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VOL.

401, APRIL 24, 2003 545


Commissioner of Internal Revenue vs. General Foods
(Phils.), Inc.

*
G.R. No. 143672. April 24, 2003.

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs. GENERAL FOODS (PHILS.), INC. respondent.

Taxation Statutory Construction It is a governing principle


in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing
authority Deductions for income tax purposes partake of the
nature of tax exemptions, hence strictly construed.It is a
governing principle in taxation that tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally
in favor of the taxing authority and he who claims an exemption
must be able to justify his claim by the clearest grant of organic or
statute law. An exemption from the common burden cannot be
permitted to exist upon vague implications. Deductions for income
tax purposes partake of the

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* THIRD DIVISION.

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546 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc.

nature of tax exemptions hence, if tax exemptions are strictly


construed, then deductions must also be strictly construed.
Same Income Taxation Advertising Expenses Requisites for
Deductions from Gross Income for Advertising Expense.Simply
put, to be deductible from gross income, the subject advertising
expense must comply with the following requisites: (a) the
expense must be ordinary and necessary (b) it must have been
paid or incurred during the taxable year (c) it must have been
paid or incurred in carrying on the trade or business of the
taxpayer and (d) it must be supported by receipts, records or
other pertinent papers.
Same Same Same There is yet to be a clearcut criteria or
fixed test for determining the reasonableness of an advertising
expense.There is yet to be a clearcut criteria or fixed test for
determining the reasonableness of an advertising expense. There
being no hard and fast rule on the matter, the right to a deduction
depends on a number of factors such as but not limited to: the
type and size of business in which the taxpayer is engaged the
volume and amount of its net earnings the nature of the
expenditure itself the intention of the taxpayer and the general
economic conditions. It is the interplay of these, among other
factors and properly weighed, that will yield a proper evaluation.
Same Same Same Words and Phrases Advertising is
generally of two kinds(1) advertising to stimulate the current
sale of merchandise or use of services and (2) advertising designed
to stimulate the future sale of merchandise or use of services.
Advertising is generally of two kinds: (1) advertising to
stimulate the current sale of merchandise or use of services and
(2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves
expenditures incurred, in whole or in part, to create or maintain
some form of goodwill for the taxpayers trade or business or for
the industry or profession of which the taxpayer is a member. If
the expenditures are for the advertising of the first kind, then,
except as to the question of the reasonableness of amount, there is
no doubt such expenditures are deductible as business expenses.
If, however, the expenditures are for advertising of the second
kind, then normally they should be spread out over a reasonable
period of time.
Same Same Same Protection of brand franchise is
analogous to the maintenance of goodwill or title to ones property,
a capital expenditure which should be spread out over a
reasonable period of time.We agree with the Court of Tax
Appeals that the subject advertising expense was of the second
kind. Not only was the amount staggering the respondent
corporation itself also admitted, in its letter protest to the
Commissioner of Internal Revenues assessment, that the subject
media expense was incurred in order to protect respondent
corporations brand franchise, a

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VOL. 401, APRIL 24, 2003 547

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc.

critical point during the period under review. The protection of


brand franchise is analogous to the maintenance of goodwill or
title to ones property. This is a capital expenditure which should
be spread out over a reasonable period of time. Respondent
corporations venture to protect its brand franchise was
tantamount to efforts to establish a reputation. This was akin to
the acquisition of capital assets and therefore expenses related
thereto were not to be considered as business expenses but as
capital expenditures.
Same Same Same The taxpayers prerogative to determine
the amount of advertising expenses it will incur and where to
apply them is subject to certain considerations, one of which
relates to the extent to which the expenditures are actually capital
outlays, and the second relates to whether the expenditures are
ordinary and necessary For an expense to be considered ordinary,
it must be reasonable in amount.True, it is the taxpayers
prerogative to determine the amount of advertising expenses it
will incur and where to apply them. Said prerogative, however, is
subject to certain considerations. The first relates to the extent to
which the expenditures are actually capital outlays this
necessitates an inquiry into the nature or purpose of such
expenditures. The second, which must be applied in harmony with
the first, relates to whether the expenditures are ordinary and
necessary. Concomitantly, for an expense to be considered
ordinary, it must be reasonable in amount. The Court of Tax
Appeals ruled that respondent corporation failed to meet the two
foregoing limitations.
Same Same Same Administrative Law Court of Tax
Appeals It has been a long standing policy and practice of the
Court to respect the conclusions of quasijudicial agencies such as
the Court of Tax Appeals, a highly specialized body specifically
created for the purpose of reviewing tax cases.It has been a long
standing policy and practice of the Court to respect the
conclusions of quasijudicial agencies such as the Court of Tax
Appeals, a highly specialized body specifically created for the
purpose of reviewing tax cases. The CTA, by the nature of its
functions, is dedicated exclusively to the study and consideration
of tax problems. It has necessarily developed an expertise on the
subject. We extend due consideration to its opinion unless there is
an abuse or improvident exercise of authority. Since there is none
in the case at bar, the Court adheres to the findings of the CTA.
Same Same Same Burden of Proof It is not incumbent upon
the taxing authority to prove that the amount of items being
claimed is unreasonablethe burden of proof to establish the
validity of claimed deductions is on the taxpayer.Accordingly,
we find that the Court of Appeals committed reversible error
when it declared the subject media advertising expense to be
deductible as an ordinary and necessary expense on the ground
that it has not been established that the item being claimed as

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548 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc.

deduction is excessive. It is not incumbent upon the taxing


authority to prove that the amount of items being claimed is
unreasonable. The burden of proof to establish the validity of
claimed deductions is on the taxpayer. In the present case, that
burden was not discharged satisfactorily.

PETITION for review on certiorari of a decision of the


Court of Appeals.

The facts are stated in the opinion of the Court.


Rhodora J. CorcueraMenzon for petitioner.
Ortega, Del Castillo, Bacorro, Odulio, Calma &
Carbonell for respondent.

CORONA, J.:

Petitioner Commissioner of Internal


1
Revenue
(Commissioner) assails the resolution
2
of the Court of
Appeals reversing the decision of the Court of Tax Appeals
which in turn denied the protest filed by respondent
General Foods (Phils.), Inc., regarding the assessment
made against the latter for deficiency taxes.
The records reveal that, on June 14, 1985, respondent
corporation, which is engaged in the manufacture of
beverages such as Tang, Calumet and KoolAid, filed
its income tax return for the fiscal year ending February
28, 1985. In said tax return, respondent corporation
claimed as deduction, among other business expenses, the
amount of P9,461,246 for media advertising for Tang.
On May 31, 1988, the Commissioner disallowed 50% or
P4,730,623 of the deduction claimed by respondent
corporation. Consequently, respondent corporation was
assessed deficiency income taxes in the amount of
P2,635,141.42. The latter filed a motion for reconsideration
but the same was denied.
On September 29, 1989, respondent corporation
appealed to the Court of Tax Appeals but the appeal was
dismissed:

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1 Penned by Associate Justice Andres B. Reyes and concurred in by


Associate Justices Quirino D. Abad Santos, Jr. and Romeo A. Brawner of
the Third Division.
2 Penned by Associate Judge Manuel K. Gruba and concurred in by
Associate Judge Ramon O. de Veyra.

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VOL. 401, APRIL 24, 2003 549


Commissioner of Internal Revenue vs. General Foods
(Phils.), Inc.

With such a gargantuan expense for the advertisement of a


singular product, which even excludes other advertising and
promotions expenses, we are not prepared to accept that such
amount is reasonable to stimulate the current sale of
merchandise regardless of Petitioners explanation that such
expense does not connote unreasonableness considering the
grave economic situation taking place after the Aquino
assassination characterized by capital flight, strong deterioration
of the purchasing power of the Philippine peso and the slacking
demand for consumer products (Petitioners Memorandum, CTA
Records, p. 273). We are not convinced with such an explanation.
The staggering expense led us to believe that such expenditure
was incurred to create or maintain some form of good will for the
taxpayers trade or business or for the industry or profession of
which the taxpayer is a member. The term good will can hardly
be said to have any precise signification it is generally used to
denote the benefit arising from connection and reputation (Words
and Phrases, Vol. 18, p. 556 citing Douhart vs. Loagan, 86 III.
App. 294). As held in the case of Welch vs. Helvering, efforts to
establish reputation are akin to acquisition of capital assets and,
therefore, expenses related thereto are not business expenses but
capital expenditures. (Atlas Mining and Development Corp. vs.
Commissioner of Internal Revenue, supra). For sure such
expenditure was meant not only to generate present sales but
more for future and prospective benefits. Hence, abnormally
large expenditures for advertising are usually to be spread over
the period of years during which the benefits of the expenditures
are received (Mertens, supra, citing Colonial Ice Cream Co., 7
BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the
case appealed from, we hereby RESOLVE to DISMISS the instant
petition for lack of merit and ORDER the Petitioner to pay the
respondent Commissioner the assessed amount of P2,635,141.42
representing its deficiency3 income tax liability for the fiscal year
ended February 28, 1985.

Aggrieved, respondent corporation filed a petition for


review at the Court of Appeals which rendered a decision
reversing and setting aside the decision of the Court of Tax
Appeals:

Since it has not been sufficiently established that the item it


claimed as a deduction is excessive, the same should be allowed.
WHEREFORE, the petition of petitioner General Foods
(Philippines), Inc. is hereby GRANTED. Accordingly, the
Decision, dated 8 February 1994 of respondent Court of Tax
Appeals is REVERSED and SET ASIDE and the letter, dated 31
May 1988 of respondent Commissioner of Internal Revenue is
CANCELLED.

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3 Rollo, pp. 2223.

550

550 SUPREME COURT REPORTS ANNOTATED


Commissioner of Internal Revenue vs. General Foods
(Phils.), Inc.
4
SO ORDERED.

Thus, the instant petition, wherein the Commissioner


presents for the Courts consideration a lone issue: whether
or not the subject media advertising expense for Tang
incurred by respondent corporation was an ordinary and
necessary expense fully deductible under the National
Internal Revenue Code (NIRC).
It is a governing principle in taxation that tax
exemptions must be construed in strictissimi juris against5
the taxpayer and liberally in favor of the taxing authority
and he who claims an exemption must be able to justify his
claim by the clearest grant of organic or statute law. An
exemption from the common burden
6
cannot be permitted to
exist upon vague implications.
Deductions for income tax purposes partake of the
nature of tax exemptions hence, if tax exemptions are
strictly construed, then deductions must also be strictly
construed.
We then proceed to resolve the singular issue in the case
at bar. Was the media advertising expense for Tang paid
or incurred by respondent corporation for the fiscal year
ending February 28, 1985 necessary and ordinary, hence,
fully deductible under the NIRC? Or was it a capital
expenditure, paid in order to create goodwill and
reputation for respondent corporation and/or its products,
which should have been amortized over a reasonable
period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the
NIRC provides:

(A) Expenses.
(1) Ordinary and necessary trade, business or professional
expenses.

(a) In general.There shall be allowed as deduction from


gross income all ordinary and necessary expenses paid or
incurred during the taxable year in carrying on, or which
are directly attrib

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4 Id., p. 24.
5 Commissioner of Internal Revenue vs. Visayan Electric Co., 23 SCRA 715
[1968].
6 Asiatic Petrolium Co. vs. Llanas, 49 Phil. 466 [1926] cited in Davao Light &
Power Co. vs. Commissioner of Customs, 44 SCRA 122 [1972].

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VOL. 401, APRIL 24, 2003 551


Commissioner of Internal Revenue vs. General Foods (Phils.), Inc.

utable to, the development, management, operation and/or


conduct of the trade, business or exercise of a profession.

Simply put, to be deductible from gross income, the subject


advertising expense must comply with the following
requisites: (a) the expense must be ordinary and necessary
(b) it must have been paid or incurred during the taxable
year (c) it must have been paid or incurred in carrying on
the trade or business of the taxpayer and (d) it must7 be
supported by receipts, records or other pertinent papers.
The parties are in agreement that the subject
advertising expense was paid or incurred within the
corresponding taxable year and was incurred in carrying on
a trade or business. Hence, it was necessary. However,
their views conflict as to whether or not it was ordinary. To
be deductible, an advertising expense should not only be
necessary but also ordinary. These two requirements must
be met.
The Commissioner maintains that the subject
advertising expense was not ordinary on the ground that it
failed the two conditions set by U.S. jurisprudence: first,
reasonableness of the amount incurred and second, the
amount incurred must not be a capital outlay to create
goodwill for the product and/or private respondents
business. Otherwise, the expense must be considered a
capital expenditure to be spread out over a reasonable
time.
We agree.
There is yet to be a clearcut criteria or fixed test for
determining the reasonableness of an advertising expense.
There being no hard and fast rule on the matter, the right
to a deduction depends on a number of factors such as but
not limited to: the type and size of business in which the
taxpayer is engaged the volume and amount of its net
earnings the nature of the expenditure itself the intention
of the taxpayer and the general economic conditions. It is
the interplay of these, among other factors and properly
weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media
advertising expense for Tang alone was almost onehalf of
its total claim for marketing expenses. Aside from that,
respondentcorporation

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7 Zamora vs. Collector, 8 SCRA 163 [1963].

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552 SUPREME COURT REPORTS ANNOTATED


Commissioner of Internal Revenue vs. General Foods
(Phils.), Inc.

also claimed P2,678,328 as other advertising and


promotions expense and another P1,548,614, for consumer
promotion.
Furthermore, the subject P9,461,246 media advertising
expense for Tang was almost double the amount of
respondent corporations P4,640,636 general and
administrative expenses.
We find the subject expense for the advertisement of a
single product to be inordinately large. Therefore, even if it
is necessary, it cannot be considered an ordinary expense
deductible under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to
stimulate the current sale of merchandise or use of services
and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves
expenditures incurred, in whole or in part, to create or
maintain some form of goodwill for the taxpayers trade or
business or for the industry or profession of which the
taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question
of the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses. If,
however, the expenditures are for advertising of the second
kind, then normally they should be spread out over a
reasonable period of time.
We agree with the Court of Tax Appeals that the subject
advertising expense was of the second kind. Not only was
the amount staggering the respondent8
corporation itself
also admitted, in its letter protest to the Commissioner of
Internal Revenues assessment, that the subject media
expense was incurred in order to protect respondent
corporations brand franchise, a critical point during the
period under review.
The protection of brand franchise is analogous to the
maintenance of goodwill or title to ones property. This is a
capital expenditure which 9
should be spread out over a
reasonable period of time.
Respondent corporations venture to protect its brand
franchise was tantamount to efforts to establish a
reputation. This was akin to the acquisition of capital
assets and therefore expenses related

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8 Dated June 14, 1988 Petition for Review, p. 8 citing BIR Records, pp.
198199 Rollo, p. 15.
9 Mertens, Vol. 4A 25.38 p. 190 citing Colonial Ice Cream Co., 7 BTA
154.

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Commissioner of Internal Revenue vs. General Foods
(Phils.), Inc.
thereto were not to be considered
10
as business expenses but
as capital expenditures.
True, it is the taxpayers prerogative to determine the
amount of advertising
11
expenses it will incur and where to
apply them. Said prerogative, however, is subject to
certain considerations. The first relates to the extent to
which the expenditures are actually capital outlays this
necessitates an12
inquiry into the nature or purpose of such
expenditures. The second, which must be applied in
harmony with the first, relates to whether the expenditures
are ordinary and necessary. Concomitantly, for an expense
to be considered ordinary, it must be reasonable in amount.
The Court of Tax Appeals ruled that respondent
corporation failed to meet the two foregoing limitations.
We find said ruling to be well founded. Respondent
corporation incurred the subject advertising expense in
order to protect its brand franchise. We consider this as a
capital outlay since it created goodwill for its business
and/or product. The P9,461,246 media advertising expense
for the promotion of a single product, almost onehalf of
petitioner corporations entire claim for marketing
expenses for that year under review, inclusive of other
advertising and promotion expenses of P2,678,328 and
P1,548,614 for consumer promotion, is doubtlessly
unreasonable.
It has been a long standing policy and practice of the
Court to respect the conclusions of quasijudicial agencies
such as the Court of Tax Appeals, a highly specialized body
specifically created for the purpose of reviewing tax cases.
The CTA, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems.
It has necessarily developed an expertise on the subject.
We extend due consideration to its opinion unless
13
there is
an abuse or improvident exercise of authority. Since there
is none in the case at bar, the Court adheres to the findings
of the CTA.
Accordingly, we find that the Court of Appeals
committed reversible error when it declared the subject
media advertising ex

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10 Welch vs. Helvering, 290 US 111 [1933].


11 Revenue Audit Memorandum Order No. 187.
12 Mertens, Vol. 4A 25.38 p. 190, citing E.H. Sheldon & Co., 19 TC 481
[1952].
13 Commissioner vs. Court of Tax Appeals & Atlas Consolidated Mining
and Development Co., 204 SCRA 182 [1991].
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554 SUPREME COURT REPORTS ANNOTATED


Commissioner of Internal Revenue vs. General Foods
(Phils.), Inc.

pense to be deductible as an ordinary and necessary


expense on the ground that it has not been established
that the item being claimed as deduction is excessive. It is
not incumbent upon the taxing authority to prove that the
amount of items being claimed is unreasonable. The
burden of proof to establish14 the validity of claimed
deductions is on the taxpayer. In the present case, that
burden was not discharged satisfactorily.
WHEREFORE, premises considered, the instant petition
is GRANTED. The assailed decision of the Court of Appeals
is hereby REVERSED and SET ASIDE. Pursuant to
Sections 248 and 249 of the Tax Code, respondent General
Foods (Phils.), Inc. is hereby ordered to pay its deficiency
income tax in the amount of P2,635,141.42, plus 25%
surcharge for late payment and 20% annual interest
computed from August 25, 1989, the date of the denial of
its protest, until the same is fully paid.
SO ORDERED.

Puno (Chairman), Panganiban, SandovalGutierrez


and CarpioMorales, JJ., concur.

Petition granted, judgment reversed and set aside.

Notes.The law does not look with favor on tax


exemptions and he who would seek to be thus privileged
must justify it by words too plain to be mistaken and too
categorical to be misinterpreted. (Reagan vs. Commissioner
of Internal Revenue, 30 SCRA 968 [1969])
While the government is not estopped from collecting
taxes legally due because of mistakes or errors of its
agents, this admits of exceptions in the interest of justice
and fair play, as where injustice will result to the taxpayer.
(Commissioner of Internal Revenue vs. Court of Appeals,
267 SCRA 557 [1997])

o0o

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14 Commissioner vs. Algue, Inc., 158 SCRA 9 [1988].

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