CIR v Castaneda (G.R. No. 96016)
As explained in Borromeo v CSC, the rationale of the
FACTS:
Efren Castaneda retired from govt service as Revenue
Attache in the Philippine Embassy, London, England. Upon
retirement, he received benefits such as the terminal leave
pay. The Commissioner of Internal Revenue withheld
P12,557 allegedly representing that it was tax income.
Castaneda filed for a refund, contending that the cash
equivalent of his terminal leave is exempt from income tax.
The Solicitor General contends that the terminal leave is
based from an employer-employee relationship and that as
part of the services rendered by the employee, the terminal
leave pay is part of the gross income of the recipient.
CTA -> ruled in favor of Castaneda and ordered the refund.
CA -> affirmed decision of CTA. Hence, this petition for
review on certiorari.
ISSUE:
Whether or not terminal leave pay (on occasion of his
compulsory retirement) is subject to income tax.
HELD:
NO.
court in holding that terminal leave pays are subject to
income tax is that:
. . commutation of leave credits, more commonly known as
terminal leave, is applied for by an officer or employee who
retires, resigns or is separated from the service through no
fault of his own. In the exercise of sound personnel policy,
the Government encourages unused leaves to be
accumulated. The Government recognizes that for most
public servants, retirement pay is always less than generous
if not meager and scrimpy. A modest nest egg which the
senior citizen may look forward to is thus avoided. Terminal
leave payments are given not only at the same time but
also for the same policy considerations governing retirement
benefits.
A terminal leave pay is a retirement benefit which is NOT
subject to income tax.
*Petition denied.

Esso Standard Eastern Inc. vs. CIR (G.R. Nos. L-
28508-9, July 7, 1989)
Post under case digests, Taxation at Saturday, March 10,
2012 Posted by Schizophrenic Mind
Facts: In CTA Case No. 1251, Esso Standard Eastern Inc.
(Esso) deducted from its gross income for 1959, as part of
its ordinary and necessary business expenses, the amount it
had spent for drilling and exploration of its petroleum
concessions. This claim was disallowed by the Commissioner
of Internal Revenue (CIR) on the ground that the expenses
should be capitalized and might be written off as a loss only
when a "dry hole" should result. Esso then filed an amended
return where it asked for the refund of P323,279.00 by
reason of its abandonment as dry holes of several of its oil
wells. Also claimed as ordinary and necessary expenses in
the same return was the amount of P340,822.04,
representing margin fees it had paid to the Central Bank on
its profit remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of
P221,033.00 only, disallowing the claimed deduction for the
margin fees paid on the ground that the margin fees paid to
the Central Bank could not be considered taxes or allowed
as deductible business expenses.
Esso appealed to the Court of Tax Appeals (CTA) for the
refund of the margin fees it had earlier paid contending that
the margin fees were deductible from gross income either as
a tax or as an ordinary and necessary business expense.
However, Essos appeal was denied.
Issues:
(1) Whether or not the margin fees are taxes.
(2) Whether or not the margin fees are necessary and
ordinary business expenses.
Held:
(1) No. A tax is levied to provide revenue for government
operations, while the proceeds of the margin fee are applied
to strengthen our country's international reserves. The
margin fee was imposed by the State in the exercise of its
police power and not the power of taxation.
(2) No. Ordinarily, an expense will be considered 'necessary'
where the expenditure is appropriate and helpful in the
development of the taxpayer's business. It is 'ordinary' when
it connotes a payment which is normal in relation to the
business of the taxpayer and the surrounding
circumstances. Since the margin fees in question were
incurred for the remittance of funds to Esso's Head Office in
New York, which is a separate and distinct income taxpayer
from the branch in the Philippines, for its disposal abroad, it
can never be said therefore that the margin fees were
appropriate and helpful in the development of Esso's
business in the Philippines exclusively or were incurred for
purposes proper to the conduct of the affairs of Esso's
branch in the Philippines exclusively or for the purpose of
realizing a profit or of minimizing a loss in the Philippines
exclusively. If at all, the margin fees were incurred for
purposes proper to the conduct of the corporate affairs of
Esso in New York, but certainly not in the Philippines.
ZAMORA VS. COLLECTOR (1963)
Allowed Tax Deductions
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. 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.
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, the court should determine
from all available data, the amount properly deductible as
representation expenses.
FACTS:
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.
On appeal by Zamora, the Court of Tax Appeals 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.
Having failed to obtain a reconsideration of the decision,
Mariano Zamora appealed alleging that the Court of Tax
Appeals erred (amongst other things, this being the only
relevant to the topic) in disallowing 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).

Note: 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.
ISSUE:
Whether or not 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 in the absence
of receipts proving the same.
HELD: NO
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. 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 not 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, it was declared that representation expenses fall
under the category of business expenses which are CIR disallowed 4 items of deductions in the ITR. Court of Tax
allowable deductions from gross income, if they meet the Appeals upheld the disallowance of an item which was paid
conditions prescribed by law, particularly section 30 (a) [1], to Mr. C. Hoskins representing 50% of supervision fees
of the Tax Code; that to be deductible, said business earned and set aside the disallowance of the other 3 items.
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 Issue:
in amount; that when some of the representation expenses
Whether or not the disallowance of the 4 items were proper.
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 Held:
representation expenses allegedly made by the taxpayer
NOT deductible. It did not pass the test of reasonableness
and about the general nature of such alleged expenses; that
which is:
accordingly, it is not possible to determine the actual
amount covered by supporting papers and the amount General rule, bonuses to employees made in good faith and
without supporting papers, the court should determine from as additional compensation for services actually rendered by
all available data, the amount properly deductible as the employees are deductible, provided such payments,
representation expenses. when added to the salaries do not exceed the compensation
for services rendered.

The conditions precedent to the deduction of bonuses to

employees are:

Payment of bonuses is in fact compensation

C. M. Hoskins & Co. Inc. v Commissioner of Internal
Must be for personal services actually rendered
Revenue
Bonuses when added to salaries are reasonable when
Facts:
measured by the amount and quality of services performed
Hoskins, a domestic corporation engaged in the real estate with relation to the business of the particular taxpayer.
business as broker, managing agents and administrators,
There is no fixed test for determining the reasonableness of
filed its income tax return (ITR) showing a net income of
a given bonus as compensation. This depends upon many
P92,540.25 and a tax liability of P18,508 which it paid.
factors.

In the case, Hoskins fails to pass the test. CTA was correct in
holding that the payment of the company to Mr. Hoskins of
the sum P99,977.91 as 50% share of supervision fees
received by the company was inordinately large and could
not be treated as an ordinary and necessary expenses
allowed for deduction.
CIR vs. CTA and Smith Kline & French Overseas Co.
(Philippine branch)
FACTS: Smith Kline and French Overseas Company, a
multinational firm domiciled in Pennsylvania, is licensed to
do business in the Phils. It is engaged in the importation,
manufacture, and sale of pharmaceutical drugs and
chemicals.
In its original incomes tax return in 1971, Smith Kline
declared a net taxable income of P1,489,277 and paid
P511,247 as tax due. Among the deductions claimed from
gross income was P501,040 as its share of the head office
overhead expenses.
However, in its amended return in 1973, there was
an overpayment of P324,255 arising from underdeduction
of home office overhead. It made a formal claim for refund
of the alleged overpayment because it appears that
sometime in October 1972, Smith Kline received from its
international independent auditors an authenticated
certification to the effect that the Philippine share in the
unallocated overhead expenses of the main office for the
year ended December 1971 was actually P1,427,484, and
that the allocation was made on the basis of the percentage
of gross income in the Philippines to gross income of the
corporation as a whole. By reason of the new adjustment,
Smith Klines tax liability was greatly reduced from P511,247
to P186,992, resulting in an overpayment of P324,255.
The CTA rendered a decision in 1980 ordering the
Commissioner to refund the overpayment or grant a tax
credit to Smith Kline. The Commissioner appealed.
ISSUE: Is Smith Klines share of the head office overhead
expenses incurred outside the Philippines deductible?
HELD: YES. Smith Klines share of the head officer overhead
expenses incurred outside the Philippines is deductible.
Section 37 of the old NIRC. Net Income from sources
in the Philippines.
From the items of gross income specified in
subsection (a) of this section, there shall be deducted the
expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any
expenses, losses, or other deductions which cannot
definitely be allocated to some item or class of gross
income. The remained, if any, shall be included in full as net From the foregoing provisions, it is manifest that
income from sources within the Philippines. where an expense is clearly related to the production of
Philippine-derived income or to Phil operations (e.g., salaries
Section 160. Apportionment of deductions. of Phil personnel, rental of office building in the Phils), that
The ratable part is based upon the ration of gross expense can be deducted from the gross income acquired in
income from sources within the Philippines to the total gross the Phils without resorting to apportionment.
income. The overhead expenses incurred by the parent
EXAMPLE: A non-resident alien individual whose company in connection with finance, administration, and
taxable year is the calendar year, derived gross income research and development, all of which direct benefit its
from all sources for 1939 of P180,000, including therein: branches all over the world, including the Phils, fall under a
Interest on bonds of a domestic corporation different category however. There are items which cannot be
P9,000 definitely allocated or identified with the operations of the
Dividends on stock of a domestic corporation Phil branch. For 1971, the parent company of Smith Kline
4,000 spent $1,077,739. Under Sec. 37, Smith Kline can claim as
Royalty for the use of patents within the Phils its deductible share a ratable part of such expenses based
12,000 upon the ration of the local branchs gross income to the
Gain from sale of real property located in the Phils total gross income, worldwide, of the multinational
11,000 corporation. Smith Kline also presented ample evidence to
TOTAL support its claim for refund. We hold that Smith Klines
36,000 amended 1971 return is in conformity with the law and
That is, 1/5 of the total gross income was from sources regulations. The Tax Court correctly held that the refund or
within the Philippines. The remainder of the gross income credit of the resulting overpayment is in order.
was from sources without the Philippines. The expenses of
the taxpayer for the year amount to P78,000. Of these
expenses, P8,000 is properly allocated to income from
sources within the Phils and P40,000 is from sources without
the Phils. The remainder of the expense, P30,000, cannot be
definitely allocated to any class of income. A ratable part
thereof, based upon the relation of gross income from
sources within the Phils to the total gross income shall be
deducted in computing net income from sources within the
Phils. Thus, these are deducted from the P36,000 of gross
income from sources within the Phils expenses amounting to
P14,000 (representing P8,000 properly apportioned to the
income from sources within the Philippines and P6,000, a
ratable part (1/5) of the expenses which could not be
allocated to any item or class of gross income). The
remainder of P22,000 is the net income from sources within
the Phils.
Gancayco vs.Collector

Gancyaco files his income tax return for the year 1949.
Respondent issued a warrant of distraint and levy against
the properties of Gancayco for the satisfaction of his
deficiency income tax liability, and accordingly, the
municipal treasurer issued a notice of sale of said property
at public auction. Gancayco filed a petition to cancel the
sale and direct that the same be re-advertised at a future
date

ISSUE: Whether the sum of PhP 16,860.31 is due from

Gancayco as deficiency income tax for 1949 hinges on the
validity of his claim for deduction:

a) farming expense PhP 27,459

b) representation expenses PhP

8,933.45

HELD:

a)Farming Expenses - no evidence has been presnted as to

the nature of the said farming expenses other than the care
statement of petitioner that they were spent for the
development and cultivation of his property.
No specification has been made as to the actual amount
spent for purchase of tools, equipment or materials or the
amount spent for improvement.

b) Representation expense

PhP 22, 820 is allowed CIR v Palanca, Jr.

PhP 8,993.45 is disallowed because of the absence of recipt, GR No L-16626,

invoices or vouchers of the expenditures in question, October 29, 1966
petitioner could not sspecify the items constituting the same
when or on whom or on what they were incurred.
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.

ISSUES:

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:

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
COMMISSIONER OF INTERNAL REVENUE, petitioner,
on them.
vs. PAPER INDUSTRIES CORPORATION OF THE
PHILIPPINES (PICOP), THE COURT OF APPEALS, and
THE COURT OF TAX APPEALS, respondents.
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
Ma. Lourdes A. Gadioma for Paper Industries Corporation of
the 30-day period for prescription under RA 1125 should be
the Phil.
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 two-year
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.
The Solicitor General for the Commissioner of Internal
Revenue.
SYLLABUS
1. TAXATION; RA 5186 (INVESTMENT INCENTIVES ACT);
EXEMPTION OF PIONEER ENTERPRISES FROM ALL TAXES
UNDER THE NIRC EXCEPT INCOME TAX; NOT EXEMPT FROM
PAYMENT OF TRANSACTION TAX WHICH IS INCOME TAX.
We agree with the CTA and the Court of Appeals that Picop's
tax exemption under RA. 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 is an income tax, that is, it is a tax on
the interest income of the lenders or creditors. 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. 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. 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 RA. 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 made personally liable for the thirty-five percent
(35%) transaction tax 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. 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. AHacIS
2. ID.; PRESIDENTIAL DECREE NO. 1154; 35% TRANSACTION
TAX ON COMMERCIAL PAPER; WITH NO RETROACTIVE
APPLICATION. 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. 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.
3. ID.; NATIONAL INTERNAL REVENUE CODE; AUTHORITY OF
THE SECRETARY OF FINANCE TO PROMULGATE RULES AND
REGULATIONS; AUTHORITY TO IMPOSE CIVIL PENALTIES
MUST BE EXPRESSLY GIVEN BY THE ENABLING STATUTE;
IMPOSITION OF 25% SURCHARGE AND 14% INTEREST PER
ANNUM FOR NON-PAYMENT OF TRANSACTION, WITHOUT
LEGAL BASIS. 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, issued by the
Secretary of Finance. 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. 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 open-ended, 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. 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. aIcHSC
4. ID.; ID.; SECTION 247 (A) IMPOSING CIVIL PENALTIES AS
SURCHARGE AND INTEREST WITHOUT RETROACTIVE
APPLICATION. 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. 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.
5. ID.; RA 5186 (INVESTMENT INCENTIVES ACT); EXEMPTION
OF PIONEER ENTERPRISES FROM ALL TAXES UNDER THE
NIRC EXCEPT INCOME TAX; EXEMPTION INCLUDES PAYMENT
FROM DOCUMENTARY STAMP TAXES. 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 RA 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. 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. TSEcAD
6. ID.; TAX EXEMPTIONS; STRICTLY CONSTRUED. 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.
7. ID.; NATIONAL INTERNAL REVENUE CODE; GROSS
INCOME; INTEREST PAYMENTS ON LOANS, DEDUCTIBLE.
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) 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. 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.
8. ID.; ID.; ID.; LOSSES ACTUALLY SUSTAINED CAN BE
CHARGED OFF ONLY AGAINST INCOME EARNED DURING THE
SAME YEAR. 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, Section 76
of the Philippine Income Tax Regulations [Revenue
Regulation No. 2, as amended]) 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 off
only against income earned in the same taxable year when
the losses were incurred.
9. ID.; RA 5186 (INVESTMENT INCENTIVES ACT); CARRY-
OVER OF NET OPERATING LOSSES WITH RESPECT TO THEIR
REGISTERED OPERATION; PURPOSE. Thus it is that RA. No.
5185 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. IDASHa
10. ID.; ID.; ID.; NET OPERATING LOSS OF ONE ENTERPRISE
NOT DEDUCTIBLE FROM GROSS INCOME OF ANOTHER
DESPITE MERGE. 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 the 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. 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.
11. REMEDIAL LAW; EVIDENCE; BURDEN OF PROOF;
TAXPAYER HAS THE BURDEN OF PROVING ENTITLEMENT TO
CLAIMED DEDUCTION. A taxpayer has the burden of
proving entitlement to a claimed deduction. 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. The
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. Under the best
evidence rule, 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. ScAIaT
12. ID.; ID.; ADMISSION; HIGHER SALES REFLECTED IN
PICOP'S BOOK OF ACCOUNTS, AN ADMISSION AGAINST ITS
OWN INTEREST. 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 its total sales as P800,814,851.00. Upon the other
hand, Picop's Books of Accounts reflected higher sales
figures of P803,206,495.00. 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
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.
13. TAXATION; R.A. 5186 (INVESTMENT INCENTIVES ACT);
NON-EXEMPTION FROM PAYMENT OF INCOME TAX;
CORPORATE DEVELOPMENT TAX, AN INCOME TAX;
REQUISITE FOR PAYMENT. The five percent (5%) corporate
development tax is an additional corporate income tax
imposed in Section 24 (e) of the 1977 Tax Code. 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. 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. 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.
VITUG, J., concurring and dissenting opinion:
1. TAXATION; REPUBLIC ACT NO. 5186 (INVESTMENT
INCENTIVES ACT); EXEMPTION FROM PAYMENT OF INCOME
TAX DOES NOT INCLUDE EXEMPTION FROM TRANSACTION
TAX. R.A. No. 5186, also known as the Investment
Incentives Act, has provided for incentives by, among other
things, granting to registered pioneer enterprises an ||| (Paper Industries Corp. v. Court of Appeals, G.R. Nos.
exemption from all taxes, except income tax, under the 106949-50, 106984-85, [December 1, 1995], 321 PHIL 1-63)
National Internal Revenue Code. The income tax, referred to,
in my view, is that imposed in Title II, entitled "Income Tax,"
of the Revenue Code. Nowhere under that title is there a
35% transaction tax.

2. ID.; NATIONAL INTERNAL REVENUE CODE; 35%

TRANSACTION TAX; LEVIED ON BORROWER-ISSUER OF
COMMERCIAL PAPERS NOT ON INVESTOR-LENDER There
was, to be sure, a 35% transaction tax still in effect in 1977
but it was a tax, not on the investor-lender in whose favor
the interest income on the commercial paper accrues. The
tax was, instead, levied on the borrower-issuer of
commercial papers transacted in the primary market. Being
Commissioner of Internal Revenue vs. Vda. De Prieto
the principal taxpayer, the borrower-issuer could not have
(1960)
been likewise contemplated to be a mere tax withholding
agent. The tax was conceived as a tax on business
transaction, and so it was rightly incorporated in Title V,
entitled "Privilege Taxes on Business and Occupation" of the FACTS:
Tax Code. HAECID
On December 4, 1945, Consuelo L. Vda. De Prieto
conveyed by way of gifts to her four children (Antonio,
Benito, Carmen and Mauro), real property with total
3. ID.; TAXES; FACT THAT TAXPAYER CAN SHIFT PAYMENT OF assessed value of 892,497.50.
INDIRECT TAXES TO ANOTHER DOES NOT MAKE THE LATTER
THE TAXPAYER AND THE FORMER THE WITHHOLDING CIR appraised the real property donated for gift tax
AGENT. The fact that a taxpayer on whom the tax is purposes at 1,231.268.00, and assessed the total sum of
imposed can shift, characteristic of indirect taxes, the 117,706.50 as donors gift tax, interests and compromises
burden thereof to another does not make the latter the due thereon.
taxpayer and the former the withholding agent. Indeed, the
Of the total sum of 117,706.50 paid by Consuelo, the
facility of shifting the burden of the tax is opposed to the
sum of 55,978.65 represents the total interest on account of
idea of a direct tax to which class the income tax actually
delinquency. Said sum of the total interest was claimed as
belongs.
deduction by Consuelo in her 1954 income tax return.

CIR disallowed the claim and as a consequence,

assessed Consuelo the total sum of 21,410.38 as deficiency
income tax due on the aforesaid 55,978.65, including
interest up to March 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 Consuelo was in
consequence of the late payment of her donors tax, and the
same was paid within the year it is sought to be deducted.
To sustain the proposition that the interest payment
is not deductible, CIR relies heavily on section 80 of the
Revenue Regulation No. 2( 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.
CTA reversed the decision of CIR.
ISSUES:
1. WON such interest was paid upon indebtedness
within the contemplation of section 30(b) (1) of the Tax
Code.
2. WON the interest paid for the late payment of the
donors tax is deductible from the gross income under
section 30(b) of the Tax Code.
3. WON section 80 of the Revenue Regulation No. 2 is
applicable in this case, thus the deduction should not be
allowed.
HELD:
1. Yes, the donors tax may be considered as
indebtedness within the contemplation of the Tax Code.
2. Yes, given that the donors tax may be considered as
indebtedness, the interest paid for the late payment of the
donors tax is deductible from the gross income under
section 30(b) of the Tax Code.
3. No, section 80 of RR2 is not applicable in this case
because the said section of RR2 pertains to or implements
section 30(c) of the Tax Code, governing deduction of taxes,
and not section 30 (b) on deduction of interest on
indebtedness, which is the provision invoked by Consuelo.
RATIO:
1. The term indebtedness as used in the US Tax Code
containing similar provisions as in the Phil Tax Code 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. As stated by the SC in the case of Santiago
Sambrano vs. CTA and CIR: Although taxes already due
have not, strictly speaking, the same concept as debts, they
are, however, obligations that may be considered as such.
2. This conclusion finds support in the established
jurisprudence in the US. Under section 23(b) of the Internal
Revenue Code of 1939, as amended, which contains
similarly worded provisions as section 30(b) of Phil Tax Code,
the uniform ruling in the US jurisprudence is that interest on
taxes is interest on indebtedness and is deductible. This rule
applies even though the tax is nondeductible, like the
donors tax.
3. Section 80 is inapplicable to the instant case
because while it implements section 30(c) of the Tax Code
governing deduction of taxes, Consuelo seeks to come
under section 30(b) providing for deduction of interest on
indebtedness.

In conclusion, the SC is of the opinion that although interest

payment for delinquent taxes is not deductible as tax under
section 30(c) of the Tax Code and Section 80 of RR2, the
taxpayer is not precluded thereby from claiming said
interest payment as deduction under section (b) of the same
code.

Dispositive: CTAs decision AFFIRMED.

Commissioner of Internal Revenue vs W.E. Lednicky

and Maria Lednicky

GR Nos. L-18262 and L-21434, 1964

FACTS:
Spouses are both American citizens residing in the
Philippines and have derived all their income from Philippine
sources for taxable years in question.
On March, 1957, filed their ITR for 1956, reporting gross
income of P1,017,287.65 and a net income of P 733,809.44.
On March 1959, file an amended claimed deduction of P
205,939.24 paid in 1956 to the United States government as
federal income tax of 1956.
ISSUE:
Whether a citizen of the United States residing in the
Philippines, who derives wholly from sources within the
Philippines, may deduct his gross income from the income
taxes he has paid to the United States government for the
said taxable year?
HELD:
An alien resident who derives income wholly from sources
within the Philippines may not deduct from gross income the
income taxes he paid to his home country for the taxable
year. The right to deduct foreign income taxes paid given
only where alternative right to tax credit exists.
Section 30 of the NIRC, Gross Income Par. C (3): Credits
against tax per 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 shall be
credited with: Paragraph (B), Alien resident of the
Philippines; and, Paragraph C (4), Limitation on credit.
An alien resident not entitled to tax credit for foreign income
taxes paid when his income is derived wholly from sources
within the Philippines.
Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same
governmental entity. In the present case, although the
taxpayer would have to pay two taxes on the same income
but the Philippine government only receives the proceeds of
one tax, there is no obnoxious double taxation.
GUTIERREZ VS. COLLECTOR
Tax on Disposition of Property
It appears then that the acquisition by the Government of
private properties through the exercise of the power of
eminent domain, said properties being JUSTLY compensated,
is embraced within the meaning of the term "sale"
"disposition of property", and the proceeds from said
transaction clearly fall within the definition of gross income
laid down by Section 29 of the Tax Code of the Philippines.
FACTS:
1. Maria Morales, married to Gutierrez(spouses), was the
owner of an agricultural land. The U.S. Gov(pursuant to
Military Bases Agreement) wanted to expropriate the land of
Morales to expand the Clark Field Air Base.
2. The Republic was the plaintiff, and deposited a sum of
Php 152k to be able to take immediate possession. The
spouses wanted consequential damages but instead settled
with a compromise agreement. In the compromise
agreement, the parties agreed to keep the value of Php
2,500 per hectare, except to some particular lot which would
be at Php 3,000 per hectare.
3. In an assessment notice, CIR demanded payment of Php
8k for deficiency of income tax for the year 1950.
4. The spouses contend that the expropriation was not
taxable because it is not "income derived from sale, dealing
or disposition of property" as defined in Sec. 29 of the Tax
Code. The spouses further contend that they did not realize
any profit in the said transaction. CIR did not agree.
5. The spouses appealed to the CTA. The Solicitor General,
in representation of the respondent Collector of Internal
Revenue, filed an answer that the profit realized by
petitioners from the sale of the land in question was subject
to income tax, that the full compensation received by
petitioners should be included in the income received in
1950, same having been paid in 1950 by the Government.
CTA favored SolGen but disregarded the penalty charged.
6. Both parties appealed to the SC.
ISSUES:
1. Whether or not that for income tax purposes, the
expropriation should be deemed as income from sale and
any profit derived therefrom is subject to income taxes
capital gain?
2. Whether or not there was profit or gain to be taxed?
HELD: Yes to both. CTA decision affirmed. It is subject to
income tax.
RATIO 1: It is to be remembered that said property was
acquired by the Government through condemnation
proceedings and appellants' stand is, therefore, that same
cannot be considered as sale as said acquisition was by
force, there being practically no meeting of the minds
between the parties. U.S jurisprudence has held that the
transfer of property through condemnation proceedings is a
sale or exchange within the meaning of section 117 (a) of
the 1936 Revenue Act and profit from the transaction
constitutes capital gain" "The taking of property by
condemnation and the, payment of just compensation
therefore is a "sale" or "exchange" within the meaning of
section 117 (a) of the Revenue Act of 1936, and profits from
that transaction is capital gain.
SEC. 29. GROSS INCOME. (a) General definition. "Gross
income" includes gains, profits, and income derived from
salaries, wages, or compensation for personal service of
whatever kind and in whatever form paid, or from
professions, vocations, trades, businesses, commerce, sales
or dealings in property, whether real or personal, growing
out of ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the
transactions of any business carried on for gain or profit, or
gains, profits, and income derived from any source
whatsoever.
SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES.
(a) Gross income from sources within the Philippines. The
following items of gross income shall be treated as gross
income from sources within the Philippines:
xxxxxxxxx
(5) SALE OF REAL PROPERTY. Gains, profits, and income
from the sale of real property located in the Philippines;
xxxxxxxxx
It appears then that the acquisition by the Government of
private properties through the exercise of the power of
eminent domain, said properties being JUSTLY compensated,
is embraced within the meaning of the term "sale"
"disposition of property", and the proceeds from said
transaction clearly fall within the definition of gross income
laid down by Section 29 of the Tax Code of the Philippines.
RATIO 2: As to appellant taxpayers' proposition that the
profit, derived by them from the expropriation of their
property is merely nominal and not subject to income tax,
We find Section 35 of the Tax Code illuminating. Said section
reads as follows:
SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE SALE
OR OTHER DISPOSITION OF PROPERTY. The gain derived or
loss sustained from the sale or other disposition of property,
real or personal, or mixed, shall be determined in
accordance with the following schedule:
(a) xxx xxx xxx
(b) In the case of property acquired on or after March first,
nineteen hundred and thirteen, the cost thereof if such
property was acquired by purchase or the fair market price
or value as of the date of the acquisition if the same was
acquired by gratuitous title.

xxxxxxxxx

The records show that the property in question was

adjudicated to Maria Morales by order of the Court of First
Instance of Pampanga on March 23, 1929, and in
accordance with the aforequoted section of the National
Internal Revenue Code, only the fair market price or value of
the property as of the date of the acquisition thereof should
be considered in determining the gain or loss sustained by
the property owner when the property was disposed,
without taking into account the purchasing power of the
currency used in the transaction. The records placed the
value of the said property at the time of its acquisition by
appellant Maria Morales P28,291.73 and it is a fact that
same was compensated with P94,305.75 when it was
expropriated. The resulting difference is surely a capital gain
and should be correspondingly taxed.

Plaridel Surety Co vs. Collector
GR No L-21520, Dec. 11, 1967
Petitioner Plaridel Surety is a domestic corporation engaged
in the bonding business.
Petitioner surety and Constancio San Jose (principal),
solidarily executed a performance bond in favor of the PL
Galang Machinery to secure the performance of San Jose
contractual obligation to produce and supply logs. To afford
itself adequate protection against loss or damages on the
performance, petitioner required San Jose and Ramon
Cuervo to execute an indemnity agreement obligating
themselves, solidarity to indemnify petitioner for whatever
liability it may incur by reason of said performance bond.
San Jose constituted a chattel mortgage on logging
machineries and other movables in petitioners favor while
Ramon Cuervo executed a real estate mortgage.
San Jose failed to deliver the logs to Galang Machinery and
sued on the performance bond. The lower court directed
San Jose and Cuervo to reimburse petitioner for whatever
amount it would pay Galang Machinery.
Petitioner in his income tax claimed that the amount
P44,490 as deductible loss from its gross income.
CIR disallowed the claimed deductions and assessed against
petitioner the sum P8,898, plus interest, as deficiency
income tax for the year 1957.
ISSUE: WON petitioner can claim P44,490 as a deductible
loss from its gross income.
Held:
NO
Petitioner was duly compensated for otherwise than by
insurance- thru the mortgage in its favor executed by San
Jose and Cuervo and it had not yet exhausted all its
available remedies, especially as against Cuervo to
minimize its loss.
LOSS is deductible only in the taxable year it actually
happens or is sustained. However, if it is compensable by
insurance or otherwise deductions for the loss suffered is
postponed to a subsequent year, with, to be precise, is that
year in which it appears that no compensation at all can be
had, on that there is a remaining or net loss.

Fernandez Hermanos, Inc. VS. CIR
Allowable Tax Deductions
That the circumstances are such that the method does not
reflect the taxpayer s income with reasonable accuracy
and certainty and proper and just additions of personal
expenses and other non-deductible expenditures were made
and correct , fair and equitable credit adjustments were
given by way of eliminating non- taxable items.
FACTS:
Four cases involve two decisions of the Court of Tax Appeal
s determining the taxpayer ' s income tax liability for the
years 1950 to 1954 and for the year 1957. Both the
taxpayer and the Commissioner of Internal Revenue, as
petitioner and respondent in the cases a quo respectively ,
appealed from the Tax Court's decisions , insofar as their
respective contentions on particular tax items were therein
resolved against them. Since the issues raised are inter
related, the Court resolves the four appeals in this joint
decision.
The taxpayer , Fernandez Hermanos, Inc. , is a domestic
corporation organized for the principal purpose of engaging
in business as an " investment company " wi th main office
at Manila. Upon verification of the taxpayer's income tax
returns for the period in quest ion, the Commissioner of
Internal Revenue assessed against the taxpayer the sums of
P13,414.00, P119,613.00, P11,698.00, P6,887.00 and
P14,451.00 as alleged deficiency income taxes for the year s
1950, 1951, 1952, 1953 and 1954, respectively. Said
assessments were the result of alleged discrepancies found
upon the examination and verification of the taxpayer's
income tax returns for the said years, summarized by the
Tax Court in its decision of June 10, 1963 in CTA Case No.
787, as follows:
ISSUE: The correctness of the Tax Court's rulings with
respect to the disputed items of disallowances enumerated
in the Tax Court's summary reproduced
HELD:
That the circumstances are such that the method does not
reflect the taxpayers income with reasonable accuracy and
certainty and proper and just additions of personal expenses
and other non-deductible expenditures were made and
correct , fair and equitable credit adjustments were given by
way of eliminating non-taxable items.
Proper adjustments to conform to the income tax laws.
Proper adjustments for non-deductible items must be made.
The following non-deductibles , as the case may be, must be
added to the increase of decrease in the net worth:
1. Personal living or family expenses
2. Premiums paid on any life insurance policy of errors in the taxpayers entries in the books relating to
indebtedness
3. Losses from sales or exchanges of property between
members of the family

4. Income taxes paid

5. Other non-deductible taxes

6. Election expenses and other expense against public

policy

7. Non-deductible contributions

8. Gifts to others

9. Estate inheritance and gift taxes

10. Net Capital Loss

On the other hand, non- taxable items should be deducted

therefrom. These items are necessary adjustments to avoid
the inclusion of what otherwise are non-taxable receipts.
They are:

1. inheritance gifts and bequests received

2. non- taxable gains

3. compensation for injuries or sickness

4. proceeds of life insurance policies

5. sweepstakes

6. winnings

7. interest on government securities and increase in net

worth are not taxable if they are shown not to be the result
of unreported income but to be the result of the correction

China Banking Corp. v. CA
G.R. No. 125508 July 19, 2000
VITUG, J.
Lessons Applicable: Capital asset, capital loss, inventory
depends on the nature of the business
Laws Applicable:
FACTS:
Petitioner China Bank made a 53% equity investment in First
CBC Capital (Asia) Ltd., a Hongkong Subsidiary of P 16,227,
851.80
1906: with the approval of the Bangko Sentral, it wrote of as
worthless investment for being insolvent in its 1987 Income
Tax Return treated as bad debts o ordinary loss deductible.
CIR contends it should be capital loss.
CTA and CA on Petition for Review on Certiorari: upheld CIR
contention
ISSUE: W/N Capital loss (NOT Ordinary Loss)
HELD: Yes. Petition is DENIED
Equity investment is a capital asset resulting in a capital
gain or a capital loss. A capital asset is defined negatively in
Section 33(1) of the NIRC
(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 twenty-nine; or
real property used in the trade or business of the taxpayer
Thus, shares of stock; like the other securities defined in
Section 20(t)[4] of the NIRC, would be ordinary assets only
to a dealer in securities or a person engaged in the purchase
and sale of, or an active trader (for his own account) in,
securities.
Section 20(u) of the NIRC defines a dealer in securities thus"
(u) The term 'dealer in securities' means a merchant of
stocks or securities, whether an individual, partnership or
corporation, with an established place of business, regularly
engaged in the purchase of securities and their resale to
customers; that is, one who as a merchant buys securities
and sells them to customers with a view to the gains and
profits that may be derived therefrom."

In the hands, however, of another who holds the shares of

stock by way of an investment, the shares to him would be
capital assets. When the shares held by such investor
become worthless, the loss is deemed to be a loss from the
sale or exchange of capital assets.

Loss sustained by the holder of the securities, which are

capital assets (to him), is to be treated as a capital loss as if
incurred from a sale or exchange transaction. A capital gain
or a capital loss normally requires the concurrence of two
conditions for it to result: (1) There is a sale or exchange;
and (2) the thing sold or exchanged is a capital asset. When
securities become worthless, there is strictly no sale or
exchange but the law deems the loss anyway to be "a loss
from the sale or exchange of capital assets

Capital losses are allowed to be deducted only to the extent

of capital gains, i.e., gains derived from the sale or
exchange of capital assets, and not from any other income
of the taxpayer.
 The Government appealed to the SC. The alleged bad debts
are the following:

1. Portillo's Auto Seat Cover 630.31

2. Visayan Rapid Transit

17,810.26

3. Bataan Auto Seat Cover 373.13

4. Tres Amigos Auto Supply

1,370.31

5. P. C. Teodorolawphil 650.00

6. Ordnance Service, P.A. 386.42

Collector v Goodrich International Rubber Co. (G.R. No. L- 7. Ordnance Service, P.C. 796.26
22265) 8. National land Settlement Administration 3,020.76
Facts: 9. National Coconut Corporation 644.74
Goodrich claimed for deductions based upon receipts issued, 10. Interior Caltex Service Station 1,505.87
not by entities in which the alleged expenses had been
incurred, but by the officers of Goodrich who allegedly paid 11. San Juan Auto Supply
for them. 4,530.64

12. P A C S A
45.36
The Commissioner disallowed deductions in the amount of
P50,455.41 (for the year 1951) for bad debts and 13. Philippine Naval Patrol 14.18
P30,188.88 (for year 1952) for representation expenses.
14. Surplus Property Commission 277.68

15. Alverez Auto Supply

Goodrich appealed from the said assessment to the Court of 285.62
Tax Appeals (CTA) which allowed the deduction for bad
debts but disallowing the alleged representation expenses. 16. Lion Shoe Store
CTA amended its decision allowing the deduction of 1,686.93
representation expenses. 17. Ruiz Highway Transit
2,350.00
18. Esquire Auto Seat Cover the information obtained by him. In the case, Goodrich has
3,536.94 not adequately made such showing.

T O T A L
P50,455.41*
The payments made, after being characterized as bad
debts, merely stresses the undue haste with which the same
had been written off. Goodrich has not proven that said
Issue: debts were worthless. There was no evidence that the
Whether or not these bad debts are properly deducted. debtors can not pay them.

Held: SC held that the claim for bad debts are allowed but only up
to P22,627.35. (those from Debts 11-18)
The claim for deduction for debt numbers 1-10 is REJECTED.
Goodrich has not established either that the debts are
actually worthless or that it had reasonable grounds to
believe them to be so.

NIRC 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 require

proof of 2 facts:

1. That the taxpayer did in fact ascertain the debt to be

worthless

2. That he did so, in good faith.

Good faith on the part of the taxpayer is not enough. He

must also how that he had reasonably investigated the
relevant facts and had drawn a reasonable inference from
 The income tax law does not authorize the depreciation of
an asset beyond its acquisition cost. Hence, a deduction
over and above such cost cannot be claimed and allowed.
The reason is that deductions from gross income are
privileges, not matters of right. They are not created by
implication but upon clear expression in the law.

Facts:

Basilan Estates, Inc. claimed deductions for the depreciation

of its assets on the basis of their acquisition cost. As of
January 1, 1950 it changed the depreciable value of said
assets by increasing it to conform with the increase in cost
for their replacement. Accordingly, from 1950 to 1953 it
deducted from gross income the value of depreciation
computed on the reappraised value.

CIR disallowed the deductions claimed by petitioner,

consequently assessing the latter of deficiency income
taxes.

Issue:

Whether or not the depreciation shall be determined on the

acquisition cost rather than the reappraised value of the
BASILAN ESTATES, INC. v. CIR assets
G.R. No. L-22492 September 5, 1967

Bengzon, J.P., J. Held:

Yes. The following tax law provision allows a deduction from

gross income for depreciation but limits the recovery to the
Doctrine:
capital invested in the asset being depreciated:
(1)In general. A reasonable allowance for deterioration of
property arising out of its use or employment in the
business or trade, or out of its not being used: Provided,
That when the allowance authorized under this subsection
shall equal the capital invested by the taxpayer . . . no
further allowance shall be made. . . .

The income tax law does not authorize the depreciation of

an asset beyond its acquisition cost. Hence, a deduction
over and above such cost cannot be claimed and allowed.
The reason is that deductions from gross income are
privileges, not matters of right. They are not created by
implication but upon clear expression in the law [Gutierrez v.
Collector of Internal Revenue, L-19537, May 20, 1965].

Depreciation is the gradual diminution in the useful value of

tangible property resulting from wear and tear and normal
obsolescense. It commences with the acquisition of the
property and its owner is not bound to see his property
gradually waste, without making provision out of earnings
for its replacement.

The recovery, free of income tax, of an amount more than

the invested capital in an asset will transgress the
underlying purpose of a depreciation allowance. For then
what the taxpayer would recover will be, not only the
acquisition cost, but also some profit. Recovery in due time
thru depreciation of investment made is the philosophy
behind depreciation allowance; the idea of profit on the
investment made has never been the underlying reason for
the allowance of a deduction for depreciation.
 COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE

FACTS:

BENGZON, J.P., J.:

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects,

transmitted to their grandchildren by hereditary succession
the following properties:

(1) Agricultural lands with a total area of 19,000 hectares,

situated in the municipality of Nasugbu, Batangas province;

(2) A residential house and lot located at Wright St., Malate,

Manila; and

(3) Shares of stocks in different corporations.

To manage the above-mentioned properties, said children,

namely, Antonio Roxas, Eduardo Roxas and Jose Roxas,
formed a partnership called Roxas y Compania.

The Roxas brothers protested the assessment but inasmuch

as said protest was denied, they instituted an appeal in the
Court of Tax Appeals on January 9, 1961. The Tax Court
heard the appeal and rendered judgment on July 31, 1965
sustaining the assessment except the demand for the
payment of the fixed tax on dealer of securities and the
disallowance of the deductions for contributions to the
Philippine Air Force Chapel and Hijas de Jesus' Retiro de
Manresa. Not satisfied, Roxas y Cia. and the Roxas brothers
appealed to this Court. The Commissioner of Internal
ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA.,
Revenue did not appeal.
in their own respective behalf and as judicial co-
guardians of JOSE ROXAS

vs. ISSUE:
Are the deductions for business expenses and contributions
deductible?
RULING:
Roxas y Cia. deducted from its gross income the amount of
P40.00 for tickets to a banquet given in honor of Sergio
Osmena and P28.00 for San Miguel beer given as gifts to
various persons. The deduction were claimed as
representation expenses. Representation expenses are
deductible from gross income as expenditures incurred in
carrying on a trade or business under Section 30(a) of the
Tax Code provided the taxpayer proves that they are
reasonable in amount, ordinary and necessary, and incurred
in connection with his business. In the case at bar, the
evidence does not show such link between the expenses
and the business of Roxas y Cia. The findings of the Court of
Tax Appeals must therefore be sustained.
The petitioners also claim deductions for contributions to
the Pasay City Police, Pasay City Firemen, and Baguio City
Police Christmas funds, Manila Police Trust Fund, Philippines
Herald's fund for Manila's neediest families and Our Lady of
Fatima chapel at Far Eastern University.
The contributions to the Christmas funds of the Pasay City
Police, Pasay City Firemen and Baguio City Police are not
deductible for the reason that the Christmas funds were not
spent for public purposes but as Christmas gifts to the
families of the members of said entities. Under Section
39(h), a contribution to a government entity is deductible
when used exclusively for public purposes. For this reason,
the disallowance must be sustained. On the other hand, the
contribution to the Manila Police trust fund is an allowable
deduction for said trust fund belongs to the Manila Police, a
government entity, intended to be used exclusively for its
public functions.
The contributions to the Philippines Herald's fund for
Manila's neediest families were disallowed on the ground
that the Philippines Herald is not a corporation or an
association contemplated in Section 30 (h) of the Tax Code.
It should be noted however that the contributions were not
made to the Philippines Herald but to a group of civic
spirited citizens organized by the Philippines Herald solely
for charitable purposes. There is no question that the
members of this group of citizens do not receive profits, for
all the funds they raised were for Manila's neediest families.
Such a group of citizens may be classified as an association
organized exclusively for charitable purposes mentioned in
Section 30(h) of the Tax Code.
Rightly, the Commissioner of Internal Revenue disallowed
the contribution to Our Lady of Fatima chapel at the Far
Eastern University on the ground that the said university
gives dividends to its stockholders. Located within the
premises of the university, the chapel in question has not
been shown to belong to the Catholic Church or any
religious organization. On the other hand, the lower court
found that it belongs to the Far Eastern University,
contributions to which are not deductible under Section
30(h) of the Tax Code for the reason that the net income of
said university injures to the benefit of its stockholders. The
disallowance should be sustained.
MADRIGAL VS. RAFFERTY

Difference Between Capital and Income

The essential difference between capital and income is that

capital is a fund; income is a flow. A fund of property
existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time is called
income. Capital is wealth, while income is the service of
wealth.

FACTS:

Vicente Madrigal and Susana Paterno were legally married

prior to Januray 1, 1914. The marriage was contracted under
the provisions of law concerning conjugal partnership

On 1915, Madrigal filed a declaration of his net income for

year 1914, the sum of P296,302.73
 Vicente Madrigal was contending that the said declared
income does not represent his income for the year 1914 as
it was the income of his conjugal partnership with Paterno.
He said that in computing for his additional income tax, the
amount declared should be divided by 2.
The revenue officer was not satisfied with Madrigals
explanation and ultimately, the United States Commissioner
of Internal Revenue decided against the claim of Madrigal.
Madrigal paid under protest, and the couple decided to
recover the sum of P3,786.08 alleged to have been
wrongfully and illegally assessed and collected by the CIR.
ISSUE: Whether or not the income reported by Madrigal on
1915 should be divided into 2 in computing for the
additional income tax.
HELD:
No! The point of view of the CIR is that the Income Tax
Law, as the name implies, taxes upon income and not upon
capital and property.
The essential difference between capital and income is
that capital is a fund; income is a flow. A fund of property
existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time is called
income. Capital is wealth, while income is the service of
wealth.
As Paterno has no estate and income, actually and legally
vested in her and entirely distinct from her husbands
property, the income cannot properly be considered the
separate income of the wife for the purposes of the
additional tax.
To recapitulate, Vicente wants to half his declared income
in computing for his tax since he is arguing that he has a
conjugal partnership with his wife. However, the court ruled
that the one that should be taxed is the income which is the
flow of the capital, thus it should not be divided into 2.