G.R. No. 183408. July 12, 2017.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LANCASTER PHILIPPINES,

INC., respondent.

Taxation; Courts; Court of Tax Appeals; Jurisdiction; The jurisdiction of the Court of
Tax Appeals (CTA) is not limited only to cases which involve decisions or inactions of
the Commissioner of Internal Revenue (CIR) on matters relating to assessments or
refunds but also includes other cases arising from the National Internal Revenue Code
(NIRC) or related laws administered by the Bureau of Internal Revenue (BIR).—The
law vesting unto the CTA its jurisdiction is Section 7 of Republic Act No. 1125 (R.A.
No. 1125), which in part provides: Section 7. Jurisdiction.—The Court of Tax Appeals
shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided:
(1) Decisions of the Collector of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by the Bureau of Internal
Revenue; x x x (emphasis supplied) Under the aforecited provision, the jurisdiction
of the CTA is not limited only to cases which 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. Thus, for instance, we had
once held that the question of whether or not to impose a deficiency tax assessment
comes within the purview of the words “other matters arising under the National
Internal Revenue Code.”

Same; Commissioner of Internal Revenue; Jurisdiction; The Commissioner of

Internal Revenue (CIR) may authorize the examination of any taxpayer and
correspondingly make an assessment whenever necessary.—The CIR may authorize
the examination of any taxpayer and correspondingly make an assessment whenever
necessary. Thus, to give more teeth to such power of the CIR, to make an
assessment, the NIRC authorizes the CIR to examine any book, paper, record, or
data of any person. The powers granted by law to the CIR are intended, among other
things, to determine the liability of any person for any national internal revenue tax.

Same; Courts; Court of Tax Appeals; Jurisdiction; The authority to make an

examination or assessment, being a matter provided for by the National Internal
Revenue Code (NIRC), is well within the exclusive and appellate jurisdiction of the
Court of Tax Appeals (CTA).—It is clear that the issue on whether the revenue officers
who had conducted the examination on Lancaster exceeded their authority pursuant
to LOA No. 00012289 may be considered as covered by the terms “other matters”
under Section 7 of R.A. No. 1125 or its amendment, R.A. No. 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 the CTA.

Same; Letter of Authority; The Letter of Authority (LOA) gives notice to the
taxpayer that it is under investigation for possible deficiency tax assessment; at the
same time it authorizes or empowers a designated revenue officer to examine, verify,
and scrutinize a taxpayer’s books and records, in relation to internal revenue tax
liabilities for a particular period.—The audit process normally commences with the
issuance by the CIR of a Letter of Authority. The LOA gives notice to the taxpayer
that it is under investigation for possible deficiency tax assessment; at the same time
it authorizes or empowers a designated revenue officer to examine, verify, and
scrutinize a taxpayer’s books and records, in relation to internal revenue tax liabilities
for a particular period.

Same; Accounting; In our jurisdiction, the concepts in business accounting,

including certain generally accepted accounting principles (GAAP) embedded in the
National Internal Revenue Code (NIRC) comprise the rules on tax accounting.—
Noticeably, the records of this case are rife with terms and concepts in accounting.
As a science, accounting pervades many aspects of financial planning, forecasting,
and decision making in business. Its reach, however, has also permeated tax
practice. To put it into perspective, although the foundations of accounting were built
principally to analyze finances and assist businesses, many of its principles have since
been adopted for purposes of taxation. In our jurisdiction, the concepts in business
accounting, including certain generally accepted accounting principles (GAAP),
embedded in the NIRC comprise the rules on tax accounting.

Same; Same; While there may be differences between tax and accounting, it
cannot be said that the two (2) mutually excluded each other.—While there may be
differences between tax and accounting, it cannot be said that the two mutually
exclude each other. As already made clear, tax laws borrowed concepts that had
origins from accounting. In truth, tax cannot do away with accounting. It relies upon
approved accounting methods and practices to effectively carry out its objective of
collecting the proper amount of taxes from the taxpayers. Thus, an important
mechanism established in many tax systems is the requirement for taxpayers to
make a return of their true income. Maintaining accounting books and records, among
other important considerations, would in turn assist the taxpayers in complying with
their obligation to file their income tax returns. At the same time, such books and
records provide vital information and possible bases for the government, after
appropriate audit, to make an assessment for deficiency tax whenever so warranted
under the circumstances.

Same; Same; Accounting Methods; Section 43 of the National Internal Revenue

Code (NIRC) authorizes the Commissioner of Internal Revenue (CIR) to allow the use
of a method of accounting that in its opinion would clearly reflect the income of the
taxpayer.—Too, other methods approved by the CIR, even when not expressly
mentioned in the NIRC, may be adopted if such method would enable the taxpayer
to properly reflect its income. Section 43 of the NIRC authorizes the CIR to allow the
use of a method of accounting that in its opinion would clearly reflect the income of
the taxpayer. An example of such method not expressly mentioned in the NIRC, but
duly approved by the CIR, is the ‘crop method of accounting’ authorized under
RAM No. 2-95.

Same; Same; Same; Crop Method; The crop method recognizes that the
harvesting and selling of crops do not fall within the same year that they are planted
or grown.—The crop method recognizes that the harvesting and selling of crops do
not fall within the same year that they are planted or grown. This method is especially
relevant to farmers, or those engaged in the business of producing crops who,
pursuant to RAM No. 2-95, would then be able to compute their taxable income on
the basis of their crop year. On when to recognize expenses as deductions against
income, the governing rule is found in the second sentence of Subsection F cited
above. The rule enjoins the recognition of the expense (or the deduction of the cost)
of crop production in the year that the crops are sold (when income is realized).
Same; Same; A taxpayer is authorized to employ what it finds suitable for its
purpose so long as it consistently does so.—We find it wholly justifiable for Lancaster,
as a business engaged in the production and marketing of tobacco, to adopt the crop
method of accounting. A taxpayer is authorized to employ what it finds suitable for
its purpose so long as it consistently does so, and in this case, Lancaster does appear
to have utilized the method regularly for many decades already. Considering that the
crop year of Lancaster starts from October up to September of the following year, it
follows that all of its expenses in the crop production made within the crop year
starting from October 1997 to September 1998, including the February and March
1998 purchases covered by purchase invoice vouchers, are rightfully deductible for
income tax purposes in the year when the gross income from the crops are realized.
Pertinently, nothing from the pleadings or memoranda of the parties, or even from
their testimonies before the CTA, would support a finding that the gross income from
the crops (to which the subject expenses refer) was actually realized by the end of
March 1998, or the closing of Lancaster’s fiscal year for 1998. Instead, the records
show that the February and March 1998 purchases were recorded by Lancaster
as advances and later taken up as purchases by the close of the crop year in
September 1998, or as stated very clearly above, within the fiscal year 1999.

Same; Same; Matching Concept; The matching concept, which is one of the
generally accepted accounting principles, directs that the expenses are to be reported
in the same period that related revenues are earned.—In essence, the matching
concept, which is one of the generally accepted accounting principles, directs that the
expenses are to be reported in the same period that related revenues are earned. It
attempts to match revenue with expenses that helped earn it.

SECOND DIVISION
[ G.R. No. 183408, July 12, 2017 ]

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, V.

LANCASTER PHILIPPINES, INC., RESPONDENT.

DECISION

MARTIRES, J.:
This is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court
seeking to reverse and set aside the 30 April 2008 Decision[2] and 24 June 2008
Resolution[3] of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 352.

The assailed decision and resolution affirmed the 12 September 2007

Decision[4] and 12 December 2007 Resolution[5] of the CTA First Division (CTA
Division) in CTA Case No. 6753.

THE FACTS

The facts[6] are undisputed.

Petitioner Commissioner of Internal Revenue (CIR) is authorized by law, among

others, to investigate or examine and, if necessary, issue assessments for
deficiency taxes

. On the other hand, respondent Lancaster Philippines, Inc. (Lancaster) is a

domestic corporation established in 1963 and is engaged in the production,
processing, and marketing of tobacco.

In 1999, the Bureau of Internal Revenue (BIR) issued Letter of Authority (LOA) No.
00012289 authorizing its revenue officers to examine Lancaster's books of accounts
and other accounting records for all internal revenue taxes due from taxable year
1998 to an unspecified date. The LOA reads:

SEPT. 30 1999

LETTER OF AUTHORITY

LANCASTER PHILS. INC.

11th Flr. Metro Bank Plaza
Makati City

SIR/MADAM/GENTLEMEN:

The bearer(s) hereof RO's Irene Goze & Rosario Padilla to tbe supervised by GH
Catalina Leny Barrion of the Special Team created pursuant to RSO 770-99 is/are
authorized to examine your books of accounts and other accounting records for all
internal revenue taxes for the period from taxable year, 1998 to ____, 19__. He
is/[t]hey are provided with the necessary identification card(s) which shall be
presented to you upon request.

It is requested that all facilities be extended to the Revenue Officer(s) in order to

expedite the examination.

You will be duly informed of the results of the examination upon approval of the
report submitted by the aforementioned Revenue Officer(s).[7]
After the conduct of an examination pursuant to the LOA, the BIR issued
a Preliminary Assessment Notice (PAN)[8] which cited Lancaster for: 1)
overstatement of its purchases for the fiscal year April 1998 to March 1999;
and 2) noncompliance with the generally accepted accounting principle of proper
matching of cost and revenue.[9] More concretely, the BIR disallowed the purchases
of tobacco from farmers covered by Purchase Invoice Vouchers (PIVs) for the
months of February and March 1998 as deductions against income for the fiscal
year April 1998 to March 1999. The computation of Lancaster's tax deficiency,
with the details of discrepancies, is reproduced below:

INCOME TAX:

Taxable Income per ITR -0-

Add: Adjustments-Disallowed 11,496.770.18
purchases
Adjusted Taxable P11,496,770.18
Income per Investigation

INCOME TAX DUE - Basic

April 1-December 31, 1998

P
(9/12 x P11,496,770.18 x 34%)
2,913,676.4
January 1 - March 31, 1999
(3/12 x P11,496,770.18 x 33%) 948,483.54

Income tax still due per P

investigation 3,880,159.94
Interest (6/15/99 to 10/15/02) .66 2,560,905.56
Compromise Penalty 25,000

TOTAL DEFICIENCY P
INCOME TAX 6,466,065.50

DETAILS OF DISCREPANCIES
Assessment No. LTAID 11-98-00007

A. INCOME TAX (P3,880,159.94) - Taxpayer's fiscal year covers April 1998 to March 1999.
Verification of the books of accounts and pertinent documents disclosed that there was an
overstatement of purchases for the year. Purchase Invoice Vouchers (PIVs) for February and
March 1998 purchases amounting to P11,496,770.18 were included as part of purchases for
taxable year 1998 in violation of Section 45 of the National Internal Revenue Code in
relation to Section 43 of the same and Revenue Regulations No. 2 which states that the
Crop-Basis method of reporting income may be used by a farmer engaged in producing
crops which take more than one (1) year from the time of planting to the time of gathering
and disposing of crop, in such a case, the entire cost of producing the crop must be taken as
deduction in the year in which the gross income from the crop is realized and that the taxable
income should be computed upon the basis of the taxpayer's annual accounting period,
(fiscal or calendar year, as the case may be) in accordance with the method of accounting
regularly employed in keeping with the books of the taxpayer. Furthermore, it did not
comply with the generally accepted principle of proper matching of cost and revenue.[10]

Lancaster replied[11] to the PAN contending, among other things, that for the past
decades, it has used an entire 'tobacco-cropping season' to determine its total
purchases covering a one-year period from 1 October up to 30 September of the
following year (as against its fiscal year which is from 1 April up to 31 March 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.[12]

Invoking the same provisions of the law cited in the assessment, i.e., Sections
43[13] and 45[14] of the National Internal Revenue Code (NIRC), in conjunction with
Section 45[15] of Revenue Regulation No. 2, as amended, Lancaster argued that the
February and March 1998 purchases should not have been disallowed. It
maintained that the situation of farmers engaged in producing tobacco, like
Lancaster, is unique in that the costs, i.e., purchases, are taken as of a different
period and posted in the year in which the gross income from the crop is realized.
Lancaster concluded that it correctly posted the subject purchases in the fiscal year
ending March 1999 as it was only in this year that the gross income from the crop
was realized.

Subsequently on 6 November 2002, Lancaster received from the BIR a final

assessment notice (FAN),[16] captioned Formal Letter of Demand and Audit
Result/Assessment Notice LTAID II IT-98-00007, dated 11 October 2002, which
assessed Lancaster's deficiency income tax amounting to P11,496,770.18, as a
consequence of the disallowance of purchases claimed for the taxable year
ending 31 March 1999.

Lancaster duly protested[17] the FAN. There being no action taken by the
Commissioner on its protest, Lancaster filed on 21 August 2003 a petition for
review[18] before the CTA Division.

The Proceedings before the CTA

In its petition before the CTA Division, Lancaster essentially reiterated its
arguments in the protest against the assessment, maintaining that the tobacco
purchases in February and March 1998 are deductible in its fiscal year ending 31
March 1999.

The issues[19] raised by the parties for the resolution of the CTA Division were:

WHETHER OR NOT PETITIONER COMPLIED WITH THE GENERALLY ACCEPTED

ACCOUNTING PRINCIPLE OF PROPER MATCHING OF COST AND REVENUE;

II

WHETHER OR NOT THE DEFICIENCY TAX ASSESSMENT AGAINST PETITIONER FOR

THE TAXABLE YEAR 1998 IN THE AGGREGATE AMOUNT OF P6,466,065.50 SHOULD
BE CANCELLED AND WITHDRAWN BY RESPONDENT.

After trial, the CTA Division granted the petition of Lancaster, disposing as follows:

IN VIEW OF THE FOREGOING, the subject Petition, for Review is

hereby GRANTED. Accordingly, respondent
is ORDERED to CANCEL and WITHDRAW the deficiency income tax assessment
issued against petitioner under Formal Letter of Demand and Audit
Result/Assessment Notice No. LTAID II IT-98-00007 dated October 11, 2002, in the
amount of P6,466,065.50, covering the fiscal year from April 1, 1998 to March
31,1999.[20]

The CIR moved[21] but failed to obtain reconsideration of the CTA Division ruling.[22]

Aggrieved, the CIR sought recourse[23] from the CTA En Banc to seek a reversal of
the decision and the resolution of the CTA Division.

However, the CTA En Banc found no reversible error in the CTA Division's ruling,
thus, it affirmed the cancellation of the assessment against Lancaster. The
dispositive portion of the decision of the CTA En Banc states:

WHEREFORE, premises considered, the present Petition for Review is

hereby DENIED DUE COURSE, and, accordingly DISMISSED for lack of merit.[24]

The CTA En Banc likewise denied[25] the motion for reconsideration from its
Decision,

Hence, this petition.

The CIR assigns the following errors as committed by the CTA En Banc :

I.
THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT PETITIONER'S
REVENUE OFFICERS EXCEEDED THEIR AUTHORITY TO INVESTIGATE THE PERIOD
NOT COVERED BY THEIR LETTER OF AUTHORITY.

II.

THE COURT OF TAX APPEALS EN BANC ERRED IN ORDERING PETITIONER TO

CANCEL AND WITHDRAW THE DEFICIENCY ASSESSMENT ISSUED AGAINST
RESPONDENT.[26]

THE COURT'S RULING

We deny the petition.

I.

The CTA EN BANC did not err when it ruled

that the BIR revenue officers had
exceeded their authority.

To support its first assignment of error, the CIR argues that the revenue officers did
not exceed their authority when, upon examination (of the Lancaster's books of
accounts and other accounting records), they verified that Lancaster made
purchases for February and March of 1998, which purchases were not declared in
the latter’s fiscal year from 1 April 1997 to 31 March 1998. Additionally, the CIR
posits 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.

On both counts, the CIR is mistaken.

A. The Jurisdiction of the CTA

Preliminarily, we shall take up the CTA's jurisdiction to rule on the issue of the
scope of authority of the revenue officers to conduct the examination of Lancaster's
books of accounts and accounting records.

The law vesting unto the CTA its jurisdiction is Section 7 of Republic Act No.
1125 (R.A. No. 1125),[27] which in part provides:

Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein provided:

(1) Decisions of the Collector of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by the Bureau of Internal
Revenue; xxx (emphasis supplied)

Under the aforecited provision, the jurisdiction of the CTA is not limited only to
cases which 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.[28] Thus, for instance, we had once held that
the question of whether or not to impose a deficiency tax assessment comes within
the purview of the words "other matters arising under the National Internal
Revenue Code. "[29]

The jurisdiction of the CTA on such other matters arising under the NIRC was
retained under the amendments introduced by R.A No. 9282.[30] Under R.A. No.
9282, Section 7 now reads:

Sec. 7. Jurisdiction. - The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or
other laws administered by the Bureau of Internal Revenue;

2. Inaction by the Commissioner of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue
Code or other laws administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code provides a specific period of action, in which case
the inaction shall be deemed a denial; x x x." (emphasis supplied)

Is the question on the authority of revenue officers to examine the books and
records of any person cognizable by the CTA?

It must be stressed that the assessment of internal revenue taxes is one of the
duties of the BIR. Section 2 of the NIRC states:

Sec. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of
Internal Revenue shall be under the supervision and control of the Department of
Finance and its powers and duties shall comprehend, the assessment and
collection of all national internal revenue taxes, fees, and charges, and the
enforcement of all forfeitures, penalties, and fines connected therewith, including
the execution of judgments in all cases decided in its favor by the Court of Tax
Appeals and the ordinary courts.

The Bureau shall give effect to and administer the supervisory and police powers
conferred to it by this Code or other laws. (emphasis supplied)
In connection therewith, the CIR may authorize the examination of any taxpayer
and correspondingly make an assessment whenever necessary.[31] Thus, to give
more teeth to such power of the CIR, to make an assessment, the NIRC authorizes
the CIR to examine any book, paper, record, or data of any person.[32] The powers
granted by law to the CIR are intended, among other things, to determine the
liability of any person for any national internal revenue tax.

It is pursuant to such pertinent provisions of the NIRC conferring the powers to the
CIR that the petitioner (CIR) had, in this case, authorized its revenue officers to
conduct an examination of the books of account and accounting records of
Lancaster, and eventually issue a deficiency assessment against it.

From the foregoing, it is clear that the issue on whether the revenue officers who
had conducted the examination on Lancaster exceeded their authority pursuant to
LOA No. 00012289 may be considered as covered by the terms "other matters"
under Section 7 of R.A. No. 1125 or its amendment, R.A. No. 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 the CTA.

On whether the CTA can resolve an issue which was not raised by the parties, we
rule in the affirmative.

Under Section 1, Rule 14 of A.M. No. 05-11-07-CTA, or the Revised Rules of the
Court of Tax Appeals,[33] the CTA is not bound by the issues specifically raised by
the parties but may also rule upon related issues necessary to achieve an orderly
disposition of the case. The text of the provision reads:

SECTION 1. Rendition of judgment. - x x x

In deciding the case, the Court may not limit itself to the issues stipulated by the
parties but may also rule upon related issues necessary to achieve an orderly
disposition of the case.

The above section is clearly worded. On the basis thereof, the CTA Division was,
therefore, well within its authority to consider in its decision the question on the
scope of authority of the revenue officers who were named in the LOA even though
the parties had not raised the same in their pleadings or memoranda, The CTA En
Banc was likewise correct in sustaining the CTA Division's view concerning such
matter.

B. The Scope of the Authority of the Examining Officers

In the assailed decision of the CTA Division, the trial court observed that LOA No.
00012289 authorized the BIR officers to examine the books of account of Lancaster
for the taxable year 1998 only or, since Lancaster adopted a fiscal year (FY), for the
period 1 April 1997 to 31 March 1998. However, the deficiency income tax
assessment which the BIR eventually issued against Lancaster was based on the
disallowance of expenses reported in FY 1999, or for the period 1 April
1998 to 31 March 1999. The CTA concluded that the revenue examiners had
exceeded their authority when they issued the assessment against Lancaster and,
consequently, declared such assessment to be without force and effect.

We agree.

The audit process normally commences with the issuance by the CIR of a Letter of
Authority. The LOA gives notice to the taxpayer that it is under investigation for
possible deficiency tax assessment; at the same time it authorizes or empowers a
designated revenue officer to examine, verify, and scrutinize a taxpayer's books
and records, in relation to internal revenue tax liabilities for a particular period.[34]

In this case, a perusal of LOA No. 00012289 indeed shows that the period of
examination is the taxable year 1998, For better clarity, the pertinent portion of the
LOA is again reproduced, thus:

The bearer(s) hereof x x x is/are authorized to examine your books of accounts and
other accounting records for all Internal revenue taxes for the period from taxable
year, 1998 to _____, 19__. x x x." (emphasis supplied)

Even though the date after the words "taxable year 1998 to" is unstated, it is not at
all difficult to discern that the period of examination is the whole taxable year 1998.
This means that the examination of Lancaster must cover the FY period from 1 April
1997 to 31 March 1998. It could not have contemplated a longer period. The
examination for the full taxable year 1998 only is consistent with the guideline in
Revenue Memorandum Order (RMO) No. 43-90, dated 20 September 1990, that the
LOA shall cover a taxable period not exceeding one taxable year.[35] In other
words, absent any other valid cause, the LOA issued in this case is valid in all
respects.

Nonetheless, a valid LOA does not necessarily clothe validity to an assessment

issued on it, as when the revenue officers designated in the LOA act in excess or
outside of the authority granted them under said LOA. Recently in CIR v. De La
Salle University, Inc.[36] we accorded validity to the LOA authorizing the
examination of DLSU for "Fiscal Year Ending 2003 and Unverified Prior Years" and
correspondingly held the assessment for taxable year 2003 as valid because this
taxable period is specified in the LOA. However, we declared void the assessments
for taxable years 2001 and 2002 for having been unspecified on separate LOAs as
required under RMO No. 43-90.

Likewise, in the earlier case of CIR v. Sony, Phils., Inc.,[37] we affirmed the
cancellation of a deficiency VAT assessment because, while the LOA covered "the
period 1997 and unverified prior years, " the said deficiency was arrived at based
on the records of a later year, from January to March 1998, or using the fiscal
year which ended on 31 March 1998. We explained that the CIR knew which period
should be covered by the investigation and that if the CIR wanted or intended the
investigation to include the year 1998, it would have done so by including it in the
LOA or by issuing another LOA.[38]
The present case is no different from Sony in that 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 31 March 1999. This much is clear from the
notice of assessment, the relevant portion of which we again restate as follows:

INCOME TAX:

Taxable Income per ITR -0-

Add: Adjustments-Disallowed 11,496.770.18
purchases
Adjusted Taxable P11,496,770.18
Income per Investigation

INCOME TAX DUE - Basic

April 1-December 31, 1998

P
(9/12 x P11,496,770.18 x 34%)
2,913,676.4
January 1 - March 31, 1999
(3/12 x P11,496,770.18 x 33%) 948,483.54

Income tax still due per P

investigation 3,880,159.94
Interest (6/15/99 to 10/15/02) .66 2,560,905.56
Compromise Penalty 25,000

TOTAL DEFICIENCY P
INCOME TAX (emphasis 6,466,065.50
supplied)

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.

This point alone would have sufficed to invalidate the subject deficiency income tax
assessment, thus, obviating any further necessity to resolve the issue on whether
Lancaster erroneously claimed the February and March 1998 expenses as
deductions against income for FY 1999.

But, as the CTA did, we shall discuss the issue on the disallowance for the proper
guidance not only of the parties, but the bench and the bar as well.

II.
The CTA En Banc correctly sustained the
order cancelling and withdrawing
the deficiency tax assessment.

To recall, the assessment against Lancaster for deficiency income tax stemmed
from the disallowance of its February and March 1998 purchases which Lancaster
posted in its fiscal year ending on 31 March 1999 (FY 1999) instead of the fiscal
year ending on 31 March 1998 (FY 1998).

On the one hand, the BIR insists that the purchases in question should have been
reported in FY 1998 in order to conform to the generally accepted accounting
principle of proper matching of cost and revenue. Thus, when Lancaster reported
the said purchases in FY 1999, this resulted in overstatement of expenses
warranting their disallowance and, by consequence, resulting in the deficiency in
the payment of its income tax for FY 1999.

Upon the other hand, Lancaster justifies the inclusion of the February and March
1998 purchases in its FY 1999 considering that they coincided with its crop year
covering the period of October 1997 to September 1998. Consistent with Revenue
Audit Memorandum (RAM) No. 2-95,[39] Lancaster argues that its purchases in
February and March 1998 were properly posted in FY 1999, or the year in which its
gross income from the crop was realized. Lancaster concludes that by doing so, it
had complied with the matching concept that was also relied upon by the BIR in its
assessment.

The issue essentially boils down to the proper timing when Lancaster should
recognize its purchases in computing its taxable income. Such issue directly
correlates to the fact that Lancaster's 'crop year' does not exactly coincide with its
fiscal year for tax purposes.

Noticeably, the records of this case are rife with terms and concepts in accounting.
As a science, accounting[40] pervades many aspects of financial planning,
forecasting, and decision making in business. Its reach, however, has also
permeated tax practice.

To put it into perspective, although the foundations of accounting were built

principally to analyze finances and assist businesses, many of its principles have
since been adopted for purposes of taxation.[41] In our jurisdiction, the concepts in
business accounting, including certain generally accepted accounting principles
(GAAP), embedded in the NIRC comprise the rules on tax accounting.

To be clear, the principles under financial or business accounting, in theory and

application, are not necessarily interchangeable with those in tax accounting. Thus,
although closely related, tax and business accounting had invariably produced
concepts that at some point diverge in understanding or usage. For instance, two of
such important concepts are taxable income and business income (or accounting
income). Much of the difference can be attributed to the distinct purposes or
objectives that the concepts of tax and business accounting are aimed at. Chief
Justice Querube Makalintal made an apt observation on the nature of such
difference. In Consolidated Mines, Inc. v. CTA,[42] he noted:

While taxable income is based on the method of accounting used by the taxpayer, it
will almost always differ from accounting income. This is so because of a
fundamental difference in the ends the two concepts serve. Accounting attempts
to match cost against revenue. Tax law is aimed at collecting revenue. It is
quick to treat an item as income, slow to recognize deductions or losses. Thus, the
tax law will not recognize deductions for contingent future losses except in very
limited situations. Good accounting, on the other hand, requires their recognition.
Once this fundamental difference in approach is accepted, income tax accounting
methods can be understood more easily.[43] (emphasis supplied)

While there may be differences between tax and accounting,[44] it cannot be said
that the two mutually exclude each other. As already made clear, tax laws
borrowed concepts that had origins from accounting. In truth, tax cannot do away
with accounting. It relies upon approved accounting methods and practices to
effectively carry out its objective of collecting the proper amount of taxes from the
taxpayers. Thus, an important mechanism established in many tax systems is the
requirement for taxpayers to make a return of their true income.[45] Maintaining
accounting books and records, among other important considerations, would in turn
assist the taxpayers in complying with their obligation to file their income tax
returns. At the same time, such books and records provide vital information and
possible bases for the government, after appropriate audit, to make an assessment
for deficiency tax whenever so warranted under the circumstances.

The NIRC, just like the tax laws in other jurisdictions, recognizes the important
facility provided by generally accepted accounting principles and methods to the
primary aim of tax laws to collect the correct amount of taxes. The NIRC even
devoted a whole chapter on accounting periods and methods of accounting, some
relevant provisions of which we cite here for more emphasis:

CHAPTER VIII

ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

Sec. 43. General Rule. - The taxable income shall be computed upon the basis of
the taxpayer's annual accounting period (fiscal year or calendar year, as the case
may be) in accordance with the method of accounting regularly employed in
keeping the books of such taxpayer; but if no such method of accounting has been
so employed, or if the method employed does not clearly reflect the income, the
computation shall be made in accordance with such method as in the opinion of the
Commissioner clearly reflects the income.

If the taxpayer's annual accounting period is other than a fiscal year, as defined in
Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep
books, or if the taxpayer is an individual, the taxable income shall be computed on
the basis of the calendar year.
Sec. 44. Period in which Items of Gross Income Included. - The amount of all items
of gross income shall be included in the gross income for the taxable year in which
received by the taxpayer, unless, under methods of accounting permitted under
Section 43, any such amounts are to be properly accounted for as of a different
period.

In the case of the death of a taxpayer, there shall be included in computing taxable
income for the taxable period in which falls the date of his death, amounts accrued
up to the date of his death if not otherwise properly includible in respect of such
period or a prior period.

Sec. 45. Period for which Deductions and Credits Taken. - The deductions
provided for in this Title shall be taken for the taxable year in which 'paid or
accrued' or 'paid or incurred,' dependent upon the method of accounting upon
the basis of which the net income is computed, unless in order to clearly reflect the
income, the deductions should be taken as of a different period. In the case of the
death of a taxpayer, there shall be allowed, as deductions for the taxable period in
which falls the date of his death, amounts accrued up to the date of his death if not
otherwise properly allowable in respect of such period or a prior period.

Sec. 46. Change of Accounting Period. - If a taxpayer, other than an individual,

changes his accounting period from fiscal year to calendar year, from calendar year
to fiscal year, or from one fiscal year to another, the net income shall, with the
approval of the Commissioner, be computed on the basis of such new accounting
period, subject to the provisions of Section 47.

xxxx

Sec. 48. Accounting for Long-term Contracts. - Income from long-term

contracts shall be reported for tax purposes in the manner as provided in. this
Section.

As used herein, the term 'long-term contracts' means building, installation or

construction contracts covering a period in excess of one (1) year.

Persons whose gross income is derived in whole or in part from such contracts shall
report such income upon the basis of percentage of completion.

The return should be accompanied by a return certificate of architects or engineers

showing the percentage of completion during the taxable year of the entire work
performed under contract.

There should be deducted from such gross income all expenditures made during the
taxable year on account of the contract, account being taken of the material and
supplies on hand at the beginning and end of the taxable period for use in
connection with the work under the contract but not yet so applied. If upon
completion of a contract, it is found that the taxable net income arising thereunder
has not been clearly reflected for any year or years, the Commissioner may permit
or require an amended return.

Sec. 49. Installment Basis. -

(A) Sales of Dealers in Personal Property. - Under rules and regulations

prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, a person who regularly sells or otherwise disposes of personal
property on the installment plan may return as income therefrom in any taxable
year that proportion of the installment payments actually received in that year,
which the gross profit realized or to be realized when payment is completed, bears
to the total contract price.

(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a
casual sale or other casual disposition of personal property (other than property of
a kind which would properly be included in the inventory of the taxpayer if on hand
at the close of the taxable year), for a price exceeding One thousand pesos
(P1,000), or (2) of a sale or other disposition of real property, if in either case the
initial payments do not exceed twenty-five percent (25%) of the selling price, the
income may, under the rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, be returned on the basis and
ill the manner above prescribed in this Section.

As used in this Section, the term 'initial payments' means the payments received
in cash or property other than evidences of indebtedness of the purchaser during
the taxable period in which the sale or other disposition is made.

(C) Sales of Real Property Considered as Capital Asset by Individuals. - An

individual who sells or disposes of real property, considered as capital asset, and is
otherwise qualified to report the gain therefrom under Subsection (B) may pay the
capital gains tax in installments under rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the Commissioner.

(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the

benefits of Subsection (A) elects for any taxable year to report his taxable income
on the installment basis, then in computing his income for the year of change or
any subsequent year, amounts actually received during any such year on account of
sales or other dispositions of property made in any prior year shall not be
excluded." (emphasis in the original)

We now proceed to the matter respecting the accounting method employed by

Lancaster.

An accounting method is a "set of rules for determining when and how to report
income and deductions."[46] The provisions under Chapter VIII, Title II of the NIRC
cited above enumerate the methods of accounting that the law expressly
recognizes, to wit:
(1) Cash basis method;[47]
(2) Accrual method;[48]
(3) Installment method;[49]
(4) Percentage of completion method;[50] and
(5) Other accounting methods.

Any of the foregoing methods may be employed by any taxpayer so long as it

reflects its income properly and such method is used regularly. The peculiarities of
the business or occupation engaged in by a taxpayer would largely determine how
it would report incomes and expenses in its accounting books or records. The NIRC
does not prescribe a uniform, or even specific, method of accounting.

Too, other methods approved by the CIR, even when not expressly mentioned in
the NIRC, may be adopted if such method would enable the taxpayer to properly
reflect its income. Section 43 of the NIRC authorizes the CIR to allow the use of a
method of accounting that in its opinion would clearly reflect the income of the
taxpayer. An example of such method not expressly mentioned in the NIRC, but
duly approved by the CIR, is the 'crop method of accounting' authorized under
RAM No. 2-95. The pertinent provision reads:

II. Accounting Methods

xxxx

F. Crop Year Basis is a method applicable only to farmers engaged in the production
of crops which take more than a year from the time of planting to the process of
gathering and disposal. Expenses paid or incurred are deductible in the year the
gross income from the sale of the crops are realized.

The crop method recognizes that the harvesting and selling of crops do not fall
within the same year that they are planted or grown. This method is especially
relevant to farmers, or those engaged in the business of producing crops who,
pursuant to RAM No. 2-95, would then be able to compute their taxable income on
the basis of their crop year. On when to recognize expenses as deductions against
income, the governing rule is found in the second sentence of Subsection F cited
above. The rule enjoins the recognition of the expense (or the deduction of the
cost) of crop production in the year that the crops are sold (when income is
realized).

In the present case, we find it wholly justifiable for Lancaster, as a business

engaged in the production and marketing of tobacco, to adopt the crop method of
accounting. A taxpayer is authorized to employ what it finds suitable for its purpose
so long as it consistently does so, and in this case, Lancaster does appear to have
utilized the method regularly for many decades already. Considering that the crop
year of Lancaster starts from October up to September of the following year, it
follows that all of its expenses in the crop production made within the crop year
starting from October 1997 to September 1998, including the February and March
1998 purchases covered by purchase invoice vouchers, are rightfully deductible for
income tax purposes in the year when the gross income from the crops are
realized. Pertinently, nothing from the pleadings or memoranda of the parties, or
even from their testimonies before the CTA, would support a finding that the gross
income from the crops (to which the subject expenses refer) was actually realized
by the end of March 1998, or the closing of Lancaster's fiscal year for 1998.
Instead, the records show that the February and March 1998 purchases were
recorded by Lancaster as advances and later taken up as purchases by the close of
the crop year in September 1998, or as stated very clearly above, within the fiscal
year 1999[51] On this point, we quote with approval the ruling of the CTA En Banc ,
thus:

Considering that [Lancaster] is engaged in the production of tobacco, it applied the

crop year basis in determining its total purchases for each fiscal year. Thus,
[Lancaster's] total cost for the production of its crops, which includes its purchases,
must be taken as a deduction in the year in which the gross income is realized.
Thus, We agree with the following ratiocination of the First Division:

Evident from the foregoing, the crop year basis is one unusual method of
accounting wherein the entire cost of producing the crops (including purchases)
must be taken as a deduction in the year in which the gross income from the crop
is realized. Since the petitioner's crop year starts in October and ends in September
of the following year, the same does not coincide with petitioner's fiscal year which
starts in April and ends in March of the following year. However, the law and
regulations consider this peculiar situation and allow the costs to be taken up at the
time the gross income from the crop is realized, as in the instant case.

[Lancaster's] fiscal period is from April 1, 1998 to March 31, 1999. On the other
hand, its crop year is from October 1, 1997 to September 1, 1998. Accordingly, in
applying the crop year method, all the purchases made by the respondent for
October 1, 1997 to September 1, 1998 should be deducted from the fiscal year
ending March 31, 1999, since it is the time when the gross income from the crops is
realized.[52]

The matching principle

Both petitioner CIR and respondent Lancaster, it must be noted, rely upon the
concept of matching cost against revenue to buttress their respective theories.
Also, both parties cite RAM 2-95 in referencing the crop method of accounting.

We are tasked to determine which view is legally sound.

In essence, the matching concept, which is one of the generally accepted

accounting principles, directs that the expenses are to be reported in the same
period that related revenues are earned. It attempts to match revenue with
expenses that helped earn it.

The CIR posits that Lancaster should not have recognized in FY 1999 the purchases
for February and March 1998.[53] Apparent from the reasoning of the CIR is that
such expenses ought to have been deducted in FY 1998, when they were supposed
to be paid or incurred by Lancaster. In other words, the CIR is of the view that the
subject purchases match with revenues in 1998, not in 1999.

A reading of RAM No. 2-95, however, clearly 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 it
is paid or incurred. As noted by the CTA,[54] 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.

Even if we were to accept the notion that applying the 1998 purchases as
deductions in the fiscal year 1998 conforms with the generally accepted principle of
matching cost against revenue, the same would still not lend any comfort to the
CIR. Revenue Memorandum Circular (RMC) No. 22-04, entitled "Supplement to
Revenue Memorandum Circular No. 44-2002 on Accounting Methods to be Used by
Taxpayers for Internal Revenue Tax Purposes"[55] dated 12 April 2004, commands
that where there is conflict between the provisions of the Tax Code (NIRC),
including its implementing rules and regulations, on accounting methods and the
generally accepted accounting principles, the former shall prevail. The relevant
portion of RMC 22-04 reads:

II. Provisions of the Tax Code Shall Prevail.

All returns required to be filed by the Tax Code shall be prepared always in
conformity with the provisions of the Tax Code, and the rules and regulations
implementing said Tax Code. Taxability of income and deductibility of expenses
shall be determined strictly in accordance with the provisions of the Tax Code and
the rules and regulations issued implementing said Tax Code. In case of difference
between the provisions of the Tax Code and the rules and regulations implementing
the Tax Code, on one hand, and the generally accepted accounting principles
(GAAP) and the generally accepted accounting standards (GAAS), on the other
hand, the provisions of the Tax Code and the rules and regulations issued
implementing said Tax Code shall prevail. (italics supplied)

RAM No. 2-95 is clear-cut on the rule on when to recognize deductions for
taxpayers using the crop method of accounting. The rule prevails over any GAAP,
including the matching concept as applied in financial or business accounting.

In sum, and considering the foregoing premises, we find no cogent reason to

overturn the assailed decision and resolution of the CTA. As the CTA decreed,
Assessment Notice LTAID II IT-98-00007, dated 11 October 2002, in the amount of
P6,466,065.50 for deficiency income tax should be cancelled and set aside. The
assessment is void for being issued without valid authority. Furthermore, there is
no legal justification for the disallowance of Lancaster's expenses for the purchase
of tobacco in February and March 1998.

WHEREFORE, the petition is DENIED. The assailed 30 April 2008 Decision and 24
June 2008 Resolution of the Court of Tax Appeals En Banc are AFFIRMED. No
costs.

SO ORDERED.

Carpio (Chairperson), Peralta, Mendoza, and Leonen,[*] JJ., concur.

Carpio, J., certify that J. Leonen left his vote concurring with this ponencia.