112 CIR v.

Phoenix
No. L-19727 (1965)
J. J.P Benzon / Tita K
Subject Matter: Deductions from gross income
Summary:
Phoenix insurance filed its Income Tax Returns for years 1950, 1952, 1953 and 1954. For the 1950 ITR, it claimed a
deduction of P37,147.04 as net addition to marine insurance reserve equivalent to 40% of the gross marine insurance
premiums received during the year. The CIR disallowed P11,772.57 of such claim for deduction. Nonetheless, the SC
allowed the claim for deduction in full because Phoenix’s claim for deduction was actually less than what the law allows
under Sec. 186 of the Insurance law and Sec. 32 of the Tax Code. (See doctrine # 1). For ITRs for year 1952, 1953, 1954,
Phoenix claimed a deduction representing the reinsurance premiums ceded to foreign reinsurers. Nonetheless, the CIR
disallowed certain amounts of deduction representing head office expenses allocable to said Philippine branch. The SC
sustained such disallowance. In computing such disallowance, the CIR excluded the income not belonging to the
Philippines.

Doctrines:
For income tax purposes a taxpayer is free to deduct from its gross income a lesser amount, or not to claim any
deduction at all. What is prohibited by the income tax law is to claim a deduction beyond the amount authorized
therein.

Items of income not belonging to Philippines excluded in determining expenses allocable to Philippines.

Parties:
No. L-19727
Petitioner THE COMMISSIONER OF INTERNAL REVENUE
Respondent PHOENIX ASSURANCE CO., LTD. (Phoenix)
No. L-19903
Petitioner PHOENIX ASSURANCE CO., LTD.
Respondent THE COMMISSIONER OF INTERNAL REVENUE
Facts:
 Phoenix is a foreign insurance corporation organized under the laws of Great Britain, is licensed to do business in the Philippines
with head office in London.
 It entered into worldwide reinsurance treaties with various foreign insurance companies. It agreed to cede a portion of
premiums received on original insurances in consideration for assumption by the foreign insurance companies of an
equivalent portion of the liability from such original insurances.
 Pursuant to such reinsurance treaties, Phoenix ceded portions of the 1952, 1953, and 1954 premiums it earned from its
underwriting business in the Philippines, upon which the CIR assessed withholding taxes in the total amount of P183,838.42.
April 1951 – Phoenix filed its income tax return (ITR) for 1950. It claimed a deduction of P37,147.04 as net addition to marine
insurance reserve equivalent to 40% of the gross marine insurance premiums received during the year. The CIR disallowed
P11,772.57 of such claim for deduction and subsequently assessed against Phoenix P1,884.00 as deficiency income tax. The
disallowance resulted from the fixing by the CIR of the net addition to the marine insurance reserve at 100% of the marine
insurance premiums received during the last three months of the year.
April 1953- Phoenix filed its ITR for 1952, claiming a deduction from gross income of P35,912.25 as part of the head office
expenses incurred for its Philippine business, computed at 5% on its gross Philippine income.
 August 1955 - it amended its ITR for 1952 by excluding from its gross income the amount of P316,526.75 representing
reinsurance premiums ceded to foreign reinsurers and further eliminating deductions corresponding to the ceded
premiums. The amended return showed an income tax due in the amount of P2,502.00. CIR disallowed P15,826.35 of
the claimed deduction for head office expenses and assessed a deficiency tax of P5,667.00.
April 1954 - Phoenix filed its ITR for 1953, claiming a deduction from gross income of P33,070.88 as head office expenses
allocable to its Philippine business, equivalent to 5% of its gross Philippine income.
 August 1955 - it amended its 1953 ITR to exclude from its gross income the amount of P246,082.04 representing
reinsurance premiums ceded to foreign reinsurers. CIR disallowed P12,304.10 of the deduction representing head
office expenses allocable to Philippine business.
 April 1955 - Phoenix filed its ITR for 1954, claiming a deduction from gross income of P29,624.75 as head office expenses
allocable to its Philippine business, computed at 5% of its gross Philippine income. It also excluded from its gross income the
amount of P203,384.69 representing reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines.
 In August 1958, BIR released the assessments for deficiency income tax for the years 1952 and 1954 against Phoenix resulted
from the disallowance of a portion of the deduction claimed by Phoenix as head office expenses allocable to its business in the
Philippines fixed by the Commissioner at 5% of the net Philippine income instead of 5% of the gross Philippine income as
claimed in the returns.
 Phoenix protested against the said assessments for withholding tax and deficiency income tax. However, CIR denied such
protest.
 When elevated to the CTA, CTA allowed in full the amount claimed by Phoenix for 1950 as net addition to marine insurance
reserve; determined the allowable head office expenses allocable to Philippine business to be 5% of the net income in the
Philippines; declared the right of the CIR to assess deficiency income tax for 1952 to have prescribed; absolved Phoenix from
payment of the statutory penalties for non-filing of withholding tax return.

Issue/s:

1. WON the right of the Commissioner of Internal Revenue to assess deficiency income tax for the year 1952
against Phoenix Assurance Co., Ltd. has prescribed. (NO)
2. WON the deduction claimed by Phoenix Assurance Co., Ltd. as net addition to reserve for the year 1950 is
excessive. (NO)
3. WON the deductions claimed by Phoenix Assurance Co., Ltd. for head office expenses allocable to Philippine
business for the years 1952, 1953 and 1954 are excessive.

Ratio:
1. The right of the Commissioner to assess the deficiency tax on such amended return has NOT prescribed.

 Sec. 3311 of the Tax Code, which limits the right of the Commissioner of Internal Revenue to assess income tax within
five years from the filing of the income tax return.
 The running of the prescriptive period commence from the filing of the amended return.
o The deficiency income tax in question could not possibly be determined, or assessed, on the basis of the
original return filed on April 1953. Not until the amended return was filed on August 30, 1955 could the
Commissioner assess the deficiency income tax in question.
o The changes and alterations embodied in the amended ITR consisted of the exclusion of reinsurance
premiums received from domestic insurance companies by Phoenix’s London head office, reinsurance
premiums ceded to foreign reinsurers not doing business in the Philippines and various items of deduction
attributable to such excluded reinsurance premiums thereby substantially modifying the original return.
o Furthermore, although the deduction for head office expenses allocable to Philippine business, whose
disallowance gave rise to the deficiency tax, was claimed also in the original return, CIR could not have
possibly determined a deficiency tax thereunder because Phoenix declared a loss of P199,583.93 therein
which would have more than offset such disallowance of P15,826.35.
o Considering that the deficiency assessment was based on the amended return which, as aforestated, is
substantially different from the original return, the period of limitation of the right to issue the same
should be counted from the filing of the amended income tax return.
o From August 30, 1955, when the amended return was filed, to July 24, 1958, when the deficiency
assessment was issued, less than five years elapsed.

2. The deduction claimed by Phoenix as net addition to reserve for the year 1950 is NOT excessive and should be
allowed.

1“SEC. 331. Period of limitation upon assessment and collection.— Except as provided in the succeeding section, internal revenue taxes shall be
assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun
after the expiration of such period. For the purposes of this section, a return filed before the last day prescribed by law for the filing thereof shall
be considered as filed on such last day: Provided, That this limitation shall not apply to cases already investigated prior to the approval of this
Code.”
  The reserve required for marine insurance is determined on two bases: 50% of premiums under policies on
yearly risks (based on Sec. 1862 of the Insurance Law) and 100% of premiums under policies of marine risks not
terminated during the year (based on Sec. 32(a)3). Section 32(a) of the Tax Code allows the full amount of such
reserve to be deducted from gross income.
 However, for income tax purposes a taxpayer is free to deduct from its gross income a lesser amount, or not
to claim any deduction at all. What is prohibited by the income tax law is to claim a deduction beyond the
amount authorized therein.
o Phoenix’s claim for deduction of P37,147.04 being less than the amount required in Sec. 186 of the
Insurance Law, the same cannot be and is not excessive, and should therefore be fully allowed.

3. The deductions claimed by Phoenix Assurance Co., Ltd. for head office expenses allocable to Philippine business for
the years 1952, 1953 and 1954 are excessive.

Phoenix insists that the 5% head office expenses be determined from the gross income, while the Commissioner wants
the computation to be made on the net income.

 Sec. 30 par. 2(a) of the Tax Code provides:

“(2) Expenses allowable to non-resident alien individuals and foreign corporations. In the case of a non-resident
alien individual or a foreign corporation, the expenses deductible are the necessary expenses paid or incurred in
carrying on any business or trade conducted within the Philippines exclusively.” (Italics supplied.)
o The record shows that the Phoenix’s gross income consists of income from its Philippine business as
well as reinsurance premiums received for its head office in London and reinsurance premiums ceded
to foreign reinsurance. Since the items of income not belonging to its Philippine business are not
taxable to its Philippine branch, they should be excluded in determining the head office expenses
allocable to said Philippine branch.
o The deficiency assessments for 1952, 1953 and 1954, resulting from partial disallowance of deduction
representing head office expenses, are sustained.

2 “SEC. 186. x x x Provided, That for marine risks the insuring company shall be required to charge as the liability for reinsurance fifty per centum of
the premiums written in the policies upon yearly risks, and the full premiums written in the policies upon all other marine risks not terminated.”
(Italics supplied.)
3 “SEC. 32. Special provisions regarding income and deductions of insurance companies, whether domestic or foreign.—(a) Special deductions

allowed to insurance companies.—In the case of insurance companies, except domestic life insurance companies and foreign life insurance
companies doing business in the Philippines, the net additions, if any, required by law to be made within the year to reserve funds and the sums
other than dividends paid within the year on policy and annuity contracts may be deducted from their gross income: Provided, however, That the
released reserve be treated as income for the year of release.”