BIR Ruling [DA-328-03]

September 30, 2003 BIR RULING [DA-328-03] 34 SyCip Gorres Velayo & Co. 6/F, Ayala Life FGU Center Mindanao Avenue Cor. Biliran Road Cebu Business Park, Cebu City Attention: Mr. Lauris L. Dela Pea Tax and Business Advisory Gentlemen : This refers to your letter dated November 26, 2001 requesting on behalf of your client Grand Cement Manufacturing Corporation (GCMC) for a ruling on the deductibility for income tax purposes, of the amount of machinery and equipment and other improvements of the company's uncompleted power plant which it shall write off from its books of accounts for the calendar year ending December 31, 2001 due to its alleged non-usability brought about by its technical obsolescence and the total abandonment of the power plant project. In reply, please be informed that Section 110 of Revenue Regulations No. 2 provides for the conditions under which obsolescence could become an item of deduction from gross income. Thus, we quote the said section in its entirety as follows: CaDEAT "With respect to physical property the whole or any portion of which is clearly shown by the taxpayer as being affected by economic conditions that will result in its being abandoned at a future date prior to the end of its normal useful life, so that depreciation deductions alone are insufficient to return the cost (or other basis) at the end of its economic term of usefulness, a reasonable deduction for obsolescence, in addition to depreciation, may be allowed in accordance with the facts obtaining with respect to each item of property concerning which a claim for obsolescence is made . No deductions for obsolescence will be permitted merely because, in the opinion of a taxpayer, the property may become obsolete at some later date. This allowance will be confined to such portion of the property on which obsolescence is definitely shown to be sustained and can not be held applicable to an entire property unless all portions thereof are affected by the conditions to which obsolescence is found to be due." (emphasis supplied) Although our Regulations allows a reasonable deduction for obsolescence, it is our opinion that the request essentially involves a question of fact for which the BIR-Operations Group through its examiners are in a better position to determine more particularly, to assess or estimate the value of the property (machinery and equipment and other improvements of GCMC's uncompleted power plant) for tax purposes. Accordingly, the matter of deductibility of the claimed amounts for income tax purposes cannot be the proper subject of a ruling since this involves issues of fact which is not within the jurisdiction of this Office to rule on. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group