BASILAN ESTATES V. CIR AND CTA (TAX)

The first question for resolution is whether depreciation shall be determined on the acquisition cost or on the reappraised value of the assets.

DEPRECIATION is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. 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. Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting assets free from income tax.

Precisely, Section 30 (f)(1) states:

In general - 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, that when the allowance authorized under this subsection shall equal the capital invested by the taxpayer... no further allowance shall be made...

...allows deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated.

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.

Moreover, 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. for then what the taxpayer would recover will be, not only the acquisition cost but also some profit. Recovery in due time thru depreciation on 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.

Accordingly, the claim for depreciation has no justification in the law. The determination therefore, of the Commissioner disallowing said amount, affirmed by the CTA is sustained.

The second question for resolution is whether the miscellaneous expenses and officer's travelling expenses are allowable expenses as the same could not be supported by appropriate papers.

On this ground, the petitioner may be sustained for under Section 337 of the Tax Code, 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 have lapsed. Taxpayer's stand on this issue is therefore sustained.

The third question is on the unreasonably accumulated profits.

Section 25 of the Tax Code which imposes a surtax on profits unreasonably accumulated provides:

Sec. 25. Additional tax on corporations improperly accumulating profits or surplus - (a) Imposition of tax. - If any corporation, except banks, insurance companies, or personal holding companies, domestic or foreign, is formed or availed of for the purpose of preventing imposition of tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to 25% of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by Section 24, and shall be computed, collected, and paid in the same manner and subject to the same provisions of law, including penalties, as that tax.

Petitioner failed to provide sufficient explanation. In order to determine whether profits were accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not subsequently declared intentions which are merely the products of afterthought. As correctly held by the CTA, while certain expenses of the corporation were credited against large amounts, the unspent balance was retained by the stockholders without refunding them to petitioner at the end of each year. These advances were in fact indirect loans to the stockholders indicating the unreasonable accumulation or surplus beyond the needs of the business.