COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. A. SORIANO Y CIA. AND THE COURT OF TAX APPEALS, RESPONDENTS.

This is an appeal taken by the Commissioner of Internal Revenue
from a decision of the Court of Tax Appeals in C.T.A. Case No. 1364 entitled
“A. Soriano y Cia. vs. Commissioner of
Internal Revenue” ordering the latter to give the former a tax credit in
the amount of P18,099.00 as overpaid income tax for the year 1960.

It appears that A. Soriano y Cia., hereinafter referred to as the Taxpayer, owned a
piece of land lo­cated in Intramuros, City of Manila,
on which it pro­posed to construct an office building.  To carry out the project it had the necessary
plans drawn in 1960 by Archi­tect J. M. Zaragoza, and
entered into a pile-driving con­tract that same year with the construction firm
of A. M. Oretal & Co. – hereinafter referred to
as the Contractor.  The pile-driving was
actually done in 1960.

After these preparations and before the construc­tion of the
proposed office building itself could get started, the Taxpayer sold the
property to J. M. Tuason & Co. on April 13, 1960
under a contract that required it to meet certain specifications relative to
the load bearing factor of the timber piles driven.

The balance of P49,329.55 due on the Contractor’s fees, including
the cost of testing timber piles in the amount of P4,000.00, was paid only on
June 16, 1961 after the Contractor had concluded negotiations with the City
Engineer of Manila for the settlement of the problem brought up by J. M. Tuason & Co. regarding the allowable load bearing
factor for the timber piles at the job site, and after said Contractor had
secured a certification by the Office of the City Engineer of Manila in
connection therewith.

It also appears that in the year 1961, the Taxpayer completed
payment to the architect, Mr. Zaragoza, of the
latter’s fees for services rendered, the same consisting of the unpaid balance
of P10,000.00, plus P1,000.00 re­imbursement for disbursements made by the
latter in con­nection with the Intramuros
property.

On April 17, 1961,
the Taxpayer filed its 1960 Income Tax Return and in due time paid the income
tax due in accordance therewith.  On
October 4, 1961, it filed an amended Income Tax Return for the year 1960
showing a refundable amount of P15,099.00 due to the
inclusion of expenses paid on June 1 and June 16, 1961 amounting to P50,329.55,
expenses allegedly incurred for pile-driving and architect’s fees which the
Taxpayer claimed were part of the cost of its Intramuros
property sold, as already stated, on April 13, 1960.  On the same day, a request for the refund of
the said amount was filed.  Again, on
March 12, 1963, the Taxpayer filed a second amended re­turn showing this time a
refundable amount of P18,099.00 based on expenses
already included in the previous amend­ed Income Tax Return, plus another item
of expense in the amount of P10,000.00 paid as architect’s fees on March 15,
1961, upon the claim that all said expenses formed part of the cost of the Intramuros property aforesaid.  A re­quest for the refund of the total amount
of P18,099.00 was also made.

As correctly stated in the brief filed by the Office of the
Solicitor General on behalf of petitioner, the sole issue to be resolved in
this appeal is whether or not, in determining the income tax due from the Tax­payer
for the year 1960 in connection with the profit it had realized from the sale
of its Intramuros property on April 13, 1960, said
Taxpayer is entitled to deduct, as part of the cost, from the gross selling
price, the sum of P49,329.55 paid as service fee for pile-driving, and the
additional sum of P11,000.00 as architect’s fee.

In connection with the above issue, the following facts are
relevant and of decisive importance:

1)         
The pile-driving contract was
entered into, and the services of Architect Zaragoza
were engaged in the year 1960.  The
pile-driving was actually done,
and the plans for the proposed office building were made in the same year
(1960).

2)         
The pile-driving services as well
as the architect’s services benefited and increased the value of the property.

The logical conclusion that one may draw from the above facts is
that the expenses in question constitute capital expenditures which the owner
or Taxpayer was entitled to consider as part of the total cost of its property
in determining the amount of the profit it had realized in the sale thereof to
J. M. Tuason & Co.  That payment of these questioned items was
made only in 1961 does not alter the fact that the contracts from which the
obligation to pay arose were entered into in 1960 and the services con­tracted
for were rendered in the same year.  The
obli­gation to pay for said services, therefore, clearly dated back to 1960.

We have held heretofore that expenditures for replacements,
alterations, improvements or additions which either prolong the life of the
property or in­crease its value are capital in nature (Alhambra Cigar, etc. vs.
Collector, etc., G.R. L-12026 and 12131, May 29, 1959) and having arrived at
the con­clusion that the expenditures referred to above in­creased the value of
the property, the same must be considered as capital expenditures that formed
part of the cost of the Taxpayer’s Intramuros
property.  We, therefore, agree with the
Court of Tax Appeals that said Taxpayer was entitled to the tax credit applied
for.

WHEREFORE, the appealed decision is hereby affirmed,
without costs.

Concepcion, C.J., Reyes, Makalintal, Zaldivar, Ruiz Castro,
Fernando, Teehankee, Barredo, Villamor, and
Makasiar, JJ., concur.