September 20, 1990
BIR RULING NO. 184-90
30 169-84 184-90
Gentlemen :
This refers to your letter dated August 20, 1990 requesting in effect a ruling confirming your
opinion that liquidated damages to be paid to you by Intel Philippines Mfg., Inc. for breach of
contract is exempt from income tax. cdasia
It is represented that on May 20, 1983, Intel Phils. Mfg., Inc., entered into a contract of lease
with you (lessor) whereby it was agreed, among others, that the lessee will construct a 3 to 4storey building on your land; that the lessee failed to comply with the said undertaking; and that
you and the aforenamed lessee agreed to a proposed amended contract of lease whereby it was
agreed that you will be paid liquidated damages for actual and compensating damages you
suffered as a result of the aforementioned breach of contract.
In reply, please be informed that damages from a breach of contract constitute taxable income to
the recipient thereof in the year received only to the extent that such damages constitute a loss of
anticipated profits and non-taxable to the extent that the same represent a return of capital or
investment. (BIR Ruling dated September 8, 1954)
Such being the case, and since the liquidated damages to be paid to you by Intel Philippines
Mfg., Inc. for the breach of your contract of lease do not represent a return of capital or
investment but constitute a loss of anticipated profits, they are therefore, considered taxable
income in the year received. Accordingly, your request for exemption has to be, as it is hereby
denied for lack of legal basis. cdtai
Very truly yours,
(SGD.) JOSE U. ONG
Commissioner
