You are on page 1of 21

1. Western Minolco Corporation vs Commisioner been repealed by P.D. No.

1739, which now imposes a tax of

20% on interests from deposits and yields from deposit
Facts: Western Minolco is a domestic corporation engaged in substitute such as commercial papers issued in the primary
mining. It borrowed funds from several financial institutions market as principal instrument and provides for them in Section
from June to October 1977 and paid the corresponding 35% 24(cc) under Chapter III, Tax on Corporations, Title II – Income
transactions tax due thereon in the amount of P 1, 317, 801.03. Tax.
The tax was paid pursuant to Section 210 (b) of the National
Internal Revenue Code of 1977. On Febraaury 16, 1978, the
petitioner applied for the refund of the P 1, 317, 801. 03 alleging 2. COMMISSIONER OF INTERNAL REVENUE vs.
that it was not liable to pay the 35% tansaction tax under its ARNOLDUS CARPENTRY SHOP, INC. and COURT
Certificate of Qualifications for Tax Exemption No. 34 issued by OF TAX APPEALS
the Secretary of Agriculture and Natural Resources, and
pursuant to The Mining Act(CA 137) and the Mineral Resources Facts:
Development Decree of 1974 (PD 463), as implemented by
consolidated Mines Administrative Order of the Secretary of In March 1979, the examiners of the petitioner Commissioner of
Natural Resources dated May 17, 1974. Internal Revenue conducted an investigation of the business tax
liabilities of private respondent pursuant to Letter of Authority
Issue: Whether or not Minolco is exempt from transaction tax No. 08307 NA dated November 23, 1978. As a result thereof,
the examiners assessed private respondent for deficiency tax.
Held: No. The statutory provisions on tax exemptions clearly This tax deficiency was a consequence of the 3% tax imposed
exclude the 35%tarnsaction tax. Presidential Decree No. 237 on on private respondent's gross export sales which, in turn,
the Compensating tax. Section I of P.D. No. 238 on Conditionally resulted from the examiners' finding that categorized private
Free Importations, and Section 53 of P.D. No. 463 all refer to respondent as a contractor. Against this assessment, private
tax exemptions for importations of machineries, tools for respondent protested that the carpentry shop is a manufacturer
production, plants to convert mineral ores into saleable form, and therefor entitled to tax exemption on its gross export sales
spare parts, supplies, materials, accessories, explosives under Section 202 (e) of the National Internal Revenue Code.
chemicals and transportation and communication facilities, to be He explained that it was the 7% tax exemption on export sales
used in mining operations. Section 53 of P.D. No 463 likewise which prompted private respondent to exploit the foreign
refers to tax exemptions for mining claims and improvement market which resulted in the increase of its foreign sales to at
thereon, and mineral products, except income tax. The least 52% of its total gross sales in 1977.
petitioner’s of Qualifications for Tax Exemption No. 34 exempts
“... from payment of all taxes except income tax, payable by him Issue: Whether or not the Court of Tax Appeals erred in holding
in the court of his business ad in the importation of machineries, that private respondent is a manufacturer and not a contractor
spare parts and or equipment listed in the stamped “Annex I” and therefore not liable for the amount of P108,720.92, as
which are considered to be indispensable in the operation and deficiency contractor's tax, inclusive of surcharge and interest,
will be used by said operator lessee exclusively in the mineral for the year 1977.
land mentioned above. Petitioner’s submit that in as much as
taxes in general constitute allowable deductions from gross
income in the determination of taxable net income. The 35%
transaction tax is a business tax and not income tax because the Held:
Revenue Code itself classifies it as “Business Tax” under Title V,
and that P.D. No. 1154 expressly states that the transaction tax Private respondent is a "manufacturer" as defined in the Tax
shall be allowed as a deductictible item for purposes of Code and not a "contractor", under Section 205(e) of the Tax
determining the borrower’s taxable income. The petitioner’s Code as petitioner would have this Court decide. A contract for
contentions deserve scant consideration. The 35% tax imposed the delivery at a certain price of an article Which the vendor in
on interest income from commercial papers issued primary the ordinary course of his business manufactures or procures for
money market. Being a tax on interest, it is a tax on income. the - general market, whether the same is on hand at the time
The 35% transaction tax is an income tax on interest earnings or not, is a contract of sale, but if the goods are to be
to the lenders or placers. The latter are actually the tax payers. manufactured specially for the customer and upon his special
Therefore, the tax cannot be a tax imposed upon petitioner. In order, and not for the general market, it is a contract for a piece
other words, the petitioner who borrowed funds from several of work. As the Court of Tax Appeals did not err in holding that
financial institutions by issuing a commercial papers merely private respondent is a "manufacturer," then private respondent
withheld the 35% transaction tax before paying to the financial is entitled to the tax exemption of the Tax Code. Disposition:
institutions the interests earned by them and later remitted the WHEREFORE, the Court hereby DENIES the Petition for lack of
same to respondent Commissioner of Internal Revenue. The tax merit and AFFIRMS the Court of Tax Appeals decision.
could have been collected by a different procedure but the
statue chose this method. Whatever collecting procedure is 3. BPI V. Trinidad, Collector of Internal Revenue
adopted does not change the nature of the tax. The petitioner
also submits that the 35% transaction tax is a business tax
imposed under Title V, entitled -, Taxes on Business” and FACTS:
classified specially under Chapter II, entitled “Tax on Business.”
1. The property in question formerly belonged to the Taba Saw
The location of the 35%, tax in the Tax Code does not
necessarily determine its nature, Again, we agree with the Mill Co., a copartnership formed by Pujalte and Co. and one
Solicitor General that the legislative body must have realized
Ramon Murga. In April, 1914, Ramon Murga sold all his rights,
later that the subject tax was inappropriately included among
taxes on business because Section 210 of the Tax Code has
title, and interest in and to the said copartnership to Pujalte and B. Whether or not BPI should have proceeded under section 141
Co., which thereby became the sole owner of the concern. of Act No. 2339 (now sec. 1580 of Act No. 2711), and not under
2. That on the 26th day of September, 1912, the said Taba Saw section 140 of the said Act
Mill Co. conveyed to the plaintiff bank (BPI), by way of chattel
mortgage, the property here in question together with other RULING:
personalities, as security for the payment to said bank of two A. There is absolutely no basis for the finding of the trial court
certain promissory notes for the sum of P180,000. Said chattel that "the plaintiff bank had voluntarily and spontaneously paid
mortgage was duly registered in the office of the register of the debt of a third party, that is, that of the firm of Pujalte and
deeds of Zamboanga on the 26th day of December, 1912. Co.” Paragraph 7 of the plaintiff's complaint alleges: "That
thereupon, involuntarily and under due protest in writing, the
3. On that date the property in question was free from all tax
plaintiff bank made payment of the required sum of P2,159.79
liens; at least, the plaintiff mortgagee had no notice thereof. On
in order to secure the release of its seized property." These
the 13th day of July, 1916, when the amount here in question
allegations were specially admitted by the defendant.
was found to be due to the Government from Pujalte and Co. as
forestry charges, and when the property in question was seized
B. Section 140 of the Internal Revenue Law (Act No. 2339
by the defendant, the said chattel mortgage was still subsisting.
provides as follows:
4. On the 13th day of July, 1916, the defendant Collector of
SEC. 140. Recovery of tax paid under protest. — When the
Internal Revenue (Trinidad) hrough his duly authorized agent at
validity of any tax in questioned, or amount disputed, or
Zamboanga, seized and distrained certain personal property,
other question raised as to liability therefor, the person
consisting of machinery for sawing lumber which is particularly
against whom or against whose property the same is
enumerated and described in paragraph 3 of the complaint, and
sought to be enforced shall pay the tax under instant
advertised the same for sale, to realize the sum of P2,159.79,
protest, or upon protest within ten days, and shall thereupon
alleged to be due to the Government of the Philippine Islands
request the decision of the Collector of Internal Revenue. If the
from Pujalte and Co., as forestry charges.
decision of the Collector of Internal Revenue is adverse, or if no
5. The defendant (Trinidad) claimed that said personality that
decision is made by him within six months from the date when
belonged to the said company (Pujalte and Company) was used
his decision was requested, the taxpayer may proceed, at any
in the business on which the taxes were due, and was liable to
time within two years after the payment of the tax, to bring an
seizure to cover said taxes. On the other hand, the plaintiff (BPI)
action against the Collector of Internal Revenue for the recovery
claimed to be the owner of said property, and demanded its
of the sum alleged to have been illegally collected, the process
release. The demand being denied, the plaintiff (BPI) paid to the
to be served upon him, upon the provincial treasurer, or upon
defendant (Trinidad) the said sum of P2,159.79 under protest
the officer collecting the tax.
to prevent the sale of said property, and immediately brought
Section 141 of the same Act provides:
the present action in the Court of First Instance of Zamboanga
SEC. 141. Action to contest forfeiture of chattels. — In case of
to recover the said sum of P2,159.78 together with interest and
the seizure of personal property under claim of
costs. The lower court, after due trial, dismissed the plaintiff's
forfeiture, the owner, desiring to contest the validity of
complaint and absolved the defendant from all liability
the forfeiture, may at any time before sale or destruction
thereunder. From that judgment the plaintiff appealed to this
of the property bring an action against the person
seizing the property or having possession thereof to
recover the same, and upon giving proper bond may enjoin
the sale; or after the sale and within six months he may bring
A. Whether or not BPI voluntary and spontaneously paid the
an action to recover the net proceeds realized at the sale.
debt of Pujalte Comapny
It can be said that the personal property in question was seized
not because of forfeiture but a seizure to enforce a tax lien.
Forfeiture is "the divestiture of property without compensation,
in consequence of an offense. The effect of such forfeiture is to amount of P333,196.86, and Assessment Notice No. FAS-1-86-
transfer the title to the specific thing from the owner to the 90-000681 for deficiency expanded withholding tax in the
sovereign power." (12 R. C. L., 124.) There is a great amount of P4,897.79, inclusive of surcharges and interest, both
difference between a seizure under forfeiture and a for the taxable year 1986.
seizure to enforce a tax lien. In the former all the proceeds
derived from the sale of the thing forfeited are turned over to The deficiency income tax of P333,196.86, arose from:
the Collector of Internal Revenue (sec. 148, Act No. 2339) in the (1) BIR disallowance of ICC’s claimed expense deductions for
latter the residue of such proceeds over and above what is professional and security services billed to and paid by ICC in
required to pay the tax sought to be realized, including 1986, to wit:
expenses, is returned to the owner of the property (second (a) Expenses for auditing services of SGV & Co., for the year
aragraph, sec. 152, Act No. 2339). Clearly, the remedy ending Dec 31, 1985
applicable to the present case is that provided for in section 140, (b) Expenses for legal services [incl of retainer fees] of law
above quoted, and which the plaintiff invoked. firm Bengzon for 1984 and 1985
(c) Expense for security services of El Tigre Security for
months of April and May 1986
4. CIR v Isabela Cultural Corporation (ICC)
(2) Understatement of ICC interest income on 3 promissory
notes due from Realty Investment
DOCTRINE: The requisites for the deductibility of ordinary and
necessary trade, business, or professional expenses, like
The deficiency expanded withholding tax of P4,897.79 (inclusive
expenses paid for legal and auditing services, are: (a) the
of interest and surcharge) was allegedly due to the failure of
expense must be ordinary and necessary; (b) it must have been
ICC to withhold 1% expanded withholding tax on its claimed
paid or incurred during the taxable year; (c) it must have been
P244,890.00 deduction for security services.
paid or incurred in carrying on the trade or business of the
taxpayer; and (d) it must be supported by receipts, records or
2. On March 23, 1990, ICC sought for a reconsideration, but on
other pertinent papers. The requisite that it must have been paid
Feb 9, 1995, it received a final notice before seizure demanding
or incurred during the taxable year is further qualified by Section
payment of amounts stated in the said notices.
45 of the NIRC which states that: "[t]he deduction provided for
in this Title shall be taken for the taxable year in which ‘paid or
3. CTA held that petition is premature because final notice of
accrued’ or ‘paid or incurred’, dependent upon the method of
assessment cannot be considered as a final decision appealable
accounting upon the basis of which the net income is computed
to the tax court. CA reversed the holding that a demand letter
x x x".
of the BIR reiterating the payment of deficiency tax, amounts to
a final decision on the protested assessment and may therefore
QUICK FACTS: BIR disallowed the following ICC
be questioned before the CTA. This conclusion was sustained by
expenses for years 1984-1986 to be included in ICC’s
this Court on July 1, 2001, G.R. No. 135210. Case was remanded
1986 tax expense deductions: (1) Expenses for auditing
to CTA for further proceedings.
services for year ending 31 December 1985; (2)
Expenses for legal services for years 1984 and 1985; and
4. CTA rendered a decision canceling and setting aside the
(3) Expense for security services for months of April and
assessment notices issued against ICC. It held that the claimed
May 1986. BIR thus charged ICC for deficiency income
deductions for professional and security services were properly
taxes. ICC contested the assessment.
claimed by ICC in 1986 because it was only in the said year
when the bills demanding payment were sent to ICC. Hence,
even if some of these professional services were rendered to
1. On Feb 23, 1990, ICC received from BIR Assessment Notice
ICC in 1984 or 1985, it could not declare the same as deduction
No. FAS-1-86-90-000680 for deficiency income tax in the
for the said years as the amount could not be determined at that
time. ICC did not understate its interest income on the subject
promissory notes. It was the BIR which made an overstatement The requisite that it must have been paid or incurred during the
of said income when it compounded the interest income taxable year is further qualified by Sec 45 of the NIRC which
receivable by ICC from the promissory notes of Realty states that: "[t]he deduction provided for in this Title shall be
Investment, Inc., despite the absence of a stipulation in the taken for the taxable year in which ‘paid or accrued’ or ‘paid or
contract. CTA also found that ICC in fact withheld 1% expanded incurred’, dependent upon the method of accounting upon the
withholding tax on its claimed deduction for security services as basis of which the net income is computed x x x".
shown by the various confirmation receipts it presented as
evidence. Accounting methods for tax purposes comprise a set of rules for
determining when and how to report income and deductions.
5. CA affirmed CTA decision, holding that although the The accounting method used by ICC is the accrual method.
professional services (legal and auditing) were rendered to ICC Revenue Audit Memorandum Order No. 1-2000, provides that
in 1984 and 1985, the cost of the services was not yet under the accrual method of accounting, expenses not being
determinable at that time, hence, it could be considered as claimed as deductions by a taxpayer in the current year when
deductible expenses only in 1986 when ICC received the billing they are incurred cannot be claimed as deduction from income
statements for said services. It further ruled that ICC did not for the succeeding year. Thus, a taxpayer who is authorized to
understate its interest income from the promissory notes of deduct certain expenses and other allowable deductions for the
Realty Investment, Inc., and that ICC properly withheld and current year but failed to do so cannot deduct the same for the
remitted taxes on the payments for security services for the next year.
taxable year 1986.
The accrual method relies upon the taxpayer’s right to receive
6. BIR contention: Since ICC is using the accrual method of amounts or its obligation to pay them, in opposition to actual
accounting, the expenses for the professional services that receipt or payment, which characterizes the cash method of
accrued in 1984 and 1985, should have been declared as accounting. Amounts of income accrue where the right to
deductions from income during the said years and the failure of receive them become fixed, where there is created an
ICC to do so bars it from claiming said expenses as deduction enforceable liability. Similarly, liabilities are accrued when fixed
for the taxable year 1986. and determinable in amount, without regard to indeterminacy
merely of time of payment.
ISSUE: Whether the deduction of the expenses for professional
and security services of 1984-1986 are valid deductions from For a taxpayer using the accrual method, the determinative
ICC’s gross income for 1986 question is, when do facts present themselves in such a manner
that the taxpayer must recognize an income or expense? The
DECISION: NO for audit services from SGV and legal services accrual of income and expense is permitted when the all-events
from Bengzon; YES for security services. test has been met. It requires: (1) the fixing of a right to income
or liability to pay; and (2) the availability of the reasonable
HELD: accurate determination of such income or liability.
The requisites for the deductibility of ordinary and necessary
trade, business, or professional expenses, like expenses paid for The all-events test requires the right to income or liability be
legal and auditing services, are: (a) the expense must be fixed, and the amount of such income or liability be determined
ordinary and necessary; (b) it must have been paid or incurred with reasonable accuracy. However, the test does not demand
during the taxable year; (c) it must have been paid or incurred that the amount of income or liability be known absolutely, only
in carrying on the trade or business of the taxpayer; and (d) it that a taxpayer has at his disposal the information necessary to
must be supported by receipts, records or other pertinent compute the amount with reasonable accuracy. The all-events
papers. test is satisfied where computation remains uncertain, if its basis
is unchangeable; the test is satisfied where a computation may
be unknown, but is not as much as unknowable, within the As to the expenses for security services, the records show that
taxable year. The amount of liability does not have to be these expenses were incurred by ICC in 1986 and could
determined exactly; it must be determined with "reasonable therefore be properly claimed as deductions for 1986.
accuracy." Accordingly, the term "reasonable accuracy" implies
something less than an exact or completely accurate amount.

The propriety of an accrual must be judged by the facts that a G.R. No. 143672

taxpayer knew, or could reasonably be expected to have known,

at the closing of its books for the taxable year. Accrual method It is a general rule that `Bonuses to employees made in good
faith and as additional compensation for the services actually
of accounting presents largely a question of fact; such that the
rendered by the employees are deductible, provided such
taxpayer bears the burden of proof of establishing the accrual payments, when added to the stipulated salaries, do not exceed
a reasonable compensation for the services rendered.
of an item of income or deduction.

The condition precedents to the deduction of bonuses to

The expenses for professional fees for legal and auditing employees are: (1) the payment of the bonuses is in fact
services pertain to 1984 and 1985 legal and retainer fees of the compensation; (2) it must be for personal services actually
rendered; and (3) bonuses, when added to the salaries, are
law firm Bengzon. As testified by the ICC Treasurer, the firm has `reasonable ... when measured by the amount and quality of
been its counsel since the 1960’s. From the nature of the the services performed with relation to the business of the
particular taxpayer. Here it is admitted that the bonuses are in
claimed deductions and the span of time during which the firm fact compensation and were paid for services actually rendered.
was retained, ICC can be expected to have reasonably known
the retainer fees charged by the firm as well as the
compensation for its legal services. The failure to determine the
exact amount of the expense cannot be attributed solely to the Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its
delayed billing of these liabilities by the firm. ICC could have income tax return, declaring losses. CIR filed for deficiency of
income taxes against Kuenzle & Streiff Inc. for the said years in
inquired into the amount of their obligation to the firm, the amounts of P40,455.00, P11,248.00 and P16,228.00,
especially since it is using the accrual method of accounting. It respectively, arising from the disallowance, as deductible
expenses, of the bonuses paid by the corporation to its officers,
could also have reasonably determined the amount of legal and upon the ground that they were not ordinary, nor necessary,
retainer fees owing to its familiarity with the rates charged by nor reasonable expenses within the purview of Section 30(a) (1)
of the National Internal Revenue Code.The corporation filed with
their long time legal consultant. the Court of Tax Appeals a petition for review contesting the
assessments. CTA favored the CIR, however lowered the tax
due on 1954. The corporation moved for reconsideration, but
SGV & Co. professional fees for auditing financial statements of still lost. The Corporation contends that the tax court, in arriving
ICC for 1985 cannot be validly claimed as expense deductions at its conclusion, acted "in a purely arbitrary manner", and erred
in not considering individually the total compensation paid to
in 1986. ICC failed to present evidence showing that even with each of petitioner's officers and staff members in determining
only "reasonable accuracy" as the standard to ascertain its the reasonableness of the bonuses in question, and that it erred
likewise in holding that there was nothing in the record
liability to SGV & Co. in year 1985, it cannot determine the indicating that the actuation of the respondent was
professional fees which said company would charge for its unreasonable or unjust.


ISSUE: Whether or not the bonuses in question was reasonable

ICC thus failed to discharge the burden of proving that the and just to be allowed as a deduction?

claimed expense deductions for the professional services were

allowable deductions for the taxable year 1986. Hence, per HELD: No.
Revenue Audit Memorandum Order No. 1-2000, they cannot be
validly deducted from its gross income for the said year and RATIO: It is a general rule that `Bonuses to employees made in
good faith and as additional compensation for the services
were therefore properly disallowed by the BIR. actually rendered by the employees are deductible, provided
such payments, when added to the stipulated salaries, do not claimed as deduction, among other business expenses, the
exceed a reasonable compensation for the services rendered. amount of P9,461,246 for media advertising for "Tang" one of
The condition precedents to the deduction of bonuses to its products. The Commissioner disallowed 50% or P4,730,623
employees are: (1) the payment of the bonuses is in fact of the deduction claimed by respondent. The latter :led a motion
compensation; (2) it must be for personal services actually for reconsideration, but the same was denied. Respondent
rendered; and (3) bonuses, when added to the salaries, are appealed to the Court of Tax Appeals, but the appeal was
`reasonable ... when measured by the amount and quality of dismissed. Aggrieved, respondent :led a petition for review at
the services performed with relation to the business of the the Court of Appeals which rendered a decision reversing and
particular taxpayer. Here it is admitted that the bonuses are in setting aside the decision of the Court of Tax Appeals. Hence,
fact compensation and were paid for services actually rendered. the present petition for review. The Commissioner of Internal
The only question is whether the payment of said bonuses is Revenue presented to the Court the lone issue of whether or not
reasonable. the subject media advertising expense for "Tang" incurred by
respondent was an ordinary and necessary expense fully
deductible under the National Internal Revenue Code (NIRC).
There is no fixed test for determining the reasonableness of a The Supreme Court reversed and set aside the decision of the
given bonus as compensation. This depends upon many factors, Court of Appeals and ordered private respondent General Foods
one of them being the amount and quality of the services (Phils); Inc., to pay its de:ciency income tax in the amount of
performed with relation to the business. Other tests suggested P2,635,141.42, plus 25% surcharge for late payment and 20%
are: payment must be 'made in good faith'; the character of the annual interest computed from August 25, 1989, the date of the
taxpayer's business, the volume and amount of its net earnings, denial of its protest, until the same is fully paid. The Court found
its locality, the type and extent of the services rendered, the the subject expense for the advertisement of a single product to
salary policy of the corporation'; 'the size of the particular be inordinately large, and even if indeed it is necessary, it cannot
business'; 'the employees' qualifications and contributions to the be considered an ordinary expense deductible under Section 29
business venture'; and 'general economic conditions. However, (a) (1) (A) of the NIRC. According to the Court, the subject
'in determining whether the particular salary or compensation advertisement is one designed to stimulate the future sale of
payment is reasonable, the situation must be considered as a merchandise or use of services. Said venture of respondent to
whole. protect its brand franchise was tantamount to efforts to
establish a reputation and is akin to the acquisition of capital
It seems clear from the record that, in arriving at its assets, and should not, therefore, be considered as business
main conclusion, the tax court considered, inter alia, the expenses but as capital expenditures which normally should be
following factors: spread out over a reasonable period of time.

1) The paid officers, in the absence of evidence to the contrary,
that they were competent, on the other the record discloses no W/N the subject media advertising expense for “Tang” was
evidence nor has petitioner ever made the claim that all or some ordinary and necessary expense fully deductible under the NIRC
of them were gifted with some special talent, or had undergone
some extraordinary training, or had accomplished any particular
task, that contributed materially to the success of petitioner's
business during the taxable years in question. Held:

No. Tax exemptions must be construed in stricissimi juris

2) All the other employees received no pay increase in the said against the taxpayer and liberally in favor of the taxing
years. authority, and he who claims an exemption must be able to
justify his claim by the clearest grant of organic or statute law.
3) The bonuses were paid despite the fact that it had suffered Deductions for income taxes partake of the nature of tax
net losses for 3 years. Furthermore the corporation cannot use exemptions; hence, if tax exemptions are strictly construed,
the excuse that it is 'salary paid' to an employee because the then deductions must also be strictly construed.
CIR does not question the basic salaries paid by petitioner to the To be deductible from gross income, the subject advertising
officers and employees, but disallowed only the bonuses paid to expense must comply with the following requisites: (a) the
petitioner's top officers at the end of the taxable years in expense must be ordinary and necessary; (b) it must have been
question. 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.
While the subject advertising expense was paid or incurred
GR No. 143672 within the corresponding taxable year and was incurred in
carrying on a trade or business, hence necessary, the
parties’ views conflict as to whether or not it was ordinary. To
be deductible, an advertising expense should not only be
Facts: necessary but also ordinary.

Respondent corporation :led its income tax return for the :scal The Commissioner maintains that the subject advertising
year ending February 28, 1985. In said tax return, respondent 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 Zamora alleged that the CTA erred in:
be a capital outlay to create “goodwill” for the product and/or
private respondent’s business. Otherwise, the expense must be (1) In dissallowing P10,478.50, as promotion expenses
considered a capital expenditure to be spread out over a incurred by his wife for the promotion of the Bay View
reasonable time. Hotel and Farmacia Zamora (which is ½ of P20,957.00,
supposed business expenses):
There is yet to be a clear-cut criteria or fixed test for determining
the reasonableness of an advertising expense. There being no
(2) In disallowing 3-½% per annum as the rate of
hard and fast rule on the matter, the right to a deduction
depreciation of the Bay View Hotel Building;
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 (3) In disregarding the price stated in the deed of sale,
expenditure itself; the intention of the taxpayer and the general as the costs of a Manila property, for the purpose of
economic conditions. It is the interplay of these, among other determining alleged capital gains; and
factors and properly weighed, that will yield a proper evaluation.
(4) In applying the Ballantyne scale of values in
The Court finds the subject expense for the advertisement of a determining the cost of said property.
single product to be inordinately large. Therefore, even if it is
necessary, it cannot be considered an ordinary expense .ñët
deductible under then Section 29 (a) (1) (A) of the NIRC.

Advertising is generally of two kinds: (1) advertising to stimulate Cases Nos. L-15289 and L-15281
the current sale of merchandise or use of services and (2)
advertising designed to stimulate the future sale of merchandise Mariano Zamora and his deceased sister Felicidad Zamora,
or use of services. The second type involves expenditures bought a piece of land located in Manila on May 16, 1944, for
incurred, in whole or in part, to create or maintain some form of P132,000.00 and sold it for P75,000.00 on March 5, 1951. They
goodwill for the taxpayer’s trade or business or for the industry also purchased a lot located in Quezon City for P68,959.00 on
or profession of which the taxpayer is a member. If the January 19, 1944, which they sold for P94,000 on February 9,
expenditures are for the advertising of the first kind, then, 1951. The CTA ordered the payment of deficiency income tax
except as to the question of the reasonableness of amount, and surcharge due from the estate of Felicidad.
there is no doubt such expenditures are deductible as business
expenses. If, however, the expenditures are for advertising of ISSUES-RULING
the second kind, then normally they should be spread out over
a reasonable period of time.
a) WON the CTA erred in allowing as promotion expenses of
The company’s media advertising expense for the promotion of
Mrs. Zamora claimed in Mariano Zamora's 1951 income tax
a single product is doubtlessly unreasonable considering it
returns, merely one-half or P10,478.50
comprises almost one-half of the company’s entire claim for
marketing expenses for that year under review. Petition
granted, judgment reversed and set aside. ZAMORA: He contends that the whole amount of P20,957.00 as
promotion expenses in his 1951 income tax returns, should be
allowed and not merely one-half of it or P10,478.50, on the
ground that, while not all the itemized expenses are supported
7. MARIANO ZAMORA, petitioner, by receipts, the absence of some supporting receipts has been
vs. sufficiently and satisfactorily established. For, as alleged, the
COLLECTOR OF INTERNAL REVENUE and COURT OF TAX said amount of P20,957.00 was spent by Mrs. Esperanza A.
APPEALS, respondents. Zamora (wife of Mariano), during her travel to Japan and the
United States to purchase machinery for a new Tiki-Tiki plant,
*consolidated cases and to observe hotel management in modern hotels.

PAREDES, J.: SC: CTA did not commit any reversible error.

FACTS: Section 30, of the Tax Code, provides that in computing net
income, there shall be allowed as deductions all the ordinary and
Cases Nos. L-15290 and L-15280 necessary expenses paid or incurred during the taxable year, in
carrying on any trade or business. Since promotion expenses
constitute one of the deductions in conducting a business, claim
Mariano Zamora, owner of the Bay View Hotel and Farmacia
for the deduction of promotion expenses or entertainment
Zamora, Manila, filed his income tax returns the years 1951 and
expenses must be substantiated or supported by record showing
1952. The CIR found that he failed to file his return of the capital
in detail the amount and nature of the expenses incurred.
gains derived from the sale of certain real properties and
claimed deductions which were not allowable. He was assessed
to pay the sums of P43,758.50 and P7,625.00, as deficiency In the case, the application of Mrs. Zamora for dollar allocation
income tax for the years 1951 and 1952. shows that she went abroad on a combined medical and
business trip, not all of her expenses came under the category
of ordinary and necessary expenses; part thereof constituted
On appeal by Zamora, the CTA, modified the decision appealed
her personal expenses. There having been no means by which
from and ordered him to pay a reduced amount instead.
to ascertain which expense was incurred by her in connection of land values, as well as the extent and maintenance
with the business of Mariano Zamora and which was incurred and rehabilitation. It is allowed a depreciation rate of
for her personal benefit, the Collector and the CTA in their 2-½% corresponding to a normal useful life of only 40
decisions, considered 50% of the said amount of P20,957.00 as years (1955 PH Federal Taxes, Par 14 160-K).
business expenses and the other 50%, as her personal
expenses. Said allocation is very fair to Mariano Zamora, there Although Bulletin F has no binding force, it has a strong
having been no receipt whatsoever, submitted to explain the persuasive effect considering that the same has been the result
alleged business expenses, or proof of the connection which said of scientific studies and observation for a long period in the
expenses had to the business or the reasonableness of the said United States after whose Income Tax Law ours is patterned.
amount of P20,957.00.
c) WON Zamora is liable for the undeclared capital gains derived
While in situations like the present, absolute certainty is usually from the sales in 1951 of certain real properties in Malate, Manila
no possible, the CTA should make as close an approximation as and in Quezon City, acquired during the Japanese occupation?
it can, bearing heavily, if it chooses, upon the taxpayer whose
inexactness is of his own making.
COURT: Yes. The cost basis of property acquired in Japanese
war notes is the equivalent of the war notes in genuine
 representation expenses fall under the category of Philippine currency in accordance with the Ballantyne Scale of
business expenses which are allowable deductions values, and that the determination of the gain derived or loss
from gross income, if they meet the conditions sustained in the sale of such property is not affected by the
prescribed by law, particularly section 30 (a) [1], of the decline at the time of sale, in the purchasing power of the
Tax Code; that to be deductible, said business Philippine currency.
expenses must be ordinary and necessary expenses
paid or incurred in carrying on any trade or business;
Simply put: the court is not convinced with the contention of
that those expenses must also meet the further test of
Zamora because if the amounts in the deeds of sale will be
reasonableness in amount; that when some of the
followed, it will appear that a particular real property
representation expenses claimed by the taxpayer were
(P132,000.00) was sold to an amount that is very much below
evidenced by vouchers or chits, but others were
than its fair market value (P68,959.00). Hence, the court is
without vouchers or chits, documents or supporting
inclined to believe, based on admissions and careful study of the
papers; that there is no more than oral proof to the
evidences, that in the subject sales, the basis for the capital
effect that payments have been made for
gains computation should not the costs appearing in the deed
representation expenses allegedly made by the
of sale.
taxpayer and about the general nature of such alleged
expenses; that accordingly, it is not possible to
determine the actual amount covered by supporting
papers and the amount without supporting papers, the
court should determine from all available data, the IN VIEW HEREOF, the petition in each of the above-entitled
amount properly deductible as representation cases is dismissed, and the decision appealed from is affirmed,
expenses. without special pronouncement as to costs.

b) WON the CTA erred in disallowing 3-½% per annum as the (read the full text for a detailed explanation on issue #3)
rate of depreciation of the Bay View Hotel Building and instead
used only 2-½%?

ZAMORA: He contends that (1) the Ermita District, where the

Bay View Hotel is located, is now becoming a commercial
district; (2) the hotel has no room for improvement; and (3) the
changing modes in architecture, styles of furniture and
decorative designs, "must meet the taste of a fickle public,"
hence, the depreciation rate should be 3-½% per annum. His
basis is the testimony of its witness Mariano Katipunan, who
cited a book entitled "Hotel Management — Principles and
Practice" by Lucius Boomer, President, Hotel Waldorf Astoria

COURT: The 2-½% rate of depreciation of the Bay View Hotel

building, is approximately correct, based on Bulletin F which
8. 3M PHILIPPINES, INC., petitioner,
states that:
Normally, an average hotel building is estimated to
have a useful life of 50 years, but inasmuch as the
useful life of the building for business purposes
depends to a large extent on the suitability of the GRIÑO-AQUINO, J.:
structure to its use and location, its architectural
quality, the rate of change in population, the shifting
Section 29(a)(1) of the Tax Code which provides:

(a) Expenses. — (1) Business expenses. —

(parent company), on the ground that the fee and
royalty should be based only on locally manufactured
goods. (the basis of the CIR was the Central Bank
Circular No. 393)

On the second item, CIR allowed only one-

fifth (1/5) of 3M's capital expenditure on its tape coater
which was installed in 1973 because such expenditure
should be amortized for a period of five (5) years. The
disallowed balance should be spread over for the next
four (4) years.

In sum, CIR ordered 3M to pay P840,540.00 as deficiency

income tax on its 1974 return, plus P353,026.80 as 14% interest
per annum from February 15, 1975 to February 15, 1976, or a
total of P1,193,566.80.
CB Circular No. 393

Section 3. Requirements for Approval and Registration. —

3M protested the assessment and argues that the Central bank
The requirements for approval and registration as provided has no say in the assessment and collection of internal revenue
for in Section 2 above include, but are not limited to the taxes as such power is lodged in the Bureau of Internal
following: Revenue, that the Tax Code never mentions Circular 393 and
there is no law or regulation governing deduction of business
a. xxx xxx xxx expenses that refers to said circular.

b. xxx xxx xxx

c. The royalty/rental contracts involving manufacturing' ISSUE:

royalty, e.g., actual transfers of technological services such
as secret formula/processes, technical knowhow and the
like shall not exceed five (5) per cent of the wholesale price
WON 3M’s contention is tenable?
of the commodity/ties manufactured under the royalty
agreement. For contracts involving 'marketing' services
such as the use of foreign brands or trade names or
trademarks, the royalty/rental rate shall not exceed two RULING:
(2) per cent of the wholesale price of the commodity/ties
manufactured under the royalty agreement. The producer's No.
or foreign licensor's share in the proceeds from the
distribution/exhibition of the films shall not exceed sixty The court ruled that although the Tax Code allows payments of
(60) per cent of the net proceeds (gross proceeds less local royalty to be deducted from gross income as business expenses,
expenses) from the exhibition/distribution of the films. ...
it is CB Circular No. 393 that defines what royalty payments are
(Emphasis supplied.) (p. 27, Rollo.)
proper. Hence, improper payments of royalty are not deductible
as legitimate business expenses.
CB Circular No. 393 dated December 7,1983 was published in
3M Philippines, Inc. (3M) is a subsidiary of the Minnesota Mining the Official Gazette issue of December 17,1973 (69 O.G. No. 51,
and Manufacturing Company (or "3M-St. Paul") a non-resident p. 11737). Circulars issued by the Central Bank in the exercise
foreign corporation with principal office in St. Paul, Minnesota, of its authority under the Central Bank Act, and which have been
U.S.A. It is the exclusive importer, manufacturer, wholesaler, duly published in the Official Gazette, have the force and effect
and distributor in the Philippines of all products of 3M-St. Paul. of law. They are binding on everybody, the petitioner, as much
as the public respondent.
3M entered into a "Service Information and Technical Assistance
Agreement" and a "Patent and Trademark License Agreement" Because remittances to foreign licensors of technical service
with 3M-St. Paul under which 3M agreed to pay 3M-St. Paul a fees and royalties are made in foreign exchange, CB Circular No.
technical service fee of 3% and a royalty of 2% of its net sales. 393 (Regulations Governing Royalties/Rentals) dated December
Both agreements were submitted to, and approved by, the 7, 1973 was promulgated by the Central Bank as an exchange
Central Bank of the Philippines. control regulation to conserve foreign exchange and avoid
unnecessary drain on the country's international reserves (69
In 3M’s income tax return for the fiscal year 1974, it claimed the O.G. No. 51, pp. 11737-38).
following deductions as business expenses: (a) royalties and
technical service fees of P 3,050,646.00; and (b) pre-operational Section 3-C of the circular provides that royalties shall be paid
cost of tape coater of P97,485.08. only on commodities manufactured by the licensee under the
royalty agreement. CIR is correct in its assessment.
On the first item, CIR allowed a deduction but
only on the technical service fee and royalty for locally
manufactured products, and disallowed those which
have been paid by 3M to 3M-St. Paul as technical WHEREFORE, finding no reversible error in the decision of the
service fee and royalty on the P46,471,998.00 worth of Court of Tax Appeals, the petition for review is denied. Costs
finished products imported by 3M from the 3M-St. Paul against the petitioner.
SO ORDERED. from the sale of the Nasugbu farm lands to the tenants, and
the disallowance of deductions from gross income of various
business expenses and contributions claimed by Roxas y Cia.
and the Roxas brothers.
CIA., in their own respective behalf and as judicial co- For the reason that Roxas y Cia. subdivided its Nasugbu farm
guardians of JOSE ROXAS, petitioners, lands and sold them to the farmers on installment, the
vs. Commissioner considered the partnership as engaged in the
COURT OF TAX APPEALS and COMMISSIONER OF business of real estate, hence, 100% of the profits derived
INTERNAL REVENUE, respondents. therefrom was taxed.

BENGZON, J.P., J.: b) payment of real estate dealer's tax based on the fact that
Roxas y Cia. received house rentals from Jose Roxas in the
amount of P8,000.00. It contends that pursuant to Sec. 194
of the Tax Code, an owner of a real estate who derives a
FACTS: yearly rental income therefrom in the amount of P3,000.00
or more is considered a real estate dealer and is liable to pay
Antonio Roxas, Eduardo Roxas and Jose Roxas, formed the corresponding fixed tax. It justified its demand by
a partnership called Roxas y Compania to properly administer arguing that said partnership made profits from the purchase
the properties they inherited from their grandparents. and sale of securities.
Subject transactions: c) disallowed deductions (entities are specified in the ruling)
a) on the agricultural lands

The Government, by virtue of its constitutional mandate CTA: sustained the assessment of CIR except the demand for
subjected the Nasugbu lands of the petitioners to the the payment of the fixed tax on dealer of securities and the
coverage of agrarian reform. But since the Government did disallowance of the deductions for contributions to the Philippine
not have funds to cover the purchase price, a special Air Force Chapel and Hijas de Jesus' Retiro de Manresa.
arrangement was made for the Rehabilitation Finance
Corporation to advance to Roxas y Cia. the amount of Hence, this petition.
P1,500,000.00 as loan. Collateral for such loan were the
lands proposed to be sold to the farmers. Under the
arrangement, Roxas y Cia. allowed the farmers to buy the
lands for the same price but by installment, and contracted ISSUES:
with the Rehabilitation Finance Corporation to pay its loan
from the proceeds of the yearly amortizations paid by the 1. Is the gain derived from the sale of the Nasugbu farm
farmers. lands an ordinary gain, hence 100% taxable?
2. Are the deductions for business expenses and
In 1953 and 1955 Roxas y Cia. derived from said installment contributions deductible?
payments a net gain of P42,480.83 and P29,500.71. Fifty 3. Is Roxas y Cia liable for the payment of the fixed tax
percent of said net gain was reported for income tax on real estate dealers?
purposes as gain on the sale of capital asset held for more
than one year pursuant to Section 34 of the Tax Code.

b) on the residential house RULING:

During their bachelor days the Roxas brothers lived in the 1. The court ruled that it was only an isolated transaction .
residential house at Wright St., Malate, Manila, which they (based on the agricultural land transaction)
inherited from their grandparents. After Antonio and
The sale of the Nasugbu farm lands to the very farmers
Eduardo got married, they resided somewhere else leaving
who tilled them for generations was not only in consonance
only Jose in the old house. Jose paid to Roxas y Cia. rentals
with, but more in obedience to the request and pursuant to
for the house in the sum of P8,000.00 a year.
the policy of our Government to allocate lands to the
c) donations made by the partnership landless. It was the bounden duty of the Government to pay
the agreed compensation after it had persuaded Roxas y Cia
to sell its haciendas, and to subsequently subdivide them
among the farmers at very reasonable terms and prices.
On June 17, 1958, the CIR demanded from Roxas y Cia However, the Government could not comply with its duty for
the following: lack of funds. Obligingly, Roxas y Cia. shouldered the
Government's burden, went out of its way and sold lands
a) deficiency income taxes against the Roxas Brothers for the directly to the farmers in the same way and under the same
years 1953 and 1955. The deficiency income taxes resulted terms as would have been the case had the Government
from the inclusion as income of Roxas y Cia of the done it itself.
unreported 50% of the net profits for 1953 and 1955 derived
In fine, Roxas y Cia. cannot be considered a real estate P3,000.00 a year, does not provide any qualification as to the
dealer for the sale in question. Hence, pursuant to Section persons paying the rentals.
34 of the Tax Code the lands sold to the farmers are
capital assets, and the gain derived from the sale thereof is Section 194 of the Tax Code
capital gain, taxable only to the extent of 50%.
. . . "Real estate dealer" includes any person
engaged in the business of buying, selling, exchanging,
leasing or renting property on his own account as
2. It depends. principal and holding himself out as a full or part-time
dealer in real estate or as an owner of rental property
Under Section 39(h), a contribution to a government or properties rented or offered to rent for an aggregate
entity is deductible when used exclusively for public amount of three thousand pesos or more a year: . . .
purposes. Hence,

Allowed deductions:
WHEREFORE, the decision appealed from is modified. Roxas y
a. the contribution to the Manila Police trust fund Cia. is hereby ordered to pay the sum of P150.00 as real estate
because said trust fund belongs to the Manila Police, dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas
a government entity, intended to be used exclusively and Jose Roxas are ordered to pay the respective sums of
for its public functions. P109.00, P91.00 and P49.00 as their individual deficiency
income tax all corresponding for the year 1955. No costs. So
Disallowed deductions: ordered.
a. the contributions to the Christmas funds of the
Pasay City Police, Pasay City Firemen and Baguio
City Police because the Christmas funds were not  The power of taxation is sometimes called also the
spent for public purposes but as Christmas gifts to power to destroy. Therefore it should be exercised with
the families of the members of said entities. caution to minimize injury to the proprietary rights of a
b. the contributions to the Philippines Herald's fund for taxpayer. It must be exercised fairly, equally and
Manila's neediest families because the Philippines uniformly, lest the tax collector kill the "hen that lays
Herald is not a corporation or an association the golden egg". And, in order to maintain the general
contemplated in Section 30 (h) of the Tax Code public's trust and confidence in the Government this
(It should be noted however that the contributions power must be used justly and not treacherously. It
were not made to the Philippines Herald but to a does not conform with Our sense of justice in the
group of civic spirited citizens organized by the instant case for the Government to persuade the
Philippines Herald solely for charitable purposes. taxpayer to lend it a helping hand and later on to
There is no question that the members of this group penalize him for duly answering the urgent call.
of citizens do not receive profits, for all the funds
they raised were for Manila's neediest families. Such  Representation expenses are deductible from gross
a group of citizens may be classified as an income as expenditures incurred in carrying on a trade
association organized exclusively for charitable or business under Section 30(a) of the Tax Code
purposes mentioned in Section 30(h) of the Tax provided the taxpayer proves that they are reasonable
Code.) in amount, ordinary and necessary, and incurred in
c. the contribution to Our Lady of Fatima chapel at the connection with his business.
Far Eastern University because the said university
gives dividends to its stockholders. Located within
the premises of the university, the chapel in question
has not been shown to belong to the Catholic Church 10. Gancayco v. CIR
or any religious organization. Also, the lower court
found that it belongs to the Far Eastern University,
contributions to which are not deductible under
Section 30(h) of the Tax Code for the reason FACTS:
that the net income of said university inures to the
benefit of its stockholders. Petitioner Santiago Gancayco seeks the review of a decision of
the Court of Tax Appeals, requiring him to pay P16,860.31, plus
3. Yes. (based on the house rentals received from Jose, surcharge and interest, by way of deficiency income tax for the
pursuant to Art. 194 of the Tax Code stating that an owner of a year 1949.
real estate who derives a yearly rental income therefrom in the
amount of P3,000.00 or more is considered a real estate dealer On May 10, 1950, Gancayco filed his income tax return for the
and is liable to pay the corresponding fixed tax) year 1949. Two (2) days later, respondent Collector of Internal
Revenue issued the corresponding notice advising him that his
income tax liability for that year amounted P9,793.62, which he
Because Section 194 of the Tax Code, in considering as real paid on May 15, 1950. A year later, on May 14, 1951, respondent
estate dealers owners of real estate receiving rentals of at least wrote the communication Exhibit C, notifying Gancayco, inter
alia , that, upon investigation, there was still due from him, a
efficiency income tax for the year 1949, the sum of P29,554.05. or betterments made to increase the value of any
Gancayco sought a reconsideration, which was part granted by property or estate. (Emphasis supplied.)
respondent, who in a letter dated April 8, 1953 (Exhibit D),
informed petitioner that his income tax defendant efficiency for We concur in this view, which is a necessary consequence of
1949 amounted to P16,860.31. Gancayco urged another section 31 of the Tax Code, pursuant to which:
reconsideration (Exhibit O), but no action taken on this request,
although he had sent several communications calling (a) General Rule — In computing net income no
deduction shall in any case be allowed in respect of —
respondent's attention thereto.

On April 15, 1956, respondent issued a warrant of distraint and (1) Personal, living, or family expenses;
levy against the properties of Gancayco for the satisfaction of
his deficiency income tax liability. (2) Any amount paid out for new buildings or
for permanent improvements, or betterments made
to increase the value of any property or estate;

ISSUE: The question whether the sum of P16,860.31 is due from (3) Any amount expended in restoring property or
Gancayco as deficiency income tax for 1949 hinges on the in making good the exhaustion thereof for which an
validity of his claim for deduction of two (2) items, namely: (a) allowance is or has been made; or
for farming expenses, P27,459.00; and (b) for representation
(4) Premiums paid on any life insurance policy covering
expenses, P8,933.45.
the life of any officer or employee, or any person
financially interested in any trade or business carried
on by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under
Section 30 of the Tax Code partly reads: such policy. (Emphasis supplied.)

(a) Expenses: Said view is, likewise, in accord with the consensus of the
authorities on the subject.
(1) In General — All
the ordinary and necessary expenses paid or incurred Expenses incident to the acquisition of property follow
during the taxable year in carrying on any trade or the same rule as applied to payments made as direct
business, including a reasonable allowance for salaries consideration for the property. For example,
or other compensation for personal services actually commission paid in acquiring property are considered
rendered; traveling expenses while away from home in as representing part of the cost of the property
the pursuit of a trade or business; and rentals or other acquired. The same treatment is to be accorded to
payments required to be made as a condition to the amounts expended for maps, abstracts, legal opinions
continued use or possession, for the purposes of the on titles, recording fees and surveys. Other non-
trade or business, of property to which the taxpayer deductible expenses include amounts paid in
has not taken or is not taking title or in which he has connection with geological
no equity. (Emphasis supplied.) explorations, development and subdividing of real
estate; clearing and grading; restoration of soil, drilling
Referring to the item of P27,459, for farming expenses allegedly wells, architects's fees and similar types of
incurred by Gancayco, the decision appealed from has the expenditures. (4 Merten's Law of Federal Income
following to say: Taxation, Sec. 25.20, pp. 348-349; see also sec. 75 of
the income Regulation of the B.I.R.; Emphasis
No evidence has been presented as to the nature of
the said "farming expenses" other than the bare
statement of petitioner that they were spent for the The cost of farm machinery, equipment and farm
"development and cultivation of (his) property". No building represents a capital investment and is not an
specification has been made as to the actual amount allowable deduction as an item of expense. Amounts
spent for purchase of tools, equipment or materials, or expended in the development of farms, orchards, and
the amount spent for improvement. Respondent claims ranches prior to the time when the productive state is
that the entire amount was spent exclusively reached may be regarded as investments of capital.
for clearing and developing the farm which (Merten's Law of Federal Income Taxation, supra, sec.
were necessary to place it in a productive state. It is 25.108, p. 525.)
not, therefore, an ordinary expense but a capitol
expenditure. Accordingly, it is not deductible but it may Expenses for clearing off and grading lots acquired is
be amortized, in accordance with section 75 of a capital expenditure, representing part of the cost of
Revenue Regulations No. 2, cited above. See also, the land and was not deductible as an expense.
section 31 of the Revenue Code which provides that in (Liberty Banking Co. v. Heiner 37 F [2d] 703 [8AFTR
computing net income, no deduction shall in any case 100111] [CCA 3rd]; The B.L. Marble Chair Company v.
be allowed in respect of any amount paid out for new U.S., 15 AFTR 746).
buildings or for permanent improvements,
An item of expenditure, in order to be deductible under From July 1, 1957 to Dec. 31, P52,378.90
this section of the statute providing for the deduction 1958
of ordinary and necessary business expenses, must
fall squarely within the language of the statutory
provision. This section is intended primarily, although It is further stipulated that the sales tax collected from petitioner
not always necessarily, to cover expenditures of American Rubber Company on the local sales of its rubber
a recurring nature where the benefit derived from the products, following Internal Revenue General Circulars Nos. 431
payment is realized and exhausted within the taxable and 440, had been separately itemized and billed by petitioner
year. Accordingly, if the result of the expenditure is Company in the invoices issued to the customers, that paid both
the acquisition of an asset which has an economically the value of the rubber articles and the separately itemized sales
useful life beyond the taxable year, no deduction of tax, from January 1, 1955 to August 2, 1957.
such payment may be obtained under the provisions of
the statute. In such cases, to the extent that a
After paying under protest, the petitioner claimed refund of the
deduction is allowable, it must be obtained under the
sales taxes paid by it on the ground that under section 188,
provisions of the statute which permit deductions for
paragraph b, of the Internal Revenue Code, as amended,1 its
amortization, depreciation, depletion or loss. (W.B.
rubber products were agricultural products exempt from sales
Harbeson Co. 24 BTA, 542; Clark Thread Co., 28 BTA
tax, and upon refusal of the Commissioner of Internal Revenue,
1128 aff'd 100 F [2d] 257 [CCA 3rd, 1938]; 4 Merten's
brought the case on appeal to the Court of Tax Appeals (C.T.A.
Law of Federal Income Taxation, Sec. 25.17, pp. 337-
Nos. 356, 440,, 632). The respondent Commissioner interposed
defenses, denying that petitioner's products were agricultural
ones within the exemption; claiming that there had been no
Gancayco's claim for representation expenses aggregated exhaustion of administrative remedies; and argued that the
P31,753.97, of which P22,820.52 was allowed, and P8,933.45 sales tax having been passed to the buyers during the period
disallowed. Such disallowance is justified by the record, for, that elapsed from January 1, 1955 to August 2, 1957, the
apart from the absence of receipts, invoices or vouchers of the petitioner did not have personality to demand, sue for and
expenditures in question, petitioner could not specify the items recover the aforesaid sales taxes, plus interest.
constituting the same, or when or on whom or on what they
were incurred. The case of Cohan v. Commissioner, 39 F (2d)
In its decision, now under appeal, the Tax Court held Preserved
540, cited by petitioner is not in point, because in that case there
Latex, Flat Bark Rubber, and 3X Brown Crepe to be agricultural
was evidence on the amounts spent and the persons entertained
products, "because the labor employed in the processing thereof
and the necessity of entertaining them, although there were no
is agricultural labor", and hence, the sales of such products were
receipts an vouchers of the expenditures involved therein. Such
exempt from sales tax, but declared Pale Crepe No. 1, Ribbed
is not the case of petitioner herein.
Smoked Sheets Nos. 1 and 3, as well as 2X Brown Crepe (which
is obtained from rolling excess pieces of Smoked Sheets) to be
Being in accordance with the facts and law, the decision of the manufactured products, sales of which were subject to the tax.
Court of Tax Appeals is hereby affirmed therefore, with costs It overruled the defense of non-exhaustion of administrative
against petitioner Santiago Cancayco. It is so ordered. remedies and upheld the Revenue Commissioner's stand that
petitioner Company was not entitled to recover the sales tax that
had been separately billed to its customers, and paid by the
latter. Hence, it dismissed the appeal in C.T.A. Nos. 356 and 440
11. CIR V. AMERICAN RUBBER and ordered respondent Commissioner to refund only P3,916.49
without interest, or costs.

The factual background is the same in all four cases, and is not
(1) Whether the plaintiff's rubber products above described
in controversy, having been stipulated between the parties.
should be considered agricultural or manufactured for purposes
of their subjection to the sales tax;
Petitioner, American Rubber Company, a domestic corporation,
from January 1, 1955 to December 1, 1958, was engaged in
(2) Whether plaintiff is or is not entitled to recover the sales tax
producing rubber from its approximately 900 hectare rubber
paid by it, but passed on to and paid by the buyers of its
tree plantation, which it owned and operated in Latuan, Isabela,
products; and
City of Basilan. Its products, known in the market as Preserved
Latex, Pale Crepe No. 1, Pale Crepe No. 2, Ribbed Smoked
Sheets Nos. 1 and 2, Flat Bark Rubber, 2X Brown Crepe and 3X (3) Whether plaintiff is or is not entitled to interest on the sales
Brown Crepe. tax paid by it under protest, in case recovery thereof is allowed.

The following sales taxes on the aforementioned rubber

products were paid under protest — HELD:
From Jan. 1, 1955 to Dec. 31, P83,193.48
1956 The first issue, in our opinion, is governed by the principles laid
down by this Court in Philippine Packing Corporation vs.
From Jan. 1, 1957 to June P20,504.99 Collector of Internal Revenue, 100 Phil. 545 et seq. We there
30, 1957 ruled that the exemption from sales tax established in section
188 (b) of the Internal Revenue Tax Code in favor of sales of As to 2X Brown Crepe which is compacted out of the trimmings
agricultural products, whether in their original form or not, made and waste left over from the production of ribbed smoked
by the producer or owner of the land where produced is not sheets, no reason is seen why it should be treated differently
taken away merely because the produce undergoes processing from the ribbed smoked sheets themselves.
at the hand of said producer or owner for the purpose of working
his product into a more convenient and valuable form suited to In his appeal, the Revenue Commissioner contends that all of
meet the demand of an expanded market; that the exemption plaintiff's products should be deemed manufactured articles, on
was not designed in favor of the small agricultural producer, the strength of section 194 (n) of the Revenue Code defining a
already exempted by the subsequent paragraphs of the same "manufacturer" as
section 188, but that said exemption is not incompatible with
large scale agricultural production that incidentally required
every person who by physical or chemical process
resort to preservative processes designed to increase or prolong
alters the exterior texture or form or inner substances
marketability of the product.
of any raw material or manufactured or partially
manufactured product in such manner as to prepare it
In the case before us, the parties have stipulated that fresh latex for a special use or uses to which it could not have
directly obtained from the rubber tree, which is clearly an been put to in its original condition, or who . . . alters
agricultural product, becomes spoiled after only two hours. It the quality of any such raw material . . . as to reduce
has, therefore, a severely limited marketability. The addition of it to marketable shape . . . .
ammonia prevents its deterioration for about a month, and we
see no reason why this preservative process should wrest away
But, as pointed out in the Philippine Packing Corporation case,
from the preserved latex the protective mantle of the tax
this definition is not applicable to the exemption of agricultural
products, "whether in their original form or not". The use of this
last phrase in the statute clearly indicates that the agricultural
Taking also into account the great distance that separates the product may be altered in texture or form without being divested
plaintiff's plantation from the main rubber processing centers in of the exemption (cas cit. 100 Phil., p. 548). The exception
Japan, the United States and Europe, and the difficulty in would be sales of agricultural products while Republic Act No.
handling products in liquid form, it can be discerned without 1612 was in effect because under this Act the freedom from
difficulty that preserved, latex, with its 30-day spoilage limit, is sales tax became restricted to agricultural products "in their
still severely handicapped for export and dollar earning original form" only. So that plaintiff's sales from August 24, 1956
purposes. (approval of Republic Act 1612) to June 22, 1957 (when
Republic Act 1856 became effective and restored the exemption
To overcome these shortcomings, and extend its useful life to agricultural products "whether in their original form or not")
almost indefinitely, it becomes necessary to separate and became properly taxable. Under paragraphs (A)2 and B(4) of
solidify the rubber granules diffused in the latex, and hence, the additional stipulation of facts (CTA Rec. pp. 261-262, G.R.
according to the stipulation of facts and the evidence, acetic acid L-19801), the sales tax properly collected during this period of
is added to hasten coagulation. There is nothing on record to plaintiff's transactions amounted to P18,187.19 from August 24
show that the acetic acid in way produces anything that was not to December 31, 1956; and P18,888.28 from January 1 to June
originally in the source, the liquid latex. The coagulum is then 21, 1957, or a total of P37,075.47. This last amount is, therefore
rolled and compacted and afterwards air dried to make Pale non-recoverable.2
Crepe(1 and 2), or else cured and smoked to produce rubber
sheets. Once again we see nothing in this processing to alter The second issue in this appeal concerns the holding of the
the agricultural nature of the result; what takes place is merely Court of Tax Appeals that the plaintiff Company is not entitled
an accelerated coagulation and dessication that would naturally to recover the sales tax paid by it from January, 1955 to August
occur anyway, only within a longer period of time, coupled with 2, 1957, because during that period the plaintiff had separately
greater spoilage of the product. invoiced and billed the corresponding sales tax to the buyers of
its products. In so holding, the Tax Court relied on our decisions
Thus the operations carried out by plaintiff appear to be purely in Medina vs. City of Baguio, 91 Phil. 854; Mendoza, Santos &
preservative in nature, made necessary, by its production of Co. vs. Municipality of Meycawayan, L-6069-6070, April 30, 1954
fresh rubber latex in a large scale. they are purely incidental to (94 Phil. 1047); and Zosimo Rojas & Bros. vs. City of Cavite, L-
the latter, just as the canning of skinned and cored pineapples 10730, May 27, 1958.
in syrup was held to be incidental to the large-scale cultivation
of the fruit in the Philippine Packing Corporation case (ante). The basic ruling is that of Medina vs. City of Baguio, supra,
Being necessary to suit the product to the demands of the where this Court affirmed the ruling of the court of First Instance
market, the operations in both cases should lead to the same to the effect that —
result, non-taxability of the sales of the respective agricultural
products. In not so holding, the Tax Court was in error.
"The amount collected from the theatergoers as
additional price of admission tickets is not the property
Even less justifiable is the position taken by the Revenue of plaintiffs or any of them. It is paid by the public. If
Commissioner in his appeal against the finding of the Tax Court anybody has the right to claim it, it is those who paid
that Flat Bark 3X Brown Crepe rubber are agricultural products. it. Only owners of property has the right to claim said
According to the record, these sheets result from the drippings property. The cine owner acted as mere agents of the
and waste rubber that have dried naturally, that are rolled and city in collecting additional price charged in the sale of
compacted into the desired thickness, without any other admission tickets." (Medina vs. City of Baguio, 91 Phil.
processing. 854) (Emphasis supplied)
We agree with the plaintiff-appellant that the Medina ruling is IN VIEW OF THE FOREGOING, the decision of the Court of Tax
not applicable to the present case, since the municipal taxes Appeals is affirmed
therein imposed were taxes on the admission tickets sold, so
that, in effect, they were levies upon the theatergoers who
bought them; so much so that (as the decision expressly ruled)
the tax was collected by the theater owners as agents of the 12. No. L-20563. October 29, 1968.
respective municipal treasurers. This does not obtain in the case
at bar. The Medina ruling was merely followed in Rojas & Bros. CEBU PORTLAND CEMENT COMPANY,
vs. Cavite, supra; and in Mendoza, Santos & Co. vs. Municipality petitioner, vs.COLLECTOR (NOW COMMISSIONER) OF
of Meycawayan, 94 Phil. 1047. INTERNAL REVENUE, respondent.

By contrast with the municipal taxes involved in the preceding

cases, the sales tax is by law imposed directly, not on the thing
sold, but on the act (sale) of the manufacturer, producer or Facts: This case involves petitioner's claim for refund of
importer (Op. of the Secretary of Justice, June 15, 1946; 47 P458,241.45 sales tax paid from November 1, 1954 to March,
C.J.S., p. 1141), who is exclusively made liable for its timely 1955, and P427,552.95 ad valorem tax paid from April, 1955 to
payment. There is no proof that the tax paid by plaintiff is the
September 30, 1956 from the sale of APO
very money paid by its customers. Where the tax money paid
by the plaintiff came from is really no concern of the Portland cement produced by the petitioner.
Government, but solely a matter between the plaintiff and its
customers. Anyway, once recovered, the plaintiff must hold the
refund taxes in trust for the individual purchasers who advanced
payment thereof, and whose names must appear in plaintiff's Prior to the effectivity of Republic Act No. 1299 on June 16,
records. 1955,1 the petitioner had been paying the sales tax (known also
as percentage tax) of APO portland cement produced by
Moreover, the separate billing of the sales tax in appellant's it,2 computed at 7% of the gross selling price inclusive of the
invoices was a direct result of the respondent Commissioner's cost of the bag containers of cement and the gypsum3 used in
General Circular No. 440, providing that — the manufacture of said product. Af ter the approval of the
amendment of the law petitioner stopped paying sales tax on its
if a manufacturer, producer, or importer, in fixing the gross sales and instead paid the ad valorem tax4 on the selling
gross selling price of an article sold by him, has price of the product after deducting therefrom the
included an amount intended to cover the sales tax in
corresponding cost of the containers thereof.
the gross selling price of the article, the sales tax shall
be based on the gross selling price less the amount
intended to cover the tax, if the same is billed to the It appears, however, that since 1952, petitioner had been
purchaser as a separate item in the invoice. . . . protesting the imposition of the sales tax on its APO portland
(Emphasis supplied) cement, and on January 16, 1953, it also protested the payment
of ad valorem taxes. A written claim for refund of sales and ad
In other words, the separate itemization of the sales tax in the valorem taxes paid by petitioner was filed two years later
invoices was permitted to avoid the taxpayer being compelled (September 1955) which was reiterated on July 26, 1956.
to pay a sales tax on the tax itself. It does not seem either just
or proper that a step suggested by the Internal Revenue Without awaiting respondent's ruling on said claims for refund,
authorities themselves to protect the taxpayer from paying a petitioner, on January 24, 1957, filed with the Court of Tax
double tax should now be used to block his action to recover
Appeals a petition for review "of the action of the Collector of
taxes collected without legal sanction.
Internal Revenue in refusing to entertain petitioner's claim for
refund of the percentage tax on sales of its APO cement." It was
Finally, a more important reason that militates against extensive
and indiscriminate application of the Medina vs. City of Baguio alleged in the petition that the percentage taxes collected by
ruling is that it would tend to perpetuate illegal taxation; for the respondent are refundable since under Republic Act 1299,
individual customers to whom the tax is ultimately shifted will producers of cement are exempt from the payment of said tax.
ordinarily not care to sue for its recovery, in view of the small The petition was amended on October 24, 1959, and again
amount paid by each and the high cost of litigation for the amended on June 23, 1961, to include a claim for refund of ad
reclaiming of an illegal tax. In so far, therefore, as it favors the valorem taxes alleged to have been overpaid through double
imposition, collection and retention of illegal taxes, and
encourages a multiplicity of suits, the Tax Court's ruling under
appeal violates morals and public policy.

The plaintiff Company also urges that the refund of the taxes Issue: Whether of not Cebu Portland entitled to the refund
should include interest thereon. While this Court has allowed
of sales and ad valorem taxes?
recovery of interest in some cases, it has done so only in cases
of patent arbitrariness on the part of the Revenue authorities;
and in this instance we agree with the Tax Court that no such
patent arbitrariness has been shown.
Held: NO, due to prescription, and the taxable character of
cement. However, deductions may be had from the gross selling
price representing Gypsum and the Bag Containers of cement.

The gypsum and bag containers used in the production

and sale of cement are deductible from the gross selling price in
computing the 7% compensating tax levied on the sale of
cement before Republic Act 1299. In the absence of any
showing that the petitioner itself manufactured the bag
containers, the inference is that these bags were bought from
others from whom taxes had been levied for the original sale
thereof. The same holds true with the gypsum used in the
process of the manufacture of cement.

Pursuant to section 186 of the Tax Code and in

consonance with the case of Philippine Acetylene Co.,
Inc. vs. Commissioner of Internal Revenue & Court of Tax
Appeals, it is the petitioner, and not its customers that may ask
for a refund of whatever amounts it is entitled for the
percentage or sales tax it paid before the amendment of section
246 of the Tax Code.

** Constitutional law; Statutory construction; Statute

operates prospectively unless the contrary is made manifest;
Tax laws operate prospectively unless retrospective effect is
expressly declared or clearly implied.— It is a settled rule in
statutory construction that a statute operates prospectively only
and never retroactively, unless the legislative intent to the
contrary is made manifest either by the express terms of the
statute or by necessary implication. In every case of doubt, the
doubt must be resolved against the retrospective effect. There
is nothing in the context of the provision in question that would
manifest the Legislature's intention to have the provision apply
to taxes due in the past. On the other hand, the use of the word
"shall" gives the unmistakable impression that the lawmakers
intended this enactment to be effective only in future.
Furthermore, careful perusal of the explanatory note to House
Bill No. 3251, later approved as Republic Act 1299, and the
portions of the record of the discussions in Congress, reveals
nothing that would suggest that the amendment was enacted
to operate retrospectively. Indeed, like other statutes, tax laws
operate prospectively, whether they enact, amend or repeal,
unless as aforesaid, the purpose of the Legislature to give
retrospective effect is expressly declared or may clearly be
implied from the language used.
13. No. L-21520. December 11, 1967. is postponed to a subsequent year, which, to be precise, is that
year in which it appears that no compensation at all can be had,
PLARIDEL SURETY & INSURANCE COMPANY, or that there is a remaining or net loss, i.e., no full
petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, compensation.

Facts: Petitioner Plaridel Surety & Insurance Co., is a domestic

corporation engaged in the bonding business. On November 9, Assuming that there was no reasonable expectation of
1950, petitioner, as surety, and Constancio San Jose, as recovery of the loss sustained by petitioner, still no loss
principal, solidarity executed a performance bond in the penal deduction can be had. Sec. 30(d) (2) of the Tax Code requires
sum of P30,600.00 in favor of the P. L. Galang Machinery Co., a charge-off as one of the conditions for loss deduction.
Inc., to secure the performance of San Jose’s contractual However, petitioner, who had the burden of proof, failed to
obligation to produce and supply logs to the latter. adduce evidence that there was a charge-off in connection with
the P44,490.00—or P30,600.00—which it paid to Galang
To afford itself adequate protection against loss or damage Machinery.
on the performance bond, petitioner required San Jose and one
Ramon Cuervo to execute an indemnity agreement obligating 14. Collector vs. Goodrich International Rubber Co.
themselves, solidarity, to indemnify petitioner for whatever
liability it may incur by reason of said performance bond. No. L-22265; dated 22 December 1967; 21 SCRA 1336
Accordingly, San Jose constituted a chattel mortgage on logging
machineries and other movables in petitioner’s favor1 while
Ramon Cuervo executed a real estate mortgage.2 FACTS: Assessments was made by the Commissioner of
Internal Revenue, in the sums of P14,128.00 and P8,439.00, as
San Jose later failed to deliver the logs to Galang
deficiency income taxes allegedly due from respondent
Machinery3 and the latter sued on the performance bond. On
Goodrich—for the years 1951 and 1952. These assessments
October 1, 1952, the Court of First Instance adjudged San Jose
were based on disallowed deductions, claimed by Goodrich,
and petitioner liable; it also directed San Jose and Cuervo to
consisting of several alleged bad debts, in the aggregate sum of
reimburse petitioner for whatever amount it would pay Galang
P50,455.41, for the year 1951, and the sum of P30,138.88, as
representation expenses allegedly incurred in the year 1952.
In its income tax return for the year 1957, petitioner Goodrich had appealed from said assessments to the CA. A
claimed the said amount of P44,490.00 as deductible loss from decision allowing the deduction for bad debts, but disallowing
its gross income and, accordingly, paid the amount of P136.00 the alleged representation expenses was made. On motion for
as its income tax for 1957. reconsideration and new trial, filed by Goodrich, on November
19, 1963, the Court of Tax Appeals amended its aforementioned
The Commissioner of Internal Revenue disallowed the decision and allowed said deductions for representation
claimed deduction of P44,490.00 and assessed against expenses.
petitioner the sum of P8,898.00, plus interest, as deficiency
income tax for the year 1957.

A reading of the case shows that Portillo Auto Seat Cover,

Visayan Rapid Transit, Bataan Auto Seat Cover, Tres Amigos
Issue: Whether or not petitioner can claim P44,490 as a Supply and 6 more debtors were given a demand letter and after
deductible loss from its gross income. a while was written off as bad debt.

Held: No. Petitioner was duly compensated for otherwise than ISSUE: Should deductions to the respondent’s tax be allowed
by insurance- thru the mortgage in its favor executed by San for the bad debts incurred by the debtors?
Jose and Cuervo and it had not yet exhausted all its available
remedies, especially as against Cuervo to minimize its loss.

HELD: The claim for deduction of the said ten (10) debts should
be rejected. Goodrich has not established either that the debts
Loss is deductible only in the taxable year it actually are actually worthless or that it had reasonable grounds to
happens or is sustained. However, if the loss is compensable believe them to be so in 1951. Our statute permits the deduction
otherwise than by insurance—thru the mortgages in petitioner’s of debts “actually ascertained to be worthless within the taxable
favor executed by San Jose and Cuervo—though it had not year,” obviously to prevent arbitrary action by the taxpayer, to
exhausted all its available remedies, especially as against unduly avoid tax liability.
Cuervo, to minimize its loss, then deduction for the loss suffered
The requirement of ascertainment of worthlessness
requires proof of two facts: (1) that the taxpayer did in fact
ascertain the debt to be worthless, in the year for which the
deduction is sought; and (2) that, in so doing, he acted in good

Good faith on the part of the taxpayer is not enough. He must

show, also, that he had reasonably investigated the relevant
facts and had drawn a reasonable inference from the
information thus obtained by him. Respondent herein has not
adequately made such showing. The payments made, some in
full, after some of the foregoing accounts had been
characterized as bad debts, merely stresses the undue haste
with which the same had been written off. At any rate,
respondent has not proven that said debts were worthless.
There is no evidence that the debtors can not pay them. It
should be noted also that, in violation of Revenue Regulations
No. 2, Section 102, respondent had not attached to its income
tax returns a statement showing the propriety of the deductions
therein made for alleged bad debts.
accounts; (2) sending of collection letters; (3) giving the account
to a lawyer for collection; and (4) filing a collection case in court.
15. Phil. Refining Co. vs. CA et al

G.R. No. 118794; dated 8 May 1996; 256 SCRA 667 On the foregoing considerations, respondent Court of Appeals
held that petitioner did not satisfy the requirements of
“worthlessness of a debt” as to the thirteen (13) accounts
disallowed as deductions.
FACTS: Petitioner Philippine Refining Company (PRC) was
assessed by respondent (Commissioner) to pay a deficiency tax
for the year 1985 in the amount of P1,892,584.00. The
assessment was timely protested by petitioner on April 26, 1989,
on the ground that it was based on the erroneous disallowances
of “bad debts” and “interest expense” although the same are
both allowable and legal deductions. Respondent Commissioner,
however, issued a warrant of garnishment against the deposits
of petitioner (implied action of denial of protest).

Out of the sixteen (16) accounts alleged as bad debts, the CA

found out that only three (3) accounts have met the
requirements of the worthlessness of the accounts, hence were
properly written off as bad debts. Further, that said accounts
have not satisfied the requirements of the ‘worthlessness of a
debt.’ Mere testimony of the Financial Accountant of the
Petitioner explaining the worthlessness of said debts is seen by
this Court as nothing more than a self-serving exercise which
lacks probative value. There was no iota of documentary

ISSUE: Is nobody in a better position to determine when an

obligation becomes a bad debt than the creditor itself, and that
its judgment should not be substituted by that of respondent
court as it is PRC which has the facilities in ascertaining the
collectability or uncollectibility of the debts?

HELD: No. Court of Appeals relied on the ruling of this Court in

Collector vs. Goodrich International Rubber Co., which
established the rule in determining the “worthlessness of a
debt.” In said case, we held that for debts to be considered as
“worthless,” and thereby qualify as “bad debts” making them
deductible, the taxpayer should show that: (1) there is a valid
and subsisting debt; (2) the debt must be actually ascertained
to be worthless and uncollectible during the taxable year; (3)
the debt must be charged off during the taxable year; and (4)
the debt must arise from the business or trade of the taxpayer.

Additionally, before a debt can be considered worthless, the

taxpayer must also show that it is indeed uncollectible even in
the future. Furthermore, there are steps outlined to be
undertaken by the taxpayer to prove that he exerted diligent
efforts to collect the debts, viz.: (1) sending of statement of
HELD: The statutory test of deductibility where it is axiomatic
that to be deductible as a business expense, three conditions
16. Atlas Consolidated Mining vs. Commissioner are imposed, namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable
L-26911; dated 27January 1981; 102 SCRA 246
year, and (3) it must be paid or incurred in carrying in a trade
or business. In addition, not only must the taxpayer meet the
business test, he must substantially prove by evidence or
FACTS: This tax case (CTA No. 1312) arose from the 1957 and records the deductions claimed under the law, otherwise, the
1958 deficiency income tax assessments made by to Atlas. It is same will
a corporation engaged in the mining industry registered under be disallowed.
the laws of the Philippines.

The mere allegation of the taxpayer that an item of expense is

For the year 1957, it was the opinion of the Commissioner that ordinary and necessary does not justify its deduction. The Court
Atlas is not entitled to exemption from the income tax under has never attempted to define with precision the terms “ordinary
Section 4 of Republic Act 909 because same covers only gold and necessary.” There are however, certain guiding principles
mines. worthy of serious consideration in the proper adjudication of
conflicting claims. Ordinarily, an expense will be considered
“necessary” where the expenditure is appropriate and helpful in
the development of the taxpayer’s business.
For the year 1958, the assessment of deficiency income tax of
P761,789.12 covers the disallowance of items claimed by Atlas
as deductible from gross income. On October 9, 1962, Atlas It is “ordinary” when it connotes a payment which is normal in
protested the assessment asking for its reconsideration. relation to the business of the taxpayer and the surrounding
circumstances. The term “ordinary” does not require that the
payments be habitual or normal in the sense that the same
taxpayer will have to make them often; the payment may be
The Secretary of Finance ruled that the exemption provided in
unique or nonrecurring to the particular taxpayer affected.
Republic Act 909 embraces all new mines and old mines whether
gold or other minerals. Accordingly, the Commissioner
recomputed Atlas deficiency income tax liabilities. Thus,
eliminating the assessment of P546,295.16 for the year 1957. There is thus no hard and fast rule on the matter. The right to
The Commissioner’s assessment for 1958 was reduced from a deduction depends in each case on the particular facts and the
P215,493.96 to P39,646.82 from which Atlas appealed to the relation of the payment to the type of business in which the
Court of Tax Appeals, assailing the disallowance of the following taxpayer is engaged. The intention of the taxpayer often may
items claimed as deductible from its gross income: Transfer be the controlling fact in making the determination.
agent’s fee, Stockholders relation service fee, U.S. stock listing
expenses, Suit expenses, Provision for contingencies.

Assuming that the expenditure is ordinary and necessary in the

operation of the taxpayer’s business, the answer to the question
Atlas appealed only that portion of the Court of Tax Appeals’ as to whether the expenditure is an allowable deduction as a
decision disallowing the deduction from gross income of the so-- business expense must be determined from the nature of the
called stockholders relation service fee. Atlas claimed that it was expenditure itself, which in turn depends on the extent and
paid for services of a public relations firm, P.K. Macker & Co., a permanency of the work accomplished by the expenditure.
reputable public relations consultant in New York City, U.S.A.,
hence, an ordinary and necessary business expense in order “to
compete with other corporations also interested in the
It appears that on December 27, 1957, Atlas increased its capital
investment market in the United States.”
stock from P15,000,000 to P18,325,000. It was claimed by Atlas
that its shares of stock worth P3,325,000 were sold in the United
States because of the services rendered by the public relations
ISSUE: Are expenses paid for the services rendered by a public firm, P. K. Macker & Company. The Court of Tax Appeals ruled
relations firm P.K. Macker & Co. labelled as stockholders relation that the information about Atlas given out and played up in the
service fee an allowable deduction as business expense under mass communication media resulted in full subscription of the
Section 30 (a) (1) of the National Internal Revenue Code? additional shares issued by Atlas; consequently, the
questioned item, stockholders relation service fee, was
in effect spent for the acquisition of additional capital,
ergo, a capital expenditure. We sustain the ruling of the tax
court that the expenditure of P25,523.14 paid to P.K. Macker &
Co. as compensation for services carrying on the selling
campaign in an effort to sell Atlas’ additional capital stock of
P3,325,000 is not an ordinary expense.

That the expense in question was incurred to create a favorable

image of the corporation in order to gain or maintain the public’s
and its stockholders’ patronage, does not make it deductible as
business expense. 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
expense but capital expenditures.