TAXATION 1 | B2015

CASE DIGESTS

CIR vs. Henderson

February 28, 1961
J. Padilla
Mabel Africa

the years 1948 to 1952, which have been

reassessed. According to the reassessment, the
following should form part of their taxable income:

a) Arthurs allowances for rental, residential

expenses, subsistence, water, electricity and
SUMMARY: The BIR assessed the Spouses Henderson for their deficiency taxes.
telephone expenses
taxable income: 1) Arthurs allowances for rental, residential expenses, subsistence, water, electricity and telephone expenses 2)
b) Entrance
to the and
Marikina
Gun andallowance
Country of his
entrance fee to the Marikina Gun and Country Club which was paid by his employer
for hisfee
account
3) travelling
which
was paid
his employer
for his
wife. The Hendersons argue that they are not income, but are rather expensesClub
of the
company.
Theby
Collector
of Internal
Revenue
accountwere
and still held to be taxable. Then, The Court
merely allowed the entrance fee as nontaxable. The rent expense and travel expenses
of Tax Appeals ruled in favor of the taxpayers, that such expenses must not be considered part of taxable income. The SC appreciated
c) of
Travelling
allowance
of his
the pieces of evidence submitted by the Hendersons in proving that neither
the allowance
given
to wife.
them redounded to their
personal benefit, thus they are not taxable.
5. The taxpayers asked for a reconsideration and
presented
DOCTRINE: Rental and travel allowance are not part of the taxable income
because,the
as following
supportedarguments:
by evidence, they are used to
further the business of the company.
FACTS:
1. Arthur Henderson is the president of the American
International Underwriters for the Philippines, Inc.
a) The said domestic company is engaged in the
business of general non-life insurance, and
represents a group of American insurance
companies engaged in the same business.
2. Arthur Henderson, and his spouse Marie Henderson
filed with the BIR returns of annual net income for
the years 1948 to 1952. They clearly indicated their
net income for each year, the personal exemptions to
be deducted, and the resulting amount subject to
tax.
3. The BIR then sent the spouses assessment notices.
The spouses subsequently paid the amounts
assessed.
4. On Nov. 28, 1953, the BIR again sent assessment
notices to the spouses regarding their tax income for

a) As to the allowances for rental and utilities

i. They are not received by Arthur for
allowances. The employer-corporation
is the one who furnishes them, for the
employer-corporations purposes, with
the apartment.
ii. The spouses often entertain guests,
accommodate officials, and entertain
customers. This is part of the nature of
Arthurs work. They do not have a
choice but to live in the expensive
apartment.
iii. If only they have a choice, the spouses
would rather live in a simpler
apartment and spend a reasonable
amount of Php 4,800/year for the rent.
According to them, this is the amount
subject to tax. The excess is to be
treated as expense of the company.
b) As to the entrance fee

TAXATION 1 | B2015
CASE DIGESTS

i. It should not be considered taxable

income because it is an expense of the
employer.
ii. The membership is merely incidental
to Arthurs duties of increasing and
sustaining
the
business
of
his
employer.
c) As to the travel allowance of the wife
i. The wife only accompanied Arthurs
business trip to New York as his
secretary Marie (wife) studied and
looked into the details of the plans of a
building that his employer intended to
construct. The task was assigned to
her because the woman of the family
is closer to those problems.

c) Substantial evidence were presented by the

Hendersons to support their claim
i. Testimonies of an examiner of the BIR
and of the acting head of the
accounting
department
of
the
employer-corporation
1. The amounts given to the
Hendersons are entered in the
books
of
accouns
as
subsistence allowances and
expenses
ii. Letters of the wife sent during the
business
trip
talked
about
the
proposed building.
8. The CIR appealed the said CTA decision

6. The Collector of Internal revenue only accepted the

argument regarding the entrance fee and thus
considered it nontaxable.

ISSUE: WON the rental allowances and travel allowances

furnished and given by the employer-corporation are part of
taxable income?

a) The spouses requested for a reconsideration.

They offered to settle the case and proposed
a more equitable basis of increasing the
amount of the taxable portion of Arthurs
allowances. Also, they requested for a refund
of the amounts they paid in excess.

RATIO: No, substantial evidence supports the claim of the

Hendersons. The allowance given to them are used to
further the business of the company (hence, are company
expenses) and are not used for their personal benefit, thus,
are not part of their income. Being such, it does not form
part of the taxable income.

b) The CIR did not take any action.

RULING:
1. No part of the allowances redounded to their
personal benefit nor were such amounts retained by
them
2. The accounting books of the corporation showed that
the bills were paid directly by the employercorporation to the creditors.
3. The SC sustains the claim of the CTA regarding the
rental expenses & subsistence allowances that such
are necessary to Arthurs high executive position and

7. The Court of Tax Appeals ruled in favor of the

Hendersons on the following grounds:
a) It considered the inherent nature of Arthurs
employment
b) The spouses did not receive any benefit from
the allowances received

TAXATION 1 | B2015
CASE DIGESTS

social standing. Hence, must not form of the taxable

income.
a. Arthurs high executive position and social

standing, demanded and compelled the

couple to live in a more spacious and
expensive quarters.
b. The
subsistence
allowance
was
a
SEPARATE account from the account for
salaries and wages of employees.
c. The company did not charge rentals as
deductible from the salaries of the

employees. These expenses are COMPANY

EXPENSES, not income by employees which
are subject to tax.
DISPOSITIVE: The taxpayers claim is supported by the
evidence. The total amount of Php 3,249.32 for managers
residential expense in 1948 should be treated as rentals for
apartments and utilities and should not form part of the
ratable value subject to tax. The computation made by the
taxpayers is correctThe CIR is ordered to refund to the
taxpayers the sum of Php 5, 986.61, without pronouncement
as to costs. Judgment modified.