THE COMMISSIONER OF CUSTOMS, petitioner,
vs.
PHILIPPINE ACETYLENE COMPANY, and THE COURT OF TAX
APPEALS, respondents.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor
General Felicisimo R. Rosete and Solicitor Sumilang V. Bernardo for
petitioner.
Ponce Enrile, Siguion Reyna, Montecillo & Belo for respondent
Philippine Acetylene Company.
MAKALINTAL, J.:
This is a petition filed by the Commissioner of Customs for review of
the decision of the Court of Tax Appeals in its Case No. 1147,
ordering the herein petitioner to refund to the Philippine Acetylene
Co., Inc. the amount of P3,683.00 which it had paid under protest as
special import tax on one (1) custom built liquefied petroleum gas
tank.
FACTS:
1. That the Philippine Acetylene Company is a corporation duly
organized and existing under the laws of the Philippines;
2. That said company is engaged in the manufacture of oxygen,
acetylene and nitrogen and packaging of liquefied petroleum
gas in cylinders and tanks;
3. That sometime in 1957 the protestant imported from the US
one custom-built liquefied petroleum gas tank which arrived
via the S/S 'PLEASANT VILLE' under Register No. 1356, and
declared in Import Entry No. 94060, series of 1957; and .
4. That the amount of P3,683.00 was assessed thereon as
special import tax and which was paid under protest by the
importer-protestant.
Charles L. Butler, manager of the Philippine Acetylene Co., Inc., the
imported custom-built liquefied petroleum gas tank is simply a large
cylinder which is used as container for liquefied petroleum gas
obtained from the CALTEX Refinery in Bauan, Batangas and
transported to the company's plant in Manila.
The gas does not undergo any chemical change and is sold to
consumers in the same state as when it was acquired from the
refinery, except that before it is sold the gas is pumped into smaller
cylinders, which are labeled with the company's trademark "Philigas."
ISSUE presented for resolution is purely one of law, namely, whether
or not the Philippine Acetylene Co., Inc., insofar as its packaging
operation of liquefied petroleum gas is concerned, may be considered
engaged in an industry as contemplated in section 6 of RA 1394 and
therefore exempt from the payment of the special import tax in
respect of the gas tank in question.
Sec 6 of RA 1394, insofar as it is pertinent to the issue, provides:
Section 6. The tax provided for in section one of this Act shall not be
imposed against the importation into the Philippines of machinery
and/or raw materials to be used by new and necessary industries as
determined in accordance with Republic Act numbered Nine Hundred
and One; ...; machinery, equipment, accessories and spare parts, for
the use of industries, miners, mining enterprises planters and
farmers; ...
CTA:
In finding that the Philippine Acetylene Co., Inc. is engaged in
industry within the meaning of the abovequoted provision,
the Tax Court held that the term industry should be
understood in its ordinary and general definition, which is any
enterprise employing relatively large amounts of capital and/or
labor.
On such premise the Tax Court concluded that inasmuch as
the Philippine Acetylene Co., Inc. employs considerable labor
and capital in packaging liquefied petroleum gas purchased by
it and selling the same for profit,
it is engaged in industry and hence is exempt from the
payment of the special import tax in connection with the tank
used as container.
The following observations in the brief for the petitioner are apropos:
... in the exempting provisions of RA 1394, the exempted items are
divided into separate and specific enumerations.
The term 'industries' is used in two distinct groups.
 The first group of exempted industries refers exclusively to
those falling under the new and necessary industries as
defined in RA 901.
In the second, the term "industries" is classed together with
the terms miners, mining enterprises, planters and farmers. ...
SC:
If Congress really intended to give the term "industries" its
ordinary and general meaning and thus grant tax exemption to
all ventures and trades falling under the said ordinary and
general definition,
it should have eliminated the words "new and necessary
industries' and 'mining enterprises" since these two ventures
are already covered by the term "industries" in its ordinary and
general meaning.
On the other hand, the fact that the language of the law
specifically segregates new and necessary industries under
RA 901 among those entitled to the tax exemption, in effect,
restricts the meaning and scope of the word "industries."
The argument appears logical and reasonable.
Since the term "industries" as used in the law for the second
time is classified together with the terms "miners, mining
enterprises, planters and farmers",
the obvious legislative intent is to confine the meaning of the
term to activities that tend to produce or create or
manufacture, such as those of miners, mining enterprises, ]
planters and farmers.
The Tax Court's interpretation would lead to a Patent
inconsistency,
in that while the first part of the law confines the exemption to
new and necessary industries,
another part would extend the exemption to all other
industries, regardless of their nature, as long as they employ
labor and capital for profit-making purposes.
In granting the exemption, it would have been illogical for
Congress to specify importations needed by new and
necessary industries -- as the term is defined by law and in
the same breath allow a similar exemption to all other
industries in general.
The respondents (PACo) make much of the interpretation of
the term "industries" by the Secretary of Finance in his First
Indorsement dated November 19, 1956, to wit:
Any Productive enterprise which employs relatively large
amounts of capital and/or labor falls under the term 'industries'
as used in Section 6 of RA 1394.
Assuming the correctness of such interpretation, what should
be noted is that it stresses the productive aspect of the
enterprise.
The operation for which the respondent company (PACo)
employs the gas tank in question does not involve
manufacturing or production.
It is nothing but packaging; the liquefied gas, when obtained
from the refinery, has to be placed in some kind of container
for transportation to Manila.
When sold to consumers, it undergoes no change or
transformation, but is merely placed in smaller cylinders for
convenience. The process is certainly not production in any
sense.
The phrasing of Section 6 of RA 1394, to be sure, is rather
vague and infelicitious, particularly in the repetition of the word
"industries."
It is such lack of precision in the law that gives rise to litigious
controversies concerning its proper application.
One of the established rules of statutory construction,
however, is that tax exemptions are held strictly against the
taxpayer, and if not expressly mentioned in the law must be
within its purview by clear legislative intent.
In the present case the construction adhered to by the
respondents in reference to the scope of the term "industries"
as employed for the second time in Section 6 of RA1394 is
contrary to such rule.
For if the term were all inclusive, and meant industries in
general, that is, those which involve relatively large amounts
of capital and/or labor regardless of their productive or non-
productive nature,
there would be no point in making a separate classification
with respect to "new and necessary industries" for purposes of
the tax exemption.
We hold, therefore, that to be entitled to exemption under the
 second classification in the statute the industry concerned,
in connection with the activity for which the importation is
made, must be engaged in some productive enterprise, not in
merely packaging an already finished product to facilitate its
transportation.
In a comparable case this Court has held that the tax
exemption in connection with the processing of gasoline and
the manufacture of lubricating oil does not extend to pump
parts imported by the processor and leased to gasoline
stations for their use in servicing customers' vehicles,
overruling the argument of the petitioner therein that the
marketing of its gasoline product "is corollary to or incidental
to its industrial operations." (ESSO Standard, Eastern, Inc. vs.
Acting Commissioner of Customs, 18 SCRA 488).
WHEREFORE, the decision of the CTA is reversed and that
of the Collector of Customs of Manila and the Commissioner
of Customs upheld. Costs against respondent Philippine
Acetylene Co., Inc.
CIR v. GENERAL FOODS [G.R. No. 143672. April 24, 2003.]
FACTS:
In its income tax return, respondent corporation claimed as deduction,
among other business expenses, the amount for media advertising
for Tang, one of its products.
ISSUE: WON the subject media advertising expense for Tang
incurred by respondent was an ordinary and necessary expense fully
deductible under the NIRC
HELD: Not deductible.
Deductions for income tax purposes partake of the nature of
tax exemptions; hence, must be strictly construed.
To be deductible from gross income, the subject advertising
expense must be ordinary and necessary.
There being no hard and fast rule on the reasonableness of
an advertising expense, 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.
The amount claimed as media advertising expense for Tang
alone was almost one-half of its total claim for marketing
expenses.
Furthermore, it was almost double the amount of respondent
corporation's general and administrative expenses.
The subject expense for the advertisement of a single product
is inordinately large.
Said venture of respondent to protect its brand franchise was
tantamount to efforts to establish a reputation, and should not,
therefore, be considered as business expense but as capital
expenditure, which normally should be spread out over a
reasonable period of time.
(ALTERNATIVE)
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 companys 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
second, the amount incurred must not be a capital outlay
to create goodwill for the product and/or private
respondents 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.
Advertising is generally of two kinds:
(1) advertising to stimulate the current sale of merchandise or
use of services and
(2) advertising designed to stimulate the future sale of
merchandise or use of services.
The second type involves expenditures incurred, in whole or in
part, to create or maintain some form of goodwill for the
taxpayers trade or business or for the industry or profession
of which the taxpayer is a member.
If the expenditures are for the advertising of the first kind,
then, except as to the question of the reasonableness of
amount,
there is no doubt such expenditures are deductible as
business expenses.
If, however, the expenditures are for advertising of the second
kind, then normally they should be spread out over a
reasonable period of time.
The companys media advertising expense for the promotion of a
single product is doubtlessly unreasonable considering it comprises
almost one-half of the companys entire claim for marketing expenses
for that year under review. Petition granted, judgment reversed
and set aside.

GANCAYCO v. COLLECTOR [G.R. No. L-13325. April 20, 1961.]
FACTS:
Petitioner Santiago Gancayco seeks the review of a decision
of the CTA, requiring him to pay deficiency income tax.
The question whether the sum is due from Gancayco as
deficiency income tax hinges on the validity of his claim for
deduction of two (2) items, namely:
(a) for farming expenses; and
(b) for representation expenses.
ISSUE: WON the two claimed deductions are allowable
HELD: No.
In computing net income, no deduction shall 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 property or estate.
The cost of farm machinery, equipment and farm building
represents a capital investment and is not an allowable
deduction as an item of expense.
Hence, the farming expenses allegedly incurred for clearing
and developing the farm which were necessary to place it in a
productive state, were not an ordinary expense but a capital
expenditure.
Accordingly, they are not deductible.
As for Gancayco's claim for representation expenses, a
fraction was disallowed.
Such disallowance is justified by the record, for, apart from
the absence of receipts, invoices or vouchers of the
expenditures, petitioner could not specify the items
constituting the same, or when or on whom or on what they
were incurred.
(ALTERNATIVE)
Gancyaco files his income tax return for the year 1949.
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 issued a notice of
sale of said property at public auction.
Gancayco filed a petition to cancel the sale and direct that the
same be re-advertised at a future date
ISSUE: Whether the sum of PhP 16,860.31 is due from Gancayco as
deficiency income tax for 1949 hinges on the validity of his claim for
deduction:
a) farming expense PhP 27,459
b) representation expenses PhP 8,933.45
HELD:
a)Farming Expenses - no evidence has been presented as to the
nature of the said farming expenses other than the care 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.
b) Representation expense
PhP 22, 820 is allowed
PhP 8,993.45 is disallowed because of the absence of receipts,
invoices or vouchers of the expenditures in question, petitioner could
not sspecify the items constituting the same when or on whom or on
what they were incurred.
Commissioner vs. Itogon-Suyoc MinesGR L-25299, 29 July 1969
En Banc, Fernando (J): 9 concur, 1 took no part
Facts:
Itogon-Suyoc Mines filed its income tax return for the fiscal
year 1959 to 1960.
 4 mos. later, it filed an amended income tax return, reporting a
loss.
It thus sought a refund from the Commissioner.
When it filed its income tax return on the next year, it deducted
an amount representing alleged tax credit for overpayment for
the preceding fiscal year.
The Commissioner imposed an amount P1,512.83 as 1%
monthly interest on the amount of P13,155.20 from January to
December 1962.
The basis for such assessment was allegedly the absence of
a legal right to deduct said amount before the tax credit or
refund is approved by the Commissioner.
Issue: Whether the assessment on interest was justified.
Held:
The Tax Code provides that interest upon the amount
determined as a deficiency shall be assessed and shall be
paid upon notice and demand from the Commissioner at the
rate therein specified.
It made clear, however, in an earlier provision found in the
same section that if in any preceding year,
the taxpayer was entitled to a refund of any amount due as
tax, such amount, if not refunded, may be deducted from the
tax to be paid.
Although the imposition of monthly interest does not constitute
penalty but a just compensation to the State for the delay in
paying the tax and for the concomitant use by the taxpayer of
funds that rightfully should be in governments hands;
in light of the overpayment for 1959 and 1960, it cannot be
said that the taxpayer was guilty of delay enabling it to utilize
the money.
The company is entitled to refund.
(ALTERNATIVE)
Respondent Itogon-Suyoc Mines, a mining corporation duly
organized and existing under Philippine laws filed its income
tax return.
Fiscal year (1956-1960) paid PhP 13, 155.20 as the first
installment of the income tax due.
Then filed an amended income tax return reporting a net loss
of PhP 331,707.33
Fiscal year (1960-1961) setting forth its income tax liability of
PhP 97.345 but deducting the amount of PhP 13,155.20
representing alleged tax credit for over-payment of the
preceding fiscal year 1959-1960.
Petitioner assessed against the respondent the amount of
PhP 1,512.83 as 1% monthly interest.
The basis for such an assessment was the absence of legal
right to deduct said amount before the refund or tax credit
thereof was approved by petitioner CIR.
ISSUE: WON respondent corporation is liable to pay the sum of
PhP1,512.83 as 1% monthly interest for delinquency in the payment
of income tax.?
HELD:
NIRC provides that interest upon the amount determined as a
deficiency shall be assessed and shall be paid upon notice and
demand from the CIR at the specified.
If in any preceding year the tax payer was entitled to a refund of any
amount due as tax, such amount, if not yet refunded, maybe
deducted from the tax to be paid.
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES
(PICOP), petitioner, vs. COURT OF APPEALS, COMMISSIONER
OF INTERNAL REVENUE and COURT OF TAX APPEALS,
respondents.
G.R. Nos. 106949-50 December 1, 1995
COMMISSIONER INTERNAL REVENUE, petitioner, vs. PAPER
INDUSTRIES CORPORATION OF THE PHILIPPINES, THE COURT
OF APPEALS and THE COURT OF TAX APPEALS, respondents.
G.R. Nos. 106984-85 December 1, 1995 Justice Feliciano
Facts:
Paper Industries Corporation of the Philippines (PICOP) is a
Philippine corporation registered with the Board of
Investments (BOI) as a preferred pioneer enterprise with
respect to its integrated pulp and paper mill,
and as a preferred non-pioneer enterprise with respect to its
integrated plywood and veneer mills.
PICOP received from the CIR (2) letters of assessment and
demand
one for deficiency transaction tax and for documentary and
science stamp tax; and
(b) the other for deficiency income tax for 1977, for an
aggregate amount of PhP88,763,255.00.
PICOP protested the assessment of deficiency transaction
tax; the documentary and science stamp taxes, and the
deficiency income tax assessment.
CIR did not formally act upon these protests, but issued a
warrant of distraint on personal property and a warrant of levy
on real property against PICOP, to enforce collection of the
contested assessments, thereby denying PICOP's protests.
Thereupon, PICOP went before (CTA) appealing the
assessments.
On 15 August 1989, CTA rendered a decision, modifying the
CIRs findings and holding PICOP liable for the reduced
aggregate amount of P20,133,762.33.
Both parties went to the Supreme Court, which referred the
case to the Court of Appeals (CA).
CA denied the appeal of the CIR and modified the judgment
against PICOP holding it liable for transaction tax and
absolved it from payment of documentary and science stamp
tax and compromise penalty.
It also held PICOP liable for deficiency of income tax.
Issues:
1. Whether PICOP is liable for transaction tax
2. Whether PICOP is liable for documentary and science stamp
tax
3. Whether PICOP is liable for deficiency income tax
Held:
1. YES.
PICOP reiterates that it is exempt from the payment of the
transaction tax by virtue of its tax exemption under RA 5186,
as amended, known as the Investment Incentives Act, which
in the form it existed in 1977-1978, read in relevant part as
follows:
"SECTION 8. Incentives to a Pioneer Enterprise. In addition
to the incentives provided in the preceding section, pioneer
enterprises shall be granted the following incentive benefits:
(a) Tax Exemption. Exemption from all taxes under the National
Internal Revenue Code, except income tax, from the date of
investment is included in the Investment Priorities Plan x x x.
The SC holds that that PICOP's tax exemption under RA 5186, as
amended, does not include exemption from the thirty-five percent
(35%) transaction tax.
In the first place, the (35%) transaction tax is an income tax, a tax on
the interest income of the lenders or creditors as held by the SC in
the case of Western Minolco Corporation v. Commissioner of Internal
Revenue.
The 35% transaction tax is an income tax on interest earnings to the
lenders or placers. The latter are actually the taxpayers.
Therefore, the tax cannot be a tax imposed upon the petitioner.
In other words, the petitioner who borrowed funds from several
financial institutions by issuing commercial papers merely withheld
the 35% transaction tax before paying to the financial institutions the
interest earned by them and later remitted the same to the
respondent CIR.
The tax could have been collected by a different procedure but the
statute chose this method.
Whatever collecting procedure is adopted does not change the nature
of the tax.
It is thus clear that the transaction tax is an income tax and as such,
in any event, falls outside the scope of the tax exemption granted to
registered pioneer enterprises by Section 8 of R.A. No. 5186, as
amended.
PICOP was the withholding agent, obliged to withhold 35% of the
interest payable to its lenders and to remit the amounts so withheld to
the Bureau of Internal Revenue ("BIR").
As a withholding, agent, PICOP is made personally liable for the 35%
transaction tax 10 and if it did not actually withhold thirty-five percent
(35%) of the interest monies it had paid to its lenders, PICOP had
only itself to blame.
2. NO. The CIR assessed documentary and science stamp
taxes, amounting to PhP300,000.00, on the issuance of
PICOP's debenture bonds.
Tax exemptions are, to be sure, to be "strictly construed," that is, they
are not to be extended beyond the ordinary and reasonable
intendment of the language actually used by the legislative authority
in granting the exemption.
The issuance of debenture bonds is certainly conceptually distinct
from pulping and paper manufacturing operations.
But no one contends that issuance of bonds was a principal or regular
business activity of PICOP;
only banks or other financial institutions are in the regular business of
raising money by issuing bonds or other instruments to the general
public.
The actual dedication of the proceeds of the bonds to the carrying out
of PICOP's registered operations constituted a sufficient nexus with
such registered operations so as to exempt PICOP from taxes
ordinarily imposed upon or in connection with issuance of such
bonds.
The SC agrees with the Court of Appeals on this matter that the CTA
and the CIR had erred in rejecting PICOP's claim for exemption from
stamp taxes.
3.YES.
PICOP did not deny the existence of discrepancy in their Income Tax
Return and Books of Account owing to their procedure of recording its
export sales (reckoned in U.S. dollars) on the basis of a fixed rate,
day to day and month to month, regardless of the actual exchange
rate and without waiting when the actual proceeds are received.
In other words, PICOP recorded its export sales at a pre-determined
fixed exchange rate.
That pre-determined rate was decided upon at the beginning of the
year and continued to be used throughout the year.
Because of this, the CIR has made out at least a prima facie case
that PICOP had understated its sales and overstated its cost of sales
as set out in its Income Tax Return.
For the CIR has a right to assume that PICOP's Books of Accounts
speak the truth in this case since, as already noted, they embody
what must appear to be admissions against PICOP's own interest.

FERNANDOS HERMANOS, INC. vs. COMMISSIONER
29 SCRA 552
GR No. No. L-21551, September 30, 1969
"The filing of an answer to taxpayer's petition for review is considered
as institution of judicial action."
FACTS:
The Commissioner of Internal Revenue assessed the
petitioner investment corporation of deficiency income taxes
for the years 1950 to 1954 and for 1957.
There were two conflicting dates of assessment, which are
vital to the compliance with the statute of limitations, based on
each claim of the petitioner and the respondent;
the Commisioner's record of date of assesment is February
27, 1956
while the petitioner believes the demand was made on
December 27, 1955 so that, as the petitioner corporation
claims,
the Commissioner's action to recover its tax liability should be
deemed to have prescribed for failure on the part of the
Commissioner to file a complaint for collection against it in an
appropriate civil action.
ISSUE: Has the action for collection prescribed?
HELD: No.
It has been held that:
"a judicial action for the collection of a tax is begun by the
filing of a complaint with the proper court of first instance, or
where the assessment is appealed to the Court of Tax
Appeals, by filing an answer to the taxpayer's petition for
review wherein payment of the tax is prayed for."
This is but logical for where the taxpayer avails of the right to
appeal the tax assessment to the Court of Tax Appeals, the
said Court is vested with the authority to pronounce judgment
as to the taxpayer's liability to the exclusion of any other court.
In the present case, regardless of whether the assessments
were made on February 24 and 27, 1956, as claimed by the
Commissioner, or on December 27, 1955 as claimed by the
taxpayer,
the government's right to collect the taxes due has clearly not
prescribed, as the taxpayer's appeal or petition for review was
filed with the Tax Court on May 4, 1960, with the
Commissioner filing on May 20, 1960 his Answer with a prayer
for payment of the taxes due, long before the expiration of the
five-year period to effect collection by judicial action counted
from the date of assessment.
(ALTERNATIVE)
Fernandez Hermanos, Inc. VS. CIR- Allowable Tax Deductions
That the circumstances are such that the method does not reflect the
taxpayers income with reasonable accuracy and certainty and proper
and just additions of personal expenses and other non-deductible
expenditures were made and correct, fair and equitable credit
adjustments were given by way of eliminating non- taxable items.
FACTS:
4 cases involve two decisions of the Court of Tax Appeal s
determining the taxpayer ' s income tax liability for the years
1950 to 1954 and for the year 1957.
Both the taxpayer and the Commissioner of Internal Revenue,
as petitioner and respondent in the cases a quo respectively ,
appealed from the Tax Court's decisions , insofar as their
respective contentions on particular tax items were therein
resolved against them.
Since the issues raised are inter related, the Court resolves
the four appeals in this joint decision.
The taxpayer , Fernandez Hermanos, Inc. , is a domestic
corporation organized for the principal purpose of engaging in
business as an "investment company "with main office at
Manila.
Upon verification of the taxpayer's income tax returns for the
 period in quest ion, the Commissioner of Internal Revenue
assessed against the taxpayer the sums of P13,414.00,
P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as
alleged deficiency income taxes for the years 1950, 1951,
1952, 1953 and 1954, respectively.
Said assessments were the result of alleged discrepancies
found upon the examination and verification of the taxpayer's
income tax returns for the said years, summarized by the Tax
Court in its decision of June 10, 1963 in CTA Case No. 787,
as follows:
ISSUE: The correctness of the Tax Court's rulings with respect to the
disputed items of disallowances enumerated in the Tax Court's
summary reproduced
HELD:
That the circumstances are such that the method does not
reflect the taxpayers income with reasonable accuracy and
certainty and proper and just additions of personal expenses
and other non-deductible expenditures were made and
correct, fair and equitable credit adjustments were given by
way of eliminating non-taxable items.
Proper adjustments to conform to the income tax laws.
Proper adjustments for non-deductible items must be made.
The following non-deductibles , as the case may be, must be
added to the increase of decrease in the net worth:
1. Personal living or family expenses
2. Premiums paid on any life insurance policy
3. Losses from sales or exchanges of property between members of
the family
4. Income taxes paid
5. Other non-deductible taxes
6. Election expenses and other expense against public policy
7. Non-deductible contributions
8. Gifts to others
9. Estate inheritance and gift taxes
10. Net Capital Loss
On the other hand, non- taxable items should be deducted therefrom.
These items are necessary adjustments to avoid the inclusion of what
otherwise are non-taxable receipts. They are:
1. inheritance gifts and bequests received
2. non- taxable gains
3. compensation for injuries or sickness
4. proceeds of life insurance policies
5. sweepstakes
6. winnings
7. interest on government securities and increase in net worth are not
taxable if they are shown not to be the result of unreported income
but to be the result of the correction of errors in the taxpayers entries
in the books relating to indebtedness
PLARIDEL SURETY v. CIR
Facts:
Petitioner Plaridel Surety & Insurance Co., is a domestic
corporation engaged in the bonding business.
On November 9, 1950, petitioner, as surety, and Constancio
San Jose, as principal, solidarily executed a performance
bond in the penal sum of P30,600.00 in favor of the P. L.
Galang Machinery Co., Inc., to secure the performance of San
Jose's contractual obligation to produce and supply logs to the
latter.
To afford itself adequate protection against loss or damage on
the performance bond, petitioner required San Jose and one
Ramon Cuervo to execute an indemnity agreement obligating
themselves, solidarily, to indemnify petitioner for whatever
liability it may incur by reason of said performance bond.
Accordingly, San Jose constituted a chattel mortgage on
logging machineries and other movables in petitioner's favor1
while Ramon Cuervo executed a real estate mortgage.
San Jose later failed to deliver the logs to Galang Machinery3
and the latter sued on the performance bond.
On October 1, 1952, the Court of First Instance adjudged San
Jose and petitioner liable;
 it also directed San Jose and Cuervo to reimburse petitioner
for whatever amount it would pay Galang Machinery.
The Court of Appeals, on June 17, 1955, affirmed the
judgment of the lower court.
The same judgment was likewise affirmed by this Court4 on
January 11, 1957 except for a slight modification apropos the
award of attorney's fees.
In its income tax return for the year 1957, petitioner claimed
the said amount of P44,490.00 as deductible loss from its
gross income and, accordingly, paid the amount of P136.00 as
its income tax for 1957.
The Commissioner of Internal Revenue disallowed the
claimed deduction of P44,490.00 and assessed against
petitioner the sum of P8,898.00, plus interest, as deficiency
income tax for the year 1957.
Petitioner filed its protest which was denied.
Whereupon, appeal was taken to the Tax Court, petitioner
insisting that the P44,490.00 which it paid to Galang
Machinery was a deductible loss.
Issue: WON the amount Plaridel paid to Galang Machinery is a
deductible loss
Held: NO.
There is no question that the year in which the petitioner
Insurance Co. effected payment to Galang Machinery
pursuant to a final decision occurred in 1957.
However, under the same court decision, San Jose and
Cuervo were obligated to reimburse petitioner for whatever
payments it would make to Galang Machinery.
Clearly, petitioner's loss is compensable otherwise (than by
insurance).
It should follow, then, that the loss deduction can not be
claimed in 1957.
Now, petitioner's submission is that its case is an exception.
Citing Cu Unjieng Sons, Inc. v. Board of Tax Appeals, and
American cases also, petitioner argues that even if there is a
right to compensation by insurance or otherwise, the
deduction can be taken in the year of actual loss where the
possibility of recovery is remote.
SC:
The pronouncement, however to this effect in the Cu Unjieng
case is not as authoritative as petitioner would have it since it
was there found that the taxpayer had no legal right to
compensation either by insurance or otherwise.
And the American cases cited are not in point.
None of them involved a taxpayer who had, as in the present
case, obtained a final judgment against third persons for
reimbursement of payments made.
In those cases, there was either no legally enforceable right at
all or such claimed right was still to be, or being, litigated.
On the other hand, the rule is that loss deduction will be
denied if there is a measurable right to compensation for the
loss, with ultimate collection reasonably clear.
So where there is reasonable ground for reimbursement, the
taxpayer must seek his redress and may not secure a loss
deduction until he establishes that no recovery may be had.
In other words, as the Tax Court put it, the taxpayer
(petitioner) must exhaust his remedies first to recover or
reduce his loss.
But assuming that there was no reasonable expectation of
recovery, still no loss deduction can be had.
Sec. 30 (d) (2) of the Tax Code requires a charge-off as one
of the conditions for loss deduction:
In the case of a corporation, all losses actually sustained and
charged-off within the taxable year and not compensated for
by insurance or otherwise.
 Mertens states only four (4) requisites because the United
States Internal Revenue Code of 193913 has no charge-off
requirement.
Sec. 23(f) thereof provides merely:
In the case of a corporation, losses sustained during the
taxable year and not compensated for by insurance or
otherwise.
Petitioner, who had the burden of proof failed to adduce
evidence that there was a charge-off in connection with the
P44,490.00or P30,600.00 which it paid to Galang
Machinery.
(ALTERNATIVE)
Plaridel Surety Co vs. Collector, GR No L-21520, Dec. 11, 1967
Petitioner Plaridel Surety is a domestic corporation engaged in
the bonding business.
Petitioner surety and Constancio San Jose (principal),
solidarily executed a performance bond in favor of the PL
Galang Machinery to secure the performance of San Jose
contractual obligation to produce and supply logs.
To afford itself adequate protection against loss or damages
on the performance, petitioner required San Jose and Ramon
Cuervo to execute an indemnity agreement obligating
themselves, solidarity to indemnify petitioner for whatever
liability it may incur by reason of said performance bond.
San Jose constituted a chattel mortgage on logging
machineries and other movables in petitioners favor while
Ramon Cuervo executed a real estate mortgage.
San Jose failed to deliver the logs to Galang Machinery and
sued on the performance bond.
The lower court directed San Jose and Cuervo to reimburse
petitioner for whatever amount it would pay Galang
Machinery.
Petitioner in his income tax claimed that the amount P44,490
as deductible loss from its gross income.
CIR disallowed the claimed deductions and assessed against
petitioner the sum P8,898, plus interest, as deficiency income
tax for the year 1957.
ISSUE: WON petitioner can claim P44,490 as a deductible loss from
its gross income.
Held: NO
Petitioner was duly compensated for otherwise than by
insurance-
thru the mortgage in its favor executed by San Jose and
Cuervo and
it had not yet exhausted all its available remedies, especially
as against Cuervo to minimize its loss.
LOSS is deductible only in the taxable year it actually happens
or is sustained.
However, if it is compensable by insurance or otherwise
deductions for the loss suffered is postponed to a subsequent
year, with, to be precise, is that year in which it appears that
no compensation at all can be had, on that there is a
remaining or net loss.
(ALTERNATIVE)
ISSUE: Whether or not the entire P44,490.00 paid by it was or was
not a deductible loss under Sec. 30 (d) (2) of the Tax Code?
HELD:
The rule is that loss deduction will be denied if there is a
measurable right to compensation for the loss, with ultimate
collection reasonably clear.
So where there is reasonable ground for reimbursement, the
taxpayer must seek his redress and may not secure a loss
deduction until he establishes that no recovery may be had.
In other words, as the Tax Court put it, the taxpayer
(petitioner) must exhaust his remedies first to recover or
reduce his loss.
But assuming that there was no reasonable expectation of
 recovery, still no loss deduction can be had. section 30(d)(2)
of the Tax Code requires a charge-off as one of the conditions
for loss deduction:
In case of a corporation, all losses actually sustained and
charged-off within the taxable year and not compensated for
by insurance or otherwise.
PICOP VS CIR
Paper Industries Corporation of the Philippines (PICOP) is a
Philippine Corporation registered with Board of Investment
(BOI) as preferred pioneer enterprise with respect to its
integrated pulp and paper mill, and as preferred non-pioneer
enterprise with respect to its integrated plywood and veneer
mills.
PICOP received from CIR two (2) letters of assessment (a) for
deficiency transaction tax and for documentary and science
stamp tax (b) deficiency income tax for 1977.
PICOP maintains that it is not liable at all to pay any of the
assessments or any part thereof.
PICOP questions the imposition by the CA of the deficiency
income tax resulting from disallowance of certain claimed
financial guarantee expense and claimed year-end adjustment
of sales and cost of sales.
ISSUE: Whether PICOP is liable for:
(1) the 35% transaction;
(2) interest and surcharge on unpaid transaction tax.
HELD:
PICOP is liable for the 35% transaction tax due in respect of
interest payments on its money market borrowings.
The transaction tax maybe levied only in respect of the
interest earnings of PICOP money market lenders accruing
after PD No. 1154 went into effect, and not in respect of all the
1977 interest earning of such lenders.
PHILIPPINE REFINING COMPANY (now known as "UNILEVER
PHILIPPINES [PRC], INC.")
vs.
COURT OF APPEALS, COURT OF TAX APPEALS, and THE
COMMISSIONER OF INTERNAL REVENUE
REGALADO, J.:
FACTS:
This is an appeal by certiorari from the decision of respondent
Court of Appeals affirming the decision of the Court of Tax
Appeals which
disallowed petitioner's claim for deduction as bad debts of
several accounts in the total sum of P395,324.27,
and imposing a 25% surcharge and 20% annual delinquency
interest on the alleged deficiency income tax liability of
petitioner.
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, that is,
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.
In said decision, the Tax Court reversed and set aside the
Commissioner's disallowance of the interest expense of
P2,666,545.19 but maintained the disallowance of the
supposed bad debts of thirteen (13) debtors in the total sum of
P395,324.27.
Petitioner then elevated the case to respondent Court of
Appeals which, as earlier stated, denied due course to the
 petition for review and dismissed the same on August 24,
1994 the reason of the court was that Out of the sixteen (16)
accounts alleged as bad debts,
We find that only three (3) accounts have met the
requirements of the worthlessness of the accounts, hence
were properly written off as: bad debts.
Mere testimony of the Financial Accountant of the Petitioner
explaining the worthlessness of said debts is seen by this
Court as nothing more than a self-serving exercise which
lacks probative value.
There was no iota of documentary evidence (e.g., collection
letters sent, report from investigating fieldmen, letter of referral
to their legal department, police report/affidavit that the
owners were bankrupt due to fire that engulfed their stores or
that the owner has been murdered. etc.),
to give support to the testimony of an employee of the
Petitioner. Mere allegations cannot prove the worthlessness of
such debts in 1985.
Hence, the claim for deduction of these thirteen (13) debts
should be rejected.
ISSUE: WON all bad debts should be treated as deductions.
RULING:
This 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, we held that for debts to be considered as
"worthless," and thereby qualify as "bad debts" making them
deductible, the taxpayer should show that
(1) there is a valid and subsisting debt.
(2) the debt must be actually ascertained to be worthless and
uncollectible during the taxable year;
(3) the debt must be charged off during the taxable year; and
(4) the debt must arise from the business or trade of the
taxpayer.
Additionally, before a debt can be considered worthless, the
taxpayer must also show that it is indeed uncollectible even in
the future.
Furthermore, there are steps outlined to be undertaken by the
taxpayer to prove that he exerted diligent efforts to collect the
debts, viz.:
(1) sending of statement of accounts;
(2) sending of collection letters;
(3) giving the account to a lawyer for collection; and
(4) filing a collection case in court.
On the foregoing considerations, respondent Court of Appeals
held that petitioner did not satisfy the requirements of
"worthlessness of a debt"
as to the thirteen (13) accounts disallowed as deductions.
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.
The contentions of PRC that nobody is in a better position to
determine when an obligation becomes a bad debt than the
creditor itself,
and that its judgment should not be substituted by that of
respondent court as it is PRC which has the facilities in
ascertaining the collectibility or uncollectibility of these debts,
are presumptuous and uncalled for.
The Court of Tax Appeals is a highly specialized body
specifically created for the purpose of reviewing tax cases.
Through its expertise, it is undeniably competent to determine
 the issue of whether or not the debt is deductible through the
evidence presented before it.
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 this 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.
DEDUCTIONS AND EXEPTIONS; ALLOWABLE DEDUCTIONS;
BAD DEBTS
PHILIPPINE REFINING COMPANY V COURT OF APPEALS
Facts:
In 1985, petitioner filed its ITR where it claimed 16 items
amounting to P713,070.93 as bad debts and therefor
deductible.
Subsequently, the Commissioner for Internal Revenue
disallowed such deductions and assessed petitioner to pay a
deficiency tax for the year of 1985.
Petitioner paid the deficiency tax under protest which the
Commissioner denied.
Upon a petition for review, the CTA modified the findings of the
Commissioner by reducing the deficiency tax assessment on
the basis that three of the sixteen supposed bad debts could
be allowed as deductions.
The CA later on agreed with the CTA.
Held:
The SC upheld the ruling of the CA which it found to be in
accordance with the SC's ruling in Collector v Goodrich.
It held the petitioner failed to substantiate the worthlessness
of the 13 debts which it claimed as deductions.
As per the ruling in Collector v Goodrich, to qualify as a bad
debt, a TP must show:
1. that there is a valid and subsisting debt;
2. that the debt must be actually ascertained to be worthless and
uncollectible durring the taxable year;
3. the debt must be charged off during the taxable year; and
4. the debt must arise from the business or trade of the TP.
In addition, the Court said, before a debt can be considered
worthless, the TP must also show that it is indeed uncollectible
even in the future.
Furthermore, the TP must undertake several steps to prove
that he exerted diligent efforts to collect the debt:
1. sending statements of accounts to the debtors;
2. sending of collection letters;
3. giving the account to a lawyer for collection; and
4. filing a collection case in court.
In the case at bar, the petitioner miserably failed to show any
of the foregoing.
The only piece of evidence it offered to show the
worthlessness of the debts was the testimony of the
company's financial adviser or accountant.
The Court found that this lacked the required probity to
establish that the accounts it claimed as bad debts were
indeed worthless.
 Apart from such testimony, the petitioner failed to introduce
even a single iota of evidence to bolster its claim of
worthlessness.
(NOTE: In the rest of the case, the Court presents the allegation
of the petitioner as to why it could not collect on any of the 13
debts followed by a statement how the petitioner failed to
introduce evidence to substantiate such allegation.)
DEDUCTIONS AND EXEMPTIONS; ALLOWABLE
DEDUCTIONS;DEPRECIATION
BASILAN ESTATES, INC. v. CIR
Facts:
Basilan Estates, Inc. claimed deductions for the depreciation
of its assets on the basis of their acquisition cost.
As of January 1, 1950 it changed the depreciable value of said
assets by increasing it to conform with the increase in cost for
their replacement. Accordingly, from 1950 to 1953 it deducted
from gross income the value of depreciation computed on the
reappraised value.
CIR disallowed the deductions claimed by petitioner,
consequently assessing the latter of deficiency income taxes.
Issue: WON the depreciation shall be determined on the acquisition
cost rather than the reappraised value of the assets.
Held: Yes.
The following tax law provision allows a deduction from gross
income for depreciation but limits the recovery to the capital
invested in the asset being depreciated:
(1)In general. A reasonable allowance for deterioration of
property arising out of its use or employment in the business or
trade, or out of its not being used:
Provided, That when the allowance authorized under this
subsection shall equal the capital invested by the taxpayer . . . no
further allowance shall be made. . . . The income tax law does not
authorize the depreciation of an asset beyond its acquisition cost.
Hence, a deduction over and above such cost cannot be
claimed and allowed.
The reason is that deductions from gross income are
privileges, not matters of right.
They are not created by implication but upon clear expression
in the law.
Depreciation is the gradual diminution in the useful value of
tangible property resulting from wear and tear and normal
obsolescence.
It commences with the acquisition of the property and its
owner is not bound to see his property gradually waste,
without making provision out of earnings for its replacement.
The recovery, free of income tax, of an amount more than the
invested capital in an asset will transgress the underlying
purpose of a depreciation allowance.
For then what the taxpayer would recover will be, not only the
acquisition cost, but also some profit.
Recovery in due time thru depreciation of investment made is
the philosophy behind depreciation allowance;
the idea of profit on the investment made has never been the
underlying reason for the allowance of a deduction for
depreciation.
BASILAN v. COMMISSIONER (21 SCRA 17)
Facts:
Basilan estate inc., a corporation engaged in coconut industry
filed an income tax return and paid income tax on 1954 for
period 1953.
 Upon examination however the Commissioner assessed
Basilan estates for efficiency estate tax and surcharge.
On non-payment a warrant of distraint and levy was issued
but not executed when the deputy commissioner ordered the
District Director to hold execution and maintain construction
embargo instead.
Because of its refusal to execute waiver of prescription,
Basilans request for reinvestigation was not given due
course.
Notice was served that the warrant would be executed.
Basilan filed petition for review with CTA alleging prescription
of the period of assessment andcollection considering that the
assessment was made on February 26, 1959 but Basilan
claims it never received the same or if it did it was received
beyond the five-year period.
To prove it the notice had an annotation stating no
accompanying letter 11/25/ indicative that the notice was after
March 24, 1959,the last date of the five year period within
which to assess deficiency tax, since the original returns
werefiled on March 24, 1954.
Issue: Was the assessment made within the prescriptive period?
Held: Yes.
Under Sec. 331 of the Tax Code requiring five years within
which to assess deficiency taxes,
the assessment is deemed made when the notice to his effect
is released,
mailed or sent by the collector of internal revenue to the
taxpayer and it is not required that the notice be received by
the taxpayer within theafore mentioned 5-year period.
DEDUCTIONS AND EXEMPTIONS; ALLOWABLE DEDUCTIONS;
CHARITABLE AND OTHER CONTRIBUTIONS
ROXAS v. CTA, GR No L-25043, April 26, 1968
Facts:
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects,
transmitted to their grandchildren by hereditary succession
several properties.
To manage the above-mentioned properties, said children,
namely, Antonio Roxas, Eduardo Roxas and Jose Roxas,
formed a partnership called Roxas y Compania.
At the conclusion of the WW2, the tenants who have all been
tilling the lands in Nasugbu for generations expressed their
desire to purchase from Roxas y Cia.
The parcels which they actually occupied.
For its part, the Government, in consonance with the
constitutional mandate to acquire big landed estates and
apportion them among landless tenants-farmers, persuaded
the Roxas brothers to part with their landholdings.
Conferences were held with the farmers in the early part of
1948 and finally the Roxas brothers agreed to sell 13,500
hectares to the Government for distribution to actual
occupants for a price of P2,079,048.47 plus P300,000.00 for
survey and subdivision expenses.
It turned out however that the Government did not have funds
to cover the purchase price,
and so a special arrangement was made for the Rehabilitation
Finance Corporation to advance to Roxas y Cia.
The amount of P1,500,000.00 as loan. Collateral for such loan
were the lands proposed to be sold to the farmers.
Under the arrangement, Roxas y Cia. allowed the farmers to
buy the lands for the same price but by installment,
and contracted with the Rehabilitation Finance Corporation to
pay its loan from the proceeds of the yearly amortizations paid
by the farmers.
 The CIR demanded from Roxas y Cia the payment of
deficiency income taxes resulting from the inclusion as income
of Roxas y Cia of the unreported 50% of the net profits for
1953 and 1955 derived from the sale of the Nasugbu farm
lands to the tenants,
and the disallowance of deductions from gross income of
various business expenses and contributions claimed by
Roxas y Cia and the Roxas brothers.
For the reason that Roxas y Cia subdivided its Nasugbu farm
lands and sold them to the farmers on installment, the
Commissioner considered the partnership as engaged in the
business of real estate, hence, 100% of the profits derived
therefrom was taxed.
The Roxas brothers protested the assessment but inasmuch
as said protest was denied, they instituted an appeal in the
CTA which sustained the assessment. Hence, this appeal.
Issue: Is Roxas y Cia liable for the payment of deficiency income for
the sale of Nasugbu farmlands?
Held: NO.
The proposition of the CIR cannot be favorably accepted in
this isolated transaction with its peculiar circumstances in
spite of the fact that there were hundreds of vendees.
Although they paid for their respective holdings in installment
for a period of 10 years, it would nevertheless not make the
vendor Roxas y Cia a real estate dealer during the 10-year
amortization period.
It should be borne in mind that the sale of the Nasugbu farm
lands to the very farmers who tilled them for generations was
not only in consonance with, but more in obedience to the
request and pursuant to the policy of our Government to
allocate lands to the landless.
It was the bounden duty of the Government to pay the agreed
compensation after it had persuaded Roxas y Cia to sell its
haciendas,
and to subsequently subdivide them among the farmers at
very reasonable terms and prices.
However, the Government could not comply with its duty for
lack of funds. Obligingly, Roxas y Cia shouldered the
Government's burden, went out of its way and sold lands
directly to the farmers in the same way and under the same
terms as would have been the case had the Government done
it itself.
For this magnanimous act, the municipal council of Nasugbu
passed a resolution expressing the people's gratitude.
In fine, Roxas y Cia cannot be considered a real estate dealer
for the sale in question.
Hence, pursuant to Section 34 of the Tax Code the lands sold
to the farmers are capital assets, and the gain derived from
the sale thereof is capital gain, taxable only to the extent of
50%.
ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their
own respective behalf and as judicial co-guardians of JOSE
ROXAS
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects,
transmitted to their grandchildren by hereditary succession the
following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in
the municipality of Nasugbu, Batangas province;
(2) A residential house and lot located at Wright St., Malate, Manila;
and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely,
25.00
Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a
partnership called Roxas y Compania. Pasay City Police Dept. X'mas fund

50.00
The Commissioner assessed deficiency income taxes against the 1955
Roxas Brothers for the years 1953 and 1955, as follows: Contributions to
1953 1955 Baguio City Police Christmas fund
Antonio Roxas P7,010.00 P5,813.00
Eduardo Roxas 7,281.00 5,828.00 25.00
Jose Roxas 6,323.00 5,588.00 Pasay City Firemen Christmas fund

25.00
The deficiency income taxes resulted from the inclusion as income of
Roxas y Cia of the unreported 50% of the net profits for 1953 and Pasay City Police Christmas fund
1955 derived from the sale of the Nasugbu farm lands to the tenants,
50.00
and the disallowance of deductions from gross income of various EDUARDO ROXAS:
business expenses and contributions claimed by Roxas y Cia and the 1953
Roxas brothers. Contributions to

Hijas de Jesus' Retiro de Manresa

For the reason that Roxas y Cia. subdivided its Nasugbu farm lands
450.00
and sold them to the farmers on installment, the Commissioner
considered the partnership as engaged in the business of real estate, Philippines Herald's fund for Manila's neediest families
hence, 100% of the profits derived therefrom was taxed.
100.00
1955
The following deductions were disallowed: Contributions to Philippines
ROXAS Y CIA.: Herald's fund for Manila's
1953 neediest families 120.00
Tickets for Banquet in honor of JOSE ROXAS:
S. Osmea P 40.00 1955
Gifts of San Miguel beer 28.00 Contributions to Philippines
Contributions to Herald's fund for Manila's
neediest families 120.00
Philippine Air Force Chapel

100.00 The Roxas brothers protested the assessment but inasmuch

Manila Police Trust Fund
as said protest was denied, they instituted an appeal in the
Court of Tax Appeals on January 9, 1961.
150.00 The Tax Court heard the appeal and rendered judgment on
Philippines Herald's fund for Manila's neediest families July 31, 1965 sustaining the assessment except the demand
for the payment of the fixed tax on dealer of securities and the
100.00
1955
disallowance of the deductions for contributions to the
Contributions to Contribution to Philippine Air Force Chapel and Hijas de Jesus' Retiro de
Our Lady of Fatima Chapel, FEU 50.00 Manresa.
ANTONIO ROXAS:
1953 Not satisfied, Roxas y Cia. and the Roxas brothers appealed
Contributions to to this Court. The Commissioner of Internal Revenue did not
Pasay City Firemen Christmas Fund
appeal.
ISSUE:
Are the deductions for business expenses and contributions
deductible?
RULING:
Roxas y Cia deducted from its gross income the amount of
P40.00 for tickets to a banquet given in honor of Sergio
Osmena and P28.00 for San Miguel beer given as gifts to
various persons.
The deduction were claimed as representation expenses.
Representation expenses are deductible from gross income
as expenditures incurred in carrying on a trade or business
under Section 30(a) of the Tax Code provided the taxpayer
proves that they are reasonable in amount, ordinary and
necessary,
and incurred in connection with his business. In the case at
bar, the evidence does not show such link between the
expenses and the business of Roxas y Cia.
The findings of the Court of Tax Appeals must therefore be
sustained.
The petitioners also claim deductions for contributions to the
Pasay City Police, Pasay City Firemen, and Baguio City
Police Christmas funds, Manila Police Trust Fund, Philippines
Herald's fund for Manila's neediest families and Our Lady of
Fatima chapel at Far Eastern University.
The contributions to the Christmas funds of the Pasay City
Police, Pasay City Firemen and Baguio City Police 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. For this
reason, the disallowance must be sustained.
On the other hand, the contribution to the Manila Police trust
fund 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.
The contributions to the Philippines Herald's fund for Manila's
neediest families were disallowed on the ground that the
Philippines Herald is not a corporation or an association
contemplated in Section 30 (h) of the Tax Code.
It should be noted however that 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.
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.
Rightly, the Commissioner of Internal Revenue disallowed the
contribution to Our Lady of Fatima chapel at the Far Eastern
University on the ground that the said university gives
dividends to its stockholders. Located within the premises of
the university, the chapel in question has not been shown to
belong to the Catholic Church or any religious organization.
On the other hand, the lower court found that it belongs to the
Far Eastern University, contributions to which are not
deductible under Section 30(h) of the Tax Code for the reason
that the net income of said university injures to the benefit of
its stockholders. The disallowance should be sustained.