BASILAN ESTATES, INC. v. CIRG.R. No. L-22492 September 5, 1967The 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.

Facts: 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.

Commissioner vs. Phoenix Assurance GR L-19727, 20 May 1965

Facts: Phoenix assurance is a foreign insurance corporation organized under the laws of Great Britain, licensed to do business in the Philippines. Through its head office in London, it entered into worldwide reinsurance treaties with various foreign insurance companies. It agreed to cede a portion of premiums received on original insurances underwritten by its head office, subsidiaries, and branch offices around the world, in consideration for assumption by the foreign insurance companies of n equivalent portion of the liability form such original insurances. Pursuant to such treaties, the company ceded portions of its premiums it earned from its underwriting business in the Philippines, upon which assessed withholding tax. The company thereafter amended its tax returns (1950-1954) excluding reinsurance premium and items of deduction attributable to such premium. The Commissioner assessed deficiency income tax against the company.

Issue: Whether the Commissioner is justified in the assessment of deficiency tax.

Held: The changes and alteration embodied in the amended tax return consisted of the exclusion of reinsurance premium received from domestic insurance companies by the company’s head office, reinsurance premium ceded to foreign insurers not doing business in the Philippines and various items of deductions attributable to such excluded reinsurance premiums, thereby substantially modifying the original return. As amended return is substantially different from the original return, the period of limitation of the right to issue the same should be counted from the filing of the amended income tax return. The right of the Commissioner to assess the deficiency tax on the amended return has not prescribed. To hold otherwise would pave the way for taxpayer to evade the payment of taxes simply reporting in their original return heavy losses and amending the same more than 5 years later when the Commissioner has lost his authority to assess the proper tax there under. The object of the tax code is to impose taxes for the needs of the government, not to enhance tax avoidance to its prejudice.

Commissioner vs. Javier GR 78953, 31 July 1991

Facts: In 1977, Victoria Javier (wife of Melchor), received from the Prudential Bank and Trust Co.US$999,973.70 remitted by her sister, Dolores Ventosa, through some banks in the United States, among them Mellon Bank NA. Mellon Bank filed suit to recover the excess amount of US$9999,000 as the remittance of US$ 1 million was a clerical error and should have been US $1,000 only (Compare facts in Mellon Bank vs. Magsino, GR 71479, 18 October 1990). In 1978, Melchor Javier filed his income tax return for 1977showing a gross income of P53,053.38 and a net income of P48,053.38 and stating in the footnote of the return that “taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned outto be an error and is now subject of litigation. In 1980, the Commissioner assessed and demanded from Javier deficiency assessment of P9,287,297.51 for 1977. Javier protested such assessment, where the Commissioner in turn imposed a 50% fraud penalty against Javier.

Issue: Whether Javier is liable for the 50% fraud penalty.

Held: Under the then Section 72 of the Tax Code, a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has been made on the basis of the return filed before the discovery of the falsity or fraud. The fraud

contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most created only suspicion. A fraudulent return is always an attempt to evade a tax, but a merely false return may not be. Herein, there was no actual and intentional fraud through willful and deliberate misleading of the government agency concerned (BIR) committed by Javier. Javier did not conceal anything to induce the government to give some legal right and place itself at a disadvantage. Error or mistake of law is not fraud. As ruled by the Court of Tax Appeals, the 50% surcharge imposed as fraud penalty in the deficiency assessment should be deleted

CIR vs. Philippine Global Communication Inc. [G.R. No. 167146 October 31, 2006]

Facts: Philippine Global (respondent) is a corporation engaged in telecommunications, filed its Annual Income Tax Return for taxable year 1990 on 15 April 1991. On 13 April 1992, the Commissioner of Internal Revenue (CIR) issued Letter of Authority No. 0002307, authorizing the appropriate Bureau of Internal Revenue (BIR) officials to examine the books of account and other accounting records of respondent, in connection with the investigation of respondent’s 1990 income tax liability. BIR sent a letter to respondent requesting the latter to present for examination certain records and documents, but respondent failed to present any document. Respondent received a Preliminary Assessment Notice dated 13 April 1994 for deficiency income tax inclusive of surcharge, interest, and compromise penalty, arising from deductions that were disallowed for failure to pay the withholding tax and interest expenses that were likewise disallowed. On the following day, 22 April 1994, respondent received a Formal Assessment Notice with Assessment Notice No. 000688-80-7333, dated 14 April 1994, for deficiency income tax. 

Phil Global filed two letters of protests, in both letters, respondent requested for the cancellation of the tax assessment. More than eight years after the assessment was presumably issued, respondent received from the CIR a Final Decision dated 8 October 2002 denying the respondent’s protest against Assessment Notice No. 000688-80-7333, and affirming the said assessment in toto. 

CTA rendered a Decision in favor of respondent on 9 June 2004. It decided that the protest letters filed by the respondent cannot constitute a request for reinvestigation, hence, they cannot toll the running of the prescriptive period to collect the assessed deficiency income tax.  Thus, since more than three years had lapsed from the time Assessment Notice No. 000688-80-7333 was issued, the CIR’s right to collect the same has prescribed in conformity with Section 269 of the National Internal Revenue Code of 1977. 

Issues: (1) Whether or not CIR’s right to collect respondent’s alleged deficiency income tax is barred by prescription under Section 269(c) of the Tax Code of 1977 

(2) Whether or not the prescription on assessment was suspended by virtue of the alleged request of reinvestigation by Phil Global 

Held: Petition was denied. The law prescribed a period of three years from the date the return was actually filed or from the last date prescribed by law for the filing of such return, whichever came later, within which the BIR may assess a national internal revenue tax.  However, the law increased the prescriptive period to assess or to begin a court proceeding for the collection without an assessment to ten years when a false or fraudulent return was filed with the intent of evading the tax or when no return was filed at all.  In such cases, the ten-year period began to run only from the date of discovery by the BIR of the falsity, fraud or omission. 

If the BIR issued this assessment within the three-year period or the ten-year period, whichever was applicable, the law provided another three years after the assessment for the collection of the tax due thereon through the administrative process of distraint and/or levy or through judicial proceedings. The three-year period for collection of the assessed tax began to run on the date the assessment notice had been released, mailed or sent by the BIR. 

The assessment, in this case, was presumably issued on 14 April 1994 since the respondent did not dispute the CIR’s claim. Therefore, the BIR had until 13 April 1997. However, as there was no Warrant of Distraint and/or Levy served on the respondents nor any judicial proceedings initiated by the BIR, the earliest attempt of the BIR to collect the tax due based on this assessment was when it filed its Answer in CTA Case No. 6568 on 9 January 2003, which was several years beyond the three-year prescriptive period. Thus, the CIR is now prescribed from collecting the assessed tax.  

Court has also clarified that the statute of limitations on the collection of taxes should benefit both the Government and the taxpayers further illustrated the harmful effects that the delay in the assessment and collection of taxes inflicts upon taxpayers, that is for the purpose of expediting the collection of taxes, so that the agency charged with the assessment and collection may not tarry too long or indefinitely to the prejudice of the interests of the Government, which needs taxes to run it; and for the taxpayer so that within a reasonable time after filing his return, he may know the amount of the assessment he is required to pay, whether or not such assessment is well founded and reasonable so that he may either pay the amount of the assessment or contest its validity in court. 

The Tax Code of 1977, as amended, provides instances when the running of the statute of limitations on the assessment and collection of national internal revenue taxes could be suspended, even in the absence of a waiver, Among the exceptions, and invoked by the CIR as a ground for this petition, is the instance when the taxpayer requests for a reinvestigation which is granted by the Commissioner. However, this exception does not apply to this case since the respondent never requested for a reinvestigation. 

Revenue Regulations No. 12-85, the Procedure Governing Administrative Protests of Assessment of the Bureau of Internal Revenue, issued on 27 November 1985, defines the two types of protest, the request for reconsideration and the request for reinvestigation. 

Section 6. Protest. - The taxpayer may protest administratively an assessment by filing a written request for reconsideration or reinvestigation specifying the following particulars:  x x x x 

For the purpose of protest herein— 

(a) Request for reconsideration-- refers to a plea for a re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both. 

(b) Request for reinvestigation—refers to a plea for re-evaluation of an assessment on the basis of newly-discovered evidence or additional evidence that a taxpayer intends to present in the investigation. It may also involve a question of fact or law or both. 

The main difference between these two types of protests lies in the records or evidence to be examined by internal revenue officers, whether these are existing records or newly discovered or additional evidence. A re-evaluation of existing records which results from a request for reconsideration does not toll the running of the prescription period for the collection of an assessed tax. Section 271 distinctly limits the suspension of the running of the statute of limitations to instances when reinvestigation is requested by a taxpayer and is granted by the CIR. 

In the present case, the separate letters of protest dated 6 May 1994 and 23 May 1994 are requests for reconsideration. The CIR’s allegation that there was a request for reinvestigation is inconceivable since respondent consistently and categorically refused to submit new evidence and cooperate in any reinvestigation proceedings. 

The distinction between a request for reconsideration and a request for reinvestigation is significant. It bears repetition that a request for reconsideration, unlike a request for reinvestigation, cannot suspend the statute of limitations on the collection of an assessed tax. If both types of protest can effectively interrupt the running of the statute of limitations, an erroneous assessment may never prescribe. If the taxpayer fails to file a protest, then the erroneous assessment would become final and unappealable.  On the other hand, if the taxpayer does file the protest on a patently erroneous assessment, the statute of limitations would automatically be suspended and the tax thereon may be collected long after it was assessed. Meanwhile the interest on the deficiencies and the surcharges continue to accumulate. And for an unrestricted number of years, the taxpayers remain uncertain and are burdened with the costs of preserving their books and records. This is the predicament that the law on the statute of limitations seeks to prevent

 LUCAS ADAMSON vs. COURT OF APPEALSFACTS:A deficiency tax assessment was issued against Petitioners relating to their payment of capital gains tax and VAT on theirsale of shares of stock and parcels of land. Subsequent to the preliminary conference, the CIR filed with the Departmentof Justice her Affidavit of Complaint against Petitioners. The Court of Appeals ultimately ruled that, in a criminalprosecution for tax evasion, assessment of tax deficiency is not required because the offense of tax evasion is completeor consummated when the offender has knowingly and willfully filed a fraudulent return with intent to evade the tax. Lucas Adamson and AMC sold 131,897 common shares of stock in Adamson and Adamson, Inc. (AAI) to APACHolding Limited (APAC). The shares were valued at P7,789,995.00.[1] On June 22, 1990, P159,363.21 was paidas capital gains tax for the transaction. AMC sold to APAC Philippines, Inc. another 229,870 common shares of stock in AAI for P17,718,360.00. AMCpaid the capital gains tax of P352,242.96. The Commissioner issueda “Notice of Taxpayer” to AMC, Lucas G. Adamson, Therese June D. Adamson and SaraS. de los Reyes, informing them of deficiencies on their payment of capital gains tax and Value Added Tax (VAT).The notice contained a schedule for preliminary conference.G.R. No. 120935 Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes were charged before the Regional TrialCourt (RTC) of Makati, Branch 150 in Criminal Case Nos. 94-1842 to 94-1846. They filed a Motion to Dismiss orSuspend the Proceedings. They invoked the grounds that there was yet no final assessment of their tax liability,and there were still pending relevant Supreme Court and CTA cases. Initially, the trial court denied the motion. A Motion for Reconsideration was however filed, this time assailingthe trial court’s lack of jurisdiction over the nature of the subject cases. On August 8, 1994, the trial court granted the Motion. It ruled that the complaints for tax evasion filed by theCommissioner should be regarded as a decision of the Commissioner regarding the tax liabilities of Lucas G.Adamson, Therese June D. Adamson and Sara S. de los Reyes, and appealable to the CTA. It further held that thesaid cases cannot proceed independently of the assessment case pending before the CTA, which has jurisdictionto determine the civil and criminal tax liability of the respondents therein. Court of Appeals reversed the trial court’s decision and reinstated the criminal complaints.o 

The appellate court held that, in a criminal prosecution for tax evasion, assessment of tax deficiency isnot required because the offense of tax evasion is complete or consummated when the offender hasknowingly and willfully filed a fraudulent return with intent to evade the tax.o It ruled that private respondents filed false and fraudulent returns with intent to evade taxes, and actingthereupon, petitioner filed an Affidavit of Complaint with the Department of Justice, without anaccompanying assessment of the tax deficiency of private respondents, in order to commence criminalaction against the latter for tax evasion.G.R. No. 124557  AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed a letter request for re-investigation with the Commissioner of the “Examiner’s Findings” earlier issued by the Bureau of InternalRevenue (BIR), which pointed out the tax deficiencies. On March 15, 1994 before the Commissioner could act on their letter-request, AMC, Lucas G. Adamson, ThereseJune D. Adamson and Sara S. de los Reyes filed a Petition for Review with the CTA. They assailed theCommissioner’s finding of tax evasion againstthem. The Commissioner moved to dismiss the petition, on the ground that it was premature as she not yet issued a formal assessment of the tax liability of herein petitioners

The recommendation letter of the Commissioner cannot be considered a formal assessment as (a) it was not addressed to the taxpayers; (b) there

was no demand made on the taxpayers to pay the tax liability, nor a period for payment set therein; (c) the letter was never mailed or sent to the

taxpayers by the Commissioner. It was only an affidavit of the computation of the alleged liabilities and thus merely served as prima facie basis for

filing criminal informations.

(2) YES. When fraudulent tax returns are involved as in the cases at bar, a proceeding in court after the collection of such tax may be begun without

assessment considering that upon investigation of the examiners of the BIR, there was a preliminary finding of gross discrepancy in the computation

of the capital gains taxes due from the transactions. The Tax Code is clear that the remedies may proceed simultaneously.

(3) NO. While the laws governing the CTA have expanded the jurisdiction of the Court, they did not change the jurisdiction of the CTA to entertain an

appeal only from a final decision of the Commissioner, or in cases of inaction within the prescribed period. Since in the cases at bar, the

Commissioner has not issued an assessment of the tax liability of the Petitioners, the CTA has no jurisdiction.