BIR Ruling No. 459-61

October 11, 1961 BIR RULING NO. 459-61 MEMORANDUM for The Chief, Income Tax Division (Thru the Revenue Operations Head [Legal]) This refers to the deficiency income taxes assessed against Miss Salud Borromeo of Cebu City in the sums of P2,101.36 for the year 1947, P1,929.98 for 1948, P3,498.53 for 1949 and P378.00 for 1950, or a total of P7,907.87. The facts of the case may be summarized briefly as follows: The taxpayer is engaged in business as a common carrier by water. During the years under review, she filed consistently her income tax returns on the operations of her business. However, no field audit investigation was over conducted relative to her business during the years 1947, 1948 and 1949 till the year 1956 when her income tax return for the year 1950 was referred for investigation to Examiner Juan P. Puertellano. cdll The investigating examiner, believing that fraud was committed by the taxpayer in filing her return for 1950, decided to look into the operations of the business during the previous years. Thus his finding that no previous field investigation was conducted for the years 1947, 1948 and 1949. Consequently, he extended the scope of his investigation to cover the previous years. As a result of his investigation assessment notices were issued in the total amount of P197,891.22, inclusive of the 50% fraud penalty. Upon representation made by the taxpayer, a reinvestigation was conducted which was handled by the Investigation Branch of the Regional Office. The reinvestigation resulted in the reduction of the taxes from P197,891.22 to P7,128.45 exclusive of the 50% fraud penalty which the reinvestigating examiner considered as not warranted per his findings. It may be mentioned at this stage that the deficiency income taxes were arrived at by disallowing certain items of expenses for the repairs of the vessels used in the business, so-called insurance and provident reserves which were not actually spent and capital investments made by the taxpayer which the original investigator considered as income. In the reinvestigation, expenses for the repairs of the vessels, which were considered in the original investigation as capital expenditures, were allowed as ordinary and necessary expenses; while capital invested in the business which were considered as income, were not considered as such in the reinvestigation. llcd A controversy arose between the Investigation Branch as represented by the reinvestigator and the Tax Audit Branch over the propriety of the allowances made by the reinvestigating examiner. The Tax Audit contended that the expenses for repairs being of a substantial amount should be considered as capital expenditures, hence, not deductible. The reinvestigating examiner, on the other hand, contended that the criterion for determining whether or not the amount spent should be considered as capital expenditure is not the amount itself but rather whether the repairs for which the expenses were incurred served to prolong the useful life of the thing repaired to at least more than one year or not. For the proper resolution of the questions involved, which generally related to accounting procedures, proper verification and analysis of the entries in the books of accounts of the taxpayer, the entire docket of the case was forwarded to the National Office. On December 17, 1957, a demand letter was sent to the taxpayer requesting her to pay the total sum of P11,861.81, inclusive of the 50% fraud penalty. These assessments were once again contested by the taxpayer in her letter dated January 21, 1958. Among other things, she raised the issue of prescription and the imposition of the fraud penalty. On March 7, 1958 another set of assessments were sent to the taxpayer further reducing the total amount due to P7,907.87 due to the fact that the 50% fraud penalty was no longer imposed. The taxpayer again refused to pay the amount on the ground of prescription. She contended that she had consistently filed her income tax returns during the years under review and considering that she had not committed any fraud as shown by the returns she filed, the government lost its right to assess any deficiency income taxes against her in accordance with the provisions contained in Section 331 of the Tax Code. LibLex The sole issue for consideration is the question of prescription. Income tax returns were filed by her for the years 1947, 1948, 1949 and 1950. There was no fraudulent intention on her part to defraud the government of its lawful taxes. She kept her books of accounts even beyond the five-period provided in Section 337 of the Tax Code. In fact the findings both in the original investigation and in the subsequent reinvestigation were mostly taken from her books of accounts. The investigation to determine any deficiency income tax was only made in 1956 and the original assessments for deficiency income taxes were only issued during that year. It is quite evident that the right of the government to assess any deficiency income taxes for the years 1947, 1948 and 1949 has prescribed in accordance with Section 331 of the Tax Code. The assessment in the amount of P378.00 representing deficiency income tax for the year 1950 may still be collected. Collection thereof may be enforced thru judicial action in accordance with the ruling enunciated in the of "Collector of Internal Revenue vs. Suyoc Consolidated Mining Co., et al., G.R. No. L-11527, promulgated November 25, 1958. LLphil (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue