G.R. No. L-24893. March 26, 1971.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. A. SORIANO Y CIA. and THE COURT OF TAX APPEALS, respondents.

FACTS

Respondent A. Soriano y Cia. owned land in Intramuros, Manila, and in 1960 undertook preparatory work for constructing an office building. This included engaging an architect to draw plans and contracting with A. M. Oreta & Co. for pile-driving work, which was actually performed that same year. However, on April 13, 1960, before the main construction began, the taxpayer sold the property to J. M. Tuason & Co. The sale contract included specifications concerning the load-bearing capacity of the driven piles.
The taxpayer paid the substantial balance of the contractor’s fees, amounting to P49,329.55, only on June 16, 1961, after the contractor resolved technical issues with the Manila City Engineer. Similarly, the taxpayer paid the architect’s fee balance of P11,000.00 in 1961. In its original 1960 income tax return, filed in April 1961, the taxpayer did not deduct these payments. It later filed amended returns seeking a refund, arguing these expenses should be included in the property’s cost basis for computing the gain on the 1960 sale.

ISSUE

Whether the taxpayer, in computing its taxable gain from the 1960 sale of the Intramuros property, is entitled to deduct as part of the property’s cost the pile-driving and architect’s fees paid in 1961.

RULING

Yes. The Supreme Court affirmed the Court of Tax Appeals’ decision granting the tax credit. The legal logic centers on the proper timing for deducting capital expenditures. The Court ruled that the nature of an expense as a capital expenditure is determined by when the liability is incurred and the service is rendered, not merely by the date of payment. Here, the contracts for both the pile-driving and architectural services were entered into in 1960, and the services (the actual pile-driving and the preparation of plans) were substantially rendered in that same year. These expenditures enhanced the property’s value, making them capital in nature.
Consequently, the obligation to pay for these value-adding services accrued in 1960. The fact that payment was made in 1961 is irrelevant for determining the cost basis in the year of sale. The expenses form part of the total capital cost of the property sold. Therefore, they must be deducted from the gross selling price to correctly compute the taxable gain for the year 1960. The taxpayer correctly claimed these deductions via its amended returns, entitling it to a refund for the overpaid tax.