G.R. No.

L-28896 Febru2ry 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., 2nd THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
T/xes /re the lifeblood of the government /nd so should be collected without unnecess/ry hindr/nce On the
other h/nd, such collection should be m/de in /ccord/nce with l/w /s /ny /rbitr/riness will neg/te the very
re/son for government itself. It is therefore necess/ry to reconcile the /pp/rently conflicting interests of the
/uthorities /nd the t/xp/yers so th/t the re/l purpose of t/x/tion, which is the promotion of the common good,
m/y be /chieved.
The m/in issue in this c/se is whether or not the Collector of Intern/l Revenue correctly dis/llowed the
P75,000.00 deduction cl/imed by priv/te respondent Algue /s legitim/te business expenses in its income t/x
returns. The coroll/ry issue is whether or not the /ppe/l of the priv/te respondent from the decision of the
Collector of Intern/l Revenue w/s m/de on time /nd in /ccord/nce with l/w.
We de/l first with the procedur/l question.
The record shows th/t on J/nu/ry 14, 1965, the priv/te respondent, / domestic corpor/tion eng/ged in
engineering, construction /nd other /llied /ctivities, received / letter from the petitioner /ssessing it in the tot/l
/mount of P83,183.85 /s delinquency income t/xes for the ye/rs 1958 /nd 1959.1 On J/nu/ry 18, 1965, Algue
flied / letter of protest or request for reconsider/tion, which letter w/s st/mp received on the s/me d/y in the
office of the petitioner. 2 On M/rch 12, 1965, / w/rr/nt of distr/int /nd levy w/s presented to the priv/te
respondent, through its counsel, Atty. Alberto Guev/r/, Jr., who refused to receive it on the ground of the pending
protest. 3 A se/rch of the protest in the dockets of the c/se proved fruitless. Atty. Guev/r/ produced his file copy
/nd g/ve / photost/t to BIR /gent R/mon Reyes, who deferred service of the w/rr/nt. 4 On April 7, 1965, Atty.
Guev/r/ w/s fin/lly informed th/t the BIR w/s not t/king /ny /ction on the protest /nd it w/s only then th/t he
/ccepted the w/rr/nt of distr/int /nd levy e/rlier sought to be served.5 Sixteen d/ys l/ter, on April 23, 1965,
Algue filed / petition for review of the decision of the Commissioner of Intern/l Revenue with the Court of T/x
Appe/ls.6
The /bove chronology shows th/t the petition w/s filed se/son/bly. According to Rep. Act No. 1125, the /ppe/l
m/y be m/de within thirty d/ys /fter receipt of the decision or ruling ch/llenged.7 It is true th/t /s / rule the
w/rr/nt of distr/int /nd levy is "proof of the fin/lity of the /ssessment" 8 /nd renders hopeless / request for
reconsider/tion," 9 being "t/nt/mount to /n outright deni/l thereof /nd m/kes the s/id request deemed
rejected." 10 But there is / speci/l circumst/nce in the c/se /t b/r th/t prevents /pplic/tion of this /ccepted
doctrine.
The proven f/ct is th/t four d/ys /fter the priv/te respondent received the petitioner's notice of /ssessment, it
filed its letter of protest. This w/s /pp/rently not t/ken into /ccount before the w/rr/nt of distr/int /nd levy w/s
issued; indeed, such protest could not be loc/ted in the office of the petitioner. It w/s only /fter Atty. Guev/r/
g/ve the BIR / copy of the protest th/t it w/s, if /t /ll, considered by the t/x /uthorities. During the intervening
period, the w/rr/nt w/s prem/ture /nd could therefore not be served.
As the Court of T/x Appe/ls correctly noted," 11 the protest filed by priv/te respondent w/s not pro form' /nd
w/s b/sed on strong leg/l consider/tions. It thus h/d the effect of suspending on J/nu/ry 18, 1965, when it w/s
filed, the reglement/ry period which st/rted on the d/te the /ssessment w/s received, viz., J/nu/ry 14, 1965.
The period st/rted running /g/in only on April 7, 1965, when the priv/te respondent w/s definitely informed of
the implied rejection of the s/id protest /nd the w/rr/nt w/s fin/lly served on it. Hence, when the /ppe/l w/s
filed on April 23, 1965, only 20 d/ys of the reglement/ry period h/d been consumed.
Now for the subst/ntive question.
The petitioner contends th/t the cl/imed deduction of P75,000.00 w/s properly dis/llowed bec/use it w/s not /n
ordin/ry re/son/ble or necess/ry business expense. The Court of T/x Appe/ls h/d seen it differently. Agreeing
with Algue, it held th/t the s/id /mount h/d been legitim/tely p/id by the priv/te respondent for /ctu/l services
rendered. The p/yment w/s in the form of promotion/l fees. These were collected by the P/yees for their work in
the cre/tion of the Veget/ble Oil Investment Corpor/tion of the Philippines /nd its subsequent purch/se of the
properties of the Philippine Sug/r Est/te Development Comp/ny.
P/renthetic/lly, it m/y be observed th/t the petitioner h/d Origin/lly cl/imed these promotion/l fees to be
person/l holding comp/ny income 12 but l/ter conformed to the decision of the respondent court rejecting this
/ssertion.13 In f/ct, /s the s/id court found, the /mount w/s e/rned through the joint efforts of the persons
/mong whom it w/s distributed It h/s been est/blished th/t the Philippine Sug/r Est/te Development Comp/ny
h/d e/rlier /ppointed Algue /s its /gent, /uthorizing it to sell its l/nd, f/ctories /nd oil m/nuf/cturing process.
Pursu/nt to such /uthority, Alberto Guev/r/, Jr., Edu/rdo Guev/r/, Is/bel Guev/r/, Edith, O'F/rell, /nd P/blo
S/nchez, worked for the form/tion of the Veget/ble Oil Investment Corpor/tion, inducing other persons to invest
in it.14 Ultim/tely, /fter its incorpor/tion l/rgely through the promotion of the s/id persons, this new corpor/tion
purch/sed the PSEDC properties.15 For this s/le, Algue received /s /gent / commission of P126,000.00, /nd it
w/s from this commission th/t the P75,000.00 promotion/l fees were p/id to the /foren/med individu/ls.16
There is no dispute th/t the p/yees duly reported their respective sh/res of the fees in their income t/x returns
/nd p/id the corresponding t/xes thereon.17 The Court of T/x Appe/ls /lso found, /fter ex/mining the evidence,
th/t no distribution of dividends w/s involved.18
The petitioner cl/ims th/t these p/yments /re fictitious bec/use most of the p/yees /re members of the s/me
f/mily in control of Algue. It is /rgued th/t no indic/tion w/s m/de /s to how such p/yments were m/de, whether
by check or in c/sh, /nd there is not enough subst/nti/tion of such p/yments. In short, the petitioner suggests /
t/x dodge, /n /ttempt to ev/de / legitim/te /ssessment by involving /n im/gin/ry deduction.
We find th/t these suspicions were /dequ/tely met by the priv/te respondent when its President, Alberto
Guev/r/, /nd the /ccount/nt, Cecili/ V. de Jesus, testified th/t the p/yments were not m/de in one lump sum
but periodic/lly /nd in different /mounts /s e/ch p/yee's need /rose. 19 It should be remembered th/t this w/s
/ f/mily corpor/tion where strict business procedures were not /pplied /nd immedi/te issu/nce of receipts w/s
not required. Even so, /t the end of the ye/r, when the books were to be closed, e/ch p/yee m/de /n /ccounting
of /ll of the fees received by him or her, to m/ke up the tot/l of P75,000.00. 20 Admittedly, everything seemed to
be inform/l. This /rr/ngement w/s underst/nd/ble, however, in view of the close rel/tionship /mong the persons
in the f/mily corpor/tion.
We /gree with the respondent court th/t the /mount of the promotion/l fees w/s not excessive. The tot/l
commission p/id by the Philippine Sug/r Est/te Development Co. to the priv/te respondent w/s P125,000.00. 21
After deducting the s/id fees, Algue still h/d / b/l/nce of P50,000.00 /s cle/r profit from the tr/ns/ction. The
/mount of P75,000.00 w/s 60% of the tot/l commission. This w/s / re/son/ble proportion, considering th/t it
w/s the p/yees who did pr/ctic/lly everything, from the form/tion of the Veget/ble Oil Investment Corpor/tion to
the /ctu/l purch/se by it of the Sug/r Est/te properties. This finding of the respondent court is in /ccord with the
following provision of the T/x Code:
SEC. 30. Deductions from gross income.--In computing net income there sh/ll be /llowed /s deductions —
(/) Expenses:
(1) In gener'l.--All the ordin/ry /nd necess/ry expenses p/id or incurred during the t/x/ble ye/r in c/rrying on
/ny tr/de or business, including / re/son/ble /llow/nce for s/l/ries or other compens/tion for person/l services
/ctu/lly rendered; ... 22
/nd Revenue Regul/tions No. 2, Section 70 (1), re/ding /s follows:
SEC. 70. Compens'tion for person'l services.--Among the ordin/ry /nd necess/ry expenses p/id or incurred in
c/rrying on /ny tr/de or business m/y be included / re/son/ble /llow/nce for s/l/ries or other compens/tion for
person/l services /ctu/lly rendered. The test of deductibility in the c/se of compens/tion p/yments is whether
they /re re/son/ble /nd /re, in f/ct, p/yments purely for service. This test /nd deductibility in the c/se of
compens/tion p/yments is whether they /re re/son/ble /nd /re, in f/ct, p/yments purely for service. This test
/nd its pr/ctic/l /pplic/tion m/y be further st/ted /nd illustr/ted /s follows:
Any /mount p/id in the form of compens/tion, but not in f/ct /s the purch/se price of services, is not deductible.
(/) An ostensible s/l/ry p/id by / corpor/tion m/y be / distribution of / dividend on stock. This is likely to occur
in the c/se of / corpor/tion h/ving few stockholders, Pr/ctic/lly /ll of whom dr/w s/l/ries. If in such / c/se the
s/l/ries /re in excess of those ordin/rily p/id for simil/r services, /nd the excessive p/yment correspond or be/r
/ close rel/tionship to the stockholdings of the officers of employees, it would seem likely th/t the s/l/ries /re
not p/id wholly for services rendered, but the excessive p/yments /re / distribution of e/rnings upon the
stock. . . . (Promulg/ted Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting /t this point th/t most of the p/yees were not in the regul/r employ of Algue nor were they its
controlling stockholders. 23
The Solicitor Gener/l is correct when he s/ys th/t the burden is on the t/xp/yer to prove the v/lidity of the
cl/imed deduction. In the present c/se, however, we find th/t the onus h/s been disch/rged s/tisf/ctorily. The
priv/te respondent h/s proved th/t the p/yment of the fees w/s necess/ry /nd re/son/ble in the light of the
efforts exerted by the p/yees in inducing investors /nd prominent businessmen to venture in /n experiment/l
enterprise /nd involve themselves in / new business requiring millions of pesos. This w/s no me/n fe/t /nd
should be, /s it w/s, sufficiently recompensed.
It is s/id th/t t/xes /re wh/t we p/y for civiliz/tion society. Without t/xes, the government would be p/r/lyzed
for l/ck of the motive power to /ctiv/te /nd oper/te it. Hence, despite the n/tur/l reluct/nce to surrender p/rt of
one's h/rd e/rned income to the t/xing /uthorities, every person who is /ble to must contribute his sh/re in the
running of the government. The government for its p/rt, is expected to respond in the form of t/ngible /nd
int/ngible benefits intended to improve the lives of the people /nd enh/nce their mor/l /nd m/teri/l v/lues. This
symbiotic rel/tionship is the r/tion/le of t/x/tion /nd should dispel the erroneous notion th/t it is /n /rbitr/ry
method of ex/ction by those in the se/t of power.
But even /s we concede the inevit/bility /nd indispens/bility of t/x/tion, it is / requirement in /ll democr/tic
regimes th/t it be exercised re/son/bly /nd in /ccord/nce with the prescribed procedure. If it is not, then the
t/xp/yer h/s / right to compl/in /nd the courts will then come to his succor. For /ll the /wesome power of the
t/x collector, he m/y still be stopped in his tr/cks if the t/xp/yer c/n demonstr/te, /s it h/s here, th/t the l/w
h/s not been observed.
We hold th/t the /ppe/l of the priv/te respondent from the decision of the petitioner w/s filed on time with the
respondent court in /ccord/nce with Rep. Act No. 1125. And we /lso find th/t the cl/imed deduction by the
priv/te respondent w/s permitted under the Intern/l Revenue Code /nd should therefore not h/ve been
dis/llowed by the petitioner.
ACCORDINGLY, the /ppe/led decision of the Court of T/x Appe/ls is AFFIRMED in toto, without costs.
SO ORDERED.
Teeh'nkee, C.J., N'rv's', G'nc'yco 'nd Griño-Aquino, JJ., concur.