G.R. No. 183408 July 12, 2017
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. LANCASTER PHILIPPINES, INC., Respondent.

FACTS

The Commissioner of Internal Revenue (CIR) assessed Lancaster Philippines, Inc., a tobacco producer, for deficiency income tax for its fiscal year ending March 1999. The assessment disallowed the deduction of tobacco purchases made in February and March 1998, amounting to Php 11,496,770.18. The BIR argued these purchases pertained to the prior fiscal year (April 1997 to March 1998) and their deduction in the subsequent year violated the matching principle and the annual accounting period rule under the Tax Code. Lancaster protested, asserting its unique practice of matching costs with revenue realization. It argued that for tobacco, which takes over a year to cultivate, income is realized only upon sale of the processed leaf. Thus, it posted purchases from one cropping season (October to September) against the income of its fiscal year ending the following March, creating a six-month timing difference it claimed was a long-standing, consistent accounting method.

ISSUE

Whether the Court of Tax Appeals correctly affirmed the cancellation of the deficiency income tax assessment against Lancaster by upholding its accounting method for deducting tobacco purchases.

RULING

The Supreme Court DENIED the petition and AFFIRMED the CTA En Banc’s decision. The legal logic centers on the supremacy of the National Internal Revenue Code (NIRC) and its implementing regulations over Generally Accepted Accounting Principles (GAAP) for tax purposes. While Lancaster’s method may align with the matching principle under GAAP, tax deductions are governed strictly by the NIRC. Section 43 of the NIRC mandates taxable income be computed based on the taxpayer’s annual accounting period (fiscal or calendar year). Section 45 further requires deductions be taken for the taxable year in which “paid or accrued” or “paid or incurred,” depending on the accounting method used. Revenue Regulations No. 2, Section 45 provides a specific exception for farmers growing crops taking over one year, allowing them to deduct production costs in the year the crop income is realized. The Court found Lancaster qualified for this exception. Its method, consistently applied, allocated costs of a full cropping cycle to the fiscal year in which the resultant income was realized, which was its fiscal year ending March 1999 for the purchases in question. The BIR’s own Revenue Memorandum Circular 22-04 recognizes that where the Tax Code and GAAP conflict, the Code prevails. Here, the Code’s specific provision for agricultural producers sanctioned Lancaster’s practice. Therefore, the disallowance of the deductions was improper, and no deficiency tax existed.