CTA, however, found that for said trip Mrs. Zamora obtained only the sum of P5,000.00 from the Central Bank and
that in her application for dollar allocation, she stated that she was going abroad on a combined medical and
business trip, which facts were not denied by Mariano Zamora. No evidence had been submitted as to where Mariano
had obtained the amount in excess of P5,000.00 given to his wife which she spent abroad. No explanation had been
made either that the statement contained in Mrs. Zamora's application for dollar allocation that she was going abroad
on a combined medical and business trip, was not correct. The alleged expenses were not supported by receipts.
Mrs. Zamora could not even remember how much money she had when she left abroad in 1951, and how the alleged
amount of P20,957.00 was spent.

Section 30, of the Tax Code, provides that in computing net income, there shall be allowed as deductions all the
ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or business (Vol.
4, Mertens, Law of Federal Income Taxation, sec. 25.03, p. 307). Since promotion expenses constitute one of the
deductions in conducting a business, same must testify these requirements. Claim for the deduction of promotion
expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount
and nature of the expenses incurred (N.H. Van Socklan, Jr. v. Comm. of Int. Rev.; 33 BTA 544). Considering, as
heretofore stated, that the application of Mrs. Zamora for dollar allocation shows that she went abroad on a combined
medical and business trip, not all of her expenses came under the category of ordinary and necessary expenses; part
thereof constituted her personal expenses. There having been no means by which to ascertain which expense was
incurred by her in connection with the business of Mariano Zamora and which was incurred for her personal benefit,
the Collector and the CTA in their decisions, considered 50% of the said amount of P20,957.00 as business
expenses and the other 50%, as her personal expenses. We hold that said allocation is very fair to Mariano Zamora,
there having been no receipt whatsoever, submitted to explain the alleged business expenses, or proof of the
connection which said expenses had to the business or the reasonableness of the said amount of P20,957.00. While
in situations like the present, absolute certainty is usually no possible, the CTA should make as close an
approximation as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactness is of his own making.

In the case of Visayan Cebu Terminal Co., Inc. v. Collector of Int. Rev., G.R. No. L-12798, May 30, 1960, it was
declared that representation expenses fall under the category of business expenses which are allowable deductions
from gross income, if they meet the conditions prescribed by law, particularly section 30 (a) [1], of the Tax Code; that
to be deductible, said business expenses must be ordinary and necessary expenses paid or incurred in carrying on
any trade or business; that those expenses must also meet the further test of reasonableness in amount; that when
some of the representation expenses claimed by the taxpayer were evidenced by vouchers or chits, but others were
without vouchers or chits, documents or supporting papers; that there is no more than oral proof to the effect that
payments have been made for representation expenses allegedly made by the taxpayer and about the general nature
of such alleged expenses; that accordingly, it is not possible to determine the actual amount covered by supporting
papers and the amount without supporting papers, the court should determine from all available data, the amount
properly deductible as representation expenses.

In view hereof, We are of the opinion that the CTA, did not commit error in allowing as promotion expenses of Mrs.
Zamora claimed in Mariano Zamora's 1951 income tax returns, merely one-half or P10,478.50.

Petitioner Mariano Zamora alleges that the CTA erred in disallowing 3-% per annum as the rate of depreciation of
the Bay View Hotel Building but only 2-%. In justifying depreciation deduction of 3-%, Mariano Zamora contends
that (1) the Ermita District, where the Bay View Hotel is located, is now becoming a commercial district; (2) the hotel
has no room for improvement; and (3) the changing modes in architecture, styles of furniture and decorative designs,
"must meet the taste of a fickle public". It is a fact, however, that the CTA, in estimating the reasonable rate of
depreciation allowance for hotels made of concrete and steel at 2-%, the three factors just mentioned had been
taken into account already. Said the CTA

Normally, an average hotel building is estimated to have a useful life of 50 years, but inasmuch as the useful
life of the building for business purposes depends to a large extent on the suitability of the structure to its
use and location, its architectural quality, the rate of change in population, the shifting of land values, as well
as the extent and maintenance and rehabilitation. It is allowed a depreciation rate of 2-% corresponding to
a normal useful life of only 40 years (1955 PH Federal Taxes, Par 14 160-K). Consequently, the stand of the
petitioners can not be sustained.

As the lower court based its findings on Bulletin F, petitioner Zamora, argues that the same should have been first
proved as a law, to be subject to judicial notice. Bulletin F, is a publication of the US Federal Internal Revenue
Service, which was made after a study of the lives of the properties. In the words of the lower court: "It contains the
list of depreciable assets, the estimated average useful lives thereof and the rates of depreciation allowable for each
kind of property. (See 1955 PH Federal Taxes, Par. 14, 160 to Par. 14, 163-0). It is true that Bulletin F has no binding
force, but it has a strong persuasive effect considering that the same has been the result of scientific studies and
observation for a long period in the United States after whose Income Tax Law ours is patterned." Verily, courts are
permitted to look into and investigate the antecedents or the legislative history of the statutes involved (Director of
Lands v. Abaya, et al., 63 Phil. 559). Zamora also contends that his basis for applying the 3-% rate is the testimony
of its witness Mariano Katipunan, who cited a book entitled "Hotel Management Principles and Practice" by Lucius
Boomer, President, Hotel Waldorf Astoria Corporation. As well commented by the Solicitor General, "while the
petitioner would deny us the right to use Bulletin F, he would insist on using as authority, a book in Hotel
management written by a man who knew more about hotels than about taxation. All that the witness did (Katipunan) .
. . is to read excerpts from the said book (t.s.n. pp. 99-101), which admittedly were based on the decision of the U.S.
Tax Courts, made in 1928 (t.s.n. p. 106)". In view hereof, We hold that the 2-% rate of depreciation of the Bay View
Hotel building, is approximately correct.

The next items in dispute are the undeclared capital gains derived from the sales in 1951 of certain real properties in
Malate, Manila and in Quezon City, acquired during the Japanese occupation.

The Manila property (Esperanza Zamora v. Coll. of Int. Rev., Case No. L-15289). The CTA held in this case, that the
cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine
currency in accordance with the Ballantyne Scale of values, and that the determination of the gain derived or loss
sustained in the sale of such property is not affected by the decline at the time of sale, in the purchasing power of the
Philippine currency. It was found by the CTA that the purchase price of P132,000.00 was not entirely paid in
Japanese War notes but thereof or P66,000.00 was in Philippine currency, and that during certain periods of the
enemy occupation, the value of the Japanese war notes was very much less than the value of the genuine Philippine
currency. On this point, the CTA declared

Finally, it is alleged that the purchase price of P132,000.00 was not entirely paid in Japanese war notes,
Mariano Zamora, co-owner of the property in question, testified that P66,000.00 was paid in Philippine
currency and the other P66,000.00 was paid in Japanese war notes. No evidence was presented by
respondent to rebut the testimony of Mariano Zamora; it is assailed merely as being improbable. We have
 examined this question thoroughly and we are inclined to give credence to the allegation that a portion of the
purchase price of the property was paid in Philippine money. In the first place, it appears that the Zamoras
owned the Farmacia Zamora which continued to engage in business during the war years and that a
considerable portion of its sales was paid for in genuine Philippine currency. This circumstance enabled the
Zamoras to accumulate Philippine money which they used in acquiring the property in question and another
property in Quezon City. In the second place, P132,000.00 in Japanese war notes in May, 1944 is
equivalent to only P11,000.00. The property in question had at the time an assessed value of P27,031.00 (in
Philippine currency). Considering the well known fact that the assessed value of real property is very much
below the fair market value, it is incredible that said property should have been sold by the owner thereof for
less than one-half of its assessed value. These facts have convinced us of the veracity of the allegation that
of the purchase price of P132,000.00 the sum of P66,000.00 was paid in Philippine currency, so that only
the sum of P66,000.00 was paid in Japanese War notes.

This being the case, the Ballantyne Scale of values, which was the result of an impartial scientific study, adopted and
given judicial recognition, should be applied. As the value of the Japanese war notes in May, 1944 when the Manila
property was bought, was 1 of the genuine Philippine Peso (Ballantyne Scale), and since the gain derived or loss
sustained in the disposition of this property is to reckoned in terms of Philippine Peso, the value of the Japanese war
notes used in the purchase of the property, must be reduced in terms of the genuine Philippine Peso to determine the
cost of acquisition. It, therefore, results that since the sum of P66,000.00 in Japanese war notes in May, 1944 is
equivalent to P5,500.00 in Philippine currency (P66,000.00 divided by 12), the acquisition cost of the property in
question is P66,000.00 plus P5,500.00 or P71,500.00 and that as the property was sold for P75,000.00 in 1951, the
owners thereof Mariano and Felicidad Zamora derived a capital gain of P3,500.00 or P1,750.00 each.

The Quezon City Property (Mariano Zamora v. Coll. of Customs, Case No. 15290). The Zamoras alleged that the
entire purchase price of P68,959.00 was paid in Philippine currency. The collector, on the other hand, contends that
the purchase price of P68,959.00 was paid in Japanese war notes. The CTA, however, giving credence to Zamora's
version, said

. . . If , as contended by respondent, the purchase price of P68,959.00 was paid in Japanese war notes, the
purchase price in Philippine currency would be only P17,239.75 (P68,959.00 divided by 4, 34.00 in war
notes being equivalent to P1.00 in Philippine currency). The assessed value of said property in Philippine
currency at the time of acquisition was P46,910.00. It is quite incredible that real property with an assessed
value of P46,910.00 should have been sold by the owner thereof in Japanese war notes with an equivalent
value in Philippine currency of only P17,239.75. We are more inclined to believe the allegation that it was
purchased for P68,959.00 in genuine Philippine currency. Since the property was sold for P94,000.00 on
February 9, 1951, the gain derived from the sale is P15,361.75, after deducting from the selling price the
cost of acquisition in the sum of P68,959.00 and the expense of sale in the sum of P9,679.25.

The above appraisal is correct, and We have no plausible reason to disturb the same.

Consequently, the total undeclared income of petitioners derived from the sales of the Manila and Quezon City
properties in 1951 is P17,111.75 (P1,750.00 plus P15,361.75), 50% of which in the sum of P8,555.88 is taxable, the
said properties being capital assets held for more than one year.

IN VIEW HEREOF, the petition in each of the above-entitled cases is dismissed, and the decision appealed from is
affirmed, without special pronouncement as to costs.

Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala and Makalintal, JJ., concur.
Labrador and Barrera, JJ., took no part.

FACTS: Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his income tax returns. The Collector of
Internal Revenue found that the promotion expenses incurred by his wife for the promotion of the Bay View Hotel and Farmacia
Zamora were not allowable deductions. Mariano Zamora contends that the whole amount of the promotion expenses in his income
tax returns, should be allowed and not merely one-half of it, on the ground that, while not all the itemized expenses are supported by
receipts, the absence of some

supporting receipts has been sufficiently and satisfactorily established.

ISSUE: In the absence of receipts, WON to allow as deduction all or merely one-half of the promotion expenses of Mrs. Zamora
claimed in Mariano Zamora's income tax returns

HELD: One-half only. Claims for the deduction of promotion expenses entertainment expenses must also be substantiated or
supported by record showing in detail the amount and nature of the expense incurred. Considering that the application of Mrs.
Zamora for dollar allocation shows that she went abroad on a combined medical and business trip, not all of her expenses came
under the category of ordinary and necessary expenses; part thereof constituted her personal expenses. There having been no
means by which to ascertain which expense was incurred by her in connection with the business of Mariano Zamora and which was
incurred for her personal benefit, the Collector and the CTA in their decisions, considered 50% of the said amount as business
expense and the other 50%, as her personal expenses. While in situations like the present, absolute certainty is usually not
possible, the CTA should make as close an approximate as it can, bearing heavily, if it chooses, upon the taxpayer whose
inexactness is of his own making.

Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his income tax returns the years
1951 and 1952. The Collector of Internal Revenue found that he failed to file his return of the capital gains derived
from the sale of certain real properties and claimed deductions which were not allowable. The collector required him
to pay the sums of P43,758.50 and P7,625.00, as deficiency income tax for the years 1951 and 1952.

On appeal by Zamora, the Court of Tax Appeals modified the decision appealed from and ordered him to pay the
reduced total sum of P30,258.00 (P22,980.00 and P7,278.00, as deficiency income tax for the years 1951 and 1952.

Having failed to obtain a reconsideration of the decision, Mariano Zamora appealed alleging that the Court of Tax
Appeals erred (amongst other things, this being the only relevant to the topic) in disallowing P10,478.50, as
promotion expenses incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora (which is
of P20,957.00, supposed business expenses).

Note: He contends that the whole amount of P20,957.00 as promotion expenses in his 1951 income tax returns,
should be allowed and not merely one-half of it or P10,478.50, on the ground that, while not all the itemized expenses
are supported by receipts, the absence of some supporting receipts has been sufficiently and satisfactorily
established. For, as alleged, the said amount of P20,957.00 was spent by Mrs. Esperanza A. Zamora (wife of
Mariano), during her travel to Japan and the United States to purchase machinery for a new Tiki-Tiki plant, and to
observe hotel management in modern hotels. The CTA, however, found that for said trip Mrs. Zamora obtained only
the sum of P5,000.00 from the Central Bank and that in her application for dollar allocation, she stated that she was
going abroad on a combined medical and business trip, which facts were not denied by Mariano Zamora. No
evidence had been submitted as to where Mariano had obtained the amount in excess of P5,000.00 given to his wife
which she spent abroad. No explanation had been made either that the statement contained in Mrs. Zamora's
application for dollar allocation that she was going abroad on a combined medical and business trip, was not correct.
The alleged expenses were not supported by receipts. Mrs. Zamora could not even remember how much money she
had when she left abroad in 1951, and how the alleged amount of P20,957.00 was spent.

ISSUE:
Whether or not the CTA erred in disallowing P10,478.50 as promotion expenses incurred by his wife for the
promotion of the Bay View Hotel and Farmacia Zamora in the absence of receipts proving the same.

HELD: NO
Section 30, of the Tax Code, provides that in computing net income, there shall be allowed as deductions all the
ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or business.
Since promotion expenses constitute one of the deductions in conducting a business, same must testify these
requirements. Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated
or supported by record showing in detail the amount and nature of the expenses incurred (N.H. Van Socklan, Jr. v.
Comm. of Int. Rev.; 33 BTA 544). Considering, as heretofore stated, that the application of Mrs. Zamora for dollar
allocation shows that she went abroad on a combined medical and business trip, not all of her expenses came under
the category of ordinary and necessary expenses; part thereof constituted her personal expenses. There having been
no means by which to ascertain which expense was incurred by her in connection with the business of Mariano
Zamora and which was incurred for her personal benefit, the Collector and the CTA in their decisions, considered
50% of the said amount of P20,957.00 as business expenses and the other 50%, as her personal expenses. We hold
that said allocation is very fair to Mariano Zamora, there having been no receipt whatsoever, submitted to explain the
alleged business expenses, or proof of the connection which said expenses had to the business or the
reasonableness of the said amount of P20,957.00. While in situations like the present, absolute certainty is usually
not possible, the CTA should make as close an approximation as it can, bearing heavily, if it chooses, upon the
taxpayer whose inexactness is of his own making.

In the case of Visayan Cebu Terminal Co., Inc. v. Collector of Int. Rev, it was declared that representation expenses
fall under the category of business expenses which are allowable deductions from gross income, if they meet the
conditions prescribed by law, particularly section 30 (a) [1], of the Tax Code; that to be deductible, said business
expenses must be ordinary and necessary expenses paid or incurred in carrying on any trade or business; that those
expenses must also meet the further test of reasonableness in amount; that when some of the representation
expenses claimed by the taxpayer were evidenced by vouchers or chits, but others were without vouchers or chits,
documents or supporting papers; that there is no more than oral proof to the effect that payments have been made
for representation expenses allegedly made by the taxpayer and about the general nature of such alleged expenses;
that accordingly, it is not possible to determine the actual amount covered by supporting papers and the amount
without supporting papers, the court should determine from all available data, the amount properly deductible as
representation expenses.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-22492 September 5, 1967

BASILAN ESTATES, INC., petitioner,

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

Felix A. Gulfin and Antonio S. Alano for petitioner.

Office of the Solicitor General for respondents.

BENGZON, J.P., J.:

A Philippine corporation engaged in the coconut industry, Basilan Estates, Inc., with principal offices
in Basilan City, filed on March 24, 1954 its income tax returns for 1953 and paid an income tax of
P8,028. On February 26, 1959, the Commissioner of Internal Revenue, per examiners' report of
February 19, 1959, assessed Basilan Estates, Inc., a deficiency income tax of P3,912 for 1953 and
P86,876.85 as 25% surtax on unreasonably accumulated profits as of 1953 pursuant to Section 25
of the Tax Code. On non-payment of the assessed amount, a warrant of distraint and levy was
issued but the same was not executed because Basilan Estates, Inc. succeeded in getting the
Deputy Commissioner of Internal Revenue to order the Director of the district in Zamboanga City to
hold execution and maintain constructive embargo instead. Because of its refusal to waive the
period of prescription, the corporation's request for reinvestigation was not given due course, and on
December 2, 1960, notice was served the corporation that the warrant of distraint and levy would be
executed.
On December 20, 1960, Basilan Estates, Inc. filed before the Court of Tax Appeals a petition for
review of the Commissioner's assessment, alleging prescription of the period for assessment and
collection; error in disallowing claimed depreciations, travelling and miscellaneous expenses; and
error in finding the existence of unreasonably accumulated profits and the imposition of 25% surtax
thereon. On October 31, 1963, the Court of Tax Appeals found that there was no prescription and
affirmed the deficiency assessment in toto.

On February 21, 1964, the case was appealed to Us by the taxpayer, upon the following issues:

1. Has the Commissioner's right to collect deficiency income tax prescribed?

2. Was the disallowance of items claimed as deductible proper?

3. Have there been unreasonably accumulated profits? If so, should the 25% surtax be imposed on
the balance of the entire surplus from 1947-1953, or only for 1953?

4. Is the petitioner exempt from the penalty tax under Republic Act 1823 amending Section 25 of the
Tax Code?

PRESCRIPTION

There is no dispute that the assessment of the deficiency tax was made on February 26, 1959; but
the petitioner claims that it never received notice of such assessment or if it did, it received the
notice beyond the five-year prescriptive period. To show prescription, the annotation on the notice
(Exhibit 10, No. 52, ACR, p. 54-A of the BIR records) "No accompanying letter 11/25/" is advanced
as indicative of the fact that receipt of the notice was after March 24, 1959, the last date of the five-
year period within which to assess deficiency tax, since the original returns were filed on March 24,
1954.

Although the evidence is not clear on this point, We cannot accept this interpretation of the
petitioner, considering the presence of circumstances that lead Us to presume regularity in the
performance of official functions. The notice of assessment shows the assessment to have been
made on February 26, 1959, well within the five-year period. On the right side of the notice is also
stamped "Feb. 26, 1959" denoting the date of release, according to Bureau of Internal Revenue
practice. The Commissioner himself in his letter (Exh. H, p. 84 of BIR records) answering petitioner's
request to lift, the warrant of distraint and levy, asserts that notice had been sent to petitioner. In the
letter of the Regional Director forwarding the case to the Chief of the Investigation Division which the
latter received on March 10, 1959 (p. 71 of the BIR records), notice of assessment was said to have
been sent to petitioner. Subsequently, the Chief of the Investigation Division indorsed on March 18,
1959 (p. 24 of the BIR records) the case to the Chief of the Law Division. There it was alleged that
notice was already sent to petitioner on February 26, 1959. These circumstances pointing to official
performance of duty must necessarily prevail over petitioner's contrary interpretation. Besides, even
granting that notice had been received by the petitioner late, as alleged, under Section 331 of the
Tax Code requiring five years within which to assess deficiency taxes, the assessment is deemed
made when notice to this effect is released, mailed or sent by the Collector to the taxpayer and it is
not required that the notice be received by the taxpayer within the aforementioned five-year period.1

ASSESSMENT

The questioned assessment is as follows:

 Net Income per return P40,142.90
Add: Over-claimed depreciation P10,500.49
Mis. expenses disallowed 6,759.17

Officer's travelling expenses

2,300.40 19,560.06
disallowed
Net Income per Investigation P59,702.96
20% tax on P59,702.96 11,940.00
Less: Tax already assessed 8,028.00

Deficiency income tax P3,912.00

Add: Additional tax of 25% on P347,507.01 86,876.75

Tax Due & Collectible P90,788.75

=========

The Commissioner disallowed:

Over-claimed depreciation P10,500.49

Miscellaneous expenses 6,759.17
Officer's travelling expenses 2,300.40

DEDUCTIONS

A. Depreciation. Basilan Estates, Inc. claimed deductions for the depreciation of its assets up to
1949 on the basis of their acquisition cost. As of January 1, 1950 it changed the depreciable value of
said assets by increasing it to conform with the increase in cost for their replacement. Accordingly,
from 1950 to 1953 it deducted from gross income the value of depreciation computed on the
reappraised value.

In 1953, the year involved in this case, taxpayer claimed the following depreciation deduction:

Reappraised assets P47,342.53

New assets consisting of hospital building and
equipment 3,910.45
Total depreciation
P51,252.98

Upon investigation and examination of taxpayer's books and papers, the Commissioner of Internal
Revenue found that the reappraised assets depreciated in 1953 were the same ones upon which
depreciation was claimed in 1952. And for the year 1952, the Commissioner had already
determined, with taxpayer's concurrence, the depreciation allowable on said assets to be
P36,842.04, computed on their acquisition cost at rates fixed by the taxpayer. Hence, the
Commissioner pegged the deductible depreciation for 1953 on the same old assets at P36,842.04
and disallowed the excess thereof in the amount of P10,500.49.

The question for resolution therefore is whether depreciation shall be determined on the acquisition
cost or on the reappraised value of the assets.
Depreciation is the gradual diminution in the useful value of tangible property resulting from wear
and tear and normal obsolescense. The term is also applied to amortization of the value of intangible
assets, the use of which in the trade or business is definitely limited in duration.2 Depreciation
commences with the acquisition of the property and its owner is not bound to see his property
gradually waste, without making provision out of earnings for its replacement. It is entitled to see that
from earnings the value of the property invested is kept unimpaired, so that at the end of any given
term of years, the original investment remains as it was in the beginning. It is not only the right of a
company to make such a provision, but it is its duty to its bond and stockholders, and, in the case of
a public service corporation, at least, its plain duty to the public.3 Accordingly, the law permits the
taxpayer to recover gradually his capital investment in wasting assets free from income
tax.4 Precisely, Section 30 (f) (1) which states:

(1)In general. A reasonable allowance for deterioration of property arising out of its use or
employment in the business or trade, or out of its not being used: Provided, That when the
allowance authorized under this subsection shall equal the capital invested by the taxpayer .
. . no further allowance shall be made. . . .

allows a deduction from gross income for depreciation but limits the recovery to the capital invested
in the asset being depreciated.

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost.
Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that
deductions from gross income are privileges,5 not matters of right.6 They are not created by
implication but upon clear expression in the law.7

Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset
will transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would
recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru
depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit
on the investment made has never been the underlying reason for the allowance of a deduction for
depreciation.

Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has no
justification in the law. The determination, therefore, of the Commissioner of Internal Revenue
disallowing said amount, affirmed by the Court of Tax Appeals, is sustained.

B. Expenses. The next item involves disallowed expenses incurred in 1953, broken as follows:

Miscellaneous expenses P6,759.17

Officer's travelling expenses 2,300.40

Total
P9,059.57

These were disallowed on the ground that the nature of these expenses could not be satisfactorily
explained nor could the same be supported by appropriate papers.

Felix Gulfin, petitioner's accountant, explained the P6,759.17 was actual expenses credited to the
account of the president of the corporation incurred in the interest of the corporation during the
president's trip to Manila (pp. 33-34 of TSN of Dec. 5, 1962); he stated that the P2,300.40 was the
president's travelling expenses to and from Manila as to the vouchers and receipts of these, he said
the same were made but got burned during the Basilan fire on March 30, 1962 (p. 40 of same TSN).
Petitioner further argues that when it sent its records to Manila in February, 1959, the papers in
support of these miscellaneous and travelling expenses were not included for the reason that by
February 9, 1959, when the Bureau of Internal Revenue decided to investigate, petitioner had no
more obligation to keep the same since five years had lapsed from the time these expenses were
incurred (p. 41 of same TSN). On this ground, the petitioner may be sustained, for under Section
337 of the Tax Code, receipts and papers supporting such expenses need be kept by the taxpayer
for a period of five years from the last entry. At the time of the investigation, said five years had
lapsed. Taxpayer's stand on this issue is therefore sustained.

UNREASONABLY ACCUMULATED PROFITS

Section 25 of the Tax Code which imposes a surtax on profits unreasonably accumulated, provides:

Sec. 25. Additional tax on corporations improperly accumulating profits or surplus (a)
Imposition of tax. If any corporation, except banks, insurance companies, or personal
holding companies, whether domestic or foreign, is formed or availed of for the purpose of
preventing the imposition of the tax upon its shareholders or members or the shareholders or
members of another corporation, through the medium of permitting its gains and profits to
accumulate instead of being divided or distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-five per centum of the undistributed
portion of its accumulated profits or surplus which shall be in addition to the tax imposed by
section twenty-four, and shall be computed, collected and paid in the same manner and
subject to the same provisions of law, including penalties, as that tax. 1aw phl.nt

The Commissioner found that in violation of the abovequoted section, petitioner had unreasonably
accumulated profits as of 1953 in the amount of P347,507.01, based on the following circumstances
(Examiner's Report pp. 62-68 of BIR records):

1. Strong financial position of the petitioner as of December 31, 1953. Assets were
P388,617.00 while the liabilities amounted to only P61,117.31 or a ratio of 6:1.

2. As of 1953, the corporation had considerable capital adequate to meet the reasonable
needs of the business amounting to P327,499.69 (assets less liabilities).

3. The P200,000 reserved for electrification of drier and mechanization and the P50,000
reserved for malaria control were reverted to its surplus in 1953.

4. Withdrawal by shareholders, of large sums of money as personal loans.

5. Investment of undistributed earnings in assets having no proximate connection with the

business as hospital building and equipment worth P59,794.72.

6. In 1953, with an increase of surplus amounting to P677,232.01, the capital stock was
increased to P500,000 although there was no need for such increase.

Petitioner tried to show that in considering the surplus, the examiner did not take into account the
possible expenses for cultivation, labor, fertilitation, drainage, irrigation, repair, etc. (pp. 235-237 of
TSN of Dec. 7, 1962). As aptly answered by the examiner himself, however, they were already
included as part of the working capital (pp. 237-238 of TSN of Dec. 7, 1962).
In the unreasonable accumulation of P347,507.01 are included P200,000 for electrification of driers
and mechanization and P50,000 for malaria control which were reserved way back in 1948 (p. 67 of
the BIR records) but reverted to the general fund only in 1953. If there were any plans for these
amounts to be used in further expansion through projects, it did not appear in the records as was
properly indicated in 1948 when such amounts were reserved. Thus, while in 1948 it was already
clear that the money was intended to go to future projects, in 1953 upon reversion to the general
fund, no such intention was shown. Such reversion therefore gave occasion for the Government to
consider the same for tax purposes. The P250,000 reverted to the general fund was sought to be
explained as later used elsewhere: "part of it in the Hilano Industries, Inc. in building the factory site
and buildings to house technical men . . . part of it was spent in the facilities for the waterworks
system and for industrialization of the coconut industry" (p. 117 of TSN of Dec. 6, 1962). This is not
sufficient explanation. Persuasive jurisprudence on the matter such as those in the United States
from where our tax law was derived,8 has it that: "In order to determine whether profits were
accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the
controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not
subsequently declared intentions which are merely the products of after-thought."9 The reversion
here was made because the reserved amount was not enough for the projects intended, without any
intent to channel the same to some particular future projects in mind.

Petitioner argues that since it has P560,717.44 as its expenses for the year 1953, a surplus of
P347,507.01 is not unreasonably accumulated. As rightly contended by the Government, there is no
need to have such a large amount at the beginning of the following year because during the year,
current assets are converted into cash and with the income realized from the business as the year
goes, these expenses may well be taken care of (pp. 238 of TSN of Dec. 7, 1962). Thus, it is
erroneous to say that the taxpayer is entitled to retain enough liquid net assets in amounts
approximately equal to current operating needs for the year to cover "cost of goods sold and
operating expenses" for "it excludes proper consideration of funds generated by the collection of
notes receivable as trade accounts during the course of the year."10 In fact, just because the fatal
accumulations are less than 70% of the annual operating expenses of the year, it does not mean
that the accumulations are reasonable as a matter of law."11

Petitioner tried to show that investments were made with Basilan Coconut Producers Cooperative
Association and Basilan Hospital (pp. 103-105 of TSN of Dec. 6, 1962) totalling P59,794.72 as of
December 31, 1953. This shows all the more the unreasonable accumulation. As of December 31,
1953 already P59,794.72 was spent yet as of that date there was still a surplus of P347,507.01.

Petitioner questions why the examiner covered the period from 1948-1953 when the taxable year on
review was 1953. The surplus of P347,507.01 was taken by the examiner from the balance sheet of
petitioner for 1953. To check the figure arrived at, the examiner traced the accumulation process
from 1947 until 1953, and petitioner's figure stood out to be correct. There was no error in the
process applied, for previous accumulations should be considered in determining unreasonable
accumulations for the year concerned. "In determining whether accumulations of earnings or profits
in a particular year are within the reasonable needs of a corporation, it is neccessary to take into
account prior accumulations, since accumulations prior to the year involved may have been
sufficient to cover the business needs and additional accumulations during the year involved would
not reasonably be necessary."12

Another factor that stands out to show unreasonable accumulation is the fact that large amounts
were withdrawn by or advanced to the stockholders. For the year 1953 alone these totalled
P197,229.26. Yet the surplus of P347,507.01 was left as of December 31, 1953. We find
unacceptable petitioner's explanation that these were advances made in furtherance of the business
purposes of the petitioner. As correctly held by the Court of Tax Appeals, while certain expenses of
the corporation were credited against these amounts, the unspent balance was retained by the
stockholders without refunding them to petitioner at the end of each year. These advances were in
fact indirect loans to the stockholders indicating the unreasonable accumulation of surplus beyond
the needs of the business.

ALLEGED EXEMPTION

Petitioner wishes to avail of the exempting proviso in Sec. 25 of the Internal Revenue Code as
amended by R.A. 1823, approved June 22, 1957, whereby accumulated profits or surplus if invested
in any dollar-producing or dollar-earning industry or in the purchase of bonds issued by the Central
Bank, may not be subject to the 25% surtax. We have but to point out that the unreasonable
accumulation was in 1953. The exemption was by virtue of Republic Act 1823 which amended Sec.
25 only on June 22, 1957 more than three years after the period covered by the assessment.

In resume, Basilan Estates, Inc. is liable for the payment of deficiency income tax and surtax for the
year 1953 in the amount of P88,977.42, computed as follows:

Net Income per return P40,142.90

Add: Over-claimed
10,500.49
depreciation

Net income per finding P50,643.39

20% tax on P50,643.39 P10,128.67

Less: Tax already assessed 8,028.00

Deficiency income tax P2,100.67

Add: 25% surtax on
86,876.75
P347,507.01

Total tax due and collectible P88,977.42

===========

WHEREFORE, the judgment appealed from is modified to the extent that petitioner is allowed its
deductions for travelling and miscellaneous expenses, but affirmed insofar as the petitioner is liable
for P2,100.67 as deficiency income tax for 1953 and P86,876.75 as 25% surtax on the unreasonably
accumulated profit of P347,507.01. No costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and
Fernando, JJ., concur.

Basilan Estates, Inc. claimed deductions for the depreciation of its assets on the basis of their acquisition cost. As of January 1, 1950 it

changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement. Accordingly, from

1950 to 1953 it deducted from gross income the value of depreciation computed on the reappraised value.

CIR disallowed the deductions claimed by petitioner, consequently assessing the latter of deficiency income taxes.
Issue:

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

Held:

Yes. The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in

the asset being depreciated:

(1)In general. A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade, or out of

its not being used: Provided, That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer . . .

no further allowance shall be made. . . .

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such

cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not

created by implication but upon clear expression in the law [Gutierrez v. Collector of Internal Revenue, L-19537, May 20, 1965].

Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. It

commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out

of earnings for its replacement.

The recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the underlying purpose of a

depreciation allowance. For then what the taxpayer would recover will be, not only the acquisition cost, but also some profit. Recovery in due

time thru depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit on the investment made has

never been the underlying reason for the allowance of a deduction for depreciation.