Fernandez Hermanos Vs Cir

 

FERNANDEZ HERMANOS vs CIR, G.R. No. L-21551, September !, 1"#" FAC$S%

The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized for the principal purpose of engaging in business as an "investment company" with main office at anila. !pon verification of the taxpayers income tax returns for the period in #uestion, the $ommissioner of  Intern Int ernal al %evenu %evenue e assess assessed ed agains againstt the taxpay taxpayer er the sums sums of &'(,)' &'(,)').* ).**, *, &''+,' &''+,'(.** (.**,, &'',+-.**, &,--.** and &'),)/'.** as alleged deficiency income taxes for the years '+/*, '+ '+/', /', '+/0, '+/0, '+ '+/( /( and and '+/ '+/), ), resp respect ectiv ivel ely. y. 1aid 1aid as asse sess ssme ment ntss were were the the resu result lt of alle allege ged d discrepancies found upon the examination and verification of the taxpayers income tax returns for the said years, summarized by the Tax $ourt in its decision of 2une '*, '+(. The Tax $ourt set aside the $ommissioners treatment as taxable income of certain increases in the taxpayers net worth. It found that3 For the year '+/*, respondent determined that petitioner had an increase in net worth in the sum of &(*,*/*.**, and for the year '+/', the sum of &',(-0.-/. These amounts were treated by respondent as taxable income of petitioner for said years. It appears that petitioner had an account with the anila Insurance $ompany, the records bearing on which were lost. 4hen its records were reconstituted the amount of &()+,-**.** was set up as its liability to the anila Insurance $ompany. It was discovered later that the correct liability was only ('+,/*.**, or a difference of &(*,*/*.**, so that the records were ad5usted so as to show the correct liability. The correction or ad5ustment was made in '+/*. %espondent contends that the reduction of petitioners liability to anila Insurance $ompany resulted in the increase of petitioners net worth wor th to the extent of &(*,*/*.** which is taxable. ISS&E% '(et(er or )ot t(e CIR *s +orre+t. HELD% No.

This is erroneous. The principle underlying the taxability of an increase in the net worth of a taxpayer rests on the theory that such suc h an increase in net worth, if unreported and not explained by the taxpayer, comes from income derived from a taxable source. 61ee &erez v. 7raneta, 8.%. 9o. :;+'+(, ay 0+, '+/< $oll. vs. %eyes, 8.%. 9os. :; ''/() = :;''//-, 9ov. 0/, '+/-.> In this case, the increase in the net worth of petitioner petitioner for '+/* to the extent of &(*,*/*.** was not the result of the receipt by it of taxable income. It was merely the outcome of the correction of an error in the entry in its boo?s relating to its indebtedness to the anila Insurance $ompany. The Income Tax :aw imposes a tax on income< it does not tax any or every increase in net worth whether or not derived from income. 1urely, the said sum of  &(*,*/*.** was not income to petitioner, and it was error for respondent to assess a deficiency income tax on said amount. The same holds true in the case of the alleged increase in net worth of petitioner for the year '+/' in the sum of &',(-0.-/. It appears that certain items 6all amounting to &',(-0.-/> remained in petitioners boo?s as outstanding liabilities of trade creditors. These accounts were discovered in '+/' as having been paid in prior years, so that the necessary ad5ustments were made to correct the errors. If there was an increase in net worth of the petitioner, the increase

 

in net worth was not the result of receipt by petitioner of taxable income." The $ommissioner advances no valid grounds in his brief for contesting the Tax $ourts findings. $ertainly, these increases in the taxpayers net worth were not taxable increases in net worth, as they were not the result of the receipt by it of unreported or unexplained taxable income, but were shown to be merely the result of the correction of errors in its entries in its boo?s relating to its indebt ind ebtedn edness esses es to certai certain n credit creditors ors,, whi which ch had bee been n errone erroneous ously ly overst overstate ated d or lis listed ted as outstanding when they had in fact been duly paid. The Tax $ourts action must be affirmed.