G.R. No. L-18282; May 29, 1964
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PRISCILA ESTATE, INC., and THE COURT OF APPEALS, respondents.

FACTS

Priscila Estate, Inc., a domestic corporation engaged in leasing real estate, filed its income tax returns for 1949, 1950, and 1951. On September 13, 1952, it claimed a refund of P4,941.00 as overpaid income tax for 1950, asserting it had understated its deductible loss from a property sale. The Commissioner of Internal Revenue investigated the returns for 1949-1951, granted a partial tax credit for 1950, but issued deficiency assessments for 1949 and 1951. Priscila Estate contested these assessments, leading to a suit before the Court of Tax Appeals (CTA).
The CTA ruled in favor of Priscila Estate, ordering a refund. The Commissioner appealed, raising several issues. The first pertained to the 1949 deduction of P11,237.35 for the cost of a demolished “barong-barong.” The Commissioner argued this cost should have been capitalized into the new building’s cost. Other contested issues involved the proper basis and rates for depreciation on various corporate assets, including a building acquired in exchange for stock. Finally, the Commissioner argued the refund claim was barred by the two-year prescriptive period.

ISSUE

The primary issues were: (1) Whether the cost of the demolished building was a deductible loss or a capital expenditure; (2) Whether the CTA correctly determined the basis and rates for depreciation; and (3) Whether the claim for refund was prescribed.

RULING

The Supreme Court affirmed the CTA’s decision. On the first issue, the Court upheld the deduction for the loss of the “barong-barong.” The CTA found the demolition was not voluntary but was forced by the city engineer as the structure was a fire hazard. The corporation was earning substantial rent from it and had to borrow to build a replacement. These facts negated an intent to demolish merely to erect a new building. Since the loss was not compensated by insurance, it was properly deductible under Section 30(2) of the Internal Revenue Code.
On the depreciation issues, the Court found no reversible error. For the building acquired via stock swap, the CTA correctly used the construction cost as the depreciation basis. A corporate resolution to revalue the property to its construction cost imported an obligation to pay the difference to the vendors, ultimately making that cost the corporate investment. The claimed rates for other assets were questions of fact. The Commissioner did not demonstrate the CTA was arbitrary or abused its discretion in accepting them. Before the Revised Rules, the Supreme Court’s review of CTA decisions was limited to questions of law, and such factual findings were thus conclusive.
Finally, the Court held the defense of prescription was waived. The Commissioner failed to plead the two-year prescriptive period either in a motion to dismiss or in his answer, as required under Section 10, Rule 9 of the Rules of Court. This failure constituted a waiver of that defense. Finding no error, the decision was affirmed.