60 Basilan Estates Inc. v. CIR (Aguirre) 4.
On non-payment of such amount, a warrant of distraint and levy was
September 5, 1967 | Bengzon, J.P, J. | Depreciation
PETITIONER: Basilan Estates, Inc.
RESPONDENTS: The Commissioner of Internal Revenue (CIR) and the
CTA
SUMMARY: Basilan Estates was assessed by the CIR for deficiency income
tax for the year 1953 . It then filed before the CTA a petition for review of
the CIR’s assessment alleging, among others, that the CIR erred in
disallowing the claimed depreciations particularly that — up to 1949,
deductions for the depreciation of its assets should be on the basis of their
acquisition cost; and that from 1950-1953: It deducted from gross income
the value of depreciation computed on the reappraised value in light of the
increase in cost for replacement. The CIR contends that the reappraised
assets depreciated in 1953 were the same ones upon which depreciation was
claimed in 1952, which is the deductible depreciation was pegged on the
acquisition cost. The issue is WoN depreciation shall be determined on the
acquisition cost or on the reappraised value of the assets? —Acquisition cost.
Depreciation is the gradual diminution in the useful value of tangible
property resulting from wear and tear and normal obsolescence. It
commences with the acquisition of the property. The income tax law does not
authorize the depreciation of an asset beyond its acquisition cost. Hence, a
deduction over and above such cost cannot be claimed and allowed. The
reason is that deductions from gross income are privileges, not matters of
right. They are not created by implication but upon clear expression in the
law. The recovery, free of income tax, of an amount more than the invested
capital in an asset will transgress the underlying purpose of a depreciation
allowance.
DOCTRINE: The income tax law does not authorize the depreciation of an
asset beyond its acquisition cost. Hence, a deduction over and above such
cost cannot be claimed and allowed.
FACTS:
1. Basilan Estates, Inc. is a Philippine corporation engaged in coconut
industry with principal offices in Basilan City.
2. It filed in 1954 its income tax returns for 1953 and paid P8,028.
3. Per examiner's report of Feb. 19, 1959, the CIR then assessed Basilan on
Feb. 26, 1959:
a. P3,912 as deficiency income tax for 1953 and
b. P86,867.85 as 25% surtax on unreasonably accumulated profits
as of 1953 pursuant to Section 25 of the Tax Code.
issued but the same was not executed because Basilan Estate succeeded
in getting the Deputy CIR to order the Director of the district in
Zamboanga City to hold execution and maintain constructive embargo
instead.
5. Because of its refusal to waive the period of prescription, the
corporation's request for reinvestigation was not given due course, and
so in 1960, notice was served that the warrant of distraint and levy would
be executed.
6. Basilan then filed before the CTA for review of CIR's assessment,
alleging:
a. Prescription of the period of assessment and collection
i. That it never received notice of such assessment or if
it did, it received it beyond the 5 year prescriptive
period.
b. Error in Reappraised
disallowingassets
claimed depreciations, travelling
47.342.53 and
New Assets: Hospital building
miscellaneous expenses. It claimed that— + Equipment 3,910.45
i. Up to 1949: Deductions for the depreciation
TOTAL DEPRECIATION 51,252.98of its
assets should be on the basis of their acquisition cost;
and that
ii. As of January 1, 1950: It changed the depreciable
value of said assets by increasing it to conform with
the increase in cost for their replacement
iii. 1950-1953: It deducted from gross income the value of
depreciation computed on the reappraised value.
c. Error in finding the existence of unreasonably accumulated
profits and the imposition of 25% surtax thereon.
7. The CTA found that there was no prescription and affirmed the
assessment
8. Hence, this appeal.
9. NOTE: Upon examination of taxpayer's books and papers, the CIR
found that the reappraised assets depreciated in 1953 were the same
ones upon which depreciation was claimed in 1952.
a. And for the year 1952, the CIR had already determined the
depreciation to be P36,842.04, computed on their acquisition
cost at rates fixed by the taxpayer. Hence, the CIR pegged the
deductible depreciation for 1953 on the same old assets at
P36,842.04 and disallowed the excess of P10,500.49.
ISSUE:
 1. MAIN: WoN depreciation shall be determined on the acquisition cost or
on the reappraised value of the assets? —Acquisition cost.
a. NOTE: On WoN the CIR’s disallowance of items which Basilan
claimed as deductible was proper — Partially granted.
i. Depreciation: CIR was correct.
ii. Other expenses: Taxpayer was correct.
2. WoN the CIR's right to collect deficiency income tax prescribed? NO
3. WoN there were unreasonably accumulated profits? YES
4. WoN the Basilan is exempt from the penalty tax? NO
RULING: The judgment appealed from is modi􏰀ed to the extent that Basilan is
allowed its deductions for travelling and miscellaneous expenses, but affirmed
insofar as the Basilan is liable for P2,100.67 as 25% deficiency income tax for 1953
and P86,876.75 as 25% surtax on the unreasonably accumulated profit.
RATIO:
First Issue: Depreciation & Expenses
Depreciation
1. Depreciation is the gradual diminution in the useful value of tangible
property resulting from wear and tear and normal obsolescence.
a. applied to amortization of the value of intangible assets, the use
of which in the trade or business is definitely limited in
duration.
2. Depreciation commences with the acquisition of the property and its
owner is not bound to see his property gradually waste, without making
provision out of earnings for its replacement.
a. It is entitled to see that from earnings the value of the property
invested is kept unimpaired, so that at the end of any given term
of years, the original investment remains as it was.
b. It is not only the right of a company to make such a provision,
but it is its duty to its bond and stockholders, and, in the case of
a public service corporation, at least, its plain duty to the public.
3. Accordingly, the law permits the taxpayer to recover gradually his
capital investment in wasting assets free from income tax.
a. Section 30 (f) (1) states: “A reasonable allowance for
deterioration of property arising out of its use…in the business
or trade, or out of its not being used: Provided, that when the
allowance authorized under this subsection shall equal the
capital invested by the taxpayer…no further allowance shall be
made…”
b. This allows a deduction from gross income for depreciation but
limits the recovery to the capital invested in the asset being
depreciated.
4. The income tax law does not authorize the depreciation of an asset
beyond its acquisition cost. Hence, a deduction over and above such cost
cannot be claimed and allowed.
a. The reason is that deductions from gross income are privileges,
not matters of right. They are not created by implication but
upon clear expression in the law.
5. The recovery, free of income tax, of an amount more than the invested
capital in an asset will transgress the underlying purpose of a
depreciation allowance.
a. For then what the taxpayer would recover will be, not only the
acquisition cost, but also some profit.
b. Recovery in due time through depreciation of investment made
is the philosophy behind depreciation allowance; the idea of
profit on the investment made has never been the underlying
reason for the allowance of a deduction for depreciation.
6. Accordingly, the claim for depreciation beyond P36,842.04 or in the
amount of P10,500.49 has no justification in the law. The determination,
of the CIR disallowing said amount, affirmed by the CTA, is sustained.
Expenses
1. CIR: disallowed because the nature of these expenses could not be
satisfactorily explained nor be supported by appropriate papers.
2. Basilan: Gulfi􏰀n, the accountant, explained that the (misc.) actual
expenses were incurred during the president's trip to Manila, and fo the
president's travelling expenses; as to the vouchers and receipts of these,
he said the same were made but got burned during the Basilan fire on
March 30, 1962.
3. The papers in support of these miscellaneous and travelling expenses
were not included for the reason that by February 9, 1959, when the BIR
decided to investigate, Basilan had no more obligation to keep the same
since 5 years had lapsed from the time these expenses were incurred
4. SC: Receipts and papers supporting such expenses need be kept by the
taxpayer for a period of 5 years from the last entry. At the time of the
investigation, said 5 years had lapsed.
Second Issue: Prescription
1. Not prescribed— considering the presence of circumstances that lead Us
to presume regularity in the performance of official functions.
2. The notice of assessment shows the assessment to have been made on
February 26, 1959, well within the 􏰀5 year period. On the right side of
the notice is also stamped "Feb. 26, 1959" — denoting the date of release,
according to BIR practice. The CIR in his letter answering Basilan's
request to lift the warrant, asserts that notice had been sent to Basilan.
Third Issue: Unreasonably Accumulated Profits
 1. The CIR found that in violation Sec, 25, petitioner had unreasonably
accumulated profits as of 1953 of P347,507.01.
2. There was no error in the process applied. Previous accumulations
should be considered in determining unreasonable accumulations for
the year, since accumulations prior to the year involved may have been
sufficient to cover the business needs.
3. Also, large amounts were advanced to the stockholders. These advances
were in fact indirect loans to the stockholders indicating the
unreasonable accumulation of surplus beyond the needs of the business.

Fourth Issue: Alleged Exemption

1. Basilan wishes to avail of the exempting proviso in Sec. 25 of the NIRC
as amended, approved June 27, 1957, whereby accumulated profits or
surplus if invested in any dollar-producing/earning industry or in the
purchase of bonds issued by the Central Bank may not be subject to the
25% surtax.
2. Here, the unreasonable accumulation was in 1953. The exemption was
by virtue of RA 1823 which amended Sec. 25 only on June 22, 1957 —
more than 3 years after.