CTA Case No. 4592 (Decision)

f ! REPUBUC OF 1l-IE PHIUPPINES COURT OF TAX APPEALS QUElONCflY ARMCO-MARSTEEL AllOY C.T.A CASE NO. 4592 CORPORATION. Petitioner, - versus - THE COMMISSIONER OF INTERNAL REVENUE Respondent. x --------------------x DECISION This case involves petitioner's claim for refund or in the , alternative tax credit of alleged overpaid income tax for the fiscal year ending October 3L 1989 in the amount of P5,061,899.00. Petitioner is a domestic corporation registered with the Board of Investments as a preferred pioneer enterprise engaged in the business of producing/manufacturing grinding balls and billets. (#11, Notes to Financial Statements, p. 53, CTA record.) Petitioner is entitled to avail as an incentive under R.A. 5186 the allowable deductions of the accelerated depreciation. (BIR Form 1702-E p. 73, CTA record.) 607

IJF.OSION - C.TA. CASE NO. 4592 Page2 Petitioner's annual income tax return for the fiscal year ending October 31, 1989 was filed on February 15, 1990. TI1e income tax return shows a refundable amount of P5,06t899.00, cornputed as follows: Total Gross Income P7t7M226.00 Less: Total Deductions 66,807,558.00 . Net Income p 4,956,668.00 Atuount of Tax Due p 1,73t834.00 Less: Quatierly Tax Payments Ot~axtex OR Number Date Paid Amot.mt Fixst B142108?S 03-31-89 P4,583,182.00 s~c(~1d B17039220 06-29-89 2,213,551.00 6,796,733.00 Total Amount of Tax Refundable p 5,061,899.00 ) For the succeeding taxable fiscal year ending October 31, 1990, petitioner suffered a loss. Thus, petitioner was not able to apply tl e refundable amount as an automatic tax credit pursuant to the provision of S ction 69 of the National Internal Re-venue Code. On Februaty 21. 1991. petitioner filed a claim for refund in the amount of ?5,061.899.00 citing as b sis Section 69 of the said Code, to wit: NSec. 69. Final Adjustment Ret1,un - Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total taxable income for the preceding calenda r or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year the corporation shall either: a) Pay the excess tax still due; or su J

DECISION- C.TA. CASE NO. 4.592 Pagel b) Be refunded the excess amount paid, as the case maybe. In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be . credited against he estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year." To date, respondent has not acted on the claim for refund/tax credit filed by petitioner. Hence, on April 3, 1991, petitioner filed the instant petition for review. Respondent answer d that the petition states no cause of action for failure on the part of petitioner to allege the date/s when the quarterly income tax payments were made. In addition, all payments made prior to April 3, 1989 have prescribed. TI1e quoted provision (Section 69) is misplaced. It is incumbent upon the taxpayer to prove entitlement to the refund/credit sought. l11e issue is simple. Is petitioner entitled to the refund or tax credit of P ,061,899.00, representing overp id income tax for the fiscal .year ending October 3L 1989? The Court answers in the affirmative. 0 tring the trial of this case, petitioner offered in evidence . the following documents: 1. Quarterly Income Tax Returns ending: a. January 31. 1989 (Exh. A) with a tax due of Pt583J82.00 (Exh. A-2);

DECISION - C.T.A. CASE NO. 4592 Page4 b. April 30, 1989 (Exh. B) with a tax due of P2,213,551.00 (Exh. B-2); and c. Julv 31, 1989 (Exh. C) with a refundable amount of J of P2,006,808.00 (Exh. C-2). 2. Annual Income Tax Returns, with the attached ~uditpr' s Report and Financial Statements, for the fiscal years ending: a. October 31, 1989 (Exh. 0-1 ) showing an Income Tax Due of PL 734,834.00 and Income Tax Refundable amount of P5,061,899.00 (Exh. 0-2); and b. October 31, 1990 (Exh. F ) showing a loss of P11, 98t 215.00 thereby indicating no tax liability (Exh. F-1). 3. Quarterly Income Tax Payments for the first and second quarters of fiscal year 1989, consisting of: a. BIR Payment Order I\Jo. C4899806 (Exh. A-3) and CB Confirmation Receipt No. B14210876 (Exh. A-5) both dated .ht'larch 3L 1989 (Exhs. A-4 and A-6, respectively) in the amount of P4,581182. 00, representing income tax paid for the first quarter of 1989; and b. BIR PayTnent Order No. C5436681 (Exh. B-3) and CB Confirmation Receipt No. B17039220 (Exh. B-5) both dated June 29, 1989 (Exhs. B-4 and B-6, respeCtively) in the arnount of P2J1l551.00, representing income tax paid for the second quarter of 1989. 4. The letter claim for refund (Exh. G) dated February 20, 1991 filed by petitioner with respondent's office on February 2L 1991 (Exh. G-1). st o

DECJSION - C.TA. CASE NO. 4592 PageS Respondent for his part presented as witness, Mrs. Jane Denosta, Revenue Officer IL BIR, tvlakati East District one of the revenue examiners who conducted the examination on petitioner's alleged claim for refund. The Statement of Findings (Exh. 1) shows that instead of a refund petitioner was found to be liable for deficiency income tax in the amount of P5.331742.34. cornpute? as follows: I. INCOME: Net incon:1. per return p 4,956,668.00 6,176,375.00 Add: Un llowe.ble accelerated depredation 2,413,193.17 R p .ir a.nd Mah"ltenance expense P13,546,236 .17 ch rge to expense that should be capitalized l\djusted net income Income tax due p 4,741,182.06 Less: Inn"~me tax per retUln 1.734,834.00 p 3,006,348.66 . Income Tax still due 751,587.16 Add: 25% sun:harge . 1.565,806.52 20% Interest 2yrs. & 1 mo. 41.6665% 10.000.00 Compromise penalty Total Deficiencv Income Tax p 5,333,742.34 ~ Repair and Maintenance Schedule 40404 JV-7-24 803 Spare parts GJ 65-0042 p 369,249.28 287,000.00 40404 JV-6-14 Rep/Main GJ 57-0009 207,908.12 249,136.3b 40404 JV-9-25 Landed Cost GJ-86-0016 264,530.00 87093 Cuyos March 113 Pinion gear 280,100.00 349,090.01 40404 JV-8-14 Rep. and Maintenance 150,000.00 40404 JV-4-21 SMD-Raw material 82225 Bearing Roller Bearing PJT0-0079 256,178.50 82277 ABB 818 Transformer PJ04-0040 p 2.413,139.19 40404 JV�1-26 Landed cost 903 GJ03-0065 611

DECISION - C.TA. CASE NO. 4592 Respondent's revenue examiner testified that upon investigation petitioner was not able to secure the approval of the BIR regarding the use of the accelerated method of depreciation. Thus, the disallowance of P6, 176,375.00 accelerated depreciation. , Likewise, the amount of P2.413J39. 19, representing some of the repairs and maintenance expense, was disallowed on the ground that the same should have been capitalized because of its material amount as compared to others with minimal amounts. At this juncture it may be noteworthy to point that petitioner requested the BIR for the privilege to use the accelerated depreciation method. But up to hearing date the same was not acted upon by respondent's office. Also, nowhere in the records of the ca~e will it shov�! that the 10-day preliminary notice of assessment \~las sent to petitioner. We shall first discuss each items raised by respondent in his answer to the petition. Respondent contended that the petition states no cause of action there being no mention of the dates when the taxes were paid. Furthermore, payments made after April 3, 1989 have already prescribed. In an earlier ruling of the Supreme Court in the case of Commissioner of Internal Revenue v. Asia Australia Exprem IJ:d.., G. R. No. 85956, April tO. 1989. it was held that "where the tax is payable by the taxpayer in quarterly installments, the final payment is the last quarter payrnent at the end of the tax year 612

.� DECISION - C.TA. CASE NO. 4592 Page7 when it is finally ascertainable that the taxpayer either made profits or suffered losses in its operations11 � In the subsequent case of Cammissianer of Internal Revenue v. TMX Sales~ Inc.� et. al. G.R. No. 83736. Janwuy 15. 1992, the Supreme Court ruled that 11the most reasonable and \ . logical application of the law would be to compute the two-year prescriptive period at the time of filing the Final Adjustment Return or the Annual Income Tax Return, when it can be finally ascertained if the taxpayer has still to pay additional income tax or if he is entitled to a refund of overpaid income tax. 11 In the case at bar, the corporate quarterly and annual income tax return for the fiscal year ending October 31, 1989 as well as the confirmation receipts and payment orders showing the amount of taxes paid, were all attached to the petition. If examined closely the annexes of the petition dearly sho~s the date when said taxes in questioned were paid. The petition, therefore, states a cause of action. The quarterly income tax payments for the first and second quarters of fiscal year 1989 should only be considered mere instalments of the annual tax due. 11These quarterly tax payrnents which are computed based on the cumulative figures of gross receipts and deductions in order to arrive at a net taxable income, should be treated as advances or portions of the annual income tax due, to be adjusted at the end of the calendar or fiscal year. This is reinforced by Section 87 (now Section 69) which provides for the filing of adjustment returns and final payment of income tax. Consequently, the two-year prescriptive perio_d

DEOSION - C.TA. CASE NO. 4592 PageS provided in Section 292 (now Section 230 of the Tax Code should be computed from the time of filing the Adjustment Return or Annual Income Tax Return and final payment of income tax." (Commissioner of Internal Revenue v. TMX Sales.. Inc... et. aL supra.) Hence, since the claim for refund covers overpaid income tax for the fiscal year ending October 31, 1989, petitioner has two -years counted from February 15, 1990 (the date when the Final Income Tax Return was filed) to file a claim for refund. It has up to February 15, 1992 to file a claim for refund with the respondent and with this Court. Since the claim for refund was filed �with respondent on February 21, 1991 and the petition for review T,Nas filed on April 3, 1991, it is therefore dear that the petition v'las filed on time. vVith regard to the . disallowance of accele.rated depreciation in the amount . of P 6,176,375.00, petitioner maintains that as a registered preferred pioneer enterprise it can avail of the incentives provided under Section 7(b) of R.A. No. 5186, to wit: n Sec. 7. Incentives to a RegistEred Entmprise. - A registered enterprise, to the extent engaged in a preferred area of investment, shall be granted the follovving incentive benefits. (a) X X X XXX XXX. (b) Arrelerated Depreciation. - At the option of the taxpayer and in accordance with the procedure established bv the Bureau of Internal Revenue, fixed assets may be (1) depreciated to the extent of not 614

DECISION - C.TA. CASE NO. 4592 Page9 more than twice as fast as normal rate of depreciation or depreciated at normal rate of depreciation if expected life is ten years or less; or (2) depreciated over any number of years between five years and expected life if the latter is more ~than ten (1 0) years; and the depreciation thereon allowed as a deduction from taxable income: fivr.'ided that the taxpayer notifies the Bureau of Internal Revenu�,at the beginning of the depreciation period which depreciation rate allowed by this section will be used by it. .. [ Underlining supplied.] Being a preferred pioneer enterprise registered with the Board of Investments, petitioner availed the incentives provided under R.A. 5186 one of which is the use of �the accelerated depreciation. In the course of the cross examination of � respondent's witness, it was established that petitioner notified the BIR of its availment of the accelerated depredation. No � response was received thereafter from the Bureau. The records ' will also show that petitioner filed with the Burea~ BIR Form . No. 1702-E, indicating the nature of incentives availed of, that is,. the accelerated depreciation. R.A. 5186 prescribes a minimum requirement of notification and not approval by the BIR of the availment of the incentive adopting the accelerated depreciation. The option to use the accelerated depreciation is on the preferred pioneer enterprise. Having exercised its power of choice, petitioner's only obligation is to notify respondent of that choice. The law is clear on this regard. Petitioner can validly deduct the accelerated depreciation from its income. The same should not be disallowed. 615

DECISION- C.T.A. CASE NO. 4592 Page 10 Another itern disallm�'led by the exammer refers to the repairs and maintenance in the total amount of P2. 413,103.17. Beca1.1se of the rnaterial arnount involve. respondent 's exarniner contends that the sarne should be capitalized. 1lte repairs and rnaintenance cost must be ordina1y and necessary business expense in order to be deduct'bh:) from income . "llte cost of incident~! rer"~ airs. {..vhich neither m -. terially add to the value uf tlte prorez ty nor appreci bly prolon g it.s life <"nd v.1 hidt t.-1?f're rnacie tn kc'ep f'!,e l'roperty in an ordinarily {'HiciC'rd nJ'~-"' , t in g cnndit.ion , tnCI)l b0 deducted as n e p0nse ." (4 "l\�:}.c,.., l. t.e...lLc ,�)) Ii �r)�..) ( )tln? r facloz s like the p1.1rpose for vvldch the expend it uz es t_.17en:) rnC~de is nlso n ecf�s:.<ny in deh''rtnining \�V hC'tll{"'l i-11! il{'l!i nf t-''<J'C'ndit 111 e sltnnld be cctpitali?.ed or not "If its pnrpnsf:' is merely to keep the property or a ma chine in effic:iett t O !'t-?l nti 11 g CU!tdi lion CIJKi is Clt'COI di ng [y in I he llct hn e of a . waintenance chaz ge, it is ot dinaz ily cl ed ncUble. If it gofl~~ beyund tha't cC~t.e.;ory. it is ordinnrily nnn ded1td ible ." (iHd .. p.3 i4,i 'Ute arnount should not be the colttrnlling factnr . SnL'sh1- nce. not form. shollld be the controlli n_s factor. In� this case. tlte [\l1tes to Finnncial Staternents of retitioner's audited financial reF -,rt for th fiscal ye r 1989 indicates that the cost of maintenance and repairs is charged to incorne as incurred and significant rene~~l.'als and betterment's are I �- � capitali:ed. (#1. r�.Jot_es to Financial Staternents, p . 47, CTA record.) l\.:lost of the iterns disallo~..~led refer to spare parts, pinion gears. roller bearing . transformers and landed cost can be considered cos t of rnachinery repairs. Spare..p� rts are deemed to 616

DECISION - C.T.A. CASE NO.II!Rl Pagett be replacement of worn-out parts the same is true with the rest of the items disallowed. The amount of expenditure standing alone is not a sufficient base for determining whether an amount expended for repairs should be capitalized. "The presumption of correctness of assessment being a mere presumption cannot be made tb rest on another presumption. 11 (~of Internal Revenue v. Benipayo~ G.R. No. L-13656. Jan. 31. 1962; Island Garment Mfg. Corp. v. Commr. of Internal Revenue. CTA No. 2070. June 22. � 1977; Medina v. CIR. CTACase No. 1245, Dec. 27. 1971; Herrera . v. Commr. of Internal Revenue, CTA Case No. 2060. June 27�. 1972: Samoon v. Commr. of Internal Revenue. CTA Case No. 232. June 30. 1958; Unterbo v. Commr. of Internal Revenue. CfA Case No. 363. Dec. 26. 1950.) The disallowance of the aforesaid amount representing repairs and maintenance is erroneous. WHEREFORE. finding the petition meritorious, respondent Commissioner of Internal Revenue is hereby ordered to refund or in the alternative, issue a tax credit certificate in favor of petitioner, Armco-Marsteel Alloy Corporation, in the amount of PS, 061,899.00, representing overpaid income tax for the fiscal 1 year ending October 31. 1989. SO ORDERED. Quezon City, Metro Manila, July 1. 1993. ~Q~~ ERNESTO D. ACOSTA Presidi~g Judge 61 7

DECISION - C.TA. CASE NO. 4592 Pa.ge12 ~ 0~. DJEOVAJrt?RA' RAMON Associate Judge CERTIFICATION I hereby certify that this decision was reached afte_r due consultation among the members of the Court of Tax Appeals in � accordance with Section 13, Article VIII of the Constitution. Cl_ __ ~\Q... ~ ' ERNE"sro D. ACOSTA Presiding Judge 61