CTA Case No. 4090 (Decision)

}' REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY S.P.S. GAMALIEL P. MAGSAYSAY and CARMEN P. GRANADA, Petitioners, - versus - C.T.A. CASE NO. 4090 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - -K DEC I s I 0 N This case involves the decision o:f respondent Commissioner o� Internal Revenue assessing petitioners o:f deficiency income tax in the amount o:f P31,335.92 :for the taxable year 1978. Petitioners' Gamaliel P. Magsaysay and Carmen Granada, husband and wi:fe, and residing at #2053 Ipil St., Sta. Cruz, Manila, during the taxable year in question were engaged in the practice o:f their respective profession as lawyer and dentist. 21 J

DECISION - C.T.A. CASE NO. 4090 -2- On April 30, 1979, petitioners filed their joint income tax return for the taxable year 1978 declaring the following items, to wit: Gross (join t > income P111,064.00 Total d eduction - ���~Q_t-!!~-~~.-9..9_ Net income p 30,225.00 Personal exemp tion P9, 000. 00 Standard deduction for working wife -�-��.9_99_!_9.9 Taxable income Tax due <Exhibit "A", p. 4, CT A records) However) upon examination conducted by Miss Celia Capuchino, Revenue Examiner, several deductions in the income tax return of petitioners were disallowed, as follows: .J.:. t~~. A~.Q UD.t. p 277.15 Overstat e me nt of expens es Furnit~ re to be capitalized 10,485.40 Tuition fees-excessive 485.00 Transp ortation 23 ,000.00 Repres enta tion Depreci ation 4,000.00 Contribution 10,200.00 2,886.00 On Ap ri l 15, 1982 respondent issued deficiency income tax assessment of P31,335.92 under Demand Letter No. 23-5- 04A -046777-78 <Exhibit "B", petitioners,. p. 8, CTA records>. In a letter dated July 2, 1982 addressed to respondent thru the Director, Revenue Region No. 4 - A, petitioners took

DECISION - C.T.A. CASE NO. 4090 -3- exception to each o� the alleged discrepancies requesting that the deduction be allowed and the said de�iciency assessment be set aside <Exhibit "C" � petitioners, p. 9, CTA records>. Respondent in a �allow - up letter dated April 1983 demanded �rom petitioners the payment o� P31,335.92 including interest <Exhibit "D", petitioners, p. 11, CTA records>. On August 1983, petitioners protested the a�oresaid assessment which was denied by respondent on June 27, 1986 <Exhibit "E", petitioners , p. CTA records>. Hence, this present petition �or review �iled on August 15, 1982, seeking the reversal o� �respondent's decision denying petitioners' request to set aside the assessment. This case at hand has been submitted �or decision based on the pleadings and records o� the case with respondent submitting his memorandum sans the memoranda o� petitioners. The issues raised in the case at bar are as �allows: /~ 221 I

DECISION - C.T.A. CASE NO. 4090 - 4- 1. whether or not petitioners are liable to the deficiency income tax of P31,335.92 for the taxable year 1978; and 2. whether or not the right of respondent to assess has already prescribed. Anent the first issue, it is well settled that when a taxpayer claims deduction he must be able to point some specific provision of the statute in which the deduction is allowed and must be able to prove that he is entitled to the deduction which the law allows. On this premise, we are discussing the controversial items as indicated in respondent's assessment. Respondent in a letter dated June 27, 1986 claimed that petitioners overstated their expenses by P277. 15, computed as follows: Per income statement o� petitioner P80,839.00 Footing by the BIR examiner _l;}_Q,. 56~-.!._� 5 Overstatement claimed by BIR ~. -�-�-�-~?.?._. ~.~ We do not agree with respondent. What happened in this case was that when respondent recomputed the amounts of A I

DECISION - C.T.A. CASE NO. 409Q -5- expenses in petitioners' income tax returns it inadvertently failed to include certain item of expenses like the medica .l care expenses in the amount of P276. 80. That explains why respondent concluded that petitioners overstated their expenses. Baaed on this Court's analysis , it appears that the ac �tual overstatement of expenses by petitioners show a difference of only P0.35 and not P277.15 as claimed by .) respondent as demonstrated below: !.t. gm~. A.!!!Q~.!lt Salaries and Wages p 6,000.00 Transportation Representation 23,000.00 Repairs Taxes and Licenses 5,000.00 Depreciation Contribution 2, 951. 35 Basic Tuition Fees Medical Care 1,294.00 Office Supplies � Dental Supplies 13,200.00 Furniture and Equipment Laboratory Expenses 5,000.00 Books and Magazines Electricity, Water, etc. 1,235.00 Postage Footing by the Court 276.80 Footing by petitioners Actual Overstatement 3,113.40 1,073.30 13,103.00 1,289.00 1,433.80 1,230.00 ___!_,.__ 639 .!_Q.O P80,838.6S -~.9....-~-~~ �--00. p .35 Petitioners maintained that the amount of P13,103.00 should be deducted as

DECISION - '. C.T.A. CASE NO. 4090 6- depreciation expense for the following furniture and equipment: Date of Na m_EL.Q.L_!;ij: or~. Pu:r_ch?._~g Amount. p 100.00 New Luzon Bed and Furniture 05/08/78 400.00 Libiran Home Furnishing 12/21/78 345.00 378.00 Phil. Bed Factory 12/23/78 550.0'0 2,200.00 Avesco Mktg. Corporation 06/16/78 _.--..-2t..J..~O ~0 Atlas General Equipment 12/23/78 ~ 1~_~:.._~03. 90 Asian Rattan Inc. 12/22/78 IBM 12/20/78 Total- Furniture & Equipment Petitioners claimed deduction for depreciation of the furniture and equipment must be viewed in the light of the following condition set forth in Sec. 30(f) of the Tax Code and jurisprudence on the matter: ( 1 ) it must be reasonable (see Bacolod Milling Co., Inc. v. Commissioner, CT A Case �No. 140 2, De t. 31 , 1 96 9 > ; <2 > for property arising out of its use or employment in the business or trade, or out of it not being used temporarily during the year (Connel Bros. Co. [Phil] v. Coll., CTA Cases Nos. 411 and 610, April 30, 1966�> ; ( 3) it must be charged off during that taxable year; and <4 > a statement on �the allowance must be attached to the return. A mere claim of a taxpayer that d e p r e c i a t.i o n allowance is deductible 22~

DECISION - C.T.A. CASE NO. 4090 ' -7- without the required evidence is unavailing with the BIR or with the Court. Petitioners in their joint return merely stated in the petition, that as practicing professionals the furniture and equipment are subject to depreciation .) allowance. Such bare statement will not hold true in the 1ight of the Supreme Court ruling in the case of Consolidated 11inea, Inc. va. The Court o:E Ta x Appeals, <58 SCRA 618, Nos. L - 18853 C18854, August 29, 1974 > wherein it was ru1ed that the burden of proof is on the taxpayers to show justification for depreciation. Petitioners' failure to discharge the burden prevent the Court from disturbing the Commissioner' a computation. We agree with respondent that the acquiai tion coat of the furniture and equipment of P 13, 103. 00 is to be spread into five year period, which is the estimated 1ife of the said items, that the actual 1ife of the said properties is not short, but of a permanent character and the amount expended by petitioners are capital expenditure which may be recovered through 22u I A

DECISION - C.T.A. CASE NO. 4090 B- depreciation. Hence, We are o:f the persuasion that the allowable amount o:f depreciation should be P2, 620. 60 or 1 I 5 o:f P 13, 105. 00 the total coat o:f the :furniture and equipme nt under the straight line method. Coming now to the deductibility o:f the basic tuition fees in the amount o:f P1,235.00. It is a mandatory requirement under Sec. 30<a, 2, A, 2> of the Tax Code, that the deduction shall not exceed P250.00 for each taxpayer dependents who are studying in high school. but not to exceed in the aggregate of P1,000.00. The l.aw is very aimpl.e and explicit and .) do not require fu .rther elaboration, as correctly stated by respondent in hie memorandum ( p. 4, CTA recorda P� 99). Petitioners' cl.aim of Pl, 255.00 for basic tuition fees of hie ( 3) high school children was excessive. Under the l.aw, the al.l.owabl.e deduction is only P750.00 or P250.00 each. Therefore, there is an overcl.aimed amount of P485.00 <1,255.00 l.eaa P750. 00).

DECISIG... - C.T.A. CASE NO. 4090 .� -9- 4. Tx. f:l_n.~.P..9..!:'_t __l�l,_t!Qrt.... -...... ......~.n9.. _._____ .!,_LI?.\_Y-�;'_J.,..J..J.:n.9. For the taxable year 1978 petitioners are claiming the amount o:f P23, 000. 00 :for transportation and travelling expenses, but respondent disallowed the whole amount claimed contending that petitioners :failed to submit supporting papers or satis:factory explanation. Under Section 30<a> o:f the Tax Code. Respondent :further argued that petitioners :failed to prove that they wer.e incurred in the year in question, and, likewise :failed to submit proo:f that the said expenses were actually incurred in connection with the exercise o:f their respective pro:fessions and incurred while away :from home. We agree with respondent. As held in the case o:f Wi~�redo L. Carisosa vs. Bureau o� Interna~ Revenue and, Cesar 11. Va~dez, i n h i s c a p a c i t y a s BIR Regiona~ Director, Revenue Regions~ Office No. '7, Cebu City, CTA Case No. 3713 January 25, 1985, "It is hardly necessary to add that the burden o:f proo:f is on the taxpayer contesting the validity or correctness o:f assessment to prove not only that the / /~

DECISION - C.T.A. CASE NO. 4090 ,' - 10 - Commissioner o� Interna1 Revenue is wrong but that he <taxpayer> is right. <Line Gutierrez vs. Co~~ector o:f Interns~ Revenue,. CTA Case No. 504,. January 28,. 1982> Petitioner �ai1ed to present evidence as proo� in support o� his a11egations in his petition �or review. Hence,. presumed is correctness o� the tax assessment <Interprovincia1 Auto-bus Co.,. Inc. vs. Co11ector o� Interna1 Revenue,. L-6741,. January 31,. 1956,. 98 Phi1. 290; Co11ector o� Interna1 Revenue vs. Boho1 Transportation,. Co.,. L-13049 and L-13462,. Apri1 29,. 1960,. 107 Phi1. 965 >,. The Court can on1y consider the c1aim �or deduction where evidence has been o��ered there�or. The record sho~s that petitioners were ab1e to substantiate the amount o� P656. 75 with corresponding bus tickets and car renta1 receipts,. showing the date o� purchase and was ab1e to prove that they were incurred in the pursuit o� their pro�ession and in the year in question <Exhibits J,. K,. L,. M,. and N,. pp. 122-125,. CTA records> . Petitioners are thus granted /~ .) I 0 I) - {..,f.-U

DECISION - C.T.A. CASE NO. 4090 - 11 the said sum of P656.75 for their trave11ing and transportation expenses. We agree with respondent that onl.y the amount of P1,000.00 is al.l.owabl.e as representation expenses. This amount appeared to be supported with receipts issued to petitioners <Exhs. M, N, 0, P, Q, and R; pp. 125- 130, CTA Records>. But the amount of P4, 000. 00 is denied for 1ack of supporting documents. xxx. <Co11ector of Internal. Revenue vs. Goodrich International. Rubber Co., No. L-22265). 6. pepreciation. We agree with the rul.ing of respondent that cooking range and television set are not subject to depre~iation a11owance since said items are for the personal. use of petitioners and are not in any way connected with the exercise of their profession pursuant to Sec. 30(f) of the Tax Code We now consider the statutory test of deductibility of depreciation for the house. As claimed by petitioners that .) portion o'f the house was used for of�ice

DECISIOn - C.T.A. CASE NO . 4090 - 12 - and as their residence. Depreciation is not measured by theoretical. yardstick but should be determined by a consideration o:f actual. :fact <Limpan Investment Corporation vs. Commiss ioner, L - 21570, July 20, 1966, 17 SCRA 703~ Commissioner vs. Preci.ll.a Estate Inc. , L - 18282, May 29, 1986 >. The records show that petitioners do not maintain any o:f:fice aside :from their residence located at 2053 Ipi.l St., Sta. Cruz, Manila, and this has been admitted by respondent in his answer. We thus agree with the contention o:f petitioners that the portion o:f the house devoted :for o��ice use is subject to depreciation al.lbwance CAbra Va~~ey Co~~ege Inc. vs. A quina, L - 390586, June 16, 1980, 162 SCRA 106 > Thus, i� only a part o:f the property (real. or personal.> is used :for business purposes or i� the entire property (real. or personal.> is used onl.y partially �or business purposes, there must be an apportionment so that depreciation wi.l.l be limited to the proportion used to total. use pa/{ <Mertens Law o� Federal. Income Taxation, Vol.. 4, 2311a, Chap. 25, p. 66). I:f a I

DECISIOrt - C.T.A. CASE NO. 4090 �. - 13 - o� the house i.e used a a o��i.ce, the corresponding rent or depreciation as the case may, be i.e deducti.b1e <C. B. 1938-183, Law o� Federa1 Income Taxation, Mertens, Vo1. P� 523). It i.e to be noted however, that peti. ti.onera �ai.1ed to state categori.ca11y what portion o� the house is devoted :for o��i.ce use. Be that as it may, petitioners are presumed to have c1ai.med depreciation :for the who1e house which is P35,000.00. As the records wi.11 show peti.t:Loners mere1y indicated the amount o� P35, 000. 00 in schedu1e 1:0 o� their income tax return ( p. 6, CTA recorda> without speci.�yi.ng what portion re1ate to the o��i.ce space and :for the house. At any rate, We are o� the impression that said amount re�era to the coat o� the who1e house. Baaed on the 1aw and jurisprudence on the matter, one ha1� portion o� the house used �or o��i.ce space can be depreciated. Since one ha1� <1/2 > o� the amount o� P35,000.00 i.e P17,500.00 which We assume to represent the coat o� the o:f:f:Lce space, and since pet:Lt:Loners were a1ready granted 1n the previous year the amount o:f /~ 23i

DECISION - C.T.A. CASE NO. 4090 14 - P19r200.00 as deductibl.e o:f:fice depreciationr petitioners are now barred in cl.aiming :further deduction :for depreciation o:f the same o:f:fice space :for the taxabl.e year 1978. The l.aw al.l.ows a deduction :from gross income o:f depreciation but l.imits recovery to the capital. invested in the assets being depreciatsd. xxx it does not authorize depreciation beyond the acquisition cost. The reason is that deduction is a privi.leger not a matter o:f right. Deduction are not created by impl.ication but on a cl.ear expression o:f .law. XXX (Basil.an Estate Inc. vs. Commissionerr 21 SCRA September 1967; Gutierrez vs. Commissionerr L-19987r May 20r 1965). Depreciation deduction :for books and magazines in the sum o:f P1r000.00 vas al.l.owed by respondent together with the amount o:f P2r000.00 :for :furniture and equipments. Regarding the amount o:f PS,OOO.OO which petitioners c.laimed as contribution expensesr except :for the bare statement o:f A I

DECISION - C.T.A. CASE NO. 4090 - 15 - petitioners as to the week1y church 1imosna o� his wi�e, no evidence was submitted to support such a11egation. Contrary to what is provided in Section 30<h> o� the Tax Code which a11ows �u11 deductions o� the contribution i� such was made in �avor o� the institutions or organizations speci�ied thereto. Contributions other than those mentioned in Sec. 30(h) o� the Tax Code are not deductib1e Respondent is correct in treating the amount o� PS,OOO.OO as excessive. And assessing deduction o� P2,113.50 as a11owab1e contribution expense o� petitioners. In �ine, petitioners de�iciency income tax 1iabi1ity �or the year 1978 shou1d be recomputed as �o11ows: Findings Amount. to be Disallowed 1. Overstatement. of expenses due to error in addition: Per income tax return P80,939.00 Per Court Footing 80,938.65 p � 35 2. Furniture and Equipment to be capitalized: Acquisition cost. P13,103.00 Less: Depreciation ) (13,103 I 5) 2,260.60 10,842.40 /~ !

-- > DECISION - C.T.A. CASE NO. 4090 - 16 ~ 3. Basic Tuition Fees of three (3) high school children: Claimed by petitioners P 1,235.00 Allowed by the law (750 X 3) 759.00 485.00 4. Transportation: 22,343.25 4,000.00 Claimed by petitioners P23,000.00 Substantiated with 10,200.00 2,886.50 receipts P50,757.50 5. Representation: Claimed by petitioners P5,000.00 Allowed by BIR examiner -1LQOO.OO 6. Depreciation: Claimed by petitioners P~1030, 200.0�0 . 00 0 Allowed by BIR examiner 7. Contribution: Claimed by petitioners P5,000.00 Allowed by BIR examiner ~13.50 Total amount to be disallowed as deductible expenses COKPUTATION OF DEFICIENCY IHCOKE TAX: Net income per return P29,725.00 Add total disallowance on 50,757.50 expens e s cla imed deductible P80,482.50 Net income per investigation _.2., 000. 00 Less personal exemptions P71,482.50 Net taxable income Tax Du e : on first P70,000.00 P23,280.00 excess of P1,482.50 at the rate of 52Y. 770.9Q P24,050.90 3,075.00 Less tax due per return P20,975.90 Deficiency income tax 9,439.15 Add interest - max. P30,415.05 <P20,975.90 x 15Y. x 3 years> ,{ TOTAL � I

DECISIC. C.T.A. CASE NO. 4090 - 17 - The Court now comes to the second issue on whether respondent's right to assess petitioners for deficiency income tax and co11ect the same has a1ready prescribed. This issue has been answered on four square in the case of Wood Works, Inc. vs. Commissioner of Interna~ Revenue, CTA Case No. 4472, Apri1 17, 1992. The pertinent portion of that decision is quoted be1ow: "The Tax Code, prior to its amendment by Batas Pambansa No. 700, entit1ed "An Act Amending Sections 318 And 319 Of The Nationa1 Interna1 Revenue Code, As Amended, So As To Reduce The Period Of Limitation For Assessment Of Interna1 Revenue Taxes From Five To Three (3) Years" <dated Apri1 5, 1984), provided in its Sections 318 and 319, respective1y, that: 'Sec. 318. Period of 1imitation upon assessment and co11~ction o f :taxe~ Except as provided in the succeeding section, interna1 revenue tax sha11 be assessed within five Y:~~rs �-��-~fter the return was fi1ed, and no proceeding in court without assessment for the co11ection of such taxes sha11 be begun after the expiration of such period. For the purposes of this section, a return fi1ed before the 1ast day prescribed by 1aw for the fi1ing thereof sha11 be considered as fi1ed on such 1ast day: Provided, That this 1imitat ion sha11 not app1y to cases a1ready investigated . �~ I (' J...',ltJ-d

DECISION - C.T.A. CASE NO. 4090 - 18 - prior to the approva1 of this Code. ' "andJ 'Sec. 319. Exceptions as to period of 1imitation of assessment and co1.lection of taxes. 'xxx XXX XXX ' <c > When the assessment of any interna1 revenue tax has been made within the period of 1imitation above- prescribed such tax may be co11ected by distraint or .levy or by a proceeding in court, but only begun <1> within five years after the assessment of the tax, or <2 > prior to the expiration of any period :for co11ection agreed upon in writing by the Commissioner and the taxpayer before the expiration of such five-year period. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previous1y agreed upon. ' "Subseque nt to BP 700, the same Tax Code . provisions, this tim� renumbe red to Sections 268 and 269, read, as fo11ows: 'Section 268. Period of 1imitation upon assessment and co11ection. Except aa provided in the succeeding section, int~rna1 revenue taxes sha1.1 be aseeased within three years aft�r the .la�t day prescribed by .law :for the fi1ing of the return, and no proceeding in court without assessment for the co.l1ection of such taX<>B shal.l. b� b�gunr

DECISION - C.T.A. CASE NO. 4090 - 19 - of s uch taxes ahal.l. be begun after the expiration of such period: Provided, That in a case where a return is fil.ed beyond the period prescribed by l.aw, the three - year period ahal.l. be counted from the day the return was fil.ed. For the purpose of this section, a return fil.ed before the l.ast day prescribed by l.aw for the fil.ing thereof ahal.l. be considered as fil.ed on such l.aat day. <Underscoring Ours>' "and; 'Section 269. Exceptions as to period of l.imitation of assessment and col.l.ection o:f taxes. 'xxx XXX XXX '<c> Any internal. assessment revenue tax whAch has b~e-~-~ssessed wit!tin the period o:f l.imitation above- prescribed may be col.l.ected by distraint or l.evy or by a pro~eeding in court vi thin three years , :fol.l.owing the asseaame~t o:f the tax. <Underscoring suppl.ied>' "In the case at bar, the income tax retur n in question was :fil.ed by petitioner on April. 16, 1984, whil.e the assessment was issued by respondent :four years and eight months .later, on January 16, 1989. Thus,. the Court must determine whether the provisions o:f the Tax Code prior to or those subsequent to B~ 700 are appl.icabl.e to the case at bar. For,. if the l.atter provisions appl.y, then respondent's right , to col.l.ect the assessed amount <and, in fact,. its right to r~u~l

DECISIOi:s - C.T.A. CASE NO. 4090 - 20 - make the assessment against the petitioner, in the first instance> as already prescribed. "Sec tion 3 of B.P. 700 provides the Court vi th the solution. It states as follows: 'Sec. 3. The period of .) limitation herein prescribed sha11 apply to assessments of ,!nter._n_~..J,.--�� revefl~~ taxes begiQ_n~.!lQ tax._ab1~-~a..!:__1~84. <Underscoring supplied)' "Clearly, since the income taxes which are the subject of the assessment notice, demand 1etter, and the warrants of distraint or levy, are petitioner's corporate taxes for the year 1983, then B.P. 700 and the amendments it introduced to the Tax Code do not apply. In other words, the provisions of Sections 318 and 319 above - quoted apply to the instant case J and, consequent1y, respondent's right to collect the assessed amount has not yet prescribed. In view of the foregoing, this Court is convinced that the �assessment made against petitioner for deficiency income tax return for 1978 in the total amount of P30,415.05 has not yet prescribed, petitioners income tax return having been filed on April 30, 1979 and the assessment having been issued on April 15, 1982. L

,. DECISIO t--. - C.T.A. CASE NO. 4090 - 2.1 - ACCORDINGLY. spouses Gama1ie1 P. Magsaysay and Carmen P. Granada. petitioners in this case. are hereby ordered to pay the amount of P30.4.15.05 to respondent Commissioner of Interna1 Revenue as deficiency income tax inc1usive of interest which accrued ther eon incident to de1inquency pursuant to Section 5.1<e> of the Nationa1 Interna1 Revenue Code of .1977. SO ORDERED. Quezon City. Metro Mani1a. / March 24. .1993. / LK. ;i~U GRUBA Judge WE CONCUR: ~~Q.~ ACOSTA esiding Judge P,J / / RAIAs~s o,cOi a.tce DJE:t~:R~~A I

DECISION - C.T.A. CASE NO. 4090 - 22 - CERTIFICATION I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ~l.~ Q.G:~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 24(J .)