EN BANC

[G.R. No. L-21551. September 30, 1969.]

FERNANDEZ HERMANOS, INC. , petitioner, vs . COMMISSIONER OF

INTERNAL REVENUE and COURT OF TAX APPEALS. , respondents.

[G.R. No. L-21557. September 30, 1969.]

COMMISSIONER OF INTERNAL REVENUE , petitioner, vs. FERNANDEZ

HERMANOS, INC., and COURT OF TAX APPEALS , respondents.

[G.R. No. L-24972. September 30, 1969.]

COMMISSIONER OF INTERNAL REVENUE , petitioner, vs. FERNANDEZ

HERMANOS, INC., and the COURT OF TAX APPEALS , respondents.

[G.R. No. L-24978. September 30, 1969.]

FERNANDEZ HERMANOS, INC. , petitioner, vs. THE COMMISSIONER

OF INTERNAL REVENUE, and HON. ROMAN A. UMALI, COURT OF
TAX APPEALS , respondents.

L-21551
Rafael Dinglasan for petitioner.
Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney
Virgilio G. Saldajeno for respondent.
L-21557:
Solicitor General for petitioner.
Rafael Dinglasan for respondent Fernandez Hermanos, Inc.
L-24972:
Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and
Special Attorney Virgilio G. Saldajeno for petitioner.
Rafael Dinglasan for respondent Fernandez Hermanos, Inc.
L-24978:
Rafael Dinglasan for petitioner.
Solicitor General Antonio P. Barredo, Assistant Solicitor General Antonio G. Ibarra and
Special Attorney Virgilio G. Saldajeno for respondent.
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 SYLLABUS

1. TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX ALLOWABLE

DEDUCTIONS; WORTHLESS SECURITIES; WRITING-OFF PROPER IN INSTANT CASE. We
nd no reason to disturb the Tax Court's allowance of the taxpayer's writing-off as
worthless securities in its 1950 return the sum of P8,050.00 representing the cost of
shares of stock of Mati Lumber Co. acquired by the taxpayer on January 1, 1948. There
was adequate basis for the writing off of the stock as worthless securities. As found by
the Tax Court, the Mati Lumber Co. ceased operation in 1949 when its manager and owner
left for Spain where he subsequently died. When the company ceased to operate, it had no
assets. Assuming that the Company would later somehow realize some proceeds from its
sawmill and equipment, which were still existing as claimed by the Commissioner, and that
such proceeds would later be distributed to its stockholders such as the taxpayer, the
amount so received by the taxpayer would then properly be reportable as income of the
taxpayer on the year it is received.
2. ID.; ID.; ID.; ID.; BAD DEBT, WHEN CONSIDERED. The Tax Court's disallowance of the
writing-off in 1951 as a loss or bad debt the sum of P353,134.25, which it had advanced or
loaned to Palawan Manganese Mines, Inc., was proper. The Solicitor General has rightly
pointed out that the taxpayer has taken an "ambiguous position" and "has not de nitely
taken a stand on whether the amount involved is claimed as losses or as bad debts but
insists that it is either a loss or a bad debt. "We sustain the government's position that the
advances made by the taxpayer to its 100% subsidiary, Palawan Manganese Mines, Inc.
amounting to P587,308.07 as of 1951 were investments and not loans. The evidence on
record shows that the board of directors of the two companies since August, 1945 were
identical and that the only capital of Palawan Manganese Mines, Inc. is the amount of
P100,000.00 entered in the taxpayer's balance sheet as its investment in its subsidiary
company. This fact explains the liberality with which the taxpayer made such large
advances to the subsidiary, despite the latter's admittedly poor financial condition.
3. ID.; ID.; ID.; ID.; DEBT OR INVESTMENT OF CORPORATION NOT WORTHLESS IF
CORPORATION IS STILL IN OPERATION. The Tax Court correctly held that the subsidiary
company was still in operation in 1951 and 1952 and the taxpayer continued to give it
advances in those years, and therefore, the alleged debt or investment could not properly
be considered worthless and deductible in 1951, as claimed by the taxpayer. Furthermore,
neither under Section 30(d)(c) of our Tax Code providing for deduction by corporations of
losses actually sustained and charged off during the taxable year nor under Section 30 (e)
(1) thereof providing for deduction of bad debts actually ascertained to be worthless and
charged off within the taxable year, can there be a partial writing-off of a loss or bad debt,
as was sought to be done here by the taxpayer. For such losses or bad debts must be
ascertained to be so and written-off during the taxable year, are therefore deductible in full
or not at all, in the absence of any express provision in the Tax Code authorizing partial
deductions.
4. ID.; ID.; ID.; ID.; LOSSES; DISALLOWANCE THEREOF PROPER IN INSTANT CASE. The
Court sustains the Tax Court's disallowance of the sums of P8,989.76 and P27,732.66
spent by the taxpayer for the operation of its Balamban coal mine in Cebu in 1950 and
1951, respectively, and claimed as losses in the taxpayer's returns for said years. The Tax
Court correctly held that the losses "are deductible in 1952, when the mines were
abandoned, and not in 1950 and 1951, when they were still in operation." The taxpayer's
claim that these expenditures should be allowed as losses for the corresponding years
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 that they were incurred, because it made no sales of coal during said years, since the
promised road or outlet through which the coal could be transported from the mines to
the provincial road was not constructed, cannot be sustained. Some de nite event must x
the time when the loss is sustained, and there it was the event of actual abandonment of
the mines in 1952.
5. ID.; ID.; ID.; ID.; LOSSES BY INVENTORY METHOD; DISALLOWANCE OF LOSSES
THEREOF, NOT PROPER. Where respondent Commissioner concedes that under Section
100 of Revenue Regulations No. 2, it does not specify how the inventories are to be made
and the Tax Court is satis ed with the evidence presented by the taxpayer ... which merely
consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri
for the years involved and the method adopted by the taxpayer as a farmer breeding
livestock, reporting on the basis of receipts and disbursements, there is no compelling
reason to disturb the ruling of the Tax Court overruling the Commissioner's disallowance
of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952).
6. ID.; ID.; ID.; ID.; DEPRECIATION OF BUILDINGS; ANNUAL RATE OF 10% DEPRECIATION,
EXCESSIVE; DISALLOWANCE PROPER. During the year 1950 to 1954, the taxpayer
claimed a depreciation allowance for its buildings at the annual rate of 10%. The
Commissioner claimed that the reasonable depreciation rate is only 3% annually. We
sustain the Tax Court's nding that the taxpayer did not submit adequate proof of the
correctness of the taxpayer's claim that the depreciable assets or buildings in question
had a useful life only of 10 years so as to justify its 10% depreciation per annum claim,
such nding being supported by the record. The taxpayer's contention that it has many
zero or one-peso assets, support the Commissioner's position that a 10% annual
depreciation rate was excessive.
7. ID.; ID.; ID.; INCREASE IN NET WORTH NOT TAXABLE IF NOT DUE TO TAXABLE
RECEIPT. Where it is shown that the increase in the taxpayer's net worth were not the
result of the receipt by it of unreported or unexplained taxable income but were merely the
result of the correction of errors in its entries in its books relating to its debtedness to
certain creditors, which had been erroneously overstated or listed as outstanding when
they had in fact duly paid, these increase in the taxpayer's net worth were not taxable
increases in net worth.
8. ID.; ID.; ID. ALLEGED UNREPORTED GAIN FROM SALE OF REAL PROPERTY, NO BASIS.
Where it was suf ciently proved from the taxpayer's books that after acquiring the
property in 1926 for P11,852.74, the gain derived from the sale of the said property for
P60,000.00 was correctly reported by the taxpayer at P37,000.00.
9. ID.; ID.; ID.; CAPITAL INVESTMENT, NOT BASIS FOR DEPLETION. The taxpayer insists
in this appeal that it could use as a method for depletion under the pertinent provision of
the Tax Code its "capital investment" representing the alleged value of its contractual
rights and titles to mining claims in the sum of P242,408.10 and thus deduct outright one-
fth (1/5) of this "Capital investment" ever year, regardless of whether it had actually
mined the product and sold the products. HELD: The alleged "capital investment" method
invoked by the taxpayer is not a method of depletion, but the Tax Code provision, prior to
its amendment by Section 1 of Republic Act No. 2698, which took effect on June 18, 1960,
expressly provided that "when the allowances shall equal capital invested . . . no further
allowances shall be made;" in other words, the "capital investment" was but the limitation
of the amount of depletion that could be claimed. The outright deduction by the taxpayer
of 1/5 of the cost of the mines, as if it were a "straight line" rate of depreciations was
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 correctly held by the Tax Court not to be authorized by the Tax Code.
10. ID.; ID.; ASSESSMENT AND COLLECTION OF INCOME TAX; PRESCRIPTION; ACTION
FOR COLLECTION IN INSTANT CASE HAS NOT PRESCRIBED. In the present case,
regardless of whether the assessments were made on February 24 and 27, 1956, as
claimed by the Commissioner, or on December 27, 1955 as claimed by the taxpayer, the
government's right to collect the taxes due has clearly not prescribed, as the taxpayer's
appeal or petition for review was led with the Tax Court on May 4, 1960, with the
Commissioner ling on May 20, 1960 his answer with a prayer for payment of the taxes
due, long before the expiration of the ve-year period to effect collection by judicial action
counted from the date of assessment.

DECISION

TEEHANKEE , J : p

These four appeals involve two decisions of the Court of Tax Appeals
determining the taxpayer's income tax liability for the years 1950 to 1954 and for the
year 1957. Both the taxpayer and the Commissioner of Internal Revenue, as petitioner
and respondent in the cases a quo respectively, appealed from the Tax Court's
decisions, insofar as their respective contentions on particular tax items were therein
resolved against them. Since the issues raised are interrelated, the Court resolves the
four appeals in this joint decision.

Cases L-21551 and L-21557

The taxpayer, Fernandez Hermanos, Inc., is a domestic-corporation organized for the
principal purpose of engaging in business as an "investment company" with main of ce at
Manila. Upon veri cation of the taxpayer's income tax returns for the period in question,
the Commissioner of Internal Revenue assessed against the taxpayer the sums of
P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged de ciency
income taxes for the years 1950, 1951, 1952, 1953 and 1954, respectively. Said
assessments were the result of alleged discrepancies found upon the examination and
veri cation of the taxpayer's income tax returns for the said years, summarized by the Tax
Court in its decision of June 10, 1963 in CTA Case No. 787, as follows:
"1. Losses

a. Losses in Mati Lumber Co. (1950) P 8,050.00

b. Losses in or bad debts of Palawan
Manganese Mines, Inc. (1951) 353,134.25
c. Losses in Balamban Coal
Mines 1950 8,989.76
1951 27,732.66
d. Losses in Hacienda Dalupiri
1950 17,418.95
1951 29,125.82
1952 26,744.81
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 1953 21,932.62
1954 42,933.56
e. Losses in Hacienda Samal
1951 8,380.25
1952 7,621.73

2. Excessive depreciation of Houses

1950 P 8,180.40
1951 8,768.11
1952 18,002.16
1953 13,655.25
1954 29,314.98

3. Taxable increase in net worth

1950 P 30,050.00
1951 1,382.85

4. Gain realized from sale of real property in

1950 P 11,147.26" 1

The Tax Court sustained the Commissioner's disallowances of Item 1, sub-items (b) and
(c) and Item 2 of the above summary, but overruled the Commissioner's disallowances of
all the remaining items. It therefore modi ed the de ciency assessments accordingly,
found the total de ciency income taxes due from the taxpayer for the years under review
to amount to P23,436.00 instead of P166,063.00 as originally assessed by the
Commissioner, and rendered the following judgment:
"RESUME
1950 P 2,748.00
1951 108,724.00
1952 3,600.00
1953 2,501,00
1954 5,863.00

Total P123,436.00

"WHEREFORE, the decision appealed from is hereby modi ed, and petitioner is
ordered to pay the sum of P123,436.00 within 30 days from the date this decision
becomes nal. If the said amount, or any part thereof, is not paid within said
period there shall be added to the unpaid amount as surcharge of 5% plus interest
as provided in Section 51 of the National Internal Revenue Code, as amended.
With costs against petitioner." (Pp. 75, 76, Taxpayer's Brief as appellant)

Both parties have appealed from the respective adverse rulings against them in the Tax
Court's decision. Two main issues are raised by the parties: rst, the correctness of the
Tax Court's rulings with respect to the disputed items of disallowances enumerated in the
Tax Court's summary reproduced above, and second, whether or not the government's
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 right to collect the deficiency income taxes in question has already prescribed.
On the first issue, we will discuss the disputed items of disallowances seriatim.
1. Re allowances/disallowances of losses.
(a) Allowance of losses in Mati Lumber Co. (1950). The Commissioner of Internal
Revenue questions the Tax Court's allowance of the taxpayer's writing off as worthless
securities in its 1950 return the sum of P8,050.00 representing the cost of shares of stock
of Mati Lumber Co. acquired by the taxpayer on January 1, 1948, on the ground that the
worthlessness of said stock in the year 1950 had not been clearly established. The
Commissioner contends that although the said Company was no longer in operation in
1950, it still had its sawmill and equipment which must be of considerable value. The
Court, however, found that "the company ceased operations in 1949 when its Manager and
owner, a certain Mr. Rocamora, left for Spain where he subsequently died. When the
company ceased to operate, it had no assets, in other words, completely insolvent. This
information as to the insolvency of the Company reached (the taxpayer) in 1950," when
properly claimed the loss as a deduction in its 1950 tax return, pursuant to Section 30(d)
(4) (b) or Section 30 (e) (3) of the National Internal Revenue Code. 2
We nd no reason to disturb this nding of the Tax Court. There was adequate basis for
the writing off of the stock as worthless securities. Assuming that the Company would
later somehow realize some proceeds from its sawmill and equipment, which were still
existing as claimed by the Commissioner, and that such proceeds would later be
distributed to its stockholders such as the taxpayer, the amount so received by the
taxpayer would then properly be reportable as income of the taxpayer in the year it is
received.
(b) Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951).
The taxpayer appeals from the Tax Court's disallowance of its writing off in 1951 as a loss
or bad debt the sum of P353,134.25, which it had advanced or loaned to Palawan
Manganese Mines, Inc. The Tax Court's findings on this item follow:
"Sometime in 1945, Palawan Manganese Mines, Inc., the controlling stockholders
of which are also the controlling stockholders of petitioner corporation, requested
nancial help from petitioner to enable it to resume its mining operations in
Coron, Palawan. The request for nancial assistance was readily and
unanimously approved by the Board of Directors of petitioner, and thereafter a
memorandum agreement was executed on August 12, 1945, embodying the terms
and conditions under which the nancial assistance was to be extended, the
pertinent provisions of which are as follows:
'WHEREAS, the FIRST PARTY, by virtue of its resolution adopted on August
10, 1945, has agreed to extend to the SECOND PARTY the requested
nancial help by way of accommodation advances and for this purpose
has authorized its President, Mr. Ramon J. Fernandez to cause the release
of funds to the SECOND PARTY.
'WHEREAS, to compensate the FIRST PARTY for the advances that it has
agreed to extend to the SECOND PARTY, the latter has agreed to pay to the
former fifteen per centum (15%) of its net profits.
'NOW THEREFORE, for and in consideration of the above premises, the
parties hereto have agreed and covenanted that in consideration of the
nancial help to be extended by the FIRST PARTY to the SECOND PARTY
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 to enable the latter to resume its mining operations in Coron, Palawan, the
SECOND PARTY has agreed and undertaken as it hereby agrees and
undertakes to pay to the FIRST PARTY fteen per centum (15%) of its net
profits.' (Exh. H-2)
Pursuant to the agreement mentioned above, petitioner gave to Palawan
Manganese Mines, Inc. yearly advances starting from 1945, which advances
amounted to P587,308.07 by the end of 1951. Despite these advances and the
resumption of operations by Palawan Manganese Mines, Inc., it continued to
suffer losses. By 1951, petitioner became convinced that those advances could
no longer be recovered. While it continued to give advances, it decided to write off
as worthless the sum of P353,134.25. This amount 'was arrived at on the basis of
the total of advances made from 1945 to 1949 in the sum of P438,981.39, from
which amount the sum of P35,647.14 had to be deducted, the latter sum
representing its pre-war assets. (t.s.n., pp. 136-139, Id.).' (Page 4, Memorandum
for Petitioner.) Petitioner decided to maintain the advances given in 1950 and
1951 in the hope that it might be able to recover the same, as in fact it continued
to give advances up to 1952. From these facts, and as admitted by petitioner
itself, Palawan Manganese Mines, Inc., was still in operation when the advances
corresponding to the years 1945 to 1949 were written off the books of petitioner.
Under the circumstances, was the sum of P353,134.25 properly claimed by
petitioner as deduction in its income tax return for 1951, either as losses or bad
debts?
"It will be noted that in giving advances to Palawan Manganese Mines, Inc.,
petitioner did not expect to be repaid. It is true that some testimonial evidence
was presented to show that there was some agreement that the advances would
be repaid, but no documentary evidence was presented to this effect. The
memorandum agreement signed by the parties appears to be very clear that the
consideration for the advances made by petitioner was 15% of the net pro ts of
Palawan Manganese Mines, Inc. In other words, if there were no earnings or
pro ts, there was no obligation to repay those advances. It has been held that the
voluntary advances made without expectation of repayment do not result in
deductible losses. 1965 PH Fed. Taxes, Par. 13, 329, citing W.F. Young, Inc. v.
Comm., 120 F 2d. 159, 27 AFTR 395; George B. Markle, 17 TC. 1593.

"Is the said amount deductible as a bad debt? As already stated, petitioner gave
advances to Palawan Manganese Mines, Inc., without expectation of repayment.
Petitioner could not sue for recovery under the memorandum agreement because
the obligation of Palawan Manganese Mines, Inc. was to pay petitioner 15% of its
net pro ts, not the advances. No bad debt could arise where there is no valid and
subsisting debt.
"Again, assuming that in this case there was a valid and subsisting debt and that
the debtor was incapable of paying the debt in 1951, when petitioner wrote off the
advances and deducted the amount in its return for said year, yet the debt is not
deductible in 1951 as a worthless debt. It appears that the debtor was still in
operation in 1951 and 1952, as petitioner continued to give advances in those
years. It has been held that if the debtor corporation, although losing money or
insolvent, was still operating at the end of the taxable year, the debt is not
considered worthless and therefore not deductible." 3

The Tax Court's disallowance of the write-off was proper. The Solicitor General has rightly
pointed out that the taxpayer has taken an "ambiguous position" and "has not de nitely
taken a stand on whether the amount involved is claimed as losses or as bad debts but
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 insists that it is either a loss or a bad debt." 4 We sustain the government's position that
the advances made by the taxpayer to its 100% subsidiary, Palawan Manganese Mines, Inc.
amounting to P587,308,07 as of 1951 were investments and not loans. 5 The evidence on
record shows that the board of directors of the two companies since August, 1945, were
identical and that the only capital of Palawan Manganese Mines, Inc. is the amount of
P100,000.00 entered in the taxpayer's balance sheet as its investment in its subsidiary
company. 6 This fact explains the liberality with which the taxpayer made such large
advances to the subsidiary, despite the latter's admittedly poor financial condition.

The taxpayer's contention that its advances were loans to its subsidiary as against the Tax
Court's nding that under their memorandum agreement, the taxpayer did not expect to be
repaid, since if the subsidiary had no earnings, there was no obligation to repay those
advances, becomes immaterial, in the light of our resolution of the question. The Tax Court
correctly held that the subsidiary company was still in operation in 1951 and 1952 and the
taxpayer continued to give it advances in those years, and, therefore, the alleged debt or
investment could not properly be considered worthless and deductible in 1951, as claimed
by the taxpayer. Furthermore, neither under Section 30 (d) (2) of our Tax Code providing
for deduction by corporations of losses actually sustained and charged off during the
taxable year nor under Section 30 (e) (1) thereof providing for deduction of bad debts
actually ascertained to be worthless and charged off within the taxable year, can there be a
partial writing off of a loss or bad debt, as was sought to be done here by the taxpayer. For
such losses or bad debts must be ascertained to be so and written off during the taxable
year, are therefore deductible in full or not at all, in the absence of any express provision in
the Tax Code authorizing partial deductions.
The Tax Court held that the taxpayer's loss of its investment in its subsidiary could not be
deducted for the year 1951, as the subsidiary was still in operation in 1951 and 1952. The
taxpayer, on the other hand, claims that its advances were irretrievably lost because of the
staggering losses suffered by its subsidiary in 1951 and that its advances after 1949 were
"only limited to the purpose of salvaging whatever ore was already available, and for the
purpose of paying the wages of the laborers who needed help." 7 The correctness of the
Tax Court's ruling in sustaining the disallowance of the write-off in 1951 of the taxpayer's
claimed losses is borne out by subsequent events shown in Cases L-24972 and L-24978
involving the taxpayer's 1957 income tax liability. (Infra, paragraph 6.) It will there be seen
that by 1956, the obligation of the taxpayer's subsidiary to it had been reduced from
P587,398.97 in 1951 to P442,885.23 in 1956, and that it was only on January 1, 1956 that
the subsidiary decided to cease operations. 8
(c) Disallowance of losses in Balamban Coal Mines (1950 and 1951). The Court sustains
the Tax Court's disallowance of the sums of P8,989.76 and P27,732.66 spent by the
taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951,
respectively, and claimed as losses in the taxpayer's returns for said years. The Tax Court
correctly held that the losses "are deductible in 1952, when the mines were abandoned,
and not in 1950 and 1951, when they were still in operation." 9 The taxpayer's claim that
these expeditions should be allowed as losses for the corresponding years that they were
incurred, because it made no sales of coal during said years, since the promised road or
outlet through which the coal could be transported from the mines to the provincial road
was not constructed, cannot be sustained. Some de nite event must x the time when the
loss is sustained, and here it was the event of actual abandonment of the mines in 1952.
The Tax Court held that the losses, totalling P36,722.42 were properly deductible in 1952,
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 but the appealed judgment does not show that the taxpayer was credited therefor in the
determination of its tax liability for said year. This additional deduction of P36,722.42 from
the taxpayer's taxable income in 1952 would result in the elimination of the de ciency tax
liability for said year in the sum of P3,600.00 as determined by the Tax Court in the
appealed judgment.
(d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal
(1951-1952). The Tax Court overruled the Commissioner's allowance of these items of
losses thus:
"Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of
P17,418.95 in 1950, P29,125.82 in 1951, P26,744.81 in 1952, P21,932.62 in 1953,
and P42,938.56 in 1954. These deductions were disallowed by respondent on the
ground that the farm was operated solely for pleasure or as a hobby and not for
pro t. This conclusion is based on the fact that the farm was operated
continuously at a loss.
"From the evidence, we are convinced that the Hacienda Dalupiri was operated by
petitioner for business and not pleasure. It was mainly a cattle farm, although a
few race horses were also raised. It does not appear that the farm was used by
petitioner for entertainment, social activities, or other non-business purposes.
Therefore, it is entitled to deduct expenses and losses in connection with the
operation of said farm. (See 1955 PH Fed. Taxes, Par. 13, 663, citing G.C.M.
21103, CB 1939-1, p. 164)
"Section 100 of Revenue Regulations No. 2, otherwise known as the Income Tax
Regulations, authorizes farmers to determine their gross income on the basis of
inventories. Said regulations provide:
'If gross income is ascertained by inventories, no deduction can be made
for livestock or products lost during the year, whether purchased for resale,
produced on the farm, as such losses will be re ected in the inventory by
reducing the amount of livestock or products on hand at the close of the
year.'
"Evidently, petitioner determined its income or losses in the operation of said farm
on the basis of inventories. We quote from the memorandum of counsel for
petitioner:
'The Taxpayer deducted from its income tax returns for the years from
1950 to 1954 inclusive, the corresponding yearly losses sustained in the
operation of Hacienda Dalupiri, which losses represent the excess of its
yearly expenditures over the receipts; that is, the losses represent the
difference between the sales of livestock and the actual cash
disbursements or expenses.' (Pages 21-22, Memorandum for Petitioner.)

"As the Hacienda Dalupiri was operated by petitioner for business and since it
sustained losses in its operation, which losses were determined by means of
inventories authorized under Section 100 of Revenue Regulations No. 2, it was
error for respondent to have disallowed the deduction of said losses. The same is
true with respect to losses sustained in the operation of the Hacienda Samal for
the years 1951 and 1952." 1 0

The Commissioner questions that the losses sustained by the taxpayer were properly
based on the inventory method of accounting. He concedes, however, "that the regulations
referred to does not specify how the inventories are to be made. The Tax Court, however,
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 felt satis ed with the evidence presented by the taxpayer . . . which merely consisted of an
alleged physical count of the number of the livestock in Hacienda Dalupiri for the years
involved." 1 1 The Tax Court was satis ed with the method adopted by the taxpayer as a
farmer breeding livestock, reporting on the basis of receipts and disbursements. We nd
no compelling reason to disturb its findings.
2. Disallowance of excessive depreciation of buildings (1950- 1954). During the years
1950 to 1954, the taxpayer claimed a depreciation allowance for its buildings at the annual
rate of 10%. The Commissioner claimed that the reasonable depreciation rate is only 3%
per annum, and, hence, disallowed as excessive the amount claimed as depreciation
allowance in excess of 3% annually. We sustain the Tax Court's finding that the taxpayer did
not submit adequate proof of the correctness of the taxpayer's claim that the depreciable
assets or buildings in question had a useful life only of 10 years so as to justify its 10%
depreciation per annum claim, such nding being supported by the record. The taxpayer's
contention that it has many zero or one-peso assets, 1 2 representing very old and fully
depreciated assets serves but to support the Commissioner's position that a 10% annual
depreciation rate was excessive.
3. Taxable increase in net worth (1950-1951) . The Tax Court set aside the
Commissioner's treatment as taxable income of certain increases in the taxpayer's net
worth. It found that:
"For the year 1950, respondent determined that petitioner had an increase in net
worth in the sum of P30,050.00 and for the year 1951, the sum of P1,382.85.
These amounts were treated by respondent as taxable income of petitioner for
said years.
"It appears that petitioner had an account with the Manila Insurance Company,
the records bearing on which were lost. When its records were reconstituted the
amount of P349,800.00 was set up as its liability to the Manila Insurance
Company. It was discovered later that the correct liability was only P319,750.00,
or a difference of P30,050.00, so that the records were adjusted so as to show the
correct liability. The correction or adjustment was made in 1950. Respondent
contends that the reduction of petitioners liability to Manila Insurance Company
resulted in the increase of petitioner's net worth to the extent of P30,050.00 which
is taxable. This is erroneous. The principle underlying the taxability of an increase
in the net worth of a taxpayer rests on the theory that such an increase in net
worth, if unreported and not explained by the taxpayer, comes from income
derived from a taxable source. (See Perez v. Araneta G.R. No. L-9193, May 29,
1957; Coll. vs. Reyes, G.R. Nos. L-11534 & L-11558, Nov. 25, 1958.) In this case,
the increase in the net worth of petitioner for 1950 to the extent of P30,050.00
was not the result of the receipt by it of taxable income. It was merely the
outcome of the correction of an error in the entry in its books relating to its
indebtedness to the Manila Insurance Company. The Income Tax Law imposes a
tax on income; it does not tax any or every increase in net worth whether or not
derived from income. Surely, the said sum of P30,050.00 was not income to
petitioner; and it was error for respondent to assess a de ciency income tax on
said amount.

"The same holds true in the case of the alleged increase in net worth of petitioner
for the year 1951 in the sum of P1,382.85. It appears that certain items (all
amounting to P1,382.85) remained in petitioner's books as outstanding liabilities
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 of trade creditors. These accounts were discovered in 1951 as having been paid
in prior years, so that the necessary adjustments were made to correct the errors.
If there was an increase in net worth of the petitioner, the increase in net worth
was not the result of receipt by petitioner of taxable income." 1 3

The Commissioner advances no valid grounds in his brief for contesting the Tax Court's
ndings. Certainly, these increases in the taxpayer's net worth were not taxable
increases in net worth, as they were not the result of the receipt by it of unreported or
unexplained taxable income, but were shown to be merely the result of the correction of
errors in its entries in its books relating to its indebtednesses to certain creditors,
which had been erroneously overstated or listed as outstanding when they had in fact
been duly paid. The Tax Court's action must be affirmed.
4. Gain realized from sale of real property (1950). We likewise sustain as being in
accordance with the evidence the Tax Court's reversal of the Commissioner's assessment
on an alleged unreported gain in the sum of P11,147.26 in the sale of a certain real
property of the taxpayer in 1950. As found by the Tax Court, the evidence shows that this
property was acquired in 1926 for P11,852.74, and was sold in 1950 for P60,000.00,
apparently, resulting in a gain of P48,147.26. 1 4 The taxpayer reported in its return a gain of
P37,000.00, or a discrepancy of P11,147.26. 1 5 It was suf ciently proved from the
taxpayer's books that after acquiring the property, the taxpayer had made improvements
totalling P11,147.26, 1 6 accounting for the apparent discrepancy in the reported gain. In
other words. this gure added to the original acquisition cost of P11,852.74 results in a
total cost of P23,000.00, and the gain derived from the sale of the property for P60,000.00
was correctly reported by the taxpayer at P37,000.00.
On the second issue of prescription, the taxpayer's contention that the Commissioner's
action to recover its tax liability should be deemed to have prescribed for failure on the
part of the Commissioner to le a complaint for collection against it in an appropriate civil
action, as contradistinguished from the answer led by the Commissioner to its petition
for review of the questioned assessments in the case a quo has long been rejected by this
Court. This Court has consistently held that "a judicial action for the collection of a tax is
begun by the ling of a complaint with the proper court of rst instance, or where the
assessment is appealed to the Court of Tax Appeals, by ling an answer to the taxpayer's
petition for review wherein payment of the tax is prayed for." 1 7 This is but logical for
where the taxpayer avails of the right to appeal the tax assessment to the Court of Tax
Appeals, the said Court is vested with the authority to pronounce judgment as to the
taxpayer's liability to the exclusion of any other court. In the present case, regardless of
whether the assessments were made on February 24 and 27, 1956, as claimed by the
Commissioner, or on December 27, 1955 as claimed by the taxpayer, the government's
right to collect the taxes due has clearly not prescribed, as the taxpayer's appeal or
petition for review was led with the Tax Court on May 4, 1960, with the Commissioner
ling on May 20, 1960 his Answer with a prayer for payment of the taxes due, long before
the expiration of the five-year period to effect collection by judicial action counted from the
date of assessment.
Cases L-24972 and L-24978
These cases refer to the taxpayer's income tax liability for the year 1957. Upon
examination of its corresponding income tax return, the Commissioner assessed it for
deficiency income tax in the amount of P38,918.76, computed as follows:
"Net income per return P 29,178.70
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 Add: Unallowable deductions:
(1) Net loss claimed on Ha. Dalupiri 89,547.33
(2) Amortization of Contractual right
claimed as an expense under
Mines Operations 48,481.62

Net income per investigation P 167,297.65
Tax due thereon 38.818.00

Less: Amount already assessed 5,836.00
Balance P32,982.00
Add: 1/2% monthly interest from 6-20-59 to
6-20-62 5,936.76

TOTAL AMOUNT DUE AND
COLLECTIBLE P38,918.76"
18

The Tax Court overruled the Commissioner's disallowance of the taxpayer's losses in the
operation of its Hacienda Dalupiri in the sum of P89,547.33 but sustained the disallowance
of the sum of P48,481.62, which allegedly represented 1/5 of the cost of the "contractual
right" over the mines of its subsidiary, Palawan Manganese Mines, Inc. which the taxpayer
had acquired. It found the taxpayer liable for de ciency income tax for the year 1957 in the
amount of P9,696.00, instead of P32,982.00 as originally assessed, and rendered the
following judgment:
"WHEREFORE, the assessment appealed from is hereby modi ed. Petitioner is
hereby ordered to pay to respondent the amount of P9,696.00 as de ciency
income tax for the year 1957, plus the corresponding interest provided in Section
51 of the Revenue Code. If the de ciency tax is not paid in full within thirty (30)
days from the date this decision becomes nal and executory, petitioner shall pay
a surcharge of ve per cent (5%) of the unpaid amount, plus interest at the rate of
one per cent (1%) a month, computed from the date this decision becomes nal
until paid, provided that the maximum amount that may be collected as interest
shall not exceed the amount corresponding to a period of three (3) years. Without
pronouncement as to costs." 1 9

Both parties again appealed from the respective adverse rulings against them in the Tax
Court's decision.
5. Allowance of losses in Hacienda Dalupiri (1957). The Tax Court cited its previous
decision overruling the Commissioner's disallowance of losses suffered by the taxpayer in
the operation of its Hacienda Dalupiri, since it was convinced that the hacienda was
operated for business and not for pleasure. And in this appeal, the Commissioner cites his
arguments in his appellant's brief in Case No. L-21557. The Tax Court, in setting aside the
Commissioner's principal objections, which were directed to the accounting method used
by the taxpayer found that:
"It is true that petitioner followed the cash basis method of reporting income and
expenses in the operation of the Hacienda Dalupiri and used the accrual method
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 with respect to its mine operations. This method of accounting, otherwise known
as the hybrid method, followed by petitioner is not without justification.

'. . . A taxpayer may not, ordinarily, combine the cash and accrual bases.
The 1954 Code provisions permit, however, the use of a hybrid method of
accounting, combining a cash and accrual method, under circumstances
and requirements to be set out in Regulations to be issued. Also, if a
taxpayer is engaged in more than one trade or business he may use a
different method of accounting for each trade or business. And a taxpayer
may report income from a business on accrual basis and his personal
income on the cash basis.' ( See Mertens, Law of Federal Income Taxation,
Zimet & Stanley Revision, Vol. 2, Sec 12.08, p. 26.)" 2 0

The Tax Court, having satis ed itself with the adequacy of the taxpayer's accounting
method and procedure as properly re ecting the taxpayer's income or losses, and the
Commissioner having failed to show the contrary, we reiterate our ruling [ supra, paragraph
1 (d) and (e)] that we find no compelling reason to disturb its findings.
6. Disallowance of amortization of alleged "contractual rights." The reasons for
sustaining this disallowance are thus given by the Tax Court:
"It appears that the Palawan Manganese Mines, Inc., during a special meeting of
its Board of Directors on January 19, 1956, approved a resolution, the pertinent
portions of which read as follows:

'RESOLVED, as it is hereby resolved, that the corporation's current assets

composed of ores, fuel, and oil, materials and supplies, spare parts and
canteen supplies appearing in the inventory and balance sheet of the
Corporation as of December 31, 1955, with an aggregate value of
P97,636.93, contractual rights for the operation of various mining claims in
Palawan with a value of P100,000.00, its title on various mining claims in
Palawan with a value of P142,408.10 or a total value of P340,045.02 be,
as they are hereby ceded and transferred to Fernandez Hermanos, Inc., as
partial settlement of the indebtedness of the corporation to said Fernandez
Hermanos, Inc., in the amount of P442,885.23.' (Exh. E, p. 17, CTA rec.)

"On March 29, 1956, petitioner's corporation accepted the above offer of transfer,
thus:
"WHEREAS, the Palawan Manganese Mines, Inc., due to its yearly
substantial losses has decided to cease operation on January 1, 1956 and
in order to satisfy at least a part of its indebtedness to the Corporation, it
has proposed to transfer its current assets in the amount of NINETY
SEVEN THOUSAND SIX HUNDRED THIRTY SIX PESOS & 98/100
(P97,636.93) as per its balance sheet as of December 31, 1955, its
contractual rights valued at ONE HUNDRED THOUSAND PESOS
(P100,000.00) and its title over various mining claims valued at ONE
HUNDRED FORTY TWO THOUSAND FOUR HUNDRED EIGHT PESOS &
10/100 (P142,408.10) or a total valuation of THREE HUNDRED FORTY
THOUSAND FORTY FIVE PESOS & 08/100 (P340,045.08) which shall be
applied in partial settlement of its obligation to the Corporation in the
amount of FOUR HUNDRED FORTY TWO THOUSAND EIGHT HUNDRED
EIGHTY FIVE PESOS & 23/100 (P442,885.23),' (Exh. E-1, p. 18, CTA rec.)
"Petitioner determined the cost of the mines at P242,408.10 by adding the value
of the contractual rights (P100,000.00) and the value of its mining claims
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 (P142,408.10). Respondent disallowed the deduction on the following grounds:
(1) that the Palawan Manganese Mines, Inc. could not transfer P242,408.10 worth
of assets to petitioner because the balance sheet of the said corporation for 1955
shows that it had only current assets worth P97,636.96; and (2) that the alleged
amortization of 'contractual rights' is not allowed by the Revenue Code.

"The law in point is Section 30 (g) (1) (B) of the Revenue Code, before its
amendment by Republic Act No. 2698, which provided in part:

'(g) Depletion of oil and gas wells and mines:

'(1) In general. . . . (B) in the case of mines, a reasonable allowance for

depletion thereof not to exceed the market value in the mine of the product
thereof, which has been mined and sold during the year for which the
return and computation are made. The allowances shall be made under
rules and regulations to be prescribed by the Secretary of Finance:
Provided, That when the allowances shall equal the capital invested, . . . no
further allowance shall be made.'
"Assuming, arguendo, that the Palawan Manganese Mines, Inc. had assets worth
P242,408.10 which it actually transferred to the petitioner in 1956, the latter
cannot just deduct one- fth (1/5) of said amount from its gross income for the
year 1957 because such deduction in the form of depletion charge was not
sanctioned by Section 30(g) (1) (B) of the Revenue Code, as above-quoted.

xxx xxx xxx

"The sole basis of petitioner in claiming the amount of P48,481.62 as a deduction
was the memorandum of its mining engineer (Exh. 1, pp. 31-32, CTA rec.), who
stated that the ore reserves of the Busuange Mines (Mines transferred by the
Palawan Manganese Mines, Inc. to the petitioner) would be exhausted in ve (5)
years, hence, the claim for P48,481.62 or one- fth (1/5) of the alleged cost of the
mines corresponding to the year 1957 and every year thereafter for a period of 5
years. The said memorandum merely showed the estimated ore reserves of the
mines and its probable selling price. No evidence whatsoever was presented to
show the produced mine and for how much they were sold during the year for
which the return and computation were made. This is necessary in order to
determine the amount of depletion that can be legally deducted from petitioner's
gross income. The method employed by petitioner in making an outright
deduction of 1/5 of the cost of the mines is not authorized under Section 30(g)
(1) (B) of the Revenue Code. Respondent's disallowance of the alleged
'contractual rights' amounting to P48,481.62 must therefore be sustained." 2 1

The taxpayer insists in this appeal that it could use as a method for depletion under the
pertinent provision of the Tax Code its "capital investment," representing the alleged value
of its contractual rights and titles to mining claims in the sum of P242,408.10 and thus
deduct outright one- fth (1/5) of this "capital investment" every year, regardless of
whether it had actually mined the product and sold the products. The very authorities cited
in its brief give the correct concept of depletion charges that they "allow for the exhaustion
of the capital value of the deposits by production"; thus, "as the cost of the raw materials
must be deducted from the gross income before the net income can be determined, so the
estimated cost of the reserve used up is allowed." 2 2 The alleged "capital investment"
method invoked by the taxpayer is not a method of depletion, but the Tax Code provision,
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 prior to its amendment by Section 1, of Republic Act No. 2698, which took effect on June
18, 1960, expressly provided that "when the allowances shall equal the capital invested . . .
no further allowances shall be made;" in other words, the "capital investment" was but the
limitation of the amount of depletion that could be claimed. The outright deduction by the
taxpayer of 1/5 of the cost of the mines, as if it were a "straight line" rate of depreciation,
was correctly held by the Tax Court not to be authorized by the Code.
ACCORDINGLY, the judgment of the Court of Tax Appeals, subject of the appeals in Cases
Nos. L-21551 and L-21557, as modi ed by the crediting of the losses of P36,722.42
disallowed in 1951 and 1952 to the taxpayer for the year 1953 as directed in paragraph 1
(c) of this decision, is hereby af rmed. The judgment of the Court of Tax Appeals appealed
from in Cases Nos. L-24972 and L-24978 is affirmed in toto. No costs. So ordered.
Concepcion, C . J ., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano and
Barredo, JJ ., concur.

Footnotes

1. Taxpayer's Brief as appellant, pp. 57-59.

2. CTA decision in Case 787, Taxpayer's Brief as appellant, p. 62.

3. CTA decision in Cafe 787, Taxpayer's Brief as appellant, pp. 63-66.

4. Commissioner's Brief as appellee, p. 9.

5. Idem., p. 18.

6. Idem., p. 18.
7. Taxpayer's Brief as appellant, p. 22.

8. CTA Decision in Case 787, Taxpayer's Brief, p. 74.

9. Idem, pp. 66-67.

10. CTA decision in Case 787, Taxpayer's Brief as appellant, pp. 68-70.

11. Commissioner's Brief as appellant, pp. 15-16.

12. Taxpayer's Brief as appellant, p. 44.

13. CTA decision in Case 787, Taxpayer's Brief as appellant, pp. 70-72.

14. Not P48,127.26, as erroneously stated in the CTA decision.

15. Not P11,852.74 as erroneously stated in the CTA decision.

16. Idem. Apparently, the CTA inadvertently switched the figures.

17. Alhambra Cigar & Cigarette Mfg. Co. vs. Collector, 105 Phil. 1337, cited in Palanca vs.
Commissioner, 4 SCRA 263, 266; Collector vs. Bohol Land Trans. Co., 107 Phil. 965, 972.

18. CTA decision in CTA Case 1389, Annex C, Commissioner's Petition, p. 1.

19. CTA decision in CTA Case 1389, Annex C, Commissioner's Petition, p. 6.

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 20. CTA decision in CTA Case 1389, Annex C, Commissioner's Petition, p. 3.
21. CTA Decision in CTA Case 1389. Annex C, Commissioner's Petition, pp. 4-5.

22. Copied verbatim from documents obtained directly from the Supreme Court.

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