CTA Case No. 172 (Decision)

/ REPUBLIC OF THE PHILIPPINES COURT OR TAX APPEALS MANI LA MARCELO STEEL CORPORATION, Petitioner, - ver sus -� C. T. A. CASE NO . 172 THE COLLECTOR OF I NTERNAL ~~1 REVENUE , Respondent. \~ x- - - - - - - - - - - - - - x .~ \ DECISi l The petitioner is a copporation duly organized and existing under and by virtue of the laws of the Philippines , with offices at Malabon, Rizal. It is engaged in t hree (3) industrial activities , namely, (1) manufacture of wire fence , (2) manufacture of nails , and (3) manufacture of steel bars, rods and other allied steel products . During theyears 1952 and 1953 , the last two mentioned industrial opera- tions , more specificallY\ the manufacture<,df- nails and the manufacture of steel bars , rods and other allied steel products, enjoyed the benefits of tax exemption under Republic Act No . 35. On May 21 , 1953 , the pet itioner filed an in- come tax return for the year 1952, reflecting a net income of ~34 , 386 . 58 realized solely from i ts business of manufacturing wi re fence , an activity which is not tax exempt , and on March 31, 195i, i t filed its income tax return for the year 1953, shovt- ing a net income of �58 , 329 . 11 realized from the same source , i.e ., the manufacture of wire fence . On the basis of the said income tax returns filed by the petitioner for the years 1952 and 1953 which did not reflect the financial results of its tax exempt business activities, the respon- dent assessed the total sum of ~12,7 50 . 00 . /�� 131

DECISION - C.T . A. CASE NO . 172 -2 Accordingly, the petitioner paid the said amount assessed against it on the following dates: T!~ Ye�t Date AmQY!!:t 1952 May 30, 1953 p; 3,458 . 50 1952 August 15, 1953 3,458. 50 1953 May 15, 1954 ~ 8~3 : oQoO fl:: z:o On October 1, 1954, the petitioner filed amended income tax returns for taxable years 1952 and 1953, showing that it Juffered a net loss of ~871 , 4o7 . 37 in 1952, and �104,956 . 29 in 1953 . The said losses were arrived at by consolidating the gross income and expenses and/or deduction of the petitioner in all its business activities,as fol- lows: For the year 1952 Net income, taxable industry: Wire Fence � � � � � � � � � � � Net loss, tax exempt industries: Nails � � � � � � ( ~ 60,950.20) steel bars � � � � < 102,335. 2o) CJ.6a : 285 . 4o~ Total net loss ��������� (�10 956 . ?9 On October 1, 1954, the petitioner, claiming that instead of earning the net i ncome shown in its original income tax returns for 1952 and 1953, it sustained the losses shwwn in its amended income tax returns for the same years, filed its request for re- fund of the income taxes for the said years amounting to �12,750 . 00 which it allegedly erroneously paid to the respondent . After more than ten months of waiting without any action being taken by the respondent on the 132

DECISION - C.T . A. CASE NO . 172 - 3- claim for ref und , and in order to protect its right under Section 306 of the National Internal Revenue Code , the petitioner, on August 13, 1955, filed with this Court the instant petition for � review� There are two issues to be resolved in this case, namely, (1) whether or not the petitioner may be allowed to deduct from the profits realized from its taxable business activities, the losses sustained by its tax exempt industries, and {2) whether or not the action for refund , with regard to the sum of - ~3,458.50 which was paid on May 30 , 1953, has already prescribe~der Section 306 of t he f ax Code. On the first issue . In the United States , it is an established principle in income taxation that tax exempt income is separate and distinct from . taxable income . And following this principle , the United States Internal Revenue Code contains a specific provision forbidding the deduction of - "Sny amouDt otherwise allowable as a deduction which is allocable to one or more classes of income other than interest (whether or not any amount of income of t hat class or classes is received or ac- crued) wholly exempt from the taxes imposed by this chapter . " ( I . R. c . , Sec . 24 {a) (5); Mertens , Law of Federal Income Taxation, Vol. lt, P� 530) The re- son for segregating tax exempt income from taxable income is aptly stated in the regula- tions issued to implement Section 24(a) (5) as f ollowsa "The object of section 24(a) ( 5) is to segregate the exempt income from the taxable income, in order that a ~ I 13 3

DECISION - C.T.A. CASE NO. 172 - lf. - double exemption may not be obtained through the reduction of taxable income by expenses and other items incurred in the production of items of income wholly exempt from tax. Accordingly, just as exempt items of income are exdluded from the computation of gross income under section 22, so section 2lf-(a) {5) excludes from the computation of deductions under section 23 all items referable to the pro- duction of exempt income, other than exempt interest." (Mertens, Law of Federal Income Taxation , Vol. 4, p. 531) ~orisidering that our income tax law is pat- terned after that of the United States, it can also be correctly stated in this j urisdiction that exempt income is distinct and separate f rom taxable income, and therefore, exp,nsea incurrred in earning tax-exempt i ncome is not deductible from taxable income. Certainly , it is incumbent upon taxpayers "to segregate expenses connected with their business from which taxable income was derived from expenses incidenito the earning of claimed nontaxable income." (Victor G. Narquisl et al., 11 BTA 334) Hence , in the case at bar, the petitioner cannot deduct from the profits realized from its taxable industries , the losses sust~ined by its tax exempt business activities, and theref ore, the claim for refund was properly denied by the res- .._ pondent ~ Moreover, when the petitioner applied for, and was granted tax exemption under Republic Act No. 35, he also agreed to the segregation of tax exempt income from taxable income and assumed the obligation of (1) filing a separ ate income tax return, and (2) keeping separately the accounting records relative to the industry declared tax exempt. (Sec. 7, Executive Order No. 433, ~~ed April 13, 1951; see also Sec. 7, Rep. Act. N0 � 90I) ~~~titioner herein cannot now lfj

UQ DECISION - C. T. A. CASE NO . 1?2 - 5- ' complain of the action of the respondent Colle ctor of Internal Revenue in considering as separate and distinct from each other the tax exe.pt income and tha taxable income. In view of our ruling on the first issue., , we deem it not necessary to decide the second question for a resolution of the same will be purely academic . ( WHEREFORE , finding no error in the decision of the Collector of Internal Revenue denying the claim for refund of the petitioner , the sameis hereby af- firmed with costs against the petitioner. SO OBEBRED. Cebu City for Manila, April 1~,.., 195? (SG. D) MARIANO NABLE Presiding Judge I CONCUR: (SGD . ) AUGUSTO M. LUCIANO Associate Judge I vote to dismcss the appeal for lack of jurisdiction. The ollector of Internal Revenue has not yet decided the claim ~~r refund, hence there is no decision to appeal to this Court . Manila, April 26 , 195?. (SGD.) ROl1AN M. UMALI Associate Judge 135