Case Summary (G.R. No. 183408)
Petitioner
Commissioner of Internal Revenue (CIR), vested by law with authority to investigate, examine and assess national internal revenue taxes under the National Internal Revenue Code (NIRC).
Respondent
Lancaster Philippines, Inc., established in 1963, engaged in production, processing and marketing of tobacco; adopts a fiscal year from April 1 to March 31 and a crop year from October 1 to September 30.
Key Dates
- September 30, 1999: LOA No. 00012289 issued for taxable year 1998.
- September 19, 2002: Preliminary Assessment Notice (PAN) received.
- October 11, 2002: Final Assessment Notice (FAN) issued.
- August 21, 2003: Petition filed before the CTA Division.
- September 12 & December 12, 2007: CTA Division decision granting petition and denial of reconsideration.
- April 30 & June 24, 2008: CTA En Banc decision and resolution dismissing CIR’s appeal.
- July 12, 2017: Supreme Court decision under Rule 45, Rule 7 CTA Rules.
Applicable Law
- 1987 Philippine Constitution
- NIRC (Sections 43–49, Chapter VIII on accounting periods and methods; Sections 5 and 6 on BIR powers)
- Revenue Regulations (Crop-basis method)
- Revenue Audit Memorandum No. 2-95 (RAM 2-95)
- Revenue Memorandum Order No. 43-90 (RMO 43-90)
- Revenue Memorandum Circular No. 22-04 (RMC 22-04)
- Rules of Court, Rule 45
- CTA jurisdiction under R.A. No. 1125 as amended by R.A. No. 9282
- Revised Rules of the Court of Tax Appeals, A.M. No. 05-11-07-CTA
Factual Background
BIR revenue officers, authorized by LOA No. 00012289, examined Lancaster’s books for taxable year 1998. Audit findings disallowed P11,496,770.18 in tobacco purchase deductions for February–March 1998, alleging violation of proper matching of cost and revenue and NIRC Sections 43 and 45. Deficiency income tax, inclusive of interest and penalties, totaled P6,466,065.50.
CTA Division Proceedings
Lancaster protested the FAN, asserting its practice of using crop-year basis accounting to match costs with crop-sale revenues. It argued that February–March 1998 purchases properly belonged to fiscal year ending March 31, 1999. CTA Division held LOA scope limited to FY 1998, invalidated the assessment and ordered its cancellation.
CTA En Banc Decision
CIR elevated the case to CTA En Banc, which affirmed the Division’s ruling. En Banc held that LOA did not authorize examination beyond taxable year 1998 and that the resulting assessment was without force and effect.
Issue on Authority Scope
Whether LOA No. 00012289 authorized examination and assessment of fiscal year ending March 31, 1999. CIR contended that scope was broad enough to cover unverified subsequent periods and that Lancaster failed to raise the issue earlier.
Authority to Examine and LOA Limitations
NIRC Section 6 authorizes CIR to examine any taxpayer and assess tax liabilities. RMO 43-90 limits each LOA to one taxable year unless additional periods are expressly stated. LOA No. 00012289 specified examination of “taxable year 1998,” i.e., April 1, 1997–March 31, 1998.
Validity of Assessment
Assessment applied disallowed costs to April 1, 1998–March 31, 1999, a period outside the LOA’s scope. Jurisprudence (CIR v. Sony Phils.; CIR v. De La Salle Univ.) invalidates assessments exceeding LOA coverage. Supreme Court held the assessment void for lack of authority.
Crop-Year Accounting Method
Under RAM 2-95, farmers producing crops requiring over one year from planting to sale may adopt a crop-year basis: expenses are deductible in the year gross income is realized. Lancaster’s crop year runs October 1–September 30; costs incurred in February–March 1998 relate to crop revenues realized in its fiscal year ending March 31, 1999.
Accounting Periods and Methods
NIRC Chapter VIII recognizes cash, accrual, installment, percentage-of-completion and other acc
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Procedural History
- Petition for Review on Certiorari under Rule 45 filed by the Commissioner of Internal Revenue (CIR) seeking reversal of CTA En Banc Decision (30 April 2008) and Resolution (24 June 2008) in CTA EB No. 352.
- CTA En Banc had affirmed CTA First Division Decision (12 September 2007) and Resolution (12 December 2007) in CTA Case No. 6753, which granted Lancaster’s petition for review and ordered cancellation of the deficiency assessment.
- CIR sought relief from the Supreme Court assigning errors concerning the LOA’s scope and the CTA’s order to cancel the assessment.
Facts
- Lancaster Philippines, Inc. is a domestic tobacco producer, processor, and marketer, organized in 1963.
- On 30 September 1999, BIR issued Letter of Authority (LOA No. 00012289) authorizing examination of Lancaster’s books for “taxable year 1998 to __, 19.”
- After examination, BIR issued a Preliminary Assessment Notice (PAN) citing:
- Overstatement of purchases for FY April 1998–March 1999.
- Non-compliance with the matching principle.
- BIR disallowed P11,496,770.18 in tobacco purchases from February–March 1998 and computed a deficiency income tax of P6,466,065.50 (including interest and penalties).
- Lancaster protested the PAN and later received a Final Assessment Notice (FAN) dated 11 October 2002 for the same deficiency, which it also protested.
- With no resolution by the CIR, Lancaster filed a petition for review with the CTA Division on 21 August 2003.
- CTA Division granted Lancaster’s petition and ordered cancellation of the assessment; CTA En Banc denied CIR’s petition for review.
Issues
- Did the revenue officers exceed their authori