Kamote Chips

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-61632 August 16, 1983
WESTERN MINOLCO CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
Raul Correa and Cenon Sorreta for petitioner.
The Solicitor General for respondents.
GUTIERREZ JR., J.:

This is a petition for review on certiorari of a Court of Tax Appeal's
decision denying the petitioner's claim for the refund of
P1,317,801.03, representing Money market transaction taxes which
the petitioner paid from June 3, 1977 to August 5, 1977, and the
resolution denying its motion for reconsideration.
Petitioner is a domestic corporation engaged in mining, particularly
copper concentrates for export mined from mineral lands in Atok and
Kibungan, Benguet.
In October 1972, upon application for tax exemption filed with the
Bureau of Mines, the petitioner was granted Certificate of
Qualification for Tax Exemption No. 34.
On December 24, 1976, the petitioner was also granted by the
Securities and Exchange Commission, under Certificate of Renewal
No. R-1056, authority to borrow money and issue commercial papers.
Pursuant to this authority, the petitioner borrowed funds from several

financial institutions from June, 1977 to October 1977 and paid the
corresponding 35% transaction tax due thereon in the amount of
P1,317,801.03, The tax was paid pursuant to Section 210 (b) of the
National Internal Revenue Code of 1977.
On February 16, 1978, the petitioner applied for the refund of the
P1,317,801.03 alleging that it was not liable to pay the 35%
transaction tax under its Certificate of Qualification for Tax Exemption
No. 34 issued by the Secretary of Agriculture and Natural Resources,
and pursuant to Section 79-A of Commonwealth Act No. 137,
otherwise known as The Mining Act and Presidential Decree No. 463,
the Mineral Resources Development Decree of 1974, as
implemented by Consolidated Mines Administrative Order of the
Secretary of Natural Resources dated May 17, 1974.
On February 19, 1979, the respondent Commissioner of internal
Revenue denied the petitioner's claim for refund.
On May 29, 1979, the petitioner filed a petition for review with the
respondent Court of Tax Appeals. On August 28, 1979, the
Commissioner of Internal Revenue filed his answer alleging inter alia
that:
xxx xxx xxx
(a) The 35% transaction tax is actually a tax on the
interest earnings of the lender who is actually the
taxpayer on whose income, the tax is imposed;
(b) Petitioner did not pay the 35", transaction tax in its
own behalf, as this liability has been fully shifted to
and paid for the account of the lender:
(c) Petitioner merely acted as withholding agent in
paying
(d) the 35% transaction tax based on the gross

interest income of the
(e) lender;
(d) Petitioner's exemption from taxes granted under
Sections 52 and 53 of Presidential Decree No. 463
relates to importations of machineries, tools and
equipment to be used in the mining operations and
taxes on mining claims, improvement thereon and
mineral products, whereas the 35% transaction tax is
levied on transactions pertaining to commercial
papers issued in the primary money market as
principal instruments; in other words, Sections 52 and
53 of P.D. 463 do not apply to this case of petitioner.
After due hearing but before the respondent court could render its
decision, the petitioner filed a pleading entitled "Request for Judicial
Notice and Request for Admission" alleging that the subject tax was
paid in the nature of a business tax, that petitioner's claim for refund
is based on its exemption from business taxes, and that its exemption
is protected by existing tax exemptions granted it under the mining
law.
On January 29, 1982, the respondent court denied the petitioner's
"Request for Judicial Notice and Request for Admission. "
On May 21, 1982, the respondent court rendered its decision
dismissing the petition for review for lack of merit.
The petitioner raised the following assignments of errors:
Assignment of error No. 1
THAT THE TAX COURT ERRONEOUSLY
CONCLUDED BY SUPPORTING RESPONDENT
COMMISSIONER'S CONTENTION THAT THE 35%
TRANSACTION TAX ON COMMERCIAL PAPER
(INVOLVED IN THIS CASE) IS AN INCOME TAX

IMPOSED UPON THE INTEREST EARNINGS OF
THE MONEY LENDER WHO (ACCORDING TO THE
TAX COURT) IS ACTUALLY THE TAX PAYER ON
WHOSE INCOME THE 35r7(, TAX IS IMPOSED.
Assignment of Error No. 2
THAT THE TAX COURT ERRED IN THAT ITS
CONCLUSIONS CONTRAVENE THE MANDATES IN
SAID P.D. No. 1154 (particularly SEC. 2 OF WHICH)
AMENDING SECTION 291b) OF THE 1977
REVENUE CODE BY EXCLUDING FROM GROSS
INCOME' THE 'INTEREST EARNED ON
COMMERCIAL PAPER ISSUED IN THE PRIMARY
MARKET (WHICH) SHALL NOT BE INCLUDED IN
THE DETERMINATION OF GROSS INCOME OF
THE LENDER FOR PURPOSES OF INCOME
TAXATION
THAT THE TAX COURT ERRED IN CONFUSING
TWO DISTINCT AND SEPARATE ASPECTS OF THE
TAXATION AND THE PERSONS OF THE TAX
PAYER AS IF THEY ARE ONE AND THE SAME
PERSON, WHEN THE LAW TREATS THEM AS
TOTALLY DISTINCT AND SEPARATE PERSONS
AND ASPECTS THEREOF.-NAMELY: (A) THE
INCIDENCE OF THE TAX AND THE PERSON
LEGALLY LIABLE FOR THE TAX; AND THE (B)
'ACTUAL PAYOR' OR 'RESULTING PAYOR' OF THE
35, of TRANSACTION TAX.
THAT THE TAX COURT ERRED IN RULING THAT
THE 35% TRANSACTION TAX IS AN INCOME TAX
FROM WHICH MINOLCO IS NOT EXEMPT AND

NOT A BUSINESS TAX.
THAT THE TAX COURT ERRED IN CONFUSING
THE 'INCIDENT OF THE TAX AND THE ACTUAL
PAYOR' OR 'RESULTING PAYOR' OF THE 35%
TRANSACTION TAX; THAT CONFUSION OF THE
TWO SEPARATE PERSONS HAS RESULTED INTO
THE ERRONEOUS CONCLUSION THAT THE 35%
TRANSACTION TAX IS AN INCOME TAX IMPOSED
UPON THE INTEREST EARNED BY THE MONEY
LENDER INVOLVED IN THE ISSUANCE OF THE
COMMERCIAL PAPER UPON WHICH INTEREST
INCOME IS PAID OR COLLECTED: THAT THIS
ERROR HAS RESULTED IN RESPONDENT
COMMISSIONER'S AND SHE TAX COURT'S) VIEW
THAT PETITIONER MINOLCO IS A WITHHOLDING
AGENT IN RESPECT OF THE INCOME TAX DUE
TO BE WITHHELD ON INTEREST INCOME OF
MONEY LENDER.
Assign
ment
of
Error
No.6
THAT THE TAX COURT ERRED IN FAILING TO
RECOGNIZE THAT PETITIONER MINOLCO IS A
QUALIFIED MINING LESSEE AND DEVELOPER
UNDER THE MINING LAW (C.A. No. t37, As
Amended), AND UNDER THE MINERAL
RESOURCES DEVELOPMENT DECREE OF 1974
(P.D. No. 463, As Amended); THAT AS SUCH
PETITIONER IS EXEMPTED FROM ALL TAXES
(EXEMPT INCOME TAX) PURSUANT TO THE LAW
AND THE IMPLEMENTING REGULATIONS

THEREOF (CONSOLIDATED MINES
ADMINISTRATIVE ORDER, DATED AND
EFFECTIVE MAY 17,1975); FURTHER, THAT THE
TAX COURT HAS ERRONEOUSLY RULED TO
IMPOSE THE INCOME TAX UPON MINOLCO
WHICH IS BASED ON SECTION 24 OF THE
REVENUE CODE AND MAY NOT BE THE SUBJECT
OF THE LITIGATION AS PART OF PETITIONER'S
APPEAL BEFORE THE TAX COURT.
THAT RESPONDENT I HAVE FAILED TO
CONSIDER THE 'WHEREAS CLAUSES OF THE
ENABLING ACT IMPOSING THE 35%
TRANSACTION TAX LAW (P.D. No. 1154) IN THE
APPLICATION OF THE LAW, TOGETHER WITH THE
IMPLEMENTING REGULATIONS THEREOF AS
WELL AS THE 'WHEREAS CLAUSES OF THE
REPEALING LAW (P.D. No. 1739) WHICH
RECOGNIZES PETITIONER'S RIGHT OF RELIEF
AGAINST THE TRANSACTION TAX (SEE PEOPLE
VS. PURISIMA, I,-42050-66; NOV. 20,1978; 86 SCRA
542).
The errors raised by the petitioner are grounded on one main issue,
whether or not the petitioner is exempt from the 35% transaction tax.
We find the alleged errors without merit.
The petitioner claims exemption from the 35% transaction tax on the
basis of the following statutory provisions:
(1) Sec. 1 of Republic Act No. 3823, amending
Commonwealth Act No. 137, otherwise known as the
Mining Act" which reads:
Sec. 1. There is hereby inserted after

Section seventy-nine, Chapter VI of
the Mining Act, a new section which
shall read as follows:
Sec. 79-A. However, new mines, and
old mines which resume operation,
when certified to as such by the
Secretary of Agriculture and Natural
Resources upon the recommendation
of the Director of Mines, shall be
granted five years complete tax
exemptions, except income tax, from
the time of its actual bona fide orders
for equipment for commercial
production.
If any of the tax-exempt articles
acquired under this provision are sold,
transferred or otherwise disposed of
within a period of five years from such
tax-exempt acquisition, all taxes and
duties which would have been due at
the time of such acquisition shall
become due and payable, together
with all interests and surcharges, and
which amount shall constitute a lien on
these properties.
(2) Sec. I of Presidential Decree No. 237, amending the Tax Code,
which reads:
Section 1. The last paragraph of
Section One hundred ninety of
Commonwealth Act Numbered Four
hundred sixty-six, otherwise known as
the 'National Internal Revenue Code'
is further amended to read as follows:
Sec. 190. Compensating Tax.

xxx xxx xxx
The provisions of existing laws to the contrary
notwithstanding exemption from this tax shall be
limited to the following:
xxx xxx xxx
4. Machineries,
equipment, tools for
production, plants to
convert mineral ores
into saleable form,
spare parts, supplies,
materials, accessories,
explosives, chemicals,
and transportation and
communication
facilities imported by
and for the use of new
mines and old mines
which resume
operations, when
certified, to as such by
the Secretary of
Agriculture and Natural
Resources upon the
recommendation of the
Director of Mines, for a
period ending five (5)
years frorn the first
date of actual
commercial production
of saleable mineral
products: Provided Th
at such articles are not
locally available in
reasonable quantity
quality and price and
are necessary or
incidental in the proper
operation of the mine:
xxx xxx xxx
(3) Sec. 1 of P. D. No. 238, further amending the Tax Code, which
reads:
Section 1. Section One hundred five of
Republic Act Numbered Nineteen
hundred and thirty-seven, otherwise
known as the 'Tariff and Customs
Code of the Philippines,' is further
amended by inserting two new
paragraphs '(u) and '(v)' therein after
paragraph '(t)' thereof which shall read
as follows:
Sec. 105. Conditionally-Free
Importations
xxx xxx xxx
... Machineries, equipment, tools for production,
plants to convert mineral ores into saleable form,
spare parts, supplies, materials, accessories,
explosives, chemicals, and transportation and
communication facilities imported by and for the use
of new mines and old mines which resume
operations, when certified to as such by the Secretary
of Agriculture and Natural Resources upon the
recommendation of the Director of Mines, for a period
ending five (5) years from the first date of actual
commercial production of saleable mineral
product; Provided That such articles are not locally

available in reasonable quantity, quality and price and
are necessary or incidental in the proper operation of
the mine.
(4) Secs. 52 and 53 of Presidential Decree No. 463, amending
Section 79-A, Commonwealth Act No. 137, which read:
Sec. 52. Power to Levy Taxes on
Mines. Mining Operations and Mineral
Products. Any law to the contrary
notwithstanding, no province, city,
municipality, barrio or municipal district
shall levy and collect taxes, fees,
rentals, royalties or charges of any
kind whatsoever on mines, mining
claims, mineral products, or on any
operation, process or activity
connected therewith.
Sec. 53. Tax Exemptions.
Machineries equipment, tools for
production, plants to convert mineral
ores into saleable form, spare parts,
supplies, materials, accessories,
explosives, chemicals and
transportation and communication
facilities imported by and for the use of
new mines and old mines which
resume operation, when certified as
such by the Secretary upon
recommendation of the Director, are
exempt from the payment of customs
duties and all taxes except income tax
for a period starting from exploration
and ending five (5) years from the first
date of actual commercial .production
of saleable mineral
products: Provided, That such articles

are not locally available in reasonable
quantity, quality and price and are
necessary or incidental in the proper
operation of the mine.
xxx xxx xxx
All mining claims, improvements
thereon and mineral products derived
therefrom shall likewise be exempt
from the payment of all taxes, except
income tax, for the same period
provided for in the first paragraph of
this section.
xxx xxx xxx
The statutory provisions on tax exemptions clearly exclude the 35%
transaction tax.
Section 1 of Presidential Decree No. 237 on Compensating Tax,
Section I of P.D. No. 238 on Conditionally Free Importations, and
Section 53 of P.D. No. 463 all refer to tax exemptions for importations
of machineries, tools for production, plants to convert mineral ores
into saleable form, spare parts, supplies, materials, accessories,
explosives, chemicals and transportation and communication
facilities, to be used in mining operations. Section 53 of P.D. No. 463
likewise refers to tax exemptions for mining claims and improvements
thereon, and mineral products, except income tax. The petitioner's
Certificate of Qualification for Tax Exemption No. 34 exempts "... from
payment of all taxes except income tax, payable by him in the
conduct of his business and in the importation of machineries, spare
parts and or equipment listed in the stamped "Annex I " which are
considered to be indispensable in the operation and will be used by
said operator lessee exclusively in the mineral land mentioned above.
Clearly, the transaction tax of P1,317,801.03 paid by the petitioner

was not actually imposed upon it in the conduct of its mining business
or in the importation of machinery, spare parts and or equipment
listed in the stamped "ANNEX I" of its certificate of qualification for tax
exemption and which are indespensable in the operation and used
exclusively on petitioner's mineral land.
Petitioner submits that inasmuch as taxes in general constitute
allowable deductions from gross income in the determination of
taxable net income, the 35% transaction tax is a business tax and not
an income tax because the Revenue Code itself classifies it as
"Business Tax" under Title V, and that P. D. No. 1154 expressly states
that the transaction tax shall be allowed as a deductible item for
purposes of determining the borrower's taxable income.
The petitioner's contentions deserve scant consideration, The 35%,
transaction tax is imposed on interest income from commercial
papers issued in the primary money market. Being a tax on interest, it
is a tax on income.
As correctly ruled by the respondent Court of Tax Appeals:
Accordingly, we need not and do not think it
necessary to discuss further the nature of the
transaction tax more than to say that the incipient
scheme in the issuance of Letter of Instructions No.
340 on November 24, 1975 (O.G. Dec. 15, 1975), i.e.,
to achieve operational simplicity and effective
administration in capturing the interest-income
'windfall' from money market operations as a new
source of revenue has lost none of its animating
principle in parturition of amendatory Presidential
decree No. 1154, now Section 210(b) of the Tax
Code. The tax thus imposed is actually a tax on
interest earrings of the lenders or placers who are
actually the taxpayer,, in whose income is imposed.
Thus, "the borrower withholds the tax of 35% from the
interest he would have to pay the lender so that he
(borrower) can pay the 35% of the interest to the

Government." (President Marcos, Times Journal,
June 17, 1977 cited in Respondent's Memorandum p.
6) ... Suffice it to state that the broad concensus of
fiscal and monetary authorities is that "even if
nominally, the borrower is made to pay the tax,
actually the tax is on the interest earning of the
immediate and an prior lenders/placers of the
money ... (Rollo, pp. 36-37)
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 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 interests earned by them
and later remitted the same to the respondent Commissioner of
Internal Revenue. 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.
Furthermore, whether or not certain taxes are on income is not
necessarily determined by their deductibility or non-deductibility from
gross income. As correctly observed by the Solicitor General, income
in the form of dividends, capital gains on real property pursuant to
Batas Pambansa Blg, 37, shares of stock pursuant to Presidential
Decree 1739, and interests on savings in bank accounts, for
instance, are incomes, yet they are not includible in the gross income
when income taxes are paid because these are subject to final
withholding taxes.
The petitioner also submits that the 35% transaction tax is a business
tax because it is imposed under Title V, entitled -,Taxes on Business"
and classified specially under Chapter II, entitled "Tax on Business."
The location of the 35%, tax in the Tax Code does not necessarily
determine its nature, Again, we agree with the Solicitor General that
the legislative body must have realized later that. the subject tax was
inappropriately included among the taxes on business because

Section 210 of the Tax Code has been repealed by Presidential
Decree No. 1739, which now imposes a tax of 20% on interests from
deposits and yields from deposit substitutes such as commercial
papers issued in the primary market as principal instrument and
provides for them in Section 24(cc) under Chapter III, Tax on
Corporations, Title II-Income. Tax.
Petitioner Western Minolco Corporation has failed to justify its
claimed exemption from the 35,7c, transaction tax. The decision of
the Commissioner of Internal Revenue denying the petitioner's claim
for refund is affirmed. It bears repeating that the law looks with
disfavor on tax exemptions and he who would seek to be thus
privileged must justify it by words too plain to be mistaken and too
categorical to be misinterpreted.
(Commissioner of Internal Revenue U. P. J Kiener Company Ltd,
International Construction Corporation et al., L,-24754, July 18, 1975,
65 SCRA 142).
WHEREFORE, the instant petition is DENIED for lack of merit. The
decision of the respondent Court of Tax Appeals is AFFIRMED:
In toto.
SO ORDERED.

SUPREME COURT
Manila
EN BANC
G.R. No. L-22443 May 29, 1971

THE COMMISSIONER OF CUSTOMS, petitioner,
vs.
PHILIPPINE ACETYLENE COMPANY, and THE COURT OF TAX

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.
The facts were stipulated by the parties as follows:
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 United States 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 (sic) was paid
under protest by the importer-protestant as evidenced
by Official Receipt No. 12690 dated February 25,
1958.
According to 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."
Under the foregoing facts the 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 Republic Act No. 1394 and therefore
exempt from the payment of the special import tax in respect of the
gas tank in question.
Section 6 of Republic Act No. 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; ...
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 Republic Act No.
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
Republic Act No. 901. In the second, the term
"industries" is classed together with the terms miners,
mining enterprises, planters and farmers. ... 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 Republic Act No. 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 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 Republic Act
No. 1394.
Assuming ng 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 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 Republic Act No. 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 Republic Act No. 1394
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 nonproductive 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 Court of Tax Appeals is reversed
and that of the Collector of Customs of Manila and the Commissioner
of Customs upheld. Costs against respondent Philippine Acetylene
Co., Inc.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 71122 March 25, 1988
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs. ARNOLDUS CARPENTRY SHOP, INC. and COURT OF TAX
APPEALS, Respondents.
CORTES, J.:
Assailed in this petition is the decision of the Court of Tax Appeals in
CTA case No. 3357 entitled "ARNOLDUS CARPENTRY SHOP, INC. v.
COMMISSIONER OF INTERNAL REVENUE."
chanrobles virtual law library
The facts are simple.
chanroblesvirtualawlibrary
Arnoldus Carpentry Shop, Inc. (private respondent herein) is a

domestic corporation which has been in existence since 1960. It has
for its secondary purpose the "preparing, processing, buying, selling,
exporting, importing, manufacturing, trading and dealing in cabinet
shop products, wood and metal home and office furniture, cabinets,
doors, windows, etc., including their component parts and materials, of
any and all nature and description" (Rollo, pp. 160-161). These
furniture, cabinets and other woodwork were sold locally and exported
abroad.
For this business venture, private respondent kept samples or models

of its woodwork on display from where its customers may refer to
when placing their orders.
Sometime in March 1979, the examiners of the petitioner

Commissioner of Internal Revenue conducted an investigation of the
business tax liabilities of private respondent pursuant to Letter of
Authority No. 08307 NA dated November 23, 1978. As per the
examination, the total gross sales of private respondent for the year
1977 from both its local and foreign dealings amounted to
P5,162,787.59 (Rollo. p. 60). From this amount, private respondent
reported in its quarterly percentage tax returns P2,471,981.62 for its
gross local sales. The balance of P2,690,805.97, which is 52% of the
total gross sales, was considered as its gross export sales (CTA
Decision, p. 12).
chanroble svirtualawlibrary
chanroble s virtual law library
Based on such an examination, BIR examiners Honesto A. Vergel de

Dios and Voltaire Trinidad made a report to the Commissioner
classifying private respondent as an "other independent contractor"
under Sec. 205 (16) [now Sec. 169 (q)] of the Tax Code. The relevant
portion of the report reads:
Examination of the records show that per purchase orders, which are
hereby attached, of the taxpayer's customers during the period under
review, subject corporation should be considered a contractor and not
a manufacturer. The corporation renders service in the course of an
independent occupation representing the will of his employer only as
to the result of his work, and not as to the means by which it is
accomplished, (Luzon Stevedoring Co. v. Trinidad, 43 Phil. 803).
Hence, in the computation of the percentage tax, the 3% contractor's
tax should be imposed instead of the 7% manufacturer's tax. [Rollo, p.
591 (Emphasis supplied.)
xxx xxx xxx
As a result thereof, the examiners assessed private respondent for

deficiency tax in the amount of EIGHTY EIGHT THOUSAND NINE
HUNDRED SEVENTY TWO PESOS AND TWENTY THREE CENTAVOS
( P88,972.23 ). Later, on January 31, 1981, private respondent
received a letter/notice of tax deficiency assessment inclusive of
charges and interest for the year 1977 in the amount of ONE
HUNDRED EIGHT THOUSAND SEVEN HUNDRED TWENTY PESOS AND
NINETY TWO CENTAVOS ( P 108,720.92 ). This tax deficiency was a
consequence of the 3% tax imposed on private respondent's gross
export sales which, in turn, resulted from the examiners' finding that
categorized private respondent as a contractor (CTA decision,
p.2).
Against this assessment, private respondent filed on February 19,

1981 a protest with the petitioner Commissioner of Internal Revenue.
In the protest letter, private respondent's manager maintained that the
carpentry shop is a manufacturer and therefor entitled to tax
exemption on its gross export sales under Section 202 (e) of the
National Internal Revenue Code. He explained that it was the 7% tax
exemption on export sales which prompted private respondent to
exploit the foreign market which resulted in the increase of its foreign
sales to at least 52% of its total gross sales in 1977 (CTA decision, pp.
1213).
chanroble svirtualawlibrary chanroble s virtual law library
On June 23, 1981, private respondent received the final decision of the
petitioner stating:
It is the stand of this Office that you are considered a contractor an
not a manufacturer.Records show that you manufacture woodworks
only upon previous order from supposed manufacturers and only in
accordance with the latter's own design, model number, color, etc.
[Rollo p. 64] (Emphasis supplied.)
On July 22, 1981, private respondent appealed to the Court of Tax
Appeals alleging that the decision of the Commissioner was contrary to
law and the facts of the case.
On April 22, 1985, respondent Court of Tax Appeals rendered the

questioned decision holding that private respondent was a
manufacturer thereby reversing the decision of the petitioner.
chanroblesvirtualawlibrary chanrobles virtual law library
Hence, this petition for review wherein petitioner raises the sole issue
of. Whether or not the Court of Tax Appeals erred in holding that
private respondent is a manufacturer and not a contractor and
therefore not liable for the amount of P108,720.92, as deficiency
contractor's tax, inclusive of surcharge and interest, for the year 1977.
The petition is without merit.
1. Private respondent is a "manufacturer" as defined in the Tax Code

and not a "contractor" under Section 205(e) of the Tax Code as
petitioner would have this Court decide.
(a) Section 205 (16) [now Sec. 170 (q)] of the Tax Code defines
"independent contractors" as:
... persons (juridical and natural) not enumerated above (but not
including individuals subject to the occupation tax under Section 12 of
the Local Tax Code) whose activity consists essentially of the sale of all
kinds of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the physical
or mental faculties of such contractors or their employees. (Emphasis
supplied.)
Private respondent's business does not fall under this definition.
Petitioner contends that the fact that private respondent "designs and
makes samples or models that are 'displayed' or presented or
'submitted' to prospective buyers who 'might choose' therefrom"
signifies that what private respondent is selling is a kind of service its
shop is capable of rendering in terms of woodwork skills and
craftsmanship (Brief for Petitioner, p. 6). He further stresses the point
that if there are no orders placed for goods as represented by the
sample or model, the shop does not produce anything; on the other
hand, if there are orders placed, the shop goes into fall production to
fill up the quantity ordered (Petitioner's Brief, p. 7).
The facts of the case do not support petitioner's claim. Petitioner is

ignoring the fact that private respondent sells goods which it keeps in
stock and not services. As the respondent Tax Court had found:
xxx xxx xxx
Petitioner [private respondent herein] claims, and the records bear

petitioner out, that it had a ready stock of its shop products for sale to
its foreign and local buyers. As a matter of fact, the purchase orders
from its foreign buyers showed that they ordered by referring to the
models designated by petitioner. Even purchases by local buyers for
television cabinets (Exhs. '2 to13', pp. 1-13, BIR records) were
by orders for existing models except only for some adjustments in
sizes and accessories utilized.
With regard to the television cabinets, petitioner presented three

witnesses its bookkeeper, production manager and manager who
testified that samples of television cabinets were designed and made
by petitioner, from which models the television companies such as
Hitachi National and others might choose, then specified whatever
innovations they desired. If found to be saleable, some television
cabinets were manufactured for display and sold to the general public.
These cabinets were not exported but only sold locally. (t.s.n., pp.
2235, February 18,1982; t.s.n., pp. 7-10, March 25, 1982; t.s.n., pp.
3-6, August 10, 1983.)
xxx xxx xxx
In the case of petitioner's other woodwork products such as barometer

cases, knife racks, church furniture, school furniture, knock down
chairs, etc., petitioner's above-mentioned witnesses testified that
these were manufactured without previous orders. Samples were
displayed, and if in stock, were available for immediate sale to local
and foreign customers. Such testimony was not contradicted by
respondent (petitioner herein). And in all the purchase orders
presented as exhibits, whether from foreign or local buyers, reference
was made to the model number of the product being ordered or to the
sample submitted by petitioner.
Respondent's examiners, in their memorandum to the Commissioner of

Internal Revenue, stated that petitioner manufactured only upon
previous orders from customers and "only in accordance with the
latter's own design, model number, color, etc." (Exh. '1', p. 27, BIR
records.) Their bare statement that the model numbers and designs
were the customers' own, unaccompanied by adequate evidence, is
difficult to believe. It ignores commonly accepted and recognized
business practices that it is not the customer but the manufacturer
who furnishes the samples or models from which the customers select
when placing their orders, The evidence adduced by petitioner to

prove that the model numbers and designs were its own is more
convincing [CTA decision, pp. 6-8.] (Emphasis supplied)
xxx xxx xxx

This Court finds no reason to disagree with the Tax Court's finding of
fact. It has been consistently held that while the decisions of the Court
of Tax Appeals are appealable to the Supreme Court, the former's
finding of fact are entitled to the highest respect. The factual findings
can only be disturbed on the part of the tax court [Collector of Intern.
al Revenue v. Henderson, L-12954, February 28, 1961, 1 SCRA 649;
Aznar v. Court of Tax Appeals, L-20569, Aug. 23, 1974, 58 SCRA 519;
Raymundo v. de Joya, L-27733, Dec. 3, 1980, 101 SCRA 495;
Industrial Textiles Manufacturing Co. of the Phils. , Inc. v.
Commissioner of Internal Revenue, L-27718 and L-27768, May
27,1985,136 SCRA 549.]
(b) Neither can Article 1467 of the New Civil Code help petitioner's
cause. Article 1467 states:
A contract for the delivery at a certain price of an article Which the

vendor in the ordinary course of his business manufactures or procures
for the - general market, whether the same is on hand at the time or
not, is a contract of sale, but if the goods are to be manufactured
specially for the customer and upon his special order, and not for the
general market, it is a contract for a piece of work.
Petitioner alleged that what exists prior to any order is but the sample
model only, nothing more, nothing less and the ordered quantity would
never have come into existence but for the particular order as
represented by the sample or model [Brief for Petitioner, pp. 9-101.]
chanrobles virtual law
library
Petitioner wants to impress upon this Court that under Article 1467,
the true test of whether or not the contract is a piece of work (and
thus classifying private respondent as a contractor) or a contract of
sale (which would classify private respondent as a manufacturer) is
the mere existence of the product at the time of the perfection of the
contract such that if the thing already exists, the contract is of sale, if
not, it is work.
This is not the test followed in this jurisdiction. As can be clearly seen
from the wordings of Art. 1467, what determines whether the contract
is one of work or of sale is whether the thing has been manufactured
specially for the customer and upon his special order." Thus, if the
thing is specially done at the order of another, this is a contract for a
piece of work. If, on the other hand, the thing is manufactured or
procured for the general market in the ordinary course of one's
business, it is a b contract of sale.
Jurisprudence has followed this criterion. As held in Commissioner of

Internal Revenue v. Engineering Equipment and Supply Co. (L-27044
and L-27452, June 30, 1975, 64 SCRA 590, 597), "the distinction
between a contract of sale and one for work, labor and materials is
tested by the inquiry whether the thing transferred is one not in
existence andwhich never would have existed but for the order of the
party desiring to acquire it, or a thing which would have existed and
has been the subject of sale to some other persons even if the order
had not been given." (Emphasis supplied.) And in a BIR ruling, which
as per Sec. 326 (now Sec. 277) of the Tax Court the Commissioner has
the power to make and which, as per settled jurisprudence is entitled
to the greatest weight as an administrative view [National Federation
of Sugar Workers (NFSW) v. Ovejera, G.R. No. 59743, May 31, 1982,
114 SCRA 354, 391; Sierra Madre Trust v. Hon. Sec. of Agriculture and
Natural Resources, Nos. 32370 and 32767, April 20, 1983,121 SCRA
384; Espanol v. Chairman and Members of the Board of
Administrators, Phil. Veterans Administration, L-44616, June 29, 1985,
137 SCRA 3141, "one who has ready for the sale to the general public
finished furniture is a manufacturer, and the mere fact that he did not
have on hand a particular piece or pieces of furniture ordered does not
make him a contractor only" (BIR Ruling No. 33-1, series of 1960).
Likewise,
xxx xxx xxx
When the vendor enters into a contract for the delivery of an article
which in the ordinary course of his business he manufactures or
procures for the general market at a price certain (Art. 1458) such
contract is one of sale even if at the time of contracting he may not
have such article on hand. Such articles fall within the meaning of
"future goods" mentioned in Art. 1462, par. 1. [5 Padilla, Civil Law:
Civil Code Annotated 139 (1974)
xxx xxx xxx

These considerations were what precisely moved the respondent Court
of Tax Appeals to rule that 'the fact that [private respondent] kept
models of its products... indicate that these products were for sale to
the general public and not for special orders,' citing Celestino Co and
Co. v. Collector of Internal Revenue [99 Phil, 841 (1956)]. (CTA
Decision, pp. 8-9.)
Petitioner alleges that the error of the respondent Tax Court was due
to the 'heavy albeit misplaced and indiscriminate reliance on the case
of Celestino Co and Co. v. Collector of Internal Revenue [99 Phil. 841,
842 (1956)] which is not a case in point' 1 Brief for Petitioner, pp. 1415). The Commissioner of Internal Revenue made capital of the
difference between the kinds of business establishments involved a
FACTORY in the Celestino Co case and a CARPENTRY SHOP in this case
(Brief for Petitioner, pp. 14-18). Petitioner seems to have missed the
whole point in the former case.
True, the former case did mention the fact of the business concern
being a FACTORY, Thus:
xxx xxx xxx
... I cannot believe that petitioner company would take, as in fact it

has taken, all the trouble and expense of registering a special trade
name for its sash business and then orders company stationery
carrying the bold print "Oriental Sash Factory (Celestino Co and
Company, Prop.) 926 Raon St., Quiapo, Manila, Tel. No. 33076,
Manufacturers of all kinds of doors, windows, sashes furniture, etc.
used season dried and kiln-dried lumber, of the best quality
workmanship" solely for the purpose of supplying the need for doors,
windows and sash of its special and limited customers. One will note
that petitioner has chosen for its trade name and has offered itself to
the public as a FACTORY, which means it is out to do business in its
chosen lines on a big scale. As a general rule, sash factories receive
orders for doors and windows of special design only in particular cases
but the bulk of their sales is derived from ready-made doors and
windows of standard sizes for the average home. [Emphasis
supplied.]
xxx xxx xxx
However, these findings were merely attendant facts to show what the
Court was really driving at - the habitualityof the production of the
goods involved for the general public.
In the instant case, it may be that what is involved is a CARPENTRY
SHOP. But, in the same vein, there are also attendant facts herein to
show habituality of the production for the general public.
In this wise, it is noteworthy to again cite the findings of fact of the

respondent Tax Court:
xxx xxx xxx
Petitioner [private respondent herein] claims, and the records bear

petitioner out, that it had a ready stock of its shop products for sale to
its foreign and local buyers. As a matter of fact, the purchase orders
from its foreign buyers showed that they ordered by referring to the
models designed by petitioner. Even purchases by local buyers for
television cabinets... were by orders for existing models. ...
With regard to the television cabinets, petitioner presented three

witnesses... who testified that samples of television cabinets were
designed and made by petitioner, from which models the television
companies ... might choose, then specified whatever innovations they
desired. If found to be saleable, some television cabinets were
manufactured for display and sold to the general public.
xxx xxx xxx
In the case of petitioner's other woodwork products... these were

manufactured without previous orders. Samples were displayed, and if
in stock, were available for immediate sale to local and foreign
customers. (CTA decision, pp. 6-8.1 [Emphasis supplied.]
(c) The private respondent not being a "contractor" as defined by the
Tax Code or of the New Civil Code, is it a 'manufacturer' as countered
by the carpentry shop?
Sec. 187 (x) [now Sec. 157 (x)] of the Tax Code defines a
manufacturer' as follows:
"Manufacturer" includes every person who by physical or chemical

process alters the exterior texture or form or inner substance of any
raw material or manufactured or partially manufactured product in
such manner as to prepare it for a special use or uses to which it could
not have been in its original condition, or who by any such process
alters the quality or any such raw material or manufactured or partially
manufactured product so as to reduce it to marketable shape or
prepare it for any of the uses of industry, or who by any such process
combines any such raw material or manufactured or partially
manufactured products with other materials or products of the same or
different kinds and in such manner that the finished product of such
process or manufacture can be put to a special use or uses to which
such raw material or manufactured or partially manufactured products
in their original condition would not have been put, and who in
addition alters such raw material or manufactured or partially
manufactured products, or combines the same to produce such
finished products for the purpose of their sale or distribution to others
and not for his own use or consumption.
It is a basic rule in statutory construction that when the language of
the law is clear and unequivocal, the law must be taken to mean
exactly what it says [Banawa et al. v. Mirano et al., L-24750, May 16,
1980, 97 SCRA 517, 533].
The term "manufacturer" had been considered in its ordinary and

general usage. The term has been construed broadly to include such
processes as buying and converting duck eggs to salted eggs ('balut")
[Ngo Shiek v. Collector of Internal Revenue, 100 Phil. 60 (1956)1; the
processing of unhusked kapok into clean kapok fiber [Oriental Kapok
Industries v. Commissioner of Internal Revenue, L-17837, Jan. 31,
1963, 7 SCRA 132]; or making charcoal out of firewood Bermejo v.
Collector of Internal Revenue, 87 Phil. 96 (1950)].
2. As the Court of Tax Appeals did not err in holding that private
respondent is a "manufacturer," then private respondent is entitled to
the tax exemption under See. 202 (d) and (e) mow Sec. 167 (d) and
(e)] of the Tax Code which states:
Sec. 202. Articles not subject to percentage tax on sales. The following
shall be exempt from the percentage taxes imposed in Sections 194,
195, 196, 197, 198, 199, and 201:
xxx xxx xxx
(d) Articles shipped or exported by the manufacturer or producer,

irrespective of any shipping arrangement that may be agreed upon
which may influence or determine the transfer of ownership of the
articles so exported.
(e) Articles sold by "registered export producers" to (1) other"

registered export producers" (2) "registered export traders' or (3)
foreign tourists or travelers, which are considered as "export sales."
The law is clear on this point. It is conceded that as a rule, as argued
by petitioner, any claim for tax exemption from tax statutes is strictly
construed against the taxpayer and it is contingent upon private
respondent as taxpayer to establish a clear right to tax exemption
[Brief for Petitioners, p. 181. Tax exemptions are strictly construed
against the grantee and generally in favor of the taxing authority [City
of Baguio v. Busuego, L-29772, Sept. 18, 1980, 100 SCRA 1161; they
are looked upon with disfavor [Western Minolco Corp. v. Commissioner
Internal Revenue, G.R. No. 61632, Aug. 16,1983,124 1211. They are
held strictly against the taxpayer and if expressly mentioned in the
law, must at least be within its purview by clear legislative intent
[Commissioner of Customs v. Phil., Acetylene Co., L-22443, May 29,
1971, 39 SCRA 70, Light and Power Co. v. Commissioner of Customs,
G.R. L-28739 and L-28902, March 29, 1972, 44 SCRA 122].
Conversely therefore, if there is an express mention or if the taxpayer

falls within the purview of the exemption by clear legislative intent,
then the rule on strict construction will not apply. In the present case
the respondent Tax Court did not err in classifying private respondent
as a "manufacturer". Clearly, the 'latter falls with the term
'manufacturer' mentioned in Art. 202 (d) and (e) of the Tax Code. As
the only question raised by petitioner in relation to this tax exemption
claim by private respondent is the classification of the latter as a
manufacturer, this Court affirms the holding of respondent Tax Court
that private respondent is entitled to the percentage tax exemption on
its export sales.
There is nothing illegal in taking advantage of tax exemptions. When

the private respondent was still exporting less and producing locally
more, the petitioner did not question its classification as a
manufacturer. But when in 1977 the private respondent produced
locally less and exported more, petitioner did a turnabout and imposed
the contractor's tax. By classifying the private respondent as a
contractor, petitioner would likewise take away the tax exemptions
granted under Sec. 202 for manufacturers. Petitioner's action finds no
support in the applicable law.
chanroblesvirtualawlibrarychanroble s virtual law library
WHEREFORE, the Court hereby DENIES the Petition for lack of merit
and AFFIRMS the Court of Tax Appeals decision in CTA Case No.
3357.
SO ORDERED.
Fernan (Chairman), Gutierrez, Jr., Feliciano and Bidin, concur.

SUPREME COURT
Manila
EN BANC
G.R. No. L-23226
November 28, 1967
ALHAMBRA CIGAR and CIGARETTE MANUFACTURING

COMPANY, petitioner-appellant,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondentappellee.
Gamboa and Gamboa for petitioner-appellant.
Office of the Solicitor General for respondent-appellee.
FERNANDO, J.:
This Court, in this petition for the review of a decision of the Court
of Tax Appeals is not faced with a problem of undue complexity.
The law governing the matter has been authoritatively expounded
in an opinion by the then Justice, now Chief Justice, Concepcion
in Alhambra Cigar v. Collector of Internal Revenue,1 a case
involving the same parties over a similar question but covering an
earlier period of time. The limits of a power of respondent
Commissioner of Internal Revenue to allow deductions from the
gross income "the ordinary and necessary expenses paid or
increased during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries and other
compensation for personal services actually rendered . . ."2 had
thus been authoritatively expounded. What remains to be decided
in this litigation is whether the decision of the Court of Tax Appeals
sought to be reviewed reflected with fidelity the doctrine thus
announced or deviated therefrom.
According to the petition for review, Alhambra Cigar & Cigarette
Manufacturing Company, petitioner-appellant, "is a corporation
duly organized and existing under the laws of the Philippines, with
principal office at 31 Tayuman street, Tondo, Manila; and the
respondent-appellee is the duly appointed and qualified
Commissioner of Internal Revenue, vested with authority to act as
such for the Government of the Republic of the Philippines, . . . .3
In the petition for review it was contended that the Court of Tax
Appeals, in affirming the action taken by respondent-appellee
Commissioner of Internal Revenue, erred "(a) In holding that A. P.
Kuenzle and H.A. Streiff who were the President and VicePresident, respectively, of the petitioner-appellant, were entitled to
a salary of only P6,000.00 each year, for 1954, 1955, 1956 and
1957, and a bonus equal to the reduced bonus of W. Eggmann for
each of said years; and disallowing as deductions the portions of
their salary and bonus in excess of said amounts; (b) In
disallowing, as deductions, all the directors' fees and commissions
paid by the petitioner-appellant to A.P. Kuenzle and H.A. Streiff; (c)

In holding that the petitioner-appellant is liable for the alleged
deficiency income taxes in question."4
It is indisputable as noted in the brief for petitioner-appellant that
the deductions disallowed by respondent-appellee, Commissioner
of Internal Revenue, for the year 1954 to 1957 designated
as salaries, officers; bonus, officers; commissions to
managers and directors' fees "relate exclusively to the
compensations paid by the petitioner-appellant in 1954, 1955,
1956 and 1957, to A. P. Kuenzle and H.A. Streiff who were, during
the said years, as they had been in prior years and still are,
directors and the president and vice-president, respectively, of the
petitioner-appellant. . . ."5
Under the category of salaries, officers of the fixed annual
compensation of A. P. Kuenzle and H. A. Streiff in the amount of
P15,000.00 each "the respondent-appellee allowed for each of
them a salary of only P6,000.00 and disallow the balance of
P9,000.00, or a total disallowance of P18,00.0,0 for both of them,
for each of the years in question."6 Under that of the bonus,
officers of the amount under such category paid to the above
gentlemen for the year 1954 of P14,750.00 each, "the respondentappellee allowed each of them a bonus of only P5,850.00, and
disallowed the balance of P8,900.00 or a total disallowance of
P17,800.00 for both of them."7 For the year 1955, the bonus being
paid, once again, amounting to P14,750.00 to each of them, "the
respondent-appellee allowed for each of them, a bonus of only
P7,000.00, and disallowed the balance of P7,750.00 each, or a
total disallowance of P15,500.00 for both of them."8 For the year
1956, again the amount, not suffering any change for each, "the
respondent-appellee allowed for each of them a bonus of only
P5,500.00 and disallowed the balance of P9,250.00 each, or a
total disallowance of P18,500.00 for both of them."9 Lastly, for the
year 1957, of a similar amount payable to each in the concept of
bonus, "the respondent-appellee allowed for each of them a bonus
of only P6,500.00, and disallowed the balance of P8,250.00 each,

or a total disallowance of P16,500.00 for both of them."10
As to the deduction in the concept of commissions to managers,
the brief for the petitioner appellant states: "The commissions paid
by the petitioner-appellant to A. P. Kuenzle and H. A. Streiff in the
amount of P13,607.61 each in 1954, or a total of P27,215.22 for
both of them; P14,097.62 each in 1955, or a total of P28,195.24
for both of them; P13,180.87 each in 1956, or a total of
P26,361.74 for both of them; and P13,144.29 each in 1957, or a
total of P26,288.48 for both of them, were entirely disallowed by
the respondent-appellee."11
Concerning the directors' fees paid to both officials by petitionerappellant, it is noted in the brief that "in the amount of P11,504.71
each in 1954, or a total of P23,009.42 for both of them;
P10,693.02 each in 1955, or a total of P21,386.04 for both of
them; P10,360.23 each in 1956, or a total of P20,720.46 for both
of them; and P9,716.63 each in 1957, or a total of P19,433.26 for
both of them were also entirely disallowed by the respondentappellee."12
In the decision of the respondent Court of Tax Appeals sought to
be reviewed, there was an appraisal of the evidence on which
respondent-appellee Commissioner of Internal Revenue based
the above deduction on salaries and bonuses: "The evidence
shows that prior to 1954, Messrs. A. P. Kuenzle and H. A. Streiff
President and Vice-President, respectively, of petitioner
corporation, were each paid an annual salary P6,000.00 and a
bonus of about four times as much as the annual salary. In
Alhambra Cigar and Cigarette Manufacturing Company v. Coll. of
Int. Rev. C.T.A. No. 142 January 31, 1957 (affd. in G.R. Nos. L12026 & L-12131, May 29, 1959), this Court held that considering
the nature of the services performed by Messrs. Kuenzle and
Streiff the salary of P6,000.00 paid to each of them was
reasonable and, therefore, deductions is ordinary and necessary
business expense. The bonus paid to each of said officers was
however reduced to the amount equivalent to that paid to Mr. W.

Eggmann, the resident Treasurer and Manager of petitioner.
Following the decision of the Supreme Court in G. R. Nos. L12026 & L- 12131, . . ., respondent allowed as deduction
P6,000.00 as salary to Messrs. Kuenzle and Streiff and a bonus
equivalent to that paid annually to Mr. Eggmann from 1954 to
1957, as indicated above."13
Then the decision of respondent Court of Tax Appeals in affirming
what respondent-appellee did explained why: "Upon the evidence
of record, we find no justification to reverse or modify the decision
of respondent with respect to the disallowance of a portion of the
salaries and bonuses paid to Messrs. Kuenzle and Streiff.
Petitioner seeks to justify the increase in the salaries of Messrs.
Kuenzle and Streiff on the ground of increased costs of living. The
said officers of petitioner are, however, non-residents of the
Philippines."14
It may be stated in this connection that the brief for petitionerappellant did not actually dispute the fact of non-residence of the
aforesaid officials. Thus: "A. P. Kuenzle or H. A. Streiff usually
came to the Philippines every two years, and generally stayed
from five to eight weeks (t.s.n., pp. 203-204). During the years in
question, H. A. Streiff was in the Philippines from January 27 to
March 20, 1954. He was personally present at the special meeting
of the board of directors of the petitioner-appellant on February
19, 1954 and at the regular meeting on February 27, 1954, the
minutes of all of which he signed as Vice-President (Exhibits Q, Q1 and Q-2). He was also personally present at the semi-annual
meeting of stockholders of the petitioner-appellant on February
19, 1954, the minutes of which he also signed as vice-president
(Exh. R). A. P. Kuenzle was in the Philippines from February 3 to
March 8, 1956 (t.s.n., pp. 204-205). He was personally present at
the special meeting of the board of directors on February 22, and
on February 23, 1956, and at the semi-annual general meeting of
stockholders on February 23, 1956, the minutes of all of which he
signed as President (Exhs. Q-8, Q-9. and R-4). H. A. Streiff came
again to the Philippines in 1958, and he personally attended the

special meeting of the board of directors on March 7, 1968, the
minutes of which he also, signed as Vice-President (Exh. Q-16)."15
There was in the brief of petitioner-appellant stress laid on those
work performed by them, both in and outside the Philippines.
"During their stay in the Philippines, A. P. Kuenzle or H. A. Streiff
inspected the install petitions of the petitioner-appellant, and
discussed with the local management, personnel and
management matters, long-range planning and policies of the
company (t.s.n., pp. 205-206). Aside from these visits of A. P.
Kuenzle and H. A. Streiff to the Philippines, there were other
personal consultations between them and the local management.
There were about seven staff members in the local management,
and each of them went on home leave every four years and for
consultations in Switzerland with the general managers, AP
Kuenzle and H. A. Streiff. These home leaves each lasted for six
months. In this way, at least one staff member went on home
leave every year and for consultations with the general
manager. . . ."16
As to commissions and directors' fees, it is the finding of the Court
of Tax Appeals: "In connection with the commissions paid to
Messrs. Kuenzle and Streiff there is no evidence of any particular
service rendered by them to petitioner to warrant payment of
commissions. Counsel for petitioner sought to prove the various
types of services performed by said officers, but the services
mentioned are those for which they have been more than
adequately compensated in the form of salaries and bonuses. As
regards the directors' fees, it is admitted that Messrs. Kuenzle and
Streiff "usually came to the Philippines every two years, and
generally stayed from five to eight weeks." (Page 17,
Memorandum for Petitioner.) We cannot see any justification for
the payment of director's fees of about P10,000.00 to each of said
officers for coming to the Philippines to visit their corporation once
in two years. Being non-resident President and Vice-President of
Petitioner corporation of which they are the controlling
stockholders, we are more inclined to believe that said

commissions and directors' fees, payment of which was based on
a certain percentage of the annual profits of petitioner, are in the
nature of dividend distributions,"17
Considering how carefully the Court of Tax Appeals considered the
matter of the disallowances in the light of Section 30 of the
National Internal Revenue Code, the task for petitioner-appellant
in proving that it erred in holding that A. P. Kuenzle and H. A.
Streiff were entitled only to the salary of P6,000.00 each a year,
for 1954, 1955, 1956 and 1957, and a bonus equal to the reduced
bonus of one of its officials a certain W. Eggmann, for each of said
years, and in disallowing as deductions the directors' fees and
commissions paid by it to them, was far from easy. Nor could it be
said that petitioner-appellant did succeed in such effort As
mentioned earlier, the previous case of Alhambra Cigar &
Cigarette Manufacturing Company v. The Collector of Internal
Revenue,18has laid down the applicable principle of law.
In the language of then Justice, now Chief Justice, Concepcion:
"In the light of the tenor of the foregoing provision, whenever a
controversy arises on the deductibility, for purposes of income tax,
of certain items for alleged compensation of officers of the
taxpayer, two (2) questions become material, namely: (a) Have
"personal services" been "actually rendered" by said officers? (b)
In the affirmative case, what is the "reasonable allowance"
therefore? When the Collector of Internal Revenue disallowed the
fees, bonuses and commissions aforementioned, and the
company appealed therefrom, it became necessary for the [Court
of Tax Appeals] to determine whether said officer had correctly
applied section 30 of the Tax Code, and this, in turn, required the
consideration of the two (2) questions already adverted to. In the
circumstances surrounding the case, we are of the opinion that
the [Court of Tax Appeals] has correctly construed and applied
said provision." So it is now. This appeal too cannot prosper.
Even if there were no such previous decision, it would still follow,

in the light of the controlling doctrines, that the Court of Tax
Appeals must be sustained. The well written brief for petitionerappellant citing Botany Worsted Bills v. United States,19 states:
"Whether the amounts disallowed by the respondent-appellee in
the respective years were reasonable compensation for personal
services, is a question of fact to be determined from all the
evidence."20 That the question thus involved is inherently factual,
appears to be undeniable. This Court is bound by the finding of
facts of the Court of Tax Appeals, especially so, where as here,
the evidence in support thereof is more than substantial, only
questions of law thus being left open to it for
determination.21 Without ignoring this various factors which
petitioner-appellant would have this Court consider in passing
upon the determination made by the Court of Tax Appeals but with
full recognition of the fact that the two officials were non-residents,
it cannot be said that it committed the alleged errors, calling for
the interposition of the corrective authority of this Court. Nor as a
matter of principle is it advisable for this Court to set aside the
conclusion reached by an agency such as the Court of Tax
Appeals which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless, as did
not happen here, there has been an abuse or improvident
exercise of its authority.
WHEREFORE, the decision of the Court of Tax Appeals is
affirmed, with costs against petitioner-appellant.

SUPREME COURT
Manila
EN BANC
G.R. No. L-18840
May 29, 1969
KUENZLE & STREIFF, INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Angel S. Gamboa for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor
General Jose P. Alejandro and Special Attorney Virgilio C.
Saldajeno for respondent.
DIZON, J.:
Petition filed by Kuenzle & Streiff Inc. for the review of the
decision of the Court of Tax Appeals in C.T.A. Case No. 551
sustaining the assessments of the respondent issued against it,
for deficiency income taxes for the years 1953, 1954 and 1955 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 petitioner 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.
Petitioner, a domestic corporation, filed its income tax
returns for the taxable years 1953, 1954 and 1955, declaring net
losses of P2,085.84, P4,953.91 and P9,246.07 respectively. Upon
a verification thereof, the respondent, on September 9, 1957,
assessed against it the deficiency income taxes in question,
arrived at as follows:
For the year 1953, by disallowing as deductions all amounts
paid that year by the petitioner as bonus to its officers and staffmembers in the aggregate sum of P175,140.00, this resulting in a
net taxable income of petitioner amounting to P173,054.16; for the
taxable years 1954 and 1955, the similar disallowance as
deductions of a portion of the bonuses paid by petitioner in said
years to its officers and staff-members in the aggregate sums of
P88,193.33 for 1954 and P90,385.00 for 1955, resulted likewise in
a net taxable income for petitioner in the sum of P83,239.42 for
1954 and P81,138.93 for 1955.
On July 9, 1958 petitioner filed with the Court of Tax
Appeals a petition for review contesting the aforementioned
assessments (C.T.A. Case No. 551), and on April 28, 1961, said
Court rendered judgment as follows:
"FOR THE FOREGOING CONSIDERATIONS, the decision
appealed from is hereby affirmed with respect to deficiency
assessment for the years 1953 and 1955. As regards the
deficiency assessment for the year 1954, the same is hereby
modified in the sense that the amount due from petitioner is
P11,248.00, instead of P16,648.00. Accordingly, petitioner is
ordered to pay within thirty days from the date this decision
becomes final the sums of P40,455.00 and P16,228.00, plus 5%
surcharge and 1% monthly interest from October 1, 1957 until
paid. It is likewise ordered to pay the sum of P11,248.00 within the
same period, and, if not so paid, there shall be added thereto 5%
surcharge and 1% monthly interest from the date of delinquency
to the date of payment. With costs against petitioner."
Petitioner moved for a reconsideration of the abovequoted
decision, and on August 21, 1961, the court amended the same to
include the following at the end thereof:
... In both cases, the maximum amount of interest shall
not exceed the amount corresponding to a period of three
years, pursuant to Section 51(e) (2) of the National Internal
Revenue Code, as amended by Section 8 of Republic Act No.
2343. With costs against petitioner.
Having found that the bonuses in question were paid for

services actually rendered by the recipients thereof, the tax court
proceeded to consider the question of "whether or not they are
reasonable". In this connection it construed Section 30(a) (1) of
the Revenue Code as allowing the deduction from gross income
of all the ordinary and necessary expenses incurred during the
taxable year in carrying on the trade or business of the taxpayer,
including a reasonable allowance for salaries or other
compensation for personal services actually rendered. We agree
with the view thus expressed, as well as with court's conclusion
that the bonuses in question were not reasonable considering all
material and relevant factors.
Petitioner 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.
It is not true, as petitioner claims to support its view, that the
respondent and the tax court based their ruling exclusively upon
the fact that petitioner had suffered net losses in its business
operations during the years when the bonuses in question were
paid. The truth appears to be that, in arriving at such conclusion,
the respondent and the tax court gave due consideration to all the
material factors that led this Court to decide an earlier case of
petitioner itself involving the same issue and where the test for
determining the reasonableness of bonuses and additional
compensation for services actually rendered were laid down by Us
as follows:
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'
(4 Mertens Law of Federal Income Taxation, Sec. 25.50, p.
410). 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' (Idem., Sec. 25.44, p. 395). Here it is
admitted that the bonuses are in fact compensation and were
paid for services actually rendered. The only question is
whether the payment of said bonuses is reasonable.
There plaintiff 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 (4 Mertens Law of Federal Income Taxation, Secs.
25.44, 25.49, 25.50, 25.51, pp. 407-412). However, 'in determining
whether the particular salary or compensation payment is
reasonable, the situation must be considered as a
whole. Ordinarily, no single factor is decisive. ... it is important to
keep in mind that it seldom happens that the application of one
test can give a satisfactory answer, and that ordinarily it is the
interplay of several factors, properly weighted for the particular
case, which must furnish the final answer (Idem)." Kuenzle &
Streiff v. Coll. of Int. Rev., G. R. Nos. L-12010 & L-12113, Oct. 20,
1959.)
lawphi1.et
Making a distinction between petitioner's previous case and

the present, the tax court said that while it is true that in the former
(C.T.A. No. 169, December 29, 1956, G.R. Nos. L-12010 and L12113, October 20, 1959, involving taxable years 1950 to 1952
(We allowed and considered deductible bonuses in amounts
bigger than the ones allowed by respondent in the case at bar,
that was due to the fact that petitioner had earned huge profits
during the years 1950-52. So much so that, the payment of such
bonuses notwithstanding, petitioner still had substantial net profits
distributable as dividends among its stockholders. In the present
case, on the other hand, it is clear that the ultimate and inevitable
result of the payment of the questioned bonuses would be net
losses for petitioner during the taxable years in which they were
paid.
It seems clear from the record that, in arriving at its main
conclusion, the tax court considered, inter alia, the following
factors:
In the first place, for the years 1953, 1954 and 1955 the
petitioner paid to its following top officers: A. P. Kuenzle, H. A.
Streiff, A. Jung, G. Gattaneo, A. Schatzmann, F. E. Rein, M.

Klinger, A. Huber, S. Meili, M. Triaca, J. Ortiz, H. Vogt, W. Ramp,
W. Strehler, H. R. Jung, K. Schedler, P. C. Curtis, R. Oefeli,
substantial amounts as salaries and bonuses ranging from
P9,000.00 yearly as a minimum (except in the case) and
P50,000.00 as maximum. All these officials headed various
departments of petitioner's business. While it must be assumed,
on the one hand, 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.
In the second place, working under the above-named
officials and constituting what we might call the staff of petitioner's
working personnel, were a good number of other employees
mostly Filipinos (T.s.n., pp. 222-223) all of whom, according to
the record (Idem. 223), received no pay increase at all during the
same years.
In the third place, the above salaries and bonuses were
paid to petitioner's top officials mentioned heretofore, in spite of
the fact that according to its income tax returns for the relevant
years, it had suffered net losses as follows: P2,085.84, P4,953.91,
P9,246.07 for the years 1953, 1954 and 1955, respectively. In fact,
petitioner's financial statements further show that its gross assets
suffered a gradual decrease for the same years (Exh. B-1, p. 58,
B.I.R., records, Exh. D-1, p. 36 id., Exh. F-1, p. 14 id.), and that a
similar downward trend took place in its surplus and capital
position during the same period of time.
That the charge of arbitrariness against respondent is
without merit is further shown by the following considerations:
Petitioner admits that the amounts it paid to its top officers

in 1953 as bonus or "additional remuneration" were taken either
from operating funds, that is, funds from the year's business
operations, or from its general reserve. Normally, the amounts
taken from the first source should have constituted profits of the
corporation distributable as dividends amongst its shareholders.
Instead it would appear that they were diverted from this purpose
and used to pay the bonuses for the year 1953. In the case of the
amounts taken from the general reserve it seems clear that the
company had to resort to the use of such reserve funds because
the item of expense to be met could not be considered as ordinary
or necessary and was therefore beyond the purview of the
provisions of Section 30(a) (1) of the National Internal Revenue
Code. This being so, We cannot see our way clear to holding that
the respondent acted arbitrarily in disallowing as deductible
expenses the amounts thus paid as bonus or "additional
remuneration".
Neither does the total disallowance of the bonuses paid to
some officers and the partial disallowance of those paid to others
show that respondent acted unjustly and unreasonably. The
record sufficiently shows that the total disallowance was more or
less due to the fact that the affected officers had previously
received substantial increases in their basic salaries.
Petitioner justifies payment of these bonuses to its top
officials by saying that its general salary policy was to give a low
salary but to grant substantial bonuses at the end of each year, so
that its officers may receive considerable lump sums with which to
purchase whatever expensive objects or items they might need.
While We are not prepared to hold that such policy is
unreasonable, still We believe that its application should not result
in producing a net loss for the employer at the end of the year, for
if that were to be the case, the scheme may be utilized to freely
achieve some other purpose evade payment of taxes.
The authority relied upon by petitioner (Mertens Law of

Federal Income Taxation, Vol. IV, p. 418) does not apply to the
present case, because it refers to the salary paid to an employee,
which may be claimed as a deductible amount. In the case before
Us the respondent 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.
In further support of its appeal petitioner claims that the
amounts disallowed by the respondent should be considered as
legitimate business expenses as their payment was made in good
faith. In bringing up this point, petitioner treads on dangerous
ground. In the first place, good faith cannot decide whether a
business is reasonable or unreasonable for purposes of income
tax deduction. In the second place, petitioner's good faith in the
matter at issue is not overly manifest, considering that the
questioned bonuses were fixed and paid at the end the years in
question at a time, therefore, when petitioner fully knew that it
was going to suffer a net loss in its business operations.
As far as petitioner's contention that as employer it has the
right to fix the compensation of its officers and employees and that
it was in the exercise of such right that it deemed proper to pay
the bonus in question, all that We need say is this: that right
maybe conceded, but for income tax purposes the employer
cannot legally claim such bonuses as deductible expenses unless
they are shown to be reasonable. To hold otherwise would open
the gate to rampant tax evasion. Lastly, We must not lose sight of
the fact that the question of allowing or disallowing as deductible
expenses the amounts paid to corporate officers by way of bonus
is determined by respondent exclusively for income tax purposes.
Concededly, he has no authority to fix the amounts to be paid to
corporate officers by way of basic salary, bonus or additional
remuneration a matter that lies more or less exclusively within
the sound discretion of the corporation itself. But this right of the
corporation is, of course, not absolute. It cannot exercise it for the

purpose of evading payment of taxes legitimately due to the State.
WHEREFORE, the appealed decision being in accordance
with law, the same is hereby affirmed, with costs.
Reyes, J.B.L., Makalintal, Zaldivar, Sanchez, Fernando,
Capistrano, Teehankee and Barredo, JJ., concur.
Concepcion, C.J., and Castro, J., are on leave

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-31305 May 10, 1990

HOSPITAL DE SAN JUAN DE DIOS, INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Valdez, Ereso, Polido & Associates for petitioner.
GRIO-AQUINO, J.:
In a letter dated January 15, 1959, the Commissioner of Internal
Revenue assessed and demanded from the petitioner, Hospital De
San Juan De Dios, Inc., payment of P51,462 as deficiency income
taxes for 1952 to 1955.
The petitioner protested against the assessment and requested the

Commissioner to cancel and withdraw it. After reviewing the
assessment, the Commissioner advised petitioner on November 8,
1960 that the deficiency income tax assessment against it was
reduced to only P16,852.41. Still the petitioner, through its auditors,
insisted on the cancellation of the revised assessment. The request
was, however, denied.
On September 18, 1965, petitioner sought a review of the
assessment by the Court of Tax Appeals (hereafter "CTA"). In a
decision dated August 29, 1969, the CTA upheld the Commissioner. It
held that 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.
Petitioner filed a motion for reconsideration of the CTA decision.
When its motion was denied, it filed this petition for review.
The background of the controversy is stated in the decision of the
CTA as follows:
There is no dispute that petitioner is engaged in both
taxable and non-taxable operations. The income
derived from the operations of the hospital and the
nursing school are exempt from income tax while the
rest of petitioner's income are subject thereto. Its
taxable or non-operating income consists of rentals,
interests and dividendS received from its properties
and investments. In the computation of its taxable
income for the years 1952 to 1955, petitioner
allowed all its taxable income to share in the
allocation of administrative expenses. Respondent
disallowed, however, theinterests and dividends from
sharing in the allocation of administrative expense on
the ground that the expenses incurred in the
administration or management of petitioner's
investments are not allowable business expenses
inasmuch as they were not incurred in 'carrying on

any trade or business' within the contemplation of
Section 30 (a) (1) of the Revenue Code.
Consequently, petitioner was assessed deficiency
income taxes for the years in question. (pp. 4546, Rollo.)
The applicable law is Section 30 of the Revenue Code which
provides:
Sec. 30. Deductions from Gross Income. In
computing net income there shad be allowed as
deduction
(A) Expenses:
(i) In General. All the ordinary and
necessary expenses paid or incurred
during the taxable year in carrying on
any trade or business, including a
reasonable allowance for salaries or
other compensation for personal
services actually rendered . . .
(Emphasis supplied). (p. 46, Rollo.)
The Court of Tax Appeals found, however, that:
. . . 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. No evidence whatsoever was
presented by petitioner to show how it handled its
investment, the manner it bought, sold and reinvested
its securities, how it made decisions, and whether it
consulted brokers, investment or statistical services.
Neither is there any showing of the extent of its
activities in stocks or bonds, and participation, if any,
direct or indirect, in the management of the

corporations where it made investments. In effect,
there is total absence of any indication of a businesslike management or operation of its interests and
dividends. (See Roebling vs. Comm. of Int. Rev., 37
BTA 82). 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 but the latter necessarily involves studying the
securities market, the tax aspects of the investments,
hiring accountants, collectors, clerical help, etc.
without showing that it was actually performing these
varied activities. Petitioner could have easily required
any of its responsible officials to testify on this regard
but it failed to do so. Under these circumstances and
coupled with the fact that the interests and dividends
here in question are merely incidental income to
petitioner's main activity, which is the operation of its
hospital and nursing schools, the conclusion becomes
inevitable that petitioner's activities never go beyond
that of a passive investor, which under existing
jurisprudence do not come within the purview of
carrying on any "trade or business". (pp. 4748, Rollo.)
The Court of Tax Appeals found that the interests and dividends
received by the petitioner "were merely incidental income to
petitioner's main activity, which is the operation of its hospital and
nursing schools [hence] the conclusion is inevitable 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'." (pp. 47-48, Rollo) That factual finding is
binding on this Court. And, as the principle of allocating expenses is
grounded on the premise that the taxable income was derived from
carrying on a trade or business, as distinguished from mere receipt of
interests and dividends from one's investments, the Court of Tax
Appeals correctly ruled that said income should not share in the
allocation of administrative expenses (p. 49, Rollo).
Hospital de San Juan De Dios, Inc., according to its Articles of
Incorporation, was established for purposes "Which are benevolent,
charitable and religious, and not for financial gain" (p. 12, Petitioner's
Brief). It is not carrying on a trade or business for the word "business"
in its ordinary and common use means "human efforts which have for
their end living or reward; it is not commonly used as descriptive of
charitable, religious, educational or social agencies" or "any particular
occupation or employment habitually engaged in especially for
livelihood or gain" or "activities where profit is the purpose or
livelihood is the motive." (Collector of Internal Revenue vs. Manila
Lodge BPOE 105 Phil. 986).
The fact that petitioner was assessed a real estate dealer's fixed tax
of P640 on its rental income does not alter its status as a charitable,
non-stock, non-profit corporation.
WHEREFORE, finding no reversible error in the decision of the Court
of Tax Appeals, the same is affirmed in toto. Costs against the
petitioner. This decision is immediately executory.
SO ORDERED.
Narvasa, Cruz and Medialdea, JJ., concur.

SUPREME COURT
Manila
EN BANC
G.R. No. L-15290
May 31, 1963
MARIANO ZAMORA, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE and COURT OF TAX
----------------------------G.R. No. L-15280
May 31, 1963
COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
MARIANO ZAMORA, respondent.
----------------------------G.R. No. L-15289
May 31, 1963
ESPERANZA A. ZAMORA, as Special Administratrix of Estate

of FELICIDAD ZAMORA, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE and COURT OF TAX
----------------------------G.R. No. L-15281
May 31, 1963

vs.
ESPERANZA A. ZAMORA, as Special Administratrix,

etc. respondent.
Office of the Solicitor General for petitioner.
Rodegelio M. Jalandoni for respondents.
PAREDES, J.:
In the above-entitled cases, a joint decision was rendered by the
lower court because they involved practically the same issues. We
do so, likewise, for the same reason.
Cases Nos. L-15290 and L-15280
Mariano Zamora, owner of the Bay View Hotel and Farmacia
Zamora, Manila, filed his income tax returns the years 1951 and
1952. The Collector of Internal Revenue found that he failed to file
his return of the capital gains derived from the sale of certain real
properties and claimed deductions which were not allowable. The
collector required him to pay the sums of P43,758.50 and
P7,625.00, as deficiency income tax for the years 1951 and 1952,
respectively (C.T.A. Case No. 234, now L-15290). On appeal by
Zamora, the Court of Tax Appeals on December 29, 1958,
modified the decision appealed from and ordered him to pay the
reduced total sum of P30,258.00 (P22,980.00 and P7,278.00, as
deficiency income tax for the years 1951 and 1952, respectively),
within thirty (30) days from the date the decision becomes final,
plus the corresponding surcharges and interest in case of
delinquency, pursuant to section 51(e), Int. Revenue Code. With
costs against petitioner.
Having failed to obtain a reconsideration of the decision, Mariano
Zamora appealed (L-15290), alleging that the Court of Tax
Appeals erred
(1) In dissallowing P10,478.50, as promotion expenses
incurred by his wife for the promotion of the Bay View Hotel
and Farmacia Zamora (which is of P20,957.00, supposed

business expenses):
(2) In disallowing 3-% per annum as the rate of depreciation
of the Bay View Hotel Building;
(3) In disregarding the price stated in the deed of sale, as the
costs of a Manila property, for the purpose of determining
alleged capital gains; and
(4) In applying the Ballantyne scale of values in determining
the cost of said property.
The Collector of Internal Revenue (L-15280) also appealed,

claiming that the Court of Tax Appeals erred
(1) In giving credence to the uncorroborated testimony of
Mariano Zamora that he bought the said real property in
question during the Japanese occupation, partly in Philippine
currency and partly in Japanese war notes, and
(2) In not holding that Mariano Zamora is liable for the
payment of the sums of P43,758.00 and P7,625.00 as
deficiency income taxes, for the years 1951 and 1952, plus
the 5% surcharge and 1% monthly interest, from the date said
amounts became due to the date of actual payment.
Wherefore, the parties respectfully pray that the foregoing
stipulation of facts be admitted and approved by this
Honorable Court, without prejudice to the parties adducing
other evidence to prove their case not covered by this
stipulation of facts.
1wph1.t
Cases Nos. L-15289 and L-15281

Mariano Zamora and his deceased sister Felicidad Zamora,
bought a piece of land located in Manila on May 16, 1944, for
P132,000.00 and sold it for P75,000.00 on March 5, 1951. They
also purchased a lot located in Quezon City for P68,959.00 on

January 19, 1944, which they sold for P94,000 on February 9,
1951. The CTA ordered the estate of the late Felicidad Zamora
(represented by Esperanza A. Zamora, as special administratrix of
her estate), to pay the sum of P235.50, representing alleged
deficiency income tax and surcharge due from said estate.
Esperanza A. Zamora appealed and alleged that the CTA erred:
The Commissioner of Internal Revenue likewise appealed from
the decision, claiming that the lower court erred:
(1) In giving credence to the uncorroborated testimony of
Mariano Zamora that he bought the real property involved
during the Japanese occupation, partly in genuine Philippine
currency and partly in Japanese war notes; and
(2) In not holding that Esperanza A. Zamora, as
administratrix, is liable for the payment of the sum of P613.00
as deficiency income tax and 50% surcharge for 1951, plus
50% surcharge and 1% monthly interest from the date said
amount became due, to the date of actual payment.
It is alleged by Mariano Zamora that the CTA erred in disallowing

P10,478.50 as promotion expenses incurred by his wife for the
promotion of the Bay View Hotel and Farmacia Zamora. He
contends that the whole amount of P20,957.00 as promotion
expenses in his 1951 income tax returns, should be allowed and
not merely one-half of it or P10,478.50, on the ground that, while
not all the itemized expenses are supported by receipts, the
absence of some supporting receipts has been sufficiently and
satisfactorily established. For, as alleged, the said amount of
P20,957.00 was spent by Mrs. Esperanza A. Zamora (wife of
Mariano), during her travel to Japan and the United States to
purchase machinery for a new Tiki-Tiki plant, and to observe hotel
management in modern hotels. The CTA, however, found that for
said trip Mrs. Zamora obtained only the sum of P5,000.00 from the
Central Bank and that in her application for dollar allocation, she
stated that she was going abroad on a combined medical and

business trip, which facts were not denied by Mariano Zamora. No
evidence had been submitted as to where Mariano had obtained
the amount in excess of P5,000.00 given to his wife which she
spent abroad. No explanation had been made either that the
statement contained in Mrs. Zamora's application for dollar
allocation that she was going abroad on a combined medical and
business trip, was not correct. The alleged expenses were not
supported by receipts. Mrs. Zamora could not even remember
how much money she had when she left abroad in 1951, and how
the alleged amount of P20,957.00 was spent.
Section 30, of the Tax Code, provides that in computing net
income, there shall be allowed as deductions all the ordinary and
necessary expenses paid or incurred during the taxable year, in
carrying on any trade or business (Vol. 4, Mertens, Law of Federal
Income Taxation, sec. 25.03, p. 307). Since promotion expenses
constitute one of the deductions in conducting a business, same
must testify these requirements. Claim for the deduction of
promotion expenses or entertainment expenses must also be
substantiated or supported by record showing in detail the amount
and nature of the expenses incurred (N.H. Van Socklan, Jr. v.
Comm. of Int. Rev.; 33 BTA 544). Considering, as heretofore
stated, that the application of Mrs. Zamora for dollar allocation
shows that she went abroad on a combined medical and business
trip, not all of her expenses came under the category of ordinary
and necessary expenses; part thereof constituted her personal
expenses. There having been no means by which to ascertain
which expense was incurred by her in connection with the
business of Mariano Zamora and which was incurred for her
personal benefit, the Collector and the CTA in their decisions,
considered 50% of the said amount of P20,957.00 as business
expenses and the other 50%, as her personal expenses. We hold
that said allocation is very fair to Mariano Zamora, there having
been no receipt whatsoever, submitted to explain the alleged
business expenses, or proof of the connection which said
expenses had to the business or the reasonableness of the said
amount of P20,957.00. While in situations like the present,

absolute certainty is usually no possible, the CTA should make as
close an approximation as it can, bearing heavily, if it chooses,
upon the taxpayer whose inexactness is of his own making.
In the case of Visayan Cebu Terminal Co., Inc. v. Collector of Int.
Rev., G.R. No. L-12798, May 30, 1960, it was declared that
representation expenses fall under the category of business
expenses which are allowable deductions from gross income, if
they meet the conditions prescribed by law, particularly section 30
(a) [1], of the Tax Code; that to be deductible, said business
expenses must be ordinary and necessary expenses paid or
incurred in carrying on any trade or business; that those expenses
must also meet the further test of reasonableness in amount; that
when some of the representation expenses claimed by the
taxpayer were evidenced by vouchers or chits, but others were
without vouchers or chits, documents or supporting papers; that
there is no more than oral proof to the effect that payments have
been made for representation expenses allegedly made by the
taxpayer and about the general nature of such alleged expenses;
that accordingly, it is not possible to determine the actual amount
covered by supporting papers and the amount without supporting
papers, the court should determine from all available data, the
amount properly deductible as representation expenses.
In view hereof, We are of the opinion that the CTA, did not commit
error in allowing as promotion expenses of Mrs. Zamora claimed
in Mariano Zamora's 1951 income tax returns, merely one-half or
P10,478.50.
Petitioner Mariano Zamora alleges that the CTA erred in
disallowing 3-% per annum as the rate of depreciation of the
Bay View Hotel Building but only 2-%. In justifying depreciation
deduction of 3-%, Mariano Zamora contends that (1) the Ermita
District, where the Bay View Hotel is located, is now becoming a
commercial district; (2) the hotel has no room for improvement;
and (3) the changing modes in architecture, styles of furniture and
decorative designs, "must meet the taste of a fickle public". It is a

fact, however, that the CTA, in estimating the reasonable rate of
depreciation allowance for hotels made of concrete and steel at 2%, the three factors just mentioned had been taken into account
already. Said the CTA
Normally, an average hotel building is estimated to have a
useful life of 50 years, but inasmuch as the useful life of the
building for business purposes depends to a large extent on
the suitability of the structure to its use and location, its
architectural quality, the rate of change in population, the
shifting of land values, as well as the extent and maintenance
and rehabilitation. It is allowed a depreciation rate of 2-%
corresponding to a normal useful life of only 40 years (1955
PH Federal Taxes, Par 14 160-K). Consequently, the stand of
the petitioners can not be sustained.
As the lower court based its findings on Bulletin F, petitioner

Zamora, argues that the same should have been first proved as a
law, to be subject to judicial notice. Bulletin F, is a publication of
the US Federal Internal Revenue Service, which was made after a
study of the lives of the properties. In the words of the lower court:
"It contains the list of depreciable assets, the estimated average
useful lives thereof and the rates of depreciation allowable for
each kind of property. (See 1955 PH Federal Taxes, Par. 14, 160
to Par. 14, 163-0). It is true that Bulletin F has no binding force,
but it has a strong persuasive effect considering that the same has
been the result of scientific studies and observation for a long
period in the United States after whose Income Tax Law ours is
patterned." Verily, courts are permitted to look into and investigate
the antecedents or the legislative history of the statutes involved
(Director of Lands v. Abaya, et al., 63 Phil. 559). Zamora also
contends that his basis for applying the 3-% rate is the testimony
of its witness Mariano Katipunan, who cited a book entitled "Hotel
Management Principles and Practice" by Lucius Boomer,
President, Hotel Waldorf Astoria Corporation. As well commented
by the Solicitor General, "while the petitioner would deny us the
right to use Bulletin F, he would insist on using as authority, a book

in Hotel management written by a man who knew more about
hotels than about taxation. All that the witness did (Katipunan) . . .
is to read excerpts from the said book (t.s.n. pp. 99-101), which
admittedly were based on the decision of the U.S. Tax Courts,
made in 1928 (t.s.n. p. 106)". In view hereof, We hold that the 2-
% rate of depreciation of the Bay View Hotel building, is
approximately correct.
The next items in dispute are the undeclared capital gains derived
from the sales in 1951 of certain real properties in Malate, Manila
and in Quezon City, acquired during the Japanese occupation.
The Manila property (Esperanza Zamora v. Coll. of Int. Rev., Case
No. L-15289). The CTA held in this case, that the cost basis of
property acquired in Japanese war notes is the equivalent of the
war notes in genuine Philippine currency in accordance with the
Ballantyne Scale of values, and that the determination of the gain
derived or loss sustained in the sale of such property is not
affected by the decline at the time of sale, in the purchasing power
of the Philippine currency. It was found by the CTA that the
purchase price of P132,000.00 was not entirely paid in Japanese
War notes but thereof or P66,000.00 was in Philippine currency,
and that during certain periods of the enemy occupation, the value
of the Japanese war notes was very much less than the value of
the genuine Philippine currency. On this point, the CTA declared
Finally, it is alleged that the purchase price of P132,000.00

was not entirely paid in Japanese war notes, Mariano
Zamora, co-owner of the property in question, testified that
P66,000.00 was paid in Philippine currency and the other
P66,000.00 was paid in Japanese war notes. No evidence
was presented by respondent to rebut the testimony of
Mariano Zamora; it is assailed merely as being improbable.
We have examined this question thoroughly and we are
inclined to give credence to the allegation that a portion of the
purchase price of the property was paid in Philippine money.

In the first place, it appears that the Zamoras owned the
Farmacia Zamora which continued to engage in business
during the war years and that a considerable portion of its
sales was paid for in genuine Philippine currency. This
circumstance enabled the Zamoras to accumulate Philippine
money which they used in acquiring the property in question
and another property in Quezon City. In the second place,
P132,000.00 in Japanese war notes in May, 1944 is
equivalent to only P11,000.00. The property in question had
at the time an assessed value of P27,031.00 (in Philippine
currency). Considering the well known fact that the assessed
value of real property is very much below the fair market
value, it is incredible that said property should have been sold
by the owner thereof for less than one-half of its assessed
value. These facts have convinced us of the veracity of the
allegation that of the purchase price of P132,000.00 the sum
of P66,000.00 was paid in Philippine currency, so that only
the sum of P66,000.00 was paid in Japanese War notes.
This being the case, the Ballantyne Scale of values, which was
the result of an impartial scientific study, adopted and given
judicial recognition, should be applied. As the value of the
Japanese war notes in May, 1944 when the Manila property was
bought, was 1 of the genuine Philippine Peso (Ballantyne
Scale), and since the gain derived or loss sustained in the
disposition of this property is to reckoned in terms of Philippine
Peso, the value of the Japanese war notes used in the purchase
of the property, must be reduced in terms of the genuine Philippine
Peso to determine the cost of acquisition. It, therefore, results that
since the sum of P66,000.00 in Japanese war notes in May, 1944
is equivalent to P5,500.00 in Philippine currency (P66,000.00
divided by 12), the acquisition cost of the property in question is
P66,000.00 plus P5,500.00 or P71,500.00 and that as the
property was sold for P75,000.00 in 1951, the owners thereof
Mariano and Felicidad Zamora derived a capital gain of P3,500.00
or P1,750.00 each.
The Quezon City Property (Mariano Zamora v. Coll. of Customs,

Case No. 15290). The Zamoras alleged that the entire purchase
price of P68,959.00 was paid in Philippine currency. The collector,
on the other hand, contends that the purchase price of P68,959.00
was paid in Japanese war notes. The CTA, however, giving
credence to Zamora's version, said
. . . If , as contended by respondent, the purchase price of
P68,959.00 was paid in Japanese war notes, the purchase
price in Philippine currency would be only P17,239.75
(P68,959.00 divided by 4, 34.00 in war notes being equivalent
to P1.00 in Philippine currency). The assessed value of said
property in Philippine currency at the time of acquisition was
P46,910.00. It is quite incredible that real property with an
assessed value of P46,910.00 should have been sold by the
owner thereof in Japanese war notes with an equivalent value
in Philippine currency of only P17,239.75. We are more
inclined to believe the allegation that it was purchased
for P68,959.00 in genuine Philippine currency. Since the
property was sold for P94,000.00 on February 9, 1951, the
gain derived from the sale is P15,361.75, after deducting from
the selling price the cost of acquisition in the sum of
P68,959.00 and the expense of sale in the sum of P9,679.25.
The above appraisal is correct, and We have no plausible reason

to disturb the same.
Consequently, the total undeclared income of petitioners derived
from the sales of the Manila and Quezon City properties in 1951 is
P17,111.75 (P1,750.00 plus P15,361.75), 50% of which in the sum
of P8,555.88 is taxable, the said properties being capital assets
held for more than one year.
IN VIEW HEREOF, the petition in each of the above-entitled cases
is dismissed, and the decision appealed from is affirmed, without
special pronouncement as to costs.

SUPREME COURT
Manila
EN BANC
G.R. No. L-13325
April 20, 1961
SANTIAGO GANCAYCO, petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent.
Benjamin J. Molina for petitioner.
Office of the Solicitor General and Special Attorney Antonio A.
Garces for respondent.
CONCEPCION, J.:
Petitioner Santiago Gancayco seeks the review of a decision of
the Court of Tax Appeals, requiring him to pay P16,860.31, plus
surcharge and interest, by way of deficiency income tax for the
year 1949.
On May 10, 1950, Gancayco filed his income tax return for the
year 1949. Two (2) days later, respondent Collector of Internal
Revenue issued the corresponding notice advising him that his
income tax liability for that year amounted P9,793.62, which he
paid on May 15, 1950. A year later, on May 14, 1951, respondent
wrote the communication Exhibit C, notifying Gancayco, inter alia,
that, upon investigation, there was still due from him, a efficiency
income tax for the year 1949, the sum of P29,554.05. Gancayco
sought a reconsideration, which was part granted by respondent,
who in a letter dated April 8, 1953 (Exhibit D), informed petitioner
that his income tax defendant efficiency for 1949 amounted to
P16,860.31. Gancayco urged another reconsideration (Exhibit O),
but no action taken on this request, although he had sent several
communications calling respondent's attention thereto.
On April 15, 1956, respondent issued a warrant of distraint and

levy against the properties of Gancayco for the satisfaction of his
deficiency income tax liability, and accordingly, the municipal
treasurer of Catanauan, Quezon issued on May 29, 1956, a notice
of sale of said property at public auction on June 19, 1956. Upon
petition of Gancayco filed on June 16, 1956, the Court of Tax
Appeal issued a resolution ordering the cancellation of the sale
and directing that the same be readvertised at a future date, in
accordance with the procedure established by the National
Internal Revenue Code. Subsequently, or on June 22, 1956,
Gancayco filed an amended petition praying that said Court:
(a) Issue a writ of preliminary injunction, enjoining the
respondents from enforcing the collection of the alleged tax
liability due from the petitioner through summary proceeding
pending determination of the present case;
(b) After a review of the present case adjudge that the right of
the government to enforce collection of any liability due on
this account had already prescribed;
(c) That even assuming that prescription had not set in the
objections of petitioner to the disallowance of the
entertainment, representation and farming expenses be
allowed;
xxx
xxx
xxx
In his answer respondent admitted some allegations the amended

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

decision adverted to above.
Gancayco maintains that the right to collect the deficiency income
tax in question is barred by the statute of limitations. In this
connection, it should be noted, however, that there are two (2) civil
remedies for the collection of internal revenue taxes, namely: (a)
by distraint of personal property and levy upon real property; and
(b) by "judicial action" (Commonwealth Act 456, section 316). The
first may not be availed of except within three (3) years after the
"return is due or has been made ..." (Tax Code, section 51 [d] ).
After the expiration of said Period, income taxes may not be
legally and validly collected by distraint and/or levy (Collector of
Internal Revenue v. Avelino, L-9202, November 19, 1956;
Collector of Internal Revenue v. Reyes, L-8685, January 31, 1957;
Collector of Internal Revenue v. Zulueta, L-8840, February 8,
1957; Sambrano v. Court of Tax Appeals, L-8652, March 30,
1957). Gancayco's income tax return for 1949 was filed on May
10, 1950; so that the warrant of distraint and levy issued on May
15, 1956, long after the expiration of said three-year period, was
illegal and void, and so was the attempt to sell his properties in
pursuance of said warrant.
The "judicial action" mentioned in the Tax Code may be resorted
to within five (5) years from the date the return has been filed, if
there has been no assessment, or within five (5) years from the
date of the assessment made within the statutory period, or within
the period agreed upon, in writing, by the Collector of Internal
Revenue and the taxpayer. before the expiration of said five-year
period, or within such extension of said stipulated period as may
have been agreed upon, in writing, made before the expiration of
the period previously situated, except that in the case of a false or
fraudulent return with intent to evade tax or of a failure to file a
return, the judicial action may be begun at any time within ten (10)
years after the discovery of the falsity, fraud or omission (Sections
331 and 332 of the Tax Code). In the case at bar, respondent
made three (3) assessments: (a) the original assessment of
P9,793.62, made on May 12, 1950; (b) the first deficiency income
tax assessment of May 14, 1951, for P29,554.05; and (c) the
amended deficiency income tax assessment of April 8, 1953, for
P16,860.31.
Gancayco argues that the five-year period for the judicial action
should be counted from May 12, 1950, the date of the original
assessment, because the income tax for 1949, he says, could
have been collected from him since then. Said assessment was,
however, not for the deficiency income tax involved in this
proceedings, but for P9,793.62, which he paid forthwith. Hence,
there never had been any cause for a judicial action against him,
and, per force, no statute of limitations to speak of, in connection
with said sum of P9,793.62.
Neither could said statute have begun to run from May 14, 1951,
the date of the first deficiency income tax assessment or
P29,554.05, because the same was, upon Gancayco's request,
reconsidered or modified by the assessment made on April 8,
1953, for P16,860.31. Indeed, this last assessment is what
Gancayco contested in the amended petition filed by him with the
Court of Tax Appeals. The amount involved in such assessment
which Gancayco refused to pay and respondent tried to collect by
warrant of distraint and/or levy, is the one in issue between the
parties. Hence, the five-year period aforementioned should be
counted from April 8, 1953, so that the statute of limitations does
not bar the present proceedings, instituted on April 12, 1956, if the
same is a judicial action, as contemplated in section 316 of the
Tax Code, which petitioner denies, upon the ground that
a. "The Court of Tax Appeals does not have original
jurisdiction to entertain an action for the collection of the tax
due;
b. "The proper party to commence the judicial action to collect
the tax due is the government, and
c. "The remedies provided by law for the collection of the tax

are exclusive."
Said Section 316 provides:

The civil remedies for the collection of internal revenue taxes,
fees, or charges, and any increment thereto resulting from
delinquency shall be (a) by distraint of goods, chattels, or
effects, and other personal property of whatever character,
including stocks and other securities, debts, credits, bank
accounts, and interest in and rights to personal property, and
by levy upon real property; and (b) by judicial action. Either of
these remedies or both simultaneously may be pursued in the
discretion of the authorities charged with the collection of
such taxes.
No exemption shall be allowed against the internal revenue
taxes in any case.
Petitioner contends that the judicial action referred to in this

provision is commenced by filing, with a court of first instance, of a
complaint for the collection of taxes. This was true at the time of
the approval of Commonwealth Act No. 456, on June 15, 1939.
However, Republic Act No. 1125 has vested the Court of Tax
Appeals, not only with exclusive appellate jurisdiction to review
decisions of the Collector (now Commissioner) of Internal
Revenue in cases involving disputed assessments, like the one at
bar, but, also, with authority to decide "all cases involving disputed
assessments of Internal Revenue taxes or customs duties
pending determination before the court of first instance" at the
time of the approval of said Act, on June 16, 1954 (Section 22,
Republic Act No. 1125). Moreover, this jurisdiction to decide all
cases involving disputed assessments of internal revenue taxes
and customs duties necessarily implies the power to authorize and
sanction the collection of the taxes and duties involved in such
assessments as may be upheld by the Court of Tax Appeals. At
any rate, the same now has the authority formerly vested in courts
of first instance to hear and decide cases involving disputed
assessments of internal revenue taxes and customs duties.

Inasmuch as those cases filed with courts of first instance
constituted judicial actions, such is, likewise, the nature of the
proceedings before the Court of Tax Appeals, insofar as sections
316 and 332 of the Tax Code are concerned.
The question whether the sum of P16,860.31 is due from
Gancayco as deficiency income tax for 1949 hinges on the validity
of his claim for deduction of two (2) items, namely: (a) for farming
expenses, P27,459.00; and (b) for representation expenses,
P8,933.45.
Section 30 of the Tax Code partly reads:
(a) Expenses:
(1) In General All the ordinary and necessary expenses
paid or incurred during the taxable year incarrying on any
trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually
rendered; traveling expenses while away from home in the
pursuit of a trade or business; and rentals or other payments
required to be made as a condition to the continued use or
possession, for the purposes of the trade or business, of
property to which the taxpayer has not taken or is not taking
title or in which he has no equity. (Emphasis supplied.)
Referring to the item of P27,459, for farming expenses allegedly

incurred by Gancayco, the decision appealed from has the
following to say:
No evidence has been presented as to the nature of the said
"farming expenses" other than the bare statement of
petitioner that they were spent for the "development and
cultivation of (his) property". No specification has been made
as to the actual amount spent for purchase of tools,
equipment or materials, or the amount spent for improvement.
Respondent claims that the entire amount was spent
exclusively forclearing and developing the farm which

were necessary to place it in a productive state. It is not,
therefore, an ordinary expense but a capitol expenditure.
Accordingly, it is not deductible but it may be amortized, in
accordance with section 75 of Revenue Regulations No. 2,
cited above. See also, section 31 of the Revenue Code which
provides that in computing net income, no deduction shall in
any case be allowed in respect of any amount paid out
for new buildings or for permanent improvements,
orbetterments made to increase the value of any property or
estate. (Emphasis supplied.)
We concur in this view, which is a necessary consequence of

section 31 of the Tax Code, pursuant to which:
(a) General Rule In computing net income no deduction
shall in any case be allowed in respect of
(1) Personal, living, or family expenses;
(2) Any amount paid out for new buildings or for permanent
improvements, or betterments made toincrease the value of
any property or estate;
(3) Any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance is or has
been made; or
(4) Premiums paid on any life insurance policy covering the
life of any officer or employee, or any person financially
interested in any trade or business carried on by the taxpayer,
individual or corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy. (Emphasis
supplied.)
Said view is, likewise, in accord with the consensus of the

authorities on the subject.
Expenses incident to the acquisition of property follow the

same rule as applied to payments made as direct
consideration for the property. For example, commission paid
in acquiring property are considered as representing part of
the cost of the property acquired. The same treatment is to be
accorded to amounts expended for maps, abstracts, legal
opinions on titles, recording fees and surveys. Other nondeductible expenses include amounts paid in connection with
geological explorations, development and subdividing of real
estate; clearing and grading; restoration of soil, drilling wells,
architects's fees and similar types of expenditures. (4
Merten's Law of Federal Income Taxation, Sec. 25.20, pp.
348-349; see also sec. 75 of the income Regulation of the
B.I.R.; Emphasis supplied.)
The cost of farm machinery, equipment and farm building
represents a capital investment and is not an allowable
deduction as an item of expense. Amounts expended in
the development of farms, orchards, and ranches prior to the
time when the productive state is reached may be regarded
as investments of capital. (Merten's Law of Federal Income
Taxation, supra, sec. 25.108, p. 525.)
Expenses for clearing off and grading lots acquired is
a capital expenditure, representing part of the cost of the land
and was not deductible as an expense. (Liberty Banking Co.
v. Heiner 37 F [2d] 703 [8AFTR 100111] [CCA 3rd]; The B.L.
Marble Chair Company v. U.S., 15 AFTR 746).
An item of expenditure, in order to be deductible under this
section of the statute providing for the deduction
of ordinary and necessary business expenses, must
fall squarely within the language of the statutory provision.
This section is intended primarily, although not always
necessarily, to cover expenditures of a recurring nature where
the benefit derived from the payment is realized and
exhausted within the taxable year. Accordingly, if the result of
the expenditure is the acquisition of an asset which has an
economically useful life beyond the taxable year,

no deduction of such payment may be obtained under the
provisions of the statute. In such cases, to the extent that a
deduction is allowable, it must be obtained under the
provisions of the statute which permit deductions for
amortization, depreciation, depletion or loss. (W.B. Harbeson
Co. 24 BTA, 542; Clark Thread Co., 28 BTA 1128 aff'd 100 F
[2d] 257 [CCA 3rd, 1938]; 4 Merten's Law of Federal Income
Taxation, Sec. 25.17, pp. 337-338.)
Gancayco's claim for representation expenses aggregated

P31,753.97, of which P22,820.52 was allowed, and P8,933.45
disallowed. Such disallowance is justified by the record, for, apart
from the absence of receipts, invoices or vouchers of the
expenditures in question, petitioner could not specify the items
constituting the same, or when or on whom or on what they were
incurred. The case of Cohan v. Commissioner, 39 F (2d) 540, cited
by petitioner is not in point, because in that case there was
evidence on the amounts spent and the persons entertained and
the necessity of entertaining them, although there were no
receipts an vouchers of the expenditures involved therein. Such is
not the case of petitioner herein.
Being in accordance with the facts and law, the decision of the
Court of Tax Appeals is hereby affirmed therefore, with costs
against petitioner Santiago Cancayco. It is so ordered.
Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera and
Dizon, JJ., concur.

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-26911 January 27, 1981
ATLAS CONSOLIDATED MINING & DEVELOPMENT
CORPORATION, petitioner,
vs.
G.R. No. L-26924 January 27, 1981
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CORPORATION and COURT OF TAX APPEALS,respondents.
DE CASTRO, J.:
These are two (2) petitions for review from the decision of the Court
of Tax Appeals of October 25, 1966 in CTA Case No. 1312 entitled
"Atlas Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue." One (L-26911) was filed by the
Atlas Consolidated Mining & Development Corporation, and in the
other L-26924), the Commissioner of Internal Revenue is the
petitioner.
This tax case (CTA No. 1312) arose from the 1957 and 1958
deficiency income tax assessments made by the Commissioner of
Internal Revenue, hereinafter referred to as Commissioner, where the
Atlas Consolidated Mining and Development Corporation, hereinafter
referred to as Atlas, was assessed P546,295.16 for 1957 and
P215,493.96 for 1958 deficiency income taxes.
Atlas is a corporation engaged in the mining industry registered

under the laws of the Philippines. On August 20, 1962, the
Commissioner assessed against Atlas the sum of P546,295.16
and P215,493.96 or a total of P761,789.12 as deficiency income

taxes for the years 1957 and 1958. For the year 1957, it was the
opinion of the Commissioner that Atlas is not entitled to exemption
from the income tax under Section 4 of Republic Act 9091 because
same covers only gold mines, the provision of which reads:
New mines, and old mines which resume operation,
when certified to as such by the Secretary of
Agriculture and Natural Resources upon the
recommendation of the Director of Mines, shall be
exempt from the payment of income tax during the
first three (3) years of actual commercial production.
Provided that, any such mine and/or mines making a
complete return of its capital investment at any time
within the said period, shall pay income tax from that
year.
For the year 1958, the assessment of deficiency income tax of
P761,789.12 covers the disallowance of items claimed by Atlas as
deductible from gross income.
On October 9, 1962, Atlas protested the assessment asking for its

reconsideration and cancellation. 2 Acting on the protest, the
Commissioner conducted a reinvestigation of the case.
On October 25, 1962, the Secretary of Finance ruled that the
exemption provided in Republic Act 909 embraces all new mines
and old mines whether gold or other minerals. 3 Accordingly, the
Commissioner recomputed Atlas deficiency income tax liabilities in
the light of the ruling of the Secretary of Finance. On June 9,
1964, the Commissioner issued a revised assessment entirely
eliminating the assessment of P546,295.16 for the year 1957. The
assessment for 1958 was reduced from P215,493.96 to
P39,646.82 from which Atlas appealed to the Court of Tax
Appeals, assailing the disallowance of the following items claimed
as deductible from its gross income for 1958:
Transfer agent's
fee.........................................................P59,477.42
Stockholders relation service
fee....................................25,523.14
U.S. stock listing
expenses..................................................8,326.70
Suit
expenses......................................................................
....6,666.65
Provision for
contingencies..................................... .........60,000.00
Total......................................................
..............P159,993.91
After hearing, the Court of Tax Appeals rendered a decision on

October 25, 1966 allowing the above mentioned disallowed items,
except the items denominated by Atlas as stockholders relation
service fee and suit expenses. 4Pertinent portions of the decision
of the Court of Tax Appeals read as follows:
Under the facts, circumstances and applicable law in
this case, the unallowable deduction from petitioner's
gross income in 1958 amounted to P32,189.79.
fee.................................... P25,523.14
Suit and litigation
expenses................................................ 6,666.65
Total..............................................................................
..... P32,189.79
As the exemption of petitioner from the payment of

corporate income tax under Section 4, Republic Act
909, was good only up to the Ist quarter of 1958
ending on March 31 of the same year, only threefourth (3/4) of the net taxable income of petitioner is
subject to income tax, computed as follows:
1958
Total net income for
1958.................................P1,968,898.27
Net income corresponding to
taxable period April 1 to
Dec. 31, 1958, 3/4 of
P1,968,898.27..........................................................1,
476,673.70
Add: 3/4 of promotion fees
of
P25,523.14..............................................................P1
9,142.35
Litigation
expenses......................................................................
...6, 666.65
Net income per decision..........................................11,
02,4 2.70
Tax due
thereon.........................................................412,695.0
0
Less: Amount already

assessed .............................405,468.00
DEFICIENCY INCOME TAX
DUE............................P7,227.00
Add: 1/2 % monthly interest
from 6-20-59 to 6-20-62
(18%)....................................P1,300.89
TOTAL AMOUNT DUE &
COLLECTIBLE............P8,526.22
From the Court of Tax Appeals' decision of October 25, 1966, both
parties appealed to this Court by way of two (2) separate petitions for
review docketed as G. R. No. L-26911 (Atlas, petitioner) and G. R.
No. L-29924 (Commissioner, petitioner).
G. R. No. L-26911Atlas appealed only that portion of the Court of
Tax Appeals' decision disallowing the deduction from gross income of
the so-called stockholders relation service fee amounting to
P25,523.14, making a lone assignment of error that
THE COURT OF TAX APPEALS ERRED IN ITS
CONCLUSION THAT THE EXPENSE IN THE
AMOUNT OF P25,523.14 PAID BY PETITIONER IN
1958 AS ANNUAL PUBLIC RELATIONS EXPENSES
WAS INCURRED FOR ACQUISITION OF
ADDITIONAL CAPITAL, THE SAME NOT BEING
SUPPORTED BY THE EVIDENCE.
It is the contention of Atlas that the amount of P25,523.14 paid in

1958 as annual public relations expenses is a deductible expense
from gross income under Section 30 (a) (1) of the National Internal
Revenue Code. Atlas claimed that it was paid for services of a
public relations firm, P.K Macker & Co., a reputable public
relations consultant in New York City, U.S.A., hence, an ordinary
and necessary business expense in order to compete with other

corporations also interested in the investment market in the United
States. 5 It is the stand of Atlas that information given out to the
public in general and to the stockholder in particular by the P.K
MacKer & Co. concerning the operation of the Atlas was aimed at
creating a favorable image and goodwill to gain or maintain their
patronage.
The decisive question, therefore, in this particular appeal taken by
Atlas to this Court is whether or not the expenses paid for the
services rendered by a public relations firm P.K MacKer & Co.
labelled as stockholders relation service fee is an allowable deduction
as business expense under Section 30 (a) (1) of the National Internal
Revenue Code.
The principle is recognized 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. As previously adverted to, the
law allowing expenses as deduction from gross income for purposes
of the income tax is Section 30 (a) (1) of the National Internal
Revenue which allows a deduction of "all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any
trade or business." An item of expenditure, in order to be deductible
under this section of the statute, must fall squarely within its
language.
We come, then, to the statutory test of deductibility where it is

axiomatic that to be deductible as a business expense, three
conditions are imposed, namely: (1) the expense must be ordinary
and necessary, (2) it must be paid or incurred within the taxable
year, and (3) it must be paid or incurred in carrying in a trade or
business. 6 In addition, not only must the taxpayer meet the
business test, he must substantially prove by evidence or records
the deductions claimed under the law, otherwise, the same will be
disallowed. The mere allegation of the taxpayer that an item of
expense is ordinary and necessary does not justify its deduction. 7
While it is true that there is a number of decisions in the United

States delving on the interpretation of the terms "ordinary and
necessary" as used in the federal tax laws, no adequate or
satisfactory definition of those terms is possible. Similarly, this
Court has never attempted to define with precision the terms
"ordinary and necessary." There are however, certain guiding
principles worthy of serious consideration in the proper
adjudication of conflicting claims. Ordinarily, an expense will be
considered "necessary" where the expenditure is appropriate and
helpful in the development of the taxpayer's business. 8 It is
"ordinary" when it connotes a payment which is normal in relation
to the business of the taxpayer and the surrounding
circumstances. 9 The term "ordinary" does not require that the
payments be habitual or normal in the sense that the same
taxpayer will have to make them often; the payment may be
unique or non-recurring to the particular taxpayer affected. 10
There is thus no hard and fast rule on the matter. The right to a
deduction depends in each case on the particular facts and the
relation of the payment to the type of business in which the
taxpayer is engaged. The intention of the taxpayer often may be
the controlling fact in making the determination. 11 Assuming that
the expenditure is ordinary and necessary in the operation of the
taxpayer's business, the answer to the question as to whether the
expenditure is an allowable deduction as a business expense
must be determined from the nature of the expenditure itself,
which in turn depends on the extent and permanency of the work
accomplished by the expenditure. 12
It appears that on December 27, 1957, Atlas increased its capital
stock from P15,000,000 to P18,325,000. 13 It was claimed by Atlas
that its shares of stock worth P3,325,000 were sold in the United
States because of the services rendered by the public relations
firm, P. K. Macker & Company. The Court of Tax Appeals ruled that
the information about Atlas given out and played up in the mass
communication media resulted in full subscription of the additional
shares issued by Atlas; consequently, the questioned item,
stockholders relation service fee, was in effect spent for the

acquisition of additional capital, ergo, a capital expenditure.
We sustain the ruling of the tax court that the expenditure of
P25,523.14 paid to P.K. Macker & Co. as compensation for
services carrying on the selling campaign in an effort to sell Atlas'
additional capital stock of P3,325,000 is not an ordinary expense
in line with the decision of U.S. Board of Tax Appeals in the case
ofHarrisburg Hospital Inc. vs. Commissioner of Internal
Revenue. 14 Accordingly, as found by the Court of Tax Appeals, the
said expense is not deductible from Atlas gross income in 1958
because expenses relating to recapitalization and reorganization
of the corporation (Missouri-Kansas Pipe Line vs. Commissioner
of Internal Revenue, 148 F. (2d), 460; Skenandos Rayon Corp. vs.
Commissioner of Internal Revenue, 122 F. (2d) 268, Cert. denied
314 U.S. 6961), the cost of obtaining stock subscription (Simons
Co., 8 BTA 631), promotion expenses (Beneficial Industrial Loan
Corp. vs. Handy, 92 F. (2d) 74), and commission or fees paid for
the sale of stock reorganization (Protective Finance Corp., 23 BTA
308) are capital expenditures.
That the expense in question was incurred to create a favorable
image of the corporation in order to gain or maintain the public's
and its stockholders' patronage, does not make it deductible as
business expense. As held in the case of Welch vs.
Helvering, 15 efforts to establish reputation are akin to acquisition
of capital assets and, therefore, expenses related thereto are not
business expense but capital expenditures.
We do not agree with the contention of Atlas that the conclusion of
the Court of Tax Appeals in holding that the expense of
P25,523.14 was incurred for acquisition of additional capital is not
supported by the evidence. The burden of proof that the expenses
incurred are ordinary and necessary is on the taxpayer 16 and does
not rest upon the Government. To avail of the claimed deduction
under Section 30(a) (1) of the National Internal Revenue Code, it
is incumbent upon the taxpayer to adduce substantial evidence to
establish a reasonably proximate relation petition between the

expenses to the ordinary conduct of the business of the taxpayer.
A logical link or nexus between the expense and the taxpayer's
business must be established by the taxpayer.
G. R. No. L-26924-In his petition for review, the Commissioner of
Internal Revenue assigned as errors the following:
I
THE COURT OF TAX APPEALS ERRED IN
ALLOWING THE DEDUCTION FROM GROSS
INCOME OF THE SO- CALLED TRANSFER
AGENT'S FEES ALLEGEDLY PAID BY
RESPONDENT;
II
INCOME OF LISTING EXPENSES ALLEGEDLY
INCURRED BY RESPONDENT;
III
HOLDING THAT THE AMOUNT OF P60,000
REPRESENTED BY RESPONDENT AS
"PROVISION FOR CONTINGENCIES" WAS ADDED
BACK BY RESPONDENT TO ITS GROSS INCOME
IN COMPUTING THE INCOME TAX DUE FROM IT
FOR 1958;
IV
DISALLOWING ONLY THE AMOUNT OF P6,666.65
AS SUIT EXPENSES, THE CORRECT AMOUNT
THAT SHOULD HAVE BEEN DISALLOWED BEING

P17,499.98.
It is well to note that only in the Court of Tax Appeals did the
Commissioner raise for the first time (in his memorandum) the
question of whether or not the business expenses deducted from
Atlas gross income in 1958 may be allowed in the absence of
proof of payments. 17 Before this Court, the Commissioner
reiterated the same as ground against deductibility when he
claimed that the Court of Tax Appeals erred in allowing the
deduction of transfer agent's fee and stock listing fee from gross
income in the absence of proof of payment thereof.
The Commissioner contended that under Section 30 (a) (1) of the
National Internal Revenue Code, it is a requirement for an expense to
be deductible from gross income that it must have been "paid or
incurred during the year" for which it is claimed; that in the absence of
convincing and satisfactory evidence of payment, the deduction from
gross income for the year 1958 income tax return cannot be
sustained; and that the best evidence to prove payment, if at all any
has been made, would be the vouchers or receipts issued therefor
which ATLAS failed to present.
Atlas admitted that it failed to adduce evidence of payment of the

deduction claimed in its 1958 income tax return, but explains the
failure with the allegation that the Commissioner did not raise that
question of fact in his pleadings, or even in the report of the
investigating examiner and/or letters of demand and assessment
notices of ATLAS which gave rise to its appeal to the Court of Tax
Appeal. 18 It was emphasized by Atlas that it went to trial and finally
submitted this case for decision on the assumption that inasmuch
as the fact of payment was never raised as a vital issue by the
Commissioner in his answer to the petition for review in the Court
of Tax Appeal, the issues is limited only to pure question of law
whether or not the expenses deducted by petitioner from its gross
income for 1958 are sanctioned by Section 30 (a) (1) of the
On this issue of whether or not the Commissioner can raise the

fact of payment for the first time on appeal in its memorandum in
the Court of Tax Appeal, we fully agree with the ruling of the tax
court that the Commissioner on appeal cannot be allowed to adopt
a theory distinct and different from that he has previously pursued,
as shown by the BIR records and the answer to the amended
petition for review. 19 As this Court said in the case of
Commissioner of Customs vs. Valencia 20 such change in the
nature of the case may not be made on appeal, specially when the
purpose of the latter is to seek a review of the action taken by an
administrative body, forming part of a coordinate branch of the
Government, such as the Executive department. In the case at
bar, the Court of Tax Appeal found that the fact of payment of the
claimed deduction from gross income was never controverted by
the Commissioner even during the initial stages of routinary
administrative scrutiny conducted by BIR examiners.21 Specifically,
in his answer to the amended petition for review in the Court of
Tax Appeal, the Commissioner did not deny the fact of payment,
merely contesting the legitimacy of the deduction on the ground
that same was not ordinary and necessary business expenses. 22
As consistently ruled by this Court, the findings of facts by the
Court of Tax Appeal will not be reviewed in the absence of
showing of gross error or abuse. 23 We, therefore, hold that it was
too late for the Commissioner to raise the issue of fact of payment
for the first time in his memorandum in the Court of Tax Appeals
and in this instant appeal to the Supreme Court. If raised earlier,
the matter ought to have been seriously delved into by the Court
of Tax Appeals. On this ground, we are of the opinion that under
all the attendant circumstances of the case, substantial justice
would be served if the Commissioner be held as precluded from
now attempting to raise an issue to disallow deduction of the item
in question at this stage. Failure to assert a question within a
reasonable time warrants a presumption that the party entitled to
assert it either has abandoned or declined to assert it.
On the second assignment of error, aside from alleging lack of

proof of payment of the expense deducted, the Commissioner
contended that such expense should be disallowed for not being
ordinary and necessary and not incurred in trade or business, as
required under Section 30 (a) (1) of the National Internal Revenue
Code. He asserted that said fees were therefore incurred not for
the production of income but for the acquisition petition of capital
in view of the definition that an expense is deemed to be incurred
in trade or business if it was incurred for the production of income,
or in the expectation of producing income for the business. In
support of his contention, the Commissioner cited the ruling
in Dome Mines, Ltd vs. Commisioner of Internal
Revenue 24 involving the same issue as in the case at bar where
the U.S. Board of Tax Appeal ruled that expenses for listing capital
stock in the stock exchange are not ordinary and necessary
expenses incurred in carrying on the taxpayer's business which
was gold mining and selling, which business is strikingly similar to
Atlas.
On the other hand, the Court of Tax Appeal relied on the ruling in
the case of Chesapeake Corporation of Virginia vs. Commissioner
of Internal Revenue 25 where the Tax Court allowed the deduction
of stock exchange fee in dispute, which is an annually recurring
cost for the annual maintenance of the listing.
We find the Chesapeake decision controlling with the facts and
circumstances of the instant case. In Dome Mines, Ltd case the stock
listing fee was disallowed as a deduction not only because the
expenditure did not meet the statutory test but also because the
same was paid only once, and the benefit acquired thereby continued
indefinitely, whereas, in the Chesapeake Corporation case, fee paid
to the stock exchange was annual and recurring. In the instant case,
we deal with the stock listing fee paid annually to a stock exchange
for the privilege of having its stock listed. It must be noted that the
Court of Tax Appeal rejected the Dome Mines casebecause it
involves a payment made only once, hence, it was held therein that
the single payment made to the stock exchange was a capital
expenditure, as distinguished from the instant case, where payments

were made annually. For this reason, we hold that said listing fee is
an ordinary and necessary business expense
On the third assignment of error, the Commissioner contended that
the Court of Tax Appeal erred when it held that the amount of
P60,000 as "provisions for contingencies" was in effect added back to
Atlas income.
On this issue, this Court has consistently ruled in several cases

adverted to earlier, that in the absence of grave abuse of
discretion or error on the part of the tax court its findings of facts
may not be disturbed by the Supreme Court. 26 It is not within the
province of this Court to resolve whether or not the P60,000
representing "provision for contingencies" was in fact added to or
deducted from the taxable income. As ruled by the Court of Tax
Appeals, the said amount was in effect added to Atlas taxable
income. 27 The same being factual in nature and supported by
substantial evidence, such findings should not be disturbed in this
appeal.
Finally, in its fourth assignment of error, the Commissioner contended
that the CTA erred in disallowing only the amount of P6,666.65 as suit
expenses instead of P17,499.98.
It appears that petitioner deducted from its 1958 gross income the
amount of P23,333.30 as attorney's fees and litigation expenses in
the defense of title to the Toledo Mining properties purchased by Atlas
from Mindanao Lode Mines Inc. in Civil Case No. 30566 of the Court
of First Instance of Manila for annulment of the sale of said mining
properties. On the ground that the litigation expense was a capital
expenditure under Section 121 of the Revenue Regulation No. 2, the
investigating revenue examiner recommended the disallowance of
P13,333.30. The Commissioner, however, reduced this amount of
P6,666.65 which latter amount was affirmed by the respondent Court
of Tax Appeals on appeal.
There is no question that, as held by the Court of Tax Ap- peals,

the litigation expenses under consideration were incurred in
defense of Atlas title to its mining properties. In line with the
decision of the U.S. Tax Court in the case of Safety Tube Corp. vs.
Commissioner of Internal Revenue, 28 it is well settled that litigation
expenses incurred in defense or protection of title are capital in
nature and not deductible. Likewise, it was ruled by the U.S. Tax
Court that expenditures in defense of title of property constitute a
part of the cost of the property, and are not deductible as
expense. 29
Surprisingly, however, the investigating revenue examiner
recommended a partial disallowance of P13,333.30 instead of the
entire amount of P23,333.30, which, upon review, was further
reduced by the Commissioner of Internal Revenue. Whether it
was due to mistake, negligence or omission of the officials
concerned, the arithmetical error committed herein should not
prejudice the Government. This Court will pass upon this particular
question since there is a clear error committed by officials
concerned in the computation of the deductible amount. As held in
the case of Vera vs. Fernandez, 30 this Court emphatically said that
taxes are the lifeblood of the Government and their prompt and
certain availability are imperious need. Upon taxation depends the
Government's ability to serve the people for whose benefit taxes
are collected. To safeguard such interest, neglect or omission of
government officials entrusted with the collection of taxes should
not be allowed to bring harm or detriment to the people, in the
same manner as private persons may be made to suffer
individually on account of his own negligence, the presumption
being that they take good care of their personal affair. This should
not hold true to government officials with respect to matters not of
their own personal concern. This is the philosophy behind the
government's exception, as a general rule, from the operation of
the principle of estoppel.31
WHEREFORE, judgment appealed from is hereby affirmed with
modification that the amount of P17,499.98 (3/4 of P23,333.00)
representing suit expenses be disallowed as deduction instead of

P6,666.65 only. With this amount as part of the net income, the
corresponding income tax shall be paid thereon, with interest of 6%
per annum from June 20, 1959 to June 20,1962.
SO ORDERED.

SUPREME COURT
Manila
EN BANC
G.R. No. L-16626
October 29, 1966

vs.
CARLOS PALANCA, JR., respondent.
Manuel B. San Jose for respondent.
REGALA, J.:
This is an appeal by the Government from the decision of the
Court of Tax Appeals in CTA Case No. 571 ordering the petitioner
to refund to the respondent the amount of P20,624.01
representing alleged over-payment of income taxes for the
calendar year 1955. The facts are:
Sometime in July, 1950, the late Don Carlos Palanca, Sr.

donated in favor of his son, the petitioner, herein shares of
stock in La Tondea, Inc. amounting to 12,500 shares. For
failure to file a return on the donation within the statutory
period, the petitioner was assessed the sums of P97,691.23,
P24,442.81 and P47,868.70 as gift tax, 25% surcharge and
interest, respectively, which he paid on June 22, 1955.
On March 1, 1956, the petitioner filed with the Bureau of
Internal Revenue his income tax return for the calendar year
1955, claiming, among others, a deduction for interest
amounting to P9,706.45 and reporting a taxable income of
P65,982.12. On the basis of this return, he was assessed the
sum of P21,052.91, as income tax, which he paid, as follows:
Taxes withheld by La Tondea Inc. from Mr. Palanca's

wages
Payment under Income Tax Receipt No. 677395 dated

May 11, 1956
Payment under Income Tax Receipt dated August 14,

1956
Subsequently, on November 10, 1956, the petitioner filed an

amended return for the calendar year 1955, claiming therein
an additional deduction in the amount of P47,868.70
representing interest paid on the donee's gift tax, thereby
reporting a taxable net income of P18,113.42 and a tax due
thereon in the sum of P3,167.00. The claim for deduction was
based on the provisions of Section 30(b) (1) of the Tax Code,
which authorizes the deduction from gross income of interest
paid within the taxable year on indebtedness. A claim for the

refund of alleged overpaid income taxes for the year 1955
amounting to P17,885.01, which is the difference between the
amount of P21,052.01 he paid as income taxes under his
original return and of P3,167.00, was filed together with this
amended return. In a communication dated June 20, 1957,
the respondent (BIR) denied the claim for refund.
On August 27, 1957, the petitioner reiterated his claim for
refund, and at the same time requested that the case be
elevated to the Appellate Division of the Bureau of Internal
Revenue for decision. The reiterated claim was denied on
October 14, 1957.
On November 2, 1957, the petitioner requested that the case
be referred to the Conference Staff of the Bureau of Internal
Revenue for review. Later, on November 6, 1957, he
requested the respondent to hold his action on the case in
abeyance until after the Court of Tax Appeals renders its
division on a similar case. And on November 7, 1957, the
respondent denied the claim for the refund of the sum of
P17,885.01.
Meanwhile, the Bureau of Internal Revenue considered the
transfer of 12,500 shares of stock of La Tondea Inc. to be a
transfer in contemplation of death pursuant to Section 88(b)
of the National Internal Revenue Code. Consequently, the
respondent assessed against the petitioner the sum of
P191,591.62 as estate and inheritance taxes on the transfer
of said 12,500 shares of stock. The amount of P17,002.74
paid on June 22, 1955 by the petitioner as gift tax, including
interest and surcharge, under Official Receipt No. 2855 was
applied to his estate and inheritance tax liability. On the tax
liability of P191,591.62, the petitioner paid the amount of
P60,581.80 as interest for delinquency as follows:
1% monthly interest on P76,724.38

September 2, 1952 to February 16, 1955
P22,633.69

February 16, 1955 to March 31, 1955
1,068.97

September 2, 1952 to April 16, 1953
4,287.99

March 31, 1955 to June 22, 1955
1,372.48

April 16, 1953 to June 22, 1955
31,218.67
Total
P60,581.80
On August 12, 1958, the petitioner once more filed an

amended income tax return for the calendar year 1955,
claiming, in addition to the interest deduction of P9,076.45
appearing in his original return, a deduction in the amount of
P60,581.80, representing interest on the estate and
inheritance taxes on the 12,500 shares of stock, thereby
reporting a net taxable income for 1955 in the amount of
P5,400.32 and an income tax due thereon in the sum of
P428.00. Attached to this amended return was a letter of the
petitioner, dated August 11, 1958, wherein he requested the
refund of P20,624.01 which is the difference between the
amounts of P21,052.01 he paid as income tax under his
original return and of P428.00.
Without waiting for the respondent's decision on this claim for
refund, the petitioner filed his petition for review before this
Court on August 13, 1958. On July 24, 1959, the respondent
denied the petitioner's request for the refund of the sum of

P20,624.01.
The Commissioner of Internal Revenue now seeks the reversal of

the Court of Tax Appeal's ruling on the aforementioned petition for
review. Specifically, he takes issue with the said court's
determination that the amount paid by respondent Palanca for
interest on his delinquent estate and inheritance tax is deductible
from the gross income for that year under Section 30 (b) (1) of the
Revenue Code, and, that said respondent's claim for refund
therefor has not prescribed.
On the first point, the Commissioner urges that a tax is not an
indebtedness. Citing American cases, he argues that there is a
material and fundamental distinction between a "tax" and a "debt."
(Meriwether v. Garrett, 102 U.S. 427; Liberty Mutual Ins. Co. v.
Johnson Shipyards Corporation, 5 AFTR pp. 5504, 5507; City of
Camden v. Allen, 26 N.J. Law, p. 398). He adopts the view that
"debts are due to the government in its corporate capacity, while
taxes are due to the government in its sovereign capacity. A debt
is a sum of money due upon contract express or implied or one
which is evidenced by a judgment. Taxes are imposts levied by
government for its support or some special purpose which the
government has recognized." In view of the distinction, then, the
Commissioner submits that the deductibility of "interest on
indebtedness" from a person's income tax under Section 30(b) (1)
cannot extend to "interest on taxes."
We find for the respondent. While "taxes" and "debts" are
distinguishable legal concepts, in certain cases as in the suit at
bar, on account of their nature, the distinction becomes
inconsequential. This qualification is recognized even in the United
States. Thus,
The term "debt" is properly used in a comprehensive sense
as embracing not merely money due by contract, but
whatever one is bound to render to another, either for contract
or the requirements of the law. (Camden vs. Fink Coule and
Coke Co., 61 ALR 584).
Where statutes impose a personal liability for a tax, the tax
becomes at least in a broad sense, a debt. (Idem.)
Some American authorities hold that, especially for remedial

purposes, Federal taxes are debts. (Tax Commission vs.
National Malleable Castings Co., 35 ALR 1448)
In our jurisdiction, the rule is settled that although taxes already

due have not, strictly speaking, the same concept as debts, they
are, however obligations that may be considered as such.
(Sambrano vs. Court of Tax Appeals, G.R. no. L-8652, March 30,
1957). In a more recent case Commissioner of Internal Revenue
vs. Prieto, G.R. No. L-13912, September 30, 1960, we explicitly
announced that while the distinction between "taxes" and "debts"
was recognized in this jurisdiction, the variance in their legal
conception does not extend to the interests paid on them, at least
insofar as Section 30 (b) (1) of the National Internal Revenue
Code is concerned. Thus,
Under the law, for interest to be deductible, it must be shown
that there be an indebtedness, that there should be interest
upon it, and that what is claimed as an interest deduction
should have been paid or accrued within the year. It is here
conceded that the interest paid by respondent was in
consequence of the late payment of her donor's tax, and the
same was paid within the year it is sought to be deducted.
The only question to be determined, as stated by the parties,
is whether or not such interest was paid upon an
indebtedness within the contemplation of Section 30(b) (1) of
the Tax Code, the pertinent part of which reads:
Sec. 30. Deductions from gross income In
computing net income there shall be allowed as
deductions
xxx
xxx
xxx
"Interest:
(1) In general. The amount of interest paid within
the taxable year on indebtedness, except on
indebtedness incurred or continued to purchase or
carry obligations the interest upon which is exempt
from taxation as income under this Title.
The term "indebtedness" as used in the Tax Code of

the United States containing similar provisions as in
the above-quoted section has been defined as the
unconditional and legally enforceable obligation for
the payment of money. (Federal Taxes Vol. 2, p. 13,
019, Prentice Hall, Inc.; Mertens' Law of Federal
Income Taxation, Vol. 4, p. 542.) Within the meaning
of that definition, it is apparent that a tax may be
considered an indebtedness. . . . (Emphasis supplied)
"It follows that the interest paid by herein respondent
for the late payment of her donor's tax is deductible
from her gross income under section 30 (b) of the Tax
Code above-quoted."
We do not see any element in this case which can justify a

departure from or abandonment of the doctrine in the Prieto case
above. In both this and the said case, the taxpayer sought the
allowance as deductible items from the gross income of the
amounts paid by them as interests on delinquent tax liabilities. Of
course, what was involved in the cited case was the donor's tax
while the present suit pertains to interest paid on the estate and
inheritance tax. This difference, however, submits no appreciable
consequence to the rationale of this Court's previous
determination that interests on taxes should be considered as
interests on indebtedness within the meaning of Section 30(b) (1)
of the Tax Code. The interpretation we have placed upon the said
section was predicated on the congressional intent, not on the
nature of the tax for which the interest was paid.
On the issue of prescription: There were actually two claims for
refund filed by the herein respondent, Carlos Palanca, Jr., anent
the case at bar. The first one was on November 10, 1956, when
he filed a claim for refund on the interest paid by him on the
donee's gift tax of P17,885.10, as originally demanded by the
Bureau of Internal Revenue. The second one was the one filed by
him on August 12, 1958, which was a claim for refund on the
interest paid by him on the estate and inheritance tax assessed by
the same Bureau in the amount of P20,624.01. Actually, this
second assessment by the Bureau was for the same transaction
as that for which they assessed respondent Palanca the above
donee's gift tax. The Bureau, however, on further consideration,
decided that the donation of the stocks in question was made in

contemplation of death, and hence, should be assessed as an
inheritance. Thus the second assessment. The first claim was
denied by the petitioner for the first time on June 20, 1957.
Thereafter, the said denial was twice reiterated, on October 14,
1957 and November 7, 1957, upon respondent Palanca's plea for
the reconsideration of the ruling of June 20, 1957. The second
claim was filed with the Court of Tax Appeals on August 13, 1958,
or even before the same had been denied by the petitioner.
Respondent Palanca's second claim was denied by the latter on
July 24, 1959.
The petitioner contends that under Section 11 of Republic Act
1124,1 the herein claimant's claim for refund has prescribed since
the same was filed outside the thirty-day period provided for
therein. According to the petitioner, the said prescriptive period
commenced to run on October 14, 1947 when the denial by the
Bureau of Internal Revenue of the respondent Palanca's claim for
refund, under his letter of November 10, 1956, became final.
Considering that the case was filed with the Court of Tax Appeals
only on August 13, 1958, then it is urged that the same had
prescribed.
The petitioner also invokes prescription, at least with respect to
the sum of P17,112.21, under Section 306 of the Tax Code.2 He
claims that for the calendar year 1955, respondent Palanca paid
his income tax as follows:
Taxes withheld by La Tondea Inc. from Mr. Palanca's

wages

May 11, 1956

August 14, 1956
Therefore, the petitioner contends, the amounts paid by claimant

Palanca under his withheld tax and under Receipt No. 677395
dated May 11, 1956 may no longer be refunded since the claim
therefor was filed in court only on August 13, 1958, or beyond two
years of their payment.
We find the petitioner's contention on prescription untenable.
In the first place, the 30-day period under Section 11 of Republic
Act 1125 did not even commence to run in this incident. It should
be recalled that while the herein petitioner originally assessed the
respondent-claimant for alleged gift tax liabilities, the said
assessment was subsequently abandoned and in its lieu, a new
one was prepared and served on the respondent-taxpayer. In this
new assessment, the petitioner charged the said respondent with
an entirely new liability and for a substantially different amount
from the first. While initially the petitioner assessed the respondent
for donee's gift tax in the amount of P170,002.74, in the
subsequent assessment the latter was asked to pay P191,591.62
for delinquent estate and inheritance tax. Considering that it is the
interest paid on this latter-assessed estate and inheritance tax that
respondent Palanca is claiming refund for, then the thirty-day
period under the abovementioned section of Republic Act 1125
should be computed from the receipt of the final denial by the
Bureau of Internal Revenue of the said claim. As has earlier been
recited, respondent Palanca's claim in this incident was filed with
the Court of Tax Appeals even before it had been denied by the
herein petitioner or the Bureau of Internal Revenue. The case was
filed with the said court on August 13, 1958 while the petitioner
denied the claim subject of the said case only on July 24, 1959.
In the second place, the claim at bar refers to the alleged

overpayment by respondent Palanca of his 1955 income tax.
Inasmuch as the said account was paid by him by installment,
then the computation of the two-year prescriptive period, under
Section 306 of the National Internal Revenue Code, should be
from the date of the last installment. (Antonio Prieto, et al. vs.
Collector of Internal Revenue, G.R. No. L-11976, August 29, 1961)
Respondent Palanca paid the last installment on his 1955 income
tax account on August 14, 1956. His claim for refund of the
alleged overpayment on it was filed with the court on August 13,
1958. It was, therefore, still timely instituted.
WHEREFORE, the decision appealed from is affirmed in full,
without pronouncement on costs.
SUPREME COURT
Manila
EN BANC
G.R. No. L-15802
September 30, 1960
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
ENRIQUE MAGALONA, JR., ET AL., defendants-appellants.
Teofilo A. Abejo and Tomas de Guzman for appellants.
Asst. Solicitor General J.P. Alejandro and Atty. B.A. Atienza for
appellee.
BARRERA, J.:
This is an appeal taken originally to the Court of Appeals but
which was certified to us because one of the issues raised by
appellants is the supposed lack of jurisdiction of the Court of First
Instance of Manila over the subject matter.
The case involves the collection of income tax due from

appellants spouses Enrique Magalona, Jr. and Teresita Durango,
thereon at 1% per month from April 16, 1953 to the date of full
payment, and costs.
It appears that on April 30, 1951, appellants Magalona, Jr.
and Durango, filed with the Bureau of Internal Revenue, a joint
income tax return for the calendar year 1950. After examination
and audit of said return, said office assessed the income tax
payable by appellants at P2,964.00. Accordingly, Income Tax
Assessment Notice Ear-23187-52150 dated March 18, 1953, was
sent to appellants, demanding payment of said amount to the City
Treasurer of Manila, on or before April 15, 1953. Said notice was
received by appellants on the same day it was sent.
No payment was made thereon and, on April 14, 1954,
appellant Magalona, Jr. needing to have a tax clearance in
connection with his going abroad, posted a surety bond, with
himself as principal and the Luzon Surety Co., Inc. as surety, to
guaranty the payment of said tax.
On December 17, 1955, the Collector of Internal Revenue
sent a letter to the Luzon Surety Co., Inc., informing it of appellant
Magalona, Jr.'s failure to pay the tax, and requesting settlement on
or before December 31, 1955, otherwise he (Collector) would
recommend immediate forfeiture of the bond without further
notice. On January 28, 1957, the Chief of the Collection Branch,
Bureau of Internal Revenue, sent a letter to appellant Magalona,
Jr. himself, reminding him of his said unpaid tax liability, and
advising him that if payment thereof is not made to the City
Treasurer of Manila within 10 days from receipt of said letter,
immediate forfeiture of the bond would be recommended. Said
official also sent a similar letter of the same date to the Luzon
Surety Co., Inc.
Not having received any reply to these letters, the Collector

of Internal Revenue, on April 24, 1957, filed the present complaint
with the Court of First Instance of Manila.
On May 6, 1957, after the filing of the complaint, appellant
Magalona, Jr. sent a letter to appellee Collector of Internal
Revenue, requesting that he be allowed to pay said tax in 3
installments, and stating that "the delay in the payment of this tax
is only due to a misunderstanding on (his) my part, coupled with
the continuous pressure of work." This request was denied by
appellee.
On May 9, 1957, the appellants filed their answer, alleging
as special defense that upon filing of the bond in favor of the
appellee on April 14, 1954, they "were led to believe that the
determination of the exact amount of their income tax liability to
the plaintiff (appellee) would be reviewed and reassessed" and
that they would be notified of the amount of their income tax after
said reassessment, and that they had no intention of avoiding
payment thereof. Appellants stated also that they "are ready and
willing to pay their tax liability in the sum of P2,964.00 without
surcharge and interests."
On May 22, 1957, appellee amended its complaint alleging,
as paragraph 8 thereof, the contents of the letter dated December
17, 1955, addressed to the Luzon Surety Co., Inc.
On May 28, 1957, Luzon Surety Co., Inc. filed an amended
answer, alleging as special defense that the condition precedent
appearing in the bond namely, a final adjudication that appellant
Magalona , Jr. is finally liable in the sum of P2,964.00 has not yet
been complied with; hence, the action was premature. It prayed
for the dismissal of the complaint.
On September 13, 1957, appellants filed an amended
answer alleging, in addition to the special defense contained in
their answer filed on May 9, 1957, that the present action has
already prescribed, and that the Court has no jurisdiction over the
case. On September 16, 1957, appellee filed a reply, stating that
the action against appellants is in accordance with Article 1144 of
the new Civil Code and Section 51 (e) of the National Internal
Revenue Code and, thereof, has not prescribed; and that the court
has jurisdiction, pursuant to Section 44, paragraph (c) of the
Judiciary Act.
Issues having been the joined, the case was tried and, after
trial, the court, on January 30, 1958, rendered a decision which
reads, in part, as follows:
Defendant Luzon Surety Co., Inc. adopted the evidence
for defendants Enrique Magalona, Jr. and Teresita Durango,
as its own evidence.
Defendants Enrique Magalona, Jr. and Teresita
Durango raise the following issues: (1) that this Court has no
jurisdiction to take cognizance of the present action: (2) that
this present action has already prescribed; and (3) that,
because they have not been officially notified of the final
determination of their tax liability as embodied in the surety
bond, they should not be made to pay further a surcharge of
5% on the amount of P2,964.00 and 1% monthly interest
thereon. Defendant Luzon Surety Co., Inc., puts up the issue
that the plaintiff has no cause of action against it, because the
condition precedent contained in the surety bond, which
states "in case it should be finally decided that Enrique
Magalona, Jr., is liable for the payment of the said amount of
P2,964.00 has not yet been complied with.
1awphl.nt
With respect to the first issue, the Court resolves that it

has jurisdiction to take cognizance of the present action. As
early as March 18, 1953, the date of their receipt of the
Income Tax Assessment Notice, defendant spouses, Enrique
Magalona, Jr. and Teresita Durango, had knowledge of their
tax liability under their joint Income Tax Return for 1950 in the
amount of P2,964.00. From that date, they had 30 days
period within which to dispute the assessment by appeal to

the Court of Tax Appeals and having failed to do so, the
amount assessed became final, hence undisputed, as of April
19, 1953, the next day after the thirty days' period to appeal
has elapsed. The defendants spouses, however, contend that
there has not been a final determination of their tax liability
because they have never received a reply to their letter sent
to the Collector of Internal Revenue requesting for a
reconsideration and re-assessment of the amount mentioned
in the Income Tax Assessment Notice (Exhibit C). The fact
that defendant Magalona, Jr. failed to produce at the hearing
a copy of his alleged letter to the Collector of Internal
Revenue, that he never received a reply thereto, and that he
did not send a follow-up letter to inquire as to the action taken
on his alleged request for a reassessment, support the
conclusion that he had not written and sent such a letter to
the Collector of Internal Revenue. Their contention too that
the surety bond, as provided in its clause marked Exhibit 3-A,
is proof that they had actually requested for a reconsideration
and reassessment of their tax liability, is without merit. A
careful perusal of said surety bond shows that it was
executed primarily to guarantee the payment of the amount of
P2,964.00 in order that a tax clearance could be issued to
defendant Enrique Magalona, Jr. who was then scheduled to
go abroad, and not to guarantee any amount that would later
on be finally assessed, because if it were for the latter
purpose, there would be no reason in putting up a surety
bond for any amounts, as it appears from the joint Income Tax
Return (Exh. A) that they are tax exempt. Besides, the bond is
purely an undertaking of the signatories thereto, and the
plaintiff is only concerned with the assurance of payment of
the tax mentioned therein.
With respect to the second issue, the Court resolves
that the present action has not prescribed. In the instance
case, the period of prescription commenced on April 16,
1953, the date following April 15, 1953, which is the last date
the defendants were given to pay the amount of P2,964.00
mentioned in the Income Tax Assessment Notice (Exhibit C).

It appearing that this case was filed on April 24, 1957, it was,
therefore, brought within the period of five years, prescribed
by law for the collection of income taxes.
Having arrived at the conclusion that the assessment in
the amount of P2,964.00 became final as of April 19, 1953,
for the reasons above adverted to, the third and fourth issues
raised, respectively, by defendants spouses and defendant
Luzon Surety Co., Inc. are without merit.
In view of all the foregoing consideration, the Court
hereby renders judgment in favor of the plaintiff and against
the defendants, ordering the defendants Luzon Surety Co.,
Inc. and Enrique Magalona, Jr. to pay to the plaintiff, jointly
and severally, the sum of P2,964.00 in accordance with the
terms of surety bond (Exhibit D) executed by them; and the
defendants Enrique Magalona, Jr. and Teresita Durango to
pay the plaintiff 5% surcharge on the amount of P2,964.00
and 1% interest thereon from April 16, 1953, to the date full
payment, and the costs of the suit.
So ordered.
Not satisfied with this decision, appellants Magalona, Jr. and

Durango 1 appealed to the Court of Appeals, but as already stated,
said court, in its resolution of July 29, 1959, certified the case to
us, on the ground that it involves only questions of law.
Appellants claim that the lower court erred in holding that
the income tax assessment notice (Exh. C) in question, was a final
income tax assessment of their income for the calendar year 1950
and consequently, in taking cognizance of the case.
The claim is devoid of merit. It is not disputed that the
income tax assessment notice in question was sent by the
Collector of Internal Revenue to appellants on March 18, 1953,
and received by them on the same date. Pursuant to Section 7 of
Republic Act No. 1125, appellants had 30 days from said date,
within which to dispute said assessment, by appealing to the
Court of Tax Appeals. Having failed to do so, as found by the trial
court, 2the assessment became final, executory, and demandable
(Republic vs. Vda. del Rosario, et al., 105 Phil., 277; 57 Off. Gaz.
[31] 5543).
It is, however, argued for appellants that the surety bond
filed by appellant Magalona, Jr. with the Bureau of Internal
Revenue on April 14, 1954, indicates that said assessment was
disputed. We find nothing in said surety bond indicating a disputed
assessment. The provision in paragraph 2 thereof (Exh. 3-A), to
the effect that appellant Magalona, Jr. "claims and believes that he
is not liable for the payment of the said taxes," is no proof that
appellant had, in fact, disputed the assessment in question. It is
nothing more than an expression of appellant's belief and
conviction, personal to him and not binding on appellee, that he
was not liable for the payment of said taxes. In this regard, we
agree with the trial court that the surety bond in question "was
executed primarily to guarantee the payment of the amount of
P2,964.00, in order that a tax clearance could be issued" to
appellant Magalona, Jr., who was then scheduled to go abroad,
and "not to guarantee any amount that would later on be finally
assessed, because if it were for the latter purpose, there would no
reason in putting up a surety bond for any amount, as it appears
from the point Income Tax Return (Exh. A) that they (appellants)
are tax exempt." Except for the bare assertion and testimony of
appellant Magalona, Jr. that he had requested for reconsideration
of the assessment, there is no absolutely no evidence showing
that the assessment notice is otherwise than final and definitive. If
it is true, as claimed by appellant Magalona, Jr. that he sent a
letter to appellee, he should have subpoenaed the latter to
produce the same, and if appellee failed to do so, he could have
presented a copy thereof. This, he did not even attempt to do. On
the other hand, the clear and unequivocal letters of demand
subsequently sent to him and the surety company, did not indicate
at all that there was a dispute as to the correctness of the
assessment of tax due. In fact, as late as May 6, 1957, even after

the filing of the complaint, appellant Magalona, Jr. did not question
the assessment but only offered to pay the tax in 3 installments.
We agree with the lower court that this is not a case of disputed
assessment.
Having reached the conclusion that the income tax
assessment in question was a final assessment of appellants'
income tax liability for the calendar year 1950, it follows that the
Court of First Instance had jurisdiction to hear the case of St.
Stephen's Association, et al vs. The Collector of Internal
Revenue (104 Phil., 314; 44 Off. Gaz. [13] 2243) invoked by
appellant, is inapplicable to the instant case. In the cited case,
unlike in the one at bar, the taxpayer (St. Stephen's Association)
did really question the assessment made by the Collector of
Internal Revenue. In fact, there were several communications
which transpired between said taxpayer and said official,
regarding its request for reconsideration of the assessment.
Appellants have not urged in this appeal the defense of
prescription which is clearly without merit.
Whereof, finding no error in the decision appealed from, the
same is hereby affirmed in all respects, with costs against the
defendants-appellants. So ordered.
Paras, C.J., Bengzon, Bautista Angelo, Labrador, Concepcion,
Reyes, J.B.L., Gutierrez David, Paredes and Dizon, JJ., concur.

SUPREME COURT
Manila
EN BANC
G.R. No. L-13912
September 30, 1960
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
CONSUELO L. VDA. DE PRIETO, respondent.
Office of the Solicitor General Edilberto Barot, Solicitor F.R.
Rosete and Special Atty. B. Gatdula, Jr. for petitioner.
Formilleza and Latorre for respondent.
GUTIERREZ DAVID, J.:
This is an appeal from a decision of the Court of tax Appeals
reversing the decision of the Commissioner of Internal Revenue
which held herein respondent Consuelo L. Vda. de Prieto liable for
the payment of the sum of P21,410.38 as deficiency income tax,
plus penalties and monthly interest.
The case was submitted for decision in the court below
upon a stipulation of facts, which for brevity is summarized as
follows: On December 4, 1945, the respondent conveyed by way
of gifts to her four children, namely, Antonio, Benito, Carmen and
Mauro, all surnamed Prieto, real property with a total assessed
value of P892,497.50. After the filing of the gift tax returns on or

about February 1, 1954, the petitioner Commissioner of Internal
Revenue appraised the real property donated for gift tax purposes
at P1,231,268.00, and assessed the total sum of P117,706.50 as
donor's gift tax, interest and compromises due thereon. Of the
total sum of P117,706.50 paid by respondent on April 29, 1954,
the sum of P55,978.65 represents the total interest on account of
deliquency. This sum of P55,978.65 was claimed as deduction,
among others, by respondent in her 1954 income tax return.
Petitioner, however, disallowed the claim and as a consequence of
such disallowance assessed respondent for 1954 the total sum of
P21,410.38 as deficiency income tax due on the aforesaid
P55,978.65, including interest up to March 31, 1957, surcharge
and compromise for the late payment.
Under the law, for interest to be deductible, it must be
shown that there be an indebtedness, that there should be interest
upon it, and that what is claimed as an interest deduction should
have been paid or accrued within the year. It is here conceded
that the interest paid by respondent was in consequence of the
late payment of her donor's tax, and the same was paid within the
year it is sought to be declared. The only question to be
determined, as stated by the parties, is whether or not such
interest was paid upon an indebtedness within the contemplation
of section 30 (b) (1) of the Tax Code, the pertinent part of which
reads:
SEC. 30 Deductions from gross income. In
computing net income there shall be allowed as deductions
xxx
xxx
xxx
(b) Interest:
(1) In general. The amount of interest paid within the
taxable year on indebtedness, except on indebtedness
incurred or continued to purchase or carry obligations the

interest upon which is exempt from taxation as income under
this Title.
The term "indebtedness" as used in the Tax Code of the

United States containing similar provisions as in the above-quoted
section has been defined as an unconditional and legally
enforceable obligation for the payment of money. (Federal Taxes
Vol. 2, p. 13,019, Prentice-Hall, Inc.; Merten's Law of Federal
Income Taxation, Vol. 4, p. 542.) Within the meaning of that
definition, it is apparent that a tax may be considered an
indebtedness. As stated by this Court in the case of Santiago
Sambrano vs. Court of Tax Appeals and Collector of Internal
Revenue (101 Phil., 1; 53 Off. Gaz., 4839)
1awphl.nt
Although taxes already due have not, strictly speaking,

the same concept as debts, they are, however, obligations
that may be considered as such.
The term "debt" is properly used in a comprehensive
sense as embracing not merely money due by contract but
whatever one is bound to render to another, either for
contract, or the requirement of the law. (Camben vs. Fink
Coule and Coke Co. 61 LRA 584)
Where statute imposes a personal liability for a tax, the
tax becomes, at least in a board sense, a debt. (Idem).
A tax is a debt for which a creditor's bill may be brought
in a proper case. (State vs. Georgia Co., 19 LRA 485).
It follows that the interest paid by herein respondent for the

late payment of her donor's tax is deductible from her gross
income under section 30(b) of the Tax Code above quoted.
The above conclusion finds support in the established
jurisprudence in the United States after whose laws our Income
Tax Law has been patterned. Thus, under sec. 23(b) of the
Internal Revenue Code of 1939, as amended 1 , which contains

similarly worded provisions as sec. 30(b) of our Tax Code, the
uniform ruling is that interest on taxes is interest on indebtedness
and is deductible. (U.S. vs. Jaffray, 306 U.S. 276. See also
Lustigvs. U.S., 138 F. Supp. 870; Commissioner of Internal
Revenue vs. Bryer, 151 F. 2d 267, 34 AFTR 151; Penrosevs. U.S.
18 F. Supp. 413, 18 AFTR 1289; Max Thomas Davis, et
al. vs. Commissioner of Internal Revenue, 46 U.S. Boared of Tax
Appeals Reports, p. 663, citing U.S. vs. Jaffray, 6 Tax Court of
United States Reports, p. 255; Armour vs. Commissioner of
Internal Revenue, 6 Tax Court of the United States Reports, p.
359; The Koppers Coal Co. vs. Commissioner of Internal
Revenue, 7 Tax Court of United States Reports, p. 1209;
Toy vs.Commissioner of Internal Revenue; Lucas vs. Comm., 34
U.S. Board of Tax Appeals Reports, 877; Evens and Howard Fire
Brick Co. vs. Commissioner of Internal Revenue, 3 Tax Court of
United States Reports, p. 62). The rule applies even though the
tax is nondeductible. (Federal Taxes, Vol. 2, Prentice Hall, sec.
163, 13,022; see also Merten's Law of Federal Income Taxation,
Vol. 5, pp. 23-24.)
To sustain the proposition that the interest payment in
question is not deductible for the purpose of computing
respondent's net income, petitioner relies heavily on section 80 of
Revenue Regulation No. 2 (known as Income Tax Regulation)
promulgated by the Department of Finance, which provides that
"the word `taxes' means taxes proper and no deductions should
be allowed for amounts representing interest, surcharge, or
penalties incident to delinquency." The court below, however, held
section 80 as inapplicable to the instant case because while it
implements sections 30(c) of the Tax Code governing deduction of
taxes, the respondent taxpayer seeks to come under section 30(b)
of the same Code providing for deduction of interest on
indebtedness. We find the lower court's ruling to be correct.
Contrary to petitioner's belief, the portion of section 80 of Revenue
Regulation No. 2 under consideration has been part and parcel of
the development to the law on deduction of taxes in the United
States. (See Capital Bldg. and Loan Assn. vs. Comm., 23 BTA
848. Thus, Mertens in his treatise says: "Penalties are to be
distinguished from taxes and they are not deductible under the
heading of taxs." . . . Interest on state taxes is not deductible as
taxes." (Vol. 5, Law on Federal Income Taxation, pp. 22-23, sec.
27.06, citing cases.) This notwithstanding, courts in that
jurisdiction, however, have invariably held that interest on
deficiency taxes are deductible, not as taxes, but as interest.
(U.S. vs. Jaffray, et al., supra; see also Mertens, sec. 26.09, Vol.
4, p. 552, and cases cited therein.) Section 80 of Revenue
Regulation No. 2, therefore, merely incorporated the established
application of the tax deduction statute in the United States, where
deduction of "taxes" has always been limited to taxes proper and
has never included interest on delinquent taxes, penalties and
surcharges.
To give to the quoted portion of section 80 of our Income
Tax Regulations the meaning that the petitioner gives it would run
counter to the provision of section 30(b) of the Tax Code and the
construction given to it by courts in the United States. Such effect
would thus make the regulation invalid for a "regulation which
operates to create a rule out of harmony with the statute, is a
mere nullity." (Lynch vs. Tilden Produce Co., 265 U.S. 315;
Miller vs. U.S., 294 U.S. 435.) As already stated, section 80
implements only section 30(c) of the Tax Code, or the provision
allowing deduction of taxes, while herein respondent seeks to be
allowed deduction under section 30(b), which provides for
deduction of interest on indebtedness.
In conclusion, we are of the opinion and so hold that
although interest payment for delinquent taxes is not deductible as
tax under Section 30(c) of the Tax Code and section 80 of the
Income Tax Regulations, the taxpayer is not precluded thereby
from claiming said interest payment as deduction under section
30(b) of the same Code.
In view of the foregoing, the decision sought to be reviewed

is affirmed, without pronouncement as to costs.
Bengzon, Bautista Angelo, Labrador, Barrera, Paredes, and
Dizon, JJ., concur.
Paras, C. J., Concepcion, and Reyes, J.B.L., JJ., concur in the
result.

SUPREME COURT
Manila
EN BANC
G.R. Nos. 106949-50 December 1, 1995
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. 106984-85 December 1, 1995
COMMISSIONER INTERNAL REVENUE, petitioner,
vs.
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES, THE
COURT OF APPEALS and THE COURT OF TAX
FELICIANO, J.:
The Paper Industries Corporation of the Philippines ("Picop"), which
is petitioner in G.R. Nos. 106949-50 and private respondent in G.R.
Nos. 106984-85, 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 preferrednonpioneer enterprise with respect to its integrated plywood and veneer
mills.
On 21 April 1983, Picop received from the Commissioner of Internal
Revenue ("CIR") two (2) letters of assessment and demand both
dated 31 March 1983: (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 ofP88,763,255.00.
These assessments were computed as follows:
Transaction Tax
Interest payments on
money market
borrowings P 45,771,849.00
35% Transaction tax due
thereon 16,020,147.00
Add: 25% surcharge 4,005,036.75
T o t a l P 20,025,183.75
Add:
14% int. fr.
1-20-78 to
7-31-80 P 7,093,302.57
20% int, fr.
8-1-80 to
3-31-83 10,675,523.58
17,768,826.15
P 37,794,009.90
Documentary and Science Stamps Tax
Total face value of
debentures P100,000,000.00
Documentary Stamps
Tax Due
(P0.30 x P100,000.000 )
( P200 ) P 150,000.00
Science Stamps Tax Due
(P0.30 x P100,000,000 )
( P200 ) P 150,000.00
T o t a l P 300,000.00
Add: Compromise for
non-affixture 300.00
300,300.00
TOTAL AMOUNT DUE AND COLLECTIBLE P

38,094,309.90
===========
Deficiency Income Tax for 1977
Net income per return P 258,166.00
Add: Unallowable deductions
1) Disallowed deductions
availed of under
R.A. No. 5186 P 44,332,980.00
2) Capitalized interest
expenses on funds
used for acquisition
of machinery & other
equipment 42,840,131.00
3) Unexplained financial
guarantee expense 1,237,421.00
4) Understatement
of sales 2,391,644.00
5) Overstatement of
cost of sales 604,018.00
P91,406,194.00
Net income per investigation P91,664,360.00
Income tax due thereon 34,734,559.00
Less: Tax already assessed per return 80,358.00
Deficiency P34,654,201.00
Add:
14% int. fr.
4-15-78 to
7-31-81 P 11,128,503.56
20% int. fr.

8-1-80 to
4-15-81 4,886,242.34
P16,014,745.90
TOTAL AMOUNT DUE AND COLLECTIBLE P 50,668,946.90
===========
On 26 April 1983, Picop protested the assessment of deficiency
transaction tax and documentary and science stamp taxes. Picop
also protested on 21 May 1983 the deficiency income tax
assessment for 1977. These protests were not formally acted upon
by respondent CIR. On 26 September 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.
Thereupon, Picop went before the Court of Tax Appeals ("CTA")
appealing the assessments. After trial, the CTA rendered a decision
dated 15 August 1989, modifying the findings of the CIR and holding
Picop liable for the reduced aggregate amount of P20,133,762.33,
which was itemized in the dispositive portion of the decision as
follows:
35% Transaction Tax P 16,020,113.20
Documentary & Science
Stamp Tax 300,300.00
Deficiency Income Tax Due 3,813,349.33
TOTAL AMOUNT DUE AND PAYABLE P 20,133,762.53 2
===========
Picop and the CIR both went to the Supreme Court on separate
Petitions for Review of the above decision of the CTA. In two (2)
Resolutions dated 7 February 1990 and 19 February 1990,
respectively, the Court referred the two (2) Petitions to the Court of
Appeals. The Court of Appeals consolidated the two (2) cases and
rendered a decision, dated 31 August 1992, which further reduced
the liability of Picop to P6,338,354.70. The dispositive portion of the
Court of Appeals decision reads as follows:
WHEREFORE, the appeal of the Commissioner of
Internal Revenue is denied for lack of merit. The
judgment against PICOP is modified, as follows:
1. PICOP is declared liable for the 35% transaction
tax in the amount of P3,578,543.51;
2. PICOP is absolved from the payment of
documentary and science stamp tax of P300,000.00
and the compromise penalty of P300.00;
3. PICOP shall pay 20% interest per annum on the
deficiency income tax of P1,481,579.15, for a period
of three (3) years from 21 May 1983, or in the total
amount of P888,947.49, and a surcharge of 10% on
the latter amount, or P88,984.75.
No pronouncement as to costs.
SO ORDERED.
Picop and the CIR once more filed separate Petitions for Review
before the Supreme Court. These cases were consolidated and, on
23 August 1993, the Court resolved to give due course to both
Petitions in G.R. Nos. 106949-50 and 106984-85 and required the
parties to file their Memoranda.
Picop now maintains that it is not liable at all to pay any of the
assessments or any part thereof. It assails the propriety of the
thirty-five percent (35%) deficiency transaction tax which the Court
of Appeals held due from it in the amount of P3,578,543.51. Picop

also questions the imposition by the Court of Appeals of the
deficiency income tax of P1,481,579.15, resulting from
disallowance of certain claimed financial guarantee expenses and
claimed year-end adjustments of sales and cost of sales figures
by Picop's external auditors. 3
The CIR, upon the other hand, insists that the 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:
(a) the net operating losses of another corporation
(i.e., Rustan Pulp and Paper Mills, Inc.); and
(b) interest payments on loans for the purchase of
machinery and equipment.
The CIR also claims that Picop should be held liable for
interest at fourteen percent (14%) per annum from 15 April
1978 for three (3) years, and interest at twenty percent
(20%) per annum for a maximum of three (3) years; and for a
surcharge of ten percent (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.
The issues which we must here address may be sorted out and
grouped in the following manner:
I. Whether Picop is liable for:
(1) the thirty-five percent (35%) transaction tax;
(2) interest and surcharge on unpaid transaction tax;
and
(3) documentary and science stamp taxes;
II. Whether Picop is entitled to deductions against
income of:
(1) interest payments

on loans for the
purchase of machinery
and equipment;
(2) net operating
losses incurred by the
Rustan Pulp and
Paper Mills, Inc.; and
(3) certain claimed financial guarantee expenses; and
III. (1) Whether Picop had understated
its sales and overstated its cost of
sales for 1977; and
(2) Whether Picop is
liable for the corporate
development tax of
five percent (5%) of its
net income for 1977.
We will consider these issues in the foregoing sequence.
I.
(1) Whether Picop is liable
for the thirty-five percent
(35%) transaction tax.
With the authorization of the Securities and Exchange Commission,
Picop issued commercial paper consisting of serially numbered
promissory notes with the total face value of P229,864,000.00 and a
maturity period of one (1) year, i.e., from 24 December 1977 to 23
December 1978. These promissory notes were purchased by various
commercial banks and financial institutions. On these promissory
notes, Picop paid interest in the aggregate amount of
P45,771,849.00. In respect of these interest payments, the CIR
required Picop to pay the thirty-five percent (35%) transaction tax.
The CIR based this assessment on Presidential Decree No. 1154
dated 3 June 1977, which reads in part as follows:
Sec. 1. The National Internal Revenue Code, as

amended, is hereby further amended by adding a new
section thereto to read as follows:
Sec. 195-C. Tax on certain interest. There shall be
levied, assessed, collected and paid on every
commercial paper issued in the primary market as
principal instrument, a transaction tax equivalent to
thirty-five percent (35%) based on the gross amount
of interest thereto as defined hereunder, which shall
be paid by the borrower/issuer: Provided, however,
that in the case of a long-term commercial paper
whose maturity exceeds more than one year, the
borrower shall pay the tax based on the amount of
interest corresponding to one year, and thereafter
shall pay the tax upon accrual or actual payment
(whichever is earlier) of the untaxed portion of the
interest which corresponds to a period not exceeding
one year.
The transaction tax imposed in this section shall be a
final tax to be paid by the borrower and shall be
allowed as a deductible item for purposes of
computing the borrower's taxable income.
For purposes of this tax
(a) "Commercial paper" shall be defined as an
instrument evidencing indebtedness of any person or
entity, including banks and non-banks performing
quasi-banking functions, which is issued, endorsed,
sold, transferred or in any manner conveyed to
another person or entity, either with or without
recourse and irrespective of
maturity. Principally, commercial papers are
promissory notesand/or similar instruments issued in
the primary market and shall not include repurchase
agreements, certificates of assignments, certificates
of participations, and such other debt instruments
issued in the secondary market.
(b) The term "interest" shall mean the difference
between what the principal borrower received and the
amount it paid upon maturity of the commercial paper

which shall, in no case, be lower than the interest rate
prevailing at the time of the issuance or renewal of the
commercial paper. Interest shall be deemed
synonymous with discount and shall include all fees,
commissions, premiums and other payments which
form integral parts of the charges imposed as a
consequence of the use of money.
In all cases, where no interest rate is stated or if the
rate stated is lower than the prevailing interest rate at
the time of the issuance or renewal of commercial
paper, the Commissioner of Internal Revenue, upon
consultation with the Monetary Board of the Central
Bank of the Philippines, shall adjust the interest rate
in accordance herewith, and assess the tax on the
basis thereof.
The tax herein imposed shall be remitted by the
borrower to the Commissioner of Internal Revenue or
his Collection Agent in the municipality where such
borrower has its principal place of business within five
(5) working days from the issuance of the commercial
paper. In the case of long term commercial paper, the
tax upon the untaxed portion of the interest which
corresponds to a period not exceeding one year shall
be paid upon accrual payment, whichever is earlier.
(Emphasis supplied)
Both the CTA and the Court of Appeals sustained the
assessment of transaction tax.
In the instant Petition, Picop reiterates its claim that it is exempt from
the payment of the transaction tax by virtue of its tax exemption under
R.A. No. 5186, as amended, known as the Investment Incentives Act,
which in the form it existed in 1977-1978, read in relevant part as
follows:
Sec. 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 the area of investment is included
in the Investment Priorities Plan to the following
extent:
(1) One hundred per cent (100%) for the first five
years;
(2) Seventy-five per cent (75%) for the sixth through
the eighth years;
(3) Fifty per cent (50%) for the ninth and tenth years;
(4) Twenty per cent (20%) for the eleventh and twelfth
years; and
(5) Ten per cent (10%) for the thirteenth through the
fifteenth year.
xxx xxx xxx 4
We agree with the CTA and the Court of Appeals that Picop's tax
exemption under R.A. No. 5186, as amended, does not include
exemption from the thirty-five percent (35%) transaction tax. In the
first place, the thirty-five percent (35%) transaction tax 5 is an
income tax, that is, it is a tax on the interest income of the lenders
or creditors. In Western Minolco Corporation v. Commissioner of
Internal Revenue, 6 the petitioner corporation borrowed funds from
several financial institutions from June 1977 to October 1977 and
paid the corresponding thirty-five (35%) transaction tax thereon in
the amount of P1,317,801.03, pursuant to Section 210 (b) of the
1977 Tax Code. Western Minolco applied for refund of that amount
alleging it was exempt from the thirty-five (35%) transaction tax by
reason of Section 79-A of C.A. No. 137, as amended, which
granted new mines and old mines resuming operation "five (5)
years complete tax exemptions, except income tax, from the time
of its actualbonafide orders for equipment for commercial
production." In denying the claim for refund, this Court held:
The petitioner's contentions deserve scant
consideration. The 35% transaction tax is imposed on
interest income from commercial papers issued in the

primary money market. Being a tax on interest, it is a
tax on income.
As correctly ruled by the respondent Court of Tax
Appeals:
Accordingly, we need not and do not
think it necessary to discuss further
the nature of the transaction tax more
than to say that the incipient scheme
in the issuance of Letter of Instructions
No. 340 on November 24, 1975 (O.G.
Dec. 15, 1975), i.e., to achieve
operational simplicity and effective
administration in capturing the
interest-income "windfall" from money
market operations as a new source of
revenue, has lost none of its animating
principle in parturition of amendatory
Presidential Decree No. 1154, now
Section 210 (b) of the Tax Code. The
tax thus imposed is actually a tax on
interest earnings of the lenders or
placers who are actually the taxpayers
in whose income is imposed. Thus
"the borrower withholds the tax of 35%
from the interest he would have to pay
the lender so that he (borrower) can
pay the 35% of the interest to the
Government." (Citation omitted) . . . .
Suffice it to state that the broad
consensus of fiscal and monetary
authorities is that "even if nominally,
the borrower is made to pay the tax,
actually, the tax is on the interest
earning of the immediate and all prior
lenders/placers of the money. . . ."
(Rollo, pp. 36-37)
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 interests earned by them and
later remitted the same to the respondent
Commissioner of Internal Revenue. 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.
xxx xxx xxx 7
(Emphasis supplied)
Much the same issue was passed upon in Marinduque
Mining Industrial Corporation v. Commissioner of Internal
Revenue 8 and resolved in the same way:
It is very obvious that the transaction tax, which is a
tax on interest derived from commercial paper issued
in the money market, is not a tax contemplated in the
above-quoted legal provisions. The petitioner admits
that it is subject to income tax. Its tax exemption
should be strictly construed.
We hold that petitioner's claim for refund was
justifiably denied. The transaction tax, although
nominally categorized as a business tax, is in reality a
withholding tax as positively stated in LOI No. 340.
The petitioner could have shifted the tax to the
lenders or recipients of the interest. It did not choose
to do so. It cannot be heard now to complain about
the tax. LOI No. 340 is an extraneous or extrinsic aid
to the construction of section 210 (b).
xxx xxx xxx 9
(Emphasis supplied)
It is thus clear that the transaction tax is an income tax and as

such, in any event, falls outside the scope of the tax exemption
granted to registered pioneer enterprises by Section 8 of R.A. No.
5186, as amended. Picop was the withholding agent, obliged to

withhold thirty-five percent (35%) of the interest payable to its
lenders and to remit the amounts so withheld to the Bureau of
Internal Revenue ("BIR"). As a withholding agent, Picop is
madepersonally liable for the thirty-five percent (35%) transaction
tax 10 and if it did not actually withhold thirty-five percent (35%) of
the interest monies it had paid to its lenders, Picop had only itself
to blame.
Picop claims that it had relied on a ruling, dated 6 October 1977,
issued by the CIR, which held that Picop was not liable for the thirtyfive (35%) transaction tax in respect of debenture bonds issued by
Picop. Prior to the issuance of the promissory notes involved in the
instant case, Picop had also issued debenture bonds
P100,000,000.00 in aggregate face value. The managing underwriter
of this debenture bond issue, Bancom Development Corporation,
requested a formal ruling from the Bureau of Internal Revenue on the
liability of Picop for the thirty-five percent (35%) transaction tax in
respect of such bonds. The ruling rendered by the then Acting
Commissioner of Internal Revenue, Efren I. Plana, stated in relevant
part:
It is represented that PICOP will be offering to the
public primary bonds in the aggregate principal sum
of one hundred million pesos (P100,000,000.00); that
the bonds will be issued as debentures in
denominations of one thousand pesos (P1,000.00) or
multiples, to mature in ten (10) years at 14%
interest per annum payable semi-annually; that the
bonds are convertible into common stock of the
issuer at the option of the bond holder at an agreed
conversion price; that the issue will be covered by
a "Trust Indenture" with a duly authorized trust
corporation as required by the Securities and
Exchange Commission, which trustee will act for and
in behalf of the debenture bond holders as
beneficiaries; that once issued, the bonds cannot be
preterminated by the holder and cannot be redeemed
by the issuer until after eight (8) years from date of
issue; that the debenture bonds will be subordinated
to present and future debts of PICOP; and that said
bonds are intended to be listed in the stock
exchanges, which will place them alongside listed

equity issues.
In reply, I have the honor to inform you that although the bonds hereinabove
described are commercial papers which will be issued in the primary
market, however, it is clear from the abovestated facts that said bonds will
not be issued as money market instruments. Such being the case, and
considering that the purposes of Presidential Decree No. 1154, as can be
gleaned from Letter of Instruction No. 340, dated November 21, 1975, are
(a) to regulate money market transactions and (b) to ensure the collection
of the tax on interest derived from money market transactions by imposing
a withholding tax thereon, said bonds do not come within the purview of
the "commercial papers"intended to be subjected to the 35% transaction
tax prescribed in Presidential Decree No. 1154, as implemented by
Revenue Regulations No. 7-77. (See Section 2 of said Regulation)
Accordingly, PICOP is not subject to 35% transaction tax on its issues of
the aforesaid bonds. However, those investing in said bonds should be
made aware of the fact that the transaction tax is not being imposed on the
issuer of said bonds by printing or stamping thereon, in bold letters, the
following statement: "ISSUER NOT SUBJECT TO TRANSACTION TAX
UNDER P.D. 1154. BONDHOLDER SHOULD DECLARE INTEREST
EARNING FOR INCOME TAX." 11 (Emphases supplied)
In the above quoted ruling, the CIR basically held that Picop's
debenture bonds did not constitute "commercial papers" within the
meaning of P.D. No. 1154, and that, as such, those bonds were not
subject to the thirty-five percent (35%) transaction tax imposed by
P.D. No. 1154.
The above ruling, however, is not applicable in respect of the

promissory notes which are the subject matter of the instant case.
It must be noted that the debenture bonds which were the subject
matter of Commissioner Plana's ruling were long-term bonds
maturing in ten (10) years and which could not be pre-terminated
and could not be redeemed by Picop until after eight (8) years
from date of issue; the bonds were moreover subordinated to
present and future debts of Picop and convertible into common
stock of Picop at the option of the bondholder. In contrast, the
promissory notes involved in the instant case are short-term
instruments bearing a one-year maturity period. These promissory
notes constitute the very archtype of money market instruments.
For money market instruments are precisely, by custom and
usage of the financial markets, short-term instruments with a tenor
of one (1) year or less. 12 Assuming, therefore, (without passing
upon) the correctness of the 6 October 1977 BIR ruling, Picop's
short-term promissory notes must be distinguished, and treated
differently, from Picop's long-term debenture bonds.
We conclude that Picop was properly held liable for the thirty-five
percent (35%) transaction tax due in respect of interest payments on
its money market borrowings.
At the same time, we agree with the Court of Appeals that the
transaction tax may be levied only in respect of the interest earnings
of Picop's money market lenders accruing after P.D. No. 1154 went
into effect, and not in respect of all the 1977 interest earnings of such
lenders. The Court of Appeals pointed out that:
PICOP, however contends that even if the tax has to be paid, it should be
imposed only for the interests earned after 20 September 1977 when PD
1154 creating the tax became effective. We find merit in this contention. It
appears that the tax was levied on interest earnings from January to
October, 1977. However, as found by the lower court, PD 1154 was
published in the Official Gazette only on 5 September 1977, and became
effective only fifteen (15) days after the publication, or on 20 September
1977, no other effectivity date having been provided by the PD. Based on
the Worksheet prepared by the Commissioner's office, the interests earned
from 20 September to October 1977 was P10,224,410.03. Thirty-five (35%)
per cent of this is P3,578,543.51 which is all PICOP should pay as
transaction tax. 13(Emphasis supplied)
P.D. No. 1154 is not, in other words, to be given retroactive effect by

imposing the thirty-five percent (35%) transaction tax in respect of
interest earnings which accrued before the effectivity date of P.D. No.
1154, there being nothing in the statute to suggest that the legislative
authority intended to bring about such retroactive imposition of the
tax.
(2) Whether Picop is liable
for interest and surcharge
on unpaid transaction tax.
With respect to the transaction tax due, the CIR prays that Picop
be held liable for a twenty-five percent (25%) surcharge and for
interest at the rate of fourteen percent (14%) per annum from the
date prescribed for its payment. In so praying, the CIR relies upon
Section 10 of Revenue Regulation 7-77 dated 3 June
1977, 14 issued by the Secretary of Finance. This Section reads:
Sec. 10. Penalties. Where the amount shown by
the taxpayer to be due on its return or part of such
payment is not paid on or before the date prescribed
for its payment, the amount of the tax shall be
increased by twenty-five (25%) per centum, the
increment to be a part of the tax and theentire amount

shall be subject to interest at the rate of fourteen
(14%) per centum per annum from the date
prescribed for its payment.
In the case of willful neglect to file the return within the
period prescribed herein or in case a false or
fraudulent return is willfully made, there shall be
added to the tax or to the deficiency tax in case any
payment has been made on the basis of such return
before the discovery of the falsity or fraud,
asurcharge of fifty (50%) per centum of its amount.
The amount so added to any tax shall be collected at
the same time and in the same manner and as part of
the tax unless the tax has been paid before the
discovery of the falsity or fraud, in which case the
amount so added shall be collected in the same
manner as the tax.
In addition to the above administrative penalties, the criminal and civil
penalties as provided for under Section 337 of the Tax Code of 1977 shall
be imposed for violation of any provision of Presidential Decree No.
1154. 15 (Emphases supplied)
The 1977 Tax Code itself, in Section 326 in relation to Section

4 of the same Code, invoked by the Secretary of Finance in
issuing Revenue Regulation 7-77, set out, in comprehensive
terms, the rule-making authority of the Secretary of Finance:
Sec. 326. Authority of Secretary of Finance to
Promulgate Rules and Regulations. The Secretary
of Finance, upon recommendation of the
Commissioner of Internal Revenue, shall
promulgate all needful rules and regulations for the
effective enforcement of the provisions of this Code.
(Emphasis supplied)
Section 4 of the same Code contains a list of subjects or
areas to be dealt with by the Secretary of Finance through the
medium of an exercise of his quasi-legislative or rule-making
authority. This list, however, while it purports to be openended, does not include the imposition of administrative or
civil penalties such as the payment of amounts additional to
the tax due. Thus, in order that it may be held to be legally
effective in respect of Picop in the present case, Section 10 of

Revenue Regulation 7-77 must embody or rest upon some
provision in the Tax Code itself which imposes surcharge and
penalty interest for failure to make a transaction tax payment
when due.
P.D. No. 1154 did not itself impose, nor did it expressly authorize the
imposition of, a surcharge and penalty interest in case of failure to
pay the thirty-five percent (35%) transaction tax when due. Neither
did Section 210 (b) of the 1977 Tax Code which re-enacted Section
195-C inserted into the Tax Code by P.D. No. 1154.
The CIR, both in its petition before the Court of Appeals and its
Petition in the instant case, points to Section 51 (e) of the 1977 Tax
Code as its source of authority for assessing a surcharge and penalty
interest in respect of the thirty-five percent (35%) transaction tax due
from Picop. This Section needs to be quoted in extenso:
Sec. 51. Payment and Assessment of Income Tax.
(c) Definition of deficiency. As used in this Chapter
in respect of a tax imposed by this Title, the term
"deficiency" means:
(1) The amount by which the tax imposed by this
Title exceeds the amount shown as the tax by the
taxpayer upon his return; but the amount so shown on
the return shall first be increased by the amounts
previously assessed (or collected without
assessment) as a deficiency, and decreased by the
amount previously abated, credited, returned, or
otherwise in respect of such tax; . . .
xxx xxx xxx
(e) Additions to the tax in case of non-payment.
(1) Tax shown on the return. Where the amount
determined by the taxpayer as the tax imposed by
this Title or any installment thereof, or any part of
such amount or installment is not paid on or before
the date prescribed for its payment, there shall be
collected as a part of the tax, interest upon such
unpaid amount at the rate of fourteen per centum per

annum from the date prescribed for its payment until it
is paid: Provided, That the maximum amount that may
be collected as interest on deficiency shall in no case
exceed the amount corresponding to a period of three
years, the present provisions regarding prescription to
the contrary notwithstanding.
(2) Deficiency. Where a deficiency, or any interest
assessed in connection therewith under paragraph (d)
of this section, or any addition to the taxes provided
for in Section seventy-two of this Code is not paid in
full within thirty days from the date of notice and
demand from the Commissioner of Internal Revenue,
there shall be collected upon the unpaid amount as
part of the tax, interest at the rate of fourteen per
centum per annum from the date of such notice and
demand until it is paid:Provided, That the maximum
amount that may be collected as interest on
deficiency shall in no case exceed the amount
corresponding to a period of three years, the present
provisions regarding prescription to the contrary
notwithstanding.
(3) Surcharge. If any amount of tax included in the
notice and demand from the Commissioner of Internal
Revenue is not paid in full within thirty days after such
notice and demand, there shall be collected in
addition to the interest prescribed herein and in
paragraph (d) above and as part of the tax a
surcharge of five per centum of the amount of tax
unpaid. (Emphases supplied)
Section 72 of the 1977 Tax Code referred to in Section 51 (e)
(2) above, provides:
Sec. 72. Surcharges for failure to render returns and
for rendering false and fraudulent returns. In case
of willful neglect to file the return or list required by
this Title within the time prescribed by law, or in case
a false or fraudulent return or list is wilfully made, the
Commissioner of Internal Revenue shall add to the
tax or to the deficiency tax, in case any payment has
been made on the basis of such return before the
discovery of the falsity or fraud, as surcharge of fifty

per centum of the amount of such tax or deficiency
tax. In case of any failure to make and file a return or
list within the time prescribed by law or by the
Commissioner or other Internal Revenue Officer, not
due to willful neglect, the Commissioner of Internal
Revenue shall add to the tax twenty-five per centum
of its amount, except that, when a return is voluntarily
and without notice from the Commissioner or other
officer filed after such time, and it is shown that the
failure to file it was due to a reasonable cause, no
such addition shall be made to the tax. The amount
so added to any tax shall be collected at the same
time, in the same manner and as part of the tax
unless the tax has been paid before the discovery of
the neglect, falsity, or fraud, in which case the amount
so added shall be collected in the same manner as
the tax. (Emphases supplied)
It will be seen that Section 51 (c) (1) and (e) (1) and (3), of the 1977
Tax Code, authorize the imposition of surcharge and interest only in
respect of a "tax imposed by this Title," that is to say, Title II
on "Income Tax." It will also be seen that Section 72 of the 1977 Tax
Code imposes a surcharge only in case of failure to file a return or list
"required by this Title," that is, Title II on "Income Tax." The thirty-five
percent (35%) transaction tax is, however, imposed in the 1977 Tax
Code by Section 210 (b) thereof which Section is embraced in Title V
on"Taxes on Business" of that Code. Thus, while the thirty-five
percent (35%) transaction tax is in truth a tax
imposed on interest income earned by lenders or creditors
purchasing commercial paper on the money market, the relevant
provisions, i.e., Section 210 (b), were not inserted in Title II of the
1977 Tax Code. The end result is that the thirty-five percent (35%)
transaction tax is not one of the taxes in respect of which Section 51
(e) authorized the imposition of surcharge and interest and Section
72 the imposition of a fraud surcharge.
It is not without reluctance that we reach the above conclusion on the
basis of what may well have been an inadvertent error in legislative
draftsmanship, a type of error common enough during the period of
Martial Law in our country. Nevertheless, we are compelled to adopt
this conclusion. We consider that the authority to impose what the
present Tax Code calls (in Section 248) civil penalties consisting of
additions to the tax due, must be expressly given in the enabling
statute, in language too clear to be mistaken. The grant of that

authority is not lightly to be assumed to have been made to
administrative officials, even to one as highly placed as the Secretary
of Finance.
The state of the present law tends to reinforce our conclusion that
Section 51 (c) and (e) of the 1977 Tax Code did not authorize the
imposition of a surcharge and penalty interest for failure to pay the
thirty-five percent (35%) transaction tax imposed under Section 210
(b) of the same Code. The corresponding provision in the current Tax
Code very clearly embraces failure to pay all taxes imposed in the
Tax Code, without any regard to the Title of the Code where
provisions imposing particular taxes are textually located. Section 247
(a) of the NIRC, as amended, reads:
Title X
Statutory Offenses and Penalties
Chapter I
Additions to the Tax
Sec. 247. General Provisions. (a) The additions to
the tax or deficiency tax prescribed in this Chapter
shall apply to all taxes, fees and charges imposed in
this Code. The amount so added to the tax shall be
collected at the same time, in the same manner and
as part of the tax. . . .
Sec. 248. Civil Penalties. (a) There shall be
imposed, in addition to the tax required to be paid,
penalty equivalent to twenty-five percent (25%) of the
amount due, in the following cases:
xxx xxx xxx
(3) failure to pay the tax within the
time prescribed for its payment; or
xxx xxx xxx
(c) the penalties imposed hereunder shall form part of

the tax and the entire amount shall be subject to the
interest prescribed in Section 249.
Sec. 249. Interest. (a) In General. There shall
be assessed and collected on any unpaid amount of
tax, interest at the rate of twenty percent (20%) per
annum or such higher rate as may be prescribed by
regulations, from the date prescribed for payment until
the amount is fully paid. . . . (Emphases supplied)
In other words, Section 247 (a) of the current NIRC supplies
what did not exist back in 1977 when Picop's liability for the
thirty-five percent (35%) transaction tax became fixed. We do
not believe we can fill that legislative lacuna by judicial fiat.
There is nothing to suggest that Section 247 (a) of the
present Tax Code, which was inserted in 1985, was intended
to be given retroactive application by the legislative
authority. 16
(3) Whether Picop is Liable
for Documentary and
Science Stamp Taxes.
As noted earlier, Picop issued sometime in 1977 long-term
subordinated convertible debenture bonds with an aggregate face
value of P100,000,000.00. Picop stated, and this was not disputed by
the CIR, that the proceeds of the debenture bonds were in fact
utilized to finance the BOI-registered operations of Picop. The CIR
assessed documentary and science stamp taxes, amounting to
P300,000.00, on the issuance of Picop's debenture bonds. It is
claimed by Picop that its tax exemption "exemption from all taxes
under the National Internal Revenue Code, except income tax" on a
declining basis over a certain period of time includes exemption
from the documentary and science stamp taxes imposed under the
NIRC.
The CIR, upon the other hand, stresses that the tax exemption
under the Investment Incentives Act may be granted or recognized
only to the extent that the claimant Picop was engaged in
registered operations, i.e., operations forming part of its integrated
pulp and paper project. 17 The borrowing of funds from the public,
in the submission of the CIR, was not an activity included in
Picop's registered operations. The CTA adopted the view of the

CIR and held that "the issuance of convertible debenture bonds
[was] not synonymous [with] the manufactur[ing] operations of an
integrated pulp and paper mill." 18
The Court of Appeals took a less rigid view of the ambit of the tax
exemption granted to registered pioneer enterprises. Said the Court
of Appeals:
. . . PICOP's explanation that the debenture bonds were issued to finance
its registered operation is logical and is unrebutted. We are aware that tax
exemptions must be applied strictly against the beneficiary in order to deter
their abuse. It would indeed be altogether a different matter if there is a
showing that the issuance of the debenture bonds had no bearing
whatsoever on the registered operations PICOP and that they were issued
in connection with a totally different business undertaking of PICOP other
than its registered operation. There is, however, a dearth of evidence in this
regard. It cannot be denied that PICOP needed funds for its operations.
One of the means it used to raise said funds was to issue debenture
bonds. Since the money raised thereby was to be used in its registered
operation, PICOP should enjoy the incentives granted to it by R.A. 5186,
one of which is the exemption from payment of all taxes under the National
Internal Revenue Code, except income taxes, otherwise the purpose of the
incentives would be defeated. Documentary and science stamp taxes on
debenture bonds are certainly not income taxes. 19 (Emphasis supplied)
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. We consider
that 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 stamp taxes
ordinarily imposed upon or in connection with issuance of such
bonds. We agree, therefore, 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.
It remains only to note that after commencement of the present
litigation before the CTA, the BIR took the position that the tax
exemption granted by R.A. No. 5186, as amended, does include
exemption from documentary stamp taxes on transactions entered
into by BOI-registered enterprises. BIR Ruling No. 088, dated 28 April
1989, for instance, held that a registered preferred pioneer enterprise

engaged in the manufacture of integrated circuits, magnetic heads,
printed circuit boards, etc., is exempt from the payment of
documentary stamp taxes. The Commissioner said:
You now request a ruling that as a preferred pioneer
enterprise, you are exempt from the payment of
Documentary Stamp Tax (DST).
In reply, please be informed that your request is
hereby granted. Pursuant to Section 46 (a) of
Presidential Decree No. 1789, pioneer enterprises
registered with the BOI are exempt from all taxes
under the National Internal Revenue Code, except
from all taxes under the National Internal Revenue
Code, except income tax, from the date the area of
investment is included in the Investment Priorities
Plan to the following extent:
xxx xxx xxx
Accordingly, your company is exempt from the
payment of documentary stamp tax to the extent of
the percentage aforestated on transactions
connected with the registered business activity. (BIR
Ruling No. 111-81) However, if said transactions
conducted by you require the execution of a taxable
document with other parties, said parties who are not
exempt shall be the one directly liable for the tax.
(Sec. 173, Tax Code, as amended; BIR Ruling No.
236-87) In other words, said parties shall be liable to
the same percentage corresponding to your tax
exemption. (Emphasis supplied)
Similarly, in BIR Ruling No. 013, dated 6 February 1989, the
Commissioner held that a registered pioneer enterprise
producing polyester filament yarn was entitled to exemption
"from the documentary stamp tax on [its] sale of real property
in Makati up to December 31, 1989." It appears clear to the
Court that the CIR, administratively at least, no longer insists
on the position it originally took in the instant case before the
CTA.
II
(1) Whether Picop is entitled
to deduct against current
income interest payments
on loans for the purchase
of machinery and equipment.
In 1969, 1972 and 1977, Picop obtained loans from foreign creditors
in order to finance the purchase of machinery and equipment needed
for its operations. In its 1977 Income Tax Return, Picop claimed
interest payments made in 1977, amounting to P42,840,131.00, on
these loans as a deduction from its 1977 gross income.
The CIR disallowed this deduction upon the ground that, because the
loans had been incurred for the purchase of machinery and
equipment, the interest payments on those loans should have been
capitalized instead and claimed as a depreciation deduction taking
into account the adjusted basis of the machinery and equipment
(original acquisition cost plus interest charges) over the useful life of
such assets.
Both the CTA and the Court of Appeals sustained the position of
Picop and held that the interest deduction claimed by Picop was
proper and allowable. In the instant Petition, the CIR insists on its
original position.
We begin by noting that 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. Section 30 of the
1977 Tax Code provided as follows:
Sec. 30. Deduction from Gross Income. The
following may be deducted from gross income:
(a) Expenses:
xxx xxx xxx
(b) Interest:
(1) In general. The amount
of interest paid within the taxable year
on indebtedness, except on
indebtedness incurred or continued to
purchase or carry obligations the
interest upon which is exempt from
taxation as income under this Title: . . .
(Emphasis supplied)
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. 20 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 CIR has been unable to point to any provision of the 1977 Tax
Code or any other Statute that requires the disallowance of the
interest payments made by Picop. The CIR invokes Section 79 of
Revenue Regulations No. 2 as amended which reads as follows:
Sec. 79. Interest on Capital. Interest calculated for
cost-keeping or other purposes on account of capital
or surplus invested in the business, which does not
represent a charge arising under an interest-bearing
obligation, is not allowable deduction from gross
income. (Emphases supplied)
We read the above provision of Revenue Regulations No. 2
as referring to 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 notarise from a legally demandable
interest-bearing 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.
It is claimed by the CIR that Section 79 of Revenue Regulations No. 2
was "patterned after" paragraph 1.266-1 (b), entitled "Taxes and
Carrying Charges Chargeable to Capital Account and Treated as
Capital Items" of the U.S. Income Tax Regulations, which paragraph
reads as follows:
(B) Taxes and Carrying Charges. The items thus
chargeable to capital accounts are
(11) In the case of real property, whether improved or
unimproved and whether productive or nonproductive.
(a) Interest on a loan (but not theoretical interest of a taxpayer using his
own funds). 21
The truncated excerpt of the U.S. Income Tax Regulations quoted by

the CIR needs to be related to the relevant provisions of the U.S.
Internal Revenue Code, which provisions deal with the general topic
of adjusted basis for determining allowable gain or loss on sales or
exchanges of property and allowable depreciation and depletion of
capital assets of the taxpayer:
Present Rule. The Internal Revenue Code, and the
Regulations promulgated thereunder provide that "No
deduction shall be allowed for amounts paid or
accrued for such taxes and carrying charges as,
under regulations prescribed by the Secretary or his
delegate, are chargeable to capital account with
respect to property, if the taxpayer elects, in
accordance with such regulations, to treat such taxes
or charges as so chargeable."
At the same time, under the adjustment of basis provisions which have just
been discussed, it is provided that adjustment shall be made for all
"expenditures, receipts, losses, or other items" properly chargeable to a
capital account, thus including taxes and carrying charges; however, an
exception exists, in which event such adjustment to the capital account is
not made, with respect to taxes and carrying charges which the taxpayer
has not elected to capitalize but for which a deduction instead has been
taken. 22 (Emphasis supplied)
The "carrying charges" which may be capitalized under the

above quoted provisions of the U.S. Internal Revenue Code
include, as the CIR has pointed out, interest on a loan "(but
not theoretical interest of a taxpayer using his own funds)."
What the CIR failed to point out is that such "carrying
charges" may, at the election of the taxpayer, either be (a)
capitalized in which case the cost basis of the capital assets,
e.g., machinery and equipment, will be adjusted by adding the
amount of such interest payments oralternatively, be (b)
deducted from gross income of the taxpayer. Should the
taxpayer elect to deduct the interest payments against its
gross income, the taxpayer cannot at the same time capitalize
the interest payments. In other words, the taxpayer
is not entitled to both the deduction from gross income and
the adjusted (increased) basis for determining gain or loss
and the allowable depreciation charge. The U.S. Internal
Revenue Code does not prohibit the deduction of interest on
a loan obtained for purchasing machinery and equipment
against gross income, unless the taxpayer has also or
previously capitalized the same interest payments and
thereby adjusted the cost basis of such assets.
We have already noted that our 1977 NIRC does not prohibit the
deduction of interest on a loan incurred for acquiring machinery and
equipment. Neither does our 1977 NIRC compel the capitalization of
interest payments on such a loan. The 1977 Tax Code is simply silent
on a taxpayer's right to elect one or the other tax treatment of such
interest payments. Accordingly, the general rule that interest
payments on a legally demandable loan are deductible from gross
income must be applied.
The CIR argues finally that to allow Picop to deduct its interest
payments against its gross income would be to encourage fraudulent
claims to double deductions from gross income:
[t]o allow a deduction of incidental expense/cost incurred in the purchase of
fixed asset in the year it was incurred would invite tax
evasionthrough fraudulent application of double deductions from gross
income. 23 (Emphases supplied)
The Court is not persuaded. So far as the records of the

instant cases show, Picop has not claimed to be entitled to
double deduction of its 1977 interest payments. The CIR has
neither alleged nor proved that Picop had previously adjusted
its cost basis for the machinery and equipment purchased
with the loan proceeds by capitalizing the interest payments

here involved. The Court will not assume that the CIR would
be unable or unwilling to disallow "a double deduction" should
Picop, having deducted its interest cost from its gross income,
also attempt subsequently to adjust upward the cost basis of
the machinery and equipment purchased and claim, e.g.,
increased deductions for depreciation.
We conclude that the CTA and the Court of Appeals did not err in
allowing the deductions of Picop's 1977 interest payments on its
loans for capital equipment against its gross income for 1977.
income net operating losses
incurred by Rustan Pulp
and Paper Mills, Inc.
On 18 January 1977, Picop entered into a merger agreement with the
Rustan Pulp and Paper Mills, Inc. ("RPPM") and Rustan
Manufacturing Corporation ("RMC"). Under this agreement, the
rights, properties, privileges, powers and franchises of RPPM and
RMC were to be transferred, assigned and conveyed to Picop as the
surviving corporation. The entire subscribed and outstanding capital
stock of RPPM and RMC would be exchanged for 2,891,476 fully
paid up Class "A" common stock of Picop (with a par value of P10.00)
and 149,848 shares of preferred stock of Picop (with a par value of
P10.00), to be issued by Picop, the result being that Picop would
wholly own both RPPM and RMC while the stockholders of RPPM
and RMC would join the ranks of Picop's shareholders. In addition,
Picop paid off the obligations of RPPM to the Development Bank of
the Philippines ("DBP") in the amount of P68,240,340.00, by issuing
6,824,034 shares of preferred stock (with a par value of P10.00) to
the DBP. The merger agreement was approved in 1977 by the
creditors and stockholders of Picop, RPPM and RMC and by the
Securities and Exchange Commission. Thereupon, on 30 November
1977, apparently the effective date of merger, RPPM and RMC were
dissolved. The Board of Investments approved the merger agreement
on 12 January 1978.
It appears that RPPM and RMC were, like Picop, BOI-registered

companies. Immediately before merger effective date, RPPM had
over preceding years accumulated losses in the total amount of
P81,159,904.00. In its 1977 Income Tax Return, Picop claimed

P44,196,106.00 of RPPM's accumulated losses as a deduction
against Picop's 1977 gross income. 24
Upon the other hand, even before the effective date of merger, on
30 August 1977, Picop sold all the outstanding shares of RMC
stock to San Miguel Corporation for the sum of P38,900,000.00,
and reported a gain of P9,294,849.00 from this transaction. 25
In claiming such deduction, Picop relies on section 7 (c) of R.A. No.
5186 which provides as follows:
Sec. 7. Incentives to Registered Enterprise. A
registered enterprise, to the extent engaged in a
preferred area of investment, shall be granted the
following incentive benefits:
xxx xxx xxx
(c) Net Operating Loss Carry-over. A net operating
loss incurred in any of the first ten years of operations
may be carried over as a deduction from taxable
income for the six years immediately following the
year of such loss. The entire amount of the loss shall
be carried over to the first of the six taxable years
following the loss, and any portion of such loss which
exceeds the taxable income of such first year shall be
deducted in like manner from the taxable income of
the next remaining five years. The net operating loss
shall be computed in accordance with the provisions
of the National Internal Revenue Code, any provision
of this Act to the contrary notwithstanding, except that
income not taxable either in whole or in part under
this or other laws shall be included in gross income.
(Emphasis supplied)
Picop had secured a letter-opinion from the BOI dated 21
February 1977 that is, after the date of the agreement of
merger but before the merger became effective relating to
the deductibility of the previous losses of RPPM under
Section 7 (c) of R.A. No. 5186 as amended. The pertinent
portions of this BOI opinion, signed by BOI Governor Cesar
Lanuza, read as follows:
2) PICOP will not be allowed to carry over the losses

of Rustan prior to the legal dissolution of the latter
because at that time the two (2) companies still had
separate legal personalities;
3) After BOI approval of the merger, PICOP can no longer apply for the
registration of the registered capacity of Rustan because with the approved
merger, such registered capacity of Rustan transferred to PICOP will have
the same registration date as that of Rustan. In this case, the previous
losses of Rustan may be carried over by PICOP, because with the merger,
PICOP assumes all the rights and obligations of Rustan subject, however,
to the period prescribed for carrying over of such
losses. 26 (Emphasis supplied)
Curiously enough, Picop did not also seek a ruling on this

matter, clearly a matter of tax law, from the Bureau of Internal
Revenue. Picop chose to rely solely on the BOI letter-opinion.
The CIR disallowed all the deductions claimed on the basis of

RPPM's losses, apparently on two (2) grounds. Firstly, the
previous losses were incurred by "another taxpayer," RPPM, and
not by Picop in connection with Picop's own registered operations.
The CIR took the view that Picop, RPPM and RMC were merged
into one (1) corporate personality only on 12 January 1978, upon
approval of the merger agreement by the BOI. Thus, during the
taxable year 1977, Picop on the one hand and RPPM and RMC
on the other, still had their separate juridical personalities.
Secondly, the CIR alleged that these losses had been incurred by
RPPM "from the borrowing of funds" and not from carrying out of
RPPM's registered operations. We focus on the first ground. 27
The CTA upheld the deduction claimed by Picop; its reasoning,
however, is less than crystal clear, especially in respect of its view of
what the U.S. tax law was on this matter. In any event, the CTA
apparently fell back on the BOI opinion of 21 February 1977 referred
to above. The CTA said:
Respondent further averred that the incentives
granted under Section 7 of R.A. No. 5186 shall be
available only to the extent in which they are engaged
in registered operations, citing Section 1 of Rule IX of
the Basic Rules and Regulations to Implement the
Intent and Provisions of the Investment Incentives
Act, R.A. No. 5186.
We disagree with respondent. The purpose of the merger was to rationalize

the container board industry and not to take advantage of the net losses
incurred by RPPMI prior to the stock swap. Thus, when stock of a
corporation is purchased in order to take advantage of the corporation's net
operating loss incurred in years prior to the purchase, the corporation
thereafter entering into a trade or business different from that in which it
was previously engaged, the net operating loss carry-over may be entirely
lost. [IRC (1954), Sec. 382(a), Vol. 5, Mertens, Law of Federal Income
Taxation, Chap. 29.11a, p. 103]. 28 Furthermore, once the BOI approved the
merger agreement, the registered capacity of Rustan shall be transferred to
PICOP, and the previous losses of Rustan may be carried over by PICOP
by operation of law. [BOI ruling dated February 21, 1977 (Exh. J-1)] It is
clear therefrom, that the deduction availed of under Section 7(c) of R.A. No.
5186 was only proper." (pp. 38-43, Rollo of SP No. 20070) 29 (Emphasis
supplied)
In respect of the above underscored portion of the CTA

decision, we must note that the CTA in fact overlooked the
statement made by petitioner's counsel before the CTA that:
Among the attractions of the merger to Picop was the
accumulated net operating loss carry-over of RMC
that it might possibly use to relieve it (Picop) from its
income taxes, under Section 7 (c) of R.A. 5186. Said
section provides:
xxx xxx xxx
With this benefit in mind, Picop addressed three (3) questions to the BOI in
a letter dated November 25, 1976. The BOI replied on February 21, 1977
directly answering the three (3) queries. 30 (Emphasis supplied)
The size of RPPM's accumulated losses as of the date of the

merger more than P81,000,000.00 must have
constituted a powerful attraction indeed for Picop.
The Court of Appeals followed the result reached by the CTA. The
Court of Appeals, much like the CTA, concluded that since RPPM
was dissolved on 30 November 1977, its accumulated losses
were appropriately carried over by Picop in the latter's 1977
Income Tax Return "because by that time RPPMI and Picop were
no longer separate and different taxpayers." 31
After prolonged consideration and analysis of this matter, the Court is
unable to agree with the CTA and Court of Appeals on the
deductibility of RPPM's accumulated losses against Picop's 1977
gross income.
It is important to note at the outset that in our jurisdiction, the ordinary

rule that is, the rule applicable in respect of
corporations not registered with the BOI as a preferred pioneer
enterprise is that net operating losses cannot be carried over.
Under our Tax Code, both in 1977 and at present, losses may be
deducted from gross income only if such losses were actually
sustained in the same year that they are deducted or charged off.
Section 30 of the 1977 Tax Code provides:
Sec. 30. Deductions from Gross Income. In
computing net income, there shall be allowed as
deduction
xxx xxx xxx
(d) Losses:
(1) By Individuals. In the case of an individual,
losses actually sustained during the taxable yearand
not compensated for by an insurance or otherwise
(A) If incurred in trade or business;
xxx xxx xxx
(2) By Corporations. In a case of a corporation, all
losses actually sustained and charged off within the
taxable year and not compensated for by insurance or
otherwise.
(3) By Non-resident Aliens or Foreign Corporations. In the case of a nonresident alien individual or a foreign corporation, the losses deductible are
those actually sustained during the year incurred in business or trade
conducted within the Philippines, . . . 32 (Emphasis supplied)
Section 76 of the Philippine Income Tax Regulations

(Revenue Regulation No. 2, as amended) is even more
explicit and detailed:
Sec. 76. When charges are deductible. Each year's
return, so far as practicable, both as to gross income
and deductions therefrom should be complete in itself,
and taxpayers are expected to make every
reasonable effort to ascertain the facts necessary to
make a correct return. The expenses, liabilities, or

deficit of one year cannot be used to reduce the
income of a subsequent year. A taxpayer has the right
to deduct all authorized allowances and it follows
that if he does not within any year deduct certain of
his expenses, losses, interests, taxes, or other
charges,
he can not deduct them from the income of the next
or any succeeding year. . . .
xxx xxx xxx
. . . . If subsequent to its occurrence, however, a
taxpayer first ascertains the amount of a loss
sustained during a prior taxable year which has not
been deducted from gross income, he may render an
amended return for such preceding taxable
year including such amount of loss in the deduction
from gross income and may in proper cases file
a claim for refund of the excess paid by reason of the
failure to deduct such loss in the original return. A loss
from theft or embezzlement occurring in one year and
discovered in another is ordinarily deductible for the
year in which sustained. (Emphases supplied)
It is thus clear that under our law, and outside the special
realm of BOI-registered enterprises, there is no such thing as
a carry-over of net operating loss. To the contrary, losses
must be deducted against current income in the taxable year
when such losses were incurred. Moreover, such losses may
be charged offonly against income earned in the same
taxable year when the losses were incurred.
Thus it is that R.A. No. 5186 introduced the carry-over of net
operating losses as a very special incentive to be granted only to
registered pioneer enterprises and only with respect to their
registered operations. The statutory purpose here may be seen to be
the encouragement of the establishment and continued operation of
pioneer industries by allowing the registered enterprise to accumulate
its operating losses which may be expected during the early years of
the enterprise and to permit the enterprise to offset such losses
against income earned by it in later years after successful
establishment and regular operations. To promote its economic
development goals, the Republic foregoes or defers taxing the
income of the pioneer enterprise until after that enterprise has

recovered or offset its earlier losses. We consider that the statutory
purpose can be served only if the accumulated operating losses are
carried over and charged off against income subsequently earned
and accumulated by the same enterprise engaged in the same
registered operations.
In the instant case, to allow the deduction claimed by Picop would be
to permit one corporation or enterprise, Picop, to benefit from the
operating losses accumulated by another corporation or enterprise,
RPPM. RPPM far from benefiting from the tax incentive granted by
the BOI statute, in fact gave up the struggle and went out of existence
and its former stockholders joined the much larger group of Picop's
stockholders. To grant Picop's claimed deduction would be to permit
Picop to shelter its otherwise taxable income (an objective which
Picop had from the very beginning) which had not been earned by
the registered enterprise which had suffered the accumulated losses.
In effect, to grant Picop's claimed deduction would be to permit Picop
to purchase a tax deduction and RPPM to peddle its accumulated
operating losses. Under the CTA and Court of Appeals decisions,
Picop would benefit by immunizing P44,196,106.00 of its income
from taxation thereof although Picop had not run the risks and
incurred the losses which had been encountered and suffered by
RPPM. Conversely, the income that would be shielded from taxation
is not income that was, after much effort, eventually generated by the
same registered operations which earlier had sustained losses. We
consider and so hold that there is nothing in Section 7 (c) of R.A. No.
5186 which either requires or permits such a result. Indeed, that
result makes non-sense of the legislative purpose which may be seen
clearly to be projected by Section 7 (c), R.A. No. 5186.
The CTA and the Court of Appeals allowed the offsetting of RPPM's
accumulated operating losses against Picop's 1977 gross income,
basically because towards the end of the taxable year 1977, upon the
arrival of the effective date of merger, only one (1) corporation, Picop,
remained. The losses suffered by RPPM's registered operations and
the gross income generated by Picop's own registered operations
now came under one and the same corporate roof. We consider that
this circumstance relates much more to form than to substance. We
do not believe that that single purely technical factor is enough to
authorize and justify the deduction claimed by Picop. Picop's claim for
deduction is not only bereft of statutory basis; it does violence to the
legislative intent which animates the tax incentive granted by Section
7 (c) of R.A. No. 5186. In granting the extraordinary privilege and
incentive of a net operating loss carry-over to BOI-registered pioneer

enterprises, the legislature could not have intended to require the
Republic to forego tax revenues in order to benefit a corporation
which had run no risks and suffered no losses, but had merely
purchased another's losses.
Both the CTA and the Court of Appeals appeared much impressed
not only with corporate technicalities but also with the U.S. tax law
on this matter. It should suffice, however, simply to note that in
U.S. tax law, the availability to companies generally of operating
loss carry-overs and of operating loss carry-backs is expressly
provided and regulated in great detail by statute. 33 In our
jurisdiction, save for Section 7 (c) of R.A. No. 5186, no statute
recognizes or permits loss carry-overs and loss carry-backs.
Indeed, as already noted, our tax law expressly rejects the very
notion of loss carry-overs and carry-backs.
We conclude that the deduction claimed by Picop in the amount of
P44,196,106.00 in its 1977 Income Tax Return must be disallowed.
income certain claimed
financial guarantee expenses.
In its Income Tax Return for 1977, Picop also claimed a deduction in
the amount of P1,237,421.00 as financial guarantee expenses.
This deduction is said to relate to chattel and real estate mortgages
required from Picop by the Philippine National Bank ("PNB") and DBP
as guarantors of loans incurred by Picop from foreign creditors.
According to Picop, the claimed deduction represents registration
fees and other expenses incidental to registration of mortgages in
favor of DBP and PNB.
In support of this claimed deduction, Picop allegedly showed its own
vouchers to BIR Examiners to prove disbursements to the Register of
Deeds of Tandag, Surigao del Sur, of particular amounts. In the
proceedings before the CTA, however, Picop did not submit in
evidence such vouchers and instead presented one of its employees
to testify that the amount claimed had been disbursed for the
registration of chattel and real estate mortgages.
The CIR disallowed this claimed deduction upon the ground of

insufficiency of evidence. This disallowance was sustained by the
CTA and the Court of Appeals. The CTA said:
No records are available to support the abovementioned expenses. The
vouchers merely showed that the amounts were paid to the Register of
Deeds and simply cash account. Without the supporting papers such as the
invoices or official receipts of the Register of Deeds, these vouchers
standing alone cannot prove that the payments made were for the accrued
expenses in question. The best evidence of payment is the official receipts
issued by the Register of Deeds. The testimony of petitioner's witness that
the official receipts and cash vouchers were shown to the Bureau of Internal
Revenue will not suffice if no records could be presented in court for proper
marking and identification. 34 Emphasis supplied)
The Court of Appeals added:

The mere testimony of a witness for PICOP and the cash vouchers do not
suffice to establish its claim that registration fees were paid to the Register
of Deeds for the registration of real estate and chattel mortgages in favor of
Development Bank of the Philippines and the Philippine National Bank as
guarantors of PICOP's loans. The witness could very well have been merely
repeating what he was instructed to say regardless of the truth, while the
cash vouchers, which we do not find on file, are not said to provide the
necessary details regarding the nature and purpose of the expenses
reflected therein. PICOP should have presented, through the guarantors, its
owner's copy of the registered titles with the lien inscribed thereon as well
as an official receipt from the Register of Deeds evidencing payment of the
registration fee. 35 (Emphasis supplied)
We must support the CTA and the Court of Appeals in their

foregoing rulings. A taxpayer has the burden of proving entitlement
to a claimed deduction. 36 In the instant case, even Picop's own
vouchers were not submitted in evidence and the BIR Examiners
denied that such vouchers and other documents had been
exhibited to them. Moreover, cash vouchers can only confirm the
fact of disbursement but not necessarily the purpose thereof. 37The
best evidence that Picop should have presented to support its
claimed deduction were the invoices and official receipts issued by
the Register of Deeds. Picop not only failed to present such
documents; it also failed to explain the loss thereof, assuming they
had existed before. 38 Under the best evidence rule, 39 therefore,
the testimony of Picop's employee was inadmissible and was in
any case entitled to very little, if any, credence.
We consider that entitlement to Picop's claimed deduction of
P1,237,421.00 was not adequately shown and that such deduction
must be disallowed.
III
(1) Whether Picop had understated
its sales and overstated its
cost of sales for 1977.
In its assessment for deficiency income tax for 1977, the CIR claimed
that Picop had understated its sales by P2,391,644.00 and, upon the
other hand, overstated its cost of sales by P604,018.00. Thereupon,
the CIR added back both sums to Picop's net income figure per its
own return.
The 1977 Income Tax Return of Picop set forth the following figures:
Sales (per Picop's Income Tax Return):
Paper P 537,656,719.00
Timber P 263,158,132.00
Total Sales P 800,814,851.00

============
Upon the other hand, Picop's Books of Accounts reflected
higher sales figures:
Sales (per Picop's Books of Accounts):
Paper P 537,656,719.00
Timber P 265,549,776.00
Total Sales P 803,206,495.00

============
The above figures thus show a discrepancy between the

sales figures reflected in Picop's Books of Accounts and the
sales figures reported in its 1977 Income Tax Return,
amounting to: P2,391,644.00.
The CIR also contended that Picop's cost of sales set out in its 1977
Income Tax Return, when compared with the cost figures in its Books
of Accounts, was overstated:
Cost of Sales
(per Income Tax Return)
P607,246,084.00
Cost of Sales
(per Books of Accounts)
P606,642,066.00
Discrepancy P 604,018.00
============
Picop did not deny the existence of the above noted discrepancies. In
the proceedings before the CTA, Picop presented one of its officials
to explain the foregoing discrepancies. That explanation is perhaps
best presented in Picop's own words as set forth in its Memorandum
before this Court:
. . . that the adjustment discussed in the testimony of
the witness, represent the best and most objective
method of determining in pesos the amount of the
correct and actual export sales during the year. It was
this correct and actual export sales and costs of sales
that were reflected in the income tax return and in the
audited financial statements. These corrections did
not result in realization of income and should not give
rise to any deficiency tax.
xxx xxx xxx
What are the facts of this case on this matter? Why
were adjustments necessary at the year-end?
Because of PICOP's 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.
At the end of the year, the external auditors made an examination. In that
examination, the auditors determined with accuracy the actual dollar
proceeds of the export sales received. What exchange rate was used by
the auditors to convert these actual dollar proceeds into Philippine pesos?
They used the average of the differences between (a) the recorded fixed
exchange rate and (b) the exchange rate at the time the proceeds were
actually received. It was this rate at time of receipt of the proceeds that
determined the amount of pesos credited by the Central Bank (through the
agent banks) in favor of PICOP. These accumulated differences were
averaged by the external auditors and this was what was used at the yearend for income tax and other government-report purposes. (T.s.n., Oct.
17/85, pp. 20-25) 40
The above explanation, unfortunately, at least to the mind of the

Court, raises more questions than it resolves. Firstly, the
explanation assumes that all of Picop's sales were export sales for
which U.S. dollars (or other foreign exchange) were received. It
also assumes that the expenses summed up as "cost of sales"
were all dollar expenses and that no peso expenses had been
incurred. Picop's explanation further assumes that a substantial
part of Picop's dollar proceeds for its export sales were not
actually surrendered to the domestic banking system and
seasonably converted into pesos; had all such dollar proceeds
been converted into pesos, then the peso figures could have been
simply added up to reflect the actual peso value of Picop's export
sales. Picop offered no evidence in respect of these assumptions,
no explanation why and how a "pre-determined fixed exchange
rate" was chosen at the beginning of the year and maintained
throughout. Perhaps more importantly, Picop was unable to
explain why its Books of Accounts did not pick up the same
adjustments that Picop's External Auditors were alleged to have
made for purposes of Picop's Income Tax Return. Picop attempted
to explain away the failure of its Books of Accounts to reflect the
same adjustments (no correcting entries, apparently) simply by
quoting a passage from a case where this Court refused to
ascribe much probative value to the Books of Accounts of a
corporate taxpayer in a tax case. 41 What appears to have eluded

Picop, however, is that its Books of Accounts, which are kept by its
own employees and are prepared under its control and
supervision, reflect what may be deemed to be admissions
against interest in the instant case. For Picop's Books of Accounts
precisely show higher sales figures and lower cost of sales figures
than Picop's Income Tax Return.
It is insisted by Picop that its Auditors' adjustments simply present
the "best and most objective" method of reflecting in pesos the
"correct and ACTUAL export sales" 42 and that the adjustments or
"corrections" "did not result in realization of [additional] income
and should not give rise to any deficiency tax." The correctness of
this contention is not self-evident. So far as the record of this case
shows, Picop did not submit in evidence the aggregate amount of
its U.S. dollar proceeds of its export sales; neither did it show the
Philippine pesos it had actually received or been credited for such
U.S. dollar proceeds. It is clear to this Court that the testimonial
evidence submitted by Picop fell far short of demonstrating the
correctness of its explanation.
Upon the other hand, 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.
Accordingly, we must affirm the findings of the Court of Appeals and
the CTA.
(2) Whether Picop is liable for
the corporate development
tax of five percent (5%)
of its income for 1977.
The five percent (5%) corporate development tax is an additional
corporate income tax imposed in Section 24 (e) of the 1977 Tax Code
which reads in relevant part as follows:
(e) Corporate development tax. In addition to the
tax imposed in subsection (a) of this section, an
additional tax in an amount equivalent to 5 per cent of

the same taxable net income shall be paid by a
domestic or a resident foreign corporation; Provided,
That this additional tax shall be imposed only if the
net income exceeds 10 per cent of the net worth, in
case of a domestic corporation, or net assets in the
Philippines in case of a resident foreign
corporation: . . . .
The additional corporate income tax imposed in this
subsection shall be collected and paid at the same
time and in the same manner as the tax imposed in
subsection (a) of this section.
Since this five percent (5%) corporate development tax is
an income tax, Picop is not exempted from it under the
provisions of Section 8 (a) of R.A. No. 5186.
For purposes of determining whether the net income of a

corporation exceeds ten percent (10%) of its net worth, the term
"net worth" means the stockholders' equity represented by the
excess of the total assets over liabilities as reflected in the
corporation's balance sheet provided such balance sheet has
been prepared in accordance with generally accepted accounting
principles employed in keeping the books of the corporation. 43
The adjusted net income of Picop for 1977, as will be seen below, is
P48,687,355.00. Its net worth figure or total stockholders' equity as
reflected in its Audited Financial Statements for 1977 is
P464,749,528.00. Since its adjusted net income for 1977 thus
exceeded ten percent (10%) of its net worth, Picop must be held
liable for the five percent (5%) corporate development tax in the
amount of P2,434,367.75.
Recapitulating, we hold:
(1) Picop is liable for the thirty-five percent (35%) transaction tax in
the amount of P3,578,543.51.
(2) Picop is not liable for interest and surcharge on unpaid transaction
tax.
(3) Picop is exempt from payment of documentary and science stamp

taxes in the amount of P300,000.00 and the compromise penalty of
P300.00.
(4) Picop is entitled to its claimed deduction of P42,840,131.00 for
interest payments on loans for, among other things, the purchase of
machinery and equipment.
(5) Picop's claimed deduction in the amount of P44,196,106.00 for
the operating losses previously incurred by RPPM, is disallowed for
lack of merit.
(6) Picop's claimed deduction for certain financial guarantee
expenses in the amount P1,237,421.00 is disallowed for failure
adequately to prove such expenses.
(7) Picop has understated its sales by P2,391,644.00 and overstated
its cost of sales by P604,018.00, for 1977.
(8) Picop is liable for the corporate development tax of five percent
(5%) of its adjusted net income for 1977 in the amount of
P2,434,367.75.
Considering conclusions nos. 4, 5, 6, 7 and 8, the Court is compelled
to hold Picop liable for deficiency income tax for the year 1977
computed as follows:
Deficiency Income Tax
Net Income Per Return P 258,166.00
Add:
Unallowable Deductions
(1) Deduction of net
operating losses
incurred by RPPM P 44,196,106.00
(2) Unexplained financial
guarantee expenses P 1,237,421.00
(3) Understatement of
Sales P 2,391,644.00
(4) Overstatement of
Cost of Sales P 604,018.00
Total P 48,429,189.00
Net Income as Adjusted P 48,687,355.00

===========
Income Tax Due Thereon 44 P 17,030,574.00
Less:
Tax Already Assessed per
Return 80,358.00
Deficiency Income Tax P 16,560,216.00

Add:
Five percent (5%) Corporate
Development Tax P 2,434,367.00
Total Deficiency Income Tax P 18,994,583.00
===========
Add:
Five percent (5%) surcharge
45
P 949,729.15
Total Deficiency Income Tax

with surcharge P 19,944,312.15
Add:
Fourteen percent (14%)
interest from 15 April
1978 to 14 April 1981 46 P 8,376,610.80
Fourteen percent (14%)

interest from 21 April
1983 to 20 April 1986 47 P 11,894,787.00
Total Deficiency Income Tax

Due and Payable P 40,215,709.00
===========
WHEREFORE, for all the foregoing, the Decision of the Court of
Appeals is hereby MODIFIED and Picop is hereby ORDERED to pay
the CIR the aggregate amount of P43,794,252.51 itemized as
follows:
(1) Thirty-five percent (35%)
transaction tax P 3,578,543.51
(2) Total Deficiency Income
Tax Due 40,215,709.00
Aggregate Amount Due and Payable P 43,794,252.51

============
No pronouncement as to costs.
SO ORDERED.
Narvasa, C.J., Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno,
Kapunan, Mendoza, Francisco, Hermosisima, Jr. and Panganiban,
JJ., concur.
Padilla, J., took no part.

SUPREME COURT
Manila
EN BANC
G.R. No. L-12174
April 26, 1962
MARIA B. CASTRO, petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent.
Rosendo J. Tansinsin and Manuel O. Chan for petitioner.
Office of the Solicitor General and Special Attorney Librada del
Rosario-Natividad for respondent.
REYES, J.B.L., J.:
Appeal from a decision of the Court of Tax Appeals (in its C.T.A.
Case 141) holding petitioner Maria B. Castro liable under the War
Profits Tax Law, Republic Act No. 55, and ordering her to pay a
deficiency war profits tax (including surcharges and interest) in the
amount of P1,360,514.66, and costs.
The background of this case is set forth in great detail in the
decision appealed from. We quote:
Petitioner Maria B. Castro, who is authorized to manage her
own property, is a duly licensed merchant. Pursuant to the
provisions of Section 4 (b) and (c) of Republic Act No. 55, she
filed with the Bureau of Internal Revenue on February 28,
1947, her war profits tax returns which showed a net worth on
February 26, 1945 in the amount of P431,884.00 and a net
worth on December 8, 1941 in the sum of P409,581.57.
Although there is indicated an increase in net worth in the
amount of P22,302.43, she is totally exempted from paying
any war profits tax therefor as the deduction of six per centum
(6%) per annum of the net worth on December 8, 1941
therefrom would show only a taxable increase in net worth in
the amount of P5,574.61 which is not taxable under the said
law.
On November 22, 1947, however, Criminal Case No. 4976
was filed against her in the Court of First Instance of Manila
for violation of Section 4, in connection with Section 8, of the
War Profits Tax Law, for allegedly defrauding the Republic of
the Philippines in the total amount of P1,048,687.76. The
criminal action, was filed at the instance of respondent and
simultaneous with the filing of said action, the petitioner
received for the first time the notice of assessment dated
November 19, 1947 by registered mail from the Collector of
Internal Revenue. The said letter of demand was based on

the report of Supervising Examiner Felipe Aquino of the
Bureau of Internal Revenue, who recommended that the
petitioner be assessed and made to pay the sum of
P1,048,687.76 as war profits tax and surcharge, computed as
follows: .
P 885,694.63
Increase in net worth
Cumulative tax on P500,000
90% tax on P385,694.63
Total Tax
Add 50% surcharge
Total amount due and collectible
P 352,000.00
347,125.17
P 699,125.17
349,562.59
P1,048,687.76
Petitioner through counsel filed a motion to quash the criminal

action against her and during the pendency of the same, she
amended on December 20, 1947, her original war profits tax
returns making it to appear that her true net worth on
February 26, 1945 was P315,438.32 while her net worth on
December 8, 1941 was left unchanged at P409,581.57.
According to the amended return, there was therefore a
decrease in net worth in the amount of P94,143.25 instead of
an increase of P22,302.43 as originally reported.
On February 9, 1948, the motion of petitioner to quash the
information was denied by the Court of First Instance of
Manila. At the sheduled hearing of the case on the merits on
March 7, 1949, the City Fiscal of Manila manifested in open
court that after a re-investigation of the case "the amount of
the tax due and for which the accused stands charged for
evading payment is only about P700,000.00, instead of
P1,048,687.76 as stated in the information." However, at the
continuation of the hearing of the case on February 22, 1950,
Supervising Examiner Felipe Aquino of the Bureau of Internal
Revenue, who testified for the prosecution, declared in
answer to questions propounded by the City Fiscal "that as a
result of a detailed reinvestigation conducted by his office, it

was found out that no war profits tax was due from the
accused in connection with the present case." Whereupon,
City Fiscal Angeles moved for the dismissal of the case.
Finding the petition for dismissal to be well taken, the Court of
First Instance of Manila, in an Order dated February 22, 1950,
dismissed Criminal Case No. 4976 against petitioner.
After the dismissal of the Criminal Case, another report was
submitted by the same Supervising Examiner Felipe Aquino
to his superiors wherein he changed his previous stand taken
before the Court of First Instance of Manila, on the basis of
which report another letter of demand for P2,008,293.53 as
war profits tax was issued against petitioner on January 24,
1950. Barely one month thereafter, another report was again
submitted by the same Supervising Examiner Felipe Aquino
to his superiors, on the basis of which another letter of
demand for war profits tax was issued by respondent against
petitioner for the sum of P2,229,976.94 or an increase of
P221,683.31 over that assessment of January 24, 1950. The
case was again referred to the City Fiscal's Office for another
prosecution based on the earlier demand but the same was
again dropped.
Following insistent requests of petitioner for reinvestigation of
her case, the then Secretary of Finance Pio Pedrosa created
a committee on April 11, 1950 to review or re-examine the
assessment for war profits tax issued against the petitioner.
This committee, otherwise known as the Pedrosa Committee,
was chairmanned by Atty. Artemio M. Lobrin of the Bureau of
Internal Revenue, with Messrs. Melecio R. Domingo and
Roman M. Umali of the same office, Vivencio L. de Peralta of
the General Auditing Office and Jose P. Alejandro of the
Office of the Solicitor General, as members. After a thorough
investigation of the case, the Pedrosa Committee on
September 12, 1950, submitted its report, recommending the
collection of the amount of P3,593,950.78 as war profits tax
due from petitioner inclusive of surcharge and interests,
broken down as follows: .
Taxable increase in net worth
War profits tax due thereon
P1,762,203.95
P1,526,093.75
50% surcharge
Total war profits tax and surcharge
763,406.88
P2,289,140.63
15% surcharge
343,371.09
1% monthly interest thereon from

April 1947
to September 30, 1950 (42%)
961,439.06
Total amount collectible on

September 30, 1950
P3,593,950.78
The findings and recommendations of the Pedrosa Committee

were forwarded to the President of the Philippines for approval
and on September 22, 1950, the President approved the same in
toto.
Accordingly, on September 23, 1950 the respondent demanded
from the petitioner Maria B. Castro the payment of the total
amount of P3,593,950.78 as war profits tax computed in detail as
follows: .
Net worth on February 26, 1945
as per amended war profits tax returns
Add:
P 315
(a) Undeclared cash on

February 25, 1945: As per this
report
Amount declared
(b) Overdeclared accounts
payable: As per amended return
Amount per this report
Net worth on February 26, 1945

Less: Net worth on December 8, 1941:
P1,87
64,097.52
1,80
P 106,000.00
30,000.00
P2,19
Net worth as per amended return
P 409,581.57
Less: Accounts payable
43,547.22
Increase in net worth as per this report
P 36
P1,83
Less: 6% per annum on P366,034.35 from December 8, 1941

to February 26, 1945
P1,76
War profits tax due thereon:.

On P 50,000.00 (P6,000 exempt)
50%
P2
On
30,000.00
60%
On 200,000.00
70%
14
On 200,000.00
80%
16
On 500,000.00
90%
45
On 762,203.95
95%
72
P 1,762,203.95
P1,52
50% surcharge
76
15% surcharge
34
1% monthly interest from April 1, 1947

to September 30, 1950 (42%)
96
Total war profits tax and 50% surcharge (carried forward)
P2,28
Total amount collectible on September 30, 1950
P3,59
In order to enforce collection of this last mentioned assessment of

P3,593,950.78, the respondent caused to be advertised on
October 18, 1950, the sale at public auction on November 22, and
27, 1950, of various real properties of petitioner to satisfy the war
profits tax assessed against her. The petitioner, in order to stop

the scheduled sale at public auction, filed on October 18, 1950,
before the Court of First Instance of Manila a petition for
preliminary injunction (Civil Case No. 12356) against the Collector
of Internal Revenue, praying, among others, that an order be
issued enjoining said official from proceeding with the collection by
summary methods of the war profits tax demanded. Over the
objection of respondent that the Court of First Instance had no
jurisdiction to entertain the complaint nor to issue a writ of
injunction, the said Court entered an order dated November 8,
1950 declaring that it had authority proceed with the case but
denied the petition for preliminary injunction. Inasmuch as no
preliminary injunction was issued by the Court, respondent
proceeded with the distraint and levy and sale at public auction of
the properties of petitioner. These properties, which are situated in
the Cities of Manila, Pasay and Tagaytay and in the Municipalities
of Caloocan and Makati, Rizal, and Moncada, Tarlac, and
described more particularly in Exhibits C, C-1, C-2, C-3, C-4 and
C-5 of the petition for injunction filed with this Court, were offered
for sale on November 22, and 27, 1950 as scheduled, to answer
for the war profits tax liability of petitioner to the Republic of the
Philippines in the assessed sum of P3,593,950.78, inclusive of
surcharges and interest from April 1, 1947 to September 30, 1950.
For lack of bidders on the scheduled dates of sale, the following
properties (except those in Tagaytay) with their corresponding
assessed value, were forfeited to the Government under Section
328 of the National Internal Revenue Code: .
Property
Manila
Balintawak
Assessed Value
P233,460.00
521,390.00
Pasay
18,320.00
Makati
4,830.00
Tarlac
12,530.00
Tagaytay
62,930.00
In another sale at public auction on April 23, 1954, the property of

petitioner situated in Caloocan, Rizal, with an assessed value of
P4,990.00 was also offered for sale to answer for her war profits
tax liability. There being no bidders in this sale as in the previous
sale, this last mentioned real property of petitioner was also
forfeited to the Government.
The petitioner has not exercised her right of legal redemption with
respect to all these real properties with a total assessed value of
P858,440.00 which were sold at public auction by the respondent
and forfeited in favor of the Government for lack of bidders.
Parenthetically, it may be stated that the hearing of Civil Case No.
12356 before the Court of First Instance of Manila for Preliminary
Injunction was not continued to its final determination by said court
as the Supreme Court in a decision promulgated on October 31,
1951 declared the lower court without jurisdiction to proceed with
the trial. (Saturnino David v. The Honorable Simeon Ramos and
Maria B. Castro, G.R. No. L-4300)..
In the course of the summary methods employed by the
respondent to enforce the collection of the war profits tax liability
of petitioner, the respondent also distrained and advertised for
sale the properties of the Marvel Building Corporation in which the
petitioner had a substantial interest. To counter-act the move, the
said corporation through counsel filed on November 31, 1950,
Civil Case No. 12555 in the Court of First Instance of Manila
wherein it sought to enjoin the respondent Collector of Internal
Revenue from selling at public auction its various properties
described in the complaint. While the corporation was able to
secure the injunction from the lower court, the same was
dissolved by the Supreme Court in its decision in G.R. No. L-5081,
Marvel Building Corporation v. Saturnino David, promulgated on
February 24, 1954. Petitioner Maria B. Castro was declared
therein as the sole and exclusive owner of all shares of stock of
the Marvel Building Corporation and all the other partners are her
dummies.
In the meantime, petitioner filed on December 10, 1951, Civil
Case No. 15316 with the Court of First Instance of Manila against
the respondent Collector of Internal Revenue for the recovery of
the properties advertised for saleon November 22 and 27, 1950
which for lack of bidders were forfeited to theGovernment.

However, before the case could be tried on the merits before said
Court, the Court of Tax Appeals was created by Republic Act No.
1125 and pursuant to Section 22 thereof, the record of the case
was remanded for finaldisposition to this Court. This last
mentioned case is now pending hearing before this Court.
At this juncture, it should be stated that again on December 22,
1951, an additional war profits tax was assessed against the
petitioner in the sum of P20,425.00 based allegedly on certain
amounts receivable which petitioner received from Magdalena
Estate, Inc. Consequently, the total war profits taxliability of
petitioner, exclusive of surcharge and interest, as found by the
Pedrosa Committee was increased to P1,546,518.75, itemized as
follows: .
1wph1.t
Tax due as per Pedrosa Committee

Additional war profits tax on account of undeclared amount
receivable from the Magdalena Estates, Inc.
Total war profits tax exclusive of surcharge and interest.
To satisfy, fully the amount of the war profits tax assessed against
petitioner, the respondent on September 29, 1954, caused to be
advertised for sale at public auction for November 2, 1954, other
real properties of petitioner situated in Manila. These properties
are described in detail in Appendix B of the petition for review filed
with this Court. According to the "Amended Notice of Sale"
(Appendix B, Petition for Review), the properties were seized,
distrained and levied upon from petitioner "in satisfaction of
internal revenue taxes and penalties amounting to P4,539,556.26,
computed as of April 30, 1954" due from her in favor of the
Republic of the Philippines. For lack of bidders at the time of the
scheduled sale on November 2, 1954, the properties in question
were forfeited to the Government under Section 328 of the
National Internal Revenue Code for the total amount of
P3,547,892.41 which was allegedly the balance of petitioner's tax
liability as of that date.
P1,52
P1,54
Before the expiration of the one-year period provided for in

Section 328 of the National Internal Revenue Code within which
petitioner may redeem the real properties forfeited in favor of the
Government in the sale at public auction held on November 2,
1954, the petitioner filed with this Court on September 30, 1955, a
petition for the annulment of said sale and forfeiture on the ground
that her properties were advertised for sale on tax claim of the
Government far in excess of the alleged war profits tax,
surcharges and penalties fixed by respondent. Respondent filed
his opposition to the petition and after due hearing where
evidence was adduced in support of the petition as well as
opposition thereto, this Court, in a resolution dated October 31,
1955, declared the auction sale of November 2, 1954 as well as
the resulting forfeiture, null and void and of no legal force and
effect because of the admitted discrepancy in the amount of tax
stated in the notice of sale for which the properties were auctioned
and the actual amount of tax assessed and demanded.
The said resolution being without prejudice to such action and
proceedings a respondent may take in accordance with law,
respondent demanded from petitioner the amount of
P3,594,881.51 not later than November 10, 1955 or he would
again proceed with the resale of her properties on December 12,
1955. To stop the sale, petitioner filed a petition for injunction with
this Court on November 22, 1955 requesting that respondent be
enjoined from proceeding with the resale of her properties
scheduled on December 12, 1955; that the said properties be
released to her; and that she be declared not liable for the war
profits tax assessed and demanded of her. After due hearing of
this petition and the opposition thereto, this Court, in a resolution
dated December 10, 1955, denied the injunction and held in
abeyance the determination of other questions until after the case
shall have been heard on the merits. The properties were
therefore advertised for sale on December 12, 1955 to answer for
a war profits tax liability of petitioner to the Republic of the
Philippines for the alleged amount of P3,594,307.51 computed as
of that date. For lack of bidders, the same were forfeited to the
Government. Those properties and the amounts for which they
were forfeited are as follows:.
Aguinaldo Building
P2,026,517.10
Wise & Co. Building
670,291.47
Zobel Mansion
408,501.24
Shellborne Hotel
489,491.70
Total
P3,594,801.51
Add: Prior forfeitures
888,440.00
P4,453,241.51
After due hearing and reception of evidence, the Tax Court

annulled the last tax sale of December, 1955, covering the found
Manila buildings, on account of irregularities in the notices of sale;
but for the rest, it found against petitioner and assessed her tax
liability as follows: .
"Net worth on Feb. 26, 1945
as per amended war profits tax return
Add: (a) Underdeclared cash on February
26, 1945:
As per Pedrosa Committee report
Amount declared
(b) Accounts Payable: As per
amended return
Amount per Pedrosa Committee
Report-P30,000.00
Accounts payable to Lao Kang Suy
recognized by Court-P76,000.00
P 31
P1,871,542.13
64,097.52
P 106,000.00
106.000.00
Net worth on Feb. 26, 1945
P2,12
Less: Net worth on December 8,

1941:
Net worth as per amended return
Less Accounts payable P43,547.22
1,80
P 409,581.57
366,034.35
Increase in net worth
P1,756,848.58
Less 6% per annum on P366,034.35

from Dec. 8, 1941 to Feb. 26, 1945
70,644.63
P1,686,203.95
Add: Undeclared accounts receivable

from
Magdalena Estate, Inc. as of Feb. 26,
1945 that
was discovered in June, 1951 only
Total taxable increase in net worth
21,500.00
P1,707,703.95
War Profits tax due thereon:

On P50,000.00 (P6,000.00 Exempt)
@ 50%
P 22,000.00
50,000.00
@ 60%
30,000.00
200,000.00
@ 70%
140,000.00
200,000.00
@ 80%
160,000.00
500,000.00
@ 90%
450,000.00
707,703.95
@ 95%
672,318.75
Total . . . . . . . . . . . . . P1,474,318.75
50% surcharge on P1,474,318.75
P 73
15% surcharge on P1,474,318.75
22
1% monthly on P1,474,318.75 from 4/l/47 to 11/22/50
64
Total amount collectible on 11/22/50 . . . . . . . .

Less: Values of properties sold:
On Nov. 22, 1950
P1,556,000
On Nov. 27, 1950
150,900
P3,07
April 20, 1954
9,980
Total due as of December 12, 1955
From this decision, Maria Castro appealed to this Court..

The nineteen alleged errors committed by the Court of Tax
Appeals and discussed by appellant in her printed brief actually
revolve around four main defenses: (a) that the War Profits Tax
Law (R.A. No. 55) is unconstitutional and void; (b) that said law
was improperly applied to the case of the appellant; (c) that even if
appellant were subject to the tax liability declared by the court
below, such liability was totally extinguished by the levy and
forfeiture of certain properties of hers; and (d) that appellant's
acquittal in the criminal case instituted against her for violation of
the War Profits Tax Law is a bar to the collection of the taxes
assessed, and specially of the 50% surcharge. (a) Petitioner's
attack on the constitutionality of Republic Act No. 55, commonly
known as the War Profits Tax Law, on account of its retrospective
operation (Errors XVIII), is now foreclosed by our decision in
Republic vs.Oasan Vda. de Fernandez, G.R. No. L-9141,
September 25, 1956, wherein thisCourt upheld the validity of the
statute; and no reasons are alleged that would justify a departure
from the ruling made in that case..
(b) Petitioner Castro complains (Errors I and VI) that the Tax Court
had declared subject to the war profits tax her cash transactions
from June, 1945to December 31, 1946, when Republic Act No. 55
levies that tax only on the value of the taxpayer's assets (including
real and personal property and/orcash in banks) as of February
26, 1945, minus his liabilities..
This argument misconceives the process whereby the Tax Court
(and the Pedrosa Committee) arrived at the petitioner's net worth
as of February 26,1945. Because of the difficulty in determining
the taxpayer's cash on hand on said date (since her books and
records did not show her invested capital in 1945), said tax
authorities adopted the method of starting from her reported cash
on hand on December 31, 1946, and working backwards to
February,1945, by adding to the reported cash the disbursements
made by Castro during1945 and 1946, and then deducting her
1,71
P1,36
receipts from the same period. We see nothing fundamentally

erroneous in this method for, as pointed out in the appealed
decision, "if cash on hand at the beginning of the period, plus
receipts during the period minus disbursements during the period,
equals cash on hand at the end of the period, the converse must
necessarily be true.".
Such method is in effect but an application (in reverse) of the
inventory or networth system that, contrary to appellants
contention (Error XIII), has been approved by this Court in Perez
vs. Collector of Internal Revenue, G.R. No. L-10507, May 30,
1958; Collector vs. A. P. Reyes, L-11534, November 25, 1958; and
Commissioner of Internal Revenue vs. Avelino, L-14847,
September 19, 1961.
The analysis of petitioner's transactions for 1945 and 1946 merely
laid the basis for determining the undisclosed cash funds in her
possession as of February 26, 1945 (amounting to
P1,807,444.61), and it is this cash thatwas found subject to the
war profits tax.
It is urged, however, that even if this finding were correct, still,
under Republic Act No. 55, only "cash in banks" is expressly
mentioned as taxable, and appellant infers that cash on hand not
so deposited was not intended to be subject to war profits tax.
This thesis appears unmeritorious: cash heldby the taxpayer on
February 26, 1945 clearly falls under the description of "assets,
including real and personal property" that section 2 of the Act
expressly order included in determining the taxable net worth. If
"cash in banks" is expressly mentioned by the Act, it is not
because cash on hand was intended to be excluded, but because
"cash in banks" is not, strictly, speaking, part of the assets of the
taxpayer, but assets of the banks where the cash is deposited. It is
well established that a so-called "bank deposit" is in reality a loan
to the bank, the latter acquiring title to the amount "deposited",
subject to its withdrawal (or recall of the loan) on the dates
specified. Taxpayer's "assets", therefore, would not per se include
cash deposited in banks by the taxpayer; and its inclusion had to
be expressly prescribed by the statute in order to remove all doubt
as to its taxability.
Petitioner endeavored to show (Errors VII to XI) that part of the

amount of cash thus arrived at actually originated in receipts from
transactions made by her after February 26, 1945 but which were
not disclosed in the books and accounts. Aside from the fact that
this claim in her behalf contradicted her admission to the Pedrosa
Committee that all her 1946 receipts were recorded in her books
(v. Respondent's Exhibit 6-A), it lay within the exclusive discretion
of the Tax Court to believe or not to believe her evidence and
statements, and those of her witnesses regarding the source of
the cash in question; and the rule is well settled that in cases of
this kind, only errors of law, and not rulings on the weight of
evidence, are reviewable by this Court. The same principle
precludes us from interfering with the Tax Court's refusal to credit
the other deductions claimed by petitioner as amounts obtained
from loans from various individuals. The Court of Tax Appeals
found those items unproved, except the P76,000.00 payable to
Lao Kang Suy, which is accepted, although it had been rejected by
the Pedrosa Committee.
Similarly, the finding that the petitioner had disbursed in 1946
P1,025,000.00 on account of her subscription to the stock of the
Marvel Building Corporation (Error XII) may not be disturbed by
us.
(c) The third main ground of appeal is predicated on the acquittal
of petitioner in case No. 4976 of the Court of First Instance of
Manila, wherein she was criminally prosecuted for failure to render
a true and accurate return of the war profits tax due from her, with
intent to evade payment of the tax. She contends (Assignments of
Error II to IV) that the acquittal should operate as a bar to the
imposition of the tax and specially the 50% surcharge provided by
section 6 of the War Profits law (R.A. No. 55), invoking the ruling
in Coffey v. U.S., 29 L. Ed. 436.
With regard to the tax proper, the state correctly points out in its
brief that the acquittal in the criminal case could not operate to
discharge petitioner from the duty to pay the tax, since that duty is
imposed by statute prior to and independently of any attempts on
the part of the taxpayer to evade payment. The obligation to pay
the tax is not a mere consequence of the felonious acts charged in
the information, nor is it a mere civil liability derived from crime
that would be wiped out by the judicial declaration that the criminal
acts charged did not exist.
As to the 50% surcharge, the very United States Supreme Court
that rendered the Coffey decision has subsequently pointed out
that additions of this kind to the main tax are not penalties but civil
administrative sanctions, provided primarily as a safeguard for the
protection of the state revenue and to reimburse the government
for the heavy expense of investigation and the loss resulting from
the taxpayer's fraud (Helvering vs. Mitchell, 303 U.S. 390, 82 L.
Ed. 917; Spies vs. U.S. 317 U.S. 492). This is made plain by the
fact that such surcharges are enforceable, like the primary tax
itself, by distraint or civil suit, and that they are provided in a
section of R.A. No. 55 (section 5) that is separate and distinct from
that providing for criminal prosecution (section 7). We conclude
that the defense of jeopardy and estoppel by reason of the
petitioner's acquittal is untenable and without merit. Whether or
not there was fraud committed by the taxpayer justifying the
imposition of the surcharge is an issue of fact to be inferred from
the evidence and surrounding circumstances; and the finding of its
existence by the Tax Court is conclusive upon us. (Gutierrez v.
Collector, G.R. No. L-9771, May 31, 1951 ; Perez vs. Collector,
supra).
(d) The fourth main ground adduced on behalf of the petitioner
(Errors II and XlV) is that the sale and forfeiture to the government
(due to lack of bidders) of the properties of petitioner in Manila,
Balintawak, Pasay, Makati, Tarlac, Tagaytay and Caloocan which
had been levied upon by the respondent Collector of Internal
Revenue and advertised for sale in 1950 and 1954, constitutes a
full discharge of petitioner's tax liabilities. In so arguing, she relies
on the provisions of paragraph 1 of Section 328 of the Internal
Revenue Code, reading as follows: .
SEC. 328. Forfeiture to Government for Want of Bidder. - In
case there is no bidder for real property exposed for sale as
herein above provided or if the highest bid is for an amount
insufficient to pay the taxes, penalties, and costs, the
provincial or city treasurer shall declare the property forfeited
to the Government in satisfaction of the claim in question and
within two days thereafter shall make a return of his
proceedings and the forfeiture, which shall be spread upon

the records of his office,
and appellant contends that in the provision to the effect that in the
absence of bidders, the property is to be "forfeited to the
Government in satisfaction of the claim in question", the term
"satisfaction" signifies nothing but full discharge of the taxes,
penalties, and costs claimed by the state. Carried to its logical
conclusion, this theory would permit a clever taxpayer, who is able
to conceal most or the more valuable part of his property from the
revenue officers, to escape payment of his tax liability by
sacrificing an insignificant portion of his holdings; and we can not
agree that in providing that the forfeiture of the taxpayer's
distrained or levied property, for lack of adequate bids, should
operate in satisfaction of the total tax claims even beyond the
value of the property forfeited. That the satisfaction prescribed in
section 328 of the Revenue Code was intended to mean only a
discharge pro tanto is confirmed by the provisions of section 330
of the Revenue Code to the effect that "remedy by distraint of
personal property and levy on realty may be repeated if
necessary until the full amount due including all expenses, is
collected". This section makes no distinction between forfeitures to
the Government and sales to third persons, and we are satisfied
that no distinction was intended and that none is warranted.
Nor do we see that the petitioner has any ground for complaining
that the properties forfeited were undervalued (Error XV). The
relation between assessed value and market price being variable,
it is not a matter of notice. However, the Court of Tax Appeals
appraised the forfeited properties at double their assessed
evaluation, and thereby credited her with a part payment on
account of her tax liability in the amount of P1,716,880.00. There
is no adequate evidence that they were worth more, petitioner's
own estimates of value being obviously unreliable, due to her
direct interest in the matter under investigation. Since the burden
of proof lay evidently on the taxpayer, she is not in a position to
complain in this regard.
It may be noted in this connection that the validity of the levy and
sale of her properties in November of 1950 and April 1954 is
assailed by appellant in her fifth assignment of error; but as this
point was not raised in the Court below, the same can not be
entertained for the first time on appeal.
(e) As pointed out by the counsel for the Government, appellant's
stand that the undeclared cash should be averaged or spread out
for the years 1945, 1946 and 1947 (Error XVI) assumes that what
was being subjected to tax was her undeclared income during
said years, which is not correct, as previously declared in this
opinion. If her expenditures during 1945 and 1946 were
scrutinized and analyzed, it was merely to determine the actual
value of her taxable net worth as of February 26, 1945, that was
subject to the war profits tax, as representing accumulated profits
earned during the occupation years.
Finally, no argument is needed to show that unless taxes are to be
left at the discretion of the taxpayer, she can not be allowed to
seek refuge or relief by pleading (Error XVII) the alleged inefficient
and erratic manner in which her books of account and supporting
papers had been prepared, contrary to the requirements of the
revenue laws; and that it is incredible that a trader like the
appellant should be able to do business running into millions of
pesos without knowing exactly her financial condition.
Appellant's alleged Error XIX, being merely pro forma, requires no
discussion.
Finding no reversible error in the decision appealed from, we
hereby affirm the same, with costs against appellant.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion,
Paredes and Dizon, JJ., concur.
SUPREME COURT
Manila
EN BANC
G.R. No. L-25299
July 29, 1969

vs.
ITOGON-SUYOC MINES, INC., and THE COURT OF TAX
Office of the Solicitor General Antonio P. Barredo, Assistant
Solicitor General Felicisimo R. Rosete and Special Attorney Oscar
S. de Castro for petitioner.
Ramon O. Reynoso, Jr. and Melchor R. Flores for respondents.
FERNANDO, J.:
The question presented for determination in this petition for
the review of a decision of the Court of Tax Appeals, one that is of
first impression, would not have arisen had respondent ItogonSuyoc Mines, Inc., the taxpayer involved, duly paid in full its
liability according to its income tax return for the fiscal year 196061. Instead, it deducted right away the amount represented by
claim for refund filed eight (8) months back, for the previous year's
income tax, for which it was not liable at all, so it alleged, as it
suffered a loss instead, a claim subsequently favorably acted on
by petitioner Commissioner of Internal Revenue but after the date
of such payment of the 1960-1961 tax. Accordingly, an interest in
the amount of P1,512.83 was charged by petitioner Commissioner
of Internal Revenue on the sum withheld on the ground that no
deduction on such refund should be allowed before its approval.
When the matter was taken up before the Court of Tax Appeals,
the above assessment representing interest was set aside in the
decision of September 30, 1965. That is the decision now an
appeal by petitioner Commissioner of Internal Revenue. We
sustain the Court of Tax Appeals.
Respondent Itogon-Suyoc Mines, Inc., a mining corporation
duly organized and existing in accordance with the laws of the
Philippines, filed on January 13, 1961, its income tax return for the
fiscal year 1959-1960. It declared a taxable income of
P114,368.04 and a tax due thereon amounting to P26,310.41, for
which it paid on the same day, the amount of P13,155.20 as the

first installment of the income tax due. On May 17, 1961, petitioner
filed an amended income tax return, reporting therein a net loss of
P331,707.33. It thus sought a refund from the Commissioner of
Internal Revenue, now the petitioner.
1wph1.t
On February 14, 1962, respondent Itogon-Suyoc Mines, Inc.

filed its income tax return for the fiscal year 1960-1961, setting
forth its income tax liability to the tune of P97,345.00, but
deducting the amount of P13,155.20 representing alleged tax
credit for overpayment of the preceding fiscal year 1959-1960. 0n
December 18, 1962, petitioner Commissioner of Internal Revenue
assessed against the respondent the amount of P1,512.83 as 1%
monthly interest on the aforesaid amount of P13,155.20 from
January 16, 1962 to December 31, 1962. 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
Commissioner of Internal Revenue. 1
Such an assessment was contested by respondent before
the Court of Tax Appeals. As already noted, it prevailed. The
decision of September 30, 1965, now on appeal, explains why.
Thus: "Respondent assessed against the petitioner the amount of
P1,512.83 as 1% monthly interest on the sum of P13,155.20 from
January 16, 1962 to December 31, 1962 on the ground that
petitioner had no legal right to deduct the said amount from its
income tax liability for the fiscal year 1960-1961 until the refund or
tax credit thereof has been approved by respondent. As
aforestated, petitioner paid the amount of P13,155.20 as first
installment on its reported income tax liability for the fiscal year
1959-1960. But, it turned out that instead of deriving a net gain, it
sustained a net loss during the said fiscal year. Accordingly, it filed
an amended income tax return and a claim for the refund of the
sum of P13,155.20, which sum it subsequently, deducted from its
income tax liability for the succeeding fiscal year 1960-1961. The
overpayment for the fiscal year 1959-1960 and the deduction of
the overpaid amount from its 1960-1961 tax liability are not denied
by respondent. In this circumstance, we find it unfair and unjust for

the Commissioner to exact an interest on the said sum of
P13,155.20, which, after all, was paid to and received by the
government even before the incidence of the tax in question." 2
That is the question before us in this petition for review by
the Commissioner of Internal Revenue. He argues that the Court
of Tax Appeals should not have absolved respondent corporation
"from liability to pay the sum of P1,512.83 as 1% monthly interest
for delinquency in the payment of income tax for the fiscal year
1960-1961." 3 As noted at the outset, we find such contention far
from persuasive.
It could not be error for the Court of Tax Appeals,
considering the admitted fact of overpayment, entitling respondent
to refund, to hold that petitioner should not repose an interest on
the aforesaid sum of P13,155.20 "which after all was paid to and
received by the government even before the incidence of the tax
in question." It would be, according to the Court of Tax Appeals,
"unfair and unjust" to do so. We agree but we go farther. The
imposition of such an interest by petitioner is not supported by law.
The National Internal Revenue 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 of Internal Revenue at the specified. 4 It is 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 yet refunded, may
be deducted from the tax to be paid. 5
There is no question respondent was entitled to a refund.
Instead of waiting for the sum involved to be delivered to it, it
deducted the said amount from the tax that it had to pay. That it
had a right to do according to the law. It is true a doubt could have
arisen due to the fact that as of the time such a deduction was
made, the Commissioner of Internal Revenue had not as yet
approved such a refund. It is an admitted fact though that

respondent was clearly entitled to it, and petitioner did not allege
otherwise. Nor could he do so. Under all the circumstances
disclosed therefore, the applicability of the legal provision allowing
such a deduction from the amount of the tax to be paid cannot be
disputed.
This conclusion is in accordance with the principle
announced in Castro v. Collector of Internal Revenue. 6While the
case is not directly in point, it yields an implication that makes
even more formidable the case for respondent taxpayer. As there
held, the imposition of the monthly interest was considered as not
constituting a 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 the government's
hands ...."
What is therefore sought to be avoided is for the taxpayer to
make use of funds that should have been paid to the government.
Here, in view of the overpayment for the fiscal year 1959-1960,
the sum of P13,155.20 had already formed part of the public
funds. It cannot be said, therefore, that respondent taxpayer was
guilty of any delay enabling it to utilize a sum of money that should
have been in the government treasury.
How then, as a matter of pure law, even if we lay to one side
the demands of fairness and justice, which to the Court of Tax
Appeals seem to be uppermost, can its decision be overturned?
Accordingly, we find no valid ground for this appeal.
WHEREFORE, the decision of September 30, 1965 of the
Court of Tax Appeals is affirmed. Without pronouncement as to
costs.
1wph1.t
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar,

Sanchez, Castro, Capistrano and Teehankee, JJ., concur.
Barredo, J., took no part.

SUPREME COURT
Manila
EN BANC
G.R. No. L-19537
May 20, 1965
The late LINO GUTIERREZ substituted by ANDREA C. VDA.

DE GUTIERREZ, ANTONIO D. GUTIERREZ, GUILLERMO D.
GUTIERREZ, SANTIAGO D. GUTIERREZ and TOMAS D.
GUTIERREZ,petitioners,
vs.
COLLECTOR (now COMMISSIONER) OF INTERNAL
REVENUE, respondent.
Rosendo J. Tansinsin, Sr., Rosendo Tansinsin, Jr. and Juan C.
Nabong, Jr.for petitioners.
Office of the Solicitor General for respondent.
BENGZON, J.P., J.:
Lino Gutierrez was primarily engaged in the business of leasing
real property for which he paid estate broker's privilege tax. He
filed his income tax returns for the years 1951, 1952, 1953 and
1954 on the following dates:
Year
Date Filed
1951
March 1, 1952
1952
February 28, 1953
1953
February 22, 1954
1954
February 23, 1955
and paid the corresponding tax declared therein.

On July 10, 1956 the Commissioner (formerly Collector) of Internal
Revenue assessed against Gutierrez the following defiency
income tax:
1951 . . . . . . . . . . . . . .
P 1,400.00
1952 . . . . . . . . . . . . . .
672.00
1953 . . . . . . . . . . . . . .
5,161.00
1954 . . . . . . . . . . . . . .
4,608.00
Total . . . . . . . . . . . . . .
P 11,841.00
==========
The above defiency tax came about by the disallowance of

deductions from gross income representing depreciation,
expenses Gutierrez allegely 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 of:
1951
Personal expenses:
Transportation expenses to attend funeral of various persons
Repair of car and salary of driver
Expenses in attending National Convention of Filipino
Businessmen in Baguio
Alms to indigent family
P 96.50
59.80
121.35
15.00
Capital expenditures:
Electrical fixtures and supplies
100.00
Transportation and other expenses to watch laborers in

construction work
516.00
Realty tax not paid by former owner of property acquired by

Gutierrez
350.00
Litigation expenses to collect rental and eject lessee
702.65
Other disallowed deductions:

Fines and penalties for late payment of taxes
64.48
1952
Personal expenses:
Car expenses, salary of driver and car depreciation
Contribution to Lydia Samson and G. Trinidad
Officers' jewels and aprons donated to Biak-na-Bato
Lodge No. 7, Free Masons
Luncheon of Homeowners' Association
Ticket to opera "Aida"
P1,454.37
52.00
280.00
5.50
15.00
1953
Personal expenses:
Car expenses, salary of driver, car depreciation
P 1,409.24
Cruise to Corregidor with Homeowners' Association
43.00
Contribution to alms to various individuals
70.00
Tickets to operas
28.00
Cost of one set of Comments on the Rules of Court by
Moran
P 145.00
1954
Personal expenses:
Car expenses, salary of driver and car depreciation
Furniture given as commission in connection with
business transaction
Cost of iron door of Gutierrez' residence
P 1,413.67
115.00
55.00
Painting of rental apartments
P 908.00
Carpentry and lumber for rental apartments
335.83
Tinsmith and plumbing for rental apartments
605.25
Cement, tiles, gravel, sand and masonry for rental

apartments
199.48
Iron bars, venetian blind, water pumps for rental apartments
1,340.00
Relocation and registration of property used in taxpayer's

business
1,758.12
He also claimed the depreciation of his residence as follows:

1952 . . . . . .
P 99
1953 . . . . . .
94
1954 . . . . . .
89
The following are the items of income which Gutierrez did not declare in his
income tax returns:
1951
Income of wife (admitted by Gutierrez)
P 2,749.90.
1953
Overstatement of purchase price of real estate
Understatement of profits from sale of real estate
P 8,476.92
5,803.74
1954
Understatement of profits from sale of real estate
P 5,444.24
The overstatement of purchase price of real estate refers to the

sale of two pieces of property in 1953. In 1943 Gutierrez bought a
parcel of land situated along Padre Faura St. in Manila for
P35,000.00. Sometime in 1953, he sold the same for P30,400.00.
Expenses of sale amounted to P631.80. In his return he claimed a
loss of P5,231.80. 1 However, the Commissioner, including the
said property was bought in Japanese military notes, converting
the buying price to its equivalent in PhilippineCommonwealth peso
by the use of the Ballantyne Scale of Values. At P1.30 Japanese
military notes per Commonwealth peso, the acquisition cost of
P35,000.00 Japanese military notes was valued at P26,923.00
PhilippineCommonwealth peso. Accordingly, the Commissioner
determined a profit of P3,476.92 after restoring to Gutierrez' gross
income the P5,231.80 deductionfor loss.
In another transaction, Gutierrez sold a piece of land for

P1,200.00. Alleging the said property was purchased for
P1,200.00, he reported no profit hereunder. However, after
verifying the deed of acquisition, the Commissioner discovered the
purchase price to be only P800.00. Consequently, he determined
a profit of P400.00 which was added to the gross income for
1953.
1wph1.t
The understatement of profit from the sale of real estate may be

explained thus: In 1953 and 1954 Gutierrez sold four other
properties upon which he made substantial profits.2Convinced 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 byGutierrez in his
business), the Commissioner taxed 100% of the profits from their
disposition pursuant to Section 35 of the Tax Code.
Having unsuccessfully questioned the legality and correctness of
the aforesaid assessment, Gutierrez instituted on February 17,
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.
In a decision dated January 28, 1962, the Court of Tax Appeals
upheld in toto the assessment of the Commissioner of Internal
Revenue. Hence, this appeal.
On October 18, 1962, Lino Guttierrez died and he was substituted
by Andrea C. Vda. de Gutierrez, Antonio D. Gutierrez, Santiago D.
Gutierrez, Guillermo D. Gutierrez and Tomas D. Gutierrez, his
heirs,as party petitioners.
The issues are: (1) Are the taxpayer's aforementioned claims for
deduction proper and allowable? (2) May the Ballantyne Scale of
Values be applied indetermining the acquisition cost in 1943 of a
real property sold in 1953, for income tax purposes? (3) Are real
properties used in the trade or business of the taxpayer capital or
ordinary assets? (4) Has the right of the Commissioner of Internal
Revenue to collect the deficiency income tax for the years 1951
and 1952 prescribed? (5) Has the right of the Commissioner of
Internal Revenue to collect by distraint and levy the deficiency
income tax for 1953 prescribed? If not, may the taxpayer's rea
lproperty be distrained and levied upon without first exhausting his
personal property?
We come first to question whether or not the deductions claimed
by Gutierrez are allowable. Section 30(a) of the Tax Code allows
business expenses tobe deducted from gross income. We quote:
SEC. 30. Deductions from gross income. In computing net
income there shall be allowed as deductions
(a) Expenses:
(1) In general. All the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any
trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually
rendered; travelling expenses while away from home in the
pursuit of a trade or business; and rentals or other payments
required to be made as a condition to be continued use of
possession, for the purposes of the trade or business, or
property to which the taxpayer has not taken or is not taking
title or in which he has no equity.
To be deductible, therefore, an expense must be (1) ordinary and

necessary;(2) paid or incurred within the taxable year; and, (3)
paid or incurred in carrying on a trade or business. 3
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 is residence is
purely a personal expense. Personal, living, or family expenses
are not deductible. 4
On the other hand, the cost of furniture given by the taxpayer as
commission in furtherance of a business transaction, the
expenses incurred in attending the National Convention of Filipino
Businessmen, luncheon meeting and cruise to Corregidor of the
Homeowners' Association were shown to have been made in the
pursuit of his business. Commissions given in consideration for
bringing about a profitable transaction are part of the cost of the

business transaction and are deductible.
The record shows that Gutierrez was an officer of the Junior
Chamber of Commerce which sponsored the National Convention
of Filipino Businessmen. He was also the president of the
Homeowners' Association, an organization established by those
engaged in the real estate trade. Having proved that his
membership thereof and activities in connection therewith were
solely to enhance his business, the expenses incurred thereunder
are deductible as ordinary and necessary business expenses.
With respect to the taxpayer's claim for deduction for car
expenses, salary of his driver and car depreciation, one-third of
the same was disallowed by the Commissioner on the ground that
the taxpayer used his car and driver both for personal and
business purposes. There is no clear showing, however, that the
car was devoted more for the taxpayer's business than for his
personal and business needs. 5 According to the evidence, the
taxpayer's car was utilized both for personal and business needs.
We therefore find it reasonable to allow as deduction one-half of
the driver's salary, car expenses and depreciation.
The electrical supplies, paint, lumber, plumbing, cement, tiles,
gravel, masonry and labor used to repair the taxpayer's rental
apartments did not increase the value of such apartments, or
prolong their life. They merely kept the apartments in an ordinary
operating condition. Hence, the expenses incurred therefor are
deductible as necessary expenditures for the maintenance of the
taxpayer's business.
Similarly, the litigation expenses defrayed by Gutierrez to collect
apartment rentals and to eject delinquent tenants are ordinary and
necessary expenses in pursuing his business. It is routinary and
necessary for one in the leasing business to collect rentals and to
eject tenants who refuse to pay their accounts.
The following are not deductible business expenses but should be
integrated into the cost of the capital assets for which they were
incurred and depreciated yearly: (1) Expenses in watching over
laborers in construction work. Watching over laborers is an activity
more akin to the construction work than to running the taxpayer's
business. Hence, the expenses incurred therefor should form part

of the construction cost. (2) Real estate tax which remained
unpaid by the former owner of Gutierrez' rental property but which
the latter paid, is an additional cost to acquire such property and
ought therefore to be treated as part of the property's purchase
price. (3) The iron bars, venetian blind and water pump
augmented the value of the, apartments where they were
installed. Their cost is not a maintenance charge, 6 hence, not
deductible.. 7 (4) Expenses for the relocation, survey and
registration of property tend to strengthen title over the property,
hence, they should be considered as addition to the costs of such
property. (5) The set of "Comments on the Rules of Court" having
a life span of more than one year should be depreciated ratably
during its whole life span instead of its total cost being deducted in
one year.
Coming to the claim for depreciation of Gutierrez' residence, we
find 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.
8
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..9
As regards the alms to an indigent family and various individuals,
contributions to Lydia Yamson and G. Trinidad and a donation
consisting of officers' jewels and aprons to Biak-na-Bato Lodge
No. 7, the same are not deductible from gross income inasmuch
as their recipients have not been shown to be among those
specified by law. Contributions are deductible when given to the
Government of the Philippines, or any of its political subdivisions
for exclusively public purposes, to domestic corporations or
associations organized and operated exclusively for religious,
charitable, scientific, athletic, cultural or educational purposes, or

for the rehabilitation of veterans, or to societies for the prevention
of cruelty to children or animals, no part of the net income of which
inures to the benefit of any private stockholder or individual. 10
We come to the question of whether or not the Ballantyne Scale of
Values can be applied to tax cases.
Sometime in 1943 Gutierrez bought a piece of real estate in
Manila for a price of P35,000.00. In 1953 he sold said property for
P30,400.00, thereby incurring a loss which he claimed as
deduction in his income tax return for 1953. The Commissioner of
Internal Revenue, convinced that the purchase price of the
property in 1943 was in Japanese military notes, converted said
purchase price into Philippine Commonwealth pesos by the use of
the Ballantyne Scale of Values. As a result, the Commissioner
found Gutierrez to have profited, instead of lost in the sale.
Firstly, Gutierrez maintains that the purchase price was paid for in
Commonwealth pesos. On the other hand the Commissioner
insists that inasmuch as the prevailing currency in the City of
Manila in 1943 was the Japanese military issue, the transaction
could have been in said military notes. The evidence offered by
Gutierrez, consisting of the testimony of his son to the effect that it
was he who carried the bundle of Commonwealth pesos and
Japanese military notes when his father purchased the property,
did not convince the Tax Court. No cogent reason to alter the
court a quo's finding of fact in this regard has been given. There is
no definite showing that Gutierrez paid for the property in
Commonwealth pesos. Considering that in 1943 the medium of
exchange in Manila was the Japanese military notes, the use of
which the Japanese Military Government enforced with stringent
measures, we are inclined to concur with the finding that the
purchase price was in Japanese military notes. We are specifically
mindful of the fact that Gutierrez sold the property in 1953 for only
P30,400.00 at a time when the price of real estate in the City of
Manila was much greater than in 1943.
It is further contended by Gutierrez that the money he used to pay
for the purchase of the property in question came from the
proceeds of merchandise acquired prior to World War II but which
he sold after Manila was occupied by the Japanese military forces,
hence, the purchase price should be deemed to have been made

in Commonwealth pesos inasmuch as the aforesaid merchandise
was purchased in Commonwealth pesos. This contention, if true,
strengthens our conclusion that the real estate in question was
bought in Japanese military notes. For, at the time Gutierrez sold
his merchandise, the prevailing currency in the City of Manila was
the Japanese military money. Consequently, the proceeds
therefrom, which were used to buy the real estate in question,
were Japanese military notes.
Gutierrez assails the use of the Ballantyne Scale of Values in
converting the purchase price of the real estate in question from
Japanese military notes to Philippine Commonwealth pesos on
the ground that (1) the Ballantyne Scale of Values was intended
only for transactions entered into by parties voluntarily during the
Japanese occupation, wherein a portion of the contract was left
unperformed until liberation of the Philippines by the Americans;
(2) that such Scale of Values cannot be the basis of a tax, for it is
not a law.
In determining the gain or loss from the sale of property the
purchase price and the selling price ought to be in the same
currency. Since in this case the purchase price was in Japanese
military notes and the selling price was in our present legal tender,
the Japanese military notes should be converted to the present
currency. Since the only standard scale recognized by courts for
the purpose is the Ballantyne Scale of Values, we find it
compelling to use such table of values rather than adopt an
arbitrary scale. It may not be amiss to state in this connection that
the Ballantyne Scale of Values is not being used herein as the
authority to impose the tax, but only as a medium of computing
the tax base upon which the tax is to be imposed.
It is furthermore proffered by the taxpayer that in determining gain
or loss, the real value of the Commonwealth peso at the time the
property was purchased and the value of the Republic peso at the
time. the same property was sold should be considered. The
Commonwealth peso and the Republic peso are the same
currency, with the same intrinsic value, sanctioned by the same
authorities. Both are legal tender and accepted at face value
regardless of fluctuation in their buying power. The 1941
Commonwealth peso when used to buy in 1963 or in 1965 is

accorded the same value: one peso.
In his income tax returns for 1953 and 1954, Gutierrez reported
only 50% of profits he realized from the sale of real properties
during the years 1953 and 1954 on the ground that said properties
were capital assets. Profits from the sale of capital assets are
taxable to the extent of 50% thereof pursuant to Section 34 of the
Tax Code.
Section 34 provides:
SEC. 34. Capital gains and losses. (a) Definitions. As
used in this title
(1) Capital assets. 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 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 thirty; or real
property used in the trade or business of the taxpayer.
xxx
xxx
xxx
(b) Percentage taken into account. In the case of a

taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized upon the sale or
exchange of capital asset hall be taken into account in
computing net capital gain, net capital loss, and net income:
(1) One hundred per centum if the capital asset has been
held for not more than twelve months;
(2) Fifty per centum if the capital asset has been held for not
more than twelve months.
Section 34, before it was amended by Republic Act 82 in 1947,

considered as capital assets real property used in the trade or
business of a taxpayer. However, with the passage of Republic Act
82, Congress classified "real property used in the trade or
business of the taxpayer" is ordinary asset. The explanatory note
to Republic Act 82 says "... the words "or real property used in
the trade or business of the taxpayer" have been included among
the non-capital assets. This has the effect of withdrawing the gain
or loss from the sale or exchange of real property used in the
trade or business of the taxpayer from the operation of the capital
gains and losses provisions. 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. 11 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. 12
With regard to the issue of the prescription of the Commissioner's
right to collect deficiency tax for 1951 and 1952, Gutierrez claims
that the counting of the 5-year period to collect income tax should
start from the time the income tax returns were filed. He,
therefore, urges us to declare the Commissioner's right to collect
the deficiency tax for 1951 and 1952 to have prescribed, the
income tax returns for 1951 and 1952 having been filed in March
1952 and on February 28, 1953, respectively, and the action to
collect the tax having been instituted on March 5, 1958 when the
Commissioner filed his answer to the petition for review in C.T.A.
Case No. 504. On the other hand, the Commissioner argues that
the running of the prescriptive period to collect commences from
the time of assessment. Inasmuch as the tax for 1951 and 1952
were assessed only on July 10, 1956, less than five years lapsed
when he filed his answer on March 5, 1958.
The period of limitation to collect income tax is counted from the
assessment of the tax as provided for in paragraph (c) of Section
332 quoted below:
SEC. 332(c). Where the assessment of any internal revenue
tax has been made within the period of limitation above
prescribed such tax may be collected by distraint or levy or by
a proceeding in court, but only if begun (1) within five years
after the assessment of the tax, or (2) prior to the expiration of

any period for collection agreed upon in writing by the
Collector of Internal Revenue and the taxpayer before the
expiration of such five-year period. The period so agreed
upon may be extended by subsequent agreements in writing
made before the expiration of the period previously agreed
upon.
Inasmuch as the assessment for deficiency income tax was made

on July 10, 1956 which is 7 months and 25 days prior to the action
for collection, the right of the Commissioner to collect such tax has
not prescribed.
The next issue relates to the prescription of the right of the
Commissioner of Internal Revenue to collect the deficiency tax for
1954 by distraint and levy.
The pertinent provision of the Tax Code states:
SEC. 51(d). Refusal or neglect to make returns; fraudulent
returns, etc. In cases of refusal or neglect to make a return
and in cases of erroneous, false, or fraudulent returns, the
Collector of Internal Revenue shall, upon the discovery
thereof, at any time within three years after said return is due
or has been made, make a return upon information obtained
as provided for in this code or by existing law, or require the
necessary corrections to be made, and the assessment made
by the Collector of Internal Revenue thereon shall be paid by
such person or corporation immediately upon notification of
the amount of such assessment.
On February 23, 1955 Gutierrez filed his income tax return for
1954 and on February 24, 1958 the Commissioner of Internal
Revenue issued a warrant of distraint and levy to collect the tax
due thereunder. Gutierrez contends that the Commissioner's right
to issue said warrant is barred, for the same was issued more
than 3 years from the time he filed his income tax return. On the
other hand, the Commissioner of Internal Revenue maintains that
his right did not lapse inasmuch as from the last day prescribed by
law for the filing of the 1954 return to the date when he issued the
warrant of distraint and levy, less than 3 years passed. The
question now is: should the counting of the prescriptive period
commence from the actual filing of the return or from the last day
prescribed by law for the filing thereof?
We observe that Section 51(d) speaks of erroneous, false or
fraudulent returns, and refusal or neglect of the taxpayer to file a
return. It also provides for two dates from which to count the threeyear prescriptive period, namely, the date when the return is
due and the date the return has been made. We are inclined to
conclude that the date when the return is due refers to cases
where the taxpayer refused or neglected to file a return, and the
date when the return has been made refers to instances where
the taxpayer filed erroneous, false or fraudulent returns. Since
Gutierrez filed an income tax return, the three-year prescriptive
period should be counted from the time he filed such return. From
February 23, 1955 when the income tax return for 1954 was filed,
to February 24, 1958, when the warrant of distraint and levy was
issued, 3 years and 2 days elapsed. The right of the
Commissioner to issue said warrant of distraint and levy having
lapsed by two days, the warrant issued is null and void.
The above finding has made academic the question of whether or
not the warrant of distraint and levy can be enforced against the
taxpayer's real property without first exhausting his personal
properties.
In resume the tax liability of Lino Gutierrez for 1951, 1952, 1953
and 1954 may be computed as follows:
1951
Net income per investigation
Add: Disallowed deductions for salary of
driver and car expenses
P29,471.81
29.90
P29,501.81
Less: Allowable deductions:

Expenses in attending
National
Convention of Filipino
Businessmen
Repair of rental apartments
P 121.35
802.65
924.00
Net income
Less: Personal exemption
P30,425.71
3,600.00
Amount subject to tax
P26,825.71
Tax due thereon

Less tax already paid
P 5,668.00
3,981.00
Deficiency income tax due

1952
Add: Disallowed deductions:
Salary of driver
Car expenses
Car depreciation
P 1,687.00
==========
P21,632.22
P 260.67
401.51
65.00
727.18
P22,359.40
Less Allowable deduction:

Luncheon, Homeowners' Association
5.50
Net income
P22,364.90
3,600.00
P18,764.90
Tax due thereon

P 3,324.00
2,476.00

1953
Salary of driver
Car expenses
Car depreciation
848.00
==========
P69,180.91
P 140.00
406.00
58.50
604.50
P69,785.40
Less: Allowable deduction:

Cruise to Corregidor with Homeowners'
Association
42.00
Net Income
P69,828 40
3,600.00
P66,228.40
Tax due thereon

P15,179.00
9,805.00

1954
Salary of driver
Car expenses
Car depreciation
P 5,374.00
==========
P43,881.92
P 140.00
414.18
72.65
626.83
P44,508.75
Less: Allowable deductions:

Furniture given in connection
with business transaction
Repairs of rental apartments
P 115.00
2,048.56
2,163.56
Net income
P42,345.19
3,000.00
P39,345.19
Tax due thereon

P 9,984.00
5,964.00
P 4,020.00
==========
SUM MARY
1951 . . . . . . . . . . . . . . . .
P 1,687.00
1952 . . . . . . . . . . . . . . . .
848.00
1953 . . . . . . . . . . . . . . . .
5,374.00
1954 . . . . . . . . . . . . . . . .
4,020.00
TOTAL . . . . . . . . . .
P 11,929.00
=========
WHEREFORE, the decision appealed from is modified and Lino

Gutierrez and/or his heirs, namely, Andrea C. Vda. de Gutierrez,
Antonio D. Gutierrez, Santiago D. Gutierrez, Guillermo D.
Gutierrez and Tomas D. Gutierrez, are ordered to pay the sums of
P1,687.00, P848.00, P5,374.00, and P4,020.00, as deficiency
income tax for the years 1951, 1952, 1953 and 1954, respectively,
or a total of P11,929.00, plus the statutory penalties in case of
delinquency. No costs. So ordered.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L.,
Barrera, Paredes, Dizon, Makalintal and Zaldivar, JJ., concur.
Regala, J., took no part.

SUPREME COURT
Manila
EN BANC
G.R. No. L-19667
November 29, 1966

vs.
AMERICAN RUBBER COMPANY and COURT OF TAX
G.R. No. L-19801-03
November 29, 1966
AMERICAN RUBBER COMPANY, petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, ET
AL., respondents.
Nos. L-19667:
Ozaeta, Gibbs and Ozaeta for respondents.
Nos. L-19801-03:
Ozaeta, Gibbs and Ozaeta for petitioner.
Office of the Solicitor General for respondents.
REYES, J.B.L., J.:
These cases are brought on appeal from the Court of Tax Appeals
by the State (G.R. No. L-19667) as well as by the American
Rubber Company (G.R. Nos. L-19801, 19802, 19803).
The factual background is the same in all four cases, and is not in
controversy, having been stipulated between the parties.
Petitioner, American Rubber Company, a domestic corporation,

from January 1, 1955 to December 1, 1958, was engaged in
producing rubber from its approximately 900 hectare rubber tree
plantation, which it owned and operated in Latuan, Isabela, City of
Basilan. Its products, known in the market as Preserved Latex,
Pale Crepe No. 1, Pale Crepe No. 2, Ribbed Smoked Sheets Nos.
1 and 2, Flat Bark Rubber, 2X Brown Crepe and 3X Brown Crepe,
are turned out in the following manner:
The initial step common to the production of all the foregoing
rubber products is tapping, i.e., the collection of latex (rubber
juice) from rubber trees. This is done by the daily cutting, early in
the morning, of a spiral incision in the bark of rubber trees and
placing a cup below the lower end of the incision to receive the
flow of latex. The collecting cup is filled after two hours. The
tapper then collects the latex into buckets and carries them to the
collecting shed. The tapper subsequently pours the latex collected
into big milk cans. The filled milk cans are then taken in motor
vehicles to a coagulating shed, also within the premises of
petitioner's plantation, where the latex is strained into coagulating
tanks to remove foreign matter such as leaves and dirt. After these
initial steps, the processes vary in the production of the various
rubber products mentioned above. Said processes are described
hereunder.
Preserved Rubber Latex
Fresh latex is diluted with 5 to 5-1/4 ounces of ammonia per gallon
of latex. The mixture is thoroughly stirred and then poured into
metal drums. The addition of ammonia preserves the latex in liquid
form and prevents its deterioration or its acquisition of a repulsive
smell, and at the same time preserves its uniform color. Latex
which has been thus artificially preserved in its liquid form
generally lasts for about a month without spoiling. On the other
hand, fresh latex in its original state lasts for only about two hours,
after which it becomes spoiled.
Petitioner sells preserved latex only upon previous orders of
customers who supply empty metal drum containers.
Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and
2
To produce Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets

Nos. 1 and 2, the petitioner adds to the latex in the coagulating
tank about 15 or 16 ounces of glacial acetic acid per gallon of
latex. The mixture is stirred thoroughly. Thereafter aluminum
partitions are placed crosswise inside the tank so that the latex will
coagulate into uniform slabs. Acetic acid is added to the latex to
hasten coagulation which otherwise takes place naturally, and to
preserve its fresh state and color. The similarity in the production
of Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1
and 2 ends at the point of removing the coagulum (coagulated
rubber sheets) from the coagulating tanks.
To produce Pale Crepe No. 1, the coagulum is passed through a
series of rollers until the desired thickness is attained, whereupon
it is removed to the air-drying house situated inside petitioner's
plantation and hung for a period of about twelve or thirteen days to
dry. There are no mechanical driers used; the air-drying is done
naturally. As soon as the Pale Crepe is dried, the sheets are
sorted; those which are of uniform pale color are classified as Pale
Crepe No. 2, whereupon they are baled and stored, ready for
market.
Ribbed & Smoked Sheets Nos. 1 and 2 are produced practically in
the same manner as Pale Crepe, except that the coagulum is
passed only once through a roller provided with ribs after which
the flattened and ribbed coagulum is removed to petitioner's
smoke-house where it is hung and cured by exposure to heat and
smoke from wood fires for about six or seven days. The resulting
smoked sheets are sorted and classified dependent upon color
and opaqueness into ribbed smoked sheets (RSS) No. 1 and No.
2, baled, and stored ready for the market. No mechanical
equipment is used in generating the smoke in the smoke-house.
The petitioner's rollers are powered by engines although they
could be turned by hand as it is done in small rubber plantations. If
Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and
2 are not air-dried and smoked they deteriorate, get spoiled, and
the color varies.
Flat Bark Rubber
Each morning after a tapper makes a fresh incision in the bark of

a rubber tree, he gathers the latex dripping from the ground
around the tree, called "ground rubber", as well as the dried latex
from the incisions made the previous day, called "bark rubber".
Ground and bark rubber are not intentionally produced. No
chemicals are added to the latex transformed into ground and
bark rubber. This kind of dried latex is spoiled and has a bad odor.
Ground and bark rubber when gathered in sufficient quantities are
passed numerous times through the rollers or mills until they form
a uniform mass or sheet which, finally is called Flat Bark Rubber.
No chemical is used to coagulate the dried ground and bark
rubber because they are already coagulated. They are formed into
sheets by means only of pressure of the mills or rollers through
which they are passed. Flat Bark Rubber commands the lowest
prices in the rubber market.
3X Brown Crepe
Every morning, before a fresh incision is made in the bark of the
rubber trees, the tapper collects not only ground and bark rubber
but removes and collects the latex in the cups, known as "cup
rubber". The cup rubber coagulates and dries through natural
processes and, when gathered in sufficient quantities, is milled
and rolled through a series of rollers until by force of pressure it is
formed into a mass of the desired thickness called "3X Brown
Crepe." Like ground and bark rubber, no chemicals are added to
cup rubber to produce 3X Brown Crepe. Cup rubber in its original
form, like ground and bark rubber, is spoiled and has a bad odor.
2X Brown Crepe
2X Brown Crepe is obtained by milling or rolling the excess pieces
of coagulated rubber latex which had been cut or trimmed from
the from the ribbed smoked sheets No. 2 into a uniform mass. 2X
Brown Crepe is produced in the same manner as the other sheets
of crepe rubber, i.e., without the addition of any chemicals.
Petitioner during the said period sold its foregoing rubber products
locally and as prescribed by the respondent's regulations declared
same for tax purposes which respondent accordingly assessed.
Petitioner paid, under protest, the corresponding sales taxes
thereon claiming exemption therefrom under Section 188 (b) of

the National Internal Revenue Code.
The following sales taxes on the aforementioned rubber products
were paid under protest
From Jan. 1, 1955 to Dec. 31,

1956
P83,193.48
From Jan. 1, 1957 to June 30,

1957
P20,504.99
From July 1, 1957 to Dec. 31,

1958
P52,378.90
It is further stipulated that the sales tax collected from petitioner

American Rubber Company on the local sales of its rubber
products, following Internal Revenue General Circulars Nos. 431
and 440, had been separately itemized and billed by petitioner
Company in the invoices issued to the customers, that paid both
the value of the rubber articles and the separately itemized sales
tax, from January 1, 1955 to August 2, 1957.
After paying under protest, the petitioner claimed refund of the
sales taxes paid by it on the ground that under section 188,
paragraph b, of the Internal Revenue Code, as amended,1 its
rubber products were agricultural products exempt from sales tax,
and upon refusal of the Commissioner of Internal Revenue,
brought the case on appeal to the Court of Tax Appeals (C.T.A.
Nos. 356, 440,, 632). The respondent Commissioner interposed
defenses, denying that petitioner's products were agricultural ones
within the exemption; claiming that there had been no exhaustion
of administrative remedies; and argued that the sales tax having
been passed to the buyers during the period that elapsed from
January 1, 1955 to August 2, 1957, the petitioner did not have
personality to demand, sue for and recover the aforesaid sales

taxes, plus interest.
In its decision, now under appeal, the Tax Court held Preserved
Latex, Flat Bark Rubber, and 3X Brown Crepe to be agricultural
products, "because the labor employed in the processing thereof
is agricultural labor", and hence, the sales of such products were
exempt from sales tax, but declared Pale Crepe No. 1, Ribbed
Smoked Sheets Nos. 1 and 3, as well as 2X Brown Crepe (which
is obtained from rolling excess pieces of Smoked Sheets) to be
manufactured products, sales of which were subject to the tax. It
overruled the defense of non-exhaustion of administrative
remedies and upheld the Revenue Commissioner's stand that
petitioner Company was not entitled to recover the sales tax that
had been separately billed to its customers, and paid by the latter.
Hence, it dismissed the appeal in C.T.A. Nos. 356 and 440 and
ordered respondent Commissioner to refund only P3,916.49
without interest, or costs.
Both parties then duly appealed to this.
The issues posed on these appeals are:
(1) Whether the plaintiff's rubber products above described
should be considered agricultural or manufactured for
purposes of their subjection to the sales tax;
(2) Whether plaintiff is or is not entitled to recover the sales
tax paid by it, but passed on to and paid by the buyers of its
products; and
(3) Whether plaintiff is or is not entitled to interest on the sales
tax paid by it under protest, in case recovery thereof is
allowed.
The first issue, in our opinion, is governed by the principles laid

down by this Court in Philippine Packing Corporation vs. Collector
of Internal Revenue, 100 Phil. 545 et seq. We there ruled that the
exemption from sales tax established in section 188 (b) of the
Internal Revenue Tax Code in favor of sales of agricultural
products, whether in their original form or not, made by the
producer or owner of the land where produced is not taken away
merely because the produce undergoes processing at the hand of

said producer or owner for the purpose of working his product into
a more convenient and valuable form suited to meet the demand
of an expanded market; that the exemption was not designed in
favor of the small agricultural producer, already exempted by the
subsequent paragraphs of the same section 188, but that said
exemption is not incompatible with large scale agricultural
production that incidentally required resort to preservative
processes designed to increase or prolong marketability of the
product.
In the case before us, the parties have stipulated that fresh latex
directly obtained from the rubber tree, which is clearly an
agricultural product, becomes spoiled after only two hours. It has,
therefore, a severely limited marketability. The addition of
ammonia prevents its deterioration for about a month, and we see
no reason why this preservative process should wrest away from
the preserved latex the protective mantle of the tax exemption.
Taking also into account the great distance that separates the
plaintiff's plantation from the main rubber processing centers in
Japan, the United States and Europe, and the difficulty in handling
products in liquid form, it can be discerned without difficulty that
preserved, latex, with its 30-day spoilage limit, is still severely
handicapped for export and dollar earning purposes.
To overcome these shortcomings, and extend its useful life almost
indefinitely, it becomes necessary to separate and solidify the
rubber granules diffused in the latex, and hence, according to the
stipulation of facts and the evidence, acetic acid is added to
hasten coagulation. There is nothing on record to show that the
acetic acid in way produces anything that was not originally in the
source, the liquid latex. The coagulum is then rolled and
compacted and afterwards air dried to make Pale Crepe(1 and 2),
or else cured and smoked to produce rubber sheets. Once again
we see nothing in this processing to alter the agricultural nature of
the result; what takes place is merely an accelerated coagulation
and dessication that would naturally occur anyway, only within a
longer period of time, coupled with greater spoilage of the product.
Thus the operations carried out by plaintiff appear to be purely
preservative in nature, made necessary, by its production of fresh
rubber latex in a large scale. they are purely incidental to the

latter, just as the canning of skinned and cored pineapples in
syrup was held to be incidental to the large-scale cultivation of the
fruit in the Philippine Packing Corporation case (ante). Being
necessary to suit the product to the demands of the market, the
operations in both cases should lead to the same result, nontaxability of the sales of the respective agricultural products. In not
so holding, the Tax Court was in error.
Even less justifiable is the position taken by the Revenue
Commissioner in his appeal against the finding of the Tax Court
that Flat Bark 3X Brown Crepe rubber are agricultural products.
According to the record, these sheets result from the drippings
and waste rubber that have dried naturally, that are rolled and
compacted into the desired thickness, without any other
processing.
As to 2X Brown Crepe which is compacted out of the trimmings
and waste left over from the production of ribbed smoked sheets,
no reason is seen why it should be treated differently from the
ribbed smoked sheets themselves.
In his appeal, the Revenue Commissioner contends that all of
plaintiff's products should be deemed manufactured articles, on
the strength of section 194 (n) of the Revenue Code defining a
"manufacturer" as
every person who by physical or chemical process alters the
exterior texture or form or inner substances of any raw
material or manufactured or partially manufactured product in
such manner as to prepare it for a special use or uses to
which it could not have been put to in its original condition, or
who . . . alters the quality of any such raw material . . . as to
reduce it to marketable shape . . . .
But, as pointed out in the Philippine Packing Corporation case,

this definition is not applicable to the exemption of agricultural
products, "whether in their original form or not". The use of this
last phrase in the statute clearly indicates that the agricultural
product may be altered in texture or form without being divested of
the exemption (cas cit. 100 Phil., p. 548). The exception would be
sales of agricultural products while Republic Act No. 1612 was in
effect because under this Act the freedom from sales tax became
restricted to agricultural products "in their original form" only. So
that plaintiff's sales from August 24, 1956 (approval of Republic
Act 1612) to June 22, 1957 (when Republic Act 1856 became
effective and restored the exemption to agricultural products
"whether in their original form or not") became properly taxable.
Under paragraphs (A)2 and B(4) of the additional stipulation of
facts (CTA Rec. pp. 261-262, G.R. L-19801), the sales tax
properly collected during this period of plaintiff's transactions
amounted to P18,187.19 from August 24 to December 31, 1956;
and P18,888.28 from January 1 to June 21, 1957, or a total of
P37,075.47. This last amount is, therefore non-recoverable.2
The second issue in this appeal concerns the holding of the Court
of Tax Appeals that the plaintiff Company is not entitled to recover
the sales tax paid by it from January, 1955 to August 2, 1957,
because during that period the plaintiff had separately invoiced
and billed the corresponding sales tax to the buyers of its
products. In so holding, the Tax Court relied on our decisions in
Medina vs. City of Baguio, 91 Phil. 854; Mendoza, Santos & Co.
vs. Municipality of Meycawayan, L-6069-6070, April 30, 1954 (94
Phil. 1047); and Zosimo Rojas & Bros. vs. City of Cavite, L-10730,
May 27, 1958.
The basic ruling is that of Medina vs. City of Baguio, supra, where
this Court affirmed the ruling of the court of First Instance to the
effect that
"The amount collected from the theatergoers as additional
price of admission tickets is not the property of plaintiffs or
any of them. It is paid by the public. If anybody has the right
to claim it, it is those who paid it. Only owners of property has
the right to claim said property. The cine owner acted as mere
agents of the city in collecting additional price charged in the
sale of admission tickets." (Medina vs. City of Baguio, 91 Phil.
854) (Emphasis supplied)
We agree with the plaintiff-appellant that the Medina ruling is not

applicable to the present case, since the municipal taxes therein
imposed were taxes on the admission tickets sold, so that, in
effect, they were levies upon the theatergoers who bought them;
so much so that (as the decision expressly ruled) the tax was
collected by the theater owners as agents of the respective

municipal treasurers. This does not obtain in the case at bar. The
Medina ruling was merely followed in Rojas & Bros. vs. Cavite,
supra; and in Mendoza, Santos & Co. vs. Municipality of
Meycawayan, 94 Phil. 1047.
By contrast with the municipal taxes involved in the preceding
cases, the sales tax is by law imposed directly, not on the thing
sold, but on the act (sale) of the manufacturer, producer or
importer (Op. of the Secretary of Justice, June 15, 1946; 47
C.J.S., p. 1141), who is exclusively made liable for its timely
payment. There is no proof that the tax paid by plaintiff is the very
money paid by its customers. Where the tax money paid by the
plaintiff came from is really no concern of the Government, but
solely a matter between the plaintiff and its customers. Anyway,
once recovered, the plaintiff must hold the refund taxes in trust for
the individual purchasers who advanced payment thereof, and
whose names must appear in plaintiff's records.
Moreover, the separate billing of the sales tax in appellant's
invoices was a direct result of the respondent Commissioner's
General Circular No. 440, providing that
if a manufacturer, producer, or importer, in fixing the gross
selling price of an article sold by him, has included an amount
intended to cover the sales tax in the gross selling price of the
article, the sales tax shall be based on the gross selling price
less the amount intended to cover the tax, if the same is
billed to the purchaser as a separate item in the invoice. . . .
(Emphasis supplied)
In other words, the separate itemization of the sales tax in the

invoices was permitted to avoid the taxpayer being compelled to
pay a sales tax on the tax itself. It does not seem either just or
proper that a step suggested by the Internal Revenue authorities
themselves to protect the taxpayer from paying a double tax
should now be used to block his action to recover taxes collected
without legal sanction.
Finally, a more important reason that militates against extensive
and indiscriminate application of the Medina vs. City of Baguio
ruling is that it would tend to perpetuate illegal taxation; for the
individual customers to whom the tax is ultimately shifted will

ordinarily not care to sue for its recovery, in view of the small
amount paid by each and the high cost of litigation for the
reclaiming of an illegal tax. In so far, therefore, as it favors the
imposition, collection and retention of illegal taxes, and
encourages a multiplicity of suits, the Tax Court's ruling under
appeal violates morals and public policy.
The plaintiff Company also urges that the refund of the taxes
should include interest thereon. While this Court has allowed
recovery of interest in some cases, it has done so only in cases of
patent arbitrariness on the part of the Revenue authorities; and in
this instance we agree with the Tax Court that no such patent
arbitrariness has been shown.
IN VIEW OF THE FOREGOING, the decision of the Court of Tax
Appeals is affirmed in Case G.R. No. L-19667 and modified in
cases G.R. Nos. L-19801, L-19802 and L-19803, by declaring the
sales taxes therein involved to have been improperly denied
levied and collected and ordering respondent Commissioner of
Internal Revenue to refund the same, except the taxes
corresponding to the period from August 24, 1956 to June 22,
1957, during which Republic Act No. 1612 was in force. The
amount of P37,075.47 paid by the taxpayer for this period is
hereby declared properly collected and not refundable. Without
special pronouncement as to costs.
Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon,
J.P., Zaldivar and Sanchez, JJ., concur.

SUPREME COURT
Manila
EN BANC
G.R. Nos. L-18169, L-18262 & L-21434
July 31, 1964
COMMISSIONER OF INTERNAL REVENUES, petitioner,

vs.
V.E. LEDNICKY and MARIA VALERO LEDNICKY, respondents.
Ozaeta, Gibbs and Ozaeta for respondents.
REYES, J.B.L., J.:
The above-captioned cases were elevated to this Court under
separate petitions by the Commissioner for review of the
corresponding decisions of the Court of Tax Appeals. Since these
cases involve the same parties and issues akin to each case
presented, they are herein decided jointly.
The respondents, V. E. Lednicky and Maria Valero Lednicky, are
husband and wife, respectively, both American citizens residing in
the Philippines, and have derived all their income from Philippine
sources for the taxable years in question.
In compliance with local law, the aforesaid respondents, on 27
March 1957, filed their income tax return for 1956, reporting
therein a gross income of P1,017,287. 65 and a net income of
P733,809.44 on which the amount of P317,395.4 was assessed

after deducting P4,805.59 as withholding tax. Pursuant to the
petitioner's assessment notice, the respondents paid the total
amount of P326,247.41, inclusive of the withheld taxes, on 15
April 1957.
On 17 March 1959, the respondents Lednickys filed an amended
income tax return for 1956. The amendment consists in a claimed
deduction of P205,939.24 paid in 1956 to the United States
government as federal income tax for 1956. Simultaneously with
the filing of the amended return, the respondents requested the
refund of P112,437.90.
When the petitioner Commissioner of Internal Revenue failed to
answer the claim for refund, the respondents filed their petition
with the Tax Court on 11 April 1959 as CTA Case No. 646, which is
now G. R. No. L-18286 in the Supreme Court.
G. R. No. L-18169 (formerly CTA Case No. 570) is also a claim for
refund in the amount of P150,269.00, as alleged overpaid income
tax for 1955, the facts of which are as follows:
On 28 February 1956, the same respondents-spouses filed their
domestic income tax return for 1955, reporting a gross income of
P1,771,124.63 and a net income of P1,052,550.67. On 19 April
1956, they filed an amended income tax return, the amendment
upon the original being a lesser net income of P1,012,554.51,
and, on the basis of this amended return, they paid P570,252.00,
inclusive of withholding taxes. After audit, the petitioner
determined a deficiency of P16,116.00, which amount, the
respondents paid on 5 December 1956.
Back in 1955, however, the Lednickys filed with the U.S. Internal
Revenue Agent in Manila their federal income tax return for the
years 1947, 1951, 1952, 1953, and 1954 on income from
Philippine sources on a cash basis. Payment of these federal
income taxes, including penalties and delinquency interest in the
amount of P264,588.82, were made in 1955 to the U.S. Director of
Internal Revenue, Baltimore, Maryland, through the National City
Bank of New York, Manila Branch. Exchange and bank charges in
remitting payment totaled P4,143.91.
Wherefore, the parties respectfully pray that the foregoing

stipulation of facts be admitted and approved by this Honorable
Court, without prejudice to the parties adducing other evidence to
prove their case not covered by this stipulation of facts.
1wph1.t
On 11 August 1958, the said respondents amended their

Philippine income tax return for 1955 to include the following
deductions:
U.S. Federal income taxes
P471,867.32
Interest accrued up to May 15, 1955
40,333.92
Exchange and bank charges

Total
4,143.91
P516,345.15
and therewith filed a claim for refund of the sum of P166,384.00,

which was later reduced to P150,269.00.
The respondents Lednicky brought suit in the Tax Court, which
was docketed therein as CTA Case No. 570.
In G. R. No. 21434 (CTA Case No. 783), the facts are similar, but
refer to respondents Lednickys' income tax return for 1957, filed
on 28 February 1958, and for which respondents paid a total sum
of P196,799.65. In 1959, they filed an amended return for 1957,
claiming deduction of P190,755.80, representing taxes paid to the
U.S. Government on income derived wholly from Philippine
sources. On the strength thereof, respondents seek refund of P90
520.75 as overpayment. The Tax Court again decided for
respondents.
The common issue in all three cases, and one that is of first
impression in this jurisdiction, is whether a citizen of the United
States residing in the Philippines, who derives income wholly from
sources within the Republic of the Philippines, may deduct from
his gross income the income taxes he has paid to the United
States government for the taxable year on the strength of section
30 (C-1) of the Philippine Internal Revenue Code, reading as
follows:
SEC. 30. Deduction from gross income. In computing net

(a) ...
(b) ...
(c) Taxes:
(1) In general. Taxes paid or accrued within
the taxable year, except
(A) The income tax provided for under
this Title;
(B) Income, war-profits, and excess
profits taxes imposed by the authority
of any foreign country; but this
deduction shall be allowed in the case
of a taxpayer who does not signify in
his return his desire to have to any
extent the benefits of paragraph (3) of
this subsection (relating to credit for
foreign countries);
(C) Estate, inheritance and gift taxes;
and
(D) Taxes assessed against local
benefits of a kind tending to increase
the value of the property assessed.
(Emphasis supplied)
The Tax Court held that they may be deducted because of the
undenied fact that the respondent spouses did not "signify" in
their income tax return a desire to avail themselves of the
benefits of paragraph 3 (B) of the subsection, which reads:
Par. (c) (3) Credits against tax for taxes of foreign
countries. If the taxpayer signifies in his return his
desire to have the benefits of this paragraph, the tax
imposed by this Title shall be credited with
(A) ...;
(B) Alien resident of the Philippines. In the
case of an alien resident of the Philippines,
the amount of any such taxes paid or accrued
during the taxable year to any foreign country,
if the foreign country of which such alien
resident is a citizen or subject, in imposing
such taxes, allows a similar credit to citizens
of the Philippines residing in such country;
It is well to note that the tax credit so authorized is limited
under paragraph 4 (A and B) of the same subsection, in the
following terms:
Par. (c) (4) Limitation on credit. The amount of the
credit taken under this section shall be subject to
each of the following limitations:
(A) The amount of the credit in respect to the
tax paid or accrued to any country shall not
exceed the same proportion of the tax against
which such credit is taken, which the
taxpayer's net income from sources within
such country taxable under this Title bears to
his entire net income for the same taxable
year; and
(B) The total amount of the credit shall not
exceed the same proportion of the tax against
which such credit is taken, which the
taxpayer's net income from sources without
the Philippines taxable under this Title bears
to his entire net income for the same taxable
year.
We agree with appellant Commissioner that the
Construction and wording of Section 30 (c) (1) (B) of
the Internal Revenue Act shows the law's intent that
the right to deduct income taxes paid to foreign
government from the taxpayer's gross income is given
only as an alternative or substitute to his right to claim
a tax credit for such foreign income taxes under
section 30 (c) (3) and (4); so that unless the alien

resident has a right to claim such tax credit if he so
chooses, he is precluded from deducting the foreign
income taxes from his gross income. For it is obvious
that in prescribing that such deduction shall be
allowed in the case of a taxpayer who does not
signify in his return his desire to have to any extent
the benefits of paragraph (3) (relating to credits for
taxes paid to foreign countries), the statute assumes
that the taxpayer in question also may signify his
desire to claim a tax credit and waive the deduction;
otherwise, the foreign taxes would always be
deductible, and their mention in the list of nondeductible items in Section 30(c) might as well have
been omitted, or at least expressly limited to taxes on
income from sources outside the Philippine Islands.
Had the law intended that foreign income taxes could
be deducted from gross income in any
event,regardless of the taxpayer's right to claim a tax
credit, it is the latter right that should be conditioned
upon the taxpayer's waiving the deduction; in which
Case the right to reduction under subsection (c-1-B)
would have been made absolute or unconditional (by
omitting foreign taxes from the enumeration of nondeductions), while the right to a tax credit under
subsection (c-3) would have been expressly
conditioned upon the taxpayer's not claiming any
deduction under subsection (c-1). In other words, if
the law had been intended to operate as contended
by the respondent taxpayers and by the Court of Tax
Appeals section 30 (subsection (c-1) instead of
providing as at present:
SEC. 30. Deduction from gross income. In computing net
(a) ...
(b) ...
(c) Taxes:
(1) In general. Taxes paid or accrued within

the taxable year, except
(A) The income tax provided for under
this Title;
(B) Income, war-profits, and excess
profits taxes imposed by the authority
of any foreign country; but this
deduction shall be allowed in the case
of a taxpayer who does not signify in
his return his desire to have to any
extent the benefits of paragraph (3) of
this subsection (relating to credit for
taxes of foreign countries);
(C) Estate, inheritance and gift taxes;
and
(D) Taxes assessed against local
benefits of a kind tending to increase
the value of the property assessed.
would have merely provided:

SEC. 30. Decision from grow income. In computing net
income there shall be allowed as deductions:
(a) ...
(b) ...
(c) Taxes paid or accrued within the taxable year,
EXCEPT
(A) The income tax provided for in this Title;
(B) Omitted or else worded as follows:
Income, war profits and excess profits taxes imposed
by authority of any foreign country on income earned
within the Philippines if the taxpayer does not claim

the benefits under paragraph 3 of this subsection;
(C) Estate, inheritance or gift taxes;
(D) Taxes assessed against local benefits of a kind
tending to increase the value of the property
assessed.
while subsection (c-3) would have been made conditional in the

following or equivalent terms:
(3) Credits against tax for taxes of foreign countries. If the
taxpayer has not deducted such taxes from his gross income
but signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by Title shall be credited with ...
(etc.).
Petitioners admit in their brief that the purpose of the law is to

prevent the taxpayer from claiming twice the benefits of his
payment of foreign taxes, by deduction from gross income (subs.
c-1) and by tax credit (subs. c-3). This danger of double credit
certainly can not exist if the taxpayer can not claim benefit under
either of these headings at his option, so that he must be entitled
to a tax credit (respondent taxpayers admittedly are not so entitled
because all their income is derived from Philippine sources), or
the option to deduct from gross income disappears altogether.
Much stress is laid on the thesis that if the respondent taxpayers
are not allowed to deduct the income taxes they are required to
pay to the government of the United States in their return for
Philippine income tax, they would be subjected to double taxation.
What respondents fail to observe is that double taxation becomes
obnoxious only where the taxpayer is taxed twice for the benefit of
the same governmental entity (cf. Manila vs. Interisland Gas
Service, 52 Off. Gaz. 6579; Manuf. Life Ins. Co. vs. Meer, 89 Phil.
357). In the present case, while the taxpayers would have to pay
two taxes on the same income, the Philippine government only
receives the proceeds of one tax. As between the Philippines,
where the income was earned and where the taxpayer is
domiciled, and the United States, where that income
was not earned and where the taxpayer did not reside, it is
indisputable that justice and equity demand that the tax on the
income should accrue to the benefit of the Philippines. Any relief
from the alleged double taxation should come from the United
States, and not from the Philippines, since the former's right to
burden the taxpayer is solely predicated on his citizenship, without
contributing to the production of the wealth that is being taxed.
Aside from not conforming to the fundamental doctrine of income
taxation that the right of a government to tax income emanates
from its partnership in the production of income, by providing the
protection, resources, incentive, and proper climate for such
production, the interpretation given by the respondents to the
revenue law provision in question operates, in its application, to
place a resident alien with only domestic sources of income in an
equal, if not in a better, position than one who has both domestic
and foreign sources of income, a situation which is manifestly
unfair and short of logic.
Finally, to allow an alien resident to deduct from his gross income
whatever taxes he pays to his own government amounts to
conferring on the latter the power to reduce the tax income of the
Philippine government simply by increasing the tax rates on the
alien resident. Everytime the rate of taxation imposed upon an
alien resident is increased by his own government, his deduction
from Philippine taxes would correspondingly increase, and the
proceeds for the Philippines diminished, thereby subordinating our
own taxes to those levied by a foreign government. Such a result
is incompatible with the status of the Philippines as an
independent and sovereign state.
IN VIEW OF THE FOREGOING, the decisions of the Court of Tax
Appeals are reversed, and, the disallowance of the refunds
claimed by the respondents Lednicky is affirmed, with costs
against said respondents-appellees.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion,
Paredes, Regala and Makalintal, JJ., concur.

SUPREME COURT
Manila
EN BANC
G.R. No. L-12401
October 31, 1960
MARCELO STEEL CORPORATION, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
Meer, Meer & Meer for petitioner.
Asst. Solicitor General J.P. Alejandro and Atty. S. J. Javier for
respondent.
PADILLA, J.:
This is a petition to review under section 18, Republic Act No.
1125, a judgement of the Court of Tax Appeals upholding the
assessment made by the respondent for income tax due during
the years 1952 and 1953 from the petitioner (C.T.A. Case No.
172).
The parties have entered into stipulation of facts which the Court
summarized as follows:
The petitioner is a corporation duly organized and existing
under and by virtue of the laws of the Philippines, with offices
at Malabon, Rizal. It is engaged in three (3) industrial
activities, namely, (1) manufacture of wire fence, (2)
manufacture of nails, and (3) manufacture of steel bars, rods

and other allied steel products. enjoined the benefits of the
tax exemption under Republic Act No. 35.
On May 21, 1953, the petitioner filed an income tax return for
the year 1952, reflecting a net income of P34,386.58 realized
solely from its business of manufacturing wire fence, an
activity which is not tax exempt, and on March 31, 1954, it
filed its income tax return for the year 1953, showing a net
income of P58,329.00 realized from the same sources, i.e.,
the manufacture of wire fence.
On basis of the said income tax return filed by the petitioner
for the year 1952 and 1953 which did not reflect the financial
of its tax exempt business activities, the respondent assessed
the total sum of P12,750. Accordingly, the petitioner paid the
said amount assessed against it on following dates:
Tax Year
Date
Amount.
1952
May 30, 1953
1952
August 15, 1953
3,458.50
1952
May 5, 1954
5,833.00
TOTAL ..............................
P3,458.50
P12,750.00
On October 1, 1954, the petitioner filed amended income tax

returns for taxable years 1952 and 1953, showing that bit
suffered a net loss of P871,407.37 in 1952, and P10,956.29
in 1953. The said losses were arrived at by consolidating the
gross income and expenses and/or deductions of the

petitioner in all its business activities, as follows:
For the year 1952

Net Income, taxable
industry:
Wire fence
P34,386.58.
Net loss,. tax exempt

industries:
Nails
Steel bars
TOTAL NET LOSS
For the year 1953
Net income, taxable

industry:
(P620,722.73
)
(285,071.22)
(905,793.95)
(P871,407.37)
Wire fence
(P60,950.20)
Steel; bars
(102,335.20)
TOTAL NET LOSS
(163,285.40)
(P104,956.29)
On October 1, 1954, the petitioner, claiming that instead of

earning the net income shown in its original income tax
returns for 1952 and 1953, it sustained the losses shown in its
amended income tax returns for refund of the income taxes
for the said years amounting to P12,750.00 which it allegedly
paid to the respondent.
After more than ten months of waiting without any action
being taken by the respondent on the claim for refund, and in
order to protect its right under Section 306 of the National
Internal Revenue Code, the petitioner, on August 13, 1955,
filed with this Court the instant petition for review.
There are two issues to be resolved in this case, namely, (1)

whether or not the petitioner may be allowed to deduct from the
profits realized from its taxable business activities, the losses
sustained by its tax except industries, and (2) whether or not the
action for refund, with regard to the sum of P3,458.50 which was
of the Tax Code.
The Court of Tax Appeals held that "petitioner cannot deduct from
the profits realized from its taxable industries, the losses sustained
by its tax exempt business activities, . . ."
The duration of the petitioner's tax exemption with respect to the
manufacture of nails is from 25 June 1949 to 25 June 1953
(Exhibit 7), later adjusted to be from 11 August 1949 to 11 August
1953, and with respect to the manufacture of steel bars, rods and
other allied steel product, is from 16 March 1951 to 16 March
1955 (Exhibit 6). The exemption refers to the following internal

revenue taxes: the fixed and privilege tax on business, the
percentage tax on the sales of manufactured products, in respect
to which exemption was granted, the compensating tax on the
articles, goods or materials exclusively used in the new and
necessary industry, the documentary stamp tax and the income
tax with respect to the not income derived from the exempt
industry (Exhibits 6 and 7).
The petitioner's theory is that since it is a corporation organized
with a single capital that answer for all its financial obligation
including those incurred in the tax exempt industries, the gross
income derived from both its taxable or non-exempt and taxexempt industries, and the allowable deductions from said
incomes, should be consolidated and its income tax liability should
be based on the difference between the consolidated gross
incomes and the consolidated allowable deductions. It relies on
the provisions of action 24, Commonwealth Act No. 466, as
amended, providing that "there shall be levied, assessed,
collected, and paid annually upon the total net income received in
the preceding taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines." a
graduated tax (Emphasis supplied), and of section 30, subsection
(d), paragraph (2) of the same Act providing that in computing the
net income of a corporation, all losses actually sustained by it and
charged off within the taxable year and not compensated for by
insurance or otherwise, are allowed as deductions.
Republic Act No. 35, the law under which the petitioner was
granted tax exemption for the manufacture of nails and steel bars,
rods and other allied steel products, provides:.
SECTION 1. Any person, partnership, company, or
corporation who or which shall engage in anew and
necessary industry shall, for a period of four years from the
date of the organization of such industry, be entitled to
exemption from the payment of all internal revenue taxes
directly payable by such person, partnership, company, or
corporation in respect to said industry.
SEC. 2. The President of the Philippines, shall, upon
recommendation of the Secretary of Finance, periodically
determine the qualifications that the industries should

possess to be entitled to the benefits of this Act.
SEC. 3. This Act shall take effect upon its approval.
(Approved, September 30, 1946.)
The purpose of aim of Republic Act No. 35 is to encourage the

establishment or exploitation of new and necessary industries to
promote the economic growth of the country. It is a form of subsidy
granted by the Government to encourageous staking their capital
in an unknown venture. An entrepreneur engaging in a new and
necessary industry faces uncertainly and assumes a risk bigger
than one engaging in a venture already known and developed.
Like a settler in an unexplored land who is just blazing a trial in a
virgin forest, he needs all the encouragement and assistance from
the Government. He needs capital to buy his implements, to pay
his laborers and to sustain him and his family. Comparable to the
farmers who had just planted the seeds of fruit bearing trees in his
orchard, he does not except an immediate return on his
investment. Usually loss is incurred rather than profit made. It is
for these reasons that the law grants him tax exemptionto
lighten onerous financial burdens and reduce losses. However
these may be, Republic Act No. 35 has confined the privilege of
tax exemption only to new and necessary industries. It did not
intend to grant the tax exemption benefit to an entrepreneur
engaged at the same time in a taxable or non-payment industry
and a new and necessary industry, by allowing him to deduct his
gains or profits derived from the operation of the first from the
losses incurred in the operation of the second. Unlike a new and
necessary industry, a taxable or non-exempt industry is already a
going concern, deriving profits from its operation, and deserving
no subsidy from the Government. It is but fair that it be required to
give to the Government a share in its profits in the form of taxes.
The fact that the petitioner is a corporate organized with a single
capital that answer for all its financial obligations including those
incurred in the tax exempt industries is of no moment. The intent
of the law is to treat taxable or non-exempt industries as separate
and distinct from new and necessary industries which are taxexempt for purposes of taxation. Section 7, Executive Order No.
341, series of 1950, issued by the President of the Philippines

pursuant to section 2, Republic Act No. 35, provides:
Any industry granted tax exemption under the provisions of
Republic Act No. 35 shall report to the Secretary of Finance at
the end of every fiscal rear a complete list and a correct
valuation of all real and personal property of its industrial
plant of factory: shall file a separate income tax return; shall
keep separetely the accounting records relative to the
industry declared exempt; shall keep such records and submit
such sworn statements as may be prescribed from time to
time by the Secretary of Finance;1(Emphasis supplied.)
And when Congress revised the provision of Republic Act No. 35

by enacting onto law Republic Act No. 901 it incorporate similar
provisions and provided that "Any industry granted tax exemption
under of Republic Act No. 35" shall "file a separate income tax
return."2
The petitioner states that it is not liable to pay income tax on its
industries of manufacturing nails and steel bars, ros and other
allied steel product for the reason that it had incurred loss in their
operation and not because it is exempt under the provision of
Republic Act No. 35. It argues that by being allowed to deduct its
gains derived from the operation of its taxable or non-exempt
industry of manufacturing wire fence, from the losses incurred in
the operation of its tax-exempt industries of manufacturing nails
and steels bars, rod and other allied steel products, it would not
receive the benefit of double exemption under Republic Act No. 35
is to lighten the onerous financial burden and reduce the losses of
the entrepeneur, yet it is not designed to assure him of a return on
his capital invested. As already stated, the law intended to treat to
treat taxable or non-excempt industry as separate and distinct
from new and necessary industry, which is tax exempt, and did not
mean to grant an entrepreneur, engaged at the same time in a
taxable or non-exempt industry and a new and necessary industry,
the benefit or privilege of deducting his gains or profit derived from
the operation of the first from the losses incurred in the operation
of the second. Moreover, aside from its exemption from the
payment of income tax on its profits derived from the operation of
new and necessary industries, the petitioner is exempt from the
payment of other internal revenue taxes directly payable by it,
such as the fixed and privilege tax on business, the percentage

tax on the fixed and privilege tax on business, the percentage tax
on the sales of manufactured products, in respect to which
exemption is granted, the compensating tax on the articles, goods
or material exclusively used in the new and necessary industry,
and the documentary stamp tax (Exhibits 6 and 7). These
exemption alone are enough to lighten its onerous financial
burden and reduce losses.
The petitioner claims that unlike the United States Internal
Revenue Code which expressly forbids the deduction of
Any amount otherwise allowable as a deduction which is
allocable to one or more classes of income other than interest
(whether or not only any amount of income of that class or
classes is received or accrued) wholly exempt from the taxes
imposed by this chapter [(Section 24 (a) (5)].
our National Internal Revenue Code does not contain a similar

prohibition. When in 1939 Commonwealth Act No. 466, the
National Internal Revenue Code, was enacted into law, the idea of
granting tax exemption to new and necessary industries in the
Philippines had not yet been thought of because there were no
new and necessary industries being established or exploited. It
was only in 1946, after the last World War, and after the
Philippines became sovereign nation, that the establishment or
exploitation of new and necessary industries was stimulated.
Hence the absence of a similar provision in out National Internal
Revenue Code. This absence, however, cannot be capitalized
upon by the petitioner in support of its theory. For, as already
stated, when Congress enacted Republic Act No. 35 into law, it
intended to segregate income derived from the operation of new
and necessary industries from that derived from the operation of
taxable or non-exempt industries.
For the foregoing reasons, the judgement under review is
affirmed, with costs against the petitioner.
Paras, C.J., Bengzon, Bautista Angelo, Labrador, Reyes, J.B.L.,
Barrera, Gutierrez David, Paredes, and Dizon, JJ., concur

SUPREME COURT
Manila
EN BANC
G.R. No. L-21520
December 11, 1967
PLARIDEL SURETY and INSURANCE COMPANY, petitioner,

vs.
Gil R. Carlos and Associates for petitioner.
Office of the Solicitor General for respondent.
BENGZON, J.P., J.:
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.2
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.
On February 19 and March 20, 1957, petitioner effected payment
in favor of Galang Machinery in the total sum of P44,490.00
pursuant to the final decision.
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.
The Tax Court dismissed the appeal, ruling that petitioner was
duly compensated for otherwise than by insurance thru the
mortgages 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. When its motion to
reconsider was denied, petitioner elevated the present appeal.
Of the sum of P44,490.00, the amount of P30,600.00 which is

the principal sum stipulated in the performance bond is being
claimed as loss deduction under Sec. 30 (d) (2) of the Tax Code
and P10,000.00 which is the interest that had accrued on the
principal sum is now being claimed as interest deduction under
Sec. 30 (b) (1).
Loss is deductible only in the taxable year it actually happens or is
sustained. However, if it is compensable by insurance or
otherwise, deduction for the loss suffered is postponed to a
subsequent year, which, to be precise, is that year in which it
appears that no compensation at all can be had, or that there is a
remaining or net loss, i.e., no full compensation.5
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.
itc-alf
Now, petitioner's submission is that its case is an exception.

Citing Cu Unjieng Sons, Inc. v. Board of Tax Appeals,6 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. 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.7 And the American
cases cited8 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.9 In other words, as the Tax Court put it, the
taxpayer (petitioner) must exhaust his remedies first to recover or
reduce his loss.
It is on record that petitioner had not exhausted its remedies,
especially against Ramon Cuervo who was solidarily liable with
San Jose for reimbursement to it. Upon being prodded by the Tax
Court to go after Cuervo, Hermogenes Dimaguiba, president of
petitioner corporation, said that they would10 but no evidence was
submitted that anything was really done on the matter. Moreover,
petitioner's evidence on remote possibility of recovery is fatally
wanting. Its right to reimbursement is not only secured by the
mortgages executed by San Jose and Cuervo but also by a final
and executory judgment in the civil case itself. Thus, other
properties of San Jose and Cuervo were subject to levy and
execution. But no writ of execution, satisfied or unsatisfied, was
ever submitted. Neither has it been established that Cuervo was
insolvent. The only evidence on record on the point is Dimaguiba's
testimony that he does not really know if Cuervo has other
properties.11 This is not substantial proof of insolvency. Thus, it
was too premature for petitioner to claim a loss deduction.
itc-alf
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. (Emphasis supplied)
Mertens12 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:
itc-
alf
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 proof14 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.
In connection with the claimed interest deduction of P10,000.00,
the Solicitor General correctly points out that this question was
never raised before the Tax Court. Petitioner, thru counsel, had
admitted before said court15 and in the memorandum it
filed16 that the only issue in the case was whether the entire
P44,490.00 paid by it was or was not a deductible loss under Sec.
30 (d) (2) of the Tax Code. Even in petitioner's return, the
P44,490.00 was claimed wholly as losses on its bond.17 The
alleged interest deduction not having been properly litigated as an
issue before the Tax Court, it is now too late to raise and assert it
before this Court.
WHEREFORE, the appealed decision is, as it is hereby, affirmed.
Costs against petitioner Plaridel Surety & Insurance Co. So
ordered.
Sanchez, Castro, Angeles and Fernando, JJ.,concur.
SUPREME COURT
Manila
EN BANC
G.R. No. L-18611
January 30, 1964
THE CITY LUMBER, INC., petitioner,

vs.
THE HON. MELENCIO R. DOMINGO, Commissioner of Internal
Revenue and
THE HON. COURT OF TAX APPEALS, respondents.
Medina and Medina for petitioner.
LABRADOR, J.:
Petitioner seeks the review of a decision of the Court Tax Appeals,
upholding an assessment by respondent on an additional income
of P16,678.63 representing minor deductions from the alleged
expenses, on undisclosed sales of plywood, nails and GI sheets
amounting to P7,902.07, and on a cash credit balance of
P7,896.80. Petitioner claims that the respondent court erred in not
holding that plywood and GI sheets were actually lost in a fire
occuring in the city and in not considering the credit cash balance
as a loan secured by petitioner.
On the first issue petitioner introduced as a witnesses in his favor
the Chief of Police of the City of Dumaguete to testify on the
existence of a fire in the city by reason of which the store of
petitioner was looted of plywood and kegs of nails. But said
witness declared that they recovery only 100 pieces of plywood
and 5 kegs of nails, but these were returned to petitioner. The
Court below, however, rejected the alleged loss of plywood
because said loss was never reported in the books of petitioner;
and neither was such loss reported in the income tax return of
petitioner for the year, submitted some months after the alleged
loss.
We hold that the conduct of petitioner in not reporting said loss in

his book of account or in his income tax turn proves that the
alleged loss had not been suffered.
On the alleged loan of the sum of around P8,000.00 which
petitioner claims to be the cash credit balance appearing petitioner
claims to be his book of account, petitioner's book of account
failed to show such a loan also. Neither were any receipts or other
evidence produced to show that said amount was a loan secured
by petitioner, or that a loan was ever secured. In view of these We
find that the respondent court did commit the error charged.
The third error is the alleged violation of an order of Commissioner
granting Regional Directors authority close tax cases involving
deficiency assessments not exceeding P10,000.00 in taxes and
penalties for it appears that after a re-investigation of the tax
liability of petitioner by the corresponding regional director the
latter reviewed the case and reduced the assessment from
P5,028.00 to P176.00. The order in question (Memorandum Order
No. V-634 dated July 3, 1956) was applicable only to subordinate
officers of the Bureau of Internal Revenue and could not bind the
Commissioner himself, who has been entrusted by law to make
final assessments. The Commissioner cannot delegate this power
to make a final assessment to his subordinate. Delegatus non
potest delegare; the person to whom an office or duty is delegated
cannot lawfully devolve the duty on another. The existence of the
alleged error is, therefore, denied.
1wph1.t
WHEREFORE, the decision is hereby affirmed, with costs. So

ordered.
Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon,
Regala and Makalintal, JJ., concur.
Bengzon, C.J., and Reyes, J.B.L., J., took no part.

SUPREME COURT
Manila
EN BANC
G.R. No. L-18282
May 29, 1964

vs.
PRISCILA ESTATE, INC., and THE COURT OF
Sison, Dominguez and Mijares for respondents.
REYES, J.B.L., J.:
Review of the decision of the Court of Tax Appeals in its case No.
334 ordering the petitioner, Commissioner of Internal Revenue to
refund to the respondent, Priscila Estate, Inc., a domestic
corporation engaged in the business of leasing real estate, the
sum of P3,045.19, as overpaid income tax for 1950.
The corporation duly filed its income tax returns for the years
1949, 1950 and 1951. On 13 June 1952, however, it amended its
income tax returns for 1951 and paid the tax corresponding to the
assessment made by the petitioner on the basis of the returns, as
amended; and on 13 September 1952, the company claimed a
refund of P4,941.00 as overpaid income tax for the year 1950 for
having deducted from gross income only the sum of P6,013.85
instead of P39,673.25 as its loss in the sale of a lot and building.
Thereupon, the Commissioner of Internal Revenue conducted an
investigation of the company's income tax returns for 1949
through 1951 and, thereafter, granted a tax credit of P1,443.00 for
1950 but assessed on 3 November 1953 deficiency income taxes
of P3,575.49 for 1949 and P22,166.10 for 1951.
The Priscila Estate, Inc., contested the deficiency assessments

and when the Commissioner of Internal Revenue refused to
reconsider them, the former brought suit to the tax court which
after trial, rendered the decision that, in 1961, the Commissioner
elevated to this Supreme Court for review.
The first assignment of error refers to the allowance of a deduction
in the 1949 income tax returns of the respondent corporation the
amount of P11,237.35 representing the cost of a "barong-barong"
(a make-shift building), situated at the corner of Azcarraga Street
and Rizal Avenue, Manila, which was demolished on 31
December 1949 and a new one built in its place. The petitioner
claims that the value of the demolished building should not be
deducted from gross income but added to the cost of the building
replacing it because its demolition or removal was to make way for
the erection of another in its place.
1wph1.t
The foregoing argument is erroneous inasmuch as the tax court

found that the removal of the "barong-barong", instead of being
voluntary, was forced upon the corporation by the city engineer
because the structure was a fire hazard; that the rental income of
the old building was about P3,730.00 per month, and that the
corporation had no funds but had to borrow, in order to construct a
new building. All these facts, taken together, belie any intention on
the part of the corporation to demolish the old building merely for
the purpose of erecting another in its place. Since the demolished
building was not compensated for by insurance or otherwise, its
loss should be charged off as deduction from gross income. (Sec.
30[2], Internal Revenue Code.)
The second to the fifth assignments of error pertain to
depreciation.
Particularly contested by the petitioner is the basis for depreciation
of Building Priscila No. 3. This building, with an assessed value of
P70,343.00 but with a construction cost of P110,600.00, was
acquired by the respondent corporation from the spouses, Carlos
Moran Sison and Priscila F. Sison, in exchange for shares of

stock. According to the petitioner, the basis for commuting the
depreciation of this building should be limited to the capital
invested, which is the assessed value. On the other hand, the
respondent based its computation on its construction cost,
revaluing the property on this basis by a board resolution in order
to "give justice to the Sison spouse Since this revaluation would
import an obligation of the corporation to pay the Sison spouses,
as vendors, the difference between the assessed value and the
revalued construction cost, as provided in resolution Exhibit F-1
(otherwise the revaluation would make no sense), the corporate
investment would ultimately be the construction cost which is
undisputed), and depreciation logically had to be on that basis.
That the revaluation may import additional profit to the vendor
spouses is a matter related to their own income tax, and not to
that of respondent corporation.
The Collector also questions the rates of depreciation which the
tax court applied to the other properties, consisting of store and
office building, houses, a garage, library books, furniture and
fixtures and transportation equipment.
Depreciation is a question of fact,1 and is "not measured by a
theoretical yardstick, but should be determined by a consideration
of the actual facts ... ." (Landon vs. CIR of State of Kansas, 260
Fed. 433 [1920]], quoted in Sec. 23.32, Mertens, Federal Income
Taxation). The petitioner himself on page 26 of his appeal brief,
asserts that "what consist of the depreciable amount (sic) is
elusive and is a question of fact."
Since the petitioner does not claim that the tax court, in applying
certain rates and basis to arrive at the allowed amounts of
depreciation of the various properties, was, arbitrary or had
abused its discretion, and since the Supreme Court, before the
Revised Rules, limited its review of decisions of the Court of Tax
Appeals to questions of law only (Sanchez v. Commissioner of
Customs, L-8556, 30 Sept. 1957; Gutierrez v. Court of Tax
Appeals, L-9738 & L-9771, 31 May 1957), the findings of the tax
court on the depreciation of the several assets should not be
disturbed.
In the sixth and last assignment of error, the petitioner argues that
the refund to the respondent is barred by the two-year prescriptive
period under Section 306 of the Internal Revenue Code because
the action for refund was filed on 5 December 1956 while the
respondent's 1950 income tax was paid on 15 August 1951. The
petitioner's argument would have been tenable but for his failure
to plead prescription in a motion to dismiss or as a defense in his
answer, said failure is deemed a waiver of the defense of
prescription (Sec. 10, Rule 9, Rules of Court).
Finding no reversible error in the decision under review, the same
is hereby affirmed. No costs.
Bengzon, C.J., Bautista Angelo, Concepcion, Barrera, Paredes,
Regala and Makalintal, JJ., concur.
Padilla, Labrador and Dizon, JJ., took no part.

SUPREME COURT
Manila
EN BANC
G.R. No. L-22265
December 22, 1967

vs.
GOODRICH INTERNATIONAL RUBBER CO., respondent.
Manuel O. Chan for respondent.
Manuel O. Chan for respondent.
CONCEPCION, C.J.:
Appeal by the Government from a decision of the Court of Tax
Appeals, setting aside the assessments made by the
Commissioner of Internal Revenue, in the sums of P14,128.00
and P8,439.00, as deficiency income taxes allegedly due from
respondent Goodrich International Rubber Company
hereinafter referred to as Goodrich for the years 1951 and
1952, respectively.
These assessments were based on disallowed deductions,

claimed by Goodrich, consisting of several alleged bad debts, in
the aggregate sum of P50,455.41, for the year 1951, and the sum
of P30,138.88, as representation expenses allegedly incurred in
the year 1952. Goodrich had appealed from said assessments to
the Court of Tax Appeals, which, after appropriate proceedings,
rendered, on June 8, 1963, a decision allowing the deduction for
bad debts, but disallowing the alleged representation expenses.
On motion for reconsideration and new trial, filed by Goodrich, on
November 19, 1963, the Court of Tax Appeals amended its
aforementioned decision and allowed said deductions for
representation expenses. Hence, this appeal by the Government.
The alleged representation expenses are:
1. Expenses at Elks Club
P10,959.21
2. Manila Polo Club
4,947.35
3. Army and Navy Club
2,812.95
4. Manila Golf Club
4,478.45
5. Wack Wack Golf Club, Casino

Espaol, etc.
6,940.92
T O TAL
P30,138.88
The claim for deduction thereof is based upon receipts

issued, not by the entities in which the alleged expenses had been
incurred, but by the officers of Goodrich who allegedly paid them.
The claim must be rejected. If the expenses had really been
incurred, receipts or chits would have been issued by the entities
to which the payments had been made, and it would have been
easy for Goodrich or its officers to produce such receipts. These
issued by said officers merely attest to their claim that they had
incurred and paid said expenses. They do not establish payment
of said alleged expenses to the entities in which the same are said
to have been incurred. The Court of Tax Appeals erred, therefore,
in allowing the deduction thereof.
lawphil
The alleged bad debts are:
1. Portillo's Auto Seat Cover
2. Visayan Rapid Transit
3. Bataan Auto Seat Cover
4. Tres Amigos Auto Supply
5. P. C. Teodoro
lawphil
6. Ordnance Service, P.A.
P630.31
17,810.26
373.13
1,370.31
650.00
386.42
7. Ordnance Service, P.C.
8. National land Settlement Administration
9. National Coconut Corporation
796.26
3,020.76
644.74
10. Interior Caltex Service Station
1,505.87
11. San Juan Auto Supply
4,530.64
12. P A C S A
45.36
13. Philippine Naval Patrol
14.18
14. Surplus Property Commission
277.68
15. Alverez Auto Supply
285.62
16. Lion Shoe Store
1,686.93
17. Ruiz Highway Transit
2,350.00
18. Esquire Auto Seat Cover
3,536.94
T O TAL
P50,455.41*
The issue, in connection with these debts is whether or not the

same had been properly deducted as bad debts for the year 1951.
In this connection, we find:
Portillo's Auto Seat Cover (P730.00):
This debt was incurred in 1950. In 1951, the debtor paid P70.00,
leaving a balance of P630.31. That same year, the account was
written off as bad debt (Exhibit 3-C-4). Counsel for Goodrich had
merely sent two (2) letters of demand in 1951 (Exh. B-14). In
1952, the debtor paid the full balance (Exhibit A).
Visayan Rapid Transit (P17,810.26):
This debt was, also, incurred in 1950. In 1951, it was charged off
as bad debt, after the debtor had paid P275.21. No other payment
had been made. Taxpayer's Accountant testified that, according to
its branch manager in Cebu, he had been unable to collect the
balance. The debtor had merely promised and kept on promising
to pay. Taxpayer's counsel stated that the debtor had gone out of
business and became insolvent, but no proof to this effect. was
introduced.
lawphil
Bataan Auto Seat Cover (P373.13):

This is the balance of a debt of P474.13 contracted in 1949. In
1951, the debtor paid P100.00. That same year, the balance of
P373.13 was charged off as bad debt. The next year, the debtor
paid the additional sum of P50.00.
Tres Amigos Auto Supply (P1,370.31):
This account had been outstanding since 1949. Counsel for the
taxpayer had merely sent demand letters (Exh. B-13) without
success.
P. C. Teodoro (P650.00):
In 1949, the account was P751.91. In 1951, the debtor paid
P101.91, thus leaving a balance of P650.00, which the taxpayer
charged off as bad debt in the same year. In 1952, the debtor
made another payment of P150.00.
Ordinance Service, P.A. (P386.42):
In 1949, the outstanding account of this government agency was
P817.55. Goodrich's counsel sent demand letters (Exh. B-8). In
1951, it paid Goodrich P431.13. The balance of P386.42 was
written off as bad debt that same year.
Ordinance Service, P.C. (P796.26):
In 1950, the account was P796.26. It was referred to counsel for
collection. In 1951, the account was written off as a debt. In 1952,
the debtor paid it in full.
lawphil
National Land Settlement Administration (P3,020.76):

The outstanding account in 1949 was P7,041.51. Collection letters
were sent (Exh. B-7). In 1951, the debtor paid P4,020.75, leaving
a balance of P3,020.76, which was written off, that same year, as
a bad debt. This office was under liquidation, and its Board of
Liquidators promised to pay when funds shall become available.
National Coconut Corporation (P644.74):
This account had been outstanding since 1949. Collection letters
were sent (Exh. B-12) without success. It was written off as bad
debt in 1951, while the corporation was under a Board of

Liquidators, which promised to pay upon availability of funds. In
1961, the debt was fully paid.
Interior Caltex Service Station (P1,505.87):
The original account was P2,705.87, when, in 1950, it was turned
over for collection to counsel for Goodrich (p. 156, CTA Records).
Counsel began sending letters of collection in April 1950. Interior
Caltex made partial payments, so that as of December, 1951, the
balance outstanding was P1,505.87. The debtor paid P200, in
1952; P113.20, in 1954; P750.00, in 1961; and P300.00.00 in
1962. The account had been written off as bad debt in 1951.
lawphil.net
The claim for deduction of these ten (10) debts should be rejected.
Goodrich has not established either that the debts are actually
worthless or that it had reasonable grounds to believe them to be
so in 1951. Our statute permits the deduction of debts "actually
ascertained to be worthless within the taxable year," obviously to
prevent arbitrary action by the taxpayer, to unduly avoid tax
liability.
The requirement of ascertainment of worthlessness requires proof
of two facts: (1) that the taxpayer did in fact ascertain the debt to
be worthlessness, in the year for which the deduction is sought;
and (2) that, in so doing, he acted in good faith.1
Good faith on the part of the taxpayer is not enough. He must
show, also, that he had reasonably investigated the relevant facts
and had drawn a reasonable inference from the information thus
obtained by him.2 Respondent herein has not adequately made
such showing.
The payments made, some in full, after some of the foregoing
accounts had been characterized as bad debts, merely stresses
the undue haste with which the same had been written off. At any
rate, respondent has not proven that said debts were worthless.
There is no evidence that the debtors can not pay them. It should
be noted also that, in violation of Revenue Regulations No. 2,
Section 102, respondent had not attached to its income tax
returns a statement showing the propriety of the deductions
therein made for alleged bad debts.
lawphil.net
Upon the other hand, we find that the following accounts were
properly written off:
San Juan Auto Supply (P4,530.64):
This account was contracted in 1950. Referred, for collection, to
respondent's counsel, the latter secured no payment. In
November, 1950, the corresponding suit for collection was filed
(Exh. C). The debtor's counsel was allowed to withdraw, as such,
the debtor having failed to meet him. In fact, the debtor did not
appear at the hearing of the case. Judgment was rendered in
1951 for the creditor (Exh. C-2). The corresponding writ of
execution (Exh. C-3) was returned unsatisfied, for no properties
could be attached or levied upon.
lawphil.net
PACSA
(P45.36),
Philippine Naval Patrol
(P14.18),
Surplus Property Commission
(P277.68),
Alvarez Auto Supply
(P285.62):
These four (4) accounts were 2 or 3 years old in 1951. After the
collectors of the creditor had failed to collect the same, its counsel
wrote letters of demand (Exhs. B-10, B-11, B-6 and B-2) to no
avail. Considering the small amounts involved in these accounts,
the taxpayer was justified in feeling that the unsuccessful efforts
therefore exerted to collect the same sufficed to warrant their
being written off.3
Lion Shoe Store
(P11,686.93),
Ruiz Highway Transit
(P2,350.00), and
Esquire Auto Seat Cover
(P3,536.94):
These three (3) accounts were among those referred to counsel

for Goodrich for collection. Up to 1951, when they were written off,
counsel had sent 17 Letters of demand to Lion Shoe Store (Exh.
B); 16 demand letters to Ruiz Highway Transit (Exh. B-1); and 6
letters of demand to Esquire Auto Seat Cover (Exit. B-5) In 1951,
Lion Shoe Store, Ruiz Highway Transit, and Esquire Auto Seat
Cover had made partial payments in the sums of P1,050.00,
P400.00, and P300.00 respectively. Subsequent to the write-off,
additional small payments were made and accounted for as
income of Goodrich. Counsel interviewed the debtors, investigated
their ability to pay and threatened law suits. He found that the
debtors were in strained financial condition and had no attachable
or leviable property. Moreover, Lion Shoe Store was burned twice,
in 1948 and 1949. Thereafter, it continued to do business on
limited scale. Later; it went out of business. Ruiz Highway Transit,
had more debts than assets. Counsel, therefore, advised
respondent to write off these accounts as bad debts without going
to court, for it would be "foolish to spend good money after bad."
The deduction of these eight (8) accounts, aggregating
P22,627.35, as bad debts should be allowed.
WHEREFORE, the decision appealed from should be, as it is
hereby, modified, in the sense that respondent's alleged
representation expenses are totally disallowed, and its claim for
bad debts allowed up to the sum of P22,627.35 only. Without
special pronouncement as to costs. It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Bengzon, JJ., Zaldivar, Sanchez,

Castro, Angeles and Fernando, JJ., concur

SUPREME COURT
Manila
EN BANC
G.R. No. L-21551
September 30, 1969
FERNANDEZ HERMANOS, INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF
TAX APPEALS, respondents.
----------------------------G.R. No. L-21557
September 30, 1969

vs.
FERNANDEZ HERMANOS, INC., and COURT OF TAX
----------------------------G.R. No. L-24972
September 30, 1969

vs.
FERNANDEZ HERMANOS INC., and the COURT OF TAX
----------------------------G.R. No. L-24978
September 30, 1969
FERNANDEZ HERMANOS, INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, and HON.
ROMAN A. UMALI, COURT OF TAX APPEALS,respondents.
L-21551:
Rafael Dinglasan for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro
B. Afurong and Special Attorney Virgilio G. Saldajeno for
respondent.
L-21557:
Rafael Dinglasan for respondent Fernandez Hermanos, Inc.
L-24972:
Solicitor General Felicisimo R. Rosete and Special Attorney
Virgilio G. Saldajeno for petitioner.
Rafael Dinglasan for respondent Fernandez Hermanos, Inc.
L-24978:
Rafael Dinglasan for petitioner.
Solicitor General Antonio G. Ibarra and Special Attorney Virgilio G.
Saldajeno for respondent.
TEEHANKEE, J.:
These four appears involve two decisions of the Court of
Tax Appeals 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 interrelated, the Court resolves the four appeals
in this joint decision.
Cases L-21551 and L-21557
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 question, 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:
1. Losses
a. Losses in Mati Lumber Co. (1950)
P 8,050.00
b. Losses in or bad debts of Palawan Manganese

Mines, Inc. (1951)
353,134.25
c. Losses in Balamban Coal Mines
1950
1951
8,989.76
27,732.66
d. Losses in Hacienda Dalupiri

1950
1951
1952
1953
1954
17,418.95
29,125.82
26,744.81
21,932.62
42,938.56
e. Losses in Hacienda Samal
1951
1952
8,380.25
7,621.73
2. Excessive depreciation of Houses

1950
1951
1952
1953
1954
P 8,180.40
8,768.11
18,002.16
13,655.25
29,314.98
3. Taxable increase in net worth

1950
1951
P 30,050.00
1,382.85
4. Gain realized from sale of real property in 1950

P 11,147.2611
The Tax Court sustained the Commissioner's
disallowances of Item 1, sub-items (b) and (e) and Item 2 of
the above summary, but overruled the Commissioner's
disallowances of all the remaining items. It therefore modified
the deficiency assessments accordingly, found the total
deficiency income taxes due from the taxpayer for the years
under review to amount to P123,436.00 instead of
P166,063.00 as originally assessed by the Commissioner,
and rendered the following judgment:
RESUME
1950
1951
1952
1953
1954
P2,748.00
108,724.00
3,600.00
2,501.00
5,863.00
Total
P123,436.00
WHEREFORE, the decision appealed from is hereby

modified, and petitioner is ordered to pay the sum of
P123,436.00 within 30 days from the date this decision

becomes final. If the said amount, or any part thereof, is not
paid within said period, there shall be added to the unpaid
amount as surcharge of 5%, plus interest as provided in
Section 51 of the National Internal Revenue Code, as
amended. With costs against petitioner. (Pp. 75, 76,
Taxpayer's Brief as appellant)
Both parties have appealed from the respective adverse

rulings against them in the Tax Court's decision. Two main issues
are raised by the parties: first, the correctness of the Tax Court's
rulings with respect to the disputed items of disallowances
enumerated in the Tax Court's summary reproduced above, and
second, whether or not the government's right to collect the
deficiency income taxes in question has already prescribed.
On the first issue, we will discuss the disputed items of
disallowances seriatim.
1. Re allowances/disallowances of losses.
(a) Allowance of losses in Mati Lumber Co. (1950). The
Commissioner of Internal Revenue questions the Tax Court's
allowance of the taxpayer's writing off as worthless securities in its
1950 return the sum of P8,050.00 representing the cost of shares
of stock of Mati Lumber Co. acquired by the taxpayer on January
1, 1948, on the ground that the worthlessness of said stock in the
year 1950 had not been clearly established. The Commissioner
contends that although the said Company was no longer in
operation in 1950, it still had its sawmill and equipment which
must be of considerable value. The Court, however, found that
"the company ceased operations in 1949 when its Manager and
owner, a certain Mr. Rocamora, left for Spain ,where he
subsequently died. When the company eased to operate, it had no
assets, in other words, completely insolvent. This information as to
the insolvency of the Company reached (the taxpayer) in
1950," when it properly claimed the loss as a deduction in its 1950
tax return, pursuant to Section 30(d) (4) (b) or Section 30 (e) (3) of
the National Internal Revenue Code. 2
We find no reason to disturb this finding of the Tax Court.
There was adequate basis for the writing off of the stock as
worthless securities. Assuming that the Company would later

somehow realize some proceeds from its sawmill and equipment,
which were still existing as claimed by the Commissioner, and that
such proceeds would later be distributed to its stockholders such
as the taxpayer, the amount so received by the taxpayer would
then properly be reportable as income of the taxpayer in the year
it is received.
(b) Disallowance of losses in or bad debts of Palawan
Manganese Mines, Inc. (1951). The taxpayer appeals from the
Tax Court's disallowance of its writing off in 1951 as a loss or bad
debt the sum of P353,134.25, which it had advanced or loaned to
Palawan Manganese Mines, Inc. The Tax Court's findings on this
item follow:
Sometime in 1945, Palawan Manganese Mines, Inc.,
the controlling stockholders of which are also the controlling
stockholders of petitioner corporation, requested financial
help from petitioner to enable it to resume it mining operations
in Coron, Palawan. The request for financial assistance was
readily and unanimously approved by the Board of Directors
of petitioner, and thereafter a memorandum agreement was
executed on August 12, 1945, embodying the terms and
conditions under which the financial assistance was to be
extended, the pertinent provisions of which are as follows:
"WHEREAS, the FIRST PARTY, by virtue of its
resolution adopted on August 10, 1945, has agreed to
extend to the SECOND PARTY the requested
financial help by way of accommodation advances
and for this purpose has authorized its President, Mr.
Ramon J. Fernandez to cause the release of funds to
the SECOND PARTY.
"WHEREAS, to compensate the FIRST PARTY
for the advances that it has agreed to extend to the
SECOND PARTY, the latter has agreed to pay to the
former fifteen per centum (15%) of its net profits.
"NOW THEREFORE, for and in consideration
of the above premises, the parties hereto have
agreed and covenanted that in consideration of the
financial help to be extended by the FIRST PARTY to
the SECOND PARTY to enable the latter to resume

its mining operations in Coron, Palawan, the
SECOND PARTY has agreed and undertaken as it
hereby agrees and undertakes to pay to the FIRST
PARTY fifteen per centum (15%) of its net profits."
(Exh. H-2)
Pursuant to the agreement mentioned above, petitioner

gave to Palawan Manganese Mines, Inc. yearly advances starting
from 1945, which advances amounted to P587,308.07 by the end
of 1951. Despite these advances and the resumption of
operations by Palawan Manganese Mines, Inc., it continued to
suffer losses. By 1951, petitioner became convinced that those
advances could no longer be recovered. While it continued to give
advances, it decided to write off as worthless the sum of
P353,134.25. This amount "was arrived at on the basis of the total
of advances made from 1945 to 1949 in the sum of P438,981.39,
from which amount the sum of P85,647.14 had to be deducted,
the latter sum representing its pre-war assets. (t.s.n., pp. 136139, Id)." (Page 4, Memorandum for Petitioner.) Petitioner decided
to maintain the advances given in 1950 and 1951 in the hope that
it might be able to recover the same, as in fact it continued to give
advances up to 1952. From these facts, and as admitted by
petitioner itself, Palawan Manganese Mines, Inc., was still in
operation when the advances corresponding to the years 1945 to
1949 were written off the books of petitioner. Under the
circumstances, was the sum of P353,134.25 properly claimed by
petitioner as deduction in its income tax return for 1951, either as
losses or bad debts?
It will be noted that in giving advances to Palawan
Manganese Mine Inc., petitioner did not expect to be repaid. It is
true that some testimonial evidence was presented to show that
there was some agreement that the advances would be repaid,
but no documentary evidence was presented to this effect. The
memorandum agreement signed by the parties appears to be very
clear that the consideration for the advances made by petitioner
was 15% of the net profits of Palawan Manganese Mines, Inc. In
other words, if there were no earnings or profits, there was no
obligation to repay those advances. It has been held that the
voluntary advances made without expectation of repayment do not
result in deductible losses. 1955 PH Fed. Taxes, Par. 13, 329,
citing W. F. Young, Inc. v. Comm., 120 F 2d. 159, 27 AFTR 395;

George B. Markle, 17 TC. 1593.
Is the said amount deductible as a bad debt? As already
stated, petitioner gave advances to Palawan Manganese Mines,
Inc., without expectation of repayment. Petitioner could not sue for
recovery under the memorandum agreement because the
obligation of Palawan Manganese Mines, Inc. was to pay
petitioner 15% of its net profits, not the advances. No bad debt
could arise where there is no valid and subsisting debt.
Again, assuming that in this case there was a valid and
subsisting debt and that the debtor was incapable of paying the
debt in 1951, when petitioner wrote off the advances and
deducted the amount in its return for said year, yet the debt is not
deductible in 1951 as a worthless debt. It appears that the debtor
was still in operation in 1951 and 1952, as petitioner continued to
give advances in those years. It has been held that if the debtor
corporation, although losing money or insolvent, was still
operating at the end of the taxable year, the debt is not considered
worthless and therefore not deductible. 3
The Tax Court's disallowance of the write-off was proper.
The Solicitor General has rightly pointed out that the taxpayer has
taken an "ambiguous position " and "has not definitely taken a
stand on whether the amount involved is claimed as losses or as
bad debts but insists that it is either a loss or a bad debt." 4 We
sustain the government's position that the advances made by the
taxpayer to its 100% subsidiary, Palawan Manganese Mines, Inc.
amounting to P587,308,07 as of 1951 were investments and not
loans. 5 The evidence on record shows that the board of directors
of the two companies since August, 1945, were identical and that
the only capital of Palawan Manganese Mines, Inc. is the amount
of P100,000.00 entered in the taxpayer's balance sheet as its
investment in its subsidiary company. 6 This fact explains the
liberality with which the taxpayer made such large advances to the
subsidiary, despite the latter's admittedly poor financial condition.
The taxpayer's contention that its advances were loans to
its subsidiary as against the Tax Court's finding that under their
memorandum agreement, the taxpayer did not expect to be
repaid, since if the subsidiary had no earnings, there was no
obligation to repay those advances, becomes immaterial, in the

light of our resolution of the question. The Tax Court correctly held
that the subsidiary company was still in operation in 1951 and
1952 and the taxpayer continued to give it advances in those
years, and, therefore, the alleged debt or investment could not
properly be considered worthless and deductible in 1951, as
claimed by the taxpayer. Furthermore, neither under Section 30
(d) (2) of our Tax Code providing for deduction by corporations of
losses actually sustained and charged off during the taxable year
nor under Section 30 (e) (1) thereof providing for deduction of bad
debts actually ascertained to be worthless and charged off within
the taxable year, can there be a partial writing off of a loss or bad
debt, as was sought to be done here by the taxpayer. For such
losses or bad debts must be ascertained to be so and written off
during the taxable year, are therefore deductible in full or not at all,
in the absence of any express provision in the Tax Code
authorizing partial deductions.
The Tax Court held that the taxpayer's loss of its investment
in its subsidiary could not be deducted for the year 1951, as the
subsidiary was still in operation in 1951 and 1952. The taxpayer,
on the other hand, claims that its advances were irretrievably lost
because of the staggering losses suffered by its subsidiary in 1951
and that its advances after 1949 were "only limited to the purpose
of salvaging whatever ore was already available, and for the
purpose of paying the wages of the laborers who needed
help." 7 The correctness of the Tax Court's ruling in sustaining the
disallowance of the write-off in 1951 of the taxpayer's claimed
losses is borne out by subsequent events shown in Cases L24972 and L-24978 involving the taxpayer's 1957 income tax
liability. (Infra, paragraph 6.) It will there be seen that by 1956, the
obligation of the taxpayer's subsidiary to it had been reduced from
P587,398.97 in 1951 to P442,885.23 in 1956, and that it was only
on January 1, 1956 that the subsidiary decided to cease
operations. 8
(c) Disallowance of losses in Balamban Coal Mines (1950
and 1951). The Court sustains the Tax Court's disallowance of
the sums of P8,989.76 and P27,732.66 spent by the taxpayer for
the operation of its Balamban coal mines in Cebu in 1950 and
1951, respectively, and claimed as losses in the taxpayer's returns
for said years. The Tax Court correctly held that the losses "are
deductible in 1952, when the mines were abandoned, and not in

1950 and 1951, when they were still in operation." 9 The taxpayer's
claim that these expeditions should be allowed as losses for the
corresponding years that they were incurred, because it made no
sales of coal during said years, since the promised road or outlet
through which the coal could be transported from the mines to the
provincial road was not constructed, cannot be sustained. Some
definite event must fix the time when the loss is sustained, and
here it was the event of actual abandonment of the mines in 1952.
The Tax Court held that the losses, totalling P36,722.42 were
properly deductible in 1952, but the appealed judgment does not
show that the taxpayer was credited therefor in the determination
of its tax liability for said year. This additional deduction of
P36,722.42 from the taxpayer's taxable income in 1952 would
result in the elimination of the deficiency tax liability for said year
in the sum of P3,600.00 as determined by the Tax Court in the
appealed judgment.
(d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to
1954) and Hacienda Samal (1951-1952). The Tax Court
overruled the Commissioner's disallowance of these items of
losses thus:
Petitioner deducted losses in the operation of its
Hacienda Dalupiri the sums of P17,418.95 in 1950,
P29,125.82 in 1951, P26,744.81 in 1952, P21,932.62 in 1953,
and P42,938.56 in 1954. These deductions were disallowed
by respondent on the ground that the farm was operated
solely for pleasure or as a hobby and not for profit. This
conclusion is based on the fact that the farm was operated
continuously at a loss.
1awphl.nt
From the evidence, we are convinced that the

Hacienda Dalupiri was operated by petitioner for business
and not pleasure. It was mainly a cattle farm, although a few
race horses were also raised. It does not appear that the farm
was used by petitioner for entertainment, social activities, or
other non-business purposes. Therefore, it is entitled to
deduct expenses and losses in connection with the operation
of said farm. (See 1955 PH Fed. Taxes, Par. 13, 63, citing
G.C.M. 21103, CB 1939-1, p.164)
Section 100 of Revenue Regulations No. 2, otherwise

known as the Income Tax Regulations, authorizes farmers to
determine their gross income on the basis of inventories. Said
regulations provide:
"If gross income is ascertained by inventories,
no deduction can be made for livestock or products
lost during the year, whether purchased for resale,
produced on the farm, as such losses will be reflected
in the inventory by reducing the amount of livestock or
products on hand at the close of the year."
Evidently, petitioner determined its income or losses in
the operation of said farm on the basis of inventories. We
quote from the memorandum of counsel for petitioner:
"The Taxpayer deducted from its income tax
returns for the years from 1950 to 1954 inclusive, the
corresponding yearly losses sustained in the
operation of Hacienda Dalupiri, which losses
represent the excess of its yearly expenditures over
the receipts; that is, the losses represent the
difference between the sales of livestock and the
actual cash disbursements or expenses." (Pages 2122, Memorandum for Petitioner.)
As the Hacienda Dalupiri was operated by petitioner for
business and since it sustained losses in its operation, which
losses were determined by means of inventories authorized
under Section 100 of Revenue Regulations No. 2, it was error
for respondent to have disallowed the deduction of said
losses. The same is true with respect to loss sustained in the
operation of the Hacienda Samal for the years 1951 and
1952. 10
The Commissioner questions that the losses sustained by

the taxpayer were properly based on the inventory method of
accounting. He concedes, however, "that the regulations referred
to does not specify how the inventories are to be made. The Tax
Court, however, felt satisfied with the evidence presented by the
taxpayer ... which merely consisted of an alleged physical count of
the number of the livestock in Hacienda Dalupiri for the years
involved." 11 The Tax Court was satisfied with the method adopted
by the taxpayer as a farmer breeding livestock, reporting on the

basis of receipts and disbursements. We find no Compelling
reason to disturb its findings.
2. Disallowance of excessive depreciation of buildings
(1950-1954). During the years 1950 to 1954, the taxpayer
claimed a depreciation allowance for its buildings at the annual
rate of 10%. The Commissioner claimed that the reasonable
depreciation rate is only 3% per annum, and, hence, disallowed as
excessive the amount claimed as depreciation allowance in
excess of 3% annually. We sustain the Tax Court's finding that the
taxpayer did not submit adequate proof of the correctness of the
taxpayer's claim that the depreciable assets or buildings in
question had a useful life only of 10 years so as to justify its 10%
depreciation per annum claim, such finding being supported by
the record. The taxpayer's contention that it has many zero or
one-peso assets, 12representing very old and fully depreciated
assets serves but to support the Commissioner's position that a
10% annual depreciation rate was excessive.
3. Taxable increase in net worth (1950-1951). The Tax
Court set aside the Commissioner's treatment as taxable income
of certain increases in the taxpayer's net worth. It found that:
For the year 1950, respondent determined that
petitioner had an increase in net worth in the sum of
P30,050.00, and for the year 1951, the sum of P1,382.85.
These amounts were treated by respondent as taxable
income of petitioner for said years.
It appears that petitioner had an account with the
Manila Insurance Company, the records bearing on which
were lost. When its records were reconstituted the amount of
P349,800.00 was set up as its liability to the Manila Insurance
Company. It was discovered later that the correct liability was
only 319,750.00, or a difference of P30,050.00, so that the
records were adjusted so as to show the correct liability. The
correction or adjustment was made in 1950. Respondent
contends that the reduction of petitioner's liability to Manila
Insurance Company resulted in the increase of petitioner's
net worth to the extent of P30,050.00 which is taxable. This is
erroneous. The principle underlying the taxability of an
increase in the net worth of a taxpayer rests on the theory
that such an increase in net worth, if unreported and not

explained by the taxpayer, comes from income derived from a
taxable source. (See Perez v. Araneta, G.R. No. L-9193, May
29, 1957; Coll. vs. Reyes, G.R. Nos. L- 11534 & L-11558,
Nov. 25, 1958.) In this case, the increase in the net worth of
petitioner for 1950 to the extent of P30,050.00 was not the
result of the receipt by it of taxable income. It was merely the
outcome of the correction of an error in the entry in its books
relating to its indebtedness to the Manila Insurance Company.
The Income Tax Law imposes a tax on income; it does not tax
any or every increase in net worth whether or not derived
from income. Surely, the said sum of P30,050.00 was not
income to petitioner, and it was error for respondent to assess
a deficiency income tax on said amount.
The same holds true in the case of the alleged increase in

net worth of petitioner for the year 1951 in the sum of P1,382.85. It
appears that certain items (all amounting to P1,382.85) remained
in petitioner's books as outstanding liabilities of trade creditors.
These accounts were discovered in 1951 as having been paid in
prior years, so that the necessary adjustments were made to
correct the errors. If there was an increase in net worth of the
petitioner, the increase in net worth was not the result of receipt by
petitioner of taxable income." 13 The Commissioner advances no
valid grounds in his brief for contesting the Tax Court's findings.
Certainly, these increases in the taxpayer's net worth were not
taxable increases in net worth, as they were not the result of the
receipt by it of unreported or unexplained taxable income, but
were shown to be merely the result of the correction of errors in its
entries in its books relating to its indebtednesses to certain
creditors, which had been erroneously overstated or listed as
outstanding when they had in fact been duly paid. The Tax Court's
action must be affirmed.
4. Gain realized from sale of real property (1950). We
likewise sustain as being in accordance with the evidence the Tax
Court's reversal of the Commissioner's assessment on all alleged
unreported gain in the sum of P11,147.26 in the sale of a certain
real property of the taxpayer in 1950. As found by the Tax Court,
the evidence shows that this property was acquired in 1926 for
P11,852.74, and was sold in 1950 for P60,000.00, apparently,
resulting in a gain of P48,147.26. 14 The taxpayer reported in its
return a gain of P37,000.00, or a discrepancy of P11,147.26. 15 It
was sufficiently proved from the taxpayer's books that after

acquiring the property, the taxpayer had made improvements
totalling P11,147.26, 16 accounting for the apparent discrepancy in
the reported gain. In other words, this figure added to the original
acquisition cost of P11,852.74 results in a total cost of P23,000.00,
and the gain derived from the sale of the property for P60,000.00
was correctly reported by the taxpayer at P37,000.00.
On the second issue of prescription, the taxpayer's
contention that 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, as contradistinguished from the answer
filed by the Commissioner to its petition for review of the
questioned assessments in the case a quo has long been rejected
by this Court. This Court has consistently 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."17 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 fiveyear period to effect collection by judicial action counted from the
date of assessment.
Cases L-24972 and L-24978
These cases refer to the taxpayer's income tax liability for
the year 1957. Upon examination of its corresponding income tax
return, the Commissioner assessed it for deficiency income tax in
the amount of P38,918.76, computed as follows:
Net income per return

Add: Unallowable deductions:
(1) Net loss claimed on Ha. Dalupiri
(2) Amortization of Contractual right claimed as an
expense under Mines Operations
Tax due thereon
P29,178.70
89,547.33
48,481.62
P167,297.65
38,818.00
Less: Amount already assessed

Balance
Add:
1/2% monthly interest from 6-20-59 to
6-20-62
5,836.00
P32,982.00
TOTAL AMOUNT DUE AND COLLECTIBLE
P38,918.76
5,936.76
The Tax Court overruled the Commissioner's disallowance

of the taxpayer's losses in the operation of its Hacienda Dalupiri in
the sum of P89,547.33 but sustained the disallowance of the sum
of P48,481.62, which allegedly represented 1/5 of the cost of the
"contractual right" over the mines of its subsidiary, Palawan
Manganese Mines, Inc. which the taxpayer had acquired. It found
the taxpayer liable for deficiency income tax for the year 1957 in
the amount of P9,696.00, instead of P32,982.00 as originally
assessed, and rendered the following judgment:
WHEREFORE, the assessment appealed from is
hereby modified. Petitioner is hereby ordered to pay to
respondent the amount of P9,696.00 as deficiency income tax
for the year 1957, plus the corresponding interest provided in
Section 51 of the Revenue Code. If the deficiency tax is not
paid in full within thirty (30) days from the date this decision
becomes final and executory, petitioner shall pay a surcharge
of five per cent (5%) of the unpaid amount, plus interest at the
rate of one per cent (1%) a month, computed from the date
this decision becomes final until paid, provided that the
maximum amount that may be collected as interest shall not
exceed the amount corresponding to a period of three (3)
years. Without pronouncement as to costs. 19
18
Both parties again appealed from the respective adverse

rulings against them in the Tax Court's decision.
5. Allowance of losses in Hacienda Dalupiri (1957). The
Tax Court cited its previous decision overruling the
Commissioner's disallowance of losses suffered by the taxpayer in
the operation of its Hacienda Dalupiri, since it was convinced that
the hacienda was operated for business and not for pleasure. And
in this appeal, the Commissioner cites his arguments in his
appellant's brief in Case No. L-21557. The Tax Court, in setting
aside the Commissioner's principal objections, which were
directed to the accounting method used by the taxpayer found
that:
It is true that petitioner followed the cash basis method
of reporting income and expenses in the operation of the
Hacienda Dalupiri and used the accrual method with respect
to its mine operations. This method of accounting, otherwise
known as the hybrid method, followed by petitioner is not
without justification.
... A taxpayer may not, ordinarily, combine the
cash and accrual bases. The 1954 Code provisions
permit, however, the use of a hybrid method of
accounting, combining a cash and accrual method,
under circumstances and requirements to be set out
in Regulations to be issued. Also, if a taxpayer is
engaged in more than one trade or business he may
use a different method of accounting for each trade or
business. And a taxpayer may report income from a
business on accrual basis and his personal income on
the cash basis.' (See Mertens, Law of Federal Income
Taxation, Zimet & Stanley Revision, Vol. 2, Sec.
12.08, p. 26.) 20
The Tax Court, having satisfied itself with the adequacy
of the taxpayer's accounting method and procedure as
properly reflecting the taxpayer's income or losses, and the
Commissioner having failed to show the contrary, we reiterate
our ruling [supra, paragraph 1 (d) and (e)] that we find no
compelling reason to disturb its findings.
6. Disallowance of amortization of alleged "contractual

rights." The reasons for sustaining this disallowance are thus
given by the Tax Court:
It appears that the Palawan Manganese Mines, Inc.,
during a special meeting of its Board of Directors on January
19, 1956, approved a resolution, the pertinent portions of
which read as follows:
"RESOLVED, as it is hereby resolved, that the
corporation's current assets composed of ores, fuel,
and oil, materials and supplies, spare parts and
canteen supplies appearing in the inventory and
balance sheet of the Corporation as of December 31,
1955, with an aggregate value of P97,636.98,
contractual rights for the operation of various mining
claims in Palawan with a value of P100,000.00, its
title on various mining claims in Palawan with a value
of P142,408.10 or a total value of P340,045.02 be, as
they are hereby ceded and transferred to Fernandez
Hermanos, Inc., as partial settlement of the
indebtedness of the corporation to said Fernandez
Hermanos Inc. in the amount of P442,895.23." (Exh.
E, p. 17, CTA rec.)
On March 29, 1956, petitioner's corporation accepted
the above offer of transfer, thus:
"WHEREAS, the Palawan Manganese Mines,
Inc., due to its yearly substantial losses has decided
to cease operation on January 1, 1956 and in order to
satisfy at least a part of its indebtedness to the
Corporation, it has proposed to transfer its current
assets in the amount of NINETY SEVEN THOUSAND
SIX HUNDRED THIRTY SIX PESOS & 98/100
(P97,636.98) as per its balance sheet as of December
31, 1955, its contractual rights valued at ONE
HUNDRED THOUSAND PESOS (P100,000.00) and
its title over various mining claims valued at ONE
HUNDRED FORTY TWO THOUSAND FOUR
HUNDRED EIGHT PESOS & 10/100 (P142,408.10)
or a total evaluation of THREE HUNDRED FORTY
THOUSAND FORTY FIVE PESOS & 08/100
(P340,045.08) which shall be applied in partial

settlement of its obligation to the Corporation in the
amount of FOUR HUNDRED FORTY TWO
THOUSAND EIGHT HUNDRED EIGHTY FIVE
PESOS & 23/100 (P442,885.23)," (Exh. E-1, p. 18,
CTA rec.)
Petitioner determined the cost of the mines at
P242,408.10 by adding the value of the contractual rights
(P100,000.00) and the value of its mining claims
(P142,408.10). Respondent disallowed the deduction on the
following grounds: (1) that the Palawan Manganese Mines,
Inc. could not transfer P242,408.10 worth of assets to
petitioner because the balance sheet of the said corporation
for 1955 shows that it had only current as worth P97,636.96;
and (2) that the alleged amortization of "contractual rights" is
not allowed by the Revenue Code.
The law in point is Section 30(g) (1) (B) of the Revenue
Code, before its amendment by Republic Act No. 2698, which
provided in part:
"(g) Depletion of oil and gas wells and mines.:
"(1) In general. ... (B) in the case of mines, a
reasonable allowance for depletion thereof not to
exceed the market value in the mine of the product
thereof, which has been mined and sold during the
year for which the return and computation are made.
The allowances shall be made under rules and
regulations to be prescribed by the Secretary of
Finance: Provided, That when the allowances shall
equal the capital invested, ... no further allowance
shall be made."
Assuming, arguendo, that the Palawan Manganese
Mines, Inc. had assets worth P242,408.10 which it actually
transferred to the petitioner in 1956, the latter cannot just
deduct one-fifth (1/5) of said amount from its gross income for
the year 1957 because such deduction in the form of
depletion charge was not sanctioned by Section 30(g) (1) (B)
of the Revenue Code, as above-quoted.
xxx
xxx
xxx
The sole basis of petitioner in claiming the amount of

P48,481.62 as a deduction was the memorandum of its
mining engineer (Exh. 1, pp. 31-32, CTA rec.), who stated that
the ore reserves of the Busuange Mines (Mines transferred
by the Palawan Manganese Mines, Inc. to the petitioner)
would be exhausted in five (5) years, hence, the claim for
P48,481.62 or one-fifth (1/5) of the alleged cost of the mines
corresponding to the year 1957 and every year thereafter for
a period of 5 years. The said memorandum merely showed
the estimated ore reserves of the mines and it probable
selling price. No evidence whatsoever was presented to show
the produced mine and for how much they were sold during
the year for which the return and computation were made.
This is necessary in order to determine the amount of
depletion that can be legally deducted from petitioner's gross
income. The method employed by petitioner in making an
outright deduction of 1/5 of the cost of the mines is not
authorized under Section 30(g) (1) (B) of the Revenue Code.
Respondent's disallowance of the alleged "contractual rights"
amounting to P48,481.62 must therefore be sustained. 21
The taxpayer insists in this appeal that it could use as a

method for depletion under the pertinent provision of the Tax Code
its "capital investment," representing the alleged value of its
contractual rights and titles to mining claims in the sum of
P242,408.10 and thus deduct outright one-fifth (1/5) of this "capital
investment" every year. regardless of whether it had actually
mined the product and sold the products. The very authorities
cited in its brief give the correct concept of depletion charges that
they "allow for the exhaustion of the capital value of the deposits
by production"; thus, "as the cost of the raw materials must be
deducted from the gross income before the net income can be
determined, so the estimated cost of the reserve used up is
allowed." 22 The alleged "capital investment" method invoked by
the taxpayer is not a method of depletion, but the Tax Code
provision, prior to its amendment by Section 1, of Republic Act No.
2698, which took effect on June 18, 1960, expressly provided that
"when the allowances shall equal the capital invested ... no further
allowances shall be made;" in other words, the "capital
investment" was but the limitation of the amount of depletion that
could be claimed. The outright deduction by the taxpayer of 1/5 of
the cost of the mines, as if it were a "straight line" rate of

depreciation, was correctly held by the Tax Court not to be
authorized by the Tax Code.
ACCORDINGLY, the judgment of the Court of Tax Appeals,
subject of the appeals in Cases Nos. L-21551 and L-21557, as
modified by the crediting of the losses of P36,722.42 disallowed in
1951 and 1952 to the taxpayer for the year 1953 as directed in
paragraph 1 (c) of this decision, is hereby affirmed. The judgment
of the Court of Tax Appeals appealed from in Cases Nos. L-24972
and L-24978 is affirmed in toto. No costs. So ordered.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro,
Fernando, Capistrano and Barredo, JJ., concur.

SUPREME COURT
Manila
EN BANC
G.R. No. L-22492
September 5, 1967
BASILAN ESTATES, INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE
COURT OF TAX APPEALS, respondents.
Felix A. Gulfin and Antonio S. Alano for petitioner.
BENGZON, J.P., J.:

A Philippine corporation engaged in the coconut industry,
Basilan Estates, Inc., with principal offices in Basilan City, filed on
March 24, 1954 its income tax returns for 1953 and paid an
income tax of P8,028. On February 26, 1959, the Commissioner
of Internal Revenue, per examiners' report of February 19, 1959,
assessed Basilan Estates, Inc., a deficiency income tax of P3,912
for 1953 and P86,876.85 as 25% surtax on unreasonably
accumulated profits as of 1953 pursuant to Section 25 of the Tax
Code. On non-payment of the assessed amount, a warrant of
distraint and levy was issued but the same was not executed
because Basilan Estates, Inc. succeeded in getting the Deputy
Commissioner of Internal Revenue to order the Director of the
district in Zamboanga City to hold execution and maintain
constructive embargo instead. Because of its refusal to waive the
period of prescription, the corporation's request for reinvestigation
was not given due course, and on December 2, 1960, notice was
served the corporation that the warrant of distraint and levy would
be executed.
On December 20, 1960, Basilan Estates, Inc. filed before
the Court of Tax Appeals a petition for review of the
Commissioner's assessment, alleging prescription of the period for

assessment and collection; error in disallowing claimed
depreciations, travelling and miscellaneous expenses; and error in
finding the existence of unreasonably accumulated profits and the
imposition of 25% surtax thereon. On October 31, 1963, the Court
of Tax Appeals found that there was no prescription and affirmed
the deficiency assessment in toto.
On February 21, 1964, the case was appealed to Us by the
taxpayer, upon the following issues:
1. Has the Commissioner's right to collect deficiency income
tax prescribed?
2. Was the disallowance of items claimed as deductible
proper?
3. Have there been unreasonably accumulated profits? If
so, should the 25% surtax be imposed on the balance of the entire
surplus from 1947-1953, or only for 1953?
4. Is the petitioner exempt from the penalty tax under
Republic Act 1823 amending Section 25 of the Tax Code?
PRESCRIPTION
There is no dispute that the assessment of the deficiency
tax was made on February 26, 1959; but the petitioner claims that
it never received notice of such assessment or if it did, it received
the notice beyond the five-year prescriptive period. To show
prescription, the annotation on the notice (Exhibit 10, No. 52,
ACR, p. 54-A of the BIR records) "No accompanying letter 11/25/"
is advanced as indicative of the fact that receipt of 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 were filed
on March 24, 1954.
Although the evidence is not clear on this point, We cannot
accept this interpretation of the petitioner, considering the
presence of circumstances that lead Us to presume regularity in
the performance of official functions. The notice of assessment
shows the assessment to have been made on February 26, 1959,

well within the five-year period. On the right side of the notice is
also stamped "Feb. 26, 1959" denoting the date of release,
according to Bureau of Internal Revenue practice. The
Commissioner himself in his letter (Exh. H, p. 84 of BIR records)
answering petitioner's request to lift, the warrant of distraint and
levy, asserts that notice had been sent to petitioner. In the letter of
the Regional Director forwarding the case to the Chief of the
Investigation Division which the latter received on March 10, 1959
(p. 71 of the BIR records), notice of assessment was said to have
been sent to petitioner. Subsequently, the Chief of the
Investigation Division indorsed on March 18, 1959 (p. 24 of the
BIR records) the case to the Chief of the Law Division. There it
was alleged that notice was already sent to petitioner on February
26, 1959. These circumstances pointing to official performance of
duty must necessarily prevail over petitioner's contrary
interpretation. Besides, even granting that notice had been
received by the petitioner late, as alleged, under Section 331 of
the Tax Code requiring five years within which to assessdeficiency
taxes, the assessment is deemed made when notice to this effect
is released, mailed or sent by the Collector to the taxpayer and it
is not required that the notice be received by the taxpayer within
the aforementioned five-year period.1
ASSESSMENT
The questioned assessment is as follows:
Net Income per return
Add: Over-claimed depreciation
Mis. expenses disallowed
Officer's travelling expenses
disallowed
P40,142.90
P10,500.49
6,759.17
2,300.40
Net Income per Investigation

20% tax on P59,702.96
Less: Tax already assessed
Deficiency income tax
Add: Additional tax of 25% on P347,507.01
Tax Due & Collectible
19,560.06
P59,702.96
11,940.00
8,028.00
P3,912.00
86,876.75
P90,788.75
=========
The Commissioner disallowed:

Over-claimed depreciation
Miscellaneous expenses
P10,500.49
6,759.17
2,300.40
DEDUCTIONS
A. Depreciation. Basilan Estates, Inc. claimed deductions for
the depreciation of its assets up to 1949 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.
In 1953, the year involved in this case, taxpayer claimed the
following depreciation deduction:
Reappraised assets
New assets consisting of hospital building and
equipment
Total depreciation
P47,342.53
3,910.45
P51,252.98
Upon investigation and examination of taxpayer's books and

papers, the Commissioner of Internal Revenue found that the
reappraised assets depreciated in 1953 were the same ones upon
which depreciation was claimed in 1952. And for the year 1952,
the Commissioner had already determined, with taxpayer's
concurrence, the depreciation allowable on said assets to be
P36,842.04, computed on their acquisition cost at rates fixed by
the taxpayer. Hence, the Commissioner pegged the deductible
depreciation for 1953 on the same old assets at P36,842.04 and
disallowed the excess thereof in the amount of P10,500.49.
The question for resolution therefore is whether depreciation

shall be determined on the acquisition cost or on the reappraised
value of the assets.
Depreciation is the gradual diminution in the useful value of
tangible property resulting from wear and tear and normal
obsolescense. The term is also applied to amortization of the
value of intangible assets, the use of which in the trade or
business is definitely limited in duration.2 Depreciation 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. It is entitled to see that from earnings
the value of the property invested is kept unimpaired, so that at
the end of any given term of years, the original investment
remains as it was in the beginning. It is not only the right of a
company to make such a provision, but it is its duty to its bond and
stockholders, and, in the case of a public service corporation, at
least, its plain duty to the public.3 Accordingly, the law permits the
taxpayer to recover gradually his capital investment in wasting
assets free from income tax.4Precisely, Section 30 (f) (1) which
states:
(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. . . .
allows a deduction from gross income for depreciation but

limits the recovery to the capital invested in the asset being
depreciated.
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,5 not matters of
right.6 They are not created by implication but upon clear
expression in the law.7
Moreover, 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.
Accordingly, the claim for depreciation beyond P36,842.04
or in the amount of P10,500.49 has no justification in the law. The
determination, therefore, of the Commissioner of Internal Revenue
disallowing said amount, affirmed by the Court of Tax Appeals, is
sustained.
B. Expenses. The next item involves disallowed
expenses incurred in 1953, broken as follows:
Miscellaneous expenses
Total
P6,759.17
2,300.40
P9,059.57
These were disallowed on the ground that the nature of

these expenses could not be satisfactorily explained nor could the
same be supported by appropriate papers.
Felix Gulfin, petitioner's accountant, explained the
P6,759.17 was actual expenses credited to the account of the
president of the corporation incurred in the interest of the
corporation during the president's trip to Manila (pp. 33-34 of TSN
of Dec. 5, 1962); he stated that the P2,300.40 was the president's
travelling expenses to and from Manila as to the vouchers and
receipts of these, he said the same were made but got burned
during the Basilan fire on March 30, 1962 (p. 40 of same TSN).
Petitioner further argues that when it sent its records to Manila in
February, 1959, the papers in support of these miscellaneous and
travelling expenses were not included for the reason that by
February 9, 1959, when the Bureau of Internal Revenue decided
to investigate, petitioner had no more obligation to keep the same
since five years had lapsed from the time these expenses were
incurred (p. 41 of same TSN). On this ground, the petitioner may
be sustained, for under Section 337 of the Tax Code, receipts and
papers supporting such expenses need be kept by the taxpayer
for a period of five years from the last entry. At the time of the
investigation, said five years had lapsed. Taxpayer's stand on this
issue is therefore sustained.
UNREASONABLY ACCUMULATED PROFITS
Section 25 of the Tax Code which imposes a surtax on
profits unreasonably accumulated, provides:
Sec. 25. Additional tax on corporations improperly
accumulating profits or surplus (a) Imposition of tax. If
any corporation, except banks, insurance companies, or
personal holding companies, whether domestic or foreign, is
formed or availed of for the purpose of preventing the
imposition of the tax upon its shareholders or members or the
shareholders or members of another corporation, through the
medium of permitting its gains and profits to accumulate
instead of being divided or distributed, there is levied and
assessed against such corporation, for each taxable year, a
tax equal to twenty-five per centum of the undistributed
portion of its accumulated profits or surplus which shall be in
addition to the tax imposed by section twenty-four, and shall
be computed, collected and paid in the same manner and
subject to the same provisions of law, including penalties, as
that tax.
1awphl.nt
The Commissioner found that in violation of the

abovequoted section, petitioner had unreasonably accumulated
profits as of 1953 in the amount of P347,507.01, based on the
following circumstances (Examiner's Report pp. 62-68 of BIR
records):
1. Strong financial position of the petitioner as of December
31, 1953. Assets were P388,617.00 while the liabilities
amounted to only P61,117.31 or a ratio of 6:1.
2. As of 1953, the corporation had considerable capital
adequate to meet the reasonable needs of the business
amounting to P327,499.69 (assets less liabilities).
3. The P200,000 reserved for electrification of drier and

mechanization and the P50,000 reserved for malaria control
were reverted to its surplus in 1953.
4. Withdrawal by shareholders, of large sums of money
as personal loans.
5. Investment of undistributed earnings in assets having no
proximate connection with the business as hospital
building and equipment worth P59,794.72.
6. In 1953, with an increase of surplus amounting to
P677,232.01, the capital stock was increased to P500,000
although there was no need for such increase.
Petitioner tried to show that in considering the surplus, the

examiner did not take into account the possible expenses for
cultivation, labor, fertilitation, drainage, irrigation, repair, etc. (pp.
235-237 of TSN of Dec. 7, 1962). As aptly answered by the
examiner himself, however, they were already included as part of
the working capital (pp. 237-238 of TSN of Dec. 7, 1962).
In the unreasonable accumulation of P347,507.01 are
included P200,000 for electrification of driers and mechanization
and P50,000 for malaria control which were reserved way back in
1948 (p. 67 of the BIR records) but reverted to the general fund
only in 1953. If there were any plans for these amounts to be used
in further expansion through projects, it did not appear in the
records as was properly indicated in 1948 when such amounts
were reserved. Thus, while in 1948 it was already clear that the
money was intended to go to future projects, in 1953 upon
reversion to the general fund, no such intention was shown. Such
reversion therefore gave occasion for the Government to consider
the same for tax purposes. The P250,000 reverted to the general
fund was sought to be explained as later used elsewhere: "part of
it in the Hilano Industries, Inc. in building the factory site and
buildings to house technical men . . . part of it was spent in the
facilities for the waterworks system and for industrialization of the
coconut industry" (p. 117 of TSN of Dec. 6, 1962). This is not
sufficient explanation. Persuasive jurisprudence on the matter
such as those in the United States from where our tax law was
derived,8 has it that: "In order to determine whether profits were
accumulated for the reasonable needs of the business or to avoid

the surtax upon shareholders, the controlling intention of the
taxpayer is that which is manifested at the time of the
accumulation, not subsequently declared intentions which are
merely the products of after-thought."9 The reversion here was
made because the reserved amount was not enough for the
projects intended, without any intent to channel the same to some
particular future projects in mind.
Petitioner argues that since it has P560,717.44 as its
expenses for the year 1953, a surplus of P347,507.01 is not
unreasonably accumulated. As rightly contended by the
Government, there is no need to have such a large amount at the
beginning of the following year because during the year, current
assets are converted into cash and with the income realized from
the business as the year goes, these expenses may well be taken
care of (pp. 238 of TSN of Dec. 7, 1962). Thus, it is erroneous to
say that the taxpayer is entitled to retain enough liquid net assets
in amounts approximately equal to current operating needs for the
year to cover "cost of goods sold and operating expenses" for "it
excludes proper consideration of funds generated by the collection
of notes receivable as trade accounts during the course of the
year."10 In fact, just because the fatal accumulations are less than
70% of the annual operating expenses of the year, it does not
mean that the accumulations are reasonable as a matter of law."11
Petitioner tried to show that investments were made with
Basilan Coconut Producers Cooperative Association and Basilan
Hospital (pp. 103-105 of TSN of Dec. 6, 1962) totalling P59,794.72
as of December 31, 1953. This shows all the more the
unreasonable accumulation. As of December 31, 1953 already
P59,794.72 was spent yet as of that date there was still a
surplus of P347,507.01.
Petitioner questions why the examiner covered the period
from 1948-1953 when the taxable year on review was 1953. The
surplus of P347,507.01 was taken by the examiner from the
balance sheet of petitioner for 1953. To check the figure arrived at,
the examiner traced the accumulation process from 1947 until
1953, and petitioner's figure stood out to be correct. There was no
error in the process applied, for previous accumulations should be
considered in determining unreasonable accumulations for the
year concerned. "In determining whether accumulations of

earnings or profits in a particular year are within the reasonable
needs of a corporation, it is neccessary to take into account prior
accumulations, since accumulations prior to the year involved may
have been sufficient to cover the business needs and additional
accumulations during the year involved would not reasonably be
necessary."12
Another factor that stands out to show unreasonable
accumulation is the fact that large amounts were withdrawn by or
advanced to the stockholders. For the year 1953 alone these
totalled P197,229.26. Yet the surplus of P347,507.01 was left as
of December 31, 1953. We find unacceptable petitioner's
explanation that these were advances made in furtherance of the
business purposes of the petitioner. As correctly held by the Court
of Tax Appeals, while certain expenses of the corporation were
credited against these amounts, the unspent balance was retained
by the stockholders without refunding them to petitioner at the end
of each year. These advances were in fact indirect loans to the
stockholders indicating the unreasonable accumulation of surplus
beyond the needs of the business.
ALLEGED EXEMPTION
Petitioner wishes to avail of the exempting proviso in Sec.
25 of the Internal Revenue Code as amended by R.A. 1823,
approved June 22, 1957, whereby accumulated profits or surplus
if invested in any dollar-producing or dollar-earning industry or in
the purchase of bonds issued by the Central Bank, may not be
subject to the 25% surtax. We have but to point out that the
unreasonable accumulation was in 1953. The exemption was by
virtue of Republic Act 1823 which amended Sec. 25 only on June
22, 1957 more than three years after the period covered by the
assessment.
In resume, Basilan Estates, Inc. is liable for the payment of
deficiency income tax and surtax for the year 1953 in the amount
of P88,977.42, computed as follows:
Net Income per return
Add: Over-claimed
depreciation
P40,142.90
10,500.49
Net income per finding
P50,643.39
20% tax on P50,643.39

Less: Tax already assessed
P10,128.67
8,028.00
Deficiency income tax

Add: 25% surtax on
P347,507.01
Total tax due and collectible
P2,100.67
86,876.75
P88,977.42
===========
WHEREFORE, the judgment appealed from is modified to

the extent that petitioner is allowed its deductions for travelling
and miscellaneous expenses, but affirmed insofar as the petitioner
is liable for P2,100.67 as deficiency income tax for 1953 and
P86,876.75 as 25% surtax on the unreasonably accumulated
profit of P347,507.01. No costs. So ordered.
Sanchez, Castro, Angeles and Fernando, JJ., concur.

SUPREME COURT
Manila
EN BANC
G.R. No. L-24893 March 26, 1971

vs.
A. SORIANO Y CIA. and THE COURT OF TAX
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor
General Felicisimo R. Rosete and Special Attorney Michaelina
Ramos-Balasbas for petitioner.
Gadioma & Josue for respondent A. Soriano y Cia.
DIZON, J.:
This is an appeal taken by the Commissioner of Internal Revenue
from a decision of the Court of Tax Appeals in C.T.A. Case No. 1364
entitled "A. Soriano y Cia. vs. Commissioner of Internal Revenue"
ordering the latter to give the former a tax credit in the amount of
P18,099.00 as overpaid income tax for the year 1960.
It appears that A. Soriano y Cia., hereinafter referred to as the
Taxpayer, owned a piece of land located in Intramuros, City of Manila,
on which it proposed to construct an office building. To carry out the
project it had the necessary plans drawn in 1960 by Architect J. M.
Zaragoza, and entered into a pile-driving contract that same year with
the construction firm of A. M. Oreta & Co. hereinafter referred to as
the Contractor. The pile-driving was actually done in 1960.
After these preparations and before the construction of the proposed

office building itself could get started, the Taxpayer sold the property
to J. M. Tuason & Co. on April 13, 1960 under a contract that required
it to meet certain specifications relative to the load bearing factor of
the timber piles driven.
The balance of P49,329.55 due on the Contractor's fees, including
the cost of testing timber piles in the amount of P4,000.00, was paid
only on June 16, 1961 after the Contractor had concluded
negotiations with the City Engineer of Manila for the settlement of the
problem brought by J. M. Tuason & Co. regarding the allowable load
bearing factor for the timber piles at the job site, and after said
Contractor had secured a certification by the Office of the City
Engineer of Manila in connection therewith.
It also appears that in the year 1961, the Taxpayer completed
payment to the architect, Mr. Zaragoza, of the latter's fees for
services rendered, the same consisting of the unpaid balance of
P10,000.00, plus P1,000.00 reimbursement for disbursements made
by the latter in connection with the Intramuros property.
On April 17, 1961, the Taxpayer filed its 1960 Income Tax Return and
in due time paid the income tax due in accordance therewith. On
October 4, 1961, it filed an amended Income Tax Return for the year
1960 showing a refundable amount of P15,099.00 due to the
inclusion of expenses paid on June 1 and June 16, 1961 amounting
to P50,329.55, expenses allegedly incurred for pile-driving and
architect's fees which the Taxpayer claimed were part of the cost of
its Intramuros property sold, as already stated, on April 13, 1960. On
the same day, a request for the refund of the said amount was filed.
Again, on March 12, 1963, the Taxpayer filed a second amended
return showing this time a refundable amount of P18,099.00 based
on expenses already included in the previous amended Income Tax
Return, plus another item of expense in the amount of P10,000.00
paid as architect's fees on March 15, 1961, upon the claim that all
said expenses formed part of the cost of the Intramuros property
aforesaid. A request for the refund of the total amount of P18,099.00
was also made.
As correctly stated in the brief filed by the Office of the Solicitor

General on behalf of petitioner, the sole issue to be resolved in this
appeal is whether or not, in determining the income tax due from the
Taxpayer for the year 1960 in connection with the profit it had realized
from the sale of its Intramuros property on April 13, 1960, said
Taxpayer is entitled to deduct, as part of the cost, from the gross
selling price, the sum of P49,329.55 paid as service fee for piledriving, and the additional sum of P11,000.00 as architect's fee.
In connection with the above issue the following facts are relevant
and of decisive importance:
1) The pile-driving contract was entered into, and the
services of Architect Zaragoza were engaged in the
year 1960. The pile-driving was actually done, and the
plans for the proposed office building were made in
the same year (1960).
2) The Pile-driving services as well as the architect's
services benefited and increased the value of the
property.
The logical conclusion that one may draw from the above facts is that
the expenses in question constitute capital expenditures which the
owner or Taxpayer was entitled to consider as part of the total cost of
its property in determining the amount of the profit it had realized in
the sale thereof to J. M. Tuason & Co. That payment of these
questioned items was made only in 1961 does not alter the fact that
the contracts from which the obligation to pay arose were entered
into in 1960 and the services contracted for were rendered in the
same year. The obligation to pay for said services, therefore, clearly
dated back to 1960.
We have held heretofore that expenditures for replacements,
alterations, improvements or additions which either prolong the life of
the property or increase its value are capital in nature (Alhambra
Cigar etc. vs. Collector, etc., G.R. No. L-12026, and L-12131, May 29,
1959) and having arrived at the conclusion that the expenditures
referred to above increased the value of the property, the same must
be considered as capital expenditures that formed part of the cost of
the Taxpayer's Intramuros property. We, therefore, agree with the
Court of Tax Appeals that said Taxpayer was entitled to the tax credit
applied for.
WHEREFORE, the appealed decision is hereby affirmed, without
costs.
Concepcion C.J., Reyes, J.B.L., Makalintal, Zaldivar, Castro,
Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur.

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-26911 January 27, 1981
CORPORATION, petitioner,
vs.
G.R. No. L-26924 January 27, 1981
vs.
CORPORATION and COURT OF TAX APPEALS,respondents.
DE CASTRO, J.:
These are two (2) petitions for review from the decision of the Court
of Tax Appeals of October 25, 1966 in CTA Case No. 1312 entitled
"Atlas Consolidated Mining and Development Corporation vs.

Commissioner of Internal Revenue." One (L-26911) was filed by the
Atlas Consolidated Mining & Development Corporation, and in the
other L-26924), the Commissioner of Internal Revenue is the
petitioner.
This tax case (CTA No. 1312) arose from the 1957 and 1958
deficiency income tax assessments made by the Commissioner of
Internal Revenue, hereinafter referred to as Commissioner, where the
Atlas Consolidated Mining and Development Corporation, hereinafter
referred to as Atlas, was assessed P546,295.16 for 1957 and
P215,493.96 for 1958 deficiency income taxes.
Atlas is a corporation engaged in the mining industry registered

under the laws of the Philippines. On August 20, 1962, the
Commissioner assessed against Atlas the sum of P546,295.16
and P215,493.96 or a total of P761,789.12 as deficiency income
taxes for the years 1957 and 1958. For the year 1957, it was the
opinion of the Commissioner that Atlas is not entitled to exemption
from the income tax under Section 4 of Republic Act 9091 because
same covers only gold mines, the provision of which reads:
New mines, and old mines which resume operation,
when certified to as such by the Secretary of
Agriculture and Natural Resources upon the
recommendation of the Director of Mines, shall be
exempt from the payment of income tax during the
first three (3) years of actual commercial production.
Provided that, any such mine and/or mines making a
complete return of its capital investment at any time
within the said period, shall pay income tax from that
year.
For the year 1958, the assessment of deficiency income tax of
P761,789.12 covers the disallowance of items claimed by Atlas as
deductible from gross income.
On October 9, 1962, Atlas protested the assessment asking for its

reconsideration and cancellation. 2 Acting on the protest, the
Commissioner conducted a reinvestigation of the case.
On October 25, 1962, the Secretary of Finance ruled that the
exemption provided in Republic Act 909 embraces all new mines
and old mines whether gold or other minerals. 3 Accordingly, the
Commissioner recomputed Atlas deficiency income tax liabilities in
the light of the ruling of the Secretary of Finance. On June 9,
1964, the Commissioner issued a revised assessment entirely
eliminating the assessment of P546,295.16 for the year 1957. The
assessment for 1958 was reduced from P215,493.96 to
P39,646.82 from which Atlas appealed to the Court of Tax
Appeals, assailing the disallowance of the following items claimed
as deductible from its gross income for 1958:
Transfer agent's
fee.........................................................P59,477.42
fee....................................25,523.14
U.S. stock listing
expenses..................................................8,326.70
Suit
expenses......................................................................
....6,666.65
Provision for
contingencies..................................... .........60,000.00
Total......................................................
..............P159,993.91
After hearing, the Court of Tax Appeals rendered a decision on

October 25, 1966 allowing the above mentioned disallowed items,
except the items denominated by Atlas as stockholders relation
service fee and suit expenses. 4Pertinent portions of the decision

of the Court of Tax Appeals read as follows:
Under the facts, circumstances and applicable law in
this case, the unallowable deduction from petitioner's
gross income in 1958 amounted to P32,189.79.
fee.................................... P25,523.14
Suit and litigation
expenses................................................ 6,666.65
Total..............................................................................
..... P32,189.79
As the exemption of petitioner from the payment of
corporate income tax under Section 4, Republic Act
909, was good only up to the Ist quarter of 1958
ending on March 31 of the same year, only threefourth (3/4) of the net taxable income of petitioner is
subject to income tax, computed as follows:
1958
Total net income for
1958.................................P1,968,898.27
Net income corresponding to
taxable period April 1 to
Dec. 31, 1958, 3/4 of
P1,968,898.27..........................................................1,
476,673.70
Add: 3/4 of promotion fees
of
P25,523.14..............................................................P1
9,142.35
Litigation
expenses......................................................................
...6, 666.65
Net income per decision..........................................11,
02,4 2.70
Tax due
thereon.........................................................412,695.0
0
Less: Amount already
assessed .............................405,468.00
DEFICIENCY INCOME TAX
DUE............................P7,227.00
Add: 1/2 % monthly interest
from 6-20-59 to 6-20-62
(18%)....................................P1,300.89
TOTAL AMOUNT DUE &
COLLECTIBLE............P8,526.22
From the Court of Tax Appeals' decision of October 25, 1966, both
parties appealed to this Court by way of two (2) separate petitions for
review docketed as G. R. No. L-26911 (Atlas, petitioner) and G. R.
No. L-29924 (Commissioner, petitioner).
G. R. No. L-26911Atlas appealed only that portion of the Court of
Tax Appeals' decision disallowing the deduction from gross income of
the so-called stockholders relation service fee amounting to

P25,523.14, making a lone assignment of error that
THE COURT OF TAX APPEALS ERRED IN ITS
CONCLUSION THAT THE EXPENSE IN THE
AMOUNT OF P25,523.14 PAID BY PETITIONER IN
1958 AS ANNUAL PUBLIC RELATIONS EXPENSES
WAS INCURRED FOR ACQUISITION OF
ADDITIONAL CAPITAL, THE SAME NOT BEING
SUPPORTED BY THE EVIDENCE.
It is the contention of Atlas that the amount of P25,523.14 paid in

1958 as annual public relations expenses is a deductible expense
from gross income under Section 30 (a) (1) of the National Internal
Revenue Code. Atlas claimed that it was paid for services of a
public relations firm, P.K Macker & Co., a reputable public
relations consultant in New York City, U.S.A., hence, an ordinary
and necessary business expense in order to compete with other
corporations also interested in the investment market in the United
States. 5 It is the stand of Atlas that information given out to the
public in general and to the stockholder in particular by the P.K
MacKer & Co. concerning the operation of the Atlas was aimed at
creating a favorable image and goodwill to gain or maintain their
patronage.
The decisive question, therefore, in this particular appeal taken by
Atlas to this Court is whether or not the expenses paid for the
services rendered by a public relations firm P.K MacKer & Co.
labelled as stockholders relation service fee is an allowable deduction
as business expense under Section 30 (a) (1) of the National Internal
Revenue Code.
The principle is recognized 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. As previously adverted to, the
law allowing expenses as deduction from gross income for purposes
of the income tax is Section 30 (a) (1) of the National Internal
Revenue which allows a deduction of "all the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any
trade or business." An item of expenditure, in order to be deductible
under this section of the statute, must fall squarely within its
language.
We come, then, to the statutory test of deductibility where it is

axiomatic that to be deductible as a business expense, three
conditions are imposed, namely: (1) the expense must be ordinary
and necessary, (2) it must be paid or incurred within the taxable
year, and (3) it must be paid or incurred in carrying in a trade or
business. 6 In addition, not only must the taxpayer meet the
business test, he must substantially prove by evidence or records
the deductions claimed under the law, otherwise, the same will be
disallowed. The mere allegation of the taxpayer that an item of
expense is ordinary and necessary does not justify its deduction. 7
While it is true that there is a number of decisions in the United
States delving on the interpretation of the terms "ordinary and
necessary" as used in the federal tax laws, no adequate or
satisfactory definition of those terms is possible. Similarly, this
Court has never attempted to define with precision the terms
"ordinary and necessary." There are however, certain guiding
principles worthy of serious consideration in the proper
adjudication of conflicting claims. Ordinarily, an expense will be
considered "necessary" where the expenditure is appropriate and
helpful in the development of the taxpayer's business. 8 It is
"ordinary" when it connotes a payment which is normal in relation
to the business of the taxpayer and the surrounding
circumstances. 9 The term "ordinary" does not require that the
payments be habitual or normal in the sense that the same
taxpayer will have to make them often; the payment may be
unique or non-recurring to the particular taxpayer affected. 10
There is thus no hard and fast rule on the matter. The right to a
deduction depends in each case on the particular facts and the
relation of the payment to the type of business in which the
taxpayer is engaged. The intention of the taxpayer often may be

the controlling fact in making the determination. 11 Assuming that
the expenditure is ordinary and necessary in the operation of the
taxpayer's business, the answer to the question as to whether the
expenditure is an allowable deduction as a business expense
must be determined from the nature of the expenditure itself,
which in turn depends on the extent and permanency of the work
accomplished by the expenditure. 12
It appears that on December 27, 1957, Atlas increased its capital
stock from P15,000,000 to P18,325,000. 13 It was claimed by Atlas
that its shares of stock worth P3,325,000 were sold in the United
States because of the services rendered by the public relations
firm, P. K. Macker & Company. The Court of Tax Appeals ruled that
the information about Atlas given out and played up in the mass
communication media resulted in full subscription of the additional
shares issued by Atlas; consequently, the questioned item,
stockholders relation service fee, was in effect spent for the
acquisition of additional capital, ergo, a capital expenditure.
We sustain the ruling of the tax court that the expenditure of
P25,523.14 paid to P.K. Macker & Co. as compensation for
services carrying on the selling campaign in an effort to sell Atlas'
additional capital stock of P3,325,000 is not an ordinary expense
in line with the decision of U.S. Board of Tax Appeals in the case
ofHarrisburg Hospital Inc. vs. Commissioner of Internal
Revenue. 14 Accordingly, as found by the Court of Tax Appeals, the
said expense is not deductible from Atlas gross income in 1958
because expenses relating to recapitalization and reorganization
of the corporation (Missouri-Kansas Pipe Line vs. Commissioner
of Internal Revenue, 148 F. (2d), 460; Skenandos Rayon Corp. vs.
Commissioner of Internal Revenue, 122 F. (2d) 268, Cert. denied
314 U.S. 6961), the cost of obtaining stock subscription (Simons
Co., 8 BTA 631), promotion expenses (Beneficial Industrial Loan
Corp. vs. Handy, 92 F. (2d) 74), and commission or fees paid for
the sale of stock reorganization (Protective Finance Corp., 23 BTA
308) are capital expenditures.
That the expense in question was incurred to create a favorable

image of the corporation in order to gain or maintain the public's
and its stockholders' patronage, does not make it deductible as
business expense. As held in the case of Welch vs.
Helvering, 15 efforts to establish reputation are akin to acquisition
of capital assets and, therefore, expenses related thereto are not
business expense but capital expenditures.
We do not agree with the contention of Atlas that the conclusion of
the Court of Tax Appeals in holding that the expense of
P25,523.14 was incurred for acquisition of additional capital is not
supported by the evidence. The burden of proof that the expenses
incurred are ordinary and necessary is on the taxpayer 16 and does
not rest upon the Government. To avail of the claimed deduction
under Section 30(a) (1) of the National Internal Revenue Code, it
is incumbent upon the taxpayer to adduce substantial evidence to
establish a reasonably proximate relation petition between the
expenses to the ordinary conduct of the business of the taxpayer.
A logical link or nexus between the expense and the taxpayer's
business must be established by the taxpayer.
G. R. No. L-26924-In his petition for review, the Commissioner of
Internal Revenue assigned as errors the following:
I
INCOME OF THE SO- CALLED TRANSFER
AGENT'S FEES ALLEGEDLY PAID BY
RESPONDENT;
II
INCOME OF LISTING EXPENSES ALLEGEDLY
INCURRED BY RESPONDENT;
III
HOLDING THAT THE AMOUNT OF P60,000
REPRESENTED BY RESPONDENT AS
"PROVISION FOR CONTINGENCIES" WAS ADDED
BACK BY RESPONDENT TO ITS GROSS INCOME
IN COMPUTING THE INCOME TAX DUE FROM IT
FOR 1958;
IV
DISALLOWING ONLY THE AMOUNT OF P6,666.65
AS SUIT EXPENSES, THE CORRECT AMOUNT
THAT SHOULD HAVE BEEN DISALLOWED BEING
P17,499.98.
It is well to note that only in the Court of Tax Appeals did the
Commissioner raise for the first time (in his memorandum) the
question of whether or not the business expenses deducted from
Atlas gross income in 1958 may be allowed in the absence of
proof of payments. 17 Before this Court, the Commissioner
reiterated the same as ground against deductibility when he
claimed that the Court of Tax Appeals erred in allowing the
deduction of transfer agent's fee and stock listing fee from gross
income in the absence of proof of payment thereof.
The Commissioner contended that under Section 30 (a) (1) of the
National Internal Revenue Code, it is a requirement for an expense to
be deductible from gross income that it must have been "paid or
incurred during the year" for which it is claimed; that in the absence of
convincing and satisfactory evidence of payment, the deduction from
gross income for the year 1958 income tax return cannot be
sustained; and that the best evidence to prove payment, if at all any
has been made, would be the vouchers or receipts issued therefor
which ATLAS failed to present.
Atlas admitted that it failed to adduce evidence of payment of the

deduction claimed in its 1958 income tax return, but explains the
failure with the allegation that the Commissioner did not raise that
question of fact in his pleadings, or even in the report of the
investigating examiner and/or letters of demand and assessment
notices of ATLAS which gave rise to its appeal to the Court of Tax
Appeal. 18 It was emphasized by Atlas that it went to trial and finally
submitted this case for decision on the assumption that inasmuch
as the fact of payment was never raised as a vital issue by the
Commissioner in his answer to the petition for review in the Court
of Tax Appeal, the issues is limited only to pure question of law
whether or not the expenses deducted by petitioner from its gross
income for 1958 are sanctioned by Section 30 (a) (1) of the
On this issue of whether or not the Commissioner can raise the
fact of payment for the first time on appeal in its memorandum in
the Court of Tax Appeal, we fully agree with the ruling of the tax
court that the Commissioner on appeal cannot be allowed to adopt
a theory distinct and different from that he has previously pursued,
as shown by the BIR records and the answer to the amended
petition for review. 19 As this Court said in the case of
Commissioner of Customs vs. Valencia 20 such change in the
nature of the case may not be made on appeal, specially when the
purpose of the latter is to seek a review of the action taken by an
administrative body, forming part of a coordinate branch of the
Government, such as the Executive department. In the case at
bar, the Court of Tax Appeal found that the fact of payment of the
claimed deduction from gross income was never controverted by
the Commissioner even during the initial stages of routinary
administrative scrutiny conducted by BIR examiners.21 Specifically,
in his answer to the amended petition for review in the Court of
Tax Appeal, the Commissioner did not deny the fact of payment,
merely contesting the legitimacy of the deduction on the ground
that same was not ordinary and necessary business expenses. 22
As consistently ruled by this Court, the findings of facts by the

Court of Tax Appeal will not be reviewed in the absence of
showing of gross error or abuse. 23 We, therefore, hold that it was
too late for the Commissioner to raise the issue of fact of payment
for the first time in his memorandum in the Court of Tax Appeals
and in this instant appeal to the Supreme Court. If raised earlier,
the matter ought to have been seriously delved into by the Court
of Tax Appeals. On this ground, we are of the opinion that under
all the attendant circumstances of the case, substantial justice
would be served if the Commissioner be held as precluded from
now attempting to raise an issue to disallow deduction of the item
in question at this stage. Failure to assert a question within a
reasonable time warrants a presumption that the party entitled to
assert it either has abandoned or declined to assert it.
On the second assignment of error, aside from alleging lack of
proof of payment of the expense deducted, the Commissioner
contended that such expense should be disallowed for not being
ordinary and necessary and not incurred in trade or business, as
required under Section 30 (a) (1) of the National Internal Revenue
Code. He asserted that said fees were therefore incurred not for
the production of income but for the acquisition petition of capital
in view of the definition that an expense is deemed to be incurred
in trade or business if it was incurred for the production of income,
or in the expectation of producing income for the business. In
support of his contention, the Commissioner cited the ruling
in Dome Mines, Ltd vs. Commisioner of Internal
Revenue 24 involving the same issue as in the case at bar where
the U.S. Board of Tax Appeal ruled that expenses for listing capital
stock in the stock exchange are not ordinary and necessary
expenses incurred in carrying on the taxpayer's business which
was gold mining and selling, which business is strikingly similar to
Atlas.
On the other hand, the Court of Tax Appeal relied on the ruling in
the case of Chesapeake Corporation of Virginia vs. Commissioner
of Internal Revenue 25 where the Tax Court allowed the deduction
of stock exchange fee in dispute, which is an annually recurring

cost for the annual maintenance of the listing.
We find the Chesapeake decision controlling with the facts and
circumstances of the instant case. In Dome Mines, Ltd case the stock
listing fee was disallowed as a deduction not only because the
expenditure did not meet the statutory test but also because the
same was paid only once, and the benefit acquired thereby continued
indefinitely, whereas, in the Chesapeake Corporation case, fee paid
to the stock exchange was annual and recurring. In the instant case,
we deal with the stock listing fee paid annually to a stock exchange
for the privilege of having its stock listed. It must be noted that the
Court of Tax Appeal rejected the Dome Mines casebecause it
involves a payment made only once, hence, it was held therein that
the single payment made to the stock exchange was a capital
expenditure, as distinguished from the instant case, where payments
were made annually. For this reason, we hold that said listing fee is
an ordinary and necessary business expense
On the third assignment of error, the Commissioner contended that
the Court of Tax Appeal erred when it held that the amount of
P60,000 as "provisions for contingencies" was in effect added back to
Atlas income.
On this issue, this Court has consistently ruled in several cases

adverted to earlier, that in the absence of grave abuse of
discretion or error on the part of the tax court its findings of facts
may not be disturbed by the Supreme Court. 26 It is not within the
province of this Court to resolve whether or not the P60,000
representing "provision for contingencies" was in fact added to or
deducted from the taxable income. As ruled by the Court of Tax
Appeals, the said amount was in effect added to Atlas taxable
income. 27 The same being factual in nature and supported by
substantial evidence, such findings should not be disturbed in this
appeal.
Finally, in its fourth assignment of error, the Commissioner contended

that the CTA erred in disallowing only the amount of P6,666.65 as suit
expenses instead of P17,499.98.
It appears that petitioner deducted from its 1958 gross income the
amount of P23,333.30 as attorney's fees and litigation expenses in
the defense of title to the Toledo Mining properties purchased by Atlas
from Mindanao Lode Mines Inc. in Civil Case No. 30566 of the Court
of First Instance of Manila for annulment of the sale of said mining
properties. On the ground that the litigation expense was a capital
expenditure under Section 121 of the Revenue Regulation No. 2, the
investigating revenue examiner recommended the disallowance of
P13,333.30. The Commissioner, however, reduced this amount of
P6,666.65 which latter amount was affirmed by the respondent Court
of Tax Appeals on appeal.
There is no question that, as held by the Court of Tax Ap- peals,

the litigation expenses under consideration were incurred in
defense of Atlas title to its mining properties. In line with the
decision of the U.S. Tax Court in the case of Safety Tube Corp. vs.
Commissioner of Internal Revenue, 28 it is well settled that litigation
expenses incurred in defense or protection of title are capital in
nature and not deductible. Likewise, it was ruled by the U.S. Tax
Court that expenditures in defense of title of property constitute a
part of the cost of the property, and are not deductible as
expense. 29
Surprisingly, however, the investigating revenue examiner
recommended a partial disallowance of P13,333.30 instead of the
entire amount of P23,333.30, which, upon review, was further
reduced by the Commissioner of Internal Revenue. Whether it
was due to mistake, negligence or omission of the officials
concerned, the arithmetical error committed herein should not
prejudice the Government. This Court will pass upon this particular
question since there is a clear error committed by officials
concerned in the computation of the deductible amount. As held in
the case of Vera vs. Fernandez, 30 this Court emphatically said that
taxes are the lifeblood of the Government and their prompt and
certain availability are imperious need. Upon taxation depends the

Government's ability to serve the people for whose benefit taxes
are collected. To safeguard such interest, neglect or omission of
government officials entrusted with the collection of taxes should
not be allowed to bring harm or detriment to the people, in the
same manner as private persons may be made to suffer
individually on account of his own negligence, the presumption
being that they take good care of their personal affair. This should
not hold true to government officials with respect to matters not of
their own personal concern. This is the philosophy behind the
government's exception, as a general rule, from the operation of
the principle of estoppel.31
WHEREFORE, judgment appealed from is hereby affirmed with
modification that the amount of P17,499.98 (3/4 of P23,333.00)
representing suit expenses be disallowed as deduction instead of
P6,666.65 only. With this amount as part of the net income, the
corresponding income tax shall be paid thereon, with interest of 6%
per annum from June 20, 1959 to June 20,1962.
SO ORDERED.

Kamote Chips

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Kamote Chips

Uploaded by

Copyright:

Available Formats

Republic of the Philippines

GUTIERREZ JR., J.:

Pursuant to this authority, the petitioner borrowed funds from several

(d) the 35% transaction tax based on the gross

(INVOLVED IN THIS CASE) IS AN INCOME TAX

FROM WHICH MINOLCO IS NOT EXEMPT AND

AND THE IMPLEMENTING REGULATIONS

Sec. 1. There is hereby inserted after

Sec. 190. Compensating Tax.

product; Provided That such articles are not locally

products: Provided, That such articles

Clearly, the transaction tax of P1,317,801.03 paid by the petitioner

(borrower) can pay the 35% of the interest to the

inappropriately included among the taxes on business because

Republic of the Philippines

G.R. No. L-22443 May 29, 1971

PHILIPPINE ACETYLENE COMPANY, and THE COURT OF TAX

4. That the amount of P3,683.00 was assessed

In finding that the Philippine Acetylene Co., Inc. is engaged in

together with the terms "miners, mining enterprises, planters and

Republic of the Philippines

The facts are simple.

chanrobles virtual law library

Arnoldus Carpentry Shop, Inc. (private respondent herein) is a

chanrobles virtual law library

For this business venture, private respondent kept samples or models

chanrobles virtual law library

Sometime in March 1979, the examiners of the petitioner

chanroble s virtual law library

Based on such an examination, BIR examiners Honesto A. Vergel de

xxx xxx xxx

As a result thereof, the examiners assessed private respondent for

chanroble s virtual law library

Against this assessment, private respondent filed on February 19,

On April 22, 1985, respondent Court of Tax Appeals rendered the

chanroblesvirtualawlibrary chanrobles virtual law library

chanroble s virtual law library

1. Private respondent is a "manufacturer" as defined in the Tax Code

chanroble svirtualawlibrary chanroble s virtual law library

chanroble s virtual law library

The facts of the case do not support petitioner's claim. Petitioner is

chanrobles virtual law library

Petitioner [private respondent herein] claims, and the records bear

chanroble s virtual law library

With regard to the television cabinets, petitioner presented three

xxx xxx xxx

chanrobles virtual law library

In the case of petitioner's other woodwork products such as barometer

chanroble s virtual law library

Respondent's examiners, in their memorandum to the Commissioner of

when placing their orders, The evidence adduced by petitioner to

xxx xxx xxx

A contract for the delivery at a certain price of an article Which the

chanroble s virtual law library

chanrobles virtual law

chanrobles virtual law library

chanroble s virtual law library

Jurisprudence has followed this criterion. As held in Commissioner of

chanrobles virtual law library

xxx xxx xxx

chanroble s virtual law library

chanrobles virtual law library

... I cannot believe that petitioner company would take, as in fact it