SECOND DIVISION

July 12, 2017

G.R. No. 183408

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
LANCASTER PHILIPPINES, INC., Respondent

DECISION

MARTIRES, J.:

This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court

seeking to reverse and set aside the 30 April 2008 Decision2 and 24 June
2008 Resolution3 of the Court of Tax Appeals (CTA) En Banc in CTA EB No.
352.

The assailed decision and resolution affirmed the 12 September 2007

Decision4 and 12 December 2007 Resolution5 of the CTA First Division (CTA
Division) in CTA Case No. 6753.

THE FACTS

The facts6 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

SIRJMADAM/GENTLEMEN:
The bearer(s) hereof RO’s Irene Goze & Rosario Padilla to be
Supervise 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 a11
internal revenue taxes for the period from example 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 March1999; and 2) noncompliance with the generally accepted
accountingprinciple 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 purchases 11,496,770.18
Adjusted Taxable Income per Investigation ₱11,496,770.18
INCOME TAX DUE-Basic
April 1 - December 31, 1998
₱2,913,676.4
(9/12x ₱l1,496,770.18 x 34%)
January 1 - March 31, 1999
948,483.54
(3/12x ₱l1,496,770.18 x 33%)
Income tax still due per investigation ₱3,880,159.94
Interest (6/15/99 to 10115/02) .66 2,560,905.56
Compromise Penalty 25,000
TOTAL DEFlCIENCY INCOME TAX ₱6,466,065.50

DETAILS OF DISCREPANCIES
Assessment No. LTAID II-98-00007
A. INCOME TAX (₱3,880,159.94) - 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 ₱ll,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 replied11 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 followingyear (as against its fiscal year which is from 1
April up to 31 March of the followingyear); 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

4313 and 4514 of the National Internal Revenue Code (NJRC), in conjunction
with Section 4515 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 andAudit
Result/Assessment .Notice LTAID II IT-98-00007, dated 11 October2002,
which assessed Lancaster's deficiency income tax amounting to Pl
l,496,770.18, as a consequence of the disallowance of purchases claimed for
the taxable year ending199931. March 1999.
Lancaster duly protested17 the FAN. There being no action taken by the
Commissioner on its protest, Lancaster filed on 21 August 2003 a petition for
review18 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 issues19 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 ₱6,466,065.50 SHOULD BE
CANCEILED 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 l;etter of
Demand and Audit Result/Assessment Notice No. L TAID II IT-
98-00007 dated October 11, 2002, in the amount of
₱6,466,065.50, covering the fiscal year from April l, 1998 to
March 31, 1999.20

The CIR move21 but failed to obtain reconsideration of the CTA Division

ruling.22

Aggrieved, the CIR sought recourse23 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 denied25 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
PERJOD 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.

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; 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
o:r 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 "othermatters arising
under the National Internal Revenue Code."[[29]

The jurisdiction of the CTA on such other matters arising under theNIRC was

retained under the amendments introduced by R.A No. 9282.30Under 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 inten1al revenue taxes is one of

the duties of the BIR. Section 2 of the NIRC states:

Sec. 2. Powers and Duties oftheBureau of Internal Revenue. -

The Bureau of Internal Revenue shall be under the supervision
and control of the Department of Fin[:l.11ce and its powers: and
duties shall comprehend the assessment and collection of all
national internal revenue taxes, fees, andcharges, 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 CT A 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 xx

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 1April1997 to 31March1998. 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 31March1999. 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 1April1997 to 31March1998. 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 2003and
Unverified Prior Years" and correspondingly held the assessment fortaxable
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 1997and 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 31March1998. We
explainedthat 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:

1âwphi1
INCOME TAX:
Taxable Income per ITR -0-
Add: Adjustments-Disallowed purchases 11,496, 770.18
Adjusted Taxable Income per Investigation ₱l 1,496,770.18
INCOME TAX DUE-Basic
April 1 -December 31, 1998
₱2,913,676.4
(9/12xPl1,496,770.18 x 34%)
January 1-March 31, 1999
948,483.54
(3/12xPl1,496,770.18 x 33%)
Income tax still due per investigation ₱3,880,159.94
Interest (6/15/99 to 10/15/02) .66 2,560,905.56
Compromise Penalty 25,000
TOTAL DEFICIENCY INCOME TAX
₱6,466,065.50
(emphasis 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 31March1998 (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,42he 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/or 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 repo1ied 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.1âwphi1

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
(₱1,000), or (2) of a sale or other disposition of real prope1iy, 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 in 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 CT A, 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 1999.51On this point, we quote with
approval the ruling of the CT A En Banc, thus:

Considering that [Lancaster] is engaged in the production

oftobacco, 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"55dated 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 general(v 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 CT A. As the CTA
decreed, Assessment Notice LTAID II IT-98-00007, dated 11 October 2002, in
the amount of ₱6,466,065.50 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 cost

SO ORDERED.