COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. PRISCILA ESTATE, INC., AND THE COURT OF TAX APPEALS, RESPONDENTS.

REYES, J.B.L., J.:

Review of the decision of the Court of Tax Appeals in its case No. 334
ordering the petitioner, Commissioner of Internal Revenue to refund to the
respondent, Priscila Estate, Inc., a domestic corporation engaged in the
business of leasing real estate, the sum of P3,045.19, as overpaid income tax
for 1950.

The corporation duly filed its Income tax returns for the years 1949, 1950
and 1951. On 13 June 1952, however, It amended its income tax returns for 1951
and paid the tax corresponding to the assessment made by the petitioner on the
basis of the returns, as amended; and on 13 September 1952, the company claimed
a refund of P4,941.00 as overpaid income tax for the year 1950 for having
deducted from gross income only the sum of P6,013.85 instead of P39.673.25 as
its loss in the sale of a lot and building. Thereupon, the Commissioner of
Internal Revenue conducted an investigation of the company’s income tax returns
for 1949 through 1951 and, thereafter, granted a tax credit of P1,443.00 for
1950 but assessed on 3 November 1953 deficiency income taxes of P3,575.49 for
1949 and P22,166.10 for 1951.

The Priscila Estate, Inc. contested the deficiency assessments and when the
Commissioner of Internal Revenue refused to reconsider them, the former brought
suit to the tax court, which after trial, rendered the decision that in 1961,
the Commissioner elevated to this Supreme Court for review.

The first assignment of error refers to the allowance of a deduction in the
1949 income tax returns of the respondent corporation the amount of P11,237.35
representing the cost of a “barong-barong” (a make-shift building),situated at
the corner of Azcarraga Street and Rizal Avenue, Manila, which was demolished on
31 December 1949 and a new one built in its place. The petitioner claims that
the value of the demolished building should not be deducted from gross income
but added to the cost of the building replacing it because its demolition or
removal was to make way for the erection of another in its place.

The foregoing argument is erroneous inasmuch as the tax court found that the
removal of the “barong-barong”, instead of being voluntary, was forced upon the
corporation by the city engineer because the structure was a fire hazard; that
the rental income of the old building was about P3,730.00 per month, and that
the corporation had no funds but had to borrow, in order to construct a new
building. All these facts, taken together, belie any intention on the part of
the corporation to demolish the old building merely for the purpose of erecting
another in its place.

Since the demolished building was not compensated for by insurance or
otherwise, its loss should be charged off as a deduction from gross income.
(Sec. 30(2), Internal Revenue Code.)

The second to the fifth assignments of error pertain to depreciation.

Particularly contested by the petitioner is the basis for depreciation of
Building Priscila No, 3. This building, with an assessed value of P70,343.00 but
with a construction cost of P110,600.00, was acquired by the respondent
corporation from the spouses, Carlos Moran Sison and Priscila F. Sison, in
exchange for shares of stock. According to the petitioner, the basis for
computing the depreciation of |this building should be limited to the capital
invested, which is the assessed value. On the other hand, the respondent based
its computation on its construction cost, revaluing the property on this basis
by a board resolution in order to “give justice to the Sison spouses”. Since
this revaluation would import an obligation of the corporation to pay the Sison
spouses, as vendors, the difference between the assessed value and the revalued
construction cost as provided in resolution Exhibit F-l (otherwise the
revaluation would make no sense), the corporate investment would ultimately be
the construction cost (which is undisputed), and depreciation logically had to
be on that basis. That the revaluation may import additional profit to the
vendor spouses is a matter related to their own income tax, and not to that of
respondent corporation.

The Collector also questions the rates of depreciation which the tax court
applied to the other properties, consisting of store and office buildings,
houses, a garage, library books, furniture and fixtures and transportation
equipment.

Depreciation is a question of fact ^[1]and is “not measured by a theoretical
yardstick, but should be determined by a consideration of the actual facts x x
x.” (Landon vs. CIR of State of Kansas, 269 Fed. 433(1920), quoted in
Sec. 23.32, Mertens, Federal Income Taxation). The petitioner himself on page 26
of his appeal brief, asserts that “what consist of the depreciable amount (six)
is elusive and is a question of fact.”

Since the petitioner does not claim that the tax court, in applying certain
rates and basis to arrive at the allowed amounts of depreciation of the various
properties, was arbitrary or had abused its discretion, and since the Supreme
Court, before the Revised Rules, limited its review of decisions of the Court of
Tax Appeals to questions of law only (Sanchez vs. Commissioner of
Customs, 102 Phil., 37; Gutierrez vs. CTA, 101 Phil., 713), the
findings of the tax court on the depreciation of the several assets should not
be disturbed.

In the sixth and last assignment of error, the petitioner argues that the
refund to the respondent is barred by the two-year prescriptive period under
Section 306 of the Internal Revenue Code because the action for refund was filed
on 5 December 1956 while the respondent’s 1950 income tax was paid on 15 August
1951. The petitioner’s argument would have been tenable but for his failure to
plead prescription in a motion to dismiss or as a defense in his answer. Said
failure is deemed a waiver of the defense of prescription (Sec. 10, Rule 9,
Rules of Court).

Finding no reversible error in the decision under review, the same is hereby
affirmed. No costs.

Bengzon, C.J., Bautista Angelo, Concepcion, Barrera,
Paredes, Regala and Makalintal, JJ., concur.

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^[1] Cleveland House Brewing Co., 1 BTA
87; Walnut Creek Milling Co., 3 BTA 558; Norman B. Richardson, 9 BTA 875;
Bramptori Woolen Co., 18 BTA 1075, rev’d and remanded 45 F(2d) 327 (CCA 1st,
1930), on other issues; see Sec. 23.31, p. 42, Vol. 4, Law of Federal Income
Taxation by Mertens.