CIR v. LANCASTER

CIR v. LANCASTER PHILIPPINES, GR No.
183408, 2017-07-12
Facts:
Petitioner Commissioner of Internal Revenue (CIR) is authorized by law, among others, to investigate or
examine and, if necessary, issue assessments for deficiency taxes. On the other hand, respondent
Lancaster Philippines, Inc. (Lancaster) is a domestic corporation established in 1963 and is engaged in the
production, processing, and marketing of tobacco. In 1999, the Bureau of Internal Revenue (BIR) issued
Letter of Authority (LOA) No. 00012289 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) which cited Lancaster for: 1) overstatement of its purchases for the fiscal year April 1998
to March 1999; and 2) noncompliance with the generally accepted accounting principle of proper
matching of cost and revenue. 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 replied to the PAN contending, among other things, that for the past decades, it has used an
entire 'tobacco-cropping season' to determine its total purchases covering a one-year period from 1
October up to 30 September of the following year (as against its fiscal year which is from 1 April up to 31
March of the following year); that it has been adopting the 6-month timing difference to conform to the
matching concept (of cost and revenue); and that this has long been installed as part of the company's
system and consistently applied in its accounting books.[12] Invoking the same provisions of the law
cited in the assessment, i.e., Sections 43[13] and 45[14] of the National Internal Revenue Code (NIRC),
in conjunctio... n with Section 45[15] of Revenue Regulation No. 2, as amended, 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. Subsequently on 6 November
2002, Lancaster received from the BIR a final assessment notice (FAN),[16] captioned Formal Letter of
Demand and Audit Result/Assessment Notice LTAID II IT-98-00007, dated 11 October 2002, which
assessed Lancaster's deficiency income tax amounting to P11,496,770.18, as a consequence of the
disallowance of purchases claimed for the taxable year ending 31 March 1999. Lancaster duly proteste...
d[17] the FAN. There being no action taken by the Commissioner on its protest, Lancaster filed on 21
August 2003 a petition for review[18] before the CTA Division.
Issues:
I. THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT PETITIONER'S

REVENUE OFFICERS EXCEEDED THEIR AUTHORITY TO INVESTIGATE THE PERIOD NOT
COVERED BY THEIR LETTER OF AUTHORITY.
II. THE COURT OF TAX APPEALS EN BANC ERRED IN ORDERING PETITIONER TO CANCEL
AND WITHDRAW THE DEFICIENCY ASSESSMENT ISSUED AGAINST RESPONDENT.
Ruling:
I. The CTA EN BANC did not err when it ruled that the BIR revenue officers had exceeded their
authority. 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. We agree. The audit process normally commences with the issuance by the CIR of a Letter of
Authority. The LOA gives notice to the taxpayer that it is under investigation for possible deficiency tax
assessment; at the same time it authorizes or empowers a designated revenue officer to examine, verify,
and scrutinize a taxpayer's books and records, in relation to internal revenue tax liabilities for a particular
period.
II. The CTA En Banc correctly sustained the order cancelling and withdrawing the deficiency tax
assessment. To recall, the assessment against Lancaster for deficiency income tax stemmed from the
disallowance of its February and March 1998 purchases which Lancaster posted in its fiscal year ending
on 31 March 1999 (FY 1999) instead of the fiscal year ending on 31 March 1998 (FY 1998).
In sum, and considering the foregoing premises, we find no cogent reason to overturn the assailed
decision and resolution of the CTA. As the CTA decreed, Assessment Notice LTAID II IT-98-00007,
dated 11 October 2002, in the amount of P6,466,065.50 for deficiency income tax should be cancelled
and set aside. The assessment is void for being issued without valid authority. Furthermore, there is no
legal justification for the disallowance of Lancaster's expenses for the purchase of tobacco in February
and March 1998. WHEREFORE, the petition is DENIED.

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CIR v. LANCASTER PHILIPPINES, GR No.

I. THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT PETITIONER'S

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