BASILAN ESTATES, INC. vs.

THE COMMISSIONER OF INTERNAL REVENUE

FACTS:
A Philippine corporation engaged in the coconut industry, Basilan Estates, Inc., with principal
offices in Basilan City, filed on March 24, 1954 its income tax returns for 1953 and paid an
income tax of P8,028.
The CIR, per examiners' report of February 19, 1959, assessed Basilan Estates, Inc., a
deficiency income tax of P3,912 for 1953 and P86,876.85 as 25% surtax on unreasonably
accumulated profits as of 1953 pursuant to Section 25 of the Tax Code.

What happened here was this:

Basilan Estates, Inc. claimed deductions for the depreciation of its assets up to 1949 on the
basis of their acquisition cost. As of January 1, 1950 it changed the depreciable value of said
assets by increasing it to conform with the increase in cost for their replacement.
From 1950 to 1953 it deducted from gross income the value of depreciation computed on the
reappraised value.
In 1953, the year involved in this case, taxpayer claimed the following depreciation deduction:

CIR found that the reappraised assets depreciated in 1953 were the same ones upon which
depreciation was claimed in 1952. And for the year 1952, the Commissioner had already
determined, with taxpayer's concurrence, the depreciation allowable on said assets to be
P36,842.04, computed on their acquisition cost at rates fixed by the taxpayer. Hence, the
Commissioner pegged the deductible depreciation for 1953 on the same old assets at
P36,842.04 and disallowed the excess thereof in the amount of P10,500.49.
On non-payment of the assessed amount, a warrant of distraint and levy was issued but the
same was not executed because Basilan Estates, Inc. succeeded in getting the Deputy-CIR to
order the Director of the district in Zamboanga City to hold execution and maintain constructive
embargo instead.
Because of its refusal to waive the period of prescription, Basilans request for reinvestigation
was not given due course, and on December 2, 1960, notice was served the corporation that
the warrant of distraint and levy would be executed.
December 20, 1960: Basilan Estates, Inc. filed before the CTA a petition for review of the
Commissioner's assessment, alleging the ff:
1. prescription of the period for assessment and collection
2. error in disallowing claimed depreciations, travelling and miscellaneous expenses

3. error in finding the existence of unreasonably accumulated profits and the imposition of 25%
surtax thereon.
October 31, 1963, the CTA found that there was no prescription and affirmed the deficiency
assessment.
Basilan appealed to the SC.
ISSUE:
Relevant to syllabus topic: Depreciation
W/N depreciation shall be determined on the acquisition cost or on the reappraised value of the
assets. On the Reappraised Value.
HELD:
Depreciation is the gradual diminution in the useful value of tangible property resulting from
wear and tear and normal obsolescense. The term is also applied to amortization of the value of
intangible assets, the use of which in the trade or business is definitely limited in duration.
Depreciation commences with the acquisition of the property and its owner is not bound to see
his property gradually waste, without making provision out of earnings for its replacement. It is
entitled to see that from earnings the value of the property invested is kept unimpaired, so that
at the end of any given term of years, the original investment remains as it was in the beginning.
It is not only the right of a company to make such a provision, but it is its duty to its bond and
stockholders, and, in the case of a public service corporation, at least, its plain duty to the
public.
Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting
assets free from income tax. Precisely, Section 30 (f) (1) allows a deduction from gross income
for depreciation but limits the recovery to the capital invested in the asset being depreciated.
The income tax law does not authorize the depreciation of an asset beyond its acquisition
cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason
is that deductions from gross income are privileges, not matters of right. They are not created by
implication but upon clear expression in the law.
Moreover, the recovery, free of income tax, of an amount more than the invested capital in an
asset will transgress the underlying purpose of a depreciation allowance. For then what the
taxpayer would recover will be, not only the acquisition cost, but also some profit. Recovery in
due time thru depreciation of investment made is the philosophy behind depreciation allowance;
the idea of profit on the investment made has never been the underlying reason for the
allowance of a deduction for depreciation.
Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has
no justification in the law. The determination, therefore, of the CIR disallowing said amount,
affirmed by the CTA, is correct.
(There were other issues but I only focused on depreciation.)