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G.R. Nos. L-18843 and L-18844 August 29, 1974

CONSOLIDATED MINES, INC., petitioner, 

vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. Nos. L-18853 & L-18854 August 29, 1974

COMMISSIONER OF INTERNAL REVENUE, petitioner, 

vs.
CONSOLIDATED MINES, INC., respondent.

PONENTE: MAKALINTAL, C.J.

CASE DIGEST BY: KIRSTIE BARRION

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 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.
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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)
4,156,888 tons (estimated
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
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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.
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Roxas vs. CTA GR No. L-25043 | April 26, 1968

Facts:
         Don Pedro Roxas and Dona Carmen Ayala, both Spanish, transmitted to their grandchildren by
hereditary succession the following properties:
a.        Agricultural lands with a total area of 19,000 hectares in Nasugbu, Batangas
-          Tenants who have been tilling the lands expressed their desire to purchase from Roxas y Cia, the
parcels which they actually occupied
-          The govt, in line 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
-          The brothers agreed to sell 13,500 hec to the govt for P2.079Mn, plus 300K survey and subdivision
expenses
-          Unfortunately, the govt did not have funds
-          A special arrangement was made with the Rehabilitation Finance Corporation to advance to Roxas y
Cia the amount of P1.5Mn as loan
-          Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but by
installment, and contracted with the RFC to pay its loan from the proceeds of the yearly amortizations
paid by the farmers
-          In 1953 and 1955, Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and
P29,500.71. 50% of said net gain was reported for income tax purposes as gain on the sale of capital
asset held for more than one year pursuant to Sec. 34 of the Tax Code

b.        Residential house and lot at Wright St., Malate, Manila

-          After the marriage of Antonio and Eduardo, Jose lived in the house where he paid rentals of 8K/year
to Roxas y Cia

c.        Shares of stocks in different corporations

         To manage the properties, Antonio Roxas, Eduardo Roxas and Jose Roxas, the children, formed a
partnership called Roxas y Compania
         On 1958, CIR demanded from Roxas y Cia the payment of real estate dealer's tax for 1952 amtg to
P150.00 plus P10.00 compromise penalty for late payment, and P150.00 tax for dealers of securities plus
P10.00 compromise penalty for late payment.
-          Basis: house rentals received from Jose, pursuant to Art. 194 of the Tax Code stating that an owner
of a real estate who derives a yearly rental income therefrom in the amount of P3,000.00 or more is
considered a real estate dealer and is liable to pay the corresponding fixed tax
         The Commissioner further assessed deficiency income taxes against the brothers for 1953 and 1955,
resulting from the inclusion as income of Roxas y Cia of the unreported 50% of the net profits 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
         The brothers protested the assessment but was denied, thus appealing to the CTA
         CTA decision: sustained the assessment except the demand for the payment of the fixed tax on
dealer of securities and the disallowance of the deductions for contributions to the Philippine Air Force
Chapel and Hijas de Jesus' Retiro de Manresa

Issue: Should Roxas y Cia be considered a real estate dealer because it engaged in the business of selling
real estate
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Ruling: NO, being an isolated transaction

         Real estate dealer: any person engaged in the business of buying, selling, exchanging, leasing or
renting property on his own account as principal and holding himself out as a full or part-time dealer in
real estate or as an owner of rental property or properties rented or offered to rent for an aggregate
amount of three thousand pesos or more a year:
         Section 194 of the Tax Code, in considering as real estate dealers owners of real estate receiving
rentals of at least P3,000.00 a year, does not provide any qualification as to the persons paying the
rentals
         The fact that there were hundreds of vendees and them being paid for their respective holdings in
installment for a period of ten years, it would nevertheless not make the vendor Roxas y Cia. a real
estate dealer during the 10-year amortization period
         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 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. But due to the lack of funds, 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
         The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly
         Therefore, 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%

As to the deductions
a.        P40 tickets to a banquet given in honor of Sergio Osmena and P28 San Miguel beer given as gifts to
various persons – representation expenses
         Representation expenses: deductible from gross income as expenditures incurred in carrying on a
trade or business
         In this case, the evidence does not show such link between the expenses and the business of Roxas
y Cia
b.        Contributions to the Pasay police and fire department and other police departments as Christmas
funds
         Contributions to the Christmas funds are not deductible for the reason that the Christmas funds
were not spent for public purposes but as Christmas gifts to the families of the members of said entities
         Under Section 39(h), a contribution to a government entity is deductible when used exclusively for
public purposes
         As to the contribution to the Manila Police trust fund, such is an allowable deduction for said trust
fund belongs to the Manila Police, a government entity, intended to be used exclusively for its public
functions.
c.        Contributions to the Philippines Herald's fund for Manila's neediest families
         The contributions were not made to the Philippines Herald but to a group of civic spirited citizens
organized by the Philippines Herald solely for charitable purposes
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         There is no question that the members of this group of citizens do not receive profits, for all the
funds they raised were for Manila's neediest families. Such a group of citizens may be classified as an
association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code
d.        Contribution to Our Lady of Fatima chapel at the FEU
         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 or any religious organization
         The contributions belongs to the Far Eastern University, contributions to which are not deductible
under Section 30(h) of the Tax Code for the reason that the net income of said university injures to the
benefit of its stockholders

No deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas. For 1955
they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively
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C. F. CALANOC, Petitioner, v. THE COLLECTOR OF INTERNAL REVENUE,

Respondent.

Francisco M. Gonzales for Petitioner.

Solicitor General and Special Attorney Librada del Rosario-Natividad for Respondent.

SYLLABUS
1. TAXATION; ASSESSMENT FOR AMUSEMENT TAX; EXPENSES EXORBITANT;
EXEMPTION FROM PAYMENT NOT ALLOWED. — Application for exemption from
payment of amusement tax will be denied where the net proceeds of the exhibition conducted for
charitable purposes are not substantial or where the expenses incurred by the taxpayer are
exorbitant.

DECISION
This is a petition to review the decision of the Court of Tax Appeals affirming an assessment of
P7,378.57, by the Collector of Internal Revenue as amusement tax and surcharge due on a
boxing and wrestling exhibition held by petitioner Calanoc on December 3, 1949 at the Rizal
Memorial Stadium.

By authority of a solicitation permit issued by the Social Welfare Commission on November 24,
1949, whereby the petitioner was authorized to solicit and receive contributions for the orphans
and destitute children of the Child Welfare Workers Club of the Commission, the petitioner on
December 3, 1949 financed and promoted a boxing and wrestling exhibition at the Rizal
Memorial Stadium for the said charitable purpose. Before the exhibition took place, the
petitioner applied with the respondent Collector of Internal Revenue for exemption from
payment of the amusement tax, relying on the provisions of Section 260 of the National Internal
Revenue Code, to which the respondent answered that the exemption depended upon petitioner’s
compliance with the requirements of law.

After the said exhibition, the respondent, through his agent, investigated the tax case of the
petitioner, and from the statement of receipts which was furnished the agent, the latter found that
the gross sales amounted to P26,553.00; the expenditures incurred was P25,157.62; and the net
profit was only P1,375.38. Upon examination of the said receipts, the agent also found the
following items of expenditures: (a) P461.65 for police protection; (b) P460.00 for gifts; (c)
P1,880.05 for parties; and (d) several items for representation.

Out of the proceeds of the exhibition, only P1,375.38 was remitted to the Social Welfare
Commission for the said charitable purpose for which the permit was issued.

On November 24, 1951, the Collector of Internal Revenue demanded from the petitioner
payment of the amount of P7,378.57 as the amusement tax for the exhibition. Authority for this
demand for payment is an opinion of the Secretary of Finance dated June 15, 1948, authorizing
denial of application for exemption from payment of amusement tax in cases where the net
proceeds are not substantial or where the expenses are exorbitant. Not satisfied with the
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assessment imposed upon him, the petitioner brought this case to the Court of Tax Appeals for
review.

After hearing, the tax court rendered the decision sought herein to be reviewed. Hence, this
petition.

Before this Court, the petitioner questions the validity of the assessment of P7,378.57 imposed
upon him by the respondent, as affirmed by the tax court. He denies having received the stadium
fee of P1,000, which is not included in the receipts, and claims that if he did, he can not be made
to pay almost seven times the amount as amusement tax. But evidence was submitted that while
he did not receive said stadium fee of P1,000, said amount was paid by the O-SO Beverages
directly to the stadium for advertisement privileges in the evening of the entertainments. As the
fee was paid by said concessionaire, petitioner had no right to include the P1,000 stadium fee
among the items of his expenses. It results, therefore, that P1,000 went into petitioner’s pocket
which is not accounted for.

Furthermore petitioner admitted that he could not justify the other expenses, such as those for
police protection and gifts. He claims further that the accountant who prepared the statement of
receipts is already dead and could no longer be questioned on the items contained in said
statement.

We have examined the records of the case and we agree with the lower court that most of the
items of expenditures contained in the statement submitted to the agent are either exorbitant or
not supported by receipts. We agree with the tax court that the payment of P461.65 for police
protection is illegal as it is a consideration given by the petitioner to the police for the
performance by the latter of the functions required of them to be rendered by law. The
expenditures of P460.00 for gifts, P1,880.05 for parties and other items for representation are
rather excessive, considering that the purpose of the exhibition was for a charitable cause.

WHEREFORE, the decision sought herein to be reviewed is hereby affirmed, with costs against
the petitioner.
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3M PHILIPPINESv CIR
Facts: 3M Philippines, Inc. is a subsidiary of the Minnesota Mining and Manufacturing
Company (or "3M-St. Paul") a non-resident foreign corporation with principal office in St. Paul,
Minnesota, U.S.A. It is the exclusive importer, manufacturer, wholesaler, and distributor in the
Philippines of all products of 3M-St. Paul. To enable it to manufacture, package, promote,
market, sell and install the highly specialized products of its parent company, and render the
necessary post -sales service and maintenance to its customers, 3M Phils. entered into a "Service
Information and Technical Assistance Agreement" and a "Patent and Trademark License
Agreement" with the latter under which the 3m Phils. agreed to pay to 3M-St. Paul a technical
service fee of 3% and a royalty of 2% of its net sales. Both agreements were submitted to, and
approved by, the Central Bank of the Philippines. the petitioner claimed the following deductions
as business expenses: (a) royalties and technical service fees of P 3,050,646.00;and (b) pre-
operational cost of tape coater of P97,485.08. As to (a), the Commissioner of Internal Revenue
allowed a deduction of P797,046.09 only as technical service fee and royalty for locally
manufactured products, but disallowed the sum of P2,323,599.02 alleged to have been paid by
the petitioner to 3M-St. Paul as technical service fee and royalty on P46,471,998.00 worth of
finished products imported by the petitioner from the parent company, on the ground that the fee
and royalty should be based only on locally manufactured goods. While as to (b), the CIR only
allowed P19,544.77 or one-fifth (1/5) of 3M Phils.capital expenditure of P97,046.09 for its tape
coater which was installed in 1973 because such expenditure should be amortized for a period of
five (5) years, hence, payment of the disallowed balance of P77,740.38 should be spread over the
next four (4) years. The CIR ordered 3M Phil. to pay P840,540 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. 3M Phils. protested the CIR’s assessment but it did not
answer the protest, instead issuing a warrant of levy. The CTA affirmed the assessment on
appeal.

Issue: Whether or not 3M Phils is entitledto the deductions due to royalties?

Ruling: No. CB Circular No. 393 (Regulations Governing Royalties/Rentals) dated December 7,
1973 was promulgated by the Central Bank as an exchange control regulation to conserve
foreign exchange and avoid unnecessary drain on the country's international reserves (69 O.G.
No. 51, pp. 11737-38). Section 3-C of the circular provides that royalties shall be paid only on
commodities manufactured by the licensee under the royalty agreement: Section 3. Requirements
for Approval and Registration. — The requirements for approval and registration as provided for
in Section2 above include,but are not limited to the following: a. xxx xxx xxx b. xxx xxx xxx c.
The royalty/rental contracts involving manufacturing' royalty, e.g., actual transfers of
technological services such as secret formula/processes, technical know how and the like shall
not exceed five (5) per cent of the wholesale price 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 (2) per cent of the
wholesale price of the commodity/ties manufactured under the royalty agreement. The producer's
or foreign licensor's share in the proceeds fromthe distribution/exhibition of the films shall not
exceed sixty (60) per cent of the net proceeds (gross proceeds less local expenses) fromthe
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exhibition/distributionof the films.... (Emphasis supplied.) (p. 27, Rollo.) Clearly, no royalty is
payable on the wholesale price of finished products imported by the licensee from the licensor.
However,petitioner argues that the law applicable to its case is only Section29(a)(1)of the Tax
Code which provides: (a) Expenses. — (1) Business expenses. — (A) In general. — All ordinary
and necessary expenses paid or incurred during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries or other compensation for personal
services actually rendered; travelling expenses while away from home in the pursuit of a trade,
profession or business, rentals or other payments required to be made as a condition to the
continued use or possession, for the purpose of the trade, profession or business, for property to
which the taxpayer has not taken or is not taking title or in which he has no equity. Petitioner
points out that the Central bank "has no say in the assessment and collection of internal revenue
taxes as such power is lodged in the Bureau of Internal Revenue," that the Tax Code "never
mentions Circular 393 and there is no law or regulationgoverning deductionof business expenses
that refers to said circular." (p. 9, Petition.) The argument is specious, for, although the Tax Code
allows payments of royalty to be deducted from gross income as business expenses, it is CB
Circular No. 393 that defines what royalty payments are proper. Hence, improper payments of
royaltyare not deductible as legitimate business expenses.
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Gancayco vs.CIR

Petitioner Santiago Gancayco seeks the review of a decision of the Court of Tax Appeals, requiring him
to pay P16,860.31, plus surcharge and interest,by way of deficiencyincome tax for the year 1949.

On May 10, 1950, Gancayco filed his income tax return for the 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 paid on May 15, 1950. A year later, on May 14, 1951,
respondent 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. Gancayco
sought a reconsideration, which was part granted by respondent, who in a letter dated April 8, 1953
(Exhibit D), informed petitioner that his income tax defendant efficiency for 1949 amounted to
P16,860.31. Gancayco urged another reconsideration (Exhibit O), but no action taken on this request,
although he had sent several communications calling respondent's attentionthereto.

On April 15, 1956, respondent issued a warrant of distraint and levy against the properties of Gancayco
for the satisfaction of his deficiency income tax liability, and accordingly, the municipal treasurer of
Catanauan, Quezon issued on May 29, 1956, a notice of sale of said property at public auction on June
19, 1956. Upon petition of Gancayco filed on June 16, 1956, the Court of Tax Appeal issued a resolution
ordering the cancellation of the sale and directing that the same be readvertised at a future date, in
accordance with the procedure established by the National Internal Revenue Code. Subsequently,or on
June 22, 1956,Gancayco filedan amended petitionpraying that said Court:

(a) Issue a writ of preliminary injunction, enjoining the respondents from enforcing the collection of the
alleged tax liability due fromthe petitioner throughsummary proceeding pending determinationof the
present case;

(b) After a review of the present case adjudge that the right of the government to enforce collection of
any liability due on this account had already prescribed;

(c) That even assuming that prescription had not set in the objections of petitioner to the disallowance
of the entertainment,representationand farming expenses be allowed;

In his answer respondent admitted some allegations the amended petition, denied other allegations
thereof an set up some special defenses. Thereafter Gancayco received from the municipal treasurer of
Catanauan, Quezon, another notice of auction sale of his properties, to take place on August 29, 1956.
On motion of Gancayco, the Court of Tax Appeals, by resolution dated August 27, 1956, "cancelled" the
aforementioned sale and enjoined respondent and the municipal treasurer of Catanauan, Quezon, from
proceeding with the same. After appropriate proceedings, the Court of Tax Appeals rendered, on
November 14,1957,the decision adverted to above.

Gancayco maintains that the right to collect the deficiency income tax in question is barred by the
statute of limitations. In this connection, it should be noted, however, that there are two (2) civil
remedies for the collection of internal revenue taxes, namely: (a) by distraint of personal property and
 12

levy upon real property; and (b) by "judicial action" (Commonwealth Act 456, section 316). The first may
not be availed of except within three (3) years after the "return is due or has been made ..." (Tax Code,
section 51 [d] ). After the expiration of said Period, income taxes may not be legally and validly collected
by distraint and/or levy (Collector of Internal Revenue v. Avelino, L-9202, November 19, 1956; Collector
of Internal Revenue v. Reyes, L-8685, January 31, 1957; Collector of Internal Revenue v. Zulueta, L-8840,
February 8, 1957; Sambrano v. Court of Tax Appeals, L-8652, March 30, 1957). Gancayco's income tax
return for 1949 was filed on May 10, 1950; so that the warrant of distraint and levy issued on May 15,
1956, long after the expiration of said three-year period, was illegal and void,and so was the attempt to
sell his properties inpursuance of said warrant.

The "judicial action" mentioned in the Tax Code may be resorted to within five (5) years from the date
the return has been filed, if there has been no assessment, or within five (5) years from the date of the
assessment made within the statutory period, or within the period agreed upon, in writing, by the
Collector of Internal Revenue and the taxpayer. before the expiration of said five-year period, or within
such extension of said stipulated period as may have been agreed upon, in writing, made before the
expiration of the period previously situated, except that in the case of a false or fraudulent retur n with
intent to evade tax or of a failure to file a return, the judicial action may be begun at any time within ten
(10) years after the discovery of the falsity, fraud or omission (Sections 331 and 332 of the Tax Code). In
the case at bar, respondent made three (3) assessments: (a) the original assessment of P9,793.62, made
on May 12, 1950; (b) the first deficiency income tax assessment of May 14, 1951, for P29,554.05; and (c)
the amended deficiency income tax assessment of April 8, 1953, for P16,860.31.

Gancayco argues that the five-year period for the judicial action should be counted from May 12, 1950,
the date of the original assessment, because the income tax for 1949, he says, could have been collected
from him since then. Said assessment was, however, not for the deficiency income tax involved in this
proceedings, but for P9,793.62, which he paid forthwith. Hence, there never had been any cause for a
judicial action against him, and, per force, no statute of limitations to speak of, in connectionwithsaid
sum of P9,793.62.

Neither could said statute have begun to run from May 14, 1951, the date of the first deficiency income
tax assessment or P29,554.05, because the same was, upon Gancayco's request, reconsidered or
modified by the assessment made on April 8, 1953, for P16,860.31. Indeed, this last assessment is what
Gancayco contested in the amended petition filed by him with the Court of Tax Appeals. The amount
involved in such assessment which Gancayco refused to pay and respondent tried to collect by warrant
of distraint and/or levy, is the one in issue between the parties. Hence, the five-year period
aforementioned should be counted from April 8, 1953, so that the statute of limitations does not bar the
present proceedings, instituted on April 12, 1956, if the same is a judicial action, as contemplated in
section 316 of the Tax Code, which petitioner denies,upon the ground that a. "The Court of Tax Appeals
does not have original jurisdictionto entertainanactionfor the collectionof the tax due; b. "The proper
party to commence the judicial actionto collect the tax due is the government,and c. "The remedies
providedby law for the collectionof the tax are exclusive." SaidSection316 provides: The civil remedies
for the collection of internal revenue taxes, fees, or charges, and any increment thereto resulting from
delinquency shall be (a) by distraint of goods, chattels, or effects, and other personal property of
 13

whatever character, including stocks and other securities, debts, credits, bank accounts, and interest in
and rights to personal property, and by levy upon real property; and (b) by judicial action. Either of these
remedies or both simultaneously may be pursued in the discretionof the authorities chargedwiththe
collectionof such taxes. No exemptionshall be allowed against the internal revenue taxes inany case.
Petitioner contends that the judicial action referred to in this provision is commenced by filing, with a
court of first inst ance, of a complaint for the collection of taxes. This was true at the time of the
approval of Commonwealth Act No. 456, on June 15, 1939. However, Republic Act No. 1125 has vested
the Court of Tax Appeals, not only with exclusive appellate jurisdiction to review decisions of the
Collector (now Commissioner) of Internal Revenue in cases involving disputed assessments, like the one
at bar, but, also, with authority to decide "all cases involving disputed assessments of Internal Revenue
taxes or customs duties pending determination before the court of first instance" at the time of the
approval of said Act, on June 16, 1954 (Section 22, Republic Act No. 1125). Moreover, this jurisdiction to
decide all cases involving disputed assessments of internal revenue taxes and customs duties necessarily
implies the power to authorize and sanction the collection of the taxes and duties involved in such
assessments as may be upheld by the Court of Tax Appeals. At any rate, the same now has the authority
formerly vested in courts of first instance to hear and decide cases involving disputed assessments of
internal revenue taxes and customs duties. Inasmuch as those cases filed with courts of first instance
constituted judicial actions, such is, likewise, the nature of the proceedings before the Court of Tax
Appeals, insofar as sections 316 and 332 of the Tax Code are concerned. The question whether the sum
of P16,860.31 is due from Gancayco as deficiency income tax for 1949 hinges on the validity of his claim
for deduction of two (2) items, namely: (a) for farming expenses, P27,459.00; and (b) for representation
expenses, P8,933.45. Section30 of the Tax Code partlyreads: (a) Expenses: (1) In General — All the
ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries or other compensation for personal services
actually rendered; traveling expenses while away from home in the pursuit of a trade or business; and
rentals or other payments required to be made as a condition to the continued use or possession, for
the purposes of the trade or business, of property to which the taxpayer has not takenor is not taking
title or in which he has no equity. (Emphasis supplied.) Referring to the item of P27,459, for farming
expenses allegedly incurred by Gancayco, the decision appealed from has the following to say: 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 "development and cultivation of (his) property". No
specification has been made as to the actual amount spent for purchase of tools, equipment or
materials, or the amount spent for improvement. Respondent claims that the entire amount was spent
exclusively for clearing and developing the farm which were necessary to place it in a productive state. It
is not, therefore, an ordinary expense but a capitol expenditure. Accordingly, it is not deductible but it
may be amortized, in accordance with section 75 of Revenue Regulations No. 2, cited above. See also,
section 31 of the Revenue Code which provides that in computing net income, no deduction shall in any
case be allowed in respect of any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any propertyor estate.(Emphasis supplied.) We concur in this
view,whichis a necessary consequence of section31 of the Tax Code, pursuant to which: (a) General Rule
— In computing net income no deduction shall in any case be allowed in respect of — (1)
Personal,living,or family expenses; (2) Any amount paid out for new buildings or for permanent
 14

improvements, or betterments made to increase the value of any propertyor estate; (3) Any amount
expended in restoring property or in making good the exhaustion thereof for which an allowance is or
has been made; or (4) Premiums paid on any life insurance policy covering 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 indirectlya beneficiaryunder such policy.
(Emphasis supplied.) Saidview is,likewise,inaccord withthe consensus of the authorities onthe subject.
Expenses incident to the acquisition of property follow the same rule as applied to payments made as
direct consideration for the property. For example, commission paid in acquiring property are
considered as representing part of the cost of the property acquired. The same treatment is to be
accorded to amounts expended for maps, abstracts, legal opinions on titles, recording fees and surveys.
Other non-deductible expenses include amounts paid in connection with geological explorations,
development and subdividing of real estate; clearing and grading; restoration of soil, drilling wells,
architects's fees and similar types of expenditures. (4 Merten's Law of Federal Income Taxation, Sec.
25.20, pp. 348-349; see also sec. 75 of the income Regulationof the B.I.R.; Emphasis supplied.) The cost
of farm machinery, equipment and farm building represents a capital investment and is not an allowable
deduction as an item of expense. Amounts expended in the development of farms, orchards, and
ranches prior to the time when the productive state is reached may be regarded as investments of
capital. (Merten's Law of Federal Income Taxation, supra, sec. 25.108,p. 525.) Expenses for clearing off
and grading lots acquired is a capital expenditure, representing part of the cost of the land and was not
deductible as an expense. (Liberty Banking Co. v. Heiner 37 F [2d] 703 [8AFTR 100111] [CCA 3rd]; The
B.L. Marble Chair Company v.U.S., 15 AFTR 746). An item of expenditure, in order to be deductible under
this section of the st atute providing for the deduction of ordinary and necessary business expenses,
must fall squarely within the language of the statutory provision. This section is intended primarily,
although not always necessarily, to cover expenditures of a recurring nature where the benefit derived
from the payment is realized and exhausted within the taxable year. Accordingly, if the result of the
expenditure is the acquisition of an asset which has an economically useful life beyond the taxable year,
no deduction of such payment may be obtained under the provisions of the statute. In such cases, to the
extent that a deduction is allowable, it must be obtained under the provisions of the statute which
permit deductions for amortization, depreciation, depletion or loss. (W .B. Harbeson Co. 24 BTA, 542;
Clark Thread Co., 28 BTA 1128 aff'd 100 F [2d] 257 [CCA 3rd, 1938]; 4 Merten's Law of Federal Income
Taxation, Sec. 25.17, pp. 337-338.) Gancayco's claim for representation expenses aggregated
P31,753.97, of which P22,820.52 was allowed, and P8,933.45 disallowed. Such disallowance is justified
by the record, for, apart from the absence of receipts, invoices or vouchers of the expenditures in
question, petitioner could not specify the items constituting the same, or when or on w hom or on what
they were incurred. The case of Cohan v. Commissioner, 39 F (2d) 540, cited by petitioner is not in point,
because in that case there was evidence on the amounts spent and the persons entertained and the
necessity of entertaining them, although there were no receipts anvouchers of the expenditures
involvedtherein.Suchis not the case of petitioner herein. Being in accordance with the facts and law, the
decision of the Court of Tax Appeals is hereby affirmed therefore, with costs against petitioner Santiago
Cancayco. It is so ordered. Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera and Dizon, JJ.,
concur.
 15

BANK OF AMERICA NT & SA VS. CA- Remittance Tax

Category: Income Taxation

In the 15% remittance tax, the law specifies its own tax base to be on the “profit remitted
abroad.” There is absolutely nothing equivocal or uncertain about the language of the
provision. The tax is imposed on the amount sent abroad, and the law calls for nothing further.

FACTS:

1. Bank of America is a foreign corporation licensed to engage in business in the Philippines

through a branch in Makati.
2. Bank of America paid 15% branch profit remittance tax amounting to PhP7.5M from its
REGULAR UNIT OPERATIONS and another 405K PhP from its FOREIGN CURRENCY
DEPOSIT OPERATIONS
3. The tax was based on net profits after income tax without deducting the amount corresponding
to the 15% tax.
4. Bank of America thereafter filed a claim for refund with the BIR for the portion the
corresponds with the 15% branch profit remittance tax. BOA’s claim: “BIR should tax us based
on the profits actually remitted (45M), and NOT on the amount before profit remittance tax
(53M)... The basis should be the amount actually remitted abroad.”
5. CIR contends otherwise and holds that in computing the 15% remittance tax, the tax should be
inclusive of the sum deemed remitted.

ISSUES: Whether or not the branch profit remittance tax should be base on the
amount actually remitted?

HELD: YES.

1. It should be based on the amount actually committed, NOT what was applied for.
2. There is nothing in Section 24which indicates that the 15% tax/branch profit remittance is on
the total amount of profit; where the law does NOT qualify that the tax is imposed and collected
 16

at source, the qualification should not be read into law.

3. Rationale of 15%: To equalize/ share the burden of income taxation with foreign corporations

N.V. Reederij Amsterdam vs. CIR

G.R. No. L-46029 June 23, 1988

FACTS:

M.V. Amstelmeer and, MV "Amstelkroon," both of which are vessels of petitioner N.B. Reederij
"AMSTERDAM," called on Philippine ports to load cargoes for foreign destination on two separate
occasions. The freight fees for these transactions were paid abroad in two payments. In these two
instances, petitioner Royal Interocean Lines acted as husbanding agent for a fee or commission on said
vessels. No income tax appears to have been paid by petitioner N.V. Reederij "AMSTERDAM" on the
freight receipts.

Respondent Commissioner assessed said petitioner in the amounts of P193,973.20 and

P262,904.94 as deficiency income tax for 1963 and 1964, respectively, as "a non-resident foreign
corporation not engaged in trade or business in the Philippines under Section 24 (b) (1) of the Tax Code.

On the assumption that the said petitioner is a foreign corporation engaged in trade or business in
the Philippines, petitioner Royal Interocean Lines filed an income tax return of the aforementioned vessels
computed at the exchange rate of P2.00 to US1.00 and paid the tax thereon in the amount of P1,835.52
and P9,448.94. Petitioner Royal Interocean Lines as the husbanding agent of petitioner N.V. Reederij
"AMSTERDAM" filed a written protest against the abovementioned assessment made by the respondent
Commissioner which protest

ISSUES:Whether Petitioner should be taxed as a foreign corporation not engaged in trade or business in
the Philippines?

HELD:

Yes. Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or licensed
to do business in the Philippines. It does not have a branch office in the Philippines and it made only two
calls in Philippine ports, one in 1963 and the other in 1964. In order that a foreign corporation may be
considered engaged in trade or business, its business transactions must be continuous. A casual
business activity in the Philippines by a foreign corporation, as in the present case, does not amount to
engaging in trade or business in the Philippines for income tax purposes.

A foreign corporation engaged in trade or business within the Philippines, or which has an office
or place of business therein, is taxed on its total net income received from all sources within the
Philippines at the rate of 25% upon the amount but which taxable net income does not exceed
P100,000.00, and 35% upon the amount but which taxable net income exceeds P100,000.00. 2 On the
other hand, a foreign corporation not engaged in trade or business within the Philippines and which does
 17

not have any office or place of business therein is taxed on income received from all sources within the
Philippines at the rate of 35% of the gross income.

CIR V. WANDER PHILIPPINES INC.-Dividends, Withholding Tax

Category: Income Taxation

The dividends received from a domestic corporation is liable to a 15% withholding tax, provided
that the country in which the foreign corporation is domiciled shall allow a tax credit
(equivalent to 20% which is the difference between the 35% tax due on regular corporations and
the 15% tax due on dividends) against the taxes due to have been paid in the Philippines.

Facts:

Wander is a domestic corporation which is a wholly-owned subsidiary of Glaro S.A. Ltd.,a Swiss
corporation not engaged in trade/business in the Philippines. In two instances, Wander filed its
withholding tax return and remitted to Glaro (the parent company) dividends (P222,000 in the
first instance and P355,200 in the second), on which 35% tax was withheld and paid to the BIR.

Wander now files a claim for refund of the withheld tax contending that it is liable only to 15%
withholding tax pursuant to Section 24. B.1 of the Tax Code. The BIR did not act upon the claim
filed by Wander so the corporation filed a petition to the Court of Tax Appeals (CTA). The CTA
held that the corporation is entitled to 15% withholding tax rate on dividends remitted to Glaro, a
non-resident foreign corporation.

Issue: Whether or not Wander is entitled to the 15% withholding tax rate.

Held:

Yes. According to Sec. 24.B.1 of the Tax Code, the dividends received from a domestic
corporation is liable to a 15% withholding tax, provided that the country in which the foreign
corporation is domiciled shall allow a tax credit (equivalent to 20% which is the difference
between the 35% tax due on regular corporations and the 15% tax due on dividends) against the
taxes due to have been paid in the Philippines.
 18

In the case, Switzerland did not impose any tax on the dividends received by Glaro thus it should
be considered as a full satisfaction of the given condition. To deny respondent the privilege to
withhold 15% would run counter to the spirit and intent of the law and will adversely affect the
foreign corporations’ interest and discourage them from investing capital in our country.

*Petition dismissed for lack of merit.

COMMISSIONER OF INTERNAL REVENUE vs. WANDER PHILIPPINES, INC.

FACTS:

Private respondent, Wander, is a domestic corporation organized under Philippine laws. It is

wholly-owned subsidiary of the Glaro, a Swiss corporation not engaged in trade or business in the
Philippines. On July 18, 1975, Wander filed its withholding tax return for the second quarter and
remitted to its parent company, Glaro dividends on which 35% withholding tax was withheld and paid to
the BIR. On the following year, Wander again filed a withholding tax return for the second quarter on the
dividends it remitted to Glaro, on which 35% tax was withheld and paid to the BIR. On 1977, Wander
filed with the Appellate Division of the Internal Revenue a claim for refund and/or tax credit in the
amount of P115,400.00, contending that it is liable only to 15% withholding tax in accordance with
Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos. 369 and 778, and not on the
basis of 35% which was withheld and paid to and collected by the government. The petitioner having
failed to act on the above-said claim for refund, on July 15, 1977, Wander filed a petition with CTA.
Petitioner then filed its answer. The CTA rendered decision ordering respondent to grant a refund and/or
tax credit to petitioner in the amount of P115,440.00 representing overpaid withholding tax on dividends
remitted by it to the Glaro S.A. Ltd. of Switzerland during the second quarter of the years 1975 and 1976.
Petitioner filed a Motion for Reconsideration but the same was denied.. Hence, a petition for review on
certiorari was filed against CTA decision.

ISSUE:

Whether or not Wander Philippines, Inc. is entitled to the preferential rate of 15% withholding
tax on the dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of Switzerland, a non-
resident foreign corporation.

HELD:

Yes. Switzerland did not impose any tax on the dividends received by Glaro. While it may be true
that claims for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland
did not impose any tax or the dividends received by Glaro from the Philippines should be considered as a
full satisfaction of the given condition.

For, as aptly stated by respondent Court, to deny private respondent the privilege to withhold
only 15% tax provided for under Presidential Decree No. 369, amending Section 24 (b) (1) of the Tax
Code, would run counter to the very spirit and intent of said law and definitely will adversely affect
foreign corporations" interest here and discourage them from investing capital in our country. ----Besides,
it is significant to note that the conclusion reached by respondent Court is but a confirmation of the May
19, 1977 ruling of petitioner that "since the Swiss Government does not impose any tax on the dividends
 19

to be received by the said parent corporation in the Philippines, the condition imposed under the above-
mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed."