G.R. No.

L-12287 August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,

vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION,
Deputy Collector of Internal Revenue, defendants-appellees.

Gregorio Araneta for appellants.

Assistant Attorney Round for appellees.

MALCOLM, J.:

This appeal calls for consideration of the Income Tax Law, a law of American origin, with
reference to the Civil Code, a law of Spanish origin.

STATEMENT OF THE CASE.

Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The
marriage was contracted under the provisions of law concerning conjugal partnerships (sociedad
de gananciales). On February 25, 1915, Vicente Madrigal filed sworn declaration on the
prescribed form with the Collector of Internal Revenue, showing, as his total net income for the
year 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said
P296,302.73 did not represent his income for the year 1914, but was in fact the income of the
conjugal partnership existing between himself and his wife Susana Paterno, and that in
computing and assessing the additional income tax provided by the Act of Congress of October
3, 1913, the income declared by Vicente Madrigal should be divided into two equal parts, one-
half to be considered the income of Vicente Madrigal and the other half of Susana Paterno. The
general question had in the meantime been submitted to the Attorney-General of the Philippine
Islands who in an opinion dated March 17, 1915, held with the petitioner Madrigal. The revenue
officers being still unsatisfied, the correspondence together with this opinion was forwarded to
Washington for a decision by the United States Treasury Department. The United States
Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus
decided against the claim of Madrigal.

After payment under protest, and after the protest of Madrigal had been decided adversely by the
Collector of Internal Revenue, action was begun by Vicente Madrigal and his wife Susana
Paterno in the Court of First Instance of the city of Manila against Collector of Internal Revenue
and the Deputy Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged
to have been wrongfully and illegally collected by the defendants from the plaintiff, Vicente
Madrigal, under the provisions of the Act of Congress known as the Income Tax Law. The
burden of the complaint was that if the income tax for the year 1914 had been correctly and
lawfully computed there would have been due payable by each of the plaintiffs the sum of
P2,921.09, which taken together amounts of a total of P5,842.18 instead of P9,668.21,
erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result that
plaintiff Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sum
lawfully due and payable.
The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and
the stipulation, sets forth the basis of defendants' stand in the following way: The income of
Vicente Madrigal and his wife Susana Paterno of the year 1914 was made up of three items: (1)
P362,407.67, the profits made by Vicente Madrigal in his coal and shipping business; (2)
P4,086.50, the profits made by Susana Paterno in her embroidery business; (3) P16,687.80, the
profits made by Vicente Madrigal in a pawnshop company. The sum of these three items is
P383,181.97, the gross income of Vicente Madrigal and Susana Paterno for the year 1914.
General deductions were claimed and allowed in the sum of P86,879.24. The resulting net
income was P296,302.73. For the purpose of assessing the normal tax of one per cent on the net
income there were allowed as specific deductions the following: (1) P16,687.80, the tax upon
which was to be paid at source, and (2) P8,000, the specific exemption granted to Vicente
Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 was the sum upon
which the normal tax of one per cent was assessed. The normal tax thus arrived at was
P2,716.15.

The dispute between the plaintiffs and the defendants concerned the additional tax provided for
in the Income Tax Law. The trial court in an exhausted decision found in favor of defendants,
without costs.

ISSUES.

The contentions of plaintiffs and appellants having to do solely with the additional income tax, is
that is should be divided into two equal parts, because of the conjugal partnership existing
between them. The learned argument of counsel is mostly based upon the provisions of the Civil
Code establishing the sociedad de gananciales. The counter contentions of appellees are that the
taxes imposed by the Income Tax Law are as the name implies taxes upon income tax and not
upon capital and property; that the fact that Madrigal was a married man, and his marriage
contracted under the provisions governing the conjugal partnership, has no bearing on income
considered as income, and that the distinction must be drawn between the ordinary form of
commercial partnership and the conjugal partnership of spouses resulting from the relation of
marriage.

DECISION.

From the point of view of test of faculty in taxation, no less than five answers have been given
the course of history. The final stage has been the selection of income as the norm of taxation.
(See Seligman, "The Income Tax," Introduction.) The Income Tax Law of the United States,
extended to the Philippine Islands, is the result of an effect on the part of the legislators to put
into statutory form this canon of taxation and of social reform. The aim has been to mitigate the
evils arising from inequalities of wealth by a progressive scheme of taxation, which places the
burden on those best able to pay. To carry out this idea, public considerations have demanded an
exemption roughly equivalent to the minimum of subsistence. With these exceptions, the income
tax is supposed to reach the earnings of the entire non-governmental property of the country.
Such is the background of the Income Tax Law.
Income as contrasted with capital or property is to be the test. The essential difference between
capital and income is that capital is a fund; income is a flow. A fund of property existing at an
instant of time is called capital. A flow of services rendered by that capital by the payment of
money from it or any other benefit rendered by a fund of capital in relation to such fund through
a period of time is called an income. Capital is wealth, while income is the service of wealth.
(See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses the
thought in the following figurative language: "The fact is that property is a tree, income is the
fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." (Waring vs. City of
Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property. "Income," as here used,
can be defined as "profits or gains." (London County Council vs. Attorney-General [1901], A.
C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See
further Foster's Income Tax, second edition [1915], Chapter IV; Black on Income Taxes, second
edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and Towne vs. Eisner,
decided by the United States Supreme Court, January 7, 1918.)

A regulation of the United States Treasury Department relative to returns by the husband and
wife not living apart, contains the following:

The husband, as the head and legal representative of the household and general custodian of its
income, should make and render the return of the aggregate income of himself and wife, and for
the purpose of levying the income tax it is assumed that he can ascertain the total amount of said
income. If a wife has a separate estate managed by herself as her own separate property, and
receives an income of more than $3,000, she may make return of her own income, and if the
husband has other net income, making the aggregate of both incomes more than $4,000, the
wife's return should be attached to the return of her husband, or his income should be included in
her return, in order that a deduction of $4,000 may be made from the aggregate of both incomes.
The tax in such case, however, will be imposed only upon so much of the aggregate income of
both shall exceed $4,000. If either husband or wife separately has an income equal to or in
excess of $3,000, a return of annual net income is required under the law, and such return must
include the income of both, and in such case the return must be made even though the combined
income of both be less than $4,000. If the aggregate net income of both exceeds $4,000, an
annual return of their combined incomes must be made in the manner stated, although neither
one separately has an income of $3,000 per annum. They are jointly and separately liable for
such return and for the payment of the tax. The single or married status of the person claiming
the specific exemption shall be determined as one of the time of claiming such exemption which
return is made, otherwise the status at the close of the year."

With these general observations relative to the Income Tax Law in force in the Philippine
Islands, we turn for a moment to consider the provisions of the Civil Code dealing with the
conjugal partnership. Recently in two elaborate decisions in which a long line of Spanish
authorities were cited, this court in speaking of the conjugal partnership, decided that "prior to
the liquidation the interest of the wife and in case of her death, of her heirs, is an interest
inchoate, a mere expectancy, which constitutes neither a legal nor an equitable estate, and does
not ripen into title until there appears that there are assets in the community as a result of the
liquidation and settlement." (Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and
Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband
Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate
property rights and in the ultimate ownership of property acquired as income after such income
has become capital. Susana Paterno has no absolute right to one-half the income of the conjugal
partnership. Not being seized of a separate estate, Susana Paterno cannot make a separate return
in order to receive the benefit of the exemption which would arise by reason of the additional
tax. As she has no estate and income, actually and legally vested in her and entirely distinct from
her husband's property, the income cannot properly be considered the separate income of the
wife for the purposes of the additional tax. Moreover, the Income Tax Law does not look on the
spouses as individual partners in an ordinary partnership. The husband and wife are only entitled
to the exemption of P8,000 specifically granted by the law. The higher schedules of the
additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on
provisions in our Civil Code dealing with the conjugal partnership and having no application to
the Income Tax Law. The aims and purposes of the Income Tax Law must be given effect.

The point we are discussing has heretofore been considered by the Attorney-General of the
Philippine Islands and the United States Treasury Department. The decision of the latter
overruling the opinion of the Attorney-General is as follows:

TREASURY DEPARTMENT, Washington.

Income Tax.

FRANK MCINTYRE,
Chief, Bureau of Insular Affairs, War Department,
Washington, D. C.

SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of
correspondence "from the Philippine authorities relative to the method of submission of
income tax returns by marred person."

You advise that "The Governor-General, in forwarding the papers to the Bureau, advises
that the Insular Auditor has been authorized to suspend action on the warrants in question
until an authoritative decision on the points raised can be secured from the Treasury
Department."

From the correspondence it appears that Gregorio Araneta, married and living with his
wife, had an income of an amount sufficient to require the imposition of the net income
was properly computed and then both income and deductions and the specific exemption
were divided in half and two returns made, one return for each half in the names
respectively of the husband and wife, so that under the returns as filed there would be an
escape from the additional tax; that Araneta claims the returns are correct on the ground
under the Philippine law his wife is entitled to half of his earnings; that Araneta has
dominion over the income and under the Philippine law, the right to determine its use and
disposition; that in this case the wife has no "separate estate" within the contemplation of
the Act of October 3, 1913, levying an income tax.
It appears further from the correspondence that upon the foregoing explanation, tax was
assessed against the entire net income against Gregorio Araneta; that the tax was paid and
an application for refund made, and that the application for refund was rejected,
whereupon the matter was submitted to the Attorney-General of the Islands who holds
that the returns were correctly rendered, and that the refund should be allowed; and
thereupon the question at issue is submitted through the Governor-General of the Islands
and Bureau of Insular Affairs for the advisory opinion of this office.

By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be
administered as in the United States but by the appropriate internal-revenue officers of
the Philippine Government. You are therefore advised that upon the facts as stated, this
office holds that for the Federal Income Tax (Act of October 3, 1913), the entire net
income in this case was taxable to Gregorio Araneta, both for the normal and additional
tax, and that the application for refund was properly rejected.

The separate estate of a married woman within the contemplation of the Income Tax Law
is that which belongs to her solely and separate and apart from her husband, and over
which her husband has no right in equity. It may consist of lands or chattels.

The statute and the regulations promulgated in accordance therewith provide that each
person of lawful age (not excused from so doing) having a net income of $3,000 or over
for the taxable year shall make a return showing the facts; that from the net income so
shown there shall be deducted $3,000 where the person making the return is a single
person, or married and not living with consort, and $1,000 additional where the person
making the return is married and living with consort; but that where the husband and wife
both make returns (they living together), the amount of deduction from the aggregate of
their several incomes shall not exceed $4,000.

The only occasion for a wife making a return is where she has income from a sole and
separate estate in excess of $3,000, but together they have an income in excess of $4,000,
in which the latter event either the husband or wife may make the return but not both. In
all instances the income of husband and wife whether from separate estates or not, is
taken as a whole for the purpose of the normal tax. Where the wife has income from a
separate estate makes return made by her husband, while the incomes are added together
for the purpose of the normal tax they are taken separately for the purpose of the
additional tax. In this case, however, the wife has no separate income within the
contemplation of the Income Tax Law.

Respectfully,

DAVID A. GATES.
Acting Commissioner.
In connection with the decision above quoted, it is well to recall a few basic ideas. The Income
Tax Law was drafted by the Congress of the United States and has been by the Congress
extended to the Philippine Islands. Being thus a law of American origin and being peculiarly
intricate in its provisions, the authoritative decision of the official who is charged with enforcing
it has peculiar force for the Philippines. It has come to be a well-settled rule that great weight
should be given to the construction placed upon a revenue law, whose meaning is doubtful, by
the department charged with its execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S.,
338; In re Allen [1903], 2 Phil., 630; Government of the Philippine Islands vs. Municipality of
Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.) We conclude
that the judgment should be as it is hereby affirmed with costs against appellants. So ordered.

Torres, Johnson, Carson, Street and Fisher, JJ., concur.

G.R. No. 48532 August 31, 1992

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA,

BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO,
EDUARDO A. RIALP, LEANDRO G. SANTILLAN, and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. No. 48533 August 31, 1992

ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA,

JAIME E. DY-LIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN,
VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR.,
ADRIAN O. MICIANO, EDUARDO A. RIALP and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioners.

NOCON, J.:

Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax
Appeals, promulgated September 26, 19771 denying petitioners' claim for tax refunds, and order
the Commissioner of Internal Revenue to refund to them their income taxes which they claim to
have been erroneously or illegally paid or collected.

As summarized by the Solicitor General, the facts of the cases are as follows:

Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine
Manufacturing Corporation, with offices at Sarmiento Building, Ayala Avenue,
Makati, Rizal. Said corporation is a subsidiary of Procter & Gamble, a foreign
corporation based in Cincinnati, Ohio, U.S.A. During the years 1970 and 1971
petitioners were assigned, for certain periods, to other subsidiaries of Procter &
Gamble, outside of the Philippines, during which petitioners were paid U.S.
dollars as compensation for services in their foreign assignments. (Paragraphs III,
Petitions for Review, C.T.A. Cases Nos. 2511 and 2594, Exhs. D, D-1 to D-19).
When petitioners in C.T.A. Case No. 2511 filed their income tax returns for the
year 1970, they computed the tax due by applying the dollar-to-peso conversion
on the basis of the floating rate ordained under B.I.R. Ruling No. 70-027 dated
May 14, 1970, as follows:
 From January 1 to February 20, 1970 at the conversion rate of
P3.90 to U.S. $1.00;

From February 21 to December 31, 1970 at the conversion rate of

P6.25 to U.S. $1.00

Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate in
converting their dollar income for 1971 to Philippine peso. However, on February
8, 1973 and October 8, 1973, petitioners in said cases filed with the office of the
respondent Commissioner, amended income tax returns for the above-mentioned
years, this time using the par value of the peso as prescribed in Section 48 of
Republic Act No. 265 in relation to Section 6 of Commonwealth Act No. 265 in
relation to Section 6 of Commonwealth Act No. 699 as the basis for converting
their respective dollar income into Philippine pesos for purposes of computing
and paying the corresponding income tax due from them. The aforesaid
computation as shown in the amended income tax returns resulted in the alleged
overpayments, refund and/or tax credit. Accordingly, claims for refund of said
over-payments were filed with respondent Commissioner. Without awaiting the
resolution of the Commissioner of the Internal Revenue on their claims,
petitioners filed their petitioner for review in the above-mentioned cases.

Respondent Commissioner filed his Answer to petitioners' petition for review in

C.T.A. Case No. 2511 on July 31, 1973, while his Answer in C.T.A. Case No.
2594 was filed on August 7, 1974.

Upon joint motion of the parties on the ground that these two cases involve
common question of law and facts, that respondent Court of Tax Appeals heard
the cases jointly. In its decision dated September 26, 1977, the respondent Court
of Tax Appeals held that the proper conversion rate for the purpose of reporting
and paying the Philippine income tax on the dollar earnings of petitioners are the
rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71.
Accordingly, the claim for refund and/or tax credit of petitioners in the above-
entitled cases was denied and the petitions for review dismissed, with costs
against petitioners. Hence, this petition for review on certiorari. 2

Petitioners claim that public respondent Court of Tax Appeals erred in holding:

1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.

2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes in the
prevailing free market rate of exchange and not the par value of the peso; and

3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes
into Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the
rate used.
Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as
follows:

At the outset, it is submitted that the subject matter of these two cases are
Philippine income tax for the calendar years 1970 (CTA Case No. 2511) and 1971
(CTA Case No. 2594) and, therefore, should be governed by the provisions of the
National Internal Revenue Code and its implementing rules and regulations, and
not by the provisions of Central Bank Circular No. 42 dated May 21, 1953, as
contended by petitioners.

Section 21 of the National Internal Revenue Code, before its amendment by

Presidential Decrees Nos. 69 and 323 which took effect on January 1, 1973 and
January 1, 1974, respectively, imposed a tax upon the taxable net income received
during each taxable year from all sources by a citizen of the Philippines, whether
residing here or abroad.

Petitioners are citizens of the Philippines temporarily residing abroad by virtue of

their employment. Thus, in their tax returns for the period involved herein, they
gave their legal residence/address as c/o Procter & Gamble PMC, Ayala Ave.,
Makati, Rizal (Annexes "A" to "A-8" and Annexes "C" to "C-8", Petition for
Review, CTA Nos. 2511 and 2594).

Petitioners being subject to Philippine income tax, their dollar earnings should be
converted into Philippine pesos in computing the income tax due therefrom, in
accordance with the provisions of Revenue Memorandum Circular No. 7-71 dated
February 11, 1971 for 1970 income and Revenue Memorandum Circular No. 41-
71 dated December 21, 1971 for 1971 income, which reiterated BIR Ruling No.
70-027 dated May 4, 1970, to wit:

For internal revenue tax purposes, the free marker rate of

conversion (Revenue Circulars Nos. 7-71 and 41-71) should be
applied in order to determine the true and correct value in
Philippine pesos of the income of petitioners. 3

After a careful examination of the records, the laws involved and the jurisprudence on the matter,
We are inclined to agree with respondents Court of Tax Appeals and Commissioner of Internal
Revenue and thus vote to deny the petition.

This basically an income tax case. For the proper resolution of these cases income may be
defined as an amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified, it
means cash or its equivalent. 4 Income can also be though of as flow of the fruits of one's labor. 5
Petitioners are correct as to their claim that their dollar earnings are not receipts derived from
foreign exchange transactions. For a foreign exchange transaction is simply that a transaction
in foreign exchange, foreign exchange being "the conversion of an amount of money or currency
of one country into an equivalent amount of money or currency of another." 6 When petitioners
were assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their
assigned nation's currency and were ALSO spending in said currency. There was no conversion,
therefore, from one currency to another.

Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of
petitioner fell under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7

The issue now is, what exchange rate should be used to determine the peso equivalent of the
foreign earnings of petitioners for income tax purposes. Petitioners claim that since the dollar
earnings do not fall within the classification of foreign exchange transactions, there occurred no
actual inward remittances, and, therefore, they are not included in the coverage of Central Bank
Circular No. 289 which provides for the specific instances when the par value of the peso
shall not be the conversion rate used. They conclude that their earnings should be converted for
income tax purposes using the par value of the Philippine peso.

Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export
products, receipts of sale of foreign exchange or foreign borrowings and investments but not
income tax. He also claims that he had to use the prevailing free market rate of exchange in these
cases because of the need to ascertain the true and correct amount of income in Philippine peso
of dollar earners for Philippine income tax purposes.

A careful reading of said CB Circular No. 289 8 shows that the subject matters involved therein
are export products, invisibles, receipts of foreign exchange, foreign exchange payments, new
foreign borrowing and
investments nothing by way of income tax payments. Thus, petitioners are in error by
concluding that since C.B. Circular No. 289 does not apply to them, the par value of the peso
should be the guiding rate used for income tax purposes.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of
Procter & Gamble. It was a definite amount of money which came to them within a specified
period of time of two yeas as payment for their services.

Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as
follows:

Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every
individual, whether a citizen of the Philippines residing therein or abroad or an
alien residing in the Philippines, determined in accordance with the following
schedule:

xxx xxx xxx

And in the implementation for the proper enforcement of the National Internal Revenue Code,
Section 338 thereof empowers the Secretary of Finance to "promulgate all needful rules and
regulations" to effectively enforce its provisions. 9

Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued
to prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL
REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars
were a valid exercise of the authority given to the Secretary of Finance by the Legislature which
enacted the Internal Revenue Code. And these are presumed to be a valid interpretation of said
code until revoked by the Secretary of Finance himself. 12

Petitioners argue that since there were no remittances and acceptances of their salaries and wages
in US dollars into the Philippines, they are exempt from the coverage of such circulars.
Petitioners forget that they are citizens of the Philippines, and their income, within or without,
and in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does
not brook any exemption.

Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of
exchange prescribed under the aforestated Revenue Memorandum Circulars, there is no reason
for respondent Commissioner to refund any taxes to petitioner as said Revenue Memorandum
Circulars, being of long standing and not contrary to law, are valid. 13

Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of
the government" and one of the duties of a Filipino citizen is to pay his income tax.

WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent
Court of Tax Appeals of petitioners' claims for tax refunds for the income tax period for 1970
and 1971 is AFFIRMED. Costs against petitioners.

SO ORDERED.

Narvasa, C.J., Padilla and Regalado, JJ., concur.

Melo, J., took no part.

G.R. Nos. L-18843 and L-18844 August 29, 1974

CONSOLIDATED MINES, INC., petitioner,

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

G.R. Nos. L-18853 & L-18854 August 29, 1974

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
CONSOLIDATED MINES, INC., respondent.

Office of the Solicitor General for Commissioner of Internal Revenue. Taada, Carreon &
Taada for Consolidated Mines, Inc.

MAKALINTAL, C.J.:p

These are appeals from the amended decision of the Court of Tax Appeals dated August 7, 1961,
in CTA Cases No. 565 and 578, both entitled "Consolidated Mines, Inc. vs. Commissioner of
Internal Revenue," ordering the Consolidated Mines, Inc., hereinafter referred to as the
Company, to pay the Commissioner of Internal Revenue the amounts of P79,812.93, P51,528.24
and P71,392.82 as deficiency income taxes for the years 1953, 1954 and 1956, respectively, or
the total sum of P202,733.99, plus 5% surcharge and 1% monthly interest from the date of
finality of the decision.

The Company, a domestic corporation engaged in mining, had filed its income tax returns for
1951, 1952, 1953 and 1956. In 1957 examiners of the Bureau of Internal Revenue investigated
the income tax returns filed by the Company because on August 10, 1954, its auditor, Felipe
Ollada claimed the refund of the sum of P107,472.00 representing alleged overpayments of
income taxes for the year 1951. After the investigation the examiners reported that (A) for the
years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company
profits of Benguet Consolidated Mines as operator of the Company's mines, although for income
tax purposes the Company had reported income and expenses on the accrual basis; (2) depletion
and depreciation expenses had been overcharged; and (3) the claims for audit and legal fees and
miscellaneous expenses for 1953 and 1954 had not been properly substantiated; and that (B) for
the year 1956 (1) the Company had overstated its claim for depletion; and (2) certain claims for
miscellaneous expenses were not duly supported by evidence.

In view of said reports the Commissioner of Internal Revenue sent the Company a letter of
demand requiring it to pay certain deficiency income taxes for the years 1951 to 1954, inclusive,
and for the year 1956. Deficiency income tax assessment notices for said years were also sent to
the Company. The Company requested a reconsideration of the assessment, but the
Commissioner refused to reconsider, hence the Company appealed to the Court of Tax Appeals.
The assessments for 1951 to 1954 were contested in CTA Case No. 565, while that for 1956 was
contested in CTA Case No. 578. Upon agreement of the parties the two cases were heard and
decided jointly.

On May 6, 1961 the Tax Court rendered judgment ordering the Company to pay the amounts of
P107,846.56, P134,033.01 and P71,392.82 as deficiency income taxes for the years 1953, 1954
and 1956, respectively. The Tax Court nullified the assessments for the years 1951 and 1952 on
the ground that they were issued beyond the five-year period prescribed by Section 331 of the
National Internal Revenue Code.

However, on August 7, 1961, upon motion of the Company, the Tax Court reconsidered its
decision and further reduced the deficiency income tax liabilities of the Company to P79,812.93,
P51,528.24 and P71,382.82 for the years 1953, 1954 and 1956, respectively. In this amended
decision the Tax Court subscribed to the theory of the Company that Benguet Consolidated
Mining Company, hereafter referred to as Benguet, had no right to share in "Accounts
Receivable," hence one-half thereof may not be accrued as an expense of the Company for a
given year.

Both the Company and the Commissioner appealed to this Court. The Company questions the
rate of mine depletion adopted by the Court of Tax Appeals and the disallowance of depreciation
charges and certain miscellaneous expenses (G.R. Nos.
L-18843 & L-18844). The Commissioner, on the other hand, questions what he characterizes as
the "hybrid" or "mixed" method of accounting utilized by the Company, and approved by the
Tax Court, in treating the share of Benguet in the net profits from the operation of the mines in
connection with its income tax returns (G.R. Nos. L-18853 &
L-18854).

With respect to methods of accounting, the Tax Code states:

Sec. 38. General Rules. The net income shall be computed upon the basis of the
taxpayer's annual accounting period (fiscal year or calendar year, as the case may
be) in accordance with the method of accounting regularly employed in keeping
the books of such taxpayer but if no such method of accounting has been so
employed or if the method employed does not clearly reflect the income the
computation shall be made in accordance with such methods as in the opinion of
the Commissioner of Internal Revenue does clearly reflect the income ...

Sec. 39. Period in which items of gross income included. The amount of all
items of gross income shall be included in the gross income for the taxable year in
which received by the taxpayer, unless, under the methods of accounting
permitted under section 38, any such amounts are to be properly accounted for as
of a different period ...
 Sec. 40. Period for which deductions and credits taken. The deductions
provided for in this Title shall be taken for the taxable year in which "paid or
accrued" or "paid or incurred" dependent upon the method of accounting upon the
basis of which the net income is computed, unless in order to clearly reflect the
income the deductions should be taken as of a different period ...

It is said that accounting methods for tax purposes1 comprise a set of rules for determining when
and how to report income and deductions. The U.S. Internal Revenue Code2 allows each
taxpayer to adopt the accounting method most suitable to his business, and requires only that
taxable income generally be based on the method of accounting regularly employed in keeping
the taxpayer's books, provided that the method clearly reflects income.3

The Company used the accrual method of accounting in computing its income. One of its
expenses is the amount-paid to Benguet as mine operator, which amount is computed as 50% of
"net income." The Company deducts as an expense 50% of cash receipts minus disbursements,
but does not deduct at the end of each calendar year what the Commissioner alleges is "50% of
the share of Benguet" in the "accounts receivable." However, it deducts Benguet's 50% if and
when the "accounts receivable" are actually paid. It would seem, therefore, that the Company has
been deducting a portion of this expense (Benguet's share as mine operator) on the "cash &
carry" basis. The question is whether or not the accounting system used by the Company justifies
such a treatment of this item; and if not, whether said method used by the Company, and
characterized by the Commissioner as a "hybrid method," may be allowed under the aforequoted
provisions of our tax code.4

For a proper understanding of the situation the following facts are stated: The Company has
certain mining claims located in Masinloc, Zambales. Because it wanted to relieve itself of the
work and expense necessary for developing the claims, the Company, on July 9, 1934, entered
into an agreement (Exhibit L) with Benguet, a domestic anonymous partnership engaged in the
production and marketing of chromite, whereby the latter undertook to "explore, develop, mine,
concentrate and market" the pay ore in said mining claims.

The pertinent provisions of their agreement, as amended by the supplemental agreements of

September 14, 1939 (Exhibit L-1) and October 2, 1941 (Exhibit L-2), are as follows:

IV. Benguet further agrees to provide such funds from its own resources as are in
its judgment necessary for the exploration and development of said claims and
properties, for the purchase and construction of said concentrator plant and for the
installation of the proper transportation facilities as provided in paragraphs I, II
and III hereof until such time as the said properties are on a profit producing basis
and agrees thereafter to expand additional funds from its own resources, if the
income from the said claims is insufficient therefor, in the exploration and
development of said properties or in the enlargement or extension of said
concentration and transportation facilities if in its judgment good mining practice
requires such additional expenditures.
Such expenditures from its own resources prior to the time the said properties are
put on a profit producing basis shall be reimbursed as provided in paragraph VIII
hereof. Expenditures from its own resources thereafter shall be charged against
the subsequent gross income of the properties as provided in paragraph X hereof.

VII. As soon as practicable after the close of each month Benguet shall furnish
Consolidated with a statement showing its expenditures made and ore settlements
received under this agreement for the preceding month which statement shall
betaken as accepted by Consolidated unless exception is taken thereto or to any
item thereof within ten days in writing in which case the dispute shall be settled
by agreement or by arbitration as provided in paragraph XXII hereof.

VIII. While Benguet is being reimbursed for all its expenditures, advances and
disbursements hereunder as evidenced by said statements of accounts, the net
profits resulting from the operation of the aforesaid claims or properties shall be
divided ninety per cent (90%) to Benguet and ten per cent (10%) to Consolidated.
Such division of net profits shall be based on the receipts, and expenditures during
each calendar year, and shall continue until such time as the ninety per cent (90%)
of the net profits pertaining to Benguet hereunder shall equal the amount of such
expenditures, advances and disbursements. The net profits shall be computed as
provided in Paragraph X hereof.

X. After Benguet has been fully reimbursed for its expenditures, advances and
disbursements as aforesaid the net profits from the operation shall be divided
between Benguet and Consolidated share and share alike, it being understood
however, that the net profits as the term is used in this agreement shall be
computed by deducting from gross income all operating expenses and all
disbursements of any nature whatsoever as may be made in order to carry out the
terms of this agreement.

XIII. It is understood that Benguet shall receive no compensation for services

rendered as manager or technical consultants in connection with the carrying out
of this agreement. It may, however, charge against the operation actual additional
expenses incurred in its Manila Office in connection with the carrying out of the
terms of this agreement including traveling expenses of consulting staff to the
mines. Such expenses, however, shall not exceed the sum of One Thousand Pesos
(P1,000.00) per month. Otherwise, the sole compensation of Benguet shall be its
proportion of the net profits of the operation as herein above set forth.

XIV. All payments due Consolidated by Benguet under the terms of this
agreement with respect to expenditures made and ore settlements received during
the preceding calendar month, shall be payable on or before the twentieth day of
each month.
There is no question with respect to the 90%-10% sharing of profits while Benguet was being
reimbursed the expenses disbursed during the period it was trying to put the mines on a profit-
producing basis.5 It appears that by 1953 Benguet had completely recouped said advances,
because they were then dividing the profits share and share alike. .

As heretofore stated the question is: Under the arrangement between the Company and Benguet,
when did Benguet's 50% share in the "Accounts Receivable
accrue?6

The following table (summary, Exhibit A, of examiner's report of January 28, 1967, Exh. 8)
prepared for the Commissioner graphically illustrates the effect of the inclusion of one-half of
"Accounts Receivable" as expense in the computation of the net income of the Company:

SUMMARY: 1951 1952 1953 1954

Original share 1,313,640.26 3,521,751,94 2,340,624.59 2,622,968.58

of Benguet

Additional 383,829.87 677,504.76 577,394.66 282,724.76

share of
Rec'bles

Total share of 1,697,470.13 4,199,256.70 2,918,009.25 2,905,693.34

Benguet

Less: Receipts 269,619.00 383,829.87 677,504.76 577,384.66

due from prior
year operation

Share of 1,427,851.13 3,815,426.83 2,240,504.49 2,328,308.68

Benguet as
adjusted
(Acc'rd)

Less: 1,313,640.26 3,521,751.94 2,340,624.59 2,622,968.58

Participation of
Benguet
already
deducted

Additional 114,210.87 293,674.89 (100,120.10) (294,659.90)

Expense
(Income)
In the aforesaid table "Additional share on Rec'bles" is one-half of "Total Rec'bles minus "Total
Payables." It indicates, from the Commissioner's viewpoint, that there were years when the
Company had been overstating its income (1951 and 1952) and there were years when it had
been understating its income (1953 and 1954).7 The Commissioner is not interested in the taxes
for 1951 and 1952 (which had prescribed anyway) when the Company had overstated its income,
but in those for 1953 and 1954, in each of which years the amount of the "Accounts Receivable"
was less than that of the previous year, and the Company, therefore, appears to have deducted, as
expense, compensation to Benguet bigger (than what the Commissioner claims is due) by one-
half of the difference between the year's "Accounts Receivable" and the previous year's
"Accounts Receivable," thus apparently understating its income to that extent.

According to the agreement between the Company and Benguet the net profits "shall be
computed by deducting from gross income all operating expenses and all expenses of any nature
whatsoever." Periodically, Benguet was to furnish the Company with the statement of accounts
for a given month "as soon as practicable after the close" of that month. The Company had ten
days from receipt of the statement to register its objections thereto. Thereafter, the statement was
considered binding on the Company. And all payments due the Company "with respect to the
expenditures made and ore settlements received during the calendar month shall be payable on or
before the twentieth of each month."

The agreement does not say that Benguet was to share in "Accounts Receivable." But may this
be implied from the terms of the agreement? The statement of accounts (par. VIII) and the
payment part (XIV) that Benguet8 must make are both with respect to "expenditures made and
ore settlements received." "Expenditures" are payments of money.9This is the meaning intended
by the parties, considering the provision that Benguet agreed to "provide such funds from its own
resources, etc."; and that "such expenditures from its own resources" were to be reimbursed first
as provided in par. VIII, and later as provided in par. X. "Settlement" does not necessarily mean
payment or satisfaction, though it may mean that; it frequently means adjustment or
arrangement. 10 The term "settlement" may be used in the sense of "payment," or it may be used
in the sense of "adjustment" or "ascertainment," or it may be used in the sense of "adjustment" or
"ascertainment of a balance between contending parties," depending upon the circumstances
under which, and the connection in which, use of the term is made. 11 In the term "ore
settlements received," the word "settlement" was not used in the concept of "adjustment,"
"arrangement" or "ascertainment of a balance between contending parties," since all these are
"made," not "received." "Payment," then, is the more appropriate equivalent of, and
interchangeable with, the term "Settlement." Hence, "ore settlements received" means "ore
payments received," which excludes "Accounts Receivable." Thus, both par. VIII and par. XIV
refer to "payment," either received or paid by Benguet.

According to par. X, the 50-50 sharing should be on "net profits;" and "net profits" shall be
computed "by deducting from gross income all operating expenses and all disbursements of any
nature whatsoever as may be made in order to carry out the terms of the agreement." The term
"gross profit" was not defined. In the accrual method of accounting "gross income" would
include both "cash receipts" and "Accounts Receivable." But the term "gross income" does not
carry a definite and inflexible meaning under all circumstances, and should be defined in such a
way as to ascertain the sense in which the parties have used it in contracting. 12
According to par. VIII 13 the "division of net profits shall be based on the receipts and
expenditures." The term "expenditures" we have already analyzed. As used, receipts" means
"money received." 14 The same par. VIII uses the term "expenditures, advances and
disbursements." "Disbursements" means "payment," 15 while the word "advances" when used in
a contract ordinarily means money furnished with an expectation that it shall be returned. 16 It is
thus clear from par. VIII that in the computation of "net profits" (to be divided on the 90%-10%
sharing arrangement) only "cash payments" received and "cash disbursements" made by Benguet
were to be considered. On the presumption that the parties were consistent in the use of the term,
the same meaning must be given to "net profits" as used in par. X, and "gross income,"
accordingly, must be equated with "cash receipts." The language used by the parties show their
intention to compute Benguet's 50% share on the excess of actual receipts over disbursements,
without considering "Accounts Receivable" and "Accounts Payable" as factors in the
computation. Benguet then did not have a right to share in "Accounts Receivable," and,
correspondingly, the Company did not have the liability to pay Benguet any part of that item.
And a deduction cannot be accrued until an actual liability is incurred, even if payment has not
been made. 17

Here we have to distinguish between (1) the method of accounting used by the Company in
determining its net income for tax purposes; and (2) the method of computation agreed upon
between the Company and Benguet in determining the amount of compensation that was to be
paid by the former to the latter. The parties, being free to do so, had contracted that in the method
of computing compensation the basis were "cash receipts" and "cash payments." Once
determined in accordance with the stipulated bases and procedure, then the amount due Benguet
for each month accrued at the end of that month, whether the Company had made payment or
not (see par. XIV of the agreement). To make the Company deduct as an expense one-half of the
"Accounts Receivable" would, in effect, be equivalent to giving Benguet a right which it did not
have under the contract, and to substitute for the parties' choice a mode of computation of
compensation not contemplated by them. 18

Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct
in not accruing said one-half as a deduction. The Company was not using a hybrid method of
accounting, but was consistent in its use of the accrual method of accounting. The first issue
raised by the Company is with respect to the rate of mine depletion used by the Court of Tax
Appeals. The Tax Code provides that in computing net income there shall be allowed as
deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed the
market value in the mine of the product thereof which has been mined and sold during the year
for which the return is made [Sec. 30(g) (1) (B)]. 19

The formula 20 for computing the rate of depletion is:

Cost of Mine Property

---------------------- = Rate of Depletion Per Unit Estimated ore Deposit of Product Mined and
sold
The Commissioner and the Company do not agree as to the figures corresponding to either factor
that affects the rate of depletion per unit. The figures according to the Commissioner are:

P2,646,878.44 (mine cost) P0.59189 (rate of

------------------------- = depletion per ton)
4,471,892 tons (estimated ore deposit)

while the Company insists they are:

P4,238,974.57 (mine cost) P1.0197 (rate of
------------------------- - = depletion per ton)
4,156,888 tons (estimated
ore deposit)

They agree, however, that the "cost of the mine property" consists of (1) mine cost; and (2)
expenses of development before production. As to mine cost, the parties are practically in
agreement the Commissioner says it is P2,515,000 (the Company puts it at P2,500,000). As to
expenses of development before production the Commissioner and the Company widely differ.
The Company claims it is P1,738,974.56, while the Commissioner says it is only P131,878.44.
The Company argues that the Commissioner's figure is "a patently insignificant and inadequate
figure when one considers the tens of millions of pesos of revenue and production that
petitioner's chromite mine fields have finally produced."

As an income tax concept, depletion is wholly a creation of the statute21 "solely a matter of
legislative grace." 22Hence, the taxpayer has the burden of justifying the allowance of any
deduction claimed. 23 As in connection with all other tax controversies, the burden of proof to
show that a disallowance of depletion by the Commissioner is incorrect or that an allowance
made is inadequate is upon the taxpayer, and this is true with respect to the value of the property
constituting the basis of the deduction. 24 This burden-of-proof rule has been frequently applied
and a value claimed has been disallowed for lack of evidence. 25

As proof that the amount spent for developing the mines was P1,738,974.56, the Company relies
on the testimony of Eligio S. Garcia and on Exhibits 1, 31 and 38.

Exhibit I is the Company's report to its stockholders for the year 1947. It contains the Company's
balance sheet as of December 31, 1946 (Exhibit I-1). Among the assets listed is "Mines,
Improvement & Dev." in the amount of P4,238,974.57, which, according to the Company,
consisted of P2,500,000, purchase price of the mine, and P1,738,974.56, cost of developing it.
The Company also points to the statement therein that "Benguet invested approximately
P2,500,000 to put the property in operation, the greater part of such investment being devoted to
the construction of a 25-kilometer road and the installation of port facilities." This amount of
P2,500,000 was only an estimate. The Company has not explained in detail in what this amount
or the lesser amount of P1,738,974.56 consisted. Nor has it explained how that bigger amount
became P1,738,974.56 in the balance sheet for December 31, 1946.
According to the Company the total sum of P4,238,974.57 as "Mines, Improvement & Dev." was
taken from its pre-war balance sheet of December 31, 1940. As proof of this it cites the sworn
certification (Exhibit 38) executed on October 25, 1946 by R.P. Flood, in his capacity as
treasurer of the Company, and attached to other papers of the Company filed with the Securities
and Exchange Commission in compliance with the provisions of Republic Act No. 62 (An Act to
require the presentation of proof of ownership of securities and the reconstruction of corporate
and partnership records, and for other purposes). In said certification there are statements to the
effect that "the Statement of Assets & Liabilities of Consolidated Mines, Incorporated, submitted
to the Securities & Exchange Commission as a requirement for the reconstitution of the records
of the said corporation, is as of September 4, 1946;" and that "the figure P4,238,974.57
representing the value of Mines, Improvements and Developments appearing therein, was taken
from the Balance Sheet as of December 31, 1940, which is the only available source of
information of the Corporation regarding the above and consequently the undersigned considers
the stated figure to be only an estimate of the value of those items at the present time. "This
figure, the Company claims, is based on entries made in the ordinary and regular course of its
business dating as far back as before the war. The Company places reliance on Sec. 39, Rule
130, Revised Rules of Court (formerly Sec. 34, Rule 123), which provides that entries made at,
or near the time of the transactions to which they refer, by a person deceased, outside of the
Philippines or unable to testify, who was in a position to know the facts therein stated, may be
received as prima facie evidence, if such person made the entries in his professional capacity or
in the performance of duty and in the ordinary or regular course of business or duty."

Note that Exhibit 38 is not the "entries," covered by the rule. The Company, however, urges,
unreasonably, we think, that it should be afforded the same probative value since it is based on
such "entries" meaning the balance sheet of December 31, 1940, which was not presented in
evidence. Even with the presentation of said balance sheet the Company would still have had to
prove (1) that the person who made the entry did so in his professional capacity or in the
performance of a duty; (2) that the entry was made in the ordinary course of business or duty; (3)
that the entry was made at or near the time of the transaction to which it related; (4) that the one
who made it was in a position to know the facts stated in the entry; and (5) that he is dead,
outside the Philippines or unable to testify 26

A balance sheet may not be considered as "entries made in the ordinary course of business,"
which, according to Moran:

means that the entries have been made regularly, as is usual, in the management
of the trade or business. It is essential, therefore, that there be regularity in the
entries. The entry which is being introduced in evidence should appear to be part
of a group of regular entries. ... The regularity of the entries maybe proved by the
form in which they appear in the corresponding book. 27
A balance sheet, as that word is uniformly used by bookkeepers and businessmen, is
a paper which shows "a summation or general balance of all accounts," but not the particular
items going to make up the several accounts; and it is therefore essentially different from a paper
embracing "a full and complete statement of all the disbursements and receipts, showing from
what sources such receipts were derived, and for what and to whom such disbursements or
payments were made, and for what object or purpose the same were made;" but such matters
may find an appropriate place in an itemized account. 28 Neither can it be said that a balance
sheet complies with the third requisite, since the entries therein were not made at or near the time
of the transactions to which they related.

In order to render admissible books of account it must appear that they are books
of original entry, that the entries were made in the ordinary course of business,
contemporaneously with the facts recorded, and by one who had knowledge of the
facts. San Francisco Teaming Co v Gray (1909) 11 CA 314, 104 P 999. See
Brown v Ball (1932) 123 CA 758, 12 P2d 28, to the effect that the books must be
kept in the regular course of business. 29

A "ledger" is a book of accounts in which are collected and arranged, each under
its appropriate head, the various transactions scattered throughout the journal or
daybook, land is not a "book of original entries," within the rule making such
books competent evidence. First Nat. Building Co. v. Vanderberg, 119 P 224,
227; 29 Okl. 583. 30

Code Iowa, No. 3658, providing that "books of account" are receivable in
evidence, etc., means a book containing charges, and showing a continuous
dealing with persons generally. A book, to be admissible, must be kept as an
account book, and the charges made in the usual course of business. Security Co.
v. Graybeal, 52 NW 497, 85 Iowa 543, 39 Am St Rep 311. 31

Books of account may therefore be admissible under the rule. In tax cases, however, this Court
appears not to place too high a probative value on them, considering the statement in the case of
Collector of Internal Revenue v. Reyes 32 that "books of account do not prove per se that they are
veracious; in fact they may be more consistent than truthful." Indeed, books of account may be
used to carry out a plan of tax evasion. 33

At most, therefore, the presentation of the balance sheet of December 31, 1940 would only prove
that the figure P4,238,974.57 appears therein as corresponding to mine cost. But the Company
would still need to present proof to justify its adoption of that figure. It had burden of
establishing the components of the amount of P1,738,974.57: what were the particular expenses
made and the corresponding amount of each, so that it may be determined whether the expenses
were actually made and whether the items are properly part of cost of mine development, or are
actually depreciable items.

In this connection we take up Exhibit 31 of the Commissioner. This is the memorandum of BIR
Examiner Cesar P. Aguirre to the Chief of the Investigating Division of the Bureau of Internal
Revenue. According to this report "the counsel of the taxpayer alleges that the cost of Masinloc
Mine properties and improvement is P4,238,974.56 instead of P2,646,879.44 as taken up in this
report," and that the expenses as of 1941 were as follows:

Assets subject to:

1941

1. Depletion P2,646,878.44

2. 10 years depreciation 1,188,987.76

3. 3 years depreciation 78,283.75

4. 20 years depreciation 9,143.63

5. 10% amortization 171,985.00

Less: Cost Chromite Field P4,085,277.58

Expenses by operator 2,515,000.00 P1,570,277.58

The examiner concluded that "in the light of the figures listed above, the counsel for the taxpayer
fairly stated the amount disbursed by the operator until the mine property was put to production
in 1939." The Company capitalizes on this conclusion, completely disregarding the examiner's
other statements, as follows:

The counsel, however, is not aware of the fact that the expenses made by the
operator are those which are depreciable and\or amortizable instead of depletable
expenditures. The first post-war Balance Sheet (12/31/46) of the taxpayer shows
that its Mines, Improvement & Dev. is P4,328,974.57. Considering the
expenditures incurred by Benguet Consolidated as of 1941 (P1,570,277.58); the
rehabilitation expenses in 1946 (P211,223.72); and the cost of the Masinloc
Chromite Field, the total cost would only be P4,296,501.30. Of the total
expenditure of P1,570,277.58 as of 1941, P1,438,389.124 were spent on
depreciable and/or amortizable expenses and P131,878.44 were made for the
direct improvement of the mine property.

In as much as the expenditure of the operator as of 1941 and the cost of the mine
property were taken up in the account Mines, Improvement & Rehabilitation in
1946, all its assets that were rightfully subject to depletion was P2,646,878.44.

Because of the above qualification a large part of the amount spent by the operator 34 may not be
allowed for purpose of depletion deduction, 35 depletion being different from depreciation. 36
The Company's balance sheet for December 31, 1947 lists the "mine cost" of P2,500,000 as
"development cost" and the amount of P1,738,974.37 as "suspense account (mining properties
subject to war losses)." The Company claims that its accountant, Mr. Calpo, made these errors,
because he was then new at the job. Granting that was what had happened, it does not affect the
fact that the, evidence on hand is insufficient to prove the cost of development alleged by the
Company.

Nor can we rely on the statements of Eligio S. Garcia, who was the Company's treasurer and
assistant secretary at the time he testified on August 14, 1959. He admitted that he did not know
how the figure P4,238,974.57 was arrived at, explaining: "I only know that it is the figure
appearing on the balance sheet as of December 31, 1946 as certified by the Company's auditors;
and this we made as the basis of the valuation of the depletable value of the mines." (p. 94, t.s.n.)

We, therefore, have to rely on the Commissioner's assertion that the "development cost" was
P131,878.44, broken down as follows: assessment, P34,092.12; development, P61,484.63;
exploration, P13,966.62; and diamond drilling, P22,335.07.

The question as to which figure should properly correspond to "mine cost" is one of fact. 37 The
findings of fact of the Tax Court, where reasonably supported by evidence, are conclusive upon
the Supreme Court. 38

As regards the estimated ore deposit of the Company's mines, the Company's figure is
"4,156,888 tons," while that of the Commissioner is the larger figure "4,471,892 tons." The
difference of 315,004 tons was due to the fact that the Commissioner took into account all the
ore that could probably be removed and marketed by the Company, utilizing the total tonnage
shipped before and after the war (933,180 tons) and the total reserve of shipping material pegged
at 3,583,712 tons. On the other hand the Company's estimate was arrived at by taking into
consideration only the quantity shipped from solid ore namely, 733,180 tons (deducting from the
total tonnage shipped before and after the war an estimated float of 200,000 tons), and then
adding the total recoverable ore which was assessed at 3,423,708 tons.

The above-stated figures were obtained from the report 39 of geologist Paul A. Schaeffer, who
had been earlier commissioned by the Company to conduct a study of the metallurgical
possibilities of the Company's mines. In order to have a fair understanding of how the
contending parties arrived at their respective figures, We quote a pertinent portion of the
geologist's report:

Milling Data

Ore mined before the war ............... 336,850 tons

Ore mined after the war ............... 1,779,350 tons

Total ........................................... 2,116,200 tons

x Ore shipped before the war ......... 337,611 tons

xx Ore shipped after the war ............ 595,569 tons

Total ................................................ 933,180 tons

Less an estimated float of .................. 200,000 tons

Total shipped from solid ore .............. 733,180 tons

Proportion shipped 733,180

-------- = -----------
mined 2,116,200

or approximately 35% of mine ore is shipped.

Dumps

Material on dumps now total 383,346 tons. Using the above tonnage for ore shipped from mining
(excluding float) there should have been a total of 1,383,020 tons of waste produced of which
almost 1,000,00 tons has been removed from the mining area of the hill. I believe that half still
remains as alluviuma long the three principal intermittent creeks which head in the mining area,
and the remaining half million has washed into the river. Of course this is pure speculation.

x much was float material, probably about one half, leaving about 170.000 tons mined from
the hill.

xx some float included.

xxx xxx xxx

Ore Reserve

The A and B ore is considered sufficiently developed by drilling and tunnels to constitute the ore
reserve. C ore must be checked by drilling.

Tons

A . . . . . . . . . . . . . 7,729,800
B . . . . . . . . . . . . . 1,780,500
Total . . . . . . . . . . 9,510,300
C . . . . . . . . . . . . . 2,212,00
Grand Total . . . . 11,722,300
Therefore, the total ore reserve may be considered to be 9,510,300 tons. Based on past
experience 35% is shipping ore.

With the present mill there is considerably more recovery. The ore is mined selectively (between
dikes). The results are about as follows:

Of 1,500 tons mined, 500 tons are sorted and shipped direct, the remaining 1,000 tons going to
the mill from which 250 tons ore recovered for shipment. Thus 50% of the selectively mined ore
is recovered.

Thus for the reserve tonnage:

Total reserve . . . . . . . . . . . . . . . 9,510,300

Less 20% dike material . . . . . . . 1,902,060
7,608,240
Less 10% low grade ore . . . . . . 760,824
6,847,416
x
.50 =

Total recoverable ore . . . . . . . . . . 3,423,708 tons

It is probable that 30% of the dump material could be recovered by milling. So

adding to the above 115,004 ore recoverable from the dumps, we get a total
reserve of shipping material of 3,538,712 tons. With the sink float section added
to the mill this should be increased by perhaps 20%.

On the basis of the above report the Company faults the Tax Court is sustaining the
Commissioner's estimate of the ore deposit. While the figures corresponding to the total gross
tonnage shipped before and after the war have not been assailed as erroneous, the Company
maintains that the estimated float 40 of 200,000 tons as reported in the geologist's study should
have been deducted therefrom, such that the combined total of the ore shipped should have been
placed at a net of 733,180 tons instead of 933,180 tons. The other figure the Company assails as
having been improperly included by the Commissioner in his statement of ore reserve refers to
the "Recoverable ore from dump material 115,004 tons." The Company's argument in this
regard runs thus:

... This apparently was included by respondent by virtue of the geologist's report
that "it is probable that 30% of the dump material should be recovered by
milling." Actually, however, such recovery from dump or waste material is
problematical and is merely a contingency, and hence, the item of 115,004 tons
should not be included in the statement of the ore reserves. Taking out these two
items improperly and erroneously included in respondent Commissioner of
Internal Revenue's examiner's report, to wit, float or waste material of 200,060
tons and supposedly recoverable ore from dump materials of 115,004 tons,
totaling 315,004 tons, from the total figure of 4,471,892 tons given by him, the
 figure of 4,156.888 tons results as the proper statement of the total estimated ore
as correctly used by petitioner in its statement of ore reserves for purposes of
depletion. 41

We agree with the Company's observation on this point. The geological report appears clear
enough: the estimated float of 200,000 tons consisting of pieces of ore that had broken loose and
become detached by erosion from their original position could hardly be viewed as still forming
part of the total estimated ore deposit. Having already been broken up into numerous small
pieces and practically rendered useless for mining purposes, the same could not appreciably
increase the ore potentials of the Company's mines. As to the 115,004 tons which geologist Paul
A. Schaeffer believed could still be recovered by milling from the material on dumps, there are
no sufficient data on which to affirm or deny the accuracy of the said figure. It may, however, be
taken as correct, considering that it came from the Company's own commissioned geologist and
that by the Company's own admission 42 by 1957 it had mined and sold much more than its
original estimated ore deposit of 4,156,888 tons. We think that 4,271,892 tons 43would be a fair
estimate of the ore deposit in the Company's mines.

The correct figures therefore are:

P2,515,000.00 (mine cost proper) + P131,878.44 (development cost)
4,271,892 (estimated ore deposit)

or

P2,646,878.44 (mine cost) = P0.6196 (rate of depletion

4,271,892 (estimated ore per ton)
deposit)

In its second assigned error, the Company questions the disallowance by the Tax Court of the
depreciation charges claimed by the Company as deductions from its gross income 44 The items
thus disallowed consist mainly of depreciation expenses for the years 1953 and 1954 allegedly
sustained as a result of the deterioration of some of the Company's incomplete constructions.

The initial memorandum 45 of the BIR examiner assigned to verify the income tax liabilities of
the Company pursuant to the latter's claim of having overpaid its income taxes states the basic
reason why the Company's claimed depreciation should be disallowed or re-adjusted, thus: since
"..., up to its completion (the incomplete asset) has not been and is not capable of use in the
operation, the depreciation claimed could not, in fairness to the Government and the taxpayer, be
considered as proper deduction for income tax purposes as the said asset is still under
construction." Vis-a-Vis the Commissioner's consistent position in this regard the company
simply repeatedly requested for time 46 in view of the alleged voluminous working sheets that
had to be re-evaluated and recomputed to justify its claimed depreciation items within which to
submit a separate memorandum in itemized form detailing the Company's objections to the items
of depreciation adjustments or disallowances for the years involved. Strangely enough, despite
the period granted, the record is bare that the Company ever submitted its itemized objection as
proposed. Inasmuch as the taxpayer has the burden of justifying the deductions claimed for
depreciation, the Company's failure to discharge the burden prevents this Court, from disturbing
the Commissioner's computation. For taxation purposes the phrase "out of its not being used,"
with reference to depreciation allowable on assets which are idle or the use of which is
temporarily suspended, should be understood to refer only to property that has once been used in
the trade or business, not to property that has never been actually devoted to the taxpayer's
business, particularly incomplete assets that have yet to be used. .

The Company's third assigned error assails the Court of Tax Appeals in not allowing the
deduction from its gross income of certain miscellaneous business expenditures in the course of
its operation for the years 1954 and 1956. For 1954 the deduction claimed amounted to
P38,081.20, of which the Court allowed P25,600.00 and disallowed P13,481.20, 47 "for lack of
any supporting paper or evidence." For the year 1956 the claim amounted to P20,050.00 of
which the Court allowed P2,460.00, representing the one-month salary Christmas bonus given to
some of the employees, and upheld the disallowance of P17,590.00 on the ground that the
Company "failed to prove substantially that said expenses were actually incurred and are legally
deductible expenses."

Regarding the disallowed amount of P13,481.20 the year 1954, the Company submits that it
consisted of expenses supported by "vouchers and cancelled checks evidencing payments of
these amounts," and were necessary and ordinary expenses of business for that year. On the
disallowance by the Tax Court of the sum of P17,590.00 out of a total deduction for
miscellaneous expenses for 1956 among to P20,050.00, the Company advances the same
argument, namely, that the amount consisted of normal and regular expenses for that year as
evidenced by vouchers and cancelled checks.

These vouchers and cancelled checks of the Company, however, only show that the amounts
claimed had indeed been spent, and confirm the fact of disbursement, but do not necessarily
prove that the expenses for which they we're disbursed are deductible items. In the case of
Collector of Internal Revenue vs. Goodrich International Rubber Co. 48 this Court rejected the
taxpayer's similar claim for deduction of alleged representation expenses, based upon receipts
issued not by the entities to which the alleged expenses but by the officers of taxpayer
corporation who allegedly paid them. It was there stated:

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

In the case before Us, except for the Company's own vouchers and cancelled checks, together
with the Company treasurer's lone and uncorroborated testimony regarding the purpose of said
disbursements, there is no other supporting evidence to show that the expenses were legally
deductible items. We therefore affirm the Tax Court's disallowance of the same.
In resume, this Court finds:

(1) that the Company was not using a "hybrid" method of accounting in the preparation of its
income tax returns, but was consistent in its use of the accrual method of accounting;

(2) that the rate of depletion per ton of the ore deposit mined and sold by the Company is
P0.6196 per ton 49 not P0.59189 as contended by the Commissioner nor P1.0197 as claimed by
the Company;

(3) that the disallowance by the Tax Court of the depreciation charges claimed by the Company
is correct in view of the latter's failure to itemize and/or substantiate with definite proof that the
Commissioner's own method of determining depreciation is unreasonable or inaccurate;

(4) that for lack of supporting evidence to show that the Company's claimed expenses were
legally deductible items, the Tax Court's disallowance of the same is affirmed.

As recomputed then, the deficiency income taxes due from the Company are as follows:

1953

Net income as per audited return _________________ P5,193,716.89

Unallowable deductions & additional income

Depletion overcharged _________________________ P178,477.04 Depreciation adjustment

________________________ 93,862.96

Total adjustments _____________________________ 272,340.00

Net income as per investigation ___________________ 5,466,056.89
Income tax due thereon 50 _______________________ 1,522,495.92
Less amount already assessed ____________________ 1,446,241.00 DEFICIENCY TAX DUE
______________________ 76,254.92

1954

Net income as per audited return _________________ P3,320,307.68 Unallowable deductions &
additional
income
Depletion overcharged _________________________ P147,895.72 Depreciation adjustment
________________________ 11,878.12 Miscellaneous expenses ________________________
13,481.20

Total adjustments _____________________________ 173,255.04

Net income as per investigation ___________________ 3,493,562.72
Income tax due thereon _________________________ 970,197.56
Less amount already assessed ____________________ 921,686.00 DEFICIENCY TAX DUE
______________________ 48,511.56
1956

Net income as per audited return _________________ P11,504,483.97 Unallowable deductions

& additional
income
Depletion overcharged _________________________ P221,272.98 Miscellaneous expenses
________________________ 17,590.00
Total adjustments _____________________________ 238,862.98
Net income as per investigation __________________ 11,743,346.95
Income tax due thereon ________________________ 3,280,137.14
Less amount already assessed ___________________ 3,213,256.00 DEFICIENCY TAX DUE
______________________ 66,881.14
TOTAL DEFICIENCY TAXES DUE _____________ 191,647.62

WHEREFORE, the appealed decision is hereby modified by ordering Consolidated Mines, Inc.
to pay the Commissioner of Internal Revenue the amounts of P76,254.92, P48,511.56 and
P66,881.14 as deficiency income taxes for the years 1953, 1954 and 1956, respectively, or the
total sum of P191,647.62 under the terms specified by the Tax Court, without pronouncement as
to costs.

Castro, Makasiar, Esguerra and Muoz Palma, JJ., concur.

Teehankee, J., took no part.

Footnotes

1 While taxable income is based on the method of accounting used by the

taxpayer, it will almost always differ from accounting income. This is so because
of a fundamental difference in the ends the two concepts serve. Accounting
attempts to match cost against revenue. Tax law is aimed at collecting revenue. It
is quick to treat an item as income, slow to recognize deductions or losses. Thus,
the tax law will not recognize deductions for contingent future losses except in
very limited situations. Good accounting, on the other hand, their recognition.
Once this fundamental difference in approach is accepted, income tax accounting
methods can be understood more easily. 33 Am. Jur. 2d 688.

2 The Philippine income tax law was patterned after the U.S. tax law. Limpan
Investment Corp. v. Com. of Internal Revenue, L-21570, July 26, 1966.

3 33 Am. Jur. 2d 690.

4 The 1954 Code of the United States added new provisions setting out the
methods of accounting that may be used for tax purposes. These are: (1) the cash
receipts and disbursements method; (2) an accrual method; (3) any other method
permitted by the Code provisions, such as the completed contract method or the
installment method; and (4) any combination of these methods permitted under
the Regulations of the Treasury Department. It should be noted that these
provisions explicitly allow the use of a hybrid method of accounting in
accordance with regulations to be issued by the Treasury Department. 2 Mertens,
The Law of Federal Income Taxation, 1961 ed., Chapter 12, pp. 18-19. For the
exact wording of the U.S. Tax Code, see Sec. 446 IRC 26 USCA 446, p. 398. The
Philippine Tax Code does not have a provision similar thereto.

5 It appears from Clause VIII that the 90-10 sharing arrangement was computed
on an annual basis, whereas the 50-50 sharing thereafter was determined on a
monthly basis.

6 That is, if Benguet shares in the "accounts receivable."

7 As may be seen from the table, the Company appears to be exaggerating income
when the "Accounts Receivable" is bigger than the "Accounts Receivable" of the
preceding year, and seems to be underestimating income when the present year's
"Accounts Receivable" is smaller than the "Accounts Receivable" of the previous
year. This is so because the alleged share of Benguet in the "Accounts
Receivable" for the previous year is subtracted from the total share (that is, of
"Cash Receipts" plus "Accounts Receivable") it should supposedly receive for the
year, in order that it may not receive the same income twice, once when it
accrued, and secondly when it was paid.

8 While from the agreement it was Benguet that was to receive the income and
pay the Company its 50% share, actually the income accrued to the Company, all
the expenses disbursed by Benguet were for the account of the Company, and the
50% share retained by Benguet was an expense of the Company.

9 In its ordinary meaning "expenditure" means payment. 15A Words & Phrases
414, citing People v Kane 61 N.Y.S. 195, 43 App Div 472.

The word "expenditure" has been defined as the spending of money; the act of
expending; disbursement expense; money expended; a laying out of money;
payment. 15A Words & Phrases 414, citing Crow v Board of Sup'rs of Stanislaus
County, 27 P2d 655, 135 Cal App 451.

13 Par. VIII had been amended by the agreement of Sept. 14, 1939 (Exhibit L-1).
The original is as follows: Benguet shall be entitled to retain all proceeds resulting
from the operation of the aforesaid claims or properties under this agreement until
such time as the net profit therefrom shall equal the amount of the expenditures,
advances and disbursements made by Benguet hereunder as evidenced by said
statements of account.
The word "proceeds" is one of equivocal import, and of great generality. It does
not necessarily mean money, its meaning in each case depending very much upon
the connection in which it is employed and the subject-matter to which it is
applied. Phelps v Harris, 101 US 370, 25 L Ed 855; Appeal of Thompson, 89 Pa
36; Dow v Whetten, NY 8 Wend 160; Haven v Gray, 12 Mass 71, 76; Wheeler &
Wilson Mfg. Co v Winnett, 91 NW 514, 514, 3 Neb un of 293. Strictly speaking,
it implies something that arises out of or from another thing, and in its ordinary
acceptation, when applied to the income to be derived from real estate, it
embraces the idea of issues, rents, profits, or produce. In a commercial sense it
means the sum, amount, or value of goods or things sold and converted into
money. Hunt v Williams 26 NE 177, 126 Ind 493, 494. 34 Words & Phrases 208.

The term "proceeds" was apparently used in the commercial sense, considering
that the provision refers to the "statement of account," which as we have said, is
based on "expenditures made and ore settlements received."

17 Under the accrual system income is accruable in the year in which the
taxpayer's right thereto becomes fixed and definite, even though it may not be
actually received until a later year, while a deduction for a liability is to be
accrued and taken when the liability becomes fixed and certain, even though it
may not be paid until a later year. Commissioner of Internal Revenue v Blaine
141 F2d 201.

It has been held that the basis of the accrual system of accounting is that
obligations incurred in the normal course of business will be discharged in due
course; that the deductions have been "paid or accrued" or "paid and incurred;"
but in order to be accruable in the taxable year, a valid obligation upon which the
profit (or loss, in the case of a deduction) is to be determined must have existed in
the year in which the obligation became binding or enforceable. The date of the
accrued right to receive income, or the obligation to pay or expend money
constituting a deductible loss, is the date that fixes liability. Gain or loss may not
said to be fixed or accrued when the obligation is contingent upon the happening
of a future event. No duty or liability to pay an income tax upon a transaction
arises until the taxable year in which the event constituting the condition
precedent occurs under any system of accounting. Utah Idaho Sugar Co v Stage
Tax Commission, 73P 2d 974.

In the case of Republic v. De la Rama, L-21106, November 29, 1966, the

Supreme Court, in denying the imposition of the income tax, quoted with
approval the finding of the lower court that there is no showing that income in the
form of said dividend had really been received which is the verb used in Sec. 21
of the National Internal Revenue Code, by The Estate, whether actually or
constructively.
18 The situation may thus be likened to that where a company and its sales agent
agreed that the latter's salary for each year was to be a given per cent of his "cash
collections," and because the company was keeping its books in accordance with
the accrual method, it is made to compute the agent's salary on the accrual basis.

19 In American law, the statutory concept of taxable income involves the

allowance of some deductions based on the theory that production of income may
necessitate exhaustion of capital assets employed in that production. Typical of
such deductions are depreciation, obsolescence, depletion and losses. The
exhaustion of capital may be slow or rapid, sudden or gradual. The rate of
exhaustion is in essence immaterial, but what is important is that something
valuable is dissipated by the very act of producing that income which becomes
subject to tax. Mertens, Law of Federal Income Taxation, 1966 Revision of
Volume 4, Chapter 24, pp. 4- 5.

Under the American Tax Code, there are three kinds of depletion: (1) cost
depletion which is based upon the cost or March 1, 1913 value of the particular
deposit to the taxpayer; (2) discovery depletion, the concept of which is that of a
reward to the taxpayer for discovering a hitherto unknown oil, gas, or mineral
deposit and is usually based upon the fair market value of the particular natural
resource in question within 30 days after the date of its discovery; and (3)
percentage depletion, which represent a legislative attempt to avoid many
problems arising in connection with the computation of cost and discovery
depletion. It was included in the Code as a substitute for discovery depletion,
although it is not based on discovery. In practice, it is based upon a fixed
percentage of the income realized during the taxable year from the particular
property. The percentages are strictly arbitrary and vary with the different
resources. Id, Chapter 24, pp. 9-10.

20 In determining the amount of cost depletion allowable the following three facts
are essential, namely, (1) the basis of the property, (2) the estimated total
recoverable units in the property; and (3) the number of units recovered during the
taxable year in question. As used as an element in cost depletion, basis means the
dollar amount of the taxpayer's capital or investment in the property which he is
entitled to recover tax free during the period he is removing the mineral in the
deposit. Id, Chapter 24, p. 139.

21 In that regard it is different from the economic or geological concept of

depletion. Were Congress to discontinue the allowance of a deduction for
depletion, there is little doubt such disallowance would be safe from attacks on its
constitutionality. Id, Chapter 24, p. 5.

33 In the confession, defendant admitted that at least after 1925 he had kept two
sets of books, one secret "true book" and another a "false book"; that he had used
this system of bookkeeping for the purpose of evading his income tax. Wiggins v
US, 64 F 2d 950.
34 In this connection, the Commissioner claims that there is one important reason
why we should not sustain the Company's stand that the sum of P2,500,000 or the
lesser amount of P1,738,974.57, allegedly spent by Benguet should be considered
part of the depletable cost: Since Benguet "is first to be "fully reimbursed for its
expenditures, advances and disbursements" before any profit can be distributed
between them, there is no reason for including the amount so spent by Benguet, as
it has a right to reimbursement anyway." The Commissioner's claim is not correct.
Assuming that Benguet had indeed spent P1,738,974.57 in developing the mine,
the fact having been established by adequate proof, and Benguet had been
reimbursed by the Company, the Commissioner's assertion would have been
correct with respect to Benguet it would not have been entitled to claim the
amount as a depletion deduction. But the Company, which would have
reimbursed Benguet, would have a right to the deduction, because it would have
been the one, in effect, which had incurred the development expense.

35 The amount recoverable through depreciation and through deductions other

than depletion must, of course, be eliminated in order to arrive at the basis for the
mineral deposit alone. Mertens, Law of Federal Income Taxation, 1966 Revision
of Volume 4, Chapter 24, p. 140.

36 Both depletion and depreciation are predicated on the same basic promise of
avoiding a tax on capital. The allowance for depletion is based on the theory that
the extraction of minerals gradually exhausts the capital investment in the mineral
deposit. The purpose of the depiction deduction is to permit the owner of a capital
interest in mineral in place to make a tax-free recovery of that depleting capital
asset. A depletion is based upon the concept of the exhaustion of a natural
resource whereas depreciation is based upon the concept of the exhaustion of the
property, not otherwise a natural resource, used in a trade or business or held for
the production of income. Thus, depletion and depreciation are made applicable to
different types of assets. And a taxpayer may not deduct that which the Code
allows as of another. Id, Chapter 24,
pp. 6-7.

37 For a question to be one of law it must involve no examination of the probative

value of the evidence presented by the litigants or any of them. And the
distinction is well-known: There is a question of law in a given case when the
doubt or difference arises as to what the law is on a certain state of facts; there is a
question of fact when the doubt or difference arises as to the truth or the falsehood
of alleged facts. Ramos v. Pepsi-Cola Bottling Co. of the Phil., L-25533, Feb. 9,
1997.
42 See: Exh. "Q-10", p. 8. Of course, the Company insists that the increased
output was due to modernized mining and processing methods which have no
bearing on the estimated ore reserves at the time of acquisition. This reasoning,
while acceptable, however fails to consider that the estimated ore deposit,
particularly after the original estimated ore deposit should be proved inaccurate
by subsequent mining ventures which were able to produce much more than
expected, is simply the product of an educated guess and does not operate to
prevent a re-estimation of the nearest actual estimated ore depositon the basis of
newly-acquired data which would accurately reflect the ore potentials of the
Company's mines.

43 This figure is arrived at by adding to the total recoverable ore (3,423,708 tons)
the total tons of ore shipped from solid ore (733, 180 tons) and the total ore
recoverable from the material on dumps (30% of 383,346 tons of materials on
dumps, or 115,004 tons).

44 Section 30 (f), par. I of the Tax Code, permits the taxpayer, in computing the
net income, to deduct from the gross income "(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 ...."

46 See: Exhibit "13" Memorandum of the Company dated March 11, 1957
embodying its objections to the BIR investigation report dated January 26, 1957;
Exhibit "29" - Memorandum of the Company dated December 14, 1957 in answer
to the Commissioner's formal notification dated November 22, 1957 regarding the
discrepancies found in the income tax returns of the Company. It is noticeable that
even the Company's petition for review filed with the Tax Court (Cases Nos. 565
& 578) did not make mention nor place in issue the depreciation adjustments or
disallowances ordered by the Commissioner. In fact, it was only in the Company's
memorandum in support of its petition that the Company discussed for the first
time depreciation adjustments as a contencious issue before the Tax Court.

47 As gathered from the schedule of disallowance for the year 1954 (Exh. "N" for
Consolidated; Exh. "8-A" for the Commissioner), the bulk of these expenses in
the itemized sums of P8,065.00, P4,916.20, P500.00 and P2,000.00, totaling
P13,481.20, respectively consisted of expenses simply identified as disbursements
by the Company president from his discretionary fund, Christmas time expenses
alleged incurred by way of compensation or gifts to deserving persons who had
rendered valuable services or promoted the interests of the Company, expenses
allegedly incurred by the Company vice-president in his periodic trip to the
Company mines at Masinloc and contribution to the Base Metal Association of
the Philippines of which the Company was a ranking member of.
49 With the rate of depletion per unit of the chrome ore mined and sold by the
Company pegged at P0.6196, the task of determining the amount of depletion
allowance for the years concerned should be of little problem. In 1953 the
468,549 tons of chrome ore mined and sold by the Company were valued at
P14,056,470.00. In 1954 the 388,790 tons of chrome ore shipped by the Company
were valued at P11,660,220.00 while in 1956 the 581,685 tons of chrome ore
shipped realized the amount of P20,332,880.00. The rate of depletion per unit
having been established to be P0.6196, the amounts of P290,312.96, P240,894.28
and P360,412.02 would correspond to the mine depletion allowances for the years
1953, 1954 and 1956, respectively.

Since the Company had been consistently charging a depletion rate of P1.00 per
ton of ore shipped by it, or P468,790.00, P388,790.00 and P581,685.00f or the
years 1953, 1954 and 1956, respectively, there really appears to be a depletion
overcharge obtained by getting the difference between the amounts charged by
the Company as depletion allowances and the correct amount as determined in
this decision of P178,477.04 for 1953, P147,895.72 for 1954 and P221,272.98
for 1956.

50 At the time (1958) the Commissioner assessed the alleged deficiency income
taxes from the Company, the rate of taxes on domestic corporations upon their
income were as follows: 20% on net income not exceeding P100,000.00 and 28%
on net income exceeding P100,000.00 (section 24 (a) of the Tax Code). (As
amended, however, the rate of taxes has been increased to 25% on net income not
exceeding P100,000.00 and 3517, on net income exceeding P100,000.00).
G.R. No. 78953 July 31, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.

Elison G. Natividad for accused-appellant.

SARMIENTO, J.:

Central in this controversy is the issue as to whether or not a taxpayer who merely states as a
footnote in his income tax return that a sum of money that he erroneously received and already
spent is the subject of a pending litigation and there did not declare it as income is liable to pay
the 50% penalty for filing a fraudulent return.

This question is the subject of the petition for review before the Court of the portion of the
Decision1 dated July 27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393,
entitled, "Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in his capacity as Commissioner of
Internal Revenue," which orders the deletion of the 50% surcharge from Javier's deficiency
income tax assessment on his income for 1977.

The respondent CTA in a Resolution2 dated May 25, 1987, denied the Commissioner's Motion
for Reconsideration3and Motion for New Trial4 on the deletion of the 50% surcharge assessment
or imposition.

The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA
and incorporated in the assailed decision now under review, read as follows:

xxx xxx xxx

2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private
respondent herein), received from the Prudential Bank and Trust Company in Pasay City
the amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through
some banks in the United States, among which is Mellon Bank, N.A.

3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of
First Instance of Rizal (now Regional Trial Court), (docketed as Civil Case No. 26899),
against the petitioner (private respondent herein), his wife and other defendants, claiming
that its remittance of US$1,000,000.00 was a clerical error and should have been
US$1,000.00 only, and praying that the excess amount of US$999,000.00 be returned on
the ground that the defendants are trustees of an implied trust for the benefit of Mellon
Bank with the clear, immediate, and continuing duty to return the said amount from the
moment it was received.
 4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information
with the then Circuit Criminal Court (docketed as CCC-VII-3369-P.C.) charging the
petitioner (private respondent herein) and his wife with the crime of estafa, alleging that
they misappropriated, misapplied, and converted to their own personal use and benefit the
amount of US$999,000.00 which they received under an implied trust for the benefit of
Mellon Bank and as a result of the mistake in the remittance by the latter.

5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income
Tax Return for the taxable year 1977 showing a gross income of P53,053.38 and a net
income of P48,053.88 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
out to be an error and is now subject of litigation."

6. That on or before December 15, 1980, the petitioner (private respondent herein)
received a letter from the acting Commissioner of Internal Revenue dated November 14,
1980, together with income assessment notices for the years 1976 and 1977, demanding
that petitioner (private respondent herein) pay on or before December 15, 1980 the
amount of P1,615.96 and P9,287,297.51 as deficiency assessments for the years 1976 and
1977 respectively. . . .

7. That on December 15, 1980, the petitioner (private respondent herein) wrote the
Bureau of Internal Revenue that he was paying the deficiency income assessment for the
year 1976 but denying that he had any undeclared income for the year 1977 and
requested that the assessment for 1977 be made to await final court decision on the case
filed against him for filing an allegedly fraudulent return. . . .

8. That on November 11, 1981, the petitioner (private respondent herein) received from
Acting Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981
stating in reply to his December 15, 1980 letter-protest that "the amount of Mellon Bank's
erroneous remittance which you were able to dispose, is definitely taxable." . . .5

The Commissioner also imposed a 50% fraud penalty against Javier.

Disagreeing, Javier filed an appeal6 before the respondent Court of Tax Appeals on December
10, 1981.

The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote
the concluding portion:

We note that in the deficiency income tax assessment under consideration, respondent
(petitioner here) further requested petitioner (private respondent here) to pay 50%
surcharge as provided for in Section 72 of the Tax Code, in addition to the deficiency
income tax of P4,888,615.00 and interest due thereon. Since petitioner (private
respondent) filed his income tax return for taxable year 1977, the 50% surcharge was
imposed, in all probability, by respondent (petitioner) because he considered the return
filed false or fraudulent.
 This additional requirement, to our mind, is much less called for because petitioner
(private respondent), as stated earlier, reflected in as 1977 return as footnote that
"Taxpayer was recipient of some money received from abroad which he presumed to be
gift but turned out to be an error and is now subject of litigation."

From this, it can hardly be said that there was actual and intentional fraud, consisting of
deception willfully and deliberately done or resorted to by petitioner (private respondent)
in order to induce the Government to give up some legal right, or the latter, due to a false
return, was placed at a disadvantage so as to prevent its lawful agents from proper
assessment of tax liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974,
56 (sic) SCRA 519), because petitioner literally "laid his cards on the table" for
respondent to examine. Error or mistake of fact or law is not fraud. (Insular Lumber vs.
Collector, L-7100, April 28, 1956.). Besides, Section 29 is not too plain and simple to
understand. Since the question involved in this case is of first impression in this
jurisdiction, under the circumstances, the 50% surcharge imposed in the deficiency
assessment should be deleted.7

The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated
the matter to us, by the present petition, raising the main issue as to:

WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD

PENALTY?8

On the other hand, Javier candidly stated in his Memorandum,9 that he "did not appeal the
decision which held him liable for the basic deficiency income tax (excluding the 50% surcharge
for fraud)." However, he submitted in the same memorandum "that the issue may be raised in the
case not for the purpose of correcting or setting aside the decision which held him liable for
deficiency income tax, but only to show that there is no basis for the imposition of the
surcharge." This subsequent disavowal therefore renders moot and academic the posturings
articulated in as Comment10 on the non-taxability of the amount he erroneously received and the
bulk of which he had already disbursed. In any event, an appeal at that time (of the filing of the
Comments) would have been already too late to be seasonable. The petitioner, through the office
of the Solicitor General, stresses that:

xxx xxx xxx

The record however is not ambivalent, as the record clearly shows that private respondent
is self-convinced, and so acted, that he is the beneficial owner, and of which reason is
liable to tax. Put another way, the studied insinuation that private respondent may not be
the beneficial owner of the money or income flowing to him as enhanced by the studied
claim that the amount is "subject of litigation" is belied by the record and clearly exposed
as a fraudulent ploy, as witness what transpired upon receipt of the amount.
 Here, it will be noted that the excess in the amount erroneously remitted by MELLON
BANK for the amount of private respondent's wife was $999,000.00 after opening a
dollar account with Prudential Bank in the amount of $999,993.70, private respondent
and his wife, with haste and dispatch, within a span of eleven (11) electric days,
specifically from June 3 to June 14, 1977, effected a total massive withdrawal from the
said dollar account in the sum of $975,000.00 or P7,020,000.00. . . .11

In reply, the private respondent argues:

xxx xxx xxx

The petitioner contends that the private respondent committed fraud by not declaring the
"mistaken remittance" in his income tax return and by merely making a footnote thereon
which read: "Taxpayer was the recipient of some money from abroad which he presumed
to be a gift but turned out to be an error and is now subject of litigation." It is respectfully
submitted that the said return was not fraudulent. The footnote was practically an
invitation to the petitioner to make an investigation, and to make the proper assessment.

The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v.
Comm., 50 F [2d] 782), that is, it must be stronger than the "mere preponderance of
evidence" which would be sufficient to sustain a judgment on the issue of correctness of
the deficiency itself apart from the fraud penalty. (Frank A. Neddas, 40 BTA 672). The
following circumstances attendant to the case at bar show that in filing the questioned
return, the private respondent was guided, not by that "willful and deliberate intent to
prevent the Government from making a proper assessment" which constitute fraud, but
by an honest doubt as to whether or not the "mistaken remittance" was subject to tax.

First, this Honorable Court will take judicial notice of the fact that so-called "million
dollar case" was given very, very wide publicity by media; and only one who is not in his
right mind would have entertained the idea that the BIR would not make an assessment if
the amount in question was indeed subject to the income tax.

Second, as the respondent Court ruled, "the question involved in this case is of first
impression in this jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the
United States, the authorities are not unanimous in holding that similar receipts are
subject to the income tax. It should be noted that the decision in the Rutkin case is a five-
to-four decision; and in the very case before this Honorable Court, one out of three
Judges of the respondent Court was of the opinion that the amount in question is not
taxable. Thus, even without the footnote, the failure to declare the "mistaken remittance"
is not fraudulent.
 Third, when the private respondent filed his income tax return on March 15, 1978 he was
being sued by the Mellon Bank for the return of the money, and was being prosecuted by
the Government for estafa committed allegedly by his failure to return the money and by
converting it to his personal benefit. The basic tax amounted to P4,899,377.00 (See p. 6
of the Petition) and could not have been paid without using part of the mistaken
remittance. Thus, it was not unreasonable for the private respondent to simply state in his
income tax return that the amount received was still under litigation. If he had paid the
tax, would that not constitute estafa for using the funds for his own personal benefit? and
would the Government refund it to him if the courts ordered him to refund the money to
the Mellon Bank?12

xxx xxx xxx

Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal
Revenue 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.

We are persuaded considerably by the private respondent's contention that there is no fraud in the
filing of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's
notation on his income tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of
some money from abroad which he presumed to be a gift but turned out to be an error and is now
subject of litigation that it was an "error or mistake of fact or law" not constituting fraud, that
such notation was practically an invitation for investigation and that Javier had literally "laid his
cards on the table."13

In Aznar v. Court of Tax Appeals,14 fraud in relation to the filing of income tax return was
discussed in this manner:

. . . 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. Negligence, whether slight or gross, is not
equivalent to the fraud with intent to evade the tax contemplated by law. It must amount
to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows
that a mere mistake cannot be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mistakes in making entries in
the returns and in the assessment, respectively, under the inventory method of
determining tax liability, it would be unfair to treat the mistakes of the petitioner as
tainted with fraud and those of the respondent as made in good faith.

Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which,
at most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for
the purpose of tax evasion.15

A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may
not be, Rick v. U.S., App. D.C., 161 F. 2d 897, 898.16
In the case at bar, there was no actual and intentional fraud through willful and deliberate
misleading of the government agency concerned, the Bureau of Internal Revenue, headed by the
herein petitioner. The government was not induced to give up some legal right and place itself at
a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because
Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner's zealousness
to collect taxes from the unearned windfall to Javier is highly
commendable.1wphi1 Unfortunately, the imposition of the fraud penalty in this case is not
justified by the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by
spending most of the money he received, but the records lack a clear showing of fraud
committed because he did not conceal the fact that he had received an amount of money although
it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge
imposed as fraud penalty by the petitioner against the private respondent in the deficiency
assessment should be deleted.

WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax
Appeals is AFFIRMED. No costs.

SO ORDERED.

Melencio-Herrera, Padilla and Regalado, JJ., concur.

Paras, J., took no part.
G.R. No. L-25043 April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective
behalf and as judicial co-guardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

Leido, Andrada, Perez and Associates for petitioners. Office of the Solicitor General for
respondents.

BENGZON, J.P., J.:

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren
by hereditary succession the following properties:

(1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of
Nasugbu, Batangas province;

(2) A residential house and lot located at Wright St., Malate, Manila; and

(3) Shares of stocks in different corporations.

To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo
Roxas and Jose Roxas, formed a partnership called Roxas y Compania.

AGRICULTURAL LANDS

At the conclusion of the Second World War, the tenants who have all been tilling the lands in
Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels which
they actually occupied. For its part, the Government, in consonance with the constitutional
mandate to acquire big landed estates and apportion them among landless tenants-farmers,
persuaded the Roxas brothers to part with their landholdings. Conferences were held with the
farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to
the Government for distribution to actual occupants for a price of P2,079,048.47 plus
P300,000.00 for survey and subdivision expenses.

It turned out however that the Government did not have funds to cover the purchase price, and so
a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas
y Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to
be sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands
for the same price but by installment, and contracted with the Rehabilitation Finance Corporation
to pay its loan from the proceeds of the yearly amortizations paid by the farmers.
In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83
and P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on
the sale of capital asset held for more than one year pursuant to Section 34 of the Tax Code.

RESIDENTIAL HOUSE

During their bachelor days the Roxas brothers lived in the residential house at Wright St.,
Malate, Manila, which they inherited from their grandparents. After Antonio and Eduardo got
married, they resided somewhere else leaving only Jose in the old house. In fairness to his
brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.

ASSESSMENTS

On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the
payment of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise
penalty for late payment, and P150.00 tax for dealers of securities for 1952 plus P10.00
compromise penalty for late payment. The assessment for real estate dealer's tax was based on
the fact that Roxas y Cia. received house rentals from Jose Roxas in the amount of P8,000.00.
Pursuant to Sec. 194 of the Tax Code, an owner of a real estate who derives a yearly rental
income therefrom in the amount of P3,000.00 or more is considered a real estate dealer and is
liable to pay the corresponding fixed tax.

The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of
securities against Roxas y Cia., on the fact that said partnership made profits from the purchase
and sale of securities.

In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas
Brothers for the years 1953 and 1955, as follows:

1953 1955
Antonio Roxas P7,010.00 P5,813.00
Eduardo Roxas 7,281.00 5,828.00
Jose Roxas 6,323.00 5,588.00

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the
unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm
lands to the tenants, and the disallowance of deductions from gross income of various business
expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that
Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers on installment, the
Commissioner considered the partnership as engaged in the business of real estate, hence, 100%
of the profits derived therefrom was taxed.
The following deductions were disallowed:

ROXAS Y CIA.:
1953
Tickets for Banquet in honor of P
S. Osmea 40.00
Gifts of San Miguel beer 28.00
Contributions to
Philippine Air Force Chapel 100.00
Manila Police Trust Fund 150.00

Philippines Herald's fund for

Manila's neediest families 100.00
1955
Contributions to Contribution to
Our Lady of Fatima Chapel,
FEU 50.00
ANTONIO ROXAS:
1953
Contributions to
Pasay City Firemen Christmas Fund 25.00

Pasay City Police Dept. X'mas fund 50.00

1955
Contributions to
Baguio City Police Christmas fund 25.00
Pasay City Firemen Christmas fund 25.00
Pasay City Police Christmas fund 50.00
EDUARDO ROXAS:
1953
Contributions to
Hijas de Jesus' Retiro de Manresa 450.00
Philippines Herald's fund for 100.00
 Manila's neediest families

1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00
JOSE ROXAS:
1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00

The Roxas brothers protested the assessment but inasmuch as said protest was denied, they
instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the
appeal and rendered judgment on July 31, 1965 sustaining the assessment except the demand for
the payment of the fixed tax on dealer of securities and the disallowance of the deductions for
contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The Tax
Court's judgment reads:

WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners
Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the
respondent Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00
and P11,857.00, respectively, as deficiency income taxes for the years 1953 and 1955,
plus 5% surcharge and 1% monthly interest as provided for in Sec. 51(a) of the Revenue
Code; and modified with respect to the partnership Roxas y Cia. in the sense that it
should pay only P150.00, as real estate dealer's tax. With costs against petitioners.

Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of
Internal Revenue did not appeal.

The issues:

(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence
100% taxable?

(2) Are the deductions for business expenses and contributions deductible?

(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?

The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real
estate dealer because it engaged in the business of selling real estate. The business activity
alluded to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-
occupants on installment. To bolster his stand on the point, he cites one of the purposes of Roxas
y Cia. as contained in its articles of partnership, quoted below:
 4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden
pertenecer a ella en el futuro, alquilandoles por los plazos y demas condiciones, estime
convenientes y vendiendo aquellas que a juicio de sus gerentes no deben conservarse;

The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal

Revenue cannot be favorably accepted by Us in this isolated transaction with its peculiar
circumstances in spite of the fact that there were hundreds of vendees. Although they paid for
their respective holdings in installment for a period of ten years, it would nevertheless not make
the vendor Roxas y Cia. a real estate dealer during the ten-year amortization period.

It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled
them for generations was not only in consonance with, but more in obedience to the request and
pursuant to the policy of our Government to allocate lands to the landless. It was the bounden
duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to
sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable
terms and prices. However, the Government could not comply with its duty for lack of funds.
Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its way and sold
lands directly to the farmers in the same way and under the same terms as would have been the
case had the Government done it itself. For this magnanimous act, the municipal council of
Nasugbu passed a resolution expressing the people's gratitude.

The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden
egg". And, in order to maintain the general public's trust and confidence in the Government this
power must be used justly and not treacherously. It does not conform with Our sense of justice in
the instant case for the Government to persuade the taxpayer to lend it a helping hand and later
on to penalize him for duly answering the urgent call.

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence,
pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the
gain derived from the sale thereof is capital gain, taxable only to the extent of 50%.

DISALLOWED DEDUCTIONS

Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given
in honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons.
The deduction were claimed as representation expenses. Representation expenses are deductible
from gross income as expenditures incurred in carrying on a trade or business under Section
30(a) of the Tax Code provided the taxpayer proves that they are reasonable in amount, ordinary
and necessary, and incurred in connection with his business. In the case at bar, the evidence does
not show such link between the expenses and the business of Roxas y Cia. The findings of the
Court of Tax Appeals must therefore be sustained.
The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City
Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines
Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern
University.

The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and
Baguio City Police are not deductible for the reason that the Christmas funds were not spent for
public purposes but as Christmas gifts to the families of the members of said entities. Under
Section 39(h), a contribution to a government entity is deductible when used exclusively for
public purposes. For this reason, the disallowance must be sustained. On the other hand, the
contribution to the Manila Police trust fund is an allowable deduction for said trust fund belongs
to the Manila Police, a government entity, intended to be used exclusively for its public
functions.

The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed
on the ground that the Philippines Herald is not a corporation or an association contemplated in
Section 30 (h) of the Tax Code. It should be noted however that the contributions were not made
to the Philippines Herald but to a group of civic spirited citizens organized by the Philippines
Herald solely for charitable purposes. There is no question that the members of this group of
citizens do not receive profits, for all the funds they raised were for Manila's neediest families.
Such a group of citizens may be classified as an association organized exclusively for charitable
purposes mentioned in Section 30(h) of the Tax Code.

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of
Fatima chapel at the Far Eastern University on the ground that the said university gives
dividends to its stockholders. Located within the premises of the university, the chapel in
question has not been shown to belong to the Catholic Church or any religious organization. On
the other hand, the lower court found that it belongs to the Far Eastern University, contributions
to which are not deductible under Section 30(h) of the Tax Code for the reason that the net
income of said university injures to the benefit of its stockholders. The disallowance should be
sustained.

Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because
although it earned a rental income of P8,000.00 per annum in 1952, said rental income came
from Jose Roxas, one of the partners. Section 194 of the Tax Code, in considering as real estate
dealers owners of real estate receiving rentals of at least P3,000.00 a year, does not provide any
qualification as to the persons paying the rentals. The law, which states: 1wph1.t

. . . "Real estate dealer" includes any person engaged in the business of buying, selling,
exchanging, leasing or renting property on his own account as principal and holding
himself out as a full or part-time dealer in real estate or as an owner of rental property or
properties rented or offered to rent for an aggregate amount of three thousand pesos or
more a year: . . . (Emphasis supplied) .
is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this
point is sustained.1wph1.t

To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas
and Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00,
P91.00 and P49.00, respectively, computed as follows: *

ANTONIO ROXAS
Net income per return P315,476.59
Add: 1/3 share, profits in Roxas y
P 153,249.15
Cia.
Less amount declared 146,135.46

Amount understated P 7,113.69

Contributions disallowed 115.00

P 7,228.69
Less 1/3 share of contributions
amounting to P21,126.06
disallowed from partnership but
allowed to partners 7,042.02 186.67

Net income per review P315,663.26

Less: Exemptions 4,200.00

Net taxable income P311,463.26

Tax due 154,169.00
Tax paid 154,060.00

Deficiency P 109.00
==========
EDUARDO ROXAS
P
Net income per return
304,166.92
Add: 1/3 share, profits in Roxas y P 153,249.15
Cia
Less profits declared 146,052.58

Amount understated P 7,196.57

Less 1/3 share in contributions
amounting to P21,126.06
disallowed from partnership but
allowed to partners 7,042.02 155.55

Net income per review P304,322.47

Less: Exemptions 4,800.00

Net taxable income P299,592.47

Tax Due P147,250.00
Tax paid 147,159.00

Deficiency P91.00
===========
JOSE ROXAS
Net income per return P222,681.76
Add: 1/3 share, profits in Roxas y
P153,429.15
Cia.
Less amount reported 146,135.46

Amount understated 7,113.69

Less 1/3 share of contributions
disallowed from partnership but
allowed as deductions to partners 7,042.02 71.67

Net income per review P222,753.43

Less: Exemption 1,800.00

Net income subject to tax P220,953.43

 Tax due P102,763.00
Tax paid 102,714.00

Deficiency P 49.00
===========

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay
the sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas
and Jose Roxas are ordered to pay the respective sums of P109.00, P91.00 and P49.00 as their
individual deficiency income tax all corresponding for the year 1955. No costs. So ordered.

Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Zaldivar, J., took no part.
Concepcion, C.J., is on leave.
G.R. No. L-17518 October 30, 1922

FREDERICK C. FISHER, plaintiff-appellant,

vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.

Fisher and De Witt and Antonio M. Opisso for appellants. Acting Attorney-General Tuason for
appellee.

JOHNSON, J.:

The only question presented by this appeal is: Are the "stock dividends" in the present case
"income" and taxable as such under the provisions of section 25 of Act No. 2833? While the
appellant presents other important questions, under the view which we have taken of the facts
and the law applicable to the present case, we deem it unnecessary to discuss them now.

The defendant demurred to the petition in the lower court. The facts are therefore admitted. They
are simple and may be stated as follows:

That during the year 1919 the Philippine American Drug Company was a corporation duly
organized and existing under the laws of the Philippine Islands, doing business in the City of
Manila; that he appellant was a stockholder in said corporation; that said corporation, as result of
the business for that year, declared a "stock dividend"; that the proportionate share of said stock
divided of the appellant was P24,800; that the stock dividend for that amount was issued to the
appellant; that thereafter, in the month of March, 1920, the appellant, upon demand of the
appellee, paid under protest, and voluntarily, unto the appellee the sum of P889.91 as income tax
on said stock dividend. For the recovery of that sum (P889.91) the present action was instituted.
The defendant demurred to the petition upon the ground that it did not state facts sufficient to
constitute cause of action. The demurrer was sustained and the plaintiff appealed.

To sustain his appeal the appellant cites and relies on some decisions of the Supreme Court of
the United States as will as the decisions of the supreme court of some of the states of the Union,
in which the questions before us, based upon similar statutes, was discussed. Among the most
important decisions may be mentioned the following: Towne vs. Eisner, 245 U.S., 418; Doyle vs.
Mitchell Bors. Co., 247 U.S., 179; Eisner vs. Macomber, 252 U.S., 189; Dekoven vs Alsop, 205
Ill., 309; 63 L.R.A., 587; Kaufman vs. Charlottesville Woolen Mills, 93 Va., 673.

In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and
in each case it was held that "stock dividends" were capital and not an "income" and therefore
not subject to the "income tax" law.
The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189)
that a "stock dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on
the stock dividend, does not violate the provisions of the Jones Law. The appellee further argues
that the statute of the United States providing for tax upon stock dividends is different from the
statute of the Philippine Islands, and therefore the decision of the Supreme Court of the United
States should not be followed in interpreting the statute in force here.

For the purpose of ascertaining the difference in the said statutes ( (United States and Philippine
Islands), providing for an income tax in the United States as well as that in the Philippine
Islands, the two statutes are here quoted for the purpose of determining the difference, if any, in
the language of the two statutes.

Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the collection
of an "income tax." Section 2 of said Act attempts to define what is an income. The definition
follows:

That the term "dividends" as used in this title shall be held to mean any distribution made
or ordered to made by a corporation, . . . which stock dividend shall be considered
income, to the amount of its cash value.

Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax." Section 25 of
said Act attempts to define the application of the income tax. The definition follows:

The term "dividends" as used in this Law shall be held to mean any distribution made or
ordered to be made by a corporation, . . . out of its earnings or profits accrued since
March first, nineteen hundred and thirteen, and payable to its shareholders, whether in
cash or in stock of the corporation, . . . . Stock dividend shall be considered income, to
the amount of the earnings or profits distributed.

It will be noted from a reading of the provisions of the two laws above quoted that the writer of
the law of the Philippine Islands must have had before him the statute of the United States. No
important argument can be based upon the slight different in the wording of the two sections.

It is further argued by the appellee that there are no constitutional limitations upon the power of
the Philippine Legislature such as exist in the United States, and in support of that contention, he
cites a number of decisions. There is no question that the Philippine Legislature may provide for
the payment of an income tax, but it cannot, under the guise of an income tax, collect a tax on
property which is not an "income." The Philippine Legislature can not impose a tax upon
"property" under a law which provides for a tax upon "income" only. The Philippine Legislature
has no power to provide a tax upon "automobiles" only, and under that law collect a tax upon
a carretonor bull cart. Constitutional limitations, that is to say, a statute expressly adopted for
one purpose cannot, without amendment, be applied to another purpose which is entirely distinct
and different. A statute providing for an income tax cannot be construed to cover property which
is not, in fact income. The Legislature cannot, by a statutory declaration, change the real nature
of a tax which it imposes. A law which imposes an important tax on rice only cannot be
construed to an impose an importation tax on corn.
It is true that the statute in question provides for an income tax and contains a further provision
that "stock dividends" shall be considered income and are therefore subject to income tax
provided for in said law. If "stock dividends" are not "income" then the law permits a tax upon
something not within the purpose and intent of the law.

It becomes necessary in this connection to ascertain what is an "income in order that we may be
able to determine whether "stock dividends" are "income" in the sense that the word is used in
the statute. Perhaps it would be more logical to determine first what are "stock dividends" in
order that we may more clearly understand their relation to "income." Generally speaking, stock
dividends represent undistributed increase in the capital of corporations or firms, joint stock
companies, etc., etc., for a particular period. They are used to show the increased interest or
proportional shares in the capital of each stockholder. In other words, the inventory of the
property of the corporation, etc., for particular period shows an increase in its capital, so that the
stock theretofore issued does not show the real value of the stockholder's interest, and additional
stock is issued showing the increase in the actual capital, or property, or assets of the
corporation, etc.

To illustrate: A and B form a corporation with an authorized capital of P10,000 for the purpose
of opening and conducting a drug store, with assets of the value of P2,000, and each contributes
P1,000. Their entire assets are invested in drugs and put upon the shelves in their place of
business. They commence business without a cent in the treasury. Every dollar contributed is
invested. Shares of stock to the amount of P1,000 are issued to each of the incorporators, which
represent the actual investment and entire assets of the corporation. Business for the first year is
good. Merchandise is sold, and purchased, to meet the demands of the growing trade. At the end
of the first year an inventory of the assets of the corporation is made, and it is then ascertained
that the assets or capital of the corporation on hand amount to P4,000, with no debts, and still not
a cent in the treasury. All of the receipts during the year have been reinvested in the business.
Neither of the stockholders have withdrawn a penny from the business during the year. Every
peso received for the sale of merchandise was immediately used in the purchase of new stock
new supplies. At the close of the year there is not a centavo in the treasury, with which either A
or B could buy a cup of coffee or a pair of shoes for his family. At the beginning of the year they
were P2,000, and at the end of the year they were P4,000, and neither of the stockholders have
received a centavo from the business during the year. At the close of the year, when it is
discovered that the assets are P4,000 and not P2,000, instead of selling the extra merchandise on
hand and thereby reducing the business to its original capital, they agree among themselves to
increase the capital they agree among themselves to increase the capital issued and for that
purpose issue additional stock in the form of "stock dividends" or additional stock of P1,000
each, which represents the actual increase of the shares of interest in the business. At the
beginning of the year each stockholder held one-half interest in the capital. At the close of the
year, and after the issue of the said stock dividends, they each still have one-half interest in the
business. The capital of the corporation increased during the year, but has either of them received
an income? It is not denied, for the purpose of ordinary taxation, that the taxable property of the
corporation at the beginning of the year was P2,000, that at the close of the year it was P4,000,
and that the tax rolls should be changed in accordance with the changed conditions in the
business. In other words, the ordinary tax should be increased by P2,000.
Another illustration: C and D organized a corporation for agricultural purposes with an
authorized capital stock of P20,000 each contributing P5,000. With that capital they purchased a
farm and, with it, one hundred head of cattle. Every peso contributed is invested. There is no
money in the treasury. Much time and labor was expanded during the year by the stockholders
on the farm in the way of improvements. Neither received a centavo during the year from the
farm or the cattle. At the beginning of the year the assets of the corporation, including the farm
and the cattle, were P10,000, and at the close of the year and inventory of the property of the
corporation is made and it is then found that they have the same farm with its improvements and
two hundred head of cattle by natural increase. At the end of the year it is also discovered that,
by reason of business changes, the farm and the cattle both have increased in value, and that the
value of the corporate property is now P20,000 instead of P10,000 as it was at the beginning of
the year. The incorporators instead of reducing the property to its original capital, by selling off a
part of its, issue to themselves "stock dividends" to represent the proportional value or interest of
each of the stockholders in the increased capital at the close of the year. There is still not a
centavo in the treasury and neither has withdrawn a peso from the business during the year. No
part of the farm or cattle has been sold and not a single peso was received out of the rents or
profits of the capital of the corporation by the stockholders.

Another illustration: A, an individual farmer, buys a farm with one hundred head of cattle for the
sum of P10,000. At the end of the first year, by reason of business conditions and the increase of
the value of both real estate and personal property, it is discovered that the value of the farm and
the cattle is P20,000. A, during the year, has received nothing from the farm or the cattle. His
books at the beginning of the year show that he had property of the value of P10,000. His books
at the close of the year show that he has property of the value of P20,000. A is not a corporation.
The assets of his business are not shown therefore by certificates of stock. His books, however,
show that the value of his property has increased during the year by P10,000, under any theory of
business or law, be regarded as an "income" upon which the farmer can be required to pay an
income tax? Is there any difference in law in the condition of A in this illustration and the
condition of A and B in the immediately preceding illustration? Can the increase of the value of
the property in either case be regarded as an "income" and be subjected to the payment of the
income tax under the law?

Each of the foregoing illustrations, it is asserted, is analogous to the case before us and, in view
of that fact, let us ascertain how lexicographers and the courts have defined an "income." The
New Standard Dictionary, edition of 1915, defines an income as "the amount of money coming to
a person or corporation within a specified time whether as payment or corporation within a
specified time whether as payment for services, interest, or profit from investment." Webster's
International Dictionary defines an income as "the receipt, salary; especially, the annual receipts
of a private person or a corporation from property." Bouvier, in his law dictionary, says that an
"income" in the federal constitution and income tax act, is used in its common or ordinary
meaning and not in its technical, or economic sense. (146 Northwestern Reporter, 812) Mr.
Black, in his law dictionary, says "An income is the return in money from one's business, labor,
or capital invested; gains, profit or private revenue." "An income tax is a tax on the yearly profits
arising from property , professions, trades, and offices."
The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S., 653), said in
speaking of income that mere advance in value in no sense constitutes the "income" specified in
the revenue law as "income" of the owner for the year in which the sale of the property was
made. Such advance constitutes and can be treated merely as an increase of capital. (In
re Graham's Estate, 198 Pa., 216; Appeal of Braun, 105 Pa., 414.)

Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States and now
Secretary of State of the United States, in his argument before the Supreme Court of the United
States in the case of Towne vs. Eisner, supra, defined an "income" in an income tax law, unless
it is otherwise specified, to mean cash or its equivalent. It does not mean choses in action
or unrealized increments in the value of the property, and cites in support of the definition, the
definition given by the Supreme Court in the case of Gray vs. Darlington, supra.

In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court, said:
"Notwithstanding the thoughtful discussion that the case received below, we cannot doubt that
the dividend was capital as well for the purposes of the Income Tax Law. . . . 'A stock dividend
really takes nothing from the property of the corporation, and adds nothing to the interests of the
shareholders. Its property is not diminished and their interest are not increased. . . . The
proportional interest of each shareholder remains the same. . . .' In short, the corporation is no
poorer and the stockholder is no richer then they were before." (Gibbons vs. Mahon, 136 U.S.,
549, 559, 560; Logan County vs. U.S., 169 U.S., 255, 261).

In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney, speaking for the
court, said that the act employs the term "income" in its natural and obvious sense, as importing
something distinct from principal or capital and conveying the idea of gain or increase arising
from corporate activity.

Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking for the
court said: "An income may be defined as the gain derived from capital, from labor, or from both
combined, provided it be understood to include profit gained through a sale or conversion of
capital assets."

For bookkeeping purposes, when stock dividends are declared, the corporation or company
acknowledges a liability, in form, to the stockholders, equivalent to the aggregate par value of
their stock, evidenced by a "capital stock account." If profits have been made by the corporation
during a particular period and not divided, they create additional bookkeeping liabilities under
the head of "profit and loss," "undivided profits," "surplus account," etc., or the like. None of
these, however, gives to the stockholders as a body, much less to any one of them, either a claim
against the going concern or corporation, for any particular sum of money, or a right to any
particular portion of the asset, or any shares sells or until the directors conclude that dividends
shall be made a part of the company's assets segregated from the common fund for that purpose.
The dividend normally is payable in money and when so paid, then only does the stockholder
realize a profit or gain, which becomes his separate property, and thus derive an income from the
capital that he has invested. Until that, is done the increased assets belong to the corporation and
not to the individual stockholders.
When a corporation or company issues "stock dividends" it shows that the company's
accumulated profits have been capitalized, instead of distributed to the stockholders or retained
as surplus available for distribution, in money or in kind, should opportunity offer. Far from
being a realization of profits of the stockholder, it tends rather to postpone said realization, in
that the fund represented by the new stock has been transferred from surplus to assets, and no
longer is available for actual distribution. The essential and controlling fact is that the
stockholder has received nothing out of the company's assets for his separate use and benefit; on
the contrary, every dollar of his original investment, together with whatever accretions and
accumulations resulting from employment of his money and that of the other stockholders in the
business of the company, still remains the property of the company, and subject to business risks
which may result in wiping out of the entire investment. Having regard to the very truth of the
matter, to substance and not to form, the stockholder by virtue of the stock dividend has in fact
received nothing that answers the definition of an "income." (Eisner vs. Macomber, 252 U.S.,
189, 209, 211.)

The stockholder who receives a stock dividend has received nothing but a representation of his
increased interest in the capital of the corporation. There has been no separation or segregation of
his interest. All the property or capital of the corporation still belongs to the corporation. There
has been no separation of the interest of the stockholder from the general capital of the
corporation. The stockholder, by virtue of the stock dividend, has no separate or individual
control over the interest represented thereby, further than he had before the stock dividend was
issued. He cannot use it for the reason that it is still the property of the corporation and not the
property of the individual holder of stock dividend. A certificate of stock represented by the
stock dividend is simply a statement of his proportional interest or participation in the capital of
the corporation. For bookkeeping purposes, a corporation, by issuing stock dividend,
acknowledges a liability in form to the stockholders, evidenced by a capital stock account. The
receipt of a stock dividend in no way increases the money received of a stockholder nor his cash
account at the close of the year. It simply shows that there has been an increase in the amount of
the capital of the corporation during the particular period, which may be due to an increased
business or to a natural increase of the value of the capital due to business, economic, or other
reasons. We believe that the Legislature, when it provided for an "income tax," intended to tax
only the "income" of corporations, firms or individuals, as that term is generally used in its
common acceptation; that is that the income means money received, coming to a person or
corporation for services, interest, or profit from investments. We do not believe that the
Legislature intended that a mere increase in the value of the capital or assets of a corporation,
firm, or individual, should be taxed as "income." Such property can be reached under the
ordinary from of taxation.

Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the
difference between "capital" and "income": "That the fundamental relation of 'capital' to 'income'
has been much discussed by economists, the former being likened to the tree or the land, the
latter to the fruit or the crop; the former depicted as a reservoir supplied from springs; the latter
as the outlet stream, to be measured by its flow during a period of time." It may be argued that a
stockholder might sell the stock dividend which he had acquired. If he does, then he has
received, in fact, an income and such income, like any other profit which he realizes from the
business, is an income and he may be taxed thereon.
There is a clear distinction between an extraordinary cash dividend, no matter when earned, and
stock dividends declared, as in the present case. The one is a disbursement to the stockholder of
accumulated earnings, and the corporation at once parts irrevocably with all interest thereon. The
other involves no disbursement by the corporation. It parts with nothing to the stockholder. The
latter receives, not an actual dividend, but certificate of stock which simply evidences his interest
in the entire capital, including such as by investment of accumulated profits has been added to
the original capital. They are not income to him, but represent additions to the source of his
income, namely, his invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63 L.R.A. 587). Such a
person is in the same position, so far as his income is concerned, as the owner of young domestic
animal, one year old at the beginning of the year, which is worth P50 and, which, at the end of
the year, and by reason of its growth, is worth P100. The value of his property has increased, but
has had an income during the year? It is true that he had taxable property at the beginning of the
year of the value of P50, and the same taxable property at another period, of the value of P100,
but he has had no income in the common acceptation of that word. The increase in the value of
the property should be taken account of on the tax duplicate for the purposes of ordinary
taxation, but not as income for he has had none.

The question whether stock dividends are income, or capital, or assets has frequently come
before the courts in another form in cases of inheritance. A is a stockholder in a large
corporation. He dies leaving a will by the terms of which he give to B during his lifetime the
"income" from said stock, with a further provision that C shall, at B's death, become the owner of
his share in the corporation. During B's life the corporation issues a stock dividend. Does the
stock dividend belong to B as an income, or does it finally belong to C as a part of his share in
the capital or assets of the corporation, which had been left to him as a remainder by A? While
there has been some difference of opinion on that question, we believe that a great weight of
authorities hold that the stock dividend is capital or assets belonging to C and not an income
belonging to B. In the case of D'Ooge vs. Leeds (176 Mass., 558, 560) it was held that stock
dividends in such cases were regarded as capital and not as income (Gibbons vs. Mahon, 136
U.S., 549.)

In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction between the
title of a corporation, and the interest of its members or stockholders in the property of the
corporation, is familiar and well settled. The ownership of that property is in the corporation, and
not in the holders of shares of its stock. The interest of each stockholder consists in the right to a
proportionate part of the profits whenever dividends are declared by the corporation, during its
existence, under its charter, and to a like proportion of the property remaining, upon the
termination or dissolution of the corporation, after payment of its debts." (Minot vs. Paine, 99
Mass., 101; Greeff vs. Equitable Life Assurance Society, 160 N. Y., 19.) In the case of Dekoven
vs. Alsop (205 Ill ,309, 63 L. R. A. 587) Mr. Justice Wilkin said: "A dividend is defined as a
corporate profit set aside, declared, and ordered by the directors to be paid to the stockholders on
demand or at a fixed time. Until the dividend is declared, these corporate profits belong to the
corporation, not to the stockholders, and are liable for corporate indebtedness.
There is a clear distinction between an extraordinary cash dividend, no matter when earned, and
stock dividends declared. The one is a disbursement to the stockholders of accumulated earning,
and the corporation at once parts irrevocably with all interest thereon. The other involves no
disbursement by the corporation. It parts with nothing to the stockholders. The latter receives,
not an actual dividend, but certificates of stock which evidence in a new proportion his interest in
the entire capital. When a cash becomes the absolute property of the stockholders and cannot be
reached by the creditors of the corporation in the absence of fraud. A stock dividend however,
still being the property of the corporation and not the stockholder, it may be reached by an
execution against the corporation, and sold as a part of the property of the corporation. In such a
case, if all the property of the corporation is sold, then the stockholder certainly could not be
charged with having received an income by virtue of the issuance of the stock dividend. Until the
dividend is declared and paid, the corporate profits still belong to the corporation, not to the
stockholders, and are liable for corporate indebtedness. The rule is well established that cash
dividend, whether large or small, are regarded as "income" and all stock dividends, as capital or
assets (Cook on Corporation, Chapter 32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58; Mills
vs. Britton, 64 Conn., 4; 5 Am., and Eng. Encycl. of Law, 2d ed., p. 738.)

If the ownership of the property represented by a stock dividend is still in the corporation and to
in the holder of such stock, then it is difficult to understand how it can be regarded as income to
the stockholder and not as a part of the capital or assets of the corporation. (Gibbsons vs.
Mahon, supra.) the stockholder has received nothing but a representation of an interest in the
property of the corporation and, as a matter of fact, he may never receive anything, depending
upon the final outcome of the business of the corporation. The entire assets of the corporation
may be consumed by mismanagement, or eaten up by debts and obligations, in which case the
holder of the stock dividend will never have received an income from his investment in the
corporation. A corporation may be solvent and prosperous today and issue stock dividends in
representation of its increased assets, and tomorrow be absolutely insolvent by reason of changes
in business conditions, and in such a case the stockholder would have received nothing from his
investment. In such a case, if the holder of the stock dividend is required to pay an income tax on
the same, the result would be that he has paid a tax upon an income which he never received.
Such a conclusion is absolutely contradictory to the idea of an income. An income subject to
taxation under the law must be an actual income and not a promised or prospective income.

The appelle argues that there is nothing in section 25 of Act No 2833 which contravenes the
provisions of the Jones Law. That may be admitted. He further argues that the Act of Congress
(U.S. Revenue Act of 1918) expressly authorized the Philippine Legislatures to provide for an
income tax. That fact may also be admitted. But a careful reading of that Act will show that,
while it permitted a tax upon income, the same provided that income shall include gains, profits,
and income derived from salaries, wages, or compensation for personal services, as well as from
interest, rent, dividends, securities, etc. The appellee emphasizes the "income from dividends."
Of course, income received as dividends is taxable as an income but an income from "dividends"
is a very different thing from receipt of a "stock dividend." One is an actual receipt of profits; the
other is a receipt of a representation of the increased value of the assets of corporation.
In all of the foregoing argument we have not overlooked the decisions of a few of the courts in
different parts of the world, which have reached a different conclusion from the one which we
have arrived at in the present case. Inasmuch, however, as appeals may be taken from this court
to the Supreme Court of the United States, we feel bound to follow the same doctrine announced
by that court.

Having reached the conclusion, supported by the great weight of the authority, that "stock
dividends" are not "income," the same cannot be taxes under that provision of Act No. 2833
which provides for a tax upon income. Under the guise of an income tax, property which is not
an income cannot be taxed. When the assets of a corporation have increased so as to justify the
issuance of a stock dividend, the increase of the assets should be taken account of the
Government in the ordinary tax duplicates for the purposes of assessment and collection of an
additional tax. For all of the foregoing reasons, we are of the opinion, and so decide, that the
judgment of the lower court should be revoked, and without any finding as to costs, it is so
ordered.

Araullo, C.J. Avancea, Villamor and Romualdez, JJ., concur.

G.R. No. L-21570 July 26, 1966

LIMPAN INVESTMENT CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.

Vicente L. San Luis for petitioner. Office of the Solicitor General A. A. Alafriz, Assistant Solicitor
General F. B. Rosete, Solicitor A. B. Afurong and Atty. V. G. Saldajeno for respondents.

REYES, J.B.L., J.:

Appeal interposed by petitioner Limpan Investment Corporation against a decision of the Court
of Tax Appeals, in its CTA Case No. 699, holding and ordering it (petitioner) to pay respondent
Commissioner of Internal Revenue the sums of P7,338.00 and P30,502.50, representing
deficiency income taxes, plus 50% surcharge and 1% monthly interest from June 30, 1959 to the
date of payment, with cost.

The facts of this case are:

Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in the business
of leasing real properties. It commenced actual business operations on July 1, 1955. Its principal
stockholders are the spouses Isabelo P. Lim and Purificacion Ceiza de Lim, who own and
control ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the
board is the same Isabelo P. Lim.1wph1.t

Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay
City, all of which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco
Vda. de Lim.

Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net
incomes of P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes
therefor in the sums of P657.00 and P2,220.00.

Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an
investigation of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they
discovered and ascertained that petitioner had underdeclared its rental incomes by P20,199.00
and P81,690.00 during these taxable years and had claimed excessive depreciation of its
buildings in the sums of P4,260.00 and P16,336.00 covering the same period.
On the basis of these findings, respondent Commissioner of Internal Revenue issued its letter-
assessment and demand for payment of deficiency income tax and surcharge against petitioner
corporation, computed as follows:

90-AR-C-348-58/56
Net income per audited return P 3,287.81
Add: Unallowable deductions:
Undeclared Rental Receipt
(Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . . 4,260.00 P24,459.00
Net income per investigation P27,746.00
Tax due thereon P5,549.00
Less: Amount already assessed 657.00
Balance P4,892.00
Add: 50% Surcharge 2,446.00
DEFICIENCY TAX DUE P7,338.00
90-AR-C-1196-58/57
Net income per audited return P11,098.00
Add: Unallowable deductions:
Undeclared Rental Receipt (Sched. A) . . . . . . . . P81,690.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . 16,338.00 P98,028.00
Net income per investigation P109,126.00
Tax due thereon P22,555.00
Less: Amount already assessed 2,220.00
Balance 20,335.00
Add: 50% Surcharge 10,167.50
DEFICIENCY TAX DUE P30,502.50
Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the
above assessment but the latter denied said request and reiterated its original assessment and
demand, plus 5% surcharge and the 1% monthly interest from June 30, 1959 to the date of
payment; hence, the corporation filed its petition for review before the Tax Appeals court,
questioning the correctness and validity of the above assessment of respondent Commissioner of
Internal Revenue. It disclaimed having received or collected the amount of P20,199.00, as
unreported rental income for 1956, or any part thereof, reasoning out that 'the previous owners of
the leased building has (have) to collect part of the total rentals in 1956 to apply to their payment
of rental in the land in the amount of P21,630.00" (par. 11, petition). It also denied having
received or collected the amount of P81,690.00, as unreported rental income for 1957, or any
part thereof, explaining that part of said amount totalling P31,380.00 was not declared as income
in its 1957 tax return because its president, Isabelo P. Lim, who collected and received
P13,500.00 from certain tenants, did not turn the same over to petitioner corporation in said year
but did so only in 1959; that a certain tenant (Go Tong) deposited in court his rentals amounting
to P10,800.00, over which the corporation had no actual or constructive control; and that a sub-
tenant paid P4,200.00 which ought not be declared as rental income.

Petitioner likewise alleged in its petition that the rates of depreciation applied by respondent
Commissioner of its buildings in the above assessment are unfair and inaccurate.

Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer, Vicente G.
Solis, who admitted that it had omitted to report the sum of P12,100.00 as rental income in its
1956 tax return and also the sum of P29,350.00 as rental income in its 1957 tax return. However,
with respect to the difference between this omitted income (P12,100.00) and the sum
(P20,199.00) found by respondent Commissioner as undeclared in 1956, petitioner corporation,
through the same witness (Solis), tried to establish that it did not collect or receive the same
because, in view of the refusal of some tenants to recognize the new owner, Isabelo P. Lim and
Vicenta Pantangco Vda. de Lim, the former owners, on one hand, and the same Isabelo P. Lim,
as president of petitioner corporation, on the other, had verbally agreed in 1956 to turn over to
petitioner corporation six per cent (6%) of the value of all its properties, computed at
P21,630.00, in exchange for whatever rentals the Lims may collect from the tenants. And, with
respect to the difference between the admittedly undeclared sum of P29,350.00 and that found by
respondent Commissioner as unreported rental income, (P81,690.00) in 1957, the same witness
Solis also tried to establish that petitioner corporation did not receive or collect the same but that
its president, Isabelo P. Lim, collected part thereof and may have reported the same in his own
personal income tax return; that same Isabelo P. Lim collected P13,500.00, which he turned over
to petitioner in 1959 only; that a certain tenant (Go Tong deposited in court his rentals
(P10,800.00), over which the corporation had no actual or constructive control and which were
withdrawn only in 1958; and that a sub-tenant paid P4,200.00 which ought not be declared as
rental income in 1957.

With regard to the depreciation which respondent disallowed and deducted from the returns filed
by petitioner, the same witness tried to establish that some of its buildings are old and out of
style; hence, they are entitled to higher rates of depreciation than those adopted by respondent in
his assessment.
Isabelo P. Lim was not presented as witness to corroborate the above testimony of Vicente G.
Solis.

On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the
investigation of the 1956 and 1957 income tax returns of petitioner corporation, testified for the
respondent that he personally interviewed the tenants of petitioner and found that these tenants
had been regularly paying their rentals to the collectors of either petitioner or its president,
Isabelo P. Lim, but these payments were not declared in the corresponding returns; and that in
applying rates of depreciation to petitioner's buildings, he adopted Bulletin "F" of the U.S.
Federal Internal Revenue Service.

On the basis of the evidence, the Tax Court upheld respondent Commissioner's assessment and
demand for deficiency income tax which, as above stated in the beginning of this opinion,
petitioner has appealed to this Court.

Petitioner corporation pursues, the same theory advocated in the court below and assigns the
following alleged errors of the trial court in its brief, to wit:

I. The respondent Court erred in holding that the petitioner had an unreported rental
income of P20,199.00 for the year 1956.

II. The respondent Court erred in holding that the petitioner had an unreported rental
income of P81,690.00 for the year 1957.

III. The respondent Court erred in holding that the depreciation in the amount of
P20,598.00 claimed by petitioner for the years 1956 and 1957 was excessive.

and prays that the appealed decision be reversed.

This appeal is manifestly unmeritorious. Petitioner having admitted, through its own witness
(Vicente G. Solis), that it had undeclared more than one-half (1/2) of the amount (P12,100.00 out
of P20,199.00) found by the BIR examiners as unreported rental income for the year 1956 and
more than one-third (1/3) of the amount (P29,350.00 out of P81,690.00) ascertained by the same
examiners as unreported rental income for the year 1957, contrary to its original claim to the
revenue authorities, it was incumbent upon it to establish the remainder of its pretensions by
clear and convincing evidence, that in the case is lacking.

With respect to the balance, which petitioner denied having unreported in the disputed tax
returns, the excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership
of the lands and only later transferred or disposed of the ownership of the buildings existing
thereon to petitioner corporation, so as to justify the alleged verbal agreement whereby they
would turn over to petitioner corporation six percent (6%) of the value of its properties to be
applied to the rentals of the land and in exchange for whatever rentals they may collect from the
tenants who refused to recognize the new owner or vendee of the buildings, is not only unusual
but uncorroborated by the alleged transferors, or by any document or unbiased evidence. Hence,
the first assigned error is without merit.
As to the second assigned error, petitioner's denial and explanation of the non-receipt of the
remaining unreported income for 1957 is not substantiated by satisfactory corroboration. As
above noted, Isabelo P. Lim was not presented as witness to confirm accountant Solis nor was
his 1957 personal income tax return submitted in court to establish that the rental income which
he allegedly collected and received in 1957 were reported therein.

The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no
sufficient justification for the non-declaration of said income in 1957, since the deposit was
resorted to due to the refusal of petitioner to accept the same, and was not the fault of its tenants;
hence, petitioner is deemed to have constructively received such rentals in 1957. The payment by
the sub-tenant in 1957 should have been reported as rental income in said year, since it is income
just the same regardless of its source.

On the third assigned error, suffice it to state that this Court has already held that "depreciation is
a question of fact and is not measured by theoretical yardstick, but should be determined by a
consideration of actual facts", and the findings of the Tax Court in this respect should not be
disturbed when not shown to be arbitrary or in abuse of discretion (Commissioner of Internal
Revenue vs. Priscila Estate, Inc., et al., L-18282, May 29, 1964), and petitioner has not shown
any arbitrariness or abuse of discretion in the part of the Tax Court in finding that petitioner
claimed excessive depreciation in its returns. It appearing that the Tax Court applied rates of
depreciation in accordance with Bulletin "F" of the U.S. Federal Internal Revenue Service, which
this Court pronounced as having strong persuasive effect in this jurisdiction, for having been the
result of scientific studies and observation for a long period in the United States, after whose
Income Tax Law ours is patterned (M. Zamora vs. Collector of internal Revenue & Collector of
Internal Revenue vs. M. Zamora; E. Zamora vs. Collector of Internal Revenue and Collector of
Internal Revenue vs. E. Zamora, Nos. L-15280, L-15290, L-15289 and L-15281, May 31, 1963),
the foregoing error is devoid of merit.

Wherefore, the appealed decision should be, as it is hereby, affirmed. With costs against
petitioner-appellant, Limpan Investment Corporation.

Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and
Castro, JJ., concur.