Taxation I

G.R. No. L-22443

May 29, 1971
THE COMMISSIONER OF CUSTOMS, petitioner, vs.
PHILIPPINE ACETYLENE COMPANY, and THE COURT OF TAX APPEALS, respondents.
FACTS
The Philippine Acetylene Company is a corporation duly organized and existing under the laws of the
Philippines engaged in the manufacture of oxygen, acetylene and nitrogen and packaging of liquefied
petroleum gas in cylinders and tanks. That sometime in 1957, the company 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 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.
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;
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.
ISSUE
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.
RULING
YES. 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 non-productive
nature, there would be no point in making a separate classification with respect to "new and necessary
industries" for purposes of the tax exemption. We hold, therefore, that to be entitled to exemption
under the second classification in the statute the industry concerned, in connection with the activity
for which the importation is made, must be engaged in some productive enterprise, not in merely
packaging an already finished product to facilitate its transportation.
In a comparable case this Court has held that the tax exemption in connection with the processing of
gasoline and the manufacture of lubricating oil does not extend to pump parts imported by the
processor and leased to gasoline stations for their use in servicing customers' vehicles, overruling the
argument of the petitioner therein that the marketing of its gasoline product "is corollary to or
incidental to its industrial operations."
The decision of the Court of Tax Appeals is reversed.

Taxation I

G.R. No. 71122

March 25, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
ARNOLDUS CARPENTRY SHOP, INC. and COURT OF TAX APPEALS, respondents.
FACTS
Arnoldus Carpentry Shop, Inc. is a domestic corporation which has been in existence since 1960 which
has for its 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. These furniture, cabinets and other woodwork were sold locally and exported abroad. The
company kept samples or models of its woodwork on display from where its customers may refer to
when placing their orders.
On March 1979, the examiners from BIR who conducted an investigation on the companys tax
liabilities reported that subject corporation should be considered a contractor and not a manufacturer
since 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.
Hence, in the computation of the percentage tax, the 3% contractors tax should be imposed instead of
the 7% manufacturers tax. However, responded company holds that the carpentry shop is a
manufacturer and therefore entitled to 7% tax exemption on its gross export sales under Section 202
(e) of the National Internal Revenue Code. CIR rendered its decision classifying the respondent as
contractor which was in turn reversed by the CTA. Hence, this appeal.
ISSUE
Whether or not the Court of Tax Appeals erred in holding that private respondent is a manufacturer and
not a contractor.
RULING
The Supreme Court holds that the private respondent is a manufacturer as defined in the Tax Code
and not a contractor under Section 205(e) of the Tax Code.
Petitioner CIR 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.
Based on 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 ones business, it is
a contract of sale. 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 and which 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. The 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.
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 is
ignoring the fact that private respondent sells goods which it keeps in stock and not services. The facts
show that the company 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 were by
orders for existing models except only for some adjustments in sizes and accessories utilized.

Taxation I
"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).
However, these findings were merely attendant facts to show what the Court was really driving at
the habituality of 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.
The Court finds itself in agreement with CTA and as the CTA 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) now Sec. 167 (d) and (e)] of the Tax Code.
COHAN RULE

George M. Cohan was a very well-known Broadway star in the early 1900s (his most famous
performance is Give My Regards to Broadway). Interestingly, his legacy is also closely
connected to tax law. Cohan was audited by the IRS and was told that he was not allowed to
deduct many of his business and entertainment related expenses because he did not keep all
of the necessary receipts. Mr. Cohan appealed this ruling and the courts actually sided with
him, forcing the IRS has to accept estimates of his expenses. The Cohan Rule is now a law that
allows taxpayers to deduct some of their business-related expenses even if the receipts have
been lost or misplaced so long as they are reasonable and credible.

A common law rule whereby taxpayers, when unable to produce records of actual
expenditures, may rely on reasonable estimates provided there is some factual basis for it.
"Absolute certainty in such matters is usually impossible and is not necessary; the Board
should make as close an approximation as it can, bearing heavily if it chooses upon the
taxpayer whose inexactitude is of his own making." See Cohan v. Commissioner, 39 F. 2d 540
(2d Cir. 1930).

G.R. No. L-13325

April 20, 1961
SANTIAGO GANCAYCO, petitioner, vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent.
FACTS
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.
When Gancayco filed his income tax return for the year 1949, respondent CIR, two days later, 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.
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.
In his amended petition, Gancayco prayed that disallowance of the entertainment, representation and
farming expenses be allowed.

ISSUE
Whether or not the two claimed deductions are allowable

Taxation I
RULING
NO.
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 in carrying on any trade or business, including a reasonable allowance for salaries or
other compensation for personal services actually rendered; traveling expenses while away
from home in the pursuit of a trade or business; and rentals or other payments required to be
made as a condition to the continued use or possession, for the purposes of the trade or
business, of property to which the taxpayer has not taken or is not taking title or in which he
has no equity.
Referring to the item of P27,459, for farming expenses allegedly incurred by Gancayco, the decision
appealed from has the following to say:
No evidence has been presented as to the nature of the said "farming expenses" other than
the bare statement of petitioner that they were spent for the "development and cultivation of
(his) property". No specification has been made as to the actual amount spent for purchase of
tools, equipment or materials, or the amount spent for improvement. Respondent claims that
the entire amount was spent exclusively for clearing and developing the farm which were
necessary to place it in a productive state. It is not, therefore, an ordinary expense but a
capital expenditure. Accordingly, it is not deductible but it may be amortized, in accordance
with section 75 of Revenue Regulations No. 2, cited above. See also, section 31 of the Revenue
Code which provides that in computing net income, no deduction shall in any case be allowed
in respect of any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate.
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.
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 and vouchers of the expenditures involved therein. Such is not
the case of petitioner herein.

G.R. No. 172231

February 12, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.
ISABELA CULTURAL CORPORATION, Respondent.

Taxation I
FACTS
ICC, a domestic corporation, received from the BIR assessment notice for deficiency income tax in the
amount of P333,196.86, and for deficiency expanded withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions for professional and security services
billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December 31, 1985;
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985.
(c) Expense for security services of El Tigre Security & Investigation Agency for the months of
April and May 1986.
(2) The alleged understatement of ICCs interest income on the three promissory notes due from Realty
Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00
deduction for security services.
ICC contested the assessments. The CTA rendered a decision canceling and setting aside the
assessment notices issued against ICC. It held that the claimed deductions for professional and
security services were properly claimed by ICC in 1986 because it was only in the said year when the
bills demanding payment were sent to ICC. The CTA also held that ICC did not understate its interest
income on the subject promissory notes. It found that it was the BIR which made an overstatement of
said income when it compounded the interest income receivable by ICC from the promissory notes of
Realty Investment, Inc.
The Court of Appeals affirmed the CTA decision.
ISSUE

For a taxpayer using the accrual method, when do the facts present themselves in such a
manner that thetaxpayer must recognize income or expense?
The accrual of income and expense is permitted when the all-events test has been met. This test
requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable
accurate determination of such income or liability. The test does not demand that the amount of
income or liability be known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where
computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation
may be unknown, but is not as much as unknowable, within the taxable year.

W/N the deductions were properly claimed by Isabela Cultural Corporation.

The deductions for expenses for professional fees consisting of expenses for legal and auditing
services are NOT allowable. However, the deductions for expenses for security services were properly
claimed by Isabela CulturalCorporation. For the legal and auditing services, Isabela Cultural
Corporation could have reasonably known the fees of those firms that it hired, thus satisfying the allevents test. As such, per Revenue Audit Memorandum Order No.1-2000, they cannot validly be
deducted from its gross income for the said year and were therefore properly disallowed by the BIR. As
for the security services, because they were incurred in 1986, they could be properly claimed as
deductions for the said year.
G.R. No. 143672
April 24, 2003
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

Taxation I
GENERAL FOODS (PHILS.), INC., respondent.
FACTS
Respondent corporation General Foods (Phils), which is engaged in the manufacture of Tang,
Calumet and Kool-Aid, filed its income tax return for the fiscal year ending February 1985 and
claimed as deduction, among other business expenses, P9,461,246 for media advertising for Tang.
The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of
P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied.
General Foods later on filed a petition for review at CA, which reversed and set aside an earlier
decision by CTA dismissing the companys appeal.
ISSUE
W/N the subject media advertising expense for Tang was ordinary and necessary expense fully
deductible under the NIRC
RULING
NO. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor of
the taxing authority, and he who claims an exemption must be able to justify his claim by the clearest
grant of organic or statute law. Deductions for income taxes partake of the nature of tax exemptions;
hence, if tax exemptions are strictly construed, then deductions must also be strictly construed.
To be deductible from gross income, the subject advertising expense must comply with the following
requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred
during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of
the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.
While the subject advertising expense was paid or incurred within the corresponding taxable year and
was incurred in carrying on a trade or business, hence necessary, the parties views conflict as to
whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary
but also ordinary.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground that
it failed the two conditions set by U.S. jurisprudence: first, reasonableness of the amount incurred
and second, the amount incurred must not be a capital outlay to create goodwill for the product
and/or private respondents business. Otherwise, the expense must be considered a capital
expenditure to be spread out over a reasonable time.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising
expense. There being no hard and fast rule on the matter, the right to a deduction depends on a
number of factors such as but not limited to: the type and size of business in which the taxpayer is
engaged; the volume and amount of its net earnings; the nature of the expenditure itself; the intention
of the taxpayer and the general economic conditions. It is the interplay of these, among other factors
and properly weighed, that will yield a proper evaluation.
The Court finds the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then
Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or
use of services and (2) advertising designed to stimulate the future sale of merchandise or use of
services. The second type involves expenditures incurred, in whole or in part, to create or maintain
some form of goodwill for the taxpayers trade or business or for the industry or profession of which
the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as
to the question of the reasonableness of amount, there is no doubt such expenditures are deductible
as business expenses. If, however, the expenditures are for advertising of the second kind, then
normally they should be spread out over a reasonable period of time.

Taxation I
The companys media advertising expense for the promotion of a single product is doubtlessly
unreasonable considering it comprises almost one-half of the companys entire claim for marketing
expenses for that year under review. Petition granted, judgment reversed and set aside.
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.
FACTS
Paper Industries Corporation of the Philippines ("Picop") is a Philippine corporation registered with the
Board of Investments ("BOI") as a preferred pioneer enterprise with respect to its integrated pulp and
paper mill, and as a preferred non-pioneer enterprise with respect to its integrated plywood and
veneer mills.
Picop received from the CIR 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 of P88,763,255.00.

G.R. No. L-16626

October 29, 1966
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
CARLOS PALANCA, JR., respondent.
FACTS
The late Don Carlos Palanca, Sr. donated in favor of his son, Carlos Palanca, Jr. shares of stock in La
Tondea Inc. amounting to 12,500 shares. Later, the BIR considered the donation as transfer in
contemplation of death; consequently, the BIR assessed against the respondent, Palanca Jr., the sum of
P191,591.62 as estate and inheritance taxes on the transfer of said 12,500 shares of stock, including
therein interest for delinquency of P60,581.80. The respondent then filed an amended income tax
return, claiming an additional deduction in the amount P60,581.80; hence, his new income tax due is
only P428. He attached a letter requesting the refund of P20,624.01. However, the said request for
refund was denied by the BIR. Court of tax appeals ordered the refund. Hence, this petition.
ISSUE
Whether the interest on the delinquent estate and inheritance tax is deductible from the gross income
Whether the respondents claim for refund has prescribed
RULING
1. Yes, the interest is deductible. The rule is settled that although taxes already due have not,
strictly speaking, the same concept as debts, they are, however, obligations that may be
considered as such. In CIR v Prieto, the Court explicitly announced that while the distinction
between taxes and debts was recognized in this jurisdiction, the variance in their legal
conception does not extend to the interests paid on them.
2.

No, respondents claim has not yet prescribed. Considering that it is the interest paid on this
latter-assessed estate and inheritance tax that respondent is claiming for refund, then the 30day period for prescription under RA 1125 should be computed from the receipt of the final
denial by the BIR of the said claim.

Inasmuch as the said account was paid by him by installment, then the computation of the twoyear prescriptive period, under Section 306 of the National Internal Revenue Code, should be from
the date of the last installment. Respondent Palanca paid the last installment on his 1955 income
tax account on August 14, 1956. His claim for refund was filed on August 13, 1958. It was,
therefore, still timely instituted.

Taxation I

G.R. No. L-13912

September 30, 1960
THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
CONSUELO L. VDA. DE PRIETO, respondent.
FACTS
Vda. de Prieto conveyed by way of gifts to her 4 children real property with a total assessed value of
P892,497.50. After the filing of the gift tax returns, CIR appraised the real property donated for gift tax
purposes at P1,231,268.00 and assessed the total sum of P117,706.50 as donor's gift tax, interests
and compromises due thereon. Of the total sum of P117,706.50 paid by respondent the sum of
P55,978.65 represents the total interest on account of delinquency. This sum of P55,978.65 was
claimed as deduction. 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, surcharge and compromise for the late payment.
ISSUE
W/N the interest paid by respondent for the late payment of her donor's tax is deductible from her
gross income
RULING
YES.
1) 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.
2) The term "indebtedness" has been defined as an unconditional and legally enforceable obligation for
the payment of money. Within the meaning of that definition, it is apparent that a tax may be
considered an indebtedness. "Although taxes already due have not, strictly speaking, the same
concept as debts, they are, however, obligations that may be considered as such. Where statute
imposes a personal liability for a tax, the tax becomes, at least in a board sense, a debt. 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.
3) The uniform ruling is that interest on taxes is interest on indebtedness and is deductible.
4) 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.