In an assessment for income tax, adding back the net loss carry over (NOLCO) in the year of loss to arrive at the adjusted taxable income is erroneous.

In arriving at the adjusted taxable income for the year 2003, the BIR added back the net operating loss carry-over (NOLCO) incurred in the same year. This is to recapture the tax benefit purportedly realized by the taxpayer in carrying this amount to the succeeding taxable year. The Court did not agree with this assessment. According to the Court, the BIR failed to prove that the taxpayer used its 2003 NOLCO in the succeeding year. Granting that the taxpayer actually deducted the 2003 net loss as NOLCO in the succeeding year 2004 and the said deduction is not proper as the taxpayer did not incur a net loss, the same can only be the subject of assessment, when it was claimed as deduction in the year 2004 and not in the year 2003. Hence, adding back the net loss to the taxpayer’s taxable income for 2003 is erroneous. (Philippine Aerospace Development Corporation vs. Commissioner of Internal Revenue, CTA Case No. 7830, December 11, 2012)