ALHAMBRA CIGAR and CIGARETTE MANUFACTURING COMPANY vs.

CIR FACTS: Alhambra Cigar, is a corporation duly organized and existing under the laws of the Philippines, with principal office at 31 Tayuman street, Tondo, Manila; In the petition for review it was contended that the CTA, in affirming the action taken by CIR , erred: (issues) 1. In holding that A. P. Kuenzle and H.A. Streiff who were the President and Vice-President, respectively, of the petitioner-appellant, were entitled to a salary of only P6,000.00 each year, for 1954, 1955, 1956 and 1957. 2. The bonus equal to the reduced bonus of W. Eggmann for each of said years; 3. In disallowing, as deductions, all the directors' fees and commissions paid by the petitionerappellant to A.P. Kuenzle and H.A. Streiff; INCIDENTS: 1. Under the category of salaries, officers of the fixed annual compensation of A. P. Kuenzle and H. A. Streiff in the amount of P15,000.00 each "the CIR allowed for each of them a salary of only P6,000.00 and disallow the balance of P9,000.00, or a total disallowance of P18,00.0,0 for both of them, for each of the years in question. 2. Under that of the bonus, officers of the amount under such category paid to the above gentlemen for the year 1954 of P14,750.00 each, "the CIR allowed each of them a bonus of only P5,850.00, and disallowed the balance of P8,900.00 or a total disallowance of P17,800.00 for both of 7 them." For the year 1955, the bonus being paid, once again, amounting to P14,750.00 to each of them, "the CIR allowed for each of them, a bonus of only P7,000.00, and disallowed the balance of P7,750.00 8 each, or a total disallowance of P15,500.00 for both of them." For the year 1956, again the amount, not suffering any change for each, "the CIR allowed for each of them a bonus of only P5,500.00 and disallowed the balance of P9,250.00 each, or a total disallowance of P18,500.00 for both of 9 them." Lastly, for the year 1957, of a similar amount payable to each in the concept of bonus, "the CIR allowed for each of them a bonus of only P6,500.00, and disallowed the balance of P8,250.00 each, or a total disallowance of P16,500.00 for both of them 3. As to the deduction in the concept of commissions to managers, the brief for the petitioner appellant states: "The commissions paid by the petitioner-appellant to A. P. Kuenzle and H. A. Streiff in the amount of P13,607.61 each in 1954, or a total of P27,215.22 for both of them; P14,097.62 each in 1955, or a total of P28,195.24 for both of them; P13,180.87 each in 1956, or a total of P26,361.74 for both of them; and P13,144.29 each in 1957, or a total of P26,288.48 for both of them, were entirely disallowed by the respondent-appellee. HELD: In No. 1 and 2. As previously held in the same case in Alhambra Cigar and Cigarette Manufacturing Company v. Coll. of Int. Rev. CTA No. 142 January 31, 1957, this Court held that considering the nature of the services performed by Messrs. Kuenzle and Streiff the salary of P6,000.00 paid to each of them was reasonable and, therefore, deductions is ordinary and necessary business expense. Moreover, upon the evidence of record, we find no justification to reverse or modify the decision of respondent with respect to the disallowance of a portion of the salaries and bonuses paid to Messrs. Kuenzle and Streiff. Petitioner seeks to justify the increase in the salaries of Messrs. Kuenzle and Streiff on the ground of increased costs of living. The said officers of petitioner are, however, non-residents of the Philippines. 3. As to commissions and directors' fees, CTA held that in connection with the commissions paid to Messrs. Kuenzle and Streiff there is no evidence of any particular service rendered by them to petitioner to warrant payment of commissions. Counsel for petitioner sought to prove the various types of services performed by said officers, but the services mentioned are those for which they have been more than adequately compensated in the form of salaries and bonuses. Moreover, hat the question thus involved is inherently factual, appears to be undeniable. This Court is bound by the finding of facts of the CTA, especially so that the evidence in support thereof is more than substantial, only questions of law thus being left open to it for determination. Without ignoring this various factors which petitioner-appellant would have this Court consider in passing upon the determination made by the CTA but with full recognition of the fact that the two officials were nonresidents, it cannot be said that it committed the alleged errors, calling for the interposition of the corrective authority of this Court.

PHIL FIBER PROCESSING CO. VS. COMMISSIONER FACTS: Phil Fiber is a domestic corp engaged in the manufacture of jute bags and sacks with office at Araneta Enterprises Bldng, Cubao, while its factory is located in Negros Occidental. In 1951 and 1960, PhilFiber file ITR with net income of P177,307.64 and P305,609.90. In 1961, the declared a loss of P175, 591.90 However, upon investigation, it was found that the ff items are not deductible or excluded from the petitioners gross income: 1. Commission expenses of P348,997 condoned by PNB in 1961. 2. Bad debts of P72,299.07 in 1959. 3. Unreprted interest income from Financial Corp of the Phil: (a) 1959: 7k; (b) 1960: 5k; (c) 1961: 5k. 4. Representation expenses of 24,000 in 1961. Hence, Commissioner assessed and demanded an amount of P86,497. ISSUES: 1. WON Commission expenses but which were condones by PNB in 1961 constitute income derived from source whatsoever. 2. WON Comm is justified in disallowing deduction from Phil Fibers gross income in 1959 for bad debts written off in the same year. 3. WON petitioner has unreported interest income from sister company Financial Corp of Phil. HELD: 1. Phil Fiber is indebted to PNB for P475,900 from 1955 for trade acceptances wherein the bank charged 1 Commission expenses from petitioner. Such debts was condoned by the bank reducing the petitioners principal obligation to P2.2M. But the petitioner failed to declare part of the income with regards to the condoned indebtedness in sum of P348k. Phil Fibers contentions with regard to issue No. 1:

A. As a defense, Phil Fiber contended that it was a gift to benefit the debtor, and as the rule need not be included in the gross income. However, the Court is not persuaded because of the ff reasons: a. It is unlikely that the bank intend to make a gift to one of its borrowers b. Condonation is not without any consideration, as it is subject to a condition, that it will take effect only after the applicant be required to pay the P356,470. B. Also, as a defense, Phil Fiber contends that assuming that the condoned indebtedness is an income derived from whatever sources, the same cannot be considered as income in 1961 because the cancellation of its indebtedness, which is conditional, took effect only in January 1962 or when the petitioner paid the its monetary obligation to the PNB. But the Court again is not persuaded because: a. the said condonation was accepted by the petitioner when on Dec 31, 1961, it caused to be recorded in its book of accounts. b. The method employed by the petitioner in determining its income is ACCRUAL METHOD, in which, the income is determined by allotting income and expenses to the period which it is incurred, REGARDLESS OF WHEN RECEIVED OR PAID. In the case at bar, the bank charges the for trade acceptances and other banking services were accrued by the petitioner from year to year since 1955. The Court cannot see any justifiable reason to deviate from the accounting method adopted and pursued by the petitioner. C. Lastly, the petitioner invoked the defense the deficiency tax assessment arising from the condoned indebtedness the EQUITABLE DOCTRINE OF TAX BENEFIT, which means that any amount subsequently received on account of bad debt previously charged off and allowed as deduction from the Gross Income for prior years must be included in the Gross income for the tax year in which received. Under this doctrine, the petitioner contends that its debt to PNB consist of bank charges/commissions which are deducted from its gross income for prior year effect no tax benefits. Therefore condonation in 1961 of the indebtedness for prior years which no tax benefit was derived should not be included as income derived from sources whatsoever. It is held that the doctrine is predicated on the reasoning that, ordinarily, a repayment of loan is a REIMBURSEMENT OF CAPITAL, and that unless the TP has already recovered his capital, recoveries of debts are not income for income tax purposes. It is clear therefore, that equitable doctrine of tax benefit CAN ONLY BE AVAILED OF BY A CREDITOR (PNB) BUT NEVER BY A DEBTOR (PhilFiber).

2. The deduction of bad debts is untenable because there was no efforts on part of Phil Fiber to prove or ascertain with respect to the accounts receivable from the advances to the Phil Milling Co. Before any deduction for bad debts be allowed, the TP must ascertain and able to demonstrate, with

reasonable degree of certainty, the uncollectibility of the debt. The belief alone is insufficient in absence of satisfactory evidence as to the nature of the efforts they exerted to make the collections successful. 3. The interest income credited did not appear in the petitioners books of accounts, despite evide on record that Phil Fiber received from Financing Corp of the Philippines interests on advances made. Hence there was unreported income.