TAXATION 1

MARY JOESSA G. AJOC

CASE
DIGEST
COMPILATION
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1) Officemetro Philippines,Inc. (Formerly Regus Centres, Inc.) vs.Commissioner of Internal
Revenue, CTA Case No. 8382, June 3, 2014.
4
2) CIR v. Pilipinas Shell Petroleum Corporation, G.R. No. 188497, February 19, 2014.
6
3) Deutsche Bank-AG Manila Branch v. CIR, G.R. No. 188550, August 19, 2013.
8
4) CIR v. General Foods (Phils.), Inc., G.R. No. 143672, April 24, 2003.
10
5) The Late Lino Gutierrez substituted by Andrea C. vda. De Gutierrez et. al. v. Collector (now
commissioner) of Internal Revenue, G.R. No. l-19537, May 20, 1965.
12
6) Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 172231,
February 12, 2007. 14

7) H. Tambunting Pawnshop, Inc. v. Commissioner of Internal Revenue, G.R. No. 173373, July 16
29, 2013.
8) Plaridel Surety and Insurance Company, v. Commissioner of Internal Revenue, G.R. No.
L21520, December 11, 1967. 18

9) Philippine Refining Company (now known as "Unilever Philippines [PRC], Inc."), v. CA,
CTA, and the CIR, G.R. No. 118794, May 8, 1996. 19
10) China Banking Corporation v. CA, CIR and CTA, G.R. No. 125508, July 19, 2000. 21

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TABLE OF CONTENTS
11) Commissioner of Internal Revenue v. Bicolandia Drug
TAX ON IMPROPERLY Corporation (formerly known as Elmas Drug Co.), G.R. No.
23
ACCUMULATED EARNINGS 148083, July 21, 2006.
(Sec. 29, Tax Code)
12) Kuenzle & Streiff, Inc., v. The Collector [now
Commissioner] of Internal Revenue, G.R. Nos. L-12010 and 24
L-12113, October 20, 1959.
13) Paper Industries Corporation of the Philippines
(PICOP), v. CA, CIR, and CTA, G.R. Nos. 106949-50, 26
December 1, 1995.
14) Hospital de San Juan de Dios, Inc., v. Commissioner of
28
Internal Revenue, G.R. No. L-31305 may 10, 1990.
15) Commissioner of Internal Revenue, v. Central Luzon
29
Drug Corporation, G.R. No. 159610, June 12, 2008.
16) Commissioner of Internal Revenue v. Philippine Airlines,
Inc. (PAL), G.R. No. 179259, September 25, 2013 31

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 1. Officemetro Philippines, Inc. (Formerly Regus Centres, Inc.) vs
Commissioner of Internal Revenue, CTA
Case No. 8382
June 3, 2014

FACTS:
Respondent, Commissioner of Internal Revenue, issued Letter of Authority No. 000461203 authorizing
the examination of petitioner's books of accounts and other accounting records for all internal revenue tax
liabilities for taxable year 2005.
Petitioner received a Preliminary Assessment Notice (PAN), to which it filed a Letter of Protest.
Petitioner then received a Formal Assessment Notice (FAN) with attached Details of Discrepancies and
Assessment Notices. Later on, respondent issued the assailed Final Decision on Disputed Assessment
(FDDA) for taxable year 2005, finding petitioner liable for deficiency expanded withholding tax (EWT)
in the amount of P1,210,746.16 final withholding of VAT in the amount of P4,201,938.52, deficiency
final withholding tax (FWT) in the amount of P11,499,902.49, and a compromise penalty of P50,000.00.
Petitioner filed an instant Petition for Review praying to set aside the assessments of respondent in her
FDDA. However, the respondent claims, among others, that petitioner failed to submit documents to
substantiate the claim.
Witness Gemma B. Perez testified that as petitioner's accountant, she handles its financial records. On
July 13, 2009, petitioner received a PAN dated July 13, 2009 for taxable year 2005 from the BIR, which it
protested on July 28, 2009.
March 12, 2013, petitioner informed the Court that it had ceased operation. Further, it had entered into a
Compromise Settlement with respondent and paid through Electronic Filing and Payment System (EFPS)
forty percent ( 40°/o) of the basic tax assessed in the assailed FDDA, as well as the compromise penalty
of P50,000.

ISSUES:
1. Whether or not Petitioner is liable for deficiency expanded withholding tax amounting
Php1,210,746.16 for taxable year 2005.
2. Whether or not Petitioner is liable for deficiency final withholding of value added tax amounting to
Php4,201,938.52 for taxable year 2005.
3. Whether or not Petitioner is liable for deficiency final withholding tax amounting to Php11,499,902.49
for taxable year 2005.

HELD:
The Petition for Review is PARTIALLY GRANTED.

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1. Petitioner asserts that out of the reported rental of P63,106,033.53 per Audited Financial
Statement (AFS), the property services charges in the amount of P8,850,170.00 represent
payments for condominium dues which are not taxable income of a condominium corporation,
consequently not subject to withholding tax. In other words, it should be excluded from the rental
amount subject to EWT.

The Court agrees with petitioner. Condominium dues billed to the company are not subject to
EWT. Based on the assailed FDDA, petitioner has deficiency EWT on its purchase of services.
Significantly, petitioner did not refute respondent's findings that the above income payments of
P28,075,122.46 should be subjected to EWT, hence, it is upheld in line with the principle that tax
assessments by tax examiners are presumed correct and made in good faith, and all presumptions
are in favor of the correctness of tax assessment unless proven otherwise.

2. Petitioner asserts that under Section 4.114 of RR No. 2-98, as amended by Section 7 of RR No.
14-02, only payments to non-residents for services rendered in the Philippines are subject to final
withholding of value-added tax.

To support its claim, the petitioner presented a copy of the Certification executed by William
Willems, Director of Regus Centres Pty. Ltd. and the Intercompany Services Agreement entered
by and between Regus Centres Pty. Ltd.

However, the said documents do not prove petitioner's assertion that the services were actually
performed by nonresident foreign corporation outside the Philippines. Petitioner failed to present
clear and convincing evidence to support its stand and to refute respondent's findings, the
assessment for withholding of VAT on management fees should be upheld.
3. Since petitioner was not able to prove that the services were performed outside the Philippines,
the same shall be treated as income derived from sources within the Philippines by such non-
resident foreign corporation. Consequently, it shall be subject to FWT of thirty-two percent
(32°/o), in accordance with Section 28 of the NIRC of 1997, in relation to Section 2.57.1 of RR
No. 2-98.

Both in the PAN and in the FAN, respondent assessed petitioner's license fees at the rate of 32°/o.
Petitioner stressed that the license fees are in relation to the and Regus Management Limited, a
non-resident foreign corporation established under the laws of the United Kingdom.

The Court held that the license fees, being in the nature of royalties earned by Regus
Management Limited for the use of the intellectual property, the marks, the confidential data and
the information transferred by Regus Management Limited, should be subject to the reduced tax
rate under paragraph 2 of Article 11 of the Philippines-United Kingdom (UK) Tax Treaty.
Therefore, license fees are subject to 25°/o tax rate. In addition, petitioner shall PAY respondent
the following deficiency and delinquency interests on the remaining unpaid deficiency taxes.

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 2. CIR v. Pilipinas Shell Petroleum Corporation
G.R. No. 188497
February 19, 2014

FACTS:
Respondent argues that a plain reading of Section 135 of the NIRC reveals that it is the petroleum
products sold to international carriers which are exempt from excise tax. An excise tax being an indirect
tax, Section 135 in relation to Section 148 should be interpreted as referring to a tax exemption from the
point of production and removal from the place of production considering that it is only at that point that
an excise tax is imposed.

Respondent thus concludes that exemption could only refer to the imposition of the tax paid by the
statutory seller. This is because when a tax paid by the statutory seller is passed on to the buyer it is no
longer in the nature of a tax but an added cost to the purchase price of the product sold. Respondent
contends that Section 135 only prohibits local petroleum manufacturers from shifting the burden of excise
tax to international carriers. Further, the respondent asserts the imposition of excise tax on petroleum
products sold to international carrier is in violation of the Chicago Convention.

ISSUES:
1. Whether or not Section 135 intended the tax exemption to apply to petroleum products at the point of
production.

2. Whether or not excise tax on petroleum products sold to international carriers for use or consumption
outside the Philippines attaches to the article when sold to international carriers.

HELD:
1. No. The exemption from payment of excise tax is conferred on international carriers who purchased the
petroleum products of respondent. On the basis of Philippine Acetylene, tax exemption being enjoyed by
the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of goods for any
tax due to it as the manufacturer. The excise tax imposed on petroleum products under Section 148 is the
direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted to its buyers
who are international carriers.

2. No. Excise tax on aviation fuel used for international flights is practically nil as most countries are
signatories to the 1944 Chicago Convention. Article 24 prohibits taxation of aircraft fuel consumed for
international transport. Section 135a of the NIRC and earlier amendments to the Tax Code represent our

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Government’s compliance with the Chicago Convention, its subsequent resolutions/annexes, and the air
transport agreements entered into by the Philippine Government with various countries. In fulfillment of
international agreement and practice to exempt aviation fuel from excise tax and other impositions,
prohibits the passing of the excise tax to international carriers who buys petroleum products from local
manufacturers/sellers.

Respondent, as statutory taxpayer who is directly liable to pay the excise tax on its petroleum products, is
entitled to a refund or credit of the excise taxes it paid for petroleum products sold to international
carriers, the latter having been granted exemption from the payment of said excise tax under Sec. 135(a)
of the NIRC.

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 3. Deutsche Bank-AG Manila Branch v. CIR
G.R. No. 188550
August 19, 2013

FACTS:
In accordance with Section 28(A)(5)4 of the Tax Code, petitioner withheld and remitted to the CIR PHP
67,688,553.51, which represented the fifteen percent (15%) branch profit remittance tax (BPRT) on its
regular banking unit (RBU) net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and
prior taxable years.

Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large Taxpayers
Assessment and Investigation Division an administrative claim for refund or issuance of its tax credit
certificate in the total amount of PHP 22,562,851.17. On the same date, petitioner requested from the
International Tax Affairs Division (ITAD) a confirmation of its entitlement to the preferential tax rate of
10% under the RP-Germany Tax Treaty.

Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review in its
claim for refund with the CTA. The CTA denied said petition on the ground that the application for a tax
treaty relief was not filed with ITAD prior to the payment by the former of its BPRT and actual
remittance of its branch profits to DB Germany, or prior to its availment of the preferential rate of ten
percent (10%) under the RP-Germany Tax Treaty provision. The court a quo held that petitioner violated
the fifteen (15) day period mandated under Section III paragraph (2) of Revenue Memorandum Order
(RMO) No. 1-2000.

ISSUE:
Whether application for a tax treaty relief is necessary prior to availment of the preferential rate of ten
percent (10%) under the RP-Germany Tax Treaty provision.

HELD:
No, application is not necessary to avail of the preferential rate.

The time-honored international principle of pacta sunt servanda demands the performance in good faith
of treaty obligations on the part of the states that enter into the agreement. Tax treaties are entered into to
minimize, if not eliminate the harshness of international juridical double taxation, which is why they are
also known as double tax treaty or double tax agreements.

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Thus, laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose additional requirements that would negate the availment of the
reliefs provided for under international agreements. More so, when the RP-Germany Tax Treaty does not
provide for any pre-requisite for the availment of the benefits under said agreement.

The objective of the BIR is to forestall assessments against corporations who erroneously availed
themselves of the benefits of the tax treaty but are not legally entitled thereto. This objective becomes
moot in refund cases, such as the present case, where the very basis of the claim is erroneous or there is
excessive payment arising from non-availment of a tax treaty relief at the first instance. In this case,
petitioner should not be faulted for not complying with RMO No. 1- 2000 prior to the transaction. It could
not have applied for a tax treaty relief within the period prescribed, or 15 days prior to the payment of its
BPRT, precisely because it erroneously paid the BPRT not on the basis of the preferential tax rate under
the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the prior
application requirement becomes illogical.

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 4. CIR v. General Foods (Phils.), Inc.
G.R. No. 143672
April 24, 2003

FACTS:
Respondent corporation General Foods (Phils), which is engaged in the manufacture of “Tang”,
“Calumet” and “Kool-Aid”, filed its income tax return for the fiscal year ending February 1985 and
claimed as deduction, among other business expenses, P9,461,246 for media advertising for “Tang”.
The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of
P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied.
General Foods later on filed a petition for review at CA, which reversed and set aside an earlier decision
by CTA dismissing the company’s appeal.

ISSUE:
W/N the subject media advertising expense for “Tang” was ordinary and necessary expense fully
deductible under the NIRC.

HELD:
No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor of
the taxing authority, and he who claims an exemption must be able to justify his claim by the clearest
grant of organic or statute law. Deductions for income taxes partake of the nature of tax exemptions;
hence, if tax exemptions are strictly construed, then deductions must also be strictly construed.
To be deductible from gross income, the subject advertising expense must comply with the following
requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during
the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the
taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.
While the subject advertising expense was paid or incurred within the corresponding taxable year and was
incurred in carrying on a trade or business, hence necessary, the parties’  views conflict as to whether or
not it was ordinary. To be deductible, an advertising expense should not only be necessary but also
ordinary.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it
failed the two conditions set by U.S. jurisprudence: first, “reasonableness” of the amount incurred and

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second, the amount incurred must not be a capital outlay to create “goodwill” for the product and/or
private respondent’s business. Otherwise, the expense must be considered a capital expenditure to be
spread out over a reasonable time.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising
expense. There being no hard and fast rule on the matter, the right to a deduction depends on a number of
factors such as but not limited to: the type and size of business in which the taxpayer is engaged; the
volume and amount of its net earnings; the nature of the expenditure itself; the intention of the taxpayer
and the general economic conditions. It is the interplay of these, among other factors and properly
weighed, that will yield a proper evaluation.
The Court finds the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then
Section 29 (a) (1) (A) of the NIRC.

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5. The Late Lino Gutierrez substituted by Andrea C. vda. De Gutierrez et. al. vs Collector (now
commissioner) of Internal Revenue
G.R. No. l-19537
May 20, 1965

FACTS:
Lino Gutierrez was primarily engaged in the business of leasing real property for which he paid real estate
broker’s privilege tax. He filed his income tax returns for the years 1951, 1952, 1953 and 1954 and paid
the corresponding tax declared therein.

On July 10, 1956 the Commissioner (formerly Collector) of Internal Revenue assessed against Gutierrez
the following deficiency income tax:

1951 - P1,400,00

1952 - 672.00

1953 - 5,161.00

1954 - 4,608.00

Total P11,841.00

The above deficiency tax came about by the disallowance of deductions from gross income representing
depreciation, expenses Gutierrez allegedly incurred in carrying on his business, and the addition to gross
income of receipts which he did not report in his income tax returns. The disallowed business expenses
which were considered by the Commissioner either as personal or capital expenditures consisted.

In addition, there is also an overstatement of purchase price of real estate refers to the sale of two pieces
of property in 1953 and the understatement of profit from the sale of real estate. This was explained by
stating that in 1953 and 1954 Gutierrez sold four other properties upon which he made substantial profits.
Convinced that said properties were capital assets, he declared only 50% of the profits from their sale.
However, treating said properties as ordinary assets (as property held and used by Gutierrez in his
business), the Commissioner taxed 100% of the profits from their disposition pursuant to Section 35 of
the Tax Code.

Gutierrez then instituted an appeal to the Court of Tax Appeals. Later, on February 21, 1958, the
Commissioner issued a warrant of distraint and levy on one of Gutierrez’ real properties but desisted from
enforcing the same when Gutierrez filed a bond to assure payment of his tax liability. Court of Tax
Appeals upheld in toto the assessment of the Commissioner of Internal Revenue.

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On October 18, 1962 Lino Gutierrez died and he was substituted by Andrea C. Vda. de Gutierrez,
Antonio D. Gutierrez, Santiago D. Gutierrez, Guillermo D. Gutierrez and Thomas D. Gutierrez, his heirs,
as party petitioners.

ISSUES:
1. Are the taxpayer’s aforementioned claims for deduction proper and allowable?

2. Are real properties used in the trade or business of the taxpayer capital or ordinary assets?

HELD:
1. Section 30(a) of the Tax Code allows business expenses to be deducted from gross income. The
transportation expenses which petitioner incurred to attend the funeral of his friends and the cost
of admission tickets to operas were expenses relative to his personal and social activities rather
than to his business of leasing real estate. Likewise, the procurement and installation of an iron
door to his residence is purely a personal expense. Personal, living, or family expenses are not
deductible.

According to the evidence, the taxpayer’s car was utilized both for personal and business needs.
The Court found it reasonable to allow as deduction one-half of the driver’s salary, car expenses
and depreciation.

Coming to the claim for depreciation of Gutierrez’ residence, the Court found the same not
deductible. A taxpayer may deduct from gross income a reasonable allowance for deterioration of
property arising out of its use or employment in business or trade. Gutierrez’ residence was not
used in his trade or business.

Gutierrez also claimed for deduction the fines and penalties which he paid for late payment of
taxes. While Section 30 allows taxes to be deducted from gross income, it does not specifically
allow fines and penalties to be so deducted. Deductions from gross income are matters of
legislative grace; what is not expressly granted by Congress is withheld. Moreover, when acts are
condemned by law and their commission is made punishable by fines or forfeitures, to allow
them to be deducted from the wrongdoer’s gross income, reduces, and so in part defeats, the
prescribed punishment.

2. As such real property is used in the trade or business of the taxpayer, it is logical that the gain or
loss from the sale or exchange thereof should be treated as ordinary income or loss. Accordingly,
the real estate, admittedly used by Gutierrez in his business, which he sold in 1953 and 1954
should be treated as ordinary assets and the gain from the sale thereof, as ordinary gain, hence,
fully taxable.

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 6. Commissioner of Internal Revenue v. Isabela Cultural Corporation
G.R. No. 172231
February 12, 2007

FACTS:
ICC received from the BIR Assessment Notice for deficiency income tax and deficiency expanded
withholding tax. The Deficiency income tax arose from BIR’s disallowance of ICC’s claimed expense
deductions for professional and security services billed to and paid by ICC, to wit; a. Expenses for
auditing services, legal services and security services; b. Alleged understatement of ICC’s interest income
on the three promissory notes. The deficiency expanded withholding tax due to the failure of ICC to
withhold 1% expanded withholding tax on its claimed deduction for security services.

OSG contention: ICC is using the accrual method of accounting, the expenses for the professional
services that accrued in 1984 and 1985, should have been declared as deductions from income during the
said years and the failure of ICC to do so bars it from claiming said expenses as deductions for the taxable
year 1986.

ISSUE:
Whether or not the expenses for professional and security services should be treated as deduction from
gross income.

HELD:
The deduction is invalid only insofar as expenses for the professional services. Under the Revenue Audit
Memorandum Order No. 1-2000 provides that under the accrual method of accounting, expenses not
being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed
as deductions from income for the succeeding year. A taxpayer who is authorized to deduct certain
expenses and other allowable deductions for the current year but failed to do so cannot deduct the same
for the next year. The accrual of income and expense is permitted when all-events test has been met. 1)
fixing of a right to income or liability to pay; 2) the availability of the reasonable accurate determination
of such income or liability. The test does not demand that the amount of income or liability be known
absolutely, only that it must be determined with reasonable accuracy. The propriety of an accrual must be

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judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing
of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such
that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction.

In the case at bar, the accounting method used by ICC is the accrual method. ICC can be expected to have
reasonably known the retainer fees charged by the firm as well as the compensation for its legal services.
Failure to determine the exact amount of the expense during the taxable year when they could have been
claimed as deductions cannot thus be attributed solely to the delayed billing of these liabilities by the
firm. Such defense is not sufficient to exempt it from being charged with knowledge of the reasonable
amount of the expenses for professional services. ICC failed to discharge the burden of proving that the
claimed expense deductions for the professional services were allowable deductions for the taxable year
1986.

Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot validly deducted from its gross
income for the said year and were therefore properly disallowed by the BIR.

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 7. H. Tambunting Pawnshop, Inc. v. Commissioner of Internal Revenue
G.R. No. 173373
July 29, 2013

FACTS:
The BIR through Acting Regional Dir. Sayuno issued assessment notices and demand letters assessing
Tambunting for deficiency percentage tax, income tax and compromise penalties for taxable year 1997.
Tambunting instituted an administrative protest against the assessment notices and demand letters with
the CIR. Due to CIR’s inaction, Tambunting elevated its petition to the CTA first division.

CTA rendered its decision wherein it provided for its allowable deductions however it also held that
petitioner is still liable for the amount of Php 4,536,687.15 representing deficiency income tax for the
year 1997 plus 20% delinquency interest computed from 2000 until full payment thereof on the ground
that Tambunting failed to substantiate such deductions by sufficient evidence. Petitioner filed for a
petition for review before the CTA En Banc but was likewise denied.

Hence, the present petition.

ISSUE:
Whether CTA erred in disallowing the deductions due to failure to substantiate the deductions by
sufficient evidence.

HELD:
No, Tambunting failed to properly prove its entitlement to deductions.

The rule that tax deductions, being in the nature of tax exemptions, are to be construed in strictissimi juris
against the taxpayer is well settled. Corollary to this rule is the principle that when a taxpayer claims a
deduction, he must point to some specific provision of the statute in which that deduction is authorized
and must be able to prove that he is entitled to the deduction which the law allows. An item of

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expenditure, therefore, must fall squarely within the language of the law in order to be deductible. A mere
averment that the taxpayer has incurred a loss does not automatically warrant a deduction from its gross
income.

First, Tambunting did not properly prove loss on its auction sale. The “Rematado” and “Subasta” books
that it had presented were not the proper evidence of such loss as it did not reflect the true amount of the
proceeds of the auctions due to certain items having been left unsold. Second, it failed to prove its
security/janitorial expenses. The certification issued was not the proper document required by law as it
should have presented official receipts or invoices as provided under Sec. 238 of the NIRC of 1977.
Third, it also failed to prove misclassified items of expenses absent official receipts or invoices. Fourth,
its management and professional fees were disallowed as these were supported merely by cash vouchers
which are found to have little probative value. Cash vouchers, to have probative value, must be validated
with official receipts. Lastly, its claim for deductions due to fire and theft was denied as the documents it
submitted (e.g. certification from BFP, certification from Police Station, etc.) were not enough.

What was required from Tambunting was to submit the sworn declaration of loss mandated by RR 12-17.

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 8. Plaridel Surety and Insurance Company, v. Commissioner of Internal Revenue
G.R. No. L21520
December 11, 1967

FACTS:
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 cannot claim.

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.

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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.

9. Philippine Refining Company (now known as "Unilever Philippines [PRC], Inc."), v.

CA, CTA, and the CIR
G.R. No. 118794
May 8, 1996

FACTS:
Petitioner Philippine Refining Company (PRC) was assessed by respondent Commissioner of Internal
Revenue (Commissioner) to pay a deficiency tax for the year 1985 in the amount of P1,892,584.00.

The assessment was timely protested by petitioner on April 26, 1989, on the ground that it was based on
the erroneous disallowances of "bad debts" and "interest expense" although the same are both allowable
and legal deductions. Respondent Commissioner, however, issued a warrant of garnishment against the
deposits of petitioner at a branch of City Trust Bank, in Makati, Metro Manila, which action the latter
considered as a denial of its protest.

Petitioner accordingly filed a petition for review with the Court of Tax Appeals (CTA) on the same
assignment of error stating that the "bad debts" and "interest expense" are legal and allowable deductions.
In its decision of February 3, 1993 in C.T.A. Case No. 4408, the CTA modified the findings of the
Commissioner by reducing the deficiency income tax assessment to P237,381.26, with surcharge and
interest incident to delinquency.

Petitioner then elevated the case to respondent Court of Appeals which was denied.

The pronouncement of respondent Court of Appeals relied on the ruling of this Court in Collector vs.
Goodrich International Rubber Co., which established the rule in determining the "worthlessness of a
debt."

In said case, the Court held that for debts to be considered as "worthless," and thereby qualify as "bad
debts" making them deductible, the taxpayer should show that (1) there is a valid and subsisting debt. (2)
the debt must be actually ascertained to be worthless and uncollectible during the taxable year; (3) the
debt must be charged off during the taxable year; and (4) the debt must arise from the business or trade of
the taxpayer. Additionally, before a debt can be considered worthless, the taxpayer must also show that it
is indeed uncollectible even in the future.

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ISSUE:
Whether or not the “debts” qualify as bad debts making them deductible.

HELD:
The petition is denied. The Court agrees with the lower courts.

The Court of Appeals held that petitioner did not satisfy the requirements of "worthlessness of a debt" as
to the thirteen (13) accounts disallowed as deductions. It appears that the only evidentiary support given
by PRC for its aforesaid claimed deductions was the explanation or justification posited by its financial
adviser or accountant, Guia D. Masagana. Her allegations were not supported by any documentary
evidence, hence both the Court of Appeals and the CTA ruled that said contentions per se cannot prove
that the debts were indeed uncollectible and can be considered as bad debts as to make them deductible.
That both lower courts are correct is shown by petitioner's own submission and the discussion thereof
which we have taken time and patience to cull from the antecedent proceedings in this case, albeit
bordering on factual settings.

Because of this recognized expertise, the findings of the CTA will not ordinarily be reviewed absent a
showing of gross error or abuse on its part. The findings of fact of the CTA are binding on this Court and
in the absence of strong reasons for this Court to delve into facts, only questions of law are open for
determination. Were it not, therefore, due to the desire of the Court to satisfy petitioner's calls for
clarification and to use this case as a vehicle for exemplification, this appeal could very well have been
summarily dismissed.

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 10. China Banking Corporation v. CA, CIR and CTA
G.R. No. 125508
July 19, 2000

FACTS:
China Banking Corporation made a 53% equity investment in the First CBC Capital (Asia) Ltd., a
Hongkong subsidiary engaged in financing and investment with ‘deposit-taking’ function. The investment
amounted to P16M consisting of 106,000 shares with par value of P100 per share. First CBC Capital
(Asia), Ltd. became insolvent.

With the approval of Bangko Sentral, petitioner wrote-off as being worthless its investment in its 1987
Income Tax Return and treated it as a bad debt or as an ordinary loss deductible from its gross income.

CIR disallowed the deduction, assessed China Bank for income tax deficiency in the amount of P8.5M
inclusive of surcharges, interest and compromise penalty and held the view that the shares should be
viewed as ‘capital loss’, and not as a bad debt expense there being no indebtedness to speak of between
petitioner and its subsidiary.

ISSUE:
Whether or not the worthlessness of the shares can be treated as bad debt or ordinary loss deductible from
gross income.

HELD:
NO. The equity investment in shares of stock held by CBC in its Hongkong subsidiary, the First CBC
Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary asset. Under Sec 33(1) of
the NIRC; viz, the term capital assets means property held by the taxpayer (whether or not connected with
his trade or business, but does not include stock in trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or

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property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business or property used in the trade or business, of a character which is subject to the allowance for
depreciation provided in subsection (f) of section twenty-nine; or real property used in the trade or
business of the taxpayer. Shares of stock, like the other securities, would be ordinary assets only to a
dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own
account) in, securities. In the hands, however, of another who holds the shares of stock by way of an
investment, the shares to him would be capital assets.

Section 29(d)(4)(B) of the NIRC states that securities that become worthless during the taxable year and
are capital assets, the loss resulting therefrom shall be considered as a loss from the sale or exchange, on
the last day of such taxable year, of capital assets.”

In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary corporation of
petitioner bank whose shares in said investee corporation are not intended for purchase or sale but as an
investment. Unquestionable then, any loss therefrom would be a capital loss, not an ordinary loss, to the
investor.

Under Section 33 of the NIRC referred to the foregoing provisions of the law does not include all forms
of securities but specifically covers only bonds, debentures, notes, certificates or other evidence of
indebtedness, with interest coupons or in registered form, which are instruments of credit normally dealt
with in the usual lending operations of a financial institutions.

Equity holdings cannot come close to being, within the purview of ‘evidence of indebtedness’. It is for a
like thesis that the loss of petitioner bank in its equity investment cannot be deductible as a bad debt. The
shares of stock in question do not constitute a loan extended by it to its subsidiary (First CBC Capital) or
a debt subject to obligatory repayment by the latter, essential elements to constitute a bad debt, but a long
term investment made by CBC.

In sum: a. The equity investment in shares of stocks held by CBC in its Hongkong subsidiary, the First
CBC is not indebtedness, and it is a capital, not an ordinary asset. b. Assuming that the equity investment
of CBC has become worthless, the loss sustained is a capital, not an ordinary loss. c. The capital loss
sustained by CBC can only be deducted from capital gains if any derived by it during the same taxable
year that the securities have become worthless.

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 11. Commissioner of Internal Revenue v. Bicolandia Drug Corporation (formerly known as
Elmas Drug Co.)
G.R. No. 148083
July 21, 2006

FACTS:
Pursuant to RA 7432, respondent Central Luzon granted 20% sales discount to qualified senior citizens
on their purchases of medicines covering the calendar year 1995. On April 15, 1996, respondent filed its
1995 Corporate Annual income Tax Return reflecting a nil income tax liability due to net loss incurred
from its business operation. It filed its 1997 ITR under protest. It then filed for a claim for refund or credit
of overpaid income tax as a result of the wrongful implementation of RA 7432.
Respondent treated the 20% sales discount as a deduction from gross sales in compliance with RR 22-94
instead of treating it as a tax credit as provided under Sec. 4(a) of RA7432. Respondent filed a petition for
review with CTA to declare Sec. 2(i) of RR 2-94 without force and effect for being inconsistent with the
law it seeks to implement.
CTA ruled in favor of Central Luzon. When elevated, the CA affirmed the decision of CTA in toto.

ISSUE:
Whether CA erred in holding CTA’s decision to allow its application as tax credit.

HELD:
Yes, it is clear that the lawmakers intended the grant of a tax credit to complying private establishments
like the respondent.
While the purpose of the law to benefit senior citizens is praiseworthy, the concerns of the affected
private establishments were also considered by the lawmakers. As in other cases wherein private property
is taken by the State for public use, there must be just compensation. In this particular case, it took the
form of the tax credit granted to private establishments, purposely chosen by the lawmakers.
For failure to conform with the law it sought to implement, RR 2-94 is void.

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 12. Kuenzle & Streiff, Inc., v. The Collector [now Commissioner] of Internal Revenue
G.R. Nos. L-12010 and L-12113
October 20, 1959
FACTS:
Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return, declaring losses. CIR
filed for deficiency of income taxes against Kuenzle & Streiff Inc. for the said years in the amounts of
P40,455.00, P11,248.00 and P16,228.00, respectively, arising from the disallowance, as deductible
expenses, of the bonuses paid by the corporation to its officers, upon the ground that they were not
ordinary, nor necessary, nor reasonable expenses within the purview of Section 30(a) (1) of the National
Internal Revenue Code.
The corporation filed with the Court of Tax Appeals a petition for review contesting the assessments.
CTA favored the CIR, however lowered the tax due on 1954. The corporation moved for reconsideration,
but still lost.
The Corporation contends that the tax court, in arriving at its conclusion, acted "in a purely arbitrary
manner", and erred in not considering individually the total compensation paid to each of petitioner's
officers and staff members in determining the reasonableness of the bonuses in question, and that it erred
likewise in holding that there was nothing in the record indicating that the actuation of the respondent was
unreasonable or unjust.

ISSUE:
Whether or not the bonuses in question was reasonable and just to be allowed as a deduction?

HELD:
No. It is a general rule that `Bonuses to employees made in good faith and as additional compensation for
the services actually rendered by the employees are deductible, provided such payments, when added to
the stipulated salaries, do not exceed a reasonable compensation for the services rendered.
The condition precedents to the deduction of bonuses to employees are: (1) the payment of the bonuses is
in fact compensation; (2) it must be for personal services actually rendered; and (3) bonuses, when added
to the salaries, are `reasonable ... when measured by the amount and quality of the services performed
with relation to the business of the particular taxpayer. Here it is admitted that the bonuses are in fact

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compensation and were paid for services actually rendered. The only question is whether the payment of
said bonuses is reasonable.
There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends
upon many factors, one of them being the amount and quality of the services performed with relation to
the business. Other tests suggested are: payment must be 'made in good faith'; the character of the
taxpayer's business, the volume and amount of its net earnings, its locality, the type and extent of the
services rendered, the salary policy of the corporation'; 'the size of the particular business'; 'the employees'
qualifications and contributions to the business venture'; and 'general economic conditions. However, 'in
determining whether the particular salary or compensation payment is reasonable, the situation must be
considered as a whole.
It seems clear from the record that, in arriving at its main conclusion, the tax court considered, inter alia,
the following factors:

1) The paid officers, in the absence of evidence to the contrary, that they were competent, on the other the
record discloses no evidence nor has petitioner ever made the claim that all or some of them were gifted
with some special talent, or had undergone some extraordinary training, or had accomplished any
particular task, that contributed materially to the success of petitioner's business during the taxable years
in question.
2) All the other employees received no pay increase in the said years.
3) The bonuses were paid despite the fact that it had suffered net losses for 3 years.
Furthermore, the corporation cannot use the excuse that it is 'salary paid' to an employee because the CIR
does not question the basic salaries paid by petitioner to the officers and employees, but disallowed only
the bonuses paid to petitioner's top officers at the end of the taxable years in question.

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 13. Paper Industries Corporation of the Philippines (PICOP), v. CA, CIR, and CTA
G.R. Nos. 106949-50
December 1, 1995

FACTS:
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.
In 1983, PICOP received from the CIR 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 P88,763,255.00. PICOP protested the assessment of deficiency
transaction tax and documentary and science stamp taxes. It also protested the deficiency income tax
assessment for 1977. These protests were not formally acted upon by CIR. In 1984, the CIR 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; in effect, the CIR denied PICOP's protests. PICOP appealed the
assessments to CTA, which modified the CIR’s findings and held PICOP liable for the reduced aggregate
amount of P20,133,762.33.
PICOP appealed the assessments to CTA, which modified the CIR’s findings and held PICOP liable for
the reduced aggregate amount of P20,133,762.33. PICOP and the CIR both went to the Supreme Court on
separate Petitions for Review of the above decision of the CTA. Both petitions were referred by SC to the
CA. Cases were consolidated.
CA further reduced the liability of PICOP.
Elevated the case again to SC, alleging that:
PICOP is not liable at all to pay any of the assessments or any part thereof.
The CIR alleged that Court of Appeals erred in finding PICOP not liable for surcharge and interest on
unpaid transaction tax and for documentary and science stamp taxes and in allowing PICOP to claim as
deductible expenses and that PICOP should be held liable for interest at 14% per annum for 3 years, and
interest at 20% per annum for a maximum of 3 years; and for a surcharge of 10%, on PICOP's deficiency
income tax. Finally, the CIR contends that PICOP is liable for the corporate development tax equivalent
to five percent (5%) of its correct 1977 net income.

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ISSUE:
Whether PICOP is entitled to deductions against income of interest payments on loans for the purchase of
machinery and equipment.

HELD:
YES. Interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed by
the NIRC as deductions against the taxpayer's gross income. The basis is 1977 Tax Code Sec. 30 (b).
Thus, the general rule is that interest expenses are deductible against gross income and this certainly
includes interest paid under loans incurred in connection with the carrying on of the business of the
taxpayer. In the instant case, the CIR does not dispute that the interest payments were made by Picop on
loans incurred in connection with the carrying on of the registered operations of Picop, i.e., the financing
of the purchase of machinery and equipment actually used in the registered operations of Picop. Neither
does the CIR deny that such interest payments were legally due and demandable under the terms of such
loans, and in fact paid by Picop during the tax year 1977.
The contention of CIR does not spring of the 1977 Tax Code but from Revenue Regulations 2 Sec. 79.
However, the Court said that the term “interest” here should be construed as the so-called "theoretical
interest," that is to say, interest "calculated" or computed (and not incurred or paid) for the purpose of
determining the "opportunity cost" of investing funds in a given business. Such "theoretical" or imputed
interest does not arise from a legally demandable interestbearing obligation incurred by the taxpayer who
however wishes to find out, e.g., whether he would have been better off by lending out his funds and
earning interest rather than investing such funds in his business. One thing that Section 79 quoted above
makes clear is that interest which does constitute a charge arising under an interest-bearing obligation is
an allowable deduction from gross income.

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 14. Hospital de San Juan de Dios, Inc., v. Commissioner of Internal Revenue
G.R. No. L-31305
May 10, 1990

FACTS:
CIR assessed and demanded from petitioner deficiency income taxes for 1952-1955. The expenses
incurred by the petitioner for handling its funds or income consisting solely of dividends and interests,
were not expenses incurred in ‘carrying on any trade or business, hence, not deductible as business or
administrative expenses.

ISSUE:
Whether or not interests and dividends are business expenses.

HELD:
No, they are not business expenses.
Under Section 30 of the NIRC, expenses, in general, are 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. In the case at bar, petitioner failed
to establish by competent proof that its receipt of interests and dividends constituted the carrying on of a
‘trade or business’ so as to warrant the deductibility of the expenses incurred in their realization. Instead,
petitioner merely relied on the assumption that ‘if it is to handle its investment portfolio profitably, it has
either to engage the services of an investment banker or administer it from within.
The interest and dividends as correctly held by CTA were merely incidental income to petitioner’s main
activity which is the operation of its hospital and nursing schools hence the conclusion that petitioner’s
activities never went beyond that of a passive investor, which under existing jurisprudence do not come
within the purview of carrying on any ‘trade or business’.

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 15. Commissioner of Internal Revenue, v. Central Luzon Drug Corporation
G.R. No. 159610
June 12, 2008

FACTS:
Pursuant to RA 7432, respondent Central Luzon granted 20% sales discount to qualified senior citizens
on their purchases of medicines covering the calendar year 1997 totaling 2.7M Pesos. On April 15, 1998,
respondent filed its 1997 Corporate Annual Income Tax Return reflecting a nil income tax liability due to
net loss incurred from its business operation. It filed its 1997 ITR under protest. It then filed for a claim
for refund or credit of overpaid income tax as a result of the wrongful implementation of RA 7432.
Respondent treated the 20% sales discount as a deduction from gross sales in compliance with RR 22-94
instead of treating it as a tax credit as provided under Sec. 4(a) of RA7432. Respondent filed a petition for
review with CTA to declare Sec. 2(i) of RR 2-94 without force and effect for being inconsistent with the
law it seeks to implement.
CTA ruled in favor of Central Luzon. When elevated, the CA affirmed the decision of CTA in toto.

ISSUES:
1. Whether the appellate court erred in holding that respondent may claim the 20% senior citizens' sales
discount as a tax credit deductible from future income tax liabilities instead of a mere deduction from
gross income or gross sales.
2. Whether the appellate court erred in holding that respondent is entitled to a refund.

HELD:
1. Yes, the tax credit may still be deducted from a future, not a present, tax liability. Congress
intended RA 7432’s grant of tax credit benefit to all covered establishments without conditions.
Thus, it is not required that there be a tax liability or a prior tax payment or the existence of a
grant of a tax credit.

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 A "tax credit" is an amount subtracted from a taxpayer's total tax liability to arrive at the tax due
while a "tax deduction" reduces the taxpayer's taxable income upon which the tax liability is
computed. "A credit differs from deduction in that the former is subtracted from tax while the
latter is subtracted from income before the tax is computed.

Contrary to the provision in RA 7432 where the senior citizens' discount granted by all covered
establishments can be claimed as a tax credit, RA 9257 now specifically provides that this
discount should be treated as a tax deduction. With the effectivity of RA 9257 on 21 March 2004,
there is now a new tax treatment for senior citizens' discount granted by all covered
establishments. This discount should be considered as a deductible expense from gross income
and no longer as tax credit.

The present case, however, covers the taxable year 1997 and is thus governed by the old law, RA
7432.

2. The senior citizens’ discount may be claimed as a tax credit and not a refund. Sec. 4(a) of RA
7432 expressly provides that private establishments may claim the cost as a tax credit. It does not
mention of a refund. Since the words of the law are clear, plain, and free of ambiguity, senior
citizens’ discount may be claimed as a tax credit and not as a refund.

A tax credit can only be utilized as payment for future internal revenue tax liabilities of the
taxpayer while a tax refund, issued as a check or a warrant, can be encashed. A tax refund can be
availed of immediately while a tax credit can only be utilized if the taxpayer has existing or future
tax liabilities.

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 16. Commissioner of Internal Revenue v. Philippine Airlines, Inc. (PAL)
G.R. No. 179259
September 25, 2013

FACTS:
The controversy in this case revolves around the interpretation of the provisions of Presidential Decree
No. 1590 (PD 1590), otherwise known as "An Act Granting a New Franchise to Philippine Airlines, Inc.
to Establish, Operate, and Maintain Air Transport Services in the Philippines and Other Countries" vis-a-
vis Republic Act No. 9334 (RA 9334), otherwise known as "An Act Increasing the Excise Tax Rates
Imposed on Alcohol and Tobacco Products, Amending for the Purpose Sections 131, 141, 142, 145, and
228 of the National Internal Revenue Code of 1997." PD 1590 was enacted on June 11, 1978, while RA
9334 took effect on January 1, 2005.

On September 5, 2008, PAL paid under protest. On March 5, 2009, PAL filed an administrative claim for
refund of the excise taxes it paid with the Bureau of Internal Revenue (BIR) contending that it is entitled
to tax privileges under Section 13 of PD 1590. The CTA Second Division found that PAL was able to
sufficiently prove its exemption from the payment of excise taxes pertaining to its importation of
alcoholic products, and since, it already paid the disputed excise taxes on the subject importation, and
therefore, it is entitled to refund. However, the tax court ruled that, with respect to its subject importation
of tobacco products, PAL failed to discharge its burden of proving that the said product were not locally
available in reasonable quantity, quality or price, in accordance with the requirements of the law. Thus, it
is not entitled to refund for the excise taxes paid on such importation.

In the present petition, the petitioner argues that: Section 131 of the NIRC revoked PAL's tax privilege
under Section 13 of P.D No. 1590 with respect to excise tax on its alcohol and tobacco importation.
Assuming that it is still entitled to the tax privilege, PAL failed to adequately prove that the conditions
under Section 13 of P.D. No. 1590 were met in this case.

ISSUE:
Whether PAL's alcohol and tobacco importations for its commissary supplies are subject to excise tax.

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HELD:
No. It is a basic principle of statutory construction that a later law, general in terms and not expressly
repealing or amending a prior special law, will not ordinarily affect the special provisions of such earlier
statute.

Indeed, as things stand, PD 1590 has not been revoked by the NIRC of 1997, as amended. Or to be more
precise, the tax privilege of PAL provided in Sec. 13 of PD 1590 has not been revoked by Sec. 131 of the
NIRC of 1997, as amended by Sec. 6 of RA 9334. While it is true that Sec. 6 of RA 9334 as previously
quoted states that "the provisions of any special or general law to the contrary notwithstanding," such
phrase left alone cannot be considered as an express repeal of the exemptions granted under PAL's
franchise because it fails to specifically identify PD 1590 as one of the acts intended to be repealed.

Noteworthy is the fact that PD 1590 is a special law, which governs the franchise of PAL. Between the
provisions under PD 1590 as against the provisions under the NIRC of 1997, as amended by 9334, which
is a general law, the former necessary prevails. This is in accordance with the rule that on a specific
matter, the special law shall prevail over the general law, which shall be resorted only to supply
deficiencies in the former. In addition, where there are two statutes, the earlier special and the later
general - the terms of the general broad enough to include the matter provided for in the special - the fact
that one is special and other general creates a presumption that the special is considered as remaining an
exception to the general, one as a general law of the land and the other as the law of a particular case.

The Court, on the "propriety of a tax refund is hinged on the kind of exemption which forms its basis,"
declared in no uncertain terms that PAL has "sufficiently prove[d]" its entitlement to a tax refund of the
excise taxes and that PAL's payment of either the franchise tax or basic corporate income tax in the
amount fixed thereat shall be in lieu of all other taxes or duties, and inclusive of all taxes on all
importations of commissary and catering supplies, subject to the condition of their availability and
eventual use. In other words, the franchise of PAL remains the governing law on its exemption from
taxes.

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