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CIR vs. Isabela Cultural Corp.

- The Supreme Court ruled that the Court of Appeal was incorrect in sustaining the deduction of expenses for professional services from 1985, as accrual accounting requires expenses to be deducted in the year they are incurred, not when billing is received. - However, the Court of Appeal correctly sustained the deduction of expenses for security services in 1986, as the records showed these expenses were incurred in that year. - For professional fees incurred in 1985, ICC failed to prove the expenses could not have been reasonably estimated and deducted in 1985, as required by accrual accounting. Thus, the expenses were properly disallowed as deductions for 1986.

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392 views1 page

CIR vs. Isabela Cultural Corp.

- The Supreme Court ruled that the Court of Appeal was incorrect in sustaining the deduction of expenses for professional services from 1985, as accrual accounting requires expenses to be deducted in the year they are incurred, not when billing is received. - However, the Court of Appeal correctly sustained the deduction of expenses for security services in 1986, as the records showed these expenses were incurred in that year. - For professional fees incurred in 1985, ICC failed to prove the expenses could not have been reasonably estimated and deducted in 1985, as required by accrual accounting. Thus, the expenses were properly disallowed as deductions for 1986.

Uploaded by

Natsu Dragneel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CIR VS.

ISABELA CULTRUAL CORPORATION


RULING + RATIO:
Petitioner: Commissioner of Internal Revenue - The CA is not correct in sustaining the deduction of the expenses for the
professional services. However, the CA is correct in sustatning the deduction
Respondent: Isabela Cultural Corporation
for the security services.
Doctrine: Revenue Audit Memorandum Order No.1-2000 provides that under the
- Revenue Audit Memorandum Order No.1-2000 provides that under the
accrual method of accounting, expenses not being claimed as deductions by a tax accrual method of accounting, expenses not being claimed as deductions by
payer in the current year when they are incurred cannot be claimed as deductions
a tax payer in the current year when they are incurred cannot be claimed as
from the income for the succeeding year.
deductions from the income for the succeeding year.
- In this case, the professional fees of SGV & Co. for auditing the financial
FACTS: statements of ICC for the year 1985 cannot be validly claimed as expense
deductions in 1986. This is so because ICC failed to present evidence
- Isabela Cultural Corporation (ICC), a domestic corporation, received from showing that even with only "reasonable accuracy," as the standard to
BIR assessment notices for deficiency income tax in the amount of P333, ascertain its liability to SGV & Co. in the year 1985, it cannot determine the
196.86 and for deficiency expanded withholding tax in the amount of P4, professional fees which said company would charge for its services. ICC thus
897.79, inclusive of surcharge and interest both for the taxable year failed to discharge the burden of proving that the claimed expense
1986. The deficiency income tax of P333, 196 arose from BIR disallowance deductions for the professional services were allowable deductions for the
of ICC claimed expenses deductions for professional and security services taxable year 1986. Hence, per Revenue Audit Memorandum Order No. 1-
billed to and paid by ICC in 1986. 2000, they cannot be validly deducted from its gross income for the said
- The deficiency expanded withholding tax of P4, 897.79 was allegedly due to year and were therefore properly disallowed by the BIR.
the failure of ICC to withhold 1% expanded withholding tax on its claimed - As to the expenses for security services, the records show that these
P244, 890 deduction for security services. expenses were incurred by ICC in 1986 and could therefore be properly
- Court of Tax Appeal and Court of Appeal affirmed that the professional claimed as deductions for the said year.
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 contends 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: W/N CA is correct in sustaining the deduction of the expenses for


professionals and security services from ICC’s gross income.

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