CIR vs. Isabela Cultural Corporation

Isabela Cultural Corp.(ICC for brevity) , a domestic corporation received from BIR assessment notice no. FAS-1-86-90000680 (680 for brevity) for deficiency income tax in the amount of PhP 333,196.86 and assessment notice no. FAS-1-86-90-000681 (681 for brevity) for deficiency expanded withholding tax in the amount of PhP 4,897.79, inclusive of surcharge and interest both for the taxable year 1986.  The deficiency income tax of PhP 333,196 arose from BIR disallowance of ICC claimed expenses deductions for professional and security services billed to and paid by ICC in 1986.

The deficiency expanded withholding tax of PhP4,897.79 was allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed PhP244,890 deduction for security services.

Court of Tax Appeal and Court of Appeal affirmed that the professional services were rendered to ICC in 1984 and 1985, the cost of the service was not yet determinable at that time, hence, it could be considered as deductible expenses only in 1986 when ICC received the billing statement for said service.  It further ruled that ICC did not state its interest income from the promissory notes of Realty Investment and that ICC properly withheld the remitted taxes on the payment for security services for the taxable year 1986.

Petitioner contend that since ICC is using the accrual method of accounting, the expenses for the professional services that accrued in 1984 and 9185 should have been declared as deductions from income during the said years and the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable year 1986.

ISSUE (1):  WON CA is correct in sustaining the deduction of the expenses for professionals and security services form ICC gross income?

HELD: NO

Revenue Audit Memorandum Order No.1-2000 provides that under the accrual method of accounting, expenses not being claimed as deductions by a tax payer in the current year when they are incurred cannot be claimed as deductions from the income for the succeeding year.

ISSUE (2): WON CA correctly held that ICC did not understate its interest income from the promissory notes of Realty Investment, Inc; that ICC withheld the required 1% withholding tax from the deduction for security services.

HELD:

Sustaining the finding of the CTA and CA that no such understatement exist and that only simple interest computation and not a compounded one should have been applied by the BIR.  There is no indeed no stipulation between the latter and ICC on the application of compound interest.

Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should not further earn interest.