(with Resolution of June 11, 1965)

Lino Gutierrez was primarily engaged
in the business of leasing real property for which he paid real estate broker’s
privilege tax. He filed his income tax returns for the years 1951,1952, 1953 and 1954 on the following
dates:

1951	March 1, 1952
1962	February 28, 1958
1953	February 22, 1954
1954	February 23, 1955

and paid the corresponding tax
declared therein.

On July 10, 1956 the Commissioner
(formerly Collector) of Internal Revenue assessed against Gutierrez the
following deficiency income tax:

1951	P1,400.00
1952	672.00
1953	5,161.00
1954	4,608.00
	_________
Total	P11,841.00

The above deficiency tax came
about by the disallowance of deductions from gross income representing
depreciation, expenses Gutierrez allegedly incurred in carrying on his business,
and the addition to gross income of receipts which he did not report in his
income tax returns. The disallowed business expenses which were considered by
the Commissioner either as personal or capital expenditures consisted
of:

He also claimed the depreciation
of his residence as follows:

The following are the items of
income which Gutierrez did not declare in his income tax returns:

The
overstatement of purchase price of real estate to the sale of two pieces of
property in 1953. In Gutierrez bought a parcel of
land situated along Padre Faura St. in
Manila for P35,000.00. Sometime in 1953, he sold the same for P30,400.00. Expenses of sale amounted to P631.80. In his return
he claimed a loss of P5,231.80^[1] However,
the Commissioner, concluding that said property was bought in Japanese military
notes, converted the buying price to its equivalent in Philippine Commonwealth
peso by the use of the Ballantyne Scale of Values. At
P1.30 Japanese military notes per Commonwealth peso, the acquisition cost of
P35,000.00 Japanese military notes was valued at P26,823.08 Philippine
Commonwealth peso. Accordingly, the Commissioner determined a profit of P3,476.92 after restoring to Gutierrez’ gross income the
P5,231.80 deduction for loss.

In another transaction, Gutierrez
sold a piece of land for P1,200.00. Alleging that said
property was purchased for P1,200.00, he reported no
profit thereunder. However, after verifying the deed
of acquisition, the Commissioner discovered the purchase price to be only
P800.00. Consequently, he determined a profit of P400.00 which was added to the
gross income for 1953.

The understatement of profit from
the sale of real estate may be explained thus: In 1953 and 1954 Gutierrez sold
four other properties upon which he made substantial profits.^[2] Convinced that said properties were capital
assets, he declared only 50% of the profits from their sale. However, treating
said properties as ordinary assets (as property held and used by Gutierrez in
his business), the Commissioner taxed 100% of the profits from their disposition
pursuant to Section 35 of the Tax Code.

Having unsuccessfully questioned
the legality and correctness of the aforesaid assessment, Gutierrez instituted
on February 17, 1958 an appeal to the Court of Tax Appeals. Later, on February
21, 1958, the Commissioner issued a warrant of distraint and levy on one of Gutierrez’ real properties but
desisted from enforcing the same when Gutierrez filed a bond to assure payment
of his tax liability.

In a decision dated January 28,
1962, the Court of Tax Appeals upheld in toto the
assessment of the Commissioner of Internal Revenue. Hence,
this appeal.

On October 18, 1962 Lino Gutierrez died and he was substituted by Andrea C.
Vda. de Gutierrez, Antonio D. Gutierrez, Santiago D.
Gutierrez, Guillermo D. Gutierrez and Thomas D. Gutierrez, his heirs, as party
petitioners.

The issues are: (1) Are the
taxpayer’s aforementioned claims for deduction proper and allowable? (2) May the
Ballantyne Scale of Values be applied in determining
the acquisition cost in 1943 of a real property sold in 1953 for income tax
purposes? (3) Are real properties used in the trade or business of the taxpayer
capital or ordinary assets? (4) Has the right of the Commissioner of Internal
Revenue to collect the deficiency income tax for the years 1951 and 1952
prescribed? (5) Has the right of the Commissioner of Internal Revenue to collect
by distraint and levy the deficiency income tax for
1964 prescribed? If not, may the taxpayer’s real property be distrained and levied upon, without first exhausting his
personal property?

We come first to the question
whether or not the deductions claimed by Gutierrez are allowable. Section 30 (a)
of the Tax Code allows business expenses to be deducted from gross income. We
quote:

Sec.
30.
Deductions from, gross income.—In computing net income
there shall be allowed as deductions—

“(a)
Expenses:

“(1) In general.—AM the ordinary
and necessary expenses paid or Incurred during the taxable year in carrying on
any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; traveling expenses while
away from home in the pursuit of a trade or business; and rentals or other
payments required to he made as a condition to the continued use or possession,
for the purposes of the trade or business, or property to which the taxpayer has
not taken or is not taking title of in which he has no
equity.”

To be deductible, therefore, an
expense must be (1) ordinary and necessary; (2) paid or incurred within the
taxable year; and, (3) paid or incurred in carrying on a trade or business.^[3]

The transportation expenses which
petitioner incurred to attend the funeral of his friends and the cost of
admission tickets to operas were expenses relative to his personal and social
activities rather than to his business of leasing real estate. Likewise, the
procurement and installation of an Iron door to hi3 residence is purely a
personal expense. Personal, living, or family expenses are not deductible.^[4]

On the other hand, the cost of
furniture given by the taxpayer as commission in furtherance of a business
transaction, the expenses incurred in attending the National Convention of
Filipino Businessmen, luncheon meeting and cruise to Corregidor of the Homeowners’ Association, were shown to
have been made in the pursuit of his business. Commissions given in
consideration for bringing about a profitable transaction are part of the cost
of the business transaction and are deductible.

The record shows that Gutierrez
was an officer of the Junior Chamber of Commerce which sponsored the National
Convention of Filipino Businessmen. He was also the president of the Homeowners’
Association, an organization established by those engaged in the real estate
trade. Having proved that his membership thereof and activities in connection
therewith were solely to enhance his business, the expenses incurred thereunder are deductible as ordinary and necessary business
expenses.

With respect to the taxpayer’s
claim for deduction for car expenses, salary of his driver and car depreciation,
one-third of the same was disallowed by the Commissioner on the ground that the
taxpayer used his car and driver both for personal and business purposes. There
is no clear showing, however, that the car was devoted more for the taxpayer’s
business than for his personal needs.^[5]
According to the evidence, the taxpayer’s car was utilized both for personal and
business needs. We therefore find it reasonable to allow as deduction one-half
of the driver’s salary, car expenses and depreciation.

The electrical supplies, paint,
lumber, plumbing, cement, tiles, gravel, masonry and labor used to repair the
taxpayer’s rental apartments, did not increase the value of such apartments, or
prolong their life. They merely kept the apartments in an ordinary operating
condition. Hence, the expenses incurred therefor are
deductible as necessary expenditures for the maintenance of the taxpayer’s
business.

Similarly, the litigation
expenses defrayed by Gutierrez to collect apartment rentals and to eject
delinquent tenants are ordinary and necessary expenses in pursuing his business.
It is routinary and necessary for one in the leasing
business to collect rentals and to eject tenants who refuse to pay their
accounts.

The following are not deductible
business expenses but should be integrated into the cost of the capital assets
for which they were incurred and depreciated yearly: (1) Expenses in watching
over laborers in construction work. Watching over laborers is an activity more
akin to the construction work than to running the taxpayer’s business. Hence,
the expenses incurred therefor should form part of the
construction cost. (2) Real estate tax which remained unpaid by the former owner
of Gutierrez’ rental property but which the latter paid, is an additional cost
to acquire such property and ought therefore to be treated as part of the
property’s purchase price. (3) The iron bars, Venetian blind and water pump
augmented the value of the apartments where they were installed. Their cost is
not a maintenance charge, ^[6] hence, not
deductible.^[7] (4) Expenses for the relocation, survey and
registration of property tend to strengthen title over the property, hence, they
should be considered as addition to the cost of such property. (5) The set of
“Comments on the Rules of Court” having a life span of more than one year should
be depreciated ratably during its whole life span instead of its total cost
being deducted in one year.

Coming to the claim for
depreciation of Gutierrez’ residence, we find the same not deductible. A
taxpayer may deduct from gross income a reasonable allowance for deterioration
of property arising out of its use or employment in business or trade.^[8] Gutierrez’ residence was not used in his
trade or business.

Gutierrez also claimed for
deduction the fines and penalties which he paid for late payment of taxes. While
Section 30 allows taxes to be deducted from gross income, it does not
specifically allow fines and penalties to be so deducted. Deductions from gross
income are matters of legislative grace; what is not expressly granted by
Congress is withheld. Moreover, when acts arc condemned by law and their
commission is made punishable by fines or forfeitures, to allow them to be
deducted from the wrongdoer’s gross income, reduces, and so in part defeats, the
prescribed punishment. ^[9]

As regards the
alms to an indigent family and various individuals, contributions to Lydia Yamson and G. Trinidad and a donation consisting of
officers’ jewels and aprons to Biak-na-Bato Lodge No.
7, the same are not deductible from gross income inasmuch as their recipients
have not been shown to be among those specified by law. Contributions are deductible
when given to the Government of the Philippines, or any of its political
subdivisions for exclusively public purposes, to domestic corporations or
associations organized and operated exclusively for religious, charitable,
scientific, athletic, cultural or educational purposes, or for the
rehabilitation of veterans, or to societies for the prevention of cruelty to
children or animals, no part of the net income of which inures to the benefit of
any private stockholder or individual.^[10]

We come to the question whether
or not the Ballantyne Scale of Values can be applied
to tax cases.

Sometime in 1943 Gutierrez bought
a piece of real estate in Manila for a price of P35.000.00. In
1953 he sold said property for P30.400.00, thereby incurring a loss which he
claimed as deduction in his income tax return for 1953. The Commissioner of
Internal Revenue, convinced that the purchase price of the property in 1943 was
in Japanese military notes, converted said purchase price into Philippine
Commonwealth pesos by the use of the Ballantyne Scale
of Values. As a result, the Commissioner found Gutierrez to have profited,
instead of lost in the sale.

Firstly, Gutierrez maintains that
the purchase price was paid for in Commonwealth pesos. On the other hand the
Commissioner insists that inasmuch as the prevailing currency in the City of
Manila in 1943 was the Japanese
military issue, the transaction could have been in said military notes. The
evidence offered by Gutierrez, consisting of the testimony of his son to the
effect that it was he who carried the bundle of Commonwealth pesos and Japanese
military notes when his father purchased the property, did not convince the Tax
Court. No cogent reason to alter the court a quo’s finding of fact in
this regard has been given. There is no definite showing that Gutierrez paid for
the property in Commonwealth pesos. Considering that in 1943 the medium of
exchange in Manila was the Japanese military notes,
the use of which the Japanese Military Government enforced with stringent
measures, we are inclined to concur with the finding that the purchase price was
in Japanese military notes. We are specifically mindful of the fact that
Gutierrez sold the property in 1953 for only P30,400.00
at a time when the price of real estate in the City of
Manila was much greater than in
1943.

It is further contended by
Gutierrez that the money he used to pay for the purchase of the property in
question came from the proceeds of merchandise acquired prior to World War II
but which he sold after Manila was occupied by the Japanese military forces,
hence the purchase price should be deemed to have been made in Commonwealth
pesos inasmuch as the aforesaid merchandise was purchased in Commonwealth pesos.
This contention, if true, strengthens our conclusion that the real estate in
question was bought in Japanese military notes. For, at the time Gutierrez sold
his merchandise, the prevailing currency in the City of
Manila was the Japanese military money.
Consequently, the proceeds therefrom, which was used
to buy the real estate in question, were Japanese military
notes.

Gutierrez assails the use of the
Ballantyne Scale of Values in converting the purchase
price of the real estate in question from Japanese military notes to Philippine
Commonwealth pesos on the ground that (1) the Ballantyne Scale of Values was intended only for
transactions entered into by parties voluntarily during the Japanese occupation,
wherein a portion of the contract was left unperformed until liberation of the
Philippines by the American^; (2) that such Scale of Values cannot be the basis
of a tax, for it is not a law.

In determining the gain or loss
from the sale of property the purchase price and the selling price ought to be
in the same currency. Since in this case the purchase price was in Japanese
military notes and the selling price was in our present legal tender, the
Japanese military notes should be converted to the present currency. Since the
only standard scale recognized by courts for the purpose is the Ballantyne Scale of Values, we find it compelling to use
such table of values rather than adopt an arbitrary scale. It may not be amiss
to state in this connection that the Ballantyne Scale
of Values is not being used herein as the authority to impose the tax, but only
as a medium of computing the tax base upon which the tax is to be
imposed.

It is furthermore proffered by
the taxpayer that in determining gain or loss, the real value of the
Commonwealth peso at the time the property was purchased and the value of the
Republic peso at the time the same property was sold should be considered. The
Commonwealth peso and the Republic peso are the same currency, with the same
intrinsic value, sanctioned by the same authorities. Both are legal tender and
accepted at face value regardless of fluctuation in their buying power. The 1941
Commonwealth peso when used to buy in 1953 or in 1965 is accorded the same
value: one peso.

In his income tax returns for
1953 and 1954, Gutierrez reported only 50% of profits he realized from the sale
of real properties during the years 1953 and 1954 on the ground that said
properties were capital assets. Profits from the sale of capital assets are
taxable to the extent of 50% thereof pursuant to Section 34 of the Tax
Code.

Section 34
provides:

“Sec.
34. Capital
gains and losses.—(a) Definitions.—As used in this
title—

“(1) Capital assets.—The term
‘capital assets’ means property held by the taxpayer (whether or not connected
with his trade or business), but does not include stock in trade of the taxpayer
or other 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, or property held by
the taxpayer primarily for sale to customers in the ordinary course of his trade
or business, or property, used in the trade or business, of a character which is
subject to the allowance for depreciation provided in subsection (f) of section
thirty; or real property used in the trade or business of the
taxpayer.

* * * * * *

(b) Percentage taken into
account.—In the case of a taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized’ upon the sale or exchange of capital
asset shall be taken Into account in computing net capital gain, net capital
loss, and net income:

“(1) One hundred per centum if
the capital asset has been held for not more than twelve
months;

“(2) Fifty per centum if the
capital asset has been held for more than twelve
months.”

Section 34, before it was amended
by Republic Act 82 in 1947, considered as capital assets real property used in
the trade or business of a taxpayer. However, with the passage of Republic Act
82, Congress classified ‘real property used in the trade or business of the
taxpayer” as ordinary asset. The explanatory note to Republic Act 82 says: “. .
. the words ‘or real property used in the trade or business of the taxpayer’
have been included among the non-capital assets. This has the effect of
withdrawing the gain or loss from the sale or exchange of real property used in
the trade or business of the taxpayer from the operation of the capital gains
and losses provisions. As such real property is used in the trade or business of
the taxpayer, it is logical that the gain or loss from the sale or exchange
thereof should be treated as ordinary income or loss.” ^[11] Accordingly, the real estate, admittedly
used by Gutierrez in his business, which he sold in 1953 and 1964 should be
treated as ordinary assets and the gain from the sale thereof, as ordinary gain,
hence, fully taxable.^[12]

With regard to the issue of the
prescription of the Commissioner’s right to collect deficiency tax for 1951 and
1952, Gutierrez claims that the counting of the 5- year period to collect income
tax should start from the time the income tax returns were filed. He, therefore,
urges, us to declare the Commissioner’s right to collect the deficiency tax for
1951 and 1952 to have prescribed, the income tax returns for 1951 and 1952
having been filed in March 1952 and on February 28, 1953, respectively, and the
action to collect the tax having been instituted on March 5, 1958 when the
Commissioner filed his answer to the petitioner for review in C.T.A. Case No.
504. On the other hand, the Commissioner argues that the running of the
prescriptive period to collect commences from the time of assessment. Inasmuch
as the tax for 1951 and 1952 were assessed only on July
10, 1956,
Jess than five years lapsed when he filed his answer on March 5,
1958.

The period of limitation to
collect income tax is counted from the assessment of the tax as provided for in
paragraph (c) of Section 332 quoted below:

“Sec. 332(e) Where the assessment
of any internal-revenue tax has been made with the period of limitation above
prescribed such tax may be collected by distraint or
levy or by a proceeding in court, but only if begin (1) within five years after
the assessment of the tax, or (21 prior to the expiration of any period for
collection agreed upon in writing by the Collector of Internal Revenue and the
taxpayer before the expiration of such five-year period. The period so agreed
upon may be extended by subsequent agreements in writing made before the
expiration of the period previously agreed
upon.”

Inasmuch as the assessment for
deficiency income tax was made on July 10,
1956
which is 7 months and 25 days prior to the action for collection, the right of
the Commissioner to collect such tax has not prescribed.

The next issue relates to the
prescription of the right of the Commissioner of Internal Revenue to collect the
deficiency tax for 1954 by distraint and
levy.

The pertinent provision of the
Tax Code states:

Sec. 51 (c) Refusal or neglect to
make returns; fraudulent returns, etc.—In cases of refusal oil neglected to make
a return and in cases of erroneous, false, or fraudulent returns, the Collector
of Internal Revenue shall, upon the discovery thereof at any time within three
years after said return is due, or has been made, make a return upon information
obtained as provided for in this code or by existing law, or require the
necessary corrections to be made, and the assessment made by the Collector of
Internal Revenue thereon shall be paid by such person or corporation immediately
upon notification of the amount of such
assessment.

On February 23,
1955
Gutierrez filed his income tax return for 1954 and on February 24,
1958 the
Commissioner of Internal Revenue issued a warrant of distraint and levy to collect the tax due thereunder. Gutierrez contends that the Commissioner’s right
to issue said warrant is barred, for the same was issued more than 3 years from
the time he filed his income tax return. On the other hand, the Commissioner of
Internal Revenue maintains that his right did not lapse inasmuch as from the
last day prescribed by law for the filing of the 1954 return to the date when he
issued the warrant of distraint and levy less than 3
years passed. The question now is: should the counting of the prescriptive
period commence from the actual filing of the return or from the last day
prescribed by law for the filing thereof?

We observe that Section 51 (d)
speaks of erroneous, false or fraudulent returns and refusal or neglect of the
taxpayer to file a return. It also provides for two dates from which to count
the three-year prescriptive period, namely, the date when the return is
due and the date the return has been made. We are inclined to
conclude that the date when the return is due refers to cases where the
taxpayer refused or neglected to file a return, and the date when the return
has been made refers to instances where the taxpayer filed erroneous, false
or fraudulent returns. Since Gutierrez filed an income tax return, the
three-year prescriptive period should be counted from the time he filed such
return. From February 23,
1955 when
the income tax return for 1954 was filed, to February 24,
1958,
when the warrant of distraint and levy was issued, 3
years and 2 days elapsed. The right of the Commissioner to issue said warrant of
distraint and levy having lapsed by two days, the
warrant issued is null and void.

The above finding has made
academic the question of whether or not the warrant of distraint and levy can be enforced against the taxpayer’s
real property without first exhausting his personal
properties.

In resume, the tax liability of
Lino Gutierrez 1951, 1952, 1953 and 1954 may be
computed as follows:

Wherefore, the decision appealed
from is modified and Lino Gutierrez and/or his heirs,
namely, Andrea C, Vda. de
Gutierrez, Antonio D. Gutierrez, Santiago D. Gutierrez, Guillermo D. Gutierrez
and Tomas D. Gutierrez, are ordered to pay the sums of P1,687.00, P848.00,
P5,374.00, and P4,020.00, as deficiency income tax for the years 1951,1952,1953
1954, respectively, or a total of P11,929.00, plus the statutory penalties in
case of delinquency. No costs. So
ordered.

Bengzon, C. J., Bautista Angelo, Concepcion, Reyes, J. B. L., Barrera, Paredes, Dizon, Makalintal, and Zaldivar,
JJ., concur.

^[1] P35,000
plus P651.80, minus P30,400.00.

^[2] P11,607.50 in 1953 and P10,888.47 in 1954.

^[3] Collector of Internal Revenue
vs. Philippine Education Co., 99 Phil.,319; 54 Off.
Gaz.,
2499.

^[4] Section 31 (a) (1), National
Internal Revenue Code.

^[5] Collector of Internal Revenue
vs. Jamir, L-16552, March 20,
1962.

^[6] Alhambra Cigar & Cigarette
Mfg. Co. vs. Collector of Internal Revenue, L-12026, May 29,
1959.

^[7] Section 30 (a) (2), National
Internal Revenue Code.

^[8] Section 30 (f) (1), National
Internal Revenue Code.

^[9] Jerry Rossman Corporation vs. Commissioner of Internal Revenue,
175 F 2d 711, 713.

^[10] Section 30 (h), National
Internal Revenue Code.

^[11] See Montejo, Cirilo G., National
Internal Revenue Code Annotated, pp. 125-126.

^[12] Section 30 (b), National
Internal Revenue Code; Collector of Internal Revenue vs. Bautista, L-12250, May
27, 1950.