AGUINALDO INDUSTRIES CORPORATION
(FISHING NETS DIVISION) vs.
COMMISSIONER OF INTERNAL REVENUE
and THE COURT OF TAX APPEALS
Facts: Upon investigation of petitioner's 1957
income tax returns of its Fish Nets Division, the
Bureau of Internal Revenue examiner found that the
amount of P61,187.48 was deducted from the gross
income as additional remuneration paid to the
officers of petitioner and that such amount was
taken from the net profit which petitioner derived
from an isolated transaction (sale of a parcel of its
land) which is not in the course of or carrying on of
petitioner's trade or business. The examiner
recommended disallowance of the deduction, but
petitioner insisted otherwise, claiming that the
payment of the allowance or bonus was pursuant to
its by-laws. The Court of Tax Appeals held the
petitioner liable for deficiency income tax plus
surcharge and interest
Issue: WON the profit derived from the sale of its
land is tax-exempt income under Republic Act No.
901
Held: No. Petitioner may not raise the question of
tax exemption for the first time on review where
such question was not raised at the administrative
forum
Issue: WON the bonus given to the officers of
petitioner as share in the profit realized from the
sale of the land is deductible expense for tax
purposes
Held: No. The bonus given should be considered as
deductible for income tax purposes only if payment
was made for service actually rendered and it is
reasonable and necessary. The records show that the
sale was effected through a broker who was paid by
petitioner a commission for his services. On the
other hand, there is absolutely no evidence of any
service actually rendered by petitioner's officers
which could be the basis of a grant to them of a
bonus out of the profit derived from the sale. Thus,
the payment of a bonus to them out of the gain
realized from the sale cannot be considered as a
selling expense; nor can it be deemed reasonable
and necessary so as to make it deductible for tax
purposes.
HOSPITAL DE SAN JUAN DE DIOS, INC. vs.
COMMISSIONER OF INTERNAL REVENUE
Facts: Petitioner is engaged in both taxable and
non-taxable operations. For the years 1952 to 1955,
the petitioner allocated its administrative expenses.
The respondent disallowed, however, the interests
and dividends from sharing in the allocation of
administrative expenses on the ground that the
expenses incurred in the administration or
management of petitioner's investments are not
allowable business expenses inasmuch as they were
not incurred in 'carrying on any trade or business'
within the contemplation of Section 30 (a)(1) of the
Revenue Code. Hence, were assessed for deficiency
income taxes.
Issue: WON administrative expenses should be
considered as a deduction/allocated to its interest
and dividend income for income tax purposes.
Held: No. the principle of allocating expenses is
grounded on the premise that the taxable income
was derived from carrying on a trade or business, as
distinguished from mere receipt of interests and
dividends from one's investments, the Court of Tax
Appeals correctly ruled that said income should not
share in the allocation of administrative expenses.
Hospital de San Juan De Dios, Inc., according to its
Articles of Incorporation, was established for
purposes "which are benevolent, charitable and
religious, and not for financial gain". It is not
carrying on a trade or business for the word
"business" in its ordinary and common use means
"human efforts which have for their end living or
reward; it is not commonly used as descriptive of
charitable, religious, educational or social agencies"
or "any particular occupation or employment
habitually engaged in especially for livelihood or
gain" or "activities where profit is the purpose or
livelihood is the motive."
FELIX MONTENEGRO, INC., petitioner, vs.
COMMISSIONER OF
INTERNAL REVENUE, respondent.
[C.T.A. CASE NO. 695. April 30, 1969.]
Facts: The CIR disallowed salaries of some of its
officers, value of medicines, campaign contribution
and miscellaneous expense as deduction for income
tax purposes hence the petitioner was assessed for
deficiency income taxes. The deduction of salaries
was disallowed because the said officers are also
stockholders of the corporation and that their
salaries are excessive compared to those of officers
of other corporation holding similar positions and
doing the same volume of business.
Issue: WON the salaries and expenses should be
allowed as a deduction.
Held: Yes. The general rule is that the employer is
given a wide latitude of discretion in the amount of
salaries paid to the employees. A corporation has
the right to fix the compensation of its employees
.There is no comparative study of the profits of the
two enterprises in relation to other concerns
similarly situated. Neither is there any comparative
study of the peculiar situation of the two enterprises
in relation to other concerns, nor is there a
comparison of the nature and volume of the work
performed by the officers involved. Since no two
business enterprises are exactly in the same
situation, negligible differences in salaries cannot
reasonably show that the salary is excessive or that
profits are channeled to the stockholders thru
salaries.
Issue: WON the value of medicines is a deductible
loss
Held: No. Aside from self serving testimonial
evidence, no other evidence was presented to
substantiate this claim of petitioner. There is not
even a list of the medicines, their value, and their
expiry dates. The deductible as loss on the ground
that the aforesaid medicines were no longer fit for
sale as the dates of their efficacy have expired
should be disallowed.
Issue: WON campaign contribution should be
allowed as a deduction.
Held: No. Amount expended for political campaign
purposes or payments to campaign funds are not
deductible either as business expenses or as
contribution
COLLECTOR V. PHILIPPINE EDUCATION
CO.
FACTS: Respondent lost all its pre-war books of
accounts and records, with the exception of a copy
of the trial balance sheet. It employed an accounting
firm and paid it the sum of P 13, 045.48. to prepare
and prove it’s war damage claim. In filing its
income tax return respondent claimed said sum as
deduction under section 30 of the NIRC. Petitioner
disallowed the same and instead assessed additional
P2,405.14 as deficiency income tax. CTA reversed
upon appeal and declared respondent exempt from
the deficiency income tax in question.
ISSUE: Whether or not the expense in question was
ordinary and necessary and whether or not it was
paid or incurred in carrying on respondent’s
business.
HELD: Yes. The law does not say that the expense
must be for or on account of transactions in one’s
trade or business. Ordinarily an expense will be
considered necessary where the expenditure is
appropriate and helpful in the development of the
taxpayer’s business. It is sufficient that the expense
were incurred for purposes proper to the conduct of
the corporate affairs or for the purpose of realizing a
profit or of minimizing a loss. The fee in question
was paid by the respondent to recover its lost assets
occasioned by the war and thereby to be so
rehabilitated as to be able to carry on its business.
Also, it should be noted that even if there is no law
exempting the proceeds of war damage claims from
taxes, the war damage compensation would still not
be subject to tax, not being an income.
Compensation for injury to capital is never income.
DOCTRINE: To carry on its business the taxpayer
not only must have sufficient assets but must
preserve the same and recover any that should be
lost. The fee or expense paid to recover its lost
assets occasioned by the war and thereby to be so
rehabilitated as to be able to carry on its business is
not required that it must be for or on account of
transactions in one’s trade or business.
CIR v Palanca, Jr.
GR No L-16626, October 29, 1966
FACTS:
The late Don Carlos Palanca, Sr. donated in favor of
his son, Carlos Palanca, Jr. shares of stock in La
Tondeña Inc. amounting to 12,500 shares. Later, the
BIR considered the donation as transfer in
contemplation of death; consequently, the BIR
assessed against the respondent, Palanca Jr., the
sum of P191,591.62 as estate and inheritance taxes
on the transfer of said 12,500 shares of stock,
including therein interest for delinquency of
P60,581.80. The respondent then filed an amended
income tax return, claiming an additional deduction
in the amount P60,581.80; hence, his new income
tax due is only P428. He attached a letter requesting
the refund of P20,624.01. However, the said request
for refund was denied by the BIR. Court of tax
appeals ordered the refund. Hence, this petition.
ISSUES:
1. Whether the interest on the delinquent estate
and inheritance tax is deductible from the
gross income
2. Whether the respondent’s claim for refund
has prescribed
RULING:
1. Yes, the interest is deductible. The rule is
settled that although taxes already due have
not, strictly speaking, the same
concept as debts, they are, however,
obligations that may be considered as such.
In CIR v Prieto, the Court explicitly
announced that while the distinction
between “taxes” and “debts” was recognized
in this jurisdiction, the variance in their legal
conception does not extend to the interests
paid on them.
2. No, respondent’s claim has not yet prescribed.
Considering that it is the interest paid on this latter-
assessed estate and inheritance tax that respondent
is claiming for refund, then the 30-day period for
prescription under RA 1125 should be computed
from the receipt of the final denial by the BIR of the
said claim.
Inasmuch as the said account was paid by him by
installment, then the computation of the two-year
prescriptive period, under Section 306 of the
National Internal Revenue Code, should be from the
date of the last installment.
Respondent Palanca paid the last installment on his
1955 income tax account on August 14, 1956. His
claim for refund was filed on August 13, 1958. It
was, therefore, still timely instituted.
CIR V VIUDA DE PRIETO
FACTS: Respondent conveyed by way of gifts to
her four children, namely, Antonio, Benito, Carmen
and Mauro, all surnamed Prieto, real property with a
total assessed value of P892,497.50. After the filing
of the gift tax returns on or about February 1, 1954,
the petitioner CIR appraised the real property
donated for gift tax purposes at P1,231,268.00, and
assessed the total sum of P117,706.50 as donor's
gift tax, interest and compromises due thereon. Of
the total sum of P117,706.50 paid by respondent on
April 29, 1954, the sum of P55,978.65 represents
the total interest on account of deliquency. This sum
of P55,978.65 was claimed as deduction, among
others, by respondent in her 1954 income tax return.
Petitioner, however, disallowed the claim and as a
consequence of such disallowance assessed
respondent for 1954 the total sum of P21,410.38 as
deficiency income tax due on the aforesaid
P55,978.65, including interest up to March 31,
1957, surcharge and compromise for the late
payment. Under the law, for interest to be
deductible, it must be shown that there be an
indebtedness, that there should be interest upon it,
and that what is claimed as an interest deduction
should have been paid or accrued within the year. It
is here conceded that the interest paid by respondent
was in consequence of the late payment of her
donor's tax, and the same was paid within the year it
is sought to be declared.
ISSUE/S: Whether or not such interest was paid
upon an indebtedness within the contemplation of
section 30 (b) (1) of the Tax Code.
HELD: Yes. The term "indebtedness" as used in
the Tax Code of the United States containing
similar provisions as in the above-quoted section
has been defined as an unconditional and legally
enforceable obligation for the payment of money.
Although taxes already due have not, strictly
speaking, the same concept as debts, they are,
however, obligations that may be considered as
such. The term "debt" is properly used in a
comprehensive sense as embracing not merely
money due by contract but whatever one is bound to
render to another, either for contract, or the
requirement of the law. It follows that the interest
paid by herein respondent for the late payment of
her donor's tax is deductible from her gross income
under section 30(b) of the Tax Code above quoted.
This conclusion finds support in the established
jurisprudence in the United States after whose laws
our Income Tax Law has been patterned. Thus,
under sec. 23(b) of the Internal Revenue Code of
1939, as amended , which contains similarly
worded provisions as sec. 30(b) of our Tax Code,
the uniform ruling is that interest on taxes is interest
on indebtedness and is deductible.
DOCTRINE: The term "indebtedness" as used in
the Tax Code of the United States containing
similar provisions as in the abovequoted section
has been defined as an unconditional and legally
enforceable obligation for the payment of money.
PAPER INDUSTRIES CORPORATION OF
THE PHILIPPINES (PICOP) v. CA, CIR and
CTA, G.R. Nos. 106949-50 (1995)
Facts:
Paper Industries Corporation of the Philippines
(PICOP) is a Philippine corporation registered with
the Board of Investments (BOI) as a preferred
pioneer enterprise with respect to its integrated pulp
and paper mill, and as a preferred non-pioneer
enterprise with respect to its integrated plywood and
veneer mills. Petitioner received from the
Commissioner of Internal Revenue (CIR) two (2)
letters of assessment and demand (a) one for
deficiency transaction tax and for documentary and
science stamp tax; and (b) the other for deficiency
income tax for 1977, for an aggregate amount of
PhP88,763,255.00.
PICOP protested the assessment of deficiency
transaction tax , the documentary and science stamp
taxes, and the deficiency income tax assessment.
CIR did not formally act upon these protests, but
issued a warrant of distraint on personal property
and a warrant of levy on real property against
PICOP, to enforce collection of the contested
assessments, thereby denying PICOP's protests.
Thereupon, PICOP went before (CTA) appealing
the assessments.
On 15 August 1989, CTA rendered a decision,
modifying the CIR’s findings and holding PICOP
liable for the reduced aggregate amount of
P20,133,762.33. Both parties went to the Supreme
Court, which referred the case to the Court of
Appeals (CA).
CA denied the appeal of the CIR and modified the
judgment against PICOP holding it liable for
transaction tax and absolved it from payment of
documentary and science stamp tax and
compromise penalty. It also held PICOP liable for
deficiency of income tax.
Issues:
1. Whether PICOP is liable for transaction tax
2. Whether PICOP is liable for documentary and
science stamp tax
3. Whether PICOP is liable for deficiency income tax
Held:
1. YES. PICOP reiterates that it is exempt from the
payment of the transaction tax by virtue of its tax
exemption under R.A. No. 5186, as amended,
known as the Investment Incentives Act, which in
the form it existed in 1977-1978, read in relevant
part as follows: "SECTION 8. Incentives to a
Pioneer Enterprise. — In addition to the incentives
provided in the preceding section, pioneer
enterprises shall be granted the following incentive
benefits: (a) Tax Exemption. Exemption from all
taxes under the National Internal Revenue Code,
 except income tax, from the date of investment is
included in the Investment Priorities Plan x x x”.
The Supreme Court holds that that PICOP's tax
exemption under R.A. No. 5186, as amended, does
not include exemption from the thirty-five percent
(35%) transaction tax. In the first place, the thirty-
five percent (35%) transaction tax is an income tax,
a tax on the interest income of the lenders or
creditors as held by the Supreme Court in the case
of Western Minolco Corporation v. Commissioner
of Internal Revenue. The 35% transaction tax is an
income tax on interest earnings to the lenders or
placers. The latter are actually the taxpayers.
Therefore, the tax cannot be a tax imposed upon the
petitioner. In other words, the petitioner who
borrowed funds from several financial institutions
by issuing commercial papers merely withheld the
35% transaction tax before paying to the financial
institutions the interest earned by them and later
remitted the same to the respondent CIR. The tax
could have been collected by a different procedure
but the statute chose this method. Whatever
collecting procedure is adopted does not change the
nature of the tax. It is thus clear that the transaction
tax is an income tax and as such, in any event, falls
outside the scope of the tax exemption granted to
registered pioneer enterprises by Section 8 of R.A.
No. 5186, as amended. PICOP was the withholding
agent, obliged to withhold thirty-five percent (35%)
of the interest payable to its lenders and to remit the
amounts so withheld to the Bureau of Internal
Revenue ("BIR"). As a withholding, agent, PICOP
is made personally liable for the thirty-five percent
(35%) transaction tax 10 and if it did not actually
withhold thirty-five percent (35%) of the interest
monies it had paid to its lenders, PICOP had only
itself to blame.
2. NO. The CIR assessed documentary and science
stamp taxes, amounting to PhP300,000.00, on the
issuance of PICOP's debenture bonds. Tax
exemptions are, to be sure, to be "strictly
construed," that is, they are not to be extended
beyond the ordinary and reasonable intendment of
the language actually used by the legislative
authority in granting the exemption. The issuance of
debenture bonds is certainly conceptually distinct
from pulping and paper manufacturing operations.
But no one contends that issuance of bonds was a
principal or regular business activity of PICOP;
only banks or other financial institutions are in the
regular business of raising money by issuing bonds
or other instruments to the general public. The
actual dedication of the proceeds of the bonds to the
carrying out of PICOP's registered operations
constituted a sufficient nexus with such registered
operations so as to exempt PICOP from taxes
ordinarily imposed upon or in connection with
issuance of such bonds. The Supreme Court agrees
with the Court of Appeals on this matter that the
CTA and the CIR had erred in rejecting PICOP's
claim for exemption from stamp taxes.
3. YES. PICOP did not deny the existence of
discrepancy in their Income Tax Return and Books
of Account owing to their procedure of recording its
export sales (reckoned in U.S. dollars) on the basis
of a fixed rate, day to day and month to month,
regardless of the actual exchange rate and without
waiting when the actual proceeds are received. In
other words, PICOP recorded its export sales at a
pre-determined fixed exchange rate. That pre-
determined rate was decided upon at the beginning
of the year and continued to be used throughout the
year. Because of this, the CIR has made out at least
a prima facie case that PICOP had understated its
sales and overstated its cost of sales as set out in its
Income Tax Return. For the CIR has a right to
assume that PICOP's Books of Accounts speak the
truth in this case since, as already noted, they
embody what must appear to be admissions against
PICOP's own interest.
CIR vs. Lednicky [G.R. Nos. L-18169, L-18286,
& L-21434. July 31, 1964.]
En Banc, Reyes JBL (J): 8 concurring
Facts: V. E. Lednicky and Maria Valero Lednicky,
are husband and wife, both American citizens
residing in the Philippines, and have derived all
their income from Philippine sources for the taxable
years under question. [GR L-18286] In compliance
with local law, the spouses, on 27 March 1957, filed
their income tax return for 1956, reporting therein a
gross income of P1,017,287.65 and a net income of
P733,809.44 on which the amount of P317,395.41
was assessed after deducting P4,805.59 as
withholding tax. Pursuant to the Commissioner of
Internal Revenue’s assessment notice, the spouses
paid the total amount of P326,247.41, inclusive of
the withheld taxes, on 15 April 1957. On 17 March
1959, the spouses filed an amended income tax
return for 1956. The amendment consists in a
claimed deduction of P205,939.24 paid in 1956 to
the US government as federal income tax for 1956.
Simultaneously with the filing of the amended
return, the spouses requested the refund of
P112,437.90. When the Commissioner of Internal
Revenue failed to answer the claim for refund, the
spouses filed their petition with the tax court on 11
April 1959 as CTA Case 646. [GR L-18165] On 28
February 1956, the spouses filed their domestic
income tax return for 1955, reporting a gross
income of P1,771,124.63 and a net income of
P1,052,550.67. On 19 April 1956, they filed an
amended income tax return, the amendment upon
the original being a lesser net income of
P1,012,554.51, and, on the basis of this amended
return, they paid P570,252.00, inclusive of
withholding taxes. After audit, the Commissioner
determined a deficiency of P16,116.00, which
amount the spouses paid on 5 December 1956. Back
in 1955, however, the spouses filed with the US
Internal Revenue Agent in Manila their Federal
income tax return for the years 1947, 1951, 1952,
1953 and 1954 on income from Philippine sources
on a cash basis. Payment of these federal income
taxes, including penalties and delinquency interest
in the amount of $264,588.82, were made in 1955 to
the US Director of Internal Revenue, Baltimore,
Maryland, through the National City Bank of New
York, Manila Branch. Exchange and bank charges
in remitting payment totaled P4,143.91. On 11
August 1958 the said respondents amended their
Philippines income tax return for 1955 to including
US Federal income taxes, interest accruing up to 15
May 1955, and exchange and bank charges, totaling
P516,345.15 and therewith filed a claim for refund
of the sum of P166,384.00, which was later reduced
to P150,269.00. The spouses brought suit in the Tax
Court, which was docketed therein as CTA Case
570. [GR 21434] The facts are similar to above
cases but refer to the spouses’ income tax returns
for 1957, filed on 28 February 1958, and for which
the spouses paid a total sum of P196,799.65. In
1959, they filed an amended return for 1957,
claiming deduction of P190,755.80, representing
taxes paid to the US Government on income derived
wholly from Philippine sources. On the strength
thereof, spouses seek refund of P90,520.75 as
overpayment (CTA Case 783). The Tax Court
decide for the spouses. The Commissioner thus
elevated under separate petitions for review of the
corresponding decisions of the Court of Tax
Appeals to the Supreme Court. Since these cases
involve the same parties and issues akin to each
case presented, the Court decided them jointly. The
Supreme Court reversed the decisions of the Court
of Tax Appeals, and affirmed the disallowance of
the refunds claimed by the spouses, with costs
against said spouses.
GUTIERREZ VS. COLLECTOR- TAX ON
DISPOSITION OF PROPERTY
Category: Income Taxation
It appears then that the acquisition by the
Government of private properties through the
exercise of the power of eminent domain, said
properties being JUSTLY compensated, is
embraced within the meaning of the term "sale"
"disposition of property", and the proceeds from
said transaction clearly fall within the definition of
gross income laid down by Section 29 of the Tax
Code of the Philippines.
FACTS:
1. Maria Morales, married to Gutierrez(spouses),
was the owner of an agricultural land. The U.S.
Gov(pursuant to Military Bases Agreement)
wanted to expropriate the land of Morales to
expand the Clark Field Air Base.
2. The Republic was the plaintiff, and deposited a
sum of Php 152k to be able to take immediate
possession. The spouses wanted consequential
damages but instead settled with a compromise
agreement. In the compromise agreement, the
parties agreed to keep the value of Php 2,500 per
hectare, except to some particular lot which would
be at Php 3,000 per hectare.
3. In an assessment notice, CIR demanded
payment of Php 8k for deficiency of income tax
for the year 1950.
4. The spouses contend that the expropriation was
not taxable because it is not "income derived from
sale, dealing or disposition of property" as defined
in Sec. 29 of the Tax Code. The spouses further
contend that they did not realize any profit in the
said transaction. CIR did not agree.
5. The spouses appealed to the CTA. The Solicitor
General, in representation of the respondent
Collector of Internal Revenue, filed an answer that
the profit realized by petitioners from the sale of
the land in question was subject to income tax, that
the full compensation received by petitioners
should be included in the income received in 1950,
same having been paid in 1950 by the
Government. CTA favored SolGen but disregarded
the penalty charged.
6. Both parties appealed to the SC.
ISSUES:
1. Whether or not that for income tax purposes, the
expropriation should be deemed as income from
sale and any profit derived therefrom is subject to
income taxes capital gain?
2. Whether or not there was profit or gain to be
taxed?
HELD: Yes to both. CTA decision affirmed. It
is subject to income tax.
RATIO 1: It is to be remembered that said
property was acquired by the Government through
condemnation proceedings and appellants' stand is,
therefore, that same cannot be considered as sale
as said acquisition was by force, there being
practically no meeting of the minds between the
parties. U.S jurisprudence has held that the transfer
of property through condemnation proceedings is a
sale or exchange within the meaning of section
117 (a) of the 1936 Revenue Act and profit from
the transaction constitutes capital gain" "The
taking of property by condemnation and the,
payment of just compensation therefore is a "sale"
or "exchange" within the meaning of section 117
(a) of the Revenue Act of 1936, and profits from
that transaction is capital gain.
SEC. 29. GROSS INCOME. — (a) General
definition. — "Gross income" includes gains,
profits, and income derived from salaries, wages,
or compensation for personal service of whatever
kind and in whatever form paid, or from
professions, vocations, trades, businesses,
commerce, sales or dealings in property, whether
real or personal, growing out of ownership or use
of or interest in such property; also from interests,
rents, dividends, securities, or the transactions of
any business carried on for gain or profit, or gains,
profits, and income derived from any source
whatsoever.
SEC. 37. INCOME FROM SOURCES WITHIN
THE PHILIPPINES.
—
(a) Gross income from sources within the
Philippines. — The following items of gross
income shall be treated as gross income from
sources within the Philippines:
xxxxxxxxx
(5) SALE OF REAL PROPERTY. — Gains,
profits, and income from the sale of real property
located in the Philippines;
xxxxxxxxx
It appears then that the acquisition by the
Government of private properties through the
exercise of the power of eminent domain, said
properties being JUSTLY compensated, is
embraced within the meaning of the term "sale"
"disposition of property", and the proceeds from
said transaction clearly fall within the definition of
gross income laid down by Section 29 of the Tax
Code of the Philippines.
RATIO 2: As to appellant taxpayers' proposition
that the profit, derived by them from the
expropriation of their property is merely nominal
and not subject to income tax, We find Section 35
of the Tax Code illuminating. Said section reads as
follows:
SEC. 35. DETERMINATION OF GAIN OR
LOSS FROM THE SALE OR OTHER
DISPOSITION OF PROPERTY. —The gain
derived or loss sustained from the sale or other
disposition of property, real or personal, or mixed,
shall be determined in accordance with the
following schedule:
(a) xxx xxx xxx
(b) In the case of property acquired on or after
March first, nineteen hundred and thirteen, the cost
thereof if such property was acquired by purchase
or the fair market price or value as of the date of
the acquisition if the same was acquired by
gratuitous title.
xxxxxxxxx
The records show that the property in question was
adjudicated to Maria Morales by order of the Court
of First Instance of Pampanga on March 23, 1929,
and in accordance with the aforequoted section of
the National Internal Revenue Code, only the fair
market price or value of the property as of the date
of the acquisition thereof should be considered in
determining the gain or loss sustained by the
property owner when the property was disposed,
without taking into account the purchasing power
of the currency used in the transaction. The records
placed the value of the said property at the time of
its acquisition by appellant Maria Morales
P28,291.73 and it is a fact that same was
compensated with P94,305.75 when it was
expropriated. The resulting difference is surely a
capital gain and should be correspondingly taxed.
FERNANDEZ HERMANOS, INC. VS. CIR-
ALLOWABLE TAX DEDUCTIONS
Category: Income Taxation
That the circumstances are such that the method
does not reflect the taxpayer ’ s income with
reasonable accuracy and certainty and proper and
just additions of personal expenses and other non-
deductible expenditures were made and correct ,
fair and equitable credit adjustments were given
by way of eliminating non- taxable items.
FACTS:
• Four cases involve two decisions of the Court of
Tax Appeal s determining the taxpayer ' s income
tax liability for the years 1950 to 1954 and for the
year 1957. Both the taxpayer and the
Commissioner of Internal Revenue, as petitioner
and respondent in the cases a quo respectively ,
appealed from the Tax Court's decisions , insofar
as their respective contentions on particular tax
items were therein resolved against them. Since
the issues raised are inter related, the Court
resolves the four appeals in this joint decision.
• The taxpayer , Fernandez Hermanos, Inc. , is a
domestic corporation organized for the principal
purpose of engaging in business as an " investment
company " wi th main office at Manila. Upon
verification of the taxpayer's income tax returns
for the period in quest ion, the Commissioner of
Internal Revenue assessed against the taxpayer the
sums of P13,414.00, P119,613.00, P11,698.00,
P6,887.00 and P14,451.00 as alleged deficiency
income taxes for the year s 1950, 1951, 1952, 1953
and 1954, respectively. Said assessments were the
result of alleged discrepancies found upon the
examination and verification of the taxpayer's
income tax returns for the said years, summarized
by the Tax Court in its decision of June 10, 1963
in CTA Case No. 787, as follows:
ISSUE: The correctness of the Tax Court's
rulings with respect to the disputed items of
disallowances enumerated in the Tax Court's
summary reproduced
HELD:
That the circumstances are such that the method
does not reflect the taxpayer’s income with
reasonable accuracy and certainty and proper and
just additions of personal expenses and other non-
deductible expenditures were made and correct ,
fair and equitable credit adjustments were given by
way of eliminating non-taxable items.
Proper adjustments to conform to the income tax
laws. Proper adjustments for non-deductible items
must be made. The following non-deductibles , as
the case may be, must be
added to the increase of decrease in the net worth:

1. Personal living or family expenses
2. Premiums paid on any life insurance policy
3. Losses from sales or exchanges of property
between members of the family
4. Income taxes paid
5. Other non-deductible taxes
6. Election expenses and other expense against
public policy
7. Non-deductible contributions
8. Gifts to others
9. Estate inheritance and gift taxes
10. Net Capital Loss
On the other hand, non- taxable items should be
deducted therefrom. These items are necessary
adjustments to avoid the inclusion of what
otherwise are non-taxable receipts. They are:
1. inheritance gifts and bequests received
2. non- taxable gains
3. compensation for injuries or sickness
4. proceeds of life insurance policies
5. sweepstakes
6. winnings
7. interest on government securities and increase in
net worth are not taxable if they are shown not to
be the result of unreported income but to be the
result of the correction of errors in the taxpayer’s
entries in the books relating to indebtedness
Plaridel Surety Co vs. Collector
Plaridel Surety Co vs. Collector, GR No L-21520,
Dec. 11, 1967
Petitioner Plaridel Surety is a domestic corporation
engaged in the bonding business.
Petitioner surety and Constancio San Jose
(principal), solidarily executed a performance bond
in favor of the PL Galang Machinery to secure the
performance of San Jose contractual obligation to
produce and supply logs. To afford itself adequate
protection against loss or damages on the
performance, petitioner required San Jose and
Ramon Cuervo to execute an indemnity agreement
obligating themselves, solidarity to indemnify
petitioner for whatever liability it may incur by
reason of said performance bond. San Jose
constituted a chattel mortgage on logging
machineries and other movables in petitioners favor
while Ramon Cuervo executed a real estate
mortgage.
San Jose failed to deliver the logs to Galang
Machinery and sued on the performance bond. The
lower court directed San Jose and Cuervo to
reimburse petitioner for whatever amount it would
pay Galang Machinery.
Petitioner in his income tax claimed that the amount
P44,490 as deductible loss from its gross income.
CIR disallowed the claimed deductions and
assessed against petitioner the sum P8,898, plus
interest, as deficiency income tax for the year 1957.
ISSUE: WON petitioner can claim P44,490 as a
deductible loss from its gross income.
Held:
NO
Petitioner was duly compensated for otherwise than
by insurance- thru the mortgage in its favor
executed by San Jose and Cuervo and it had not yet
exhausted all its available remedies, especially as
against Cuervo to minimize its loss.
LOSS is deductible only in the taxable year it
actually happens or is sustained. However, if it is
compensable by insurance or otherwise deductions
for the loss suffered is postponed to a subsequent
year, with, to be precise, is that year in which it
appears that no compensation at all can be had, on
that there is a remaining or net loss.
CHINA BANKING CORPORATIONvs.COURT
OF APPEALS
G.R. No. 146749; June 10, 2003
FACTS:
Petitioner paid P12,354,933.00 as gross receipts tax
on its income from interests on loan investments,
commissions, services, collection charges, foreign
exchange profits and other operating earnings
during the second quarter of 1994.Citing Asian
Bank, Petitioner argued that it was not liable for the
gross receipts tax - amounting to P1,140,623.82 - on
the sums withheld by the BangkoSentral ng
Pilipinas as final withholding tax on its passive
interest income in 1994.
Disputing Petitioner’s claim, the Commissioner
asserted that Petitioner paid the gross receipts tax
pursuant to Section 119 (now Section 121) of the
National Internal Revenue Code ("Tax Code") and
pertinent Bureau of Internal Revenue ("BIR")
regulations. Further it argued that the final
withholding tax on a bank’s interest income forms
part of its gross receipts in computing the gross
receipts tax. Contending that the term "gross
receipts" means the entire income or receipt,
without any deduction.
The Court of Tax Appeals ruled in favor of
Petitioner and held that the 20% final withholding
tax on interest income does not form part of CBC’s
taxable gross receipts.
ISSUE:
a. WON the 20% final withholding tax on interest
income should form part of CBC’s gross receipts in
computing the gross receipts tax on banks.
b. WON there is double taxation
HELD:
a. Yes. The concept of a withholding tax on
income obviously and necessarily implies that the
amount of the tax withheld comes from the income
earned by the taxpayer. Since the amount of the tax
withheld constitutes income earned by the taxpayer,
then that amount manifestly forms part of the
taxpayer’s gross receipts. Because the amount
withheld belongs to the taxpayer, he can transfer its
ownership to the government in payment of his tax
liability. The amount withheld indubitably comes
from income of the taxpayer, and thus forms part of
his gross receipts.
Actual receipt of interest income is not limited to
physical receipt. Actual receipt may either be
physical receipt or constructive receipt. When the
depository bank withholds the final tax to pay the
tax liability of the lending bank, there is prior to the
withholding a constructive receipt by the lending
bank of the amount withheld. From the amount
constructively received by the lending bank, the
depository bank deducts the final withholding tax
and remits it to the government for the account of
the lending bank. Thus, the interest income actually
received by the lending bank, both physically and
constructively, is the net interest plus the amount
withheld as final tax.
b. No. There is no double taxation when Section
121 of the Tax Code imposes a gross receipts tax on
interest income that is already subjected to the 20%
final withholding tax under Section 27 of the Tax
Code. The gross receipts tax is a business tax under
Title V of the Tax Code, while the final withholding
tax is an income tax under Title II of the Code.
There is no double taxation if the law imposes two
different taxes on the same income, business or
property.
City Lumber vs. Domingo and CTA, GR. No. L-
18611, January 30,1964
Petitioner seek the review of CTA decision,
upholding an assessment by respondent on an
additional income of P16, 678 representing minor
deductions from the alleged expenses, on
undisclosed sales of plywood, nails and GI sheets
and on a cash credit balance.
Petitioner claim the plywood and GI sheet were lost
in a fire and the credit cash balance as a loan
secured by petitioner.
Issue: WON petitioner can claim deductions on his
expenses/loss?
Held:
NO
The lower court rejected the alleged loss of
plywood because said loss was never reported in the
books of petitioner, and neither was such loss
reported in the ITR of petitioner for that
year. Neither were any receipt or other evidence
reduced to show that said amount was a loan
secured by petitioner or that loan was never
secured.
MARCELO STEEL CORPORATION VS.
COLLECTOR OF INTERNAL REVENUE
G.R. No. L-12401, October 31, 1960
NATURE:
Petition to review under section 18, Republic Act
No. 1125, a judgment of the Court of Tax Appeals
upholding the assessment made by the respondent
for income tax due during the years 1952 and 1953
from the petitioner.
FACTS:
Petitioner Marcelo Steel Corporation is a
corporation duly organized and existing under and
by virtue of the laws of the Philippines, with offices
at Malabon, Rizal. It is engaged in three (3)
industrial activities, namely, (1) manufacture of
wire fence, (2) manufacture of nails, and (3)
manufacture of steel bars, rods and other allied steel
products. The manufacture of nails and the
manufacture of steel bars, rods and other allied steel
products, enjoyed the benefits of tax exemption
under Republic Act No. 35, which provides:
“SECTION 1. Any person,
partnership, company, or corporation who
or which shall engage in a new and
necessary industry shall, for a period of
four years from the date of the
organization of such industry, be entitled
to exemption from the payment of all
internal revenue taxes directly payable by
such person, partnership, company, or
corporation in respect to said industry.
SEC. 2. The President of the
Philippines, shall, upon recommendation
of the Secretary of Finance, periodically
determine the qualifications that the
industries should possess to be entitled to
the benefits of this Act.
SEC. 3. This Act shall take effect
upon its approval.
(Approved, September 30, 1946.)”
On May 21, 1953, the petitioner filed an income tax
return for the years 1952 and 1953 which did not
reflect the financial results of its tax exempt
business activities but those realized solely from its
business of manufacturing wire fence.
On October 1, 1954, the petitioner filed amended
income tax returns for taxable years 1952 and 1953,
showing that it suffered a net loss of P871,407.37 in
1952, and P104,956.29 in 1953. The said losses
were arrived at by consolidating the gross income
and expenses and/or deductions of the petitioner in
all its business activities,
On October 1, 1954, the petitioner, claiming that
instead of earning the net income shown in its
original income tax returns for 1952 and 1953, it
sustained the losses shown in its amended income
tax returns for the same years, filed its request for
refund of the income taxes which it allegedly
erroneously paid to the respondent.
CTA:
The petitioner cannot deduct from the profits
realized from its taxable industries, the losses
sustained by its tax exempt business activities, . . . "
CASE FOR THE PETITIONER:
Since it is a corporation organized with a single
capital that answers for all its financial obligations
including those incurred in the tax-exempt
industries, the gross income derived from both its
taxable or non-exempt and tax- exempt industries,
and the allowable deductions from said incomes,
should be consolidated and its income tax liability
should be based on the difference between the
consolidated gross incomes and the consolidated
allowable deductions. It relies on the provisions of
section 24, Commonwealth Act No. 466, as
amended, and of section 30, subsection (d),
paragraph (2), of the same Act
ISSUE:
WON the petitioner may be allowed to deduct from
the profits realized from its taxable business
activities, the losses sustained by its tax exempt
industries
RULING:
No. The purpose or aim of Republic Act No. 35 is
to encourage the establishment or exploitation of
new and necessary industries to promote the
economic growth of the country. It is a form of
subsidy granted by the Government to courageous
entrepreneurs staking their capital in an unknown
venture. An entrepreneur engaging in a new and
necessary industry faces uncertainty and assumes a
risk bigger than one engaging in a venture already
known and developed. Like a settler in an
unexplored land who is just blazing a trail in a
virgin forest, he needs all the encouragement and
assistance from the Government. He needs capital
to buy his implements, to pay his laborers and to
sustain him and his family. Comparable to the
farmer who has just planted the seeds of fruit
bearing trees in his orchard, he does not expect an
immediate return on his investment. Usually loss is
incurred rather than profit made. It is for these
reasons that the law grants him tax exemption — to
lighten onerous financial burdens and reduce losses.
However these may be, Republic Act No. 35 has
confined the privilege of tax exemption only to new
and necessary industries. It did not intend to grant
the tax exemption benefit to an entrepreneur
engaged at the same time in a taxable or non-
exempt industry and a new and necessary industry,
by allowing him to deduct his gains or profits
derived from the operation of the first from the
losses incurred in the operation of the second.
Unlike a new and necessary industry, a taxable or
non-exempt industry is already a going concern,
deriving profits from its operation, and deserving no
subsidy from the Government. It is but fair that it be
required to give to the Government a share in its
profits in the form of taxes.
The fact that the petitioner is a corporation
organized with a single capital that answers for all
its financial obligations including those incurred in
the tax exempt industries is of no moment. The
intent of the law is to treat taxable or non-exempt
industries as separate and distinct from new and
necessary industries which are tax- exempt for
purposes of taxation.
DISPOSITIVE:
The judgment under review is affirmed, with costs
against the petitioner.
PHILIPPINE SUGAR ESTATE CORP V
COLLECTOR OF INTERNAL
REVENUE
Facts: Petitioner owned shares of stock in several
different companies and 154 liberty bonds at par
value of P100 each. It received certain sums from
said corporation representing dividends on its shares
of stock as well as interst on the said liberty bonds.
Petitioner filed its ITR inclusive
of the sums above-stated for which it was assessed
an amount in taxes. It paid said amount without
protest. Subsequently, petitioner filed a demand for
refund. In the letter-demand, the ground for the
refund invoked was the illegality o the collection
since the dividends and interest were exempt from
payment of income tax. Although in the present
petition, the ground invoked is that the income tax
on dividends had already been paid at the source.
Respondent denied the claim for refund because
plaintiff failed to lodge a protest concurrently when
it paid its tax liability as per Sec 1579 of the
Revised Administrative Code, as amended by Act
No. 3685. Plaintiff
countered by saying that the applicable law is Act
No. 2833 which requires no protest. In addition, it
invoked the ruling in Fox v Edwards wherein it was
ruled that any unduly paid income tax may be
refunded without the necessity of a protest.
Held: The SC found in favor of the Collector.
1.Controlling law - There is no need to distinguish
between the two laws in this case. Section 19 of Act
2833 provides that "all administrative, special, and
general provisions of law, including laws in relation
to the assessment, remission, collection, and refund
of internal revenue taxes
not hereto fore repealed and not inconsistent
with...this Law are...applicable...to this Law." By
virtue of this saving clause, Section 1579 of the
Revised Administrative Code finds application to
Act 2833.
2. Fox v Edwards is not controlling since the law
specifically applied therein did not require the
lodging of a protest concurrently with the payment
for a TP to retain such right to protest. (NOTE fr
digester: I did not find anything on losses or bad
debts in this case. I may have overlooked it.)
PHILIPPINE REFINING COMPANY V COURT
OF APPEALS
Facts: In 1985, petitioner filed its ITR where it
claimed 16 items amounting to P713,070.93 as bad
debts and therefor deductible. Subsequently, the
Commissioner for Internal Revenue disallowed
such deductions and assessed petitioner to pay a
deficiency tax for the year of 1985. Petitioner paid
the deficiency tax under protest which the
Commissioner denied.
Upon a petition for review, the CTA modified the
findings of the Commissioner by reducing the
deficiency tax assessment on the basis that three of
the sixteen supposed bad debts could be allowed as
deductions. The CA later on agreed with the CTA.
Held: The SC upheld the ruling of the CA which it
found to be in accordance with the SC's ruling in
Collector v Goodrich. It held the petitioner failed to
substantiate the “worthlessness” of the 13 debts
which it claimed as deductions. As per the ruling in
Collector v Goodrich, to qualify as a bad debt, a TP
must show: 1. that there is a valid and subsisting
debt;
2. that the debt must be actually ascertained to be
worthless and uncollectible durring 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 TP.
In addition, the Court said, before a debt can be
considered worthless, the TP must also show that it
is indeed uncollectible even in the future.
Furthermore, the TP must undertake several steps to
prove that he exerted diligent efforts to collect the
debt:
1. sending statements of accounts to the debtors; 2.
sending of collection letters; 3. giving the account
to a lawyer for collection; and
4. filing a collection case in court. In the case at bar,
the petitioner miserably failed to show any of the
foregoing. The only piece of evidence it offered to
show the worthlessness of the debts was the
testimony of the company's financial adviser or
accountant. The Court found that this lacked the
required probity to establish that the accounts it
claimed as bad debts were indeed worthless. Apart
from such testimony, the petitioner failed to
introduce even a single iota of evidence to bolster
its claim of worthlessness. (NOTE: In the rest of the
case, the Court presents the allegation of the
petitioner as to why it could not collect on any of
the 13 debts followed by a statement how the
petitioner failed to introduce evidence to
substantiate such allegation.)
Collector v Goodrich International Rubber Co.
(G.R. No. L-22265)
Facts:
Goodrich claimed for deductions based upon
receipts issued, not by entities in which the alleged
expenses had been incurred, but by the officers of
Goodrich who allegedly paid for them.
The Commissioner disallowed deductions in the
amount of P50,455.41 (for the year 1951) for bad
debts and P30,188.88 (for year 1952) for
representation expenses.
Goodrich appealed from the said assessment to the
Court of Tax Appeals (CTA) which allowed the
deduction for bad debts but disallowing the alleged
representation expenses. CTA amended its decision
allowing the deduction of representation expenses.
The Government appealed to the SC. The alleged
bad debts are the following:
1. Portillo's Auto Seat Cover
630.31
2. Visayan Rapid Transit
17,810.26
3. Bataan Auto Seat Cover
373.13
4. Tres Amigos Auto Supply
1,370.31
5. P. C. Teodorolawphil
650.00
6. Ordnance Service, P.A.
386.42
7. Ordnance Service, P.C. Good faith on the part of the taxpayer is not enough.
796.26 He must also how that he had reasonably
8. National land Settlement Administration investigated the relevant facts and had drawn a
3,020.76 reasonable inference from the information obtained
9. National Coconut Corporation by him. In the case, Goodrich has not adequately
644.74 made such showing.
10. Interior Caltex Service Station
1,505.87 The payments made, after being characterized as
11. San Juan Auto bad debts, merely stresses the undue haste with
Supply 4,530.64 which the same had been written off. Goodrich has
12. P A C S not proven that said debts were worthless. There
A 45.36 was no evidence that the debtors can not pay them.
13. Philippine Naval
Patrol 14.18 SC held that the claim for bad debts are allowed but
14. Surplus Property Commission only up to P22,627.35. (those from Debts 11-18)
277.68 amount (consisting of 18 individual accounts) of
15. Alverez Auto P50,455.41 as deductible for being bad debts. The
Supply Collector of Internal Revenue disallowed the
285.62
deductions and accordingly assessed Goodrich
16. Lion Shoe
Store 1,686.93 accordingly. Goodrich protested the assessment and
17. Ruiz Highway subsequently filed an appeal
Transit 2,350.00
18. Esquire Auto Seat with the CTA which allowed the deductions for bad
Cover 3,536.94 debts. Hence, this appeal by the Government.
TOTA
L Held: Petition is partially meritorious. Some of the
P50,455.41* items claimed by Goodrich can rightfully be written
off as bad debts. The SC rejected the claim for
Issue: deduction of 10 items because Goodrich
Whether or not these bad debts are properly
deducted. failed to establish that that the debts were actually
worthless or that it had reasonable grounds to
Held: believe them to be so in 1951. The law permits the
The claim for deduction for debt numbers 1-10 is deduction of debts “actually ascertained to be
REJECTED. Goodrich has not established either
that the debts are actually worthless or that it had worthless within the taxable year,” obviously to
reasonable grounds to believe them to be so. prevent arbitrary action by the TP to unduly avoid
tax liability. Good faith on the part of the TP is not
NIRC permits the deduction of debts “actually enough. He must furthermore show that he had
ascertained to be worthless within the taxable year” reasonably investigated the relevant facts and had
obviously to prevent arbitrary action by the drawn a reasonable inference from the information
taxpayer, to unduly avoid tax liability.
thus obtained by him. At any rate, respondent failed
The requirement of ascertainment of worthlessness to prove that the debts were indeed worthless and
require proof of 2 facts: that the debtors had no ability to pay them. On the
 1. That the taxpayer did in fact ascertain contrary, of these 10 accounts some payments were
the debt to be worthless actually made (some in full) after they had been
 2. That he did so, in good faith. characterized as bad debts and written off. The
Court however ruled that 8 of the 18 claimed bad
debts can be
allowed as deductions. Common among these 8 was
the action of Goodrich in persistently demanding
payment from its debtors; it's endorsement of the
accounts to counsel for collection; the pursuit of
legal remedies for the collection on these debts; and
the continuing failure/clear inability of the debtors
to pay off their obligations.
Basilan Estates vs CIR and CTA
Facts: Basilan Estates, Inc. claimed deductions for
the depreciation of its assets on the basis of their
acquisition cost. As of January 1, 1950 it changed
the depreciable value of said assets by increasing it
to conform with the increase in cost for their
replacement. Accordingly, from 1950 to
1953 it deducted from gross income the value of
depreciation computed on the reappraised value.
CIR disallowed the deductions claimed by
petitioner, consequently assessing the latter of
deficiency income taxes.
Issue:Whether or not the depreciation shall be
determined on the acquisition cost rather than the
reappraised value of the assets.
Held: Yes. The following tax law provision allows
a deduction from gross income for depreciation but
limits the recovery to the capital invested in the
asset being depreciated: (1)In general. — A
reasonable allowance for deterioration of property
arising out of its use or employment in the business
or trade, or out of its not being used: Provided, That
when the allowance authorized under this
subsection shall equal the capital invested by the
taxpayer . . . no further allowance shall be made. . . .
The income tax law does not authorize the
depreciation of an asset beyond its acquisition cost.
Hence, a deduction over and above such cost cannot
be claimed and allowed. The reason is that
deductions from gross income are privileges, not
matters of right. They are not created by implication
but upon clear expression in the law. Depreciation
is the gradual diminution in the useful value of
tangible property resulting from wear and tear and
normal obsolescense. It commences with the
acquisition of the property and its owner is not
bound to see his property gradually waste, without
making provision out of earnings for its
replacement. The recovery, free of income tax, of
an amount more than the invested capital in an asset
will transgress the underlying purpose of a
depreciation allowance. For then what the taxpayer
would recover will be, not only the acquisition cost,
but also some profit. Recovery in due time thru
depreciation of investment made is the philosophy
behind depreciation allowance; the idea of profit on
the investment made has never been the underlying
reason for the allowance of a deduction for
depreciation.
Zamora v. CIR
Facts: These are 4 cases regarding deficiency
income taxes allegedly incurred by the Zamoras.
Cases Nos. L-15290 and L-15280:Mariano Zamora,
owner of the Bay View Hotel and Farmacia
Zamora, Manila, filed his income tax returns the
years 1951 and 1952. The Collector of Internal
Revenue found that he failed to file his return of the
capital gains derived from the sale of certain real
properties and claimed deductions which were not
allowable. The CTA reduced the sum due Zamora
and on appeal, petitioner alleged that the CTA erred
in disallowing the promotion expenses incurred by
his wife for promotion of the above businesses,
depreciation of the Bayview Hotel Bldg, and in
applying the Ballantyne scale of values for
determining the cost of his Manila property. The
CIR, on the other hand, claimed that the CTA erred
in reducing the amounts and giving credence to the
uncorroborated testimony of Mariano Zamora that
he bought the said real property in question during
the Japanese occupation, partly in Philippine
currency and partly in Japanese war notes. Cases
Nos. L-15289 and L-15281 Mariano Zamora and his
deceased sister Felicidad Zamora, bought a piece of
land located in Manila on May 16, 1944, for
P132,000.00 and sold it for P75,000.00 on March 5,
1951. They also purchased a lot located inQuezon
City for P68,959.00 on January 19, 1944, which
they sold for P94,000 on February 9, 1951. The
CTA ordered the estate of the late Felicidad Zamora
(represented by
Esperanza A. Zamora, as special administratrix of
her estate), to pay the sum of P235.50, representing
alleged deficiency income tax and surcharge due
from said estate.
First issue – disallowance of the entire promotion
expenses incurred by Mrs. Zamora
Petitioner: The CTA erred in disallowing
P10,478.50 as promotion expenses incurred by his
wife for the promotion of the BayView Hotel and
Farmacia Zamora. He contends that the whole
amount of P20,957.00 as promotion expenses
should be allowed and not merely one-half of it. on
the ground that, while not all the itemized expenses
are supported by receipts, the absence of some
supporting receipts has been sufficiently and
satisfactorily established - to purchase machinery
for a new Tiki-Tiki plant, and to observe hotel
management in modern hotels.
Respondents: Mrs. Zamora obtained only the sum
of P5,000.00 from the Central Bank and that in her
application for dollar allocation, she stated that she
was going abroad on a combined medical and
business trip, which facts were not denied by
Mariano Zamora. The alleged expenses were not
supported by receipts. Mrs. Zamora could not even
remember how much money she had when she left
abroad in 1951, and how the alleged amount of
P20,957.00 was spent. There having been no means
by which to ascertain which expense was incurred
by her in
connection with the business of Mariano Zamora
and which was incurred for her personal benefit, the
respondents considered 50% of the said amount of
P20,957.00 as business expenses and the other 50%,
as her personal expenses.
Held: The 50% allocation is very fair to Zamora,
there being no receipt to explain the alleged
business expenses as well as the personal expenses
that might have been incurred. While in situations
like the present, absolute certainty is usually no
possible, the CTA should make as close an
approximation as it can, bearing heavily, if it
chooses, upon the taxpayer whose inexactness is of
his own making. Section 30, of the Tax Code,
provides that in computing net income, there shall
be allowed as deductions all the ordinary and
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, same must
testify these requirements. Claim for the deduction
of promotion expenses or entertainment expenses
must also be substantiated or supported by record
showing in detail the amount and nature of the
expenses incurred.
Second issue – disallowance/reduction of the rate
of depreciation of Bayview Hotel (from 3.5% to
2.5%)
Petitioner: Contends that 1) the Ermita district is
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".
Also,the reference to Bulletin F, a publication by
the IRS, should have been first proved as law to be
subject of judicial notice.
Held: The CTA was approximately correct in
holding that the rate of depreciation must be 2.5%.
An average hotel building’s estimated useful life is
5 years, but inasmuch as it also depends on the use
and location, change in population and other, it is
allowed a deprecation rate of 2.5% which
corresponds to a useful life of 40 years. It is true
that Bulletin F has no binding force, but it has a
strong persuasive effect considering that the same
has been the result of scientific studies and
observation for a long period in the United States
after whose Income Tax Law ours is patterned."
Verily, courts are permitted to look into and
investigate the antecedents or the legislative history
of the statutes involved.
Third issue-the undeclared capital gains derived
from the sales in 1951 of certain real properties
in Malate, Manila and in Quezon City, acquired
during the Japanese occupation.
Held: The CTA’s appraisal in this case is correct.
Consequently, the total undeclared income of
petitioners derived from the sales of the Manila and
Quezon City properties in 1951 is P17,111.75
(P1,750.00 plus P15,361.75), 50% of which in the
sum of P8,555.88 is taxable, the said properties
being capital assets held for more than one year.
The cost basis of property acquired in Japanese war
notes is the equivalent of the war notes in genuine
Philippine currency in accordance with the
Ballantyne Scale of values, and that the
determination of the gain derived or loss sustained
in the sale of such property is not affected by the
decline at the time of sale, in the purchasing power
of the Philippine currency. It was found by the CTA
that the purchase price of P132,000.00 was not
entirely paid in Japanese War notes but ½ thereof or
P66,000.00 was in Philippine currency. This being
the case, the Ballantyne Scale of values, which was
the result
of an impartial scientific study, adopted and given
judicial recognition, should be applied. As the value
of the Japanese war notes in May, 1944 when the
Manila property was bought, was 1 ½ of the
genuine Philippine Peso (Ballantyne Scale), and
since the gain derived or loss sustained in
the disposition of this property is to reckoned in
terms of Philippine Peso, the value of the Japanese
war notes used in the purchase of the property, must
be reduced in terms of the genuine Philippine Peso
to determine the cost of acquisition. It, therefore,
results that since the sum of P66,000.00 in Japanese
war notes in May, 1944 is equivalent to P5,500.00
in Philippine currency (P66,000.00 divided by 12),
the acquisition cost of the property in question is
P66,000.00 plus P5,500.00 or P71,500.00 and that
as the property was sold for P75,000.00 in 1951, the
owners thereof Mariano and Felicidad Zamora
derived a capital gain of P3,500.00or P1,750.00
each. For the Quezon City property, the CTA was
correct in giving credence to
Zamora’s testimony that the same was purchased
inPhilippine currency, because it is quite incredible
that real property with an assessed value of
P46,910.00 should have been soldin Japanese war
notes with an equivalent value in Philippine
currency of only P17,239.75. Thus, the gain derived
from the sale isP15,361.75, after deducting from the
selling price the cost of acquisition in the sum of
P68,959.00 and the expense of sale in the sum of
P9,679.25.
Disposition: The petitions are dismissed, and the
decision appealed from is affirmed.
Consolidated Mines vs CTA and CIR
Facts: The Company, a domestic corporation
engaged in mining, had filed its income tax returns
for 1951, 1952, 1953 and 1956. In 1957 examiners
of the BIR investigated the income tax returns filed
by the Company because its auditor, Felipe Ollada,
claimed the refund of the sum of P107,472.00
representing alleged overpayments of income taxes
for the year 1951. After the investigation the
examiners reported that (A) for the years 1951 to
1954 (1) the Company had not accrued as an
expense the share in the company profits of Benguet
Consolidated Mines as operator of the Company's
mines, although for income tax purposes the
Company had reported income and expenses on the
accrual basis; (2) depletion and depreciation
expenses had been overcharged; and (3) the claims
for audit and legal fees and miscellaneous expenses
for 1953 and 1954 had not been properly
substantiated; and that (B) for the year 1956 (1) the
Company had overstated its claim for depletion; and
(2) certain claims for miscellaneous expenses were
not duly supported by evidence.
In view of said reports the Commissioner of Internal
Revenue sent the Company a letter of demand
requiring it to pay certain deficiency income taxes
for the years 1951 to 1954, inclusive, and for the
year 1956. Deficiency income tax assessment
notices for said years were also sent to the
Company. The Company requested a 4,156,888 tons (estimated
reconsideration of the assessment, but the
Commissioner refused to reconsider, hence the
Company appealed to the Court of Tax Appeals.
On May 6, 1961 the Tax Court rendered judgment
ordering the Company to pay the amounts of
P107,846.56, P134,033.01 and P71,392.82 as
deficiency income taxes for the years 1953, 1954
and 1956, respectively.
However, on August 7, 1961, upon motion of the
Company, the Tax Court reconsidered its decision
and further reduced the deficiency income tax
liabilities of the Company to P79,812.93,
P51,528.24 and P71,382.82 for the years 1953,
1954 and 1956, respectively.
Both the Company and the Commissioner appealed
to this Court. The Company questions the rate of
mine depletion adopted by the Court of Tax
Appeals and the disallowance of depreciation
charges and certain miscellaneous.
Issue: Whether the Court of Tax Appeals erred with
respect to the rate of mine depletion.
Held: The Tax Code provides that in computing net
income there shall be allowed as deduction, in the
case of mines, a reasonable allowance for depletion
thereof not to exceed the market value in the mine
of the product thereof which has been mined and
sold during the year for which the return is made
[Sec. 30(g) (1) (B)].
The formula for computing the rate of depletion is:
Cost of Mine Property
---------------------- = Rate of Depletion Per Unit
Estimated ore Deposit of Product Mined and sold.
The Commissioner and the Company do not agree
as to the figures corresponding to either factor that
affects the rate of depletion per unit. The figures
according to the Commissioner are:
P2,646,878.44 (mine cost) P0.59189 (rate of
------------------------- = depletion per ton)
4,471,892 tons (estimated ore deposit)
while the Company insists they are:
P4,238,974.57 (mine cost) P1.0197 (rate of
------------------------- - = depletion per ton)
ore deposit)
They agree, however, that the "cost of the mine
property" consists of (1) mine cost; and (2)
expenses of development before production.
As an income tax concept, depletion is wholly a
creation of the statute— "solely a matter of
legislative grace."Hence, the taxpayer has the
burden of justifying the allowance of any deduction
claimed. As in connection with all other tax
controversies, the burden of proof to show that a
disallowance of depletion by the Commissioner is
incorrect or that an allowance made is inadequate is
upon the taxpayer, and this is true with respect to
the value of the property constituting the basis of
the deduction. This burden-of-proof rule has been
frequently applied and a value claimed has been
disallowed for lack of evidence.
The Company's balance sheet for December 31,
1947 lists the "mine cost" of P2,500,000 as
"development cost" and the amount of
P1,738,974.37 as "suspense account (mining
properties subject to war losses)." The Company
claims that its accountant, Mr. Calpo, made these
errors, because he was then new at the job. Granting
that was what had happened, it does not affect the
fact that the, evidence on hand is insufficient to
prove the cost of development alleged by the
Company. Nor can we rely on the statements of
Eligio S. Garcia, who was the Company's treasurer
and assistant secretary at the time he testified on
August 14, 1959. He admitted that he did not know
how the figure P4,238,974.57 was arrived at,
explaining: "I only know that it is the figure
appearing on the balance sheet as of December 31,
1946 as certified by the Company's auditors; and
this we made as the basis of the valuation of the
depletable value of the mines."
We, therefore, have to rely on the Commissioner's
assertion that the "development cost" was
P131,878.44, broken down as follows: assessment,
P34,092.12; development, P61,484.63; exploration,
P13,966.62; and diamond drilling, P22,335.07.
The question as to which figure should properly
correspond to "mine cost" is one of fact. The
findings of fact of the Tax Court, where reasonably
supported by evidence, are conclusive upon the
Supreme Court.
ROXAS v. CTA, GR No L-25043, April 26, 1968
Facts: Don Pedro Roxas and Dona Carmen Ayala,
Spanish subjects, transmitted to their grandchildren
by hereditary succession several properties. To
manage the above-mentioned properties, said
children, namely, Antonio Roxas, Eduardo Roxas
and Jose Roxas, formed a
partnership called Roxas y Compania. At the
conclusion of the WW2, the tenants who have all
been tilling the lands in Nasugbu for generations
expressed their desire to purchase from Roxas y
Cia. the parcels which they actually occupied. For
its part, the Government, in consonance with the
constitutional mandate to acquire big landed estates
and apportion them among landless tenants-farmers,
persuaded the Roxas brothers to part with their
landholdings. Conferences were held with the
farmers in the early part of 1948 and finally the
Roxas brothers agreed to sell 13,500 hectares to the
Government for distribution to actual occupants for
a price of P2,079,048.47 plus P300,000.00 for
survey and subdivision expenses. It turned out
however that the Government did not have funds to
cover the purchase price, and so a special
arrangement was made for the Rehabilitation
Finance Corporation to advance to Roxas y Cia.
The amount of 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 with the
Rehabilitation Finance Corporation
to pay its loan from the proceeds of the yearly
amortizations paid by the farmers. The CIR
demanded from Roxas y Cia the payment of
deficiency income taxes resulting from the inclusion
as income of Roxas y Cia. of the unreported 50% of
the net profits for 1953 and 1955 derived 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.
For the reason that Roxas y Cia. subdivided its
Nasugbu farm lands and sold
them to the farmers on installment, the
Commissioner considered the partnership as
engaged in the business of real estate, hence, 100%
of the profits derived therefrom was taxed. The
Roxas brothers protested the assessment but
inasmuch as said protest was denied, they instituted
an appeal in the CTA which sustained the
assessment. Hence, this appeal.
Issue: Is Roxas y Cia. liable for the payment of
deficiency income for the sale of Nasugbu
farmlands?
Held: NO. The proposition of the CIR cannot be
favorably accepted in this isolated transaction with
its peculiar circumstances in spite of the fact that
there were hundreds of vendees. Although they paid
for their respective holdings in installment for a
period of 10 years, it would nevertheless not make
the vendor Roxas y Cia. a real estate dealer during
the 10-year amortization period. It should be borne
in mind that the sale of the Nasugbu farm lands to
the very farmers who tilled them for generations
was not only in consonance with, but more in
obedience to the request and pursuant to the policy
of our Government to allocate lands to the 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. However, the
Government could not comply with its duty for lack
of funds. Obligingly, Roxas y Cia. shouldered the
Government's burden, went out of its way and sold
lands directly to the farmers in the same way and
under the same terms as would have been the case
had the Government done it itself. For this
magnanimous act, the municipal council of
Nasugbu passed a resolution expressing the people's
gratitude.

In fine, Roxas y Cia. cannot be considered a real

estate dealer for the sale in question. Hence,
pursuant to Section 34 of the Tax Code the lands
sold to the farmers are capital assets, and the gain
derived from the sale thereof is capital gain, taxable
only to the extent of 50%.