G.R. No. 100481 - Philippine Interisland Shipping Association of the Philippines vs. Court of Appeals

Case Summary (G.R. No. 100481)

Petitioner and Respondent

Petitioner: Fernandez Hermanos, Inc.
Respondent: Commissioner of Internal Revenue; Hon. Roman A. Umali in his capacity as CTA judge.

Key Dates

Assessment years: 1950–1954 and 1957
Original CTA decisions rendered June 10, 1963 (Case No. 787) and February 20, 1962 (Case No. 1389)
Supreme Court decision: September 30, 1969

Applicable Law

Constitution of the Philippines (1935)
National Internal Revenue Code (as in force in the 1950s)
Revenue Regulations No. 2, Section 100, on inventory accounting

Losses in Mati Lumber Co. (1950)

The Tax Court allowed the deduction of ₱8,050 as a worthless-securities loss under Sections 30(d)(4)(b) and 30(e)(3) of the Code. Substantial evidence demonstrated that Mati Lumber Co. ceased operations in 1949, had no realizable assets, and its insolvency became known to the taxpayer in 1950.

Advances to Palawan Manganese Mines, Inc. (1951)

The Tax Court correctly disallowed the ₱353,134.25 write-off of advances as losses or bad debts. Memoranda showed no enforceable debt—repayment depended solely on future net profits—and the subsidiary remained in operation through 1952. Such advances were investments, not loans, and could not be partially charged off under Sections 30(d)(2) or 30(e)(1).

Balamban Coal Mines Losses (1950–1951)

Expenditures of ₱8,989.76 and ₱27,732.66 incurred in 1950 and 1951 were disallowed for those years because the mines were still operating. The losses properly arose upon abandonment in 1952 and should be deducted in that year, eliminating the ₱3,600 deficiency for 1952.

Hacienda Dalupiri and Hacienda Samal Losses (1950–1954)

Losses totaling ₱17,418.95 to ₱42,938.56 (Dalupiri) and ₱7,621.73 to ₱8,380.25 (Samal) were correctly allowed. The farms operated as bona fide business enterprises, not hobby farms, and determined net receipts and disbursements under the inventory method authorized by Regulation 100.

Excessive Depreciation on Buildings (1950–1954)

The taxpayer’s 10% annual depreciation claim was disallowed in excess of a 3% reasonable rate. The record provided no proof of a 10-year useful life; the existence of fully depreciated, low-value assets further supported a lower rate.

Taxable Increase in Net Worth (1950–1951)

Adjustments of ₱30,050 in 1950 and ₱1,382.85 in 1951 resulted from corrected bookkeeping entries, not unreported income. Under the income tax law, mere net-worth increases from error corrections are not taxable.

Gain from Sale of Real Property (1950)

An alleged unreported gain of ₱11,147.26 was reversed. The taxpayer demonstrated that improvements in that amount augmented the ₱11,852.74 acquisition cost, yielding a properly reported ₱37,000 gain on the ₱60,000 sale.

Prescription of Collection Action

The government’s right to collect deficiency taxes has not prescribed. The Commissioner’s answer in the CTA petition constitutes commencement of judicial collection within the five-year period from assessment.

1957 Deficiency Assessment and CTA Decision

The Commissioner assessed a ₱38,918.76 deficiency for 1957 by disallowing a claimed ₱89,547.33 loss on Hacienda Dalupiri and ₱48,481.62 amortization of “contractual rights.” The CTA modified the assessment to ₱9,696, allowing the farm loss but sustaining the

Case Syllabus (G.R. No. 100481)

Background of the Appeals

Four consolidated appeals (G.R. Nos. L-21551, L-21557, L-24972, L-24978) decided September 30, 1969.
Fernandez Hermanos, Inc. (“taxpayer”) is a domestic investment company with main office in Manila.
Appeals involve Court of Tax Appeals (“CTA”) decisions on deficiency income tax assessments for taxable years 1950–1954 and 1957.
Both taxpayer and Commissioner of Internal Revenue appealed adverse CTA rulings on specific disallowed items.

CTA Proceedings and Original Assessments (1950–1954)

Commissioner audited returns and assessed deficiencies:
• 1950: ₱13,414.00
• 1951: ₱119,613.00
• 1952: ₱11,698.00
• 1953: ₱6,887.00
• 1954: ₱14,451.00
Discrepancies summarized as:
1. Losses/bad debts in various enterprises
2. Excessive depreciation on houses
3. Taxable increases in net worth
4. Unreported gain on sale of real property
CTA granted some deductions, disallowed others, and reduced total deficiency to ₱123,436.00.

Main Issues Raised

Correctness of CTA’s rulings on each disallowed deduction.
Whether the government’s right to collect the assessments has prescribed.

1. Losses Claimed as Deductions

(a) Mati Lumber Co. (1950):
• Taxpayer wrote off ₱8,050 cost of shares as worthless.
• CTA found company insolvent after manager’s death; loss properly claimed under Sections 30(d)(4)(b)/30(e)(3).
• Supreme Court affirmed allowance; any later recovery would be income when received.
(b) Palawan Manganese Mines, Inc. (1951):
• Taxpayer advanced ₱587,308.07 (1945–1951) under a profit-sharing memorandum, wrote off ₱353,134.25.
• CTA disallowed treatment as loss or bad debt: no obligation to repay when no profits; subsidiary still operating.
• Supreme Court held advances were investments, not loans or bad debts; partial write-off impermissible.
(c) Balamban Coal Mines (1950–1951):
• Taxpayer claimed P 8,989.76 (1950) and P 27,732.66 (1951) as losses.
• CTA ruled losses deductible only up