G.R. No. L-21570 July 26, 1966
LIMPAN INVESTMENT CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.

FACTS

Petitioner Limpan Investment Corporation, a domestic corporation engaged in leasing real properties, filed its 1956 and 1957 income tax returns, reporting net incomes of P3,287.81 and P11,098.36, respectively. After an investigation, the Bureau of Internal Revenue found that petitioner had underdeclared its rental incomes by P20,199.00 for 1956 and P81,690.00 for 1957, and had claimed excessive depreciation deductions of P4,260.00 for 1956 and P16,336.00 for 1957. The Commissioner of Internal Revenue issued a deficiency assessment, including a 50% surcharge. Petitioner contested the assessment before the Court of Tax Appeals, arguing it did not receive the alleged undeclared rentals and that the depreciation rates used were unfair. Petitioner’s Secretary-Treasurer, Vicente G. Solis, admitted underreporting of P12,100.00 for 1956 and P29,350.00 for 1957 but offered explanations for the remaining amounts, including a verbal agreement with former owners and collections by its president not turned over. The Tax Court upheld the Commissioner’s assessment.

ISSUE

1. Whether the Court of Tax Appeals erred in holding that petitioner had an unreported rental income of P20,199.00 for 1956.
2. Whether the Court of Tax Appeals erred in holding that petitioner had an unreported rental income of P81,690.00 for 1957.
3. Whether the Court of Tax Appeals erred in holding that the depreciation claimed by petitioner for 1956 and 1957 was excessive.

RULING

The Supreme Court affirmed the decision of the Court of Tax Appeals.
1. On the first issue, the Court found petitioner’s excuse for not reporting the balance of the 1956 income—a verbal agreement with the former owners—to be unusual and uncorroborated by the alleged transferors or any documentary evidence. Petitioner’s admission of underreporting a significant portion shifted the burden of proof, which was not met.
2. On the second issue, the Court held petitioner’s denial and explanations for the 1957 undeclared income were unsubstantiated. The president, Isabelo P. Lim, was not presented as a witness, nor was his personal tax return submitted. Rental deposits in court for 1957 were deemed constructively received by petitioner in that year, and payments from a sub-tenant constituted taxable income regardless of source.
3. On the third issue, the Court ruled that depreciation is a question of fact, and the Tax Court’s findings, based on Bulletin “F” of the U.S. Federal Internal Revenue Service—which has persuasive effect in Philippine jurisdiction—were not shown to be arbitrary or an abuse of discretion. Thus, the claimed depreciation was excessive.
The deficiency assessment, including surcharge and interest, was upheld.