Petitioner Commissioner of Internal Revenue (CIR) In 1999, issued Letter of Authority (LOA) 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. 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.
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.
Lancaster received from the BIR a final assessment notice (FAN), captioned Formal Letter of Demand andAudit Result/Assessment .Notice LTAID II IT-98-00007, dated 11 October 2002, 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 ending 31. March 1999.
Lancaster duly protested 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.
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 CTA Division granted the petition of Lancaster, The CIR move but failed to obtain reconsideration of the CTA Division ruling.
Aggrieved, the CIR sought recourse 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 CTA En Banc likewise denied the motion for reconsideration from its Decision.
Hence, this petition.
1. WHETHER 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.
2. WHETHER THE COURT OF TAX APPEALS EN BANC ERRED IN ORDERING PETITIONER TO CANCEL AND WITHDRAW THE DEFICIENCY ASSESSMENT ISSUED AGAINST RESPONDENT.
1. No, 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.
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.
2. No, 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,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.
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.