Manila Mandarin Hotels, Inc. vs. CIR

CTA Case No. 5046 dated March 24, 1997


Petitioner received an assessment notice demanding the payment of deficiency value-added and percentage taxes. Petitioner protested abd alleged that the tax deficiencies arose due to the imposition of the tax on deposits made by its clients for the use of the hotel facilities. Petitioner contends that these deposits, if not applied against hotel bills is not subject to percentage tax because these deposits partake of the nature of a security deposit which cannot be classified as income.


Whether deposits made by petitioner’s hotel clients should not be treated as part of Its gross income.


YES. Under the realization principle, revenue is generally recognized when both of the following conditions are met: (a) the earning process is complete or virtually complete, and (b) an exchange has taken place. This principle requires that revenue must be earned before It is recorded. Thus, the amounts received in advance are not treated as revenue of the period in which they are received but as revenue of the future period or periods in which they are earned. These amounts are carried as unearned revenue, that is, liabilities to transfer goods or future until the earning render services in the process is complete.

As explained by the witness Ms. Fernando, its collection is in the nature of a security deposit to ensure that the other party will perform his end of the contract. It is only upon the use of the reserved facilities or the default of the reserving guest to cancel the reservation on time that the deposit is clearly convertible to revenues. Since the deposits are payment for future services it cannot be treated as part of its gross income unti the earning process Is complete.