An undeclared income cannot be imputed from an alleged unaccounted expenses.

Among the assessments made by the BIR against the taxpayer is an alleged undeclared income from an alleged unaccounted expenses. In arriving at the alleged unaccounted expenses, the BIR compared the expenses for rent, professional fee and brokerage as reflected in the taxpayer’s income tax return (ITR) and financial statements (FS) with the same types of expenses subjected to withholding taxes as reported in the taxpayer’s alphabetical list (aplhalist). Since the amounts per alphalist were higher than the amounts per ITR/FS, the BIR inferred that there was undeclared income. In ruling against the BIR, the Court noted that the imputation of alleged undeclared income is based on a mere presumption that since there were undeclared expanses, there were likewise undeclared income corresponding to these expenses. Even if these alleged unaccounted expenses are to be considered as income, the same may be offset by recording the equivalent payments as expenses. Hence, no taxable income will result from the said transactions. (Philippine Aerospace Development Corporation vs. Commissioner of Internal Revenue, CTA Case No. 7830, December 11, 2012)