CASE DIGEST: CIR vs. LANCASTER PHILIPPINES, INC., GR. No. 183408. July 12, 2017

FACTS:

Petitioner CIR is authorized by law to investigate or examine and, if necessary, issue assessments for deficiency taxes. On the other hand, respondent Lancaster is a domestic corporation established in 1963 and is engaged in the production, processing, and marketing of tobacco.

In 1999, BIR issued a Letter of Authority (LOA) authorizing its revenue officers to examine Lancaster books of accounts and other accounting records for all internal revenue taxes due from the taxable year 1998 to an unspecified date.

After the conduct of an examination pursuant to the LOA, the BIR issued a Preliminary Assessment Notice (PAN) and later on a Final Assessment Notice (FAN).

TAXPAYER'S ARGUMENTS:

Lancaster contends that for the past decades, it has used an entire tobacco-cropping season to determine its total purchases covering a one year period from 01 October up to 30 September of the following year; that it has been adopting the 6-month timing difference to conform to the matching concept (of cost and revenue); and that this has long been installed as part of the company's system and consistently applied in its accounting books.

Lancaster further argued that the February and March 1998 purchases should not have been disallowed invoking sections 4313 and 4514 of the NIRC, in conjunction with section 4515 of RR No. 2 as amended.

It maintained that the situation of farmers engaged in producing tobacco, like Lancaster concludes unique in that the costs, like purchases, are taken as of a different period and posted in the year in which the gross income from the crop is realized. Hence, for Lancaster, the deficiency income tax assessment issued by BIR must be canceled.

GOVERNMENT'S ARGUMENTS:

BIR issued assessment notices in accordance with the result of the examination of Lancaster's books of accounts and other accounting records which shows Lancaster's (1) overstatement of its purchases for the fiscal year April 1998 to March 1999; and (2) non-compliance with the generally accepted accounting principle of proper matching of cost and revenue.

Additionally, the CIR posts that Lancaster did not raise the issue on the scope of authority of the revenue examiners at any stage of the proceedings before the CTA and, consequently, the CTA had no jurisdiction to rule on said issue.

ISSUES:

1. Whether Lancaster complied with the generally accepted accounting principles of proper matching of cost and revenue.

2. Whether revenue officers exceeded their authority to investigate the period not covered by the LOA.

3. Whether CTA has jurisdiction on the issue of the authority of the revenue officers to investigate matters covered by LOA.

CONCLUSIONS:

1. On Lancaster's compliance with the generally accepted principles of proper matching of cost and revenue.

Yes, Lancaster complied. A reading of RAM No. 2-95, evinces that it conforms with the concept that the expenses paid or incurred be deducted in the year in which gross income from the sale of the crops is realized. Put in another way, the expenses are matched with the related incomes which are eventually earned. Nothing from the provision is it strictly required that for the expense to be deductible, the income to which such expense is related to be realized in the same year that is paid or incurred. As noted by CTA, the crop method is an unusual method of accounting, unlike other recognized accounting methods that, by mandate of Sec. 45 of the NIRC, strictly require expenses be taken in the same taxable year when the income is paid or incurred or paid or accrued, depending upon the method of accounting employed by the taxpayer.

PERSONAL NOTE: The Principle of Proper matching of cost and revenue does not strictly provide that expenses incurred must be deducted in the same year when the gross income was realized from the sale of crops. It always depends on the method of accounting used by the taxpayer.

2. On the authority to investigate the period not covered by the LOA.

The court held that the examination of Lancaster covers the FY period from April 1,1997 to March 31, 1998. It could not have contemplated a longer period. The examination for the full taxable year 1998 only is consistent with the guideline in RMO 43-90 that the LOA shall cover a taxable period not exceeding one taxable year. In other words, absent any other valid cause, the LOA issued in this case is valid in all respects. However, in this instant case, the subject LOA specified that the examination should be for the taxable year 1998 only but the subsequent assessment issued against Lancaster involved disallowed expenses covering the next fiscal year, or the period ending March 31, 1999. The taxable year covered by the assessment being outside of the period specified in the LOA in this case, the assessment issued against Lancaster is therefore void.

PERSONAL NOTE: For a valid Letter of Authority, it must be in compliance with RMO 43-90 that it shall cover only a taxable period not exceeding one taxable year. Otherwise, the revenue officer who examines is in excess of his authority and thus any assessment made on the basis of such invalid LOA is also considered invalid.

3. On CTA's Jurisdiction

The jurisdiction of CTA is not limited only to cases that involve decisions or inactions of the CIR on matters relating to assessments or refunds but also includes other cases arising from the NIRC or related laws administered by the BIR.

In this case, the issue of whether revenue officers who had conducted the examination on Lancaster exceeded their authority pursuant to LOA may be considered as covered by the terms "other matters" under Section 7 of RA 1125 or its amendment RA 9282. The authority to make an examination or assessment, being a matter provided for by the NIRC is well within the exclusive and appellate jurisdiction of CTA.