9.

Supreme Liner vs BPI mortgagor is given the option whether or not to redeem the real
property. The issuance of the Certificate of Sale does not by itself
National Internal Revenue Code; capital gains tax; documentary transfer ownership. RR No. 4-99 (March 16, 1999), further amends
stamp tax; if right of redemption exercised. Under Revenue RMO No. 6-92 relative to the payment of capital gains tax and
Regulations (RR) No. 13-85 (December 12, 1985), every sale or documentary stamp tax on extrajudicial foreclosure sale of capital
exchange or other disposition of real property classified as capital assets initiated by banks, finance and insurance companies. Under
asset under the National Internal Revenue Code (NIRC) shall be this RMO, in case the mortgagor exercises his right of redemption
subject to final capital gains tax. The term “sale” includes pacto de
within one year from the issuance of the certificate of sale, no
retro and other forms of conditional sale. Section 2.2 of Revenue capital gains tax shall be imposed because no capital gain has been
Memorandum Order (RMO) No. 29-86, as amended by RMO Nos. derived by the mortgagor and no sale or transfer of real property
16-88, 27-89 and 6-92, states that these conditional sales was realized. Moreover, the transaction will be subject to
“necessarily includes mortgage foreclosure sales (judicial and documentary stamp tax of only PhP 15 because no land or realty
extrajudicial foreclosure sales).” Further, for real property was sold or transferred for a consideration. Supreme Transliner,
foreclosed by a bank on or after September 3, 1986, the capital Inc., Moises C. Alvarez and Paulita S. Alvarez vs BPI Family Savings
gains tax and documentary stamp tax must be paid before title to Bank, Inc., G.R. No. 165617, February 25, 2011; BPI Family Savings
the property can be consolidated in favor of the bank. Under Bank, Inc. vs Supreme Transliner, Inc., Moises C. Alvarez and Paulita
Section 63 of Presidential Decree No. 1529, or the Property S. Alvarez, G.R. No. 165837, February 25, 2011.
Registration Decree, if no right of redemption exists, the certificate
of title of the mortgagor shall be cancelled, and a new certificate
issued in the name of the purchaser. But where the right of
redemption exists, the certificate of title of the mortgagor shall not
be cancelled, but the certificate of sale and the order confirming the
sale shall be registered by brief memorandum thereof made by the
Register of Deeds on the certificate of title. It is therefore clear that
in foreclosure sale, there is no actual transfer of the mortgaged real
property until after the expiration of the one-year redemption
period as provided in Act No. 3135, or An Act or Regulate the Sale of
Property Under Special Powers Inserted In or Annexed to Real
Estate Mortgages, and title thereto is consolidated in the name of
the mortgagee in case of non-redemption. In the interim, the
 Supreme Transliner vs. BPI
G.R. No. 165617 : February 25, 2011
#1
FACTS:
Supreme Transliner, Inc. represented by its Managing Director,
Moises C. Alvarez, and Paulita S. Alvarez, obtained a loan in the
amount of P9,853,000.00 from BPI Family Savings Bank with a 714-
square meter lot covered by Transfer Certificate of Title No. T-79193
in the name of Moises C. Alvarez and Paulita S. Alvarez, as collateral.
For non-payment of the loan, the mortgage was extrajudicially
foreclosed and the property was sold to the bank as the highest
bidder. Before the expiration of the one-year redemption period,
the mortgagors notified the bank of their intention to redeem the
property. The mortgagors requested for the elimination of
liquidated damages and reduction of attorney’s fees and interest
(1% per month) from the amount due but the bank refused.
ISSUE:
Whether or not the foreclosing mortgagee should pay capital gains
tax upon execution of the certificate of sale, and if paid by the
mortgagee, whether the same should be shouldered by the
redemptioner.
HELD:
NO. There is no legal basis for the inclusion of this charge in the
redemption price. In foreclosure sale, there is no actual transfer of
the mortgaged real property until after the expiration of the one-
year redemption period as provided in Act No. 3135 and title
thereto is consolidated in the name of the mortgagee in case of
non-redemption. In the interim, the mortgagor is given the option
whether or not to redeem the real property. The issuance of the
Certificate of Sale does not by itself transfer ownership.

The mortgagors filed a complaint against the bank to recover the

allegedly unlawful and excessive charges. The trial court rendered
its decision dismissing the complaint and held that plaintiffs-
mortgagors are bound by the terms of the mortgage loan. According
to the trial court, plaintiffs-mortgagors are estopped from
questioning the correctness of the redemption price as they had
freely and voluntarily signed the letter-agreement prepared by the
defendant bank. However, the CA ruled that attorney’s fees and
liquidated damages were already included in the bid price.
#2
FACTS:
Supreme Transliner took out a loan from respondent and was
unable to pay.
The respondent bank extrajudicially foreclosed the collateral and,
before the expiration of the one-year redemption period, the
mortgagors notified the bank of its intention to redeem the
property.
ISSUE:
Is the mortgagee-bank liable to pay the capital gains tax upon the
execution of the certificate of sale and before the expiry of the
redemption period?
HELD:
NO. It is clear that in foreclosure sale there is no actual transfer of
the mortgaged real property until after the expiration of the one-
year period and title is consolidated in the name of the mortgagee
in case of non-redemption.
This is because before the period expires there is yet no transfer of
title and no profit or gain is realized by the mortgagor.
DOCTRINES:
National Internal Revenue Code; capital gains tax; documentary
stamp tax; if right of redemption exercised.
Under Revenue Regulations (RR) No. 13-85 (December 12, 1985),
every sale or exchange or other disposition of real property
classified as capital asset under the National Internal Revenue Code
(NIRC) shall be subject to final capital gains tax. The term “sale”
includes pacto de retro and other forms of conditional sale.
Section 2.2 of Revenue Memorandum Order (RMO) No. 29-86, as
amended by RMO Nos. 16-88, 27-89 and 6-92, states that these
conditional sales “necessarily includes mortgage foreclosure sales
(judicial and extrajudicial foreclosure sales).” F
urther, for real property foreclosed by a bank on or after September
3, 1986, the capital gains tax and documentary stamp tax must be
paid before title to the property can be consolidated in favor of the
bank.
Under Section 63 of Presidential Decree No. 1529, or the Property
Registration Decree, if no right of redemption exists, the certificate
of title of the mortgagor shall be cancelled, and a new certificate
issued in the name of the purchaser.
But where the right of redemption exists, the certificate of title of
the mortgagor shall not be cancelled, but the certificate of sale and
the order confirming the sale shall be registered by brief
memorandum thereof made by the Register of Deeds on the
certificate of title.
It is therefore clear that in foreclosure sale, there is no actual
transfer of the mortgaged real property until after the expiration of
the one-year redemption period as provided in Act No. 3135, or An
Act or Regulate the Sale of Property Under Special Powers Inserted
In or Annexed to Real Estate Mortgages, and title thereto is
consolidated in the name of the mortgagee in case of non-
redemption. In the interim, the mortgagor is given the option
whether or not to redeem the real property.
The issuance of the Certificate of Sale does not by itself transfer
ownership. RR No. 4-99 (March 16, 1999), further amends RMO No.
6-92 relative to the payment of capital gains tax and documentary
stamp tax on extrajudicial foreclosure sale of capital assets initiated
by banks, finance and insurance companies.
to affect past transactions, because a wrong construction cannot
give rise to a vested right that can be invoked by a taxpayer.
Supreme Transliner, Inc. vs BPI Family Savings Bank, Inc.

Under this RMO, in case the mortgagor exercises his right of

redemption within one year from the issuance of the certificate of
sale, no capital gains tax shall be imposed because no capital gain
has been derived by the mortgagor and no sale or transfer of real
property was realized. Moreover, the transaction will be subject to
documentary stamp tax of only PhP 15 because no land or realty
was sold or transferred for a consideration.

National Internal Revenue Code; non-retroactivity of rulings;

exception.

Section 246 of the National Internal Revenue Code sets out that rule
on non-retroactivity of rulings. In this case, the retroactive
application of Revenue Regulations No. 4-99 [to the transaction
which took place before its effectivity is more consistent with the
policy of aiding the exercise of the right of redemption.

As the Court of Tax Appeals concluded in one case, RR No. 4-99 “has
curbed the inequity of imposing a capital gains tax even before the
expiration of the redemption period [since] there is yet no transfer
of title and no profit or gain is realized by the mortgagor at the time
of foreclosure sale but only upon expiration of the redemption
period.”

In his commentaries [Hector] De Leon expressed the view that while

revenue regulations as a general rule have no retroactive effect, if
the revocation is due to the fact that the regulation is erroneous or
contrary to law, such revocation shall have retroactive operation as
10. Banco De Oro, Bank of Commerce, China Banking Corporation,
Metropolitan Bank & Trust Company, Philippine Bank of
Communications, Philippine Nation Bank, Philippine Veterans Bank
and Planters Development Bank vs. Republic of the Philippines,
Commissioner of Internal Revenue, Bureau of Internal Revenue,
Secretary of Finance, Department of Finance, The National
Treasurer and Bureau of Treasury (G.R. No. 198756. January 13,
2015)
Facts:
This case involves P35 billion worth of 10-year zero-coupon
treasury bonds issued by the Bureau of Treasury (BTr) denominated
as the Poverty Eradication and Alleviation Certificates or the PEACe
Bonds. These PEACe Bonds would initially be purchased by a special
purpose vehicle on behalf of Caucus of Development NGO Networks
(CODE-NGO), repackaged and sold at a premium to investors. The
net proceeds from the sale will be used to endow a permanent fund
to finance meritorious activities and projects of accredited non-
government organizations (NGOs) throughout the country. In
relation to this, CODE-NGO wrote a letter to the Bureau of Internal
Revenue (BIR) to inquire as to whether the PEACe Bonds will be
subject to withholding tax of 20%. The BIR issued several rulings
beginning with BIR Ruling No.020-2001 (issued on May 31, 2001)
and was subsequently reiterated its points in BIR Ruling No. 035-
200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120. The
rulings basically say that in determining whether financial assets
such as a debt instrument are deposit substitute, the “20 or more
individual or corporate lenders rule” should apply. Likewise, the “at
any one time” stated in the rules should be construed as “at the
time of the original issuance.”
With this BTr made a public offering of the PEACe Bonds to
the Government Securities Eligible Dealers (GSED) wherby RCBC
won as the highest bidder for approximately 10.17 billion, resulting
in a discount of approximately 24.83 billion. RCBC Capital Capital
entered into an underwriting agreement with CODE-NGO, whereby
RCBC Capital was appointed as the Issue Manager and Lead
Underwriter for the offering of the PEACe Bonds.
In October 7, 2011, BIR issued BIR RULING NO. 370-2011 in
response to the query of the Secretary of Finance as to the proper
tax treatment of the discounts and interest derived from
Government Bonds. It cited three other rulings issued in 2004 and
2005. The above ruling states that the all treasury bonds (including
PEACe Bonds), regardless of the number of purchasers/lenders at
the time of origination/issuance are considered deposit substitutes.
In the case of zero-coupon bonds, the discount (i.e. difference
between face value and purchase price/discounted value of the
bond) is treated as interest income of the purchaser/holder.
Ruling:
The PEACe Bonds, according to the SC, requires further
information for proper determination of whether these bonds are
within the purview of deposit substitutes. The Court noted that it
may seem that the lender is only CODE-NGO through RCBC.
However, the underwriting agreement reveals that the entire
35billion worth of zero-coupon bonds were sourced directly from
the undisclosed number of investors. These are the same investors
to whom RCBC Capital distributed the PEACe Bonds all at the time
of the origination or issuance. Hence, until there is information as to
whether the PEACe Bonds are found within the coverage of deposit
substitutes, the proper procedure for the BIR is to collect the unpaid
final withholding tax directly from RCBC Capital/ CODE-NGO, or any
lender if such be the case.
The court also noted that according to the NIRC, Section 24,
interest income received by individuals from long term deposits or
investments with a holding period of not less than five years is
exempt from final tax.
The decision provided the definition of deposit substitute
1997 National Internal Revenue Code which placed the 20-lender
rule. In particular, Section 22 (Y) states that a debt instrument shall
mean “…an alternative form of obtaining funds from the public (the
term 'public' means borrowing from twenty (20) or more individual
or corporate lenders at any one time) other than deposits, through
the issuance, endorsement, or acceptance of debt instruments for
the borrower’s own account….” The determination as to whether a
deposit substitute will be imposed with 20% final withholding tax
rests on the number of lenders.
In construing the phrase “at any one time” provided for in
the definition of “public”, the Supreme Court made an analysis of
how financial market works. According to the Court, in the financial
market whether this refers to capital markets securities or money
market securities, transactions happen in two venues: the Primary
and the Secondary Market. The primary market transactions happen
between issuers and investors where issuance of new securities is
facilitated. The secondary market is where the trading occurs
among investors. This goes to show that for one security, there are
different and separate transactions happening depending on the
flow of the transaction. In the exact words of the Supreme Court,
“an agglomeration of financial transactions in securities performed
by market participants that works to transfer the funds from the
surplus units (or investors/lenders) to those who need them (deficit
units or borrowers)….”
When there are 20 or more lenders/investors in a
transaction for a specific bond issue, the seller is required to
withhold the 20% final income tax on the imputed interest income
from the bonds. The Supreme Court cited Sections 24(B) (1),
27(D)(1), and 28(A)(7) of the 1997 National Internal Revenue Code.
These provisions state the imposition of a final tax rate of 20% upon
the amount of interest from any currency bank deposit and yield or
any other monetary benefit from deposit substitutes. On the other
hand, for instruments not considered as deposit substitutes, these
will be subjected to regular income tax. The prevailing provision is
Section 32(A). Hence, should the deposit substitute involves less
than 20 lenders in a transaction, the income is considered as
“income derived from whatever source”.
The income is a “gain from sale” and should not be
confused with “interest” provided for in Sections 24, 27 and 28. The
Supreme Court noted that the “gain” referred to in Section 32 (A)
pertains to that realized from the trading of bonds at maturity rate
(difference between selling price in the secondary market and that
upon purchase) or the gain realized by the last holder of the bonds
when redeemed at maturity (the difference between proceeds from
retirement of bonds and the price upon acquisition of the last
holder). In the case of discounted instruments, like the zero-coupon
bonds, the trading gain shall be the excess of the selling price over
the book value or accreted value (original issue price plus
accumulated discount from the time of purchase up to the time of
sale) of the instruments.
The Supreme Court finds that the BIR Rulings issued in 2001
and the assailed BIR Rulings are defective taking into consideration
the above discussions on deposit substitutes and its tax treatment.
As for the BIR Rulings issued in 2001, the SC finds that the
interpretation of the phrase “at any one time”, is “…to mean at the
point of origination alone is unduly restrictive….” On the other
hand, the 2011 BIR Ruling which relied on the 2004 and 2005 BIR
Rulings is void for creating a distinction between government bonds
and those issued by private corporations, when there is none in the
law. Further, it completely disregarding the 20-lender rule under the
NIRC since it says, ““all treasury bonds . . . regardless of the number
of purchasers/lenders at the time of origination/issuance are
considered deposit substitutes…”
11. Dumaguete Cathedral vs. CIR
Cooperatives, including their members, deserve a preferential tax
treatment because of the vital role they play in the attainment of
economic development and social justice. Thus, although taxes are
the lifeblood of the government, the State’s power to tax must give
way to foster the creation and growth of cooperatives. To borrow
the words of Justice Isagani A. Cruz: "The power of taxation, while
indispensable, is not absolute and may be subordinated to the
demands of social justice."
FACTS:
1. Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit
cooperative with the following objectives and purposes: (1) to
increase the income and purchasing power of the members; (2) to
pool the resources of the members by encouraging savings and
promoting thrift to mobilize capital formation for development
activities; and (3) to extend loans to members for provident and
productive purposes.
2. (BIR) Operations Group Deputy Commissioner, issued Letters of
Authority authorizing BIR Officers to examine petitioner’s books of
accounts and other accounting records for all internal revenue taxes
for the taxable years 1999 and 2000.
3. On 2002, DCCCO received Pre-Assessment Notices for deficiency
withholding taxes for taxable years 1999 and 2000. The deficiency
withholding taxes cover the payments of the honorarium of the
Board of Directors, security and janitorial services, legal and
professional fees, and interest on savings and time deposits of its
members.
4. DCCCO informed BIR that it would ONLY pay the deficiency
withholding taxes corresponding to the honorarium of the Board of
Directors, security and janitorial services, legal and professional fees
for the year 1999 and 2000, EXCLUDING penalties and interest.
5. After payment, DCCCO received from the BIR Transcripts of
Assessment and Audit Results/Assessment Notices, ordering
petitioner to pay the deficiency withholding taxes, INCLUSIVE of
penalties, for the years 1999 and 2000.
6. DCCO's contention:
Under Sec. 24. Income Tax Rates. — x x x x (B) Rate of Tax on
Certain Passive Income: — (1) Interests, Royalties, Prizes, and Other
Winnings. — A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest from any currency
bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements; x x x
applies only to banks and not to cooperatives, since the phrase
"similar arrangements" is preceded by terms referring to banking
transactions that have deposit peculiarities. Therefore, the savings
and time deposits of members of cooperatives are not included in
the enumeration, and thus not subject to the 20% final tax. Also,
pursuant to Article XII, Section 15 of the Constitution 25 and Article
2 of Republic Act No. 6938 (RA 6938) or the Cooperative Code of the
Philippines, cooperatives enjoy a preferential tax treatment which
exempts their members from the application of Section 24(B)(1) of
the NIRC.
ISSUE:
Whether or not DCCCO is liable to pay the deficiency withholding
taxes on interest from savings and time deposits of its members for
the taxable years 1999 and 2000, as well as the delinquency interest
of 20% per annum?
HELD:
DCCCO is not liable. The NIRC states that a "final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of
interest on currency bank deposit and yield or any other monetary
benefit from the deposit substitutes and from trust funds and
similar arrangement x x x" for individuals under Section 24(B)(1) and
for domestic corporations under Section 27(D)(1). Considering the
members’ deposits with the cooperatives are not currency bank
deposits nor deposit substitutes, Section 24(B)(1) and Section
27(D)(1), therefore, do not apply to members of cooperatives and to
deposits of primaries with federations, respectively.
Under Article 2 of RA 6938, as amended by RA 9520, it is a declared
policy of the State to foster the creation and growth of cooperatives
as a practical vehicle for promoting self-reliance and harnessing
people power towards the attainment of economic development
and social justice. Thus, to encourage the formation of cooperatives
and to create an atmosphere conducive to their growth and
development, the State extends all forms of assistance to them, one
of which is providing cooperatives a preferential tax treatment.
 retained in RA 9520. The only difference is that Article 61 of RA
The legislative intent to give cooperatives a preferential tax 9520 (formerly Section 62 of RA 6938) now expressly states that
treatment is apparent in Articles 61 and 62 of RA 6938, which read: transactions of members with the cooperatives are not subject to
any taxes and fees. Thus: ART. 61. Tax and Other Exemptions.
Cooperatives transacting business with both members and non-
ART. 61. Tax Treatment of Cooperatives. — Duly registered
members shall not be subjected to tax on their transactions with
cooperatives under this Code which do not transact any business
members. In relation to this, the transactions of members with the
with non-members or the general public shall not be subject to any
cooperative shall not be subject to any taxes and fees, including but
government taxes and fees imposed under the Internal Revenue
not limited to final taxes on members’ deposits and documentary
Laws and other tax laws. Cooperatives not falling under this article
tax. Notwithstanding the provisions of any law or regulation to the
shall be governed by the succeeding section. ART. 62. Tax and Other
contrary, such cooperatives dealing with nonmembers shall enjoy
Exemptions. — Cooperatives transacting business with both
the following tax exemptions. Moreover, no less than our
members and nonmembers shall not be subject to tax on their
Constitution guarantees the protection of cooperatives. Section 15,
transactions to members. Notwithstanding the provision of any law
Article XII of the Constitution considers cooperatives as instruments
or regulation to the contrary, such cooperatives dealing with
for social justice and economic development. At the same time,
nonmembers shall enjoy the following tax exemptions; x x x.
Section 10 of Article II of the Constitution declares that it is a policy
of the State to promote social justice in all phases of national
This exemption extends to members of cooperatives. It must be development.
emphasized that cooperatives exist for the benefit of their
members. In fact, the primary objective of every cooperative is to
provide goods and services to its members to enable them to attain
increased income, savings, investments, and productivity. 30
Therefore, limiting the application of the tax exemption to
cooperatives would go against the very purpose of a credit
cooperative. Extending the exemption to members of cooperatives,
on the other hand, would be consistent with the intent of the
legislature. Thus, although the tax exemption only mentions
cooperatives, this should be construed to include the members.

It is also worthy to note that the tax exemption in RA 6938 was

12. MA. ISABEL T. SANTOS v. SERVIER PHILIPPINES, GR No. 166377,
2008-11-28
Facts:
Petitioner Ma. Isabel T. Santos was the Human Resource Manager
of respondent Servier Philippines, Inc.
While having dinner, petitioner... complained of stomach pain, then
vomited. Eventually, she was brought to the hospital known as
Centre Chirurgical de L'Quest where she fell into coma for 21 days...
at the Intensive Care Unit (ICU) for 52 days.
Probable cause of her sudden attack was "alimentary allergy," as
she had recently ingested a meal of mussels which resulted in a
concomitant uticarial eruption.
Petitioner's hospitalization expenses, as well as those of her
husband and son, were paid by respondent
She was then confined at the St. Luke's Medical Center... for
rehabilitation.[8] During the period of petitioner's rehabilitation,
respondent continued to pay the former's salaries; and to assist her
in paying her hospital bills.
Petitioner's... physician concluded that the former had not fully
recovered mentally and physically. Hence, respondent was
constrained to terminate petitioner's services effective August 31,
1999... respondent offered a retirement package
Of the promised retirement benefits amounting to P1,063,841.76,
only P701,454.89 was released to petitioner's husband, the
balance[11] thereof was withheld allegedly for taxation purposes.
Petitioner, represented by her husband, instituted the instant case
for unpaid salaries; unpaid separation pay; unpaid balance of
retirement package plus interest; insurance pension for permanent
disability; educational assistance for her son; medical assistance;
reimbursement... of medical and rehabilitation expenses; moral,
exemplary, and actual damages, plus attorney's fees.
only on
Issues:
the only issue proper for determination is the propriety of
deducting P362,386.87 from her... total benefits, for taxation
purposes.
whether these benefits are taxable.
whether the retirement benefits are taxable.
Ruling:
On the basis of the above-mentioned retirement plan, respondent
offered the petitioner a retirement package which consists of
retirement plan benefits, insurance pension, and educational
assistance.[31] The amount of P1,063,841.76 represented the
disability... retirement benefit provided for in the plan... the receipt
of retirement benefits does not bar the retiree from receiving
separation pay. Separation pay is a statutory right designed to
provide the employee with the... wherewithal during the period
that he/she is looking for another employment. On the other hand,
retirement benefits are intended to help the employee enjoy the
remaining years of his life, lessening the burden of worrying about
his financial support, and are a form of... reward for his loyalty and
service to the employer... they are not mutually exclusive.
only true if there is no specific prohibition against the payment of
both benefits in the retirement plan and/or in the Collective
Bargaining
Agreement (CBA)
In the instant case, the Retirement Plan bars the petitioner from DECISION
claiming additional benefits on top of that provided for in the Plan.
NACHURA, J.:
Section 2, Article XII of the Retirement Plan provides:
Section 2. NO DUPLICATION OF BENEFITS
Before this Court is a Petition for Review on Certiorari under
There being such a provision,... petitioner is entitled only to either Rule 45 of the Rules of Court, seeking to set aside the Court of
the separation pay under the law or retirement benefits under the
Plan, and not both. Appeals (CA) Decision,[1] dated August 12, 2004 and its
[2]
Resolution dated December 17, 2004, in CA-G.R. SP No. 75706.
We answer in the affirmative.
Thus, for the retirement benefits to be exempt from the
The facts, as culled from the records, are as follows:
withholding tax, the taxpayer is burdened to prove the concurrence
of the following elements: (1) a reasonable private benefit plan is
maintained by the employer; (2) the retiring official or employee Petitioner Ma. Isabel T. Santos was the Human Resource
has been in the... service of the same employer for at least ten (10)
Manager of respondent Servier Philippines, Inc. since 1991 until her
years; (3) the retiring official or employee is not less than fifty (50)
years of age at the time of his retirement; and (4) the benefit had termination from service in 1999. On March 26 and 27, 1998,
been availed of only once. petitioner attended a meeting[3] of all human resource managers of
petitioner was qualified for disability retirement... petitioner was respondent, held in Paris, France. Since the last day of the meeting
only 41 years of age; and had been in the service for more or less coincided with the graduation of petitioners only child, she arranged
eight (8) years.
for a European vacation with her family right after the meeting. She,
the above provision is not applicable for failure to... comply with the thus, filed a vacation leave effective March 30, 1998.[4]
age and length of service requirements.

On March 29, 1998, petitioner, together with her husband

Antonio P. Santos, her son, and some friends, had dinner
at Leon des Bruxelles, a Paris restaurant known for mussels[5] as
their specialty. While having dinner, petitioner complained of
stomach pain, then vomited. Eventually, she was brought to the
hospital known as Centre Chirurgical de LQuest where she fell into
coma for 21 days; and later stayed at the Intensive Care Unit (ICU)
for 52 days. The hospital found that the probable cause of her
sudden attack was alimentary allergy, as she had recently ingested a
meal of mussels which resulted in a concomitant uticarial
[6]
eruption.
During the time that petitioner was confined at the hospital,
her husband and son stayed with her in Paris. Petitioners
hospitalization expenses, as well as those of her husband and son,
were paid by respondent.[7]
In June 1998, petitioners attending physicians gave a
prognosis of the formers condition; and, with the consent of her
family, allowed her to go back to the Philippines for the
continuation of her medical treatment. She was then confined at
the St. Lukes Medical Center for rehabilitation.[8] During the period
of petitioners rehabilitation, respondent continued to pay the
formers salaries; and to assist her in paying her hospital bills.
In a letter dated May 14, 1999, respondent informed the
petitioner that the former had requested the latters physician to
conduct a thorough physical and psychological evaluation of her
condition, to determine her fitness to resume her work at the
company. Petitioners physician concluded that the former had not
fully recovered mentally and physically. Hence, respondent was
constrained to terminate petitioners services effective August 31,
1999.[9]
As a consequence of petitioners termination from
employment, respondent offered a retirement package which
consists of:
Retirement Plan Benefits: P 1,063,841.76
Insurance Pension at P20,000.00/month
for 60 months from company-sponsored
group life policy: P 1,200,000.00
Educational assistance: P 465,000.00
Medical and Health Care: P 200,000.00[10]
Of the promised retirement benefits amounting
to P1,063,841.76, only P701,454.89 was released to petitioners
husband, the balance[11] thereof was withheld allegedly for taxation
purposes. Respondent also failed to give the other benefits listed
above.[12]
Petitioner, represented by her husband, instituted the
instant case for unpaid salaries; unpaid separation pay; unpaid
balance of retirement package plus interest; insurance pension for
permanent disability; educational assistance for her son; medical
assistance; reimbursement of medical and rehabilitation expenses;
moral, exemplary, and actual damages, plus attorneys fees. The
case was docketed as NLRC-NCR (SOUTH) Case No. 30-06-02520-01.
 On September 28, 2001, Labor Arbiter Aliman
Mangandog rendered a Decision[13] dismissing petitioners
complaint. The Labor Arbiter stressed that respondent had been
generous in giving financial assistance to the petitioner.[14] He
likewise noted that there was a retirement plan for the benefit of
the employees. In denying petitioners claim for separation pay, the
Labor Arbiter ratiocinated that the same had already been
integrated in the retirement plan established by respondent. Thus,
petitioner could no longer collect separation pay over and above
her retirement benefits.[15] The arbiter refused to rule on the legality
of the deductions made by respondent from petitioners total
retirement benefits for taxation purposes, as the issue was beyond
the jurisdiction of the NLRC. [16]
On the matter of educational
assistance, the Labor Arbiter found that the same may be granted
only upon the submission of a certificate of enrollment.[17] Lastly, as
to petitioners claim for damages and attorneys fees, the Labor
Arbiter denied the same as the formers dismissal was not tainted
with bad faith.[18]
On appeal to the National Labor Relations Commission
(NLRC), the tribunal set aside the Labor Arbiters decision, ruling
that:
WHEREFORE, premises considered,
Complainants appeal is partly GRANTED. The Labor
Arbiters decision in the above-entitled case is
hereby SET ASIDE. Respondent is ordered to pay
D. Complainants portion of her separation pay
covering the following: 1) P200,000.00 for medical
and health care from September 1999 to April 2001;
and 2) P35,000.00 per year for her sons high school
(second year to fourth year) education
and P45,000.00 per semester for the latters four-
year college education, upon presentation of any
applicable certificate of enrollment.
SO ORDERED.[19]
The NLRC emphasized that petitioner was not retired from the
service pursuant to law, collective bargaining agreement (CBA) or
other employment contract; rather, she was dismissed from
employment due to a disease/disability under Article 284[20] of the
Labor Code.[21] In view of her non-entitlement to retirement
benefits, the amounts received by petitioner should then be treated
as her separation pay.[22] Though not legally obliged to give the
other benefits, i.e., educational assistance, respondent volunteered
to grant them, for humanitarian consideration. The NLRC therefore
ordered the payment of the other benefits promised by the
respondent.[23] Lastly, it sustained the denial of petitioners claim for
damages for the latters failure to substantiate the same.[24]
Unsatisfied, petitioner elevated the matter to the Court of Appeals
which affirmed the NLRC decision.[25]
Hence, the instant petition.
At the outset, the Court notes that initially, petitioner raised the
issue of whether she was entitled to separation pay, retirement
benefits, and damages. In support of her claim for separation pay,
she cited Article 284 of the Labor Code, as amended. However, in
coming to this Court via a petition for review on certiorari, she
abandoned her original position and alleged that she was, in fact,
not dismissed from employment based on the above provision. She
argued that her situation could not be characterized as a disease;
rather, she became disabled. In short, in her petition before us, she
now changes her theory by saying that she is not entitled to
separation pay but to retirement pay pursuant to Section
4,[26] Article V of the Retirement Plan, on disability retirement. She,
thus, prayed for the full payment of her retirement benefits by
giving back to her the amount deducted for taxation purposes.
In our Resolution[27] dated November 23, 2005 requiring the parties
to submit their respective memoranda, we specifically stated:
No new issues may be raised by a party in the
Memorandum and the issues raised in the pleadings
but not included in the Memorandum shall be
deemed waived or abandoned.
Being summations of the parties previous pleadings,
the Court may consider the Memoranda alone in
deciding or resolving this petition.
Pursuant to the above resolution, any argument raised in her
petition, but not raised in her Memorandum,[28] is deemed
abandoned.[29] Hence, the only issue proper for determination is the
propriety of deducting P362,386.87 from her total benefits, for
taxation purposes. Nevertheless, in order to resolve the legality of
the deduction, it is imperative that we settle, once and for all, the
ground relied upon by respondent in terminating the services of the
petitioner, as well as the nature of the benefits given to her after
such termination. Only then can we decide whether the amount
deducted by the respondent should be paid to the petitioner.
Respondent dismissed the petitioner from her employment
based on Article 284 of the Labor Code, as amended, which reads:
Art. 284. DISEASE AS GROUND FOR TERMINATION
An employer may terminate the services of an
employee who has been found to be suffering from
any disease and whose continued employment is
prohibited by law or is prejudicial to his health as
well as to the health of his co-employees: Provided,
That he is paid separation pay equivalent to at least
one (1) month salary or to one-half (1/2) month
salary for every year of service, whichever is
greater, a fraction of at least six (6) months being
considered as one (1) whole year.

As she was dismissed on the abovementioned ground, the law gives
the petitioner the right to demand separation pay. However,
respondent established a retirement plan in favor of all its
employees which specifically provides for disability retirement, to
wit:
Sec. 4. DISABILITY RETIREMENT
In the event that a Member is retired by the
Company due to permanent total incapacity or
disability, as determined by a competent physician
appointed by the Company, his disability retirement
benefit shall be the Full Members Account Balance
determined as of the last valuation date. x x x.[30]
On the basis of the above-mentioned retirement plan, respondent
offered the petitioner a retirement package which consists of
retirement plan benefits, insurance pension, and educational
assistance.[31] The amount of P1,063,841.76 represented the
disability retirement benefit provided for in the plan; while the
insurance pension was to be paid by their insurer; and the
educational assistance was voluntarily undertaken by the
respondent as a gesture of compassion to the petitioner.[32]
We have declared in Aquino v. National Labor Relations
Commission[33] that the receipt of retirement benefits does not bar
the retiree from receiving separation pay. Separation pay is a
statutory right designed to provide the employee with the
wherewithal during the period that he/she is looking for another
employment. On the other hand, retirement benefits are intended
to help the employee enjoy the remaining years of his life, lessening
the burden of worrying about his financial support, and are a form
of reward for his loyalty and service to the employer.[34] Hence, they
are not mutually exclusive. However, this is only true if there is no
specific prohibition against the payment of both benefits in the
retirement plan and/or in the Collective Bargaining Agreement
(CBA).[35]
In the instant case, the Retirement Plan bars the petitioner from
claiming additional benefits on top of that provided for in the
Plan. Section 2, Article XII of the Retirement Plan provides:
Section 2. NO DUPLICATION OF BENEFITS
No other benefits other than those provided under
this Plan shall be payable from the Fund. Further, in
the event the Member receives benefits under the
Plan, he shall be precluded from receiving any other
benefits under the Labor Code or under any present
or future legislation under any other contract or
Collective Bargaining Agreement with the
Company.[36]
There being such a provision, as held in Cruz v. Philippine Global
Communications, Inc.,[37] petitioner is entitled only to either the
separation pay under the law or retirement benefits under the Plan,
and not both.
Clearly, the benefits received by petitioner from the respondent
represent her retirement benefits under the Plan. The question that
now confronts us is whether these benefits are taxable. If so,
respondent correctly made the deduction for tax
purposes. Otherwise, the deduction was illegal and respondent is
still liable for the completion of petitioners retirement benefits.
Respondent argues that the legality of the deduction from
petitioners total benefits cannot be taken cognizance of by this
Court since the issue was not raised during the early stage of the
proceedings.[38]
We do not agree.
Records reveal that as early as in petitioners position paper filed
with the Labor Arbiter, she already raised the legality of said
deduction, albeit designated as unpaid balance of the retirement
package.Petitioner specifically averred that P362,386.87 was not
given to her by respondent as it was allegedly a part of the formers
[39]
taxable income. This is likewise evident in the Labor Arbiter and
the NLRCs decisions although they ruled that the issue was beyond
the tribunals jurisdiction. They even suggested that petitioners
claim for illegal deduction could be addressed by filing a tax refund
with the Bureau of Internal Revenue.[40]
Contrary to the Labor Arbiter and NLRCs conclusions, petitioners
claim for illegal deduction falls within the tribunals jurisdiction. It is
noteworthy that petitioner demanded the completion of her
retirement benefits, including the amount withheld by respondent
for taxation purposes. The issue of deduction for tax purposes is
intertwined with the main issue of whether or not petitioners
benefits have been fully given her. It is, therefore, a money claim
arising from the employer-employee relationship, which clearly falls
within the jurisdiction[41] of the Labor Arbiter and the NLRC.
This is not the first time that the labor tribunal is faced with
the issue of illegal deduction. In Intercontinental Broadcasting
Corporation (IBC) v. Amarilla,[42] IBC withheld the salary differentials
due its retired employees to offset the tax due on their retirement
benefits. The retirees thus lodged a complaint with the NLRC
questioning said withholding. They averred that their retirement
benefits were exempt from income tax; and IBC had no authority to
withhold their salary differentials. The Labor Arbiter took
cognizance of the case, and this Court made a definitive ruling that
retirement benefits are exempt from income tax, provided that
certain requirements are met.
 Nothing, therefore, prevents us from deciding this main has been in the service of the same employer for at least ten (10)
issue of whether the retirement benefits are taxable. years; (3) the retiring official or employee is not less than fifty (50)
years of age at the time of his retirement; and (4) the benefit had
We answer in the affirmative. been availed of only once.[43]

Section 32 (B) (6) (a) of the New National Internal Revenue
Code (NIRC) provides for the exclusion of retirement benefits from
gross income, thus:
(6) Retirement Benefits, Pensions,
Gratuities, etc.
a) Retirement benefits received under
Republic Act 7641 and those received by officials
and employees of private firms, whether individual
or corporate, in accordance with a reasonable
private benefit plan maintained by the
employer: Provided, That the retiring official or
employee has been in the service of the same
employer for at least ten (10) years and is not less
than fifty (50) years of age at the time of his
retirement: Provided further, That the benefits
granted under this subparagraph shall be availed of
by an official or employee only once. x x x.
As discussed above, petitioner was qualified for disability
retirement. At the time of such retirement, petitioner was only 41
years of age; and had been in the service for more or less eight (8)
years. As such, the above provision is not applicable for failure to
comply with the age and length of service requirements. Therefore,
respondent cannot be faulted for deducting from petitioners total
retirement benefits the amount of P362,386.87, for taxation
purposes.
WHEREFORE, the petition is DENIED for lack of merit. The
Court of Appeals Decision dated August 12, 2004 and its Resolution
dated December 17, 2004, in CA-G.R. SP No. 75706 are AFFIRMED.
SO ORDERED.

Thus, for the retirement benefits to be exempt from the

withholding tax, the taxpayer is burdened to prove the concurrence
of the following elements: (1) a reasonable private benefit plan is
maintained by the employer; (2) the retiring official or employee
13. CIR vs. Isabela Cultural Corporation
DOCTRINE: The requisites for the deductibility of ordinary and
necessary trade, business, or professional expenses, like expenses
paid for legal and auditing services, are: (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. The
requisite that it must have been paid or incurred during the taxable
year is further qualified by Section 45 of the NIRC which states that:
"[t]he deduction provided for in this Title shall be taken for the
taxable year in which ‘paid or accrued’ or ‘paid or incurred’,
dependent upon the method of accounting upon the basis of which
the net income is computed x x x".
QUICK FACTS: BIR disallowed the following ICC expenses for years
1984-1986 to be included in ICC’s 1986 tax expense deductions: (1)
Expenses for auditing services for year ending 31 December 1985;
(2) Expenses for legal services for years 1984 and 1985; and (3)
Expense for security services for months of April and May 1986. BIR
thus charged ICC for deficiency income taxes. ICC contested the
assessment.
FACTS:
On Feb 23, 1990, ICC received from BIR Assessment Notice No. FAS-
1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 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) BIR disallowance of ICC’s claimed expense deductions for
professional and security services billed to and paid by ICC
in 1986, to wit:
(a) Expenses for auditing services of SGV & Co., for the
year ending Dec 31, 1985
(b) Expenses for legal services [incl of retainer fees] of
law firm Bengzon for 1984 and 1985
(c) Expense for security services of El Tigre Security for
months of April and May 1986
(2) Understatement of ICC interest income on 3 promissory
notes due from Realty Investment
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.
On March 23, 1990, ICC sought for a reconsideration, but on Feb 9,
1995, it received a final notice before seizure demanding payment
of amounts stated in the said notices.
CTA held that petition is premature because final notice of
assessment cannot be considered as a final decision appealable to
the tax court. CA reversed the holding that a demand letter of the
BIR reiterating the payment of deficiency tax, amounts to a final
decision on the protested assessment and may therefore be
questioned before the CTA. This conclusion was sustained by this
Court on July 1, 2001, G.R. No. 135210. Case was remanded to CTA
for further proceedings.
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. Hence, even if some of these
professional services were rendered to ICC in 1984 or 1985, it could
not declare the same as deduction for the said years as the amount
could not be determined at that time. ICC did not understate its
interest income on the subject promissory notes. 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., despite the absence of a stipulation in the
contract. CTA also found that ICC in fact withheld 1% expanded
withholding tax on its claimed deduction for security services as
shown by the various confirmation receipts it presented as
evidence.
CA affirmed CTA decision, holding that although the professional
services (legal and auditing) were rendered to ICC in 1984 and 1985,
the cost of the services was not yet determinable at that time,
hence, it could be considered as deductible expenses only in 1986
when ICC received the billing statements for said services. It further
ruled that ICC did not understate its interest income from the
promissory notes of Realty Investment, Inc., and that ICC properly
withheld and remitted taxes on the payments for security services
for the taxable year 1986.
BIR contention: Since ICC is using the accrual method of accounting,
the expenses for the professional services that accrued in 1984 and
1985, should have been declared as deductions from income during
the said years and the failure of ICC to do so bars it from claiming
said expenses as deduction for the taxable year 1986.
Issue: Whether the deduction of the expenses for professional and
security services of 1984-1986 are valid deductions from ICC’s gross
income for 1986
Decision: NO for audit services from SGV and legal services from
Bengzon; YES for security services.
Held:
The requisites for the deductibility of ordinary and necessary trade,
business, or professional expenses, like expenses paid for legal and
auditing services, are: (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.
The requisite that it must have been paid or incurred during the
taxable year is further qualified by Sec 45 of the NIRC which states
that: "[t]he deduction provided for in this Title shall be taken for the
taxable year in which ‘paid or accrued’ or ‘paid or incurred’,
dependent upon the method of accounting upon the basis of which
the net income is computed x x x".
Accounting methods for tax purposes comprise a set of rules for
determining when and how to report income and deductions. The
accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that
under the accrual method of accounting, expenses not being
claimed as deductions by a taxpayer in the current year when they
are incurred cannot be claimed as deduction from income for the
succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current
year but failed to do so cannot deduct the same for the next year.
The accrual method relies upon the taxpayer’s right to receive
amounts or its obligation to pay them, in opposition to actual
receipt or payment, which characterizes the cash method of
accounting. Amounts of income accrue where the right to receive
them become fixed, where there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and determinable in
amount, without regard to indeterminacy merely of time of
payment.
For a taxpayer using the accrual method, the determinative
question is, when do facts present themselves in such a manner
that the taxpayer must recognize an income or expense? The
accrual of income and expense is permitted when the all-events test
has been met. It requires: (1) the 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 all-events test requires the right to income or liability be fixed,
and the amount of such income or liability be determined with
reasonable accuracy. However, 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. The amount of
liability does not have to be determined exactly; it must be
determined with "reasonable accuracy." Accordingly, the term
"reasonable accuracy" implies something less than an exact or
completely accurate amount.
The propriety of an accrual must be judged by the facts that a
taxpayer knew, or could reasonably be expected to have known, at
the closing of its books for the taxable year. Accrual method of
accounting presents largely a question of fact; such that the
taxpayer bears the burden of proof of establishing the accrual of an
item of income or deduction.
The expenses for professional fees for legal and auditing services
pertain to 1984 and 1985 legal and retainer fees of the law firm
Bengzon. As testified by the ICC Treasurer, the firm has been its
counsel since the 1960’s. From the nature of the claimed deductions
and the span of time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees charged by
the firm as well as the compensation for its legal services. The
failure to determine the exact amount of the expense cannot be
attributed solely to the delayed billing of these liabilities by the firm.
ICC could have inquired into the amount of their obligation to the
firm, especially since it is using the accrual method of accounting. It
could also have reasonably determined the amount of legal and
retainer fees owing to its familiarity with the rates charged by their
long time legal consultant.
SGV & Co. professional fees for auditing financial statements of ICC
for 1985 cannot be validly claimed as expense deductions in 1986.
ICC failed to present evidence showing that even with only
"reasonable accuracy" as the standard to ascertain its liability to
SGV & Co. in year 1985, it cannot determine the professional fees
which said company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed
expense deductions for the professional services were allowable
deductions for the taxable year 1986. Hence, per Revenue Audit
Memorandum Order No. 1-2000, they cannot be validly deducted
from its gross income for the said year and were therefore properly
disallowed by the BIR.
As to the expenses for security services, the records show that these
expenses were incurred by ICC in 1986 and could therefore be
properly claimed as deductions for 1986.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the
September 30, 2005 Decision1 of the Court of Appeals in CA-G.R. SP
No. 78426 affirming the February 26, 2003 Decision2 of the Court of
Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set
aside the Assessment Notices for deficiency income tax and
expanded withholding tax issued by the Bureau of Internal Revenue
(BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic
corporation, received from the BIR Assessment Notice No. FAS-1-86-
90-000680 for deficiency income tax in the amount of P333,196.86,
and Assessment Notice No. FAS-1-86-90-000681 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 BIR’s disallowance of ICC’s 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;4
(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 1985.5
 (c) Expense for security services of El Tigre Security
& Investigation Agency for the months of April and
May 1986.6
(2) The alleged understatement of ICC’s 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.7
On March 23, 1990, ICC sought a reconsideration of the subject
assessments. On February 9, 1995, however, it received a final
notice before seizure demanding payment of the amounts stated in
the said notices. Hence, it brought the case to the CTA which held
that the petition is premature because the final notice of
assessment cannot be considered as a final decision appealable to
the tax court. This was reversed by the Court of Appeals holding
that a demand letter of the BIR reiterating the payment of
deficiency tax, amounts to a final decision on the protested
assessment and may therefore be questioned before the CTA. This
conclusion was sustained by this Court on July 1, 2001, in G.R. No.
135210.8 The case was thus remanded to the CTA for further
proceedings.
On February 26, 2003, 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. Hence, even if
some of these professional services were rendered to ICC in 1984 or
1985, it could not declare the same as deduction for the said years
as the amount thereof could not be determined at that time.
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., despite the absence of a stipulation in the
contract providing for a compounded interest; nor of a
circumstance, like delay in payment or breach of contract, that
would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded
withholding tax on its claimed deduction for security services as
shown by the various payment orders and confirmation receipts it
presented as evidence. The dispositive portion of the CTA’s
Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No.
FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for the taxable year 1986,
are hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals,
which affirmed the CTA decision,10 holding that although the
professional services (legal and auditing services) were rendered to
ICC in 1984 and 1985, the cost of the services was not yet
determinable at that time, hence, it could be considered as
deductible expenses only in 1986 when ICC received the billing
statements for said services. It further ruled that ICC did not
understate its interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and remitted taxes
on the payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed
the instant petition contending that since ICC is using the accrual
method of accounting, the expenses for the professional services
that accrued in 1984 and 1985, should have been declared as
deductions from income during the said years and the failure of ICC
to do so bars it from claiming said expenses as deduction for the
taxable year 1986. As to the alleged deficiency interest income and
failure to withhold expanded withholding tax assessment, petitioner
invoked the presumption that the assessment notices issued by the
BIR are valid.
The issue for resolution is whether the Court of Appeals correctly:
(1) sustained the deduction of the expenses for professional and
security services from ICC’s gross income; and (2) held that ICC did
not understate its interest income from the promissory notes of
Realty Investment, Inc; and that ICC withheld the required 1%
withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade,
business, or professional expenses, like expenses paid for legal and
auditing services, are: (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.11
The requisite that it must have been paid or incurred during the
taxable year is further qualified by Section 45 of the National
Internal Revenue Code (NIRC) which states that: "[t]he deduction
provided for in this Title shall be taken for the taxable year in which
‘paid or accrued’ or ‘paid or incurred’, dependent upon the method
of accounting upon the basis of which the net income is computed x
x x".
Accounting methods for tax purposes comprise a set of rules for
determining when and how to report income and deductions.12 In
the instant case, the accounting method used by ICC is the accrual
method.
Revenue Audit Memorandum Order No. 1-2000, provides that
under the accrual method of accounting, expenses not being
claimed as deductions by a taxpayer in the current year when they
are incurred cannot be claimed as deduction from income for the
succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current
year but failed to do so cannot deduct the same for the next year.13
The accrual method relies upon the taxpayer’s right to receive
amounts or its obligation to pay them, in opposition to actual
receipt or payment, which characterizes the cash method of
accounting. Amounts of income accrue where the right to receive
them become fixed, where there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and determinable in
amount, without regard to indeterminacy merely of time of
payment.14
For a taxpayer using the accrual method, the determinative
question is, when do the facts present themselves in such a manner
that the taxpayer 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 all-events test requires the right to income or liability be fixed,
and the amount of such income or liability be determined with
reasonable accuracy. However, 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. The amount of
liability does not have to be determined exactly; it must be
determined with "reasonable accuracy." Accordingly, the term
"reasonable accuracy" implies something less than an exact or
completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a
taxpayer knew, or could reasonably be expected to have known,
at the closing of its books for the taxable year.[16] Accrual method
of accounting presents largely a question of fact; such that the
taxpayer bears the burden of proof of establishing the accrual of an
item of income or deduction.17
Corollarily, it is a governing principle in taxation that tax exemptions
must be construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority; and one who claims an
exemption must be able to justify the same by the clearest grant of
organic or statute law. An exemption from the common burden
cannot be permitted to exist upon vague implications. And since a
deduction for income tax purposes partakes of the nature of a tax
exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of
expenses for legal and auditing services. The expenses for legal
services pertain to the 1984 and 1985 legal and retainer fees of the
law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson,
and for reimbursement of the expenses of said firm in connection
with ICC’s tax problems for the year 1984. As testified by the
Treasurer of ICC, the firm has been its counsel since the
1960’s.19 From the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be expected to
have reasonably known the retainer fees charged by the firm as well
as the compensation for its legal services. The failure to determine
the exact amount of the expense during the taxable year when they
could have been claimed as deductions cannot thus be attributed
solely to the delayed billing of these liabilities by the firm. For one,
ICC, in the exercise of due diligence could have inquired into the
amount of their obligation to the firm, especially so that it is using
the accrual method of accounting. For another, it could have
reasonably determined the amount of legal and retainer fees owing
to its familiarity with the rates charged by their long time legal
consultant.
As previously stated, the accrual method presents largely a question
of fact and that the taxpayer bears the burden of establishing the
accrual of an expense or income. However, ICC failed to discharge
this burden. As to when the firm’s performance of its services in
connection with the 1984 tax problems were completed, or whether
ICC exercised reasonable diligence to inquire about the amount of
its liability, or whether it does or does not possess the information
necessary to compute the amount of said liability
with reasonable accuracy, are questions of fact which ICC never
established. It simply relied on the defense of delayed billing by the
firm and the company, which under the circumstances, is not
sufficient to exempt it from being charged with knowledge of the
reasonable amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the
financial statements of ICC for the year 1985 cannot be validly
claimed as expense deductions in 1986. This is so because ICC failed
to present evidence showing that even with only "reasonable
accuracy," as the standard to ascertain its liability to SGV & Co. in
the year 1985, it cannot determine the professional fees which said
company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed
expense deductions for the professional services were allowable
deductions for the taxable year 1986. Hence, per Revenue Audit
Memorandum Order No. 1-2000, they cannot be validly deducted
from its gross income for the said year and were therefore properly
disallowed by the BIR.
As to the expenses for security services, the records show that these
expenses were incurred by ICC in 198620 and could therefore be
properly claimed as deductions for the said year.
Anent the purported understatement of interest income from the
promissory notes of Realty Investment, Inc., we sustain the findings
of the CTA and the Court of Appeals that no such understatement
exists and that only simple interest computation and not a
compounded one should have been applied by the BIR. There is
indeed no stipulation between the latter and ICC on the application
of compounded interest.21 Under Article 1959 of the Civil Code,
unless there is a stipulation to the contrary, interest due should not
further earn interest.
000681 in the amount of P4,897.79 for deficiency expanded
withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September
30, 2005 Decision of the Court of Appeals in CA-G.R. SP No. 78426, is
AFFIRMED with the MODIFICATION that Assessment Notice No. FAS-
1-86-90-000680, which disallowed the expense deduction of Isabela
Cultural Corporation for professional and security services, is
declared valid only insofar as the expenses for the professional fees
of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala
Pecson Azcuna & Bengson, are concerned. The decision is affirmed
in all other respects.
The case is remanded to the BIR for the computation of Isabela
Cultural Corporation’s liability under Assessment Notice No. FAS-1-
86-90-000680.
SO ORDERED.

Likewise, the findings of the CTA and the Court of Appeals that ICC
truly withheld the required withholding tax from its claimed
deductions for security services and remitted the same to the BIR is
supported by payment order and confirmation receipts.22 Hence,
the Assessment Notice for deficiency expanded withholding tax was
properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount

of P333,196.86 for deficiency income tax should be cancelled and
set aside but only insofar as the claimed deductions of ICC for
security services. Said Assessment is valid as to the BIR’s
disallowance of ICC’s expenses for professional services. The Court
of Appeal’s cancellation of Assessment Notice No. FAS-1-86-90-
14. Commissioner of Internal Revenue vs
Filinvest Development Corporation
Commissioner of Internal Revenue v Filinvest Development
Corporation Petitioner: Commissioner of Internal Revenue
Respondent: Filinvest Development Corporation July 19, 2011
Emergency Recit: FDC owns 80% of the outstanding shares of FAI
and 67.42% of FLI. FDC and FAI entered into a Deed of Exchange
with FLI where the former will transfer parcels of land to the latter
and in exchange, shares of stock of FLI were issued to FDC and FAI.
BIR assessed both FDC and FAI for deficiency taxes. One of the bases
for the assessment is the cash advances FDC extended in favor of its
affiliates. The CIR argued that they were interest free despite the
interest bearing loans it obtained from banking institutions. I: (see
issue 1) R: CIR's power to distribute, apportion or allocate gross
income or deductions between or among controlled taxpayers may
be exercised as long as the controlled taxpayer's taxable income is
not reflective of that which it would have realized had it been
dealing at arm's length with an uncontrolled taxpayer, the CIR can
make the necessary rectifications in order to prevent evasion of
taxes. However, the to power to impute "theoretical interests" is
not included in the broad parameters of CIR. There is no evidence of
actual or possible showing that the advances FDC extended to its
affiliates had resulted to the interests subsequently assessed by the
CIR.
Facts: (You’ll read this case again under a different topic)
• The owner of 80% of the outstanding shares of respondent
Filinvest Alabang, Inc. (FAI), respondent Filinvest Development
Corporation (FDC) is a holding company which also owned 67.42%
of the outstanding shares of Filinvest Land, Inc. (FLI).
• FDC and FAI entered into a Deed of Exchange with FLI
whereby the former both transferred in favor of the latter parcels of
land. In exchange, 463,094,301 shares of stock of FLI were issued to
FDC and FAI. As a result of the exchange, FLI’s ownership structure
was changed.
• FLI requested a ruling from BIR to the effect that no gain or
loss should be recognized in the aforesaid transfer of real
properties. Acting on the request, the BIR issued a ruling, finding
that the exchange is among those contemplated under Sec 34 (c) (2)
of the old NIRC which provides that “(n)o gain or loss shall be
recognized if property is transferred to a corporation by a person in
exchange for a stock in such corporation of which as a result of such
exchange said person, alone or together with others, not exceeding
four (4) persons, gains control of said corporation."
• FDC received from the BIR a Formal Notice of Demand to
pay deficiency income and documentary stamp taxes, plus interests
and compromise penalties. The deficiency taxes were assessed on
the taxable gain supposedly realized by FDC from the Deed of
Exchange it executed with FAI and FLI, on the dilution resulting from
the Shareholders’ Agreement FDC executed with RHPL as well as the
“arm’s­length” interest rate and documentary stamp taxes
imposable on the advances FDC extended to its affiliates.
o FAI similarly received from the BIR a Formal Letter of
Demand for deficiency income taxes.
• Both FDC and FAI filed their respective requests for
reconsideration/protest. The CIR failed to resolve their request thus,
FDC and FAI filed a petition for review with the CTA pursuant to Sec
228 of the 1997 NIRC.
o They allege that no taxable gain should have been assessed
from the subject Deed of Exchange since FDC and FAI collectively
gained further control of FLI as a consequence of the exchange; that
correlative to the CIR's lack of authority to impute theoretical
interests on the cash advances FDC extended in favor of its
affiliates, the rule is settled that interests cannot be demanded in
the absence of a stipulation to the effect; that not being promissory
notes or certificates of obligations, the instructional letters as well
as the cash and journal vouchers evidencing said cash advances
were not subject to documentary stamp taxes; and, that no income
tax may be imposed on the prospective gain from the supposed
appreciation of FDC's shareholdings in FAC. They prayed that the
subject assessments be cancelled and annulled.
• CIR filed its answer, claiming that the transfer should not be
considered tax-free since, with the resultant diminution of its shares
in FLI, FDC did not gain further control of said corporation. Also, the
cash advances FDC extended to its affiliates were interest free
despite the interest bearing loans it obtained from banking
institutions, the CIR invoked Sec 43 of the old NIRC which, as
implemented by RR 2, Sec 179 (b) and (c), gave him:
o "the power to allocate, distribute or apportion income or
deductions between or among such
organizations, trades or business in order to prevent evasion of
taxes."
The CIR justified the imposition of documentary stamp taxes on the
instructional letters as well as cash and journal vouchers for said
cash advances on the strength of Sec 180 of the NIRC and RRs 9-94
which provide that loan transactions are subject to said tax
irrespective of whether or not they are evidenced by a formal
agreement or by mere office memo. The CIR also argued that FDC
realized taxable gain arising from the dilution of its shares in FAC as
a result of its Shareholders' Agreement with RHPL.
• CTA Decision: with the exception of the deficiency income
tax on the interest income FDC supposedly realized from the
advances it extended in favor of its affiliates, the rest of deficiency
income and documentary stamp taxes assessed against FDC and FAI
are cancelled.
•FDC filed a petition for review before the CA. CA reversed the
decision of the CTA.
Issues/Held:
1. W/N the advances extended by respondent to its affiliates are
subject to income tax – NO. (MAIN)
2. W/N the exchange of shares of stock for property among FDC, FAI
and FLI met all the requirements for the non-recognition of taxable
gain under sec 34 (c) (2) of the old NIRC (now sec 40 (c) (2) (c) of the
NIRC) – YES.
3. W/N the letters of instruction or cash vouchers extended by FDC
to its affiliates are deemed loan agreements subject to DST under
sec 180 of the NIRC – YES.
4. W/N the gain on dilution as a result of the increase in the value of
FDC’s shareholdings is taxable – NO.
Ratio:
Theoretical Interest Rates (for the advances extended)
• Sec 43 of the 1993 NIRC provides that,
o “(i)n any case of 2 or more organizations, trades or
businesses (whether or not incorporated and whether or not
organized in the Philippines) owned or controlled directly or
indirectly by the same interests, the CIR is authorized to distribute,
apportion or allocate gross income or deductions between or
among such organization, trade or business, if he determines that
such distribution, apportionment or allocation is necessary in order
to prevent evasion of taxes or clearly to reflect the income of any
such organization, trade or business.”
• It may also be seen that the CIR's power to distribute,
apportion or allocate gross income or deductions between or
among controlled taxpayers may be likewise exercised whether or
not fraud inheres in the transaction/s under scrutiny. For as long as
the controlled taxpayer's taxable income is not reflective of that
which it would have realized had it been dealing at arm's length
with an uncontrolled taxpayer, the CIR can make the necessary
rectifications in order to prevent evasion of taxes.
• Despite the broad parameters provided, the power to
impute "theoretical interests" to the controlled taxpayer's
transactions is not included. There must be proof of the actual or, at
the very least, probable receipt or realization by the controlled
taxpayer of the item of gross income sought to be distributed,
apportioned or allocated by the CIR.
• There is no evidence of actual or possible showing that the
advances FDC extended to its affiliates had resulted to the interests
subsequently assessed by the CIR.
Regarding the Deed of Exchange
• Sec 34 (c) (2) of the 1993 NIRC:
o Sec. 34. Determination of amount of and recognition of gain
or loss.-
(c) Exception – x x x x No gain or loss shall also be recognized if
property is transferred to a corporation by a person in exchange for
shares of stock in such corporation of which as a result of such
exchange said person, alone or together with others, not exceeding
four persons, gains control of said corporation; Provided, That
stocks issued for services shall not be considered as issued in return
of property.
• Since the term "control" is clearly defined as "ownership of
stocks in a corporation possessing at least fifty-one percent of the
total voting power of classes of stocks entitled to one vote" under
Sec 34 (c) (6) [c] of the 1993 NIRC, the exchange of property for
stocks between FDC FAI and FLI clearly qualify as a tax-free
transaction under par 34 (c) (2) of the same provision.
• Inasmuch as the combined ownership of FDC and FAI of
FLI's outstanding capital stock adds up to a total of 70.99%, it stands
to reason that neither of said transferors can be held liable for
deficiency income taxes the CIR assessed on the supposed gain
which resulted from the subject transfer.
Documentary Stamp Taxes
• The instructional letters as well as the journal and cash
vouchers evidencing the advances FDC extended to its affiliates
qualified as loan agreements upon which DST may be imposed.
• We find that both the CTA and the CA erred in invalidating
the assessments issued by the CIR for the deficiency DST.
Dilution of Shares
• No reversible error can, finally, be imputed against both the
CTA and the CA for invalidating the deficiency income taxes FDC is
supposed to have incurred as a consequence of the dilution of its
shares in FAC.
• Absent showing of such error here, we find no strong and
cogent reasons to depart from said rule with respect to the CTA's
finding that no deficiency income tax can be assessed on the gain on
the supposed dilution and/or increase in the value of FDC's
shareholdings in FAC which the CIR failed to establish.
 G.R. No. 146941, Aug. 9, 2007
o Findings of fact of the CTA is entitled the greatest respect
o Stare decisis et non quieta movere
FACTS:
Filinvest filed a claim for refund, or in the alternative, the issuance
of TCC with CIR in the amount of P4,178,134.00 representing excess
creditable withholding taxes for taxable years 1994, 1995, and 1996.
When CIR had not resolved petitioner’s claim for refund and the 2-
yr prescriptive period was about to lapse, the latter filed a Petition
for Review with the CTA, which, however, dismissed the petition for
review for insufficiency of evidence because petitioner failed to
present in evidence its 1997 income tax return. CA also denied the
petition for review subsequently filed on the same ground of
insufficiency of evidence.
ISSUE:
o Whether or not petitioner is entitled to the tax refund or tax credit
PETITIONER’S CONTENTION:
CA erred (1) in denying the claim for tax refund on the sole ground
of failure to present in evidence its Annual Income Tax Return for
Corporations for 1997 despite holding that it had complied with all
the requirements to sustain a claim for tax refund; (2) relying on
CTA cases cited in its Decision as jurisprudential basis to support its
ruling; (3) not ruling that Sec. 34, Rule 132, RoC, being a procedural
rule, should be liberally construed in order that substantial justice
due petitioner shall have been served; and (4) not ruling that,
petitioner having proved that it paid excess taxes for taxable years
1995 and 196, has shifted the burden of evidence to respondent CIR
to show the factual basis to deny petitioner’s claim.
THEORY OF DEFENSE:
In claims for tax refund, the burden of proof of refundability rests
with claimant. Petitioner did not comply with the rules on formal
offer of evidence. CA did not err in relying on CTA cases because the
latter is an authority on matters of taxation and therefore its
resolutions carry great weight.
HELD:
Petitioner is entitled to the tax refund or tax credit.
Factual findings of the CTA, as affirmed by the CA, are entitled to
the highest respect and will not be disturbed on appeal unless it is
shown that the lower courts committed gross error in the
appreciation of facts.
The appellate court itself acknowledges that petitioner had
complied with the requirements to sustain a claim for tax refund or
credit. In the light of RA 1125, as amended, the law creating the
CTA, provides that proceedings therein shall not be governed strictly
by technical rules of evidence. Moreover, this Court has held time
and again that technicalities should not be used to defeat
substantive rights, especially those that have been established as a
matter of fact.

The CA, likewise, erred in relying on CTA decisions as jurisprudential
basis for its decision. By tradition and in our system of judicial
administration this Court has the last word on what the law is, and
that its decisions applying or interpreting the laws or the
Constitution form part of the legal system of the country, all other
courts should take their bearings from the decisions of this Court,
ever mindful of what this Court said fifty-seven years ago in People
vs. Vera that “a becoming modesty of inferior courts demands
conscious realization of the position that they occupy in the
interrelation and operation of the integrated judicial system of the
nation.”
The principle of stare decisis et non quieta movere, enjoins
adherence to judicial precedents. It requires our courts to follow a
rule already established in a final decision of the Supreme Court.
That decision becomes a judicial precedent to be followed in
subsequent cases by all courts in the land.
In ruling the case, the Court adopted its own ruling in BPI-Family
Savings Bank vs. Court of Appeals.
15. CIR vs. General Foods
#1
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
company’s appeal.
Issue:
W/N the subject media advertising expense for “Tang” was ordinary
and necessary expense fully deductible under the NIRC
Held:
No. Tax exemptions must be construed in stricissimi juris against the
taxpayer and liberally in favor of the taxing authority, and he who
claims an exemption must be able to justify his claim by the clearest
grant of organic or statute law. Deductions for income taxes partake
of the nature of tax exemptions; hence, if tax exemptions are strictly
construed, then deductions must also be strictly construed.
To be deductible from gross income, the subject advertising
expense must comply with the following requisites: (a) the expense
must be ordinary and necessary; (b) it must have been paid or
incurred during the taxable year; (c) it must have been paid or
incurred in carrying on the trade or business of the taxpayer; and (d)
it must be supported by receipts, records or other pertinent papers.
While the subject advertising expense was paid or incurred within
the corresponding taxable year and was incurred in carrying on a
trade or business, hence necessary, the parties’ views conflict as to
whether or not it was ordinary. To be deductible, an advertising
expense should not only be necessary but also ordinary.
The Commissioner maintains that the subject advertising expense
was not ordinary on the ground that it failed the two conditions set
by U.S. jurisprudence: first, “reasonableness” of the amount
incurred and second, the amount incurred must not be a capital
outlay to create “goodwill” for the product and/or private
respondent’s business. Otherwise, the expense must be considered
a capital expenditure to be spread out over a reasonable time.
which the taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of the
reasonableness of amount, there is no doubt such expenditures are
deductible as business expenses. If, however, the expenditures are
for advertising of the second kind, then normally they should be
spread out over a reasonable period of time.
The company’s media advertising expense for the promotion of a
single product is doubtlessly unreasonable considering it comprises
almost one-half of the company’s entire claim for marketing
expenses for that year under review. Petition granted, judgment
reversed and set aside.

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 taxpayer’s trade or business or for the industry or profession of
#2
CIR v General Foods
April 24, 2003| Corona, J. | Deductions in General
Digester: Anna Mickaella Lingat
SUMMARY: 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
company’s appeal.
The Court reversed CA and held that the subject expense for the
advertisement cannot be considered as an ordinary expense
deductible under NIRC.
DOCTRINE: Tax exemptions must be construed in strictissimi 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. An exemption from the
common burden cannot be permitted to exist upon vague
implications. Deductions for income tax purposes partake of the
nature of tax exemptions; hence, if tax exemptions are strictly
construed, then deductions must also be strictly construed.
FACTS:
 General Food is a corporation engaged in the manufacture of
beverages such as Tang, Calumet, and Kool-Aid.
 In its income tax return for fiscal year 1985, it claimed as
deduction the amount of P9,461,246 for media advertising for
Tang.
CIR
 CIR disallowed 50% or P4,730,623 of the deduction claimed.
 General Foods was also assessed deficiency income taxes of
P2,635,141.42.
 General Foods filed an MR but it was denied.
CTA
 CTA appeal also dismissed. Deduction is unreasonable.
o Deduction claimed for advertisement of a singular product,
which even excludes other advertising and promotions
expenses is not reasonable to stimulate the current sale of
merchandise regardless of General Food’s explanation that
such expense does not connote reasonableness considering
the grave economic situation (during Aquino assassination).
o The staggering expense was incurred to create or maintain
some form of good will for the taxpayers trade or business
 or for the industry or profession of which General Foods is a
taxpayer.
CA
 CA reversed CTA
 The deduction should be allowed because it has not been
sufficiently established that the item it claimed as a deduction is
excessive.
RULING: Petition is granted. General Foods (Phils.), Inc. is hereby
ordered to pay its deficiency income tax in the amount of
P2,635,141.42, plus 25% surcharge for late payment and 20%
annual interest computed from August 25, 1989, the date of the
denial of its protest, until the same is fully paid.
Whether the advertising expense incurred was an ORDINARY and
NECESSARY expense fully deductible? – NO
Whether the expense was a capital expenditure, paid in order to
create goodwill and reputation for General Foods and/or its
products? - YES
 Tax exemptions must be construed in strictissimi 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.
 An exemption from the common burden cannot be permitted to
exist upon vague implications. Deductions for income tax
purposes 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 advertising expense
must comply with the following requisites:
o (a) expense must be ordinary and necessary
o (b) it must have been paid or incurred during the taxable
year
o (c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer
o (d) it must be supported by receipts, records, or other
pertinent papers
 To be deductible, an advertising expense should not only be
necessary but also ordinary. These two requirements must be
met.
 General Foods and CIR are in agreement that the subject
advertising expense was paid or incurred within the
corresponding taxable year and was incurred in carrying on a
trade or business. Hence, it was necessary. However, their
views conflict as to whether or not it was ordinary.
 CIR argues: advertising expense was not ordinary because it
failed the two conditions set by US Jurisprudence:
o Reasonable ness of the amount incurred
o Amount incurred must not be a capital outlay to create
goodwill for the product and/or business. Otherwise, the
expense must be considered a capital expenditure to be
spread out over a reasonable time.
The Court agrees with CIR that the expense is not reasonable.
(1) The subject expense for the advertisement of a single product
is inordinately large.
 There is no hard and fast rule/criteria on determining the
reasonableness of an advertising expense.
 Hence, the right to a deduction depends on a number of factors
such as but not limited to:
o the type and size of business in which the taxpayer is
engaged
o the volume and amount of its net earnings; the nature of
the expenditure itself
o 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.
 In this case, the deduction claimed (~P9.5M media advertising
expense for Tang alone) was almost one-half of its total claim
for marketing expenses. Aside from this, General Food also
claimed ~P2.6M as other advertising and promotions expense
and another P1,548,614 for consumer promotion.
 The claimed ~P9.5M media advertising expense for Tang was
almost double the amount for the general and administrative
expenses (P4,640,636).
(2) Even if it is necessary, it cannot be considered an ordinary
expense deductible under Section 29(a)(1)(A) of the NIRC
 Advertising is generally of two kinds:
o (1) advertising to stimulate the current sale of merchandise
or use of services and
o (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 it falls under the second kind, then normally they
should be spread out over a reasonable period of time.
 In this case, the expense falls under the second kind.
o The amount is staggering.
o General Foods also admitted, in its letter protest to CIR
assessment, that the subject media expense was incurred in
order to protect respondent corporations brand franchise, a
critical point during the period under review.
o The protection of brand franchise is analogous to the
maintenance of goodwill or title to ones property. This is a
capital expenditure which should be spread out over a
reasonable period of time.
o This was akin to the acquisition of capital assets and
therefore expenses related thereto were not to be
considered as business expenses but as capital expenditures
NOTES:
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC
provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional
expenses.-
(a) In general.- There shall be allowed as deduction from gross
income all ordinary and necessary expenses paid or incurred during
the taxable year in carrying on, or which are directly attributable to,
the development, management, operation and/or conduct of the
trade, business or exercise of a profession.

16. H. Tambunting Pawnshop vs. CIR
FACTS:
- The stemmed from a pre-assessment issued by CIR against
h. tambunting for among others, a deficiency documentary
stamp tax of P 50, 910. Thereafter, the CIR issued an
assessment notice with the corresponding demand letters
for the payment of the DST and the corresponding
compromise penalty for taxable year 1997
- Tambunting filed its written protest to the assessment
notice alleging that it was not subject to documentary
stamp tax under Section 195 of the National Internal
Revenue Code (NIRC) because documentary stamp taxes
were applicable only to pledge contracts, and the pawnshop
business did not involve contracts of pledge
- Tambunting filed a petition for review when the protest it
filed with the CIR was not acted upon
- The court rendered a decision stating that petitioner is not
subject to DST
ISSUE: WHETHER THE PETITIONER, A PAWNSHOP, IS SUBJECT TO
DOCUMENTARY STAMP TAX BASED ON ITS PAWN TICKETS
HELD:
- Petitioner contends that it is the document evidencing a
pledge of personal property which is subject to the DST.
Petitioner further contends that the DST is imposed on the
documents issued, not the “transactions so had or
accomplished.” It insists that the document to be taxed
under the transaction contemplated should be the pledge
agreement, if any is issued, not the pawn ticket.
- On the other hand, commissioner contented that a
documentary stamp tax shall be collected on every pledge
of personal property as a security for the fulfillment of the
contract of loan. Since the transactions in a pawnshop
business partake of the nature of pledge transactions, then
pawn transactions evidenced by pawn tickets, are subject to
documentary stamp taxes.
Petitioner’s contention is devoid of merit.
- True, the pawn ticket is neither a security nor a printed
evidence of indebtedness. But, precisely being a receipt for
a pawn, it documents the pledge. A pledge is a real
contract, hence, it is necessary in order to constitute the
contract of pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by common
agreement.
-
- Consequently, the issuance of the pawn ticket by the
pawnshop means that the thing pledged has already been
placed in its possession and that the pledge has been
constituted.
-
- section 195 of the National Internal Revenue Code (NIRC)
imposes a DST On every mortgage or pledge of lands,
estate, or property, real or personal, heritable or movable,
whatsoever, where the same shall be made as a security
for the payment of any definite and certain sum of money
lent
 - All pledges are subject to DST, unless there is a law
exempting them in clear and categorical language.…
- The law imposes DST on documents issued in respect of the
specified transactions, such as pledge, and not only on
papers evidencing indebtedness. Therefore, a pawn ticket,
being issued in respect of a pledge transaction, is subject to
documentary stamp tax
#2
FACTS:
Petitioner was issued an assessment for deficiency VAT for the
taxable year of 1999. Petitioner, after his protest with the CIR
merited no response, it filed a Petition for Review with the CTA
raising that pawnshops are not subject to VAT under the NIRC and
that pawn tickers are not subject to documentary stamp tax.
The CTA ruled that petitioner is liable for the deficiency VAT and the
documentary stamp tax.
The petitioner argues that a pawnshop is not enumerated as one of
those engaged in sale or exchange of services in Section 108 of the
National Internal Revenue Code and citing the case of Commissioner
of Internal Revenue v. Michel J. Lhuillier Pawnshops, Inc. as basis.
ISSUE:
1. Whether petitioner is liable for the deficiency VAT.
2. Whether the petitioner is liable for the documentary stamp tax.
RULING:
YES. The Court cited the case of First Planters Pawnshop, Inc. v.
Commissioner of Internal Revenue. In the foregoing case, since the
imposition of VAT on pawnshops, which are non-bank financial
intermediaries, was deferred for the tax years 1996 to 2002,
petitioner is not liable for VAT for the tax year 1999.
NO. Sections 195 of the NIRC provides that on the pledge of
personal property, there shall be collected a documentary stamp
tax. The Court held in Michel J. Lhuillier Pawnshop, Inc. v.
Commissioner of Internal Revenue that the documentary stamp tax
is an excise tax on the exercise of a right or privilege and that pledge
is among the privileges, the exercise of which is subject to
documentary stamp taxes. For purposes of taxation, pawn tickets
are proof of an exercise of a taxable privilege of concluding a
contract of pledge.
 DECISION --------------------

BERSAMIN, J.: Total Percentage Tax Due P 957,970.00

============
To be entitled to claim a tax deduction, the taxpayer must Deficiency Income Tax
competently establish the factual and documentary bases of its
claim. Taxable Net Income per Return P 54,107.36
Adjustments per investigation Section 28
Antecedents
Overstatement of gain/loss on auction sales
H. Tambunting Pawnshop, Inc. (petitioner), a domestic corporation
Gain/Loss per F/S P 4,914,967.50
duly licensed and authorized to engage in the pawnshop business,
appeals the adverse decision promulgated on April 24, Gain/Loss per Audit 133,057.40 4,781,910.00
2006,1 whereby the Court of Tax Appeals En Bane (CTA En Bane) --------------------
affirmed the decision of the CTA First Division ordering it to pay
Unsupported Security/Janitorial Expenses
deficiency income taxes in the amount of ₱4,536,687.15 for taxable
yaar 1997, plus 20% delinquency interest computed from August 29, Per F/S 2,183,573.02
2000 until full payment, but cancelling the compromise penalties for
lack of basis. Per Audit 358,800.00 1,824,773.02
--------------------
On June 26, 2000, the Bureau of Internal Revenue (BIR), through Unsupported Rent Expenses
then Acting Regional Director Lucien E. Sayuno of Revenue Region
No. 6 in Manila, issued assessment notices and demand letters, all Per F/S 2,293,631.13
numbered 32-1-97, assessing Tambunting for deficiency percentage Per Audit 434,406.77 1,859,224.35
tax, income tax and compromise penalties for taxable year 1997,2as --------------------
follows:
Unsupported Interest Expenses 1,155,154.28
Deficiency Percentage Tax Unsupported Management & Professional 96,761.00
Fees
Taxable Sales/Receipts ₱12,749,135.25
============ Unsupported Repairs & Maintenance 348,074.68
Percentage Tax due (5%) P 637,456.76 Unsupported 13th Month Pay & Bonus 317,730.73
Add: 20% Interest up to 7-26-00 320,513.24 Disallowed Loss on Fire & Theft 906,560.00

Taxable Net Income per Investigation
Income Tax Due (35%)
-------------------- On October 8, 2004, the CTA First Division rendered a decision, the
pertinent portion of which is hereunder quoted, to wit:
P 11,344,295.43
============ In view of all the foregoing verification, petitioner’s allowable
P 3,970,503.40 deductions are summarized below:

Less Income Tax Paid 18,937.57

Per Petitioner's
---------------------
Financial Per BIR's Per Court's
Deficiency Income Tax 3,951,565.83 Particulars Statement Examination Verification

Add: 20% Interest to 7-26-00 1,799,938.23 Loss on Auction

--------------------- Sale P 4,914,967.50 P 133,057.40 P 133,057.40

Total Income Tax Due 5,751,504.06 Security & Janitorial

Services 2,183,573.02 358,800.00 736,044.26
Compromise Penalties
Rent Expense 2,293,631.13 434,406.77 642,619.10
Late Payment of Income Tax 25,000.00
Interest Expense 1,155,154.28 - 1,155,154.28
Late Payment of Percentage Tax 20,000.00
Professional &
Failure to Pay Withholding Tax Return for Management Fees 96,761.00 - -
the Months of April and May 24,000.00 Repairs &
----------------- Maintenance 348,074.68 - 329,399.18
69,000.00 13th
========== Month pay &
Bonuses 317,730.73 - 317,730.73
On July 26, 2000, Tambunting instituted an administrative protest
Loss on Fire 906,560.00 - -
against the assessment notices and demand letters with the
Commissioner of Internal Revenue.3 -------------------- -------------------- --------------------
Total P 12,216,452.34 P 926,264.17 P 3,314,004.95
On February 21, 2001, Tambunting brought a petition for review in ============= ============= =============
the CTA, pursuant to Section 228 of the National Internal Revenue
Code of 1997,4 citing the inaction of the Commissioner of Internal
Apparently, petitioner is still liable for deficiency income tax in the
Revenue on its protest within the 180-day period prescribed by law.
reduced amount of ₱4,536,687.15, computed as follows:
Net Income Per Return ₱54,107.36 =============
Add: Overstatement of Gain/Loss on Auction Sales Income Tax Due Thereon P 3,134,794.13
Gain/Loss on Auction Sales per F/S ₱4,914,967.50 Less: Amount Paid 18,937.57
Gain/Loss on Auction Sales per ------------------
Court’s
Balance P 3,115,856.56
Verification 133,057.40 4,781,910.00
Add: 20% Interest until 7-26-00 1,420,830.59
------------------
------------------
Unsupported Security/Janitorial Services
Security, Janitorial Services per F/S ₱2,183,573.02
TOTAL INCOME TAX DUE ₱4,536,687.15
Security, Janitorial Services =============
per Court’s Verification 736,044.26 1,447,528.76
------------------ WHEREFORE, petitioner is ORDERED to PAY the respondent the
amount of ₱4,536,687.15 representing deficiency income tax for the
Unsupported Rent Expenses year 1997, plus 20% delinquency interest computed from August 29,
Rent Expenses per F/S ₱2,293,631.13 2000 until full payment thereof pursuant to Section 249 (C) of the
National Internal Revenue Code. However, the compromise
Rent Expenses per Court’s penalties in the sum of ₱49,000.00 is hereby CANCELLED for lack of
Verification 642,619.10 1,651,012.03 legal basis.
------------------
SO ORDERED.5
Unsupported Management & Professional Fees 96,761.00
After its motion for reconsideration was denied for lack of merit on
Unsupported Repairs & Maintenance
February 18, 2005,6 Tambunting filed a petition for review in the
(₱348,074.68 - ₱329,399.18) 18,675.50 CTA En Banc, arguing that the First Division erred in disallowing its
deductions on the ground that it had not substantiated them by
Disallowed Loss on Fire & Theft 906,560.00 sufficient evidence.
---------------
On April 24, 2006, the CTA En Banc denied Tambunting’s petition for
Net Income review,7 disposing:
P 8,956,554.65
WHEREFORE, the Court en banc finds no reversible error to warrant
the reversal of the assailed Decision and Resolution promulgated on
October 8, 2004 and February 11, 2005, respectively, the instant
Petition for Review is hereby DISMISSED. Accordingly, the aforesaid
Decision and Resolution are hereby AFFIRMED in toto.
SO ORDERED.
On June 29, 2006, the CTA En Banc also denied Tambunting’s
motion for reconsideration for its lack of merit.8
Issues
Hence, this appeal by petition for review on certiorari.
Tambunting argues that the CTA should have allowed its deductions
because it had been able to point out the provisions of law
authorizing the deductions; that it proved its entitlement to the
deductions through all the documentary and testimonial evidence
presented in court;9 that the provisions of Section 34 (A)(1)(b) of the
1997 National Internal Revenue Code, governing the types of
evidence to prove a claim for deduction of expenses, were
applicable because the law took effect during the pendency of the
case in the CTA;10 that the CTA had allowed deductions for ordinary
and necessary expenses on the basis of cash vouchers issued by the
taxpayer or certifications issued by the payees evidencing receipt of
interest on loans as well as agreements relating to the imposition of
interest;11 that it had thus shown beyond doubt that it had incurred
the losses in its auction sales;12 and that it substantially complied
with the requirements of Revenue Regulations No. 12-77 on the
deductibility of its losses.13
On December 5, 2006, the Commissioner of Internal Revenue filed a
comment,14 stating that the conclusions of the CTA were entitled to
respect,15 due to its being a highly specialized body specifically
created for the purpose of reviewing tax cases;16 and that the
petition involved factual and evidentiary matters not reviewable by
the Court in an appeal by certiorari.17
On March 22, 2007, Tambunting reiterated its arguments in its
reply.18
Ruling
The petition has no merit.
At the outset, the Court agrees with the CTA En Banc that because
this case involved assessments relating to transactions incurred by
Tambunting prior to the effectivity of Republic Act No. 8424
(National Internal Revenue Code of 1997, or NIRC of 1997), the
provisions governing the propriety of the deductions was
Presidential Decree 1158 (NIRC of 1977). In that regard, the
pertinent provisions of Section 29 (d) (2) & (3)of the NIRC of 1977
state:
xxxx
(2) By corporation. — In the case of a corporation, all losses
actually sustained and charged off within the taxable year
and not compensated for by insurance or otherwise.
(3) Proof of loss. — In the case of a non-resident alien
individual or foreign corporation, the losses deductible are
those actually sustained during the year incurred in business
or trade conducted within the Philippines, and losses
actually sustained during the year in transactions
entered into for profit in the Philippines although not connected
with their business or trade, when such losses are not compensated
for by insurance or otherwise. The Secretary of Finance, upon
recommendation of the Commissioner of Internal Revenue, is
hereby authorized to promulgate rules and regulations prescribing,
among other things, the time and manner by which the taxpayer
shall submit a declaration of loss sustained from casualty or from
robbery, theft, or embezzlement during the taxable year: Provided,
That the time to be so prescribed in the regulations shall not be less
than 30 days nor more than 90 days from the date of the
occurrence of the casualty or robbery, theft, or embezzlement
giving rise to the loss.
The CTA En Banc ruled thusly:
To prove the loss on auction sale, petitioner submitted in evidence
its "Rematado" and "Subasta" books and the "Schedule of Losses on
Auction Sale". The "Rematado" book contained a record of items
foreclosed by the pawnshop while the "Subasta" book contained a
record of the auction sale of pawned items foreclosed.
However, as elucidated by the petitioner, the gain or loss on auction
sale represents the difference between the capital (the amount
loaned to the pawnee, the unpaid interest and other expenses
incurred in connection with such loan) and the price for which the
pawned articles were sold, as reflected in the "Subasta" Book.
Furthermore, it explained that the amounts appearing in the
"Rematado" book do not reflect the total capital of petitioner as it
merely reflected the amounts loaned to the pawnee. Likewise, the
amounts appearing in the "Subasta" book, are not representative of
the amount of sale made during the "subastas" since not all articles
are eventually sold and disposed of by petitioner.
Petitioner submits that based on the evidence presented, it was
able to show beyond doubt that it incurred the amount of losses on
auction sale claimed as deduction from its gross income for the
taxable year 1997. And that the documents/records submitted in
evidence as well as the facts contained therein were neither
contested nor controverted by the respondent, hence, admitted.
xxxx
In this case, petitioner's reliance on the entries made in the
"Subasta" book were not sufficient to substantiate the claimed
deduction of loss on auction sale. As admitted by the petitioner, the
contents in the "Rematado" and "Subasta" books do not reflect the
true amounts of the total capital and the auction sale, respectively.
Be that as it may, petitioner still failed to adduce evidence to
substantiate the other expenses alleged to have been incurred in
connection with the sale of pawned items.
As correctly held by the Court's Division in the assailed decision, and
We quote:
x x x The remaining evidence is neither conclusive to sustain its
claim of loss on auction sale in the aggregate amount of
₱4,915,967.50. While it appears that the basis of respondent is not
strong, petitioner, nevertheless, should not rely on the weakness of
such evidence but on the strength of its own documents. The facts
essential for the proper disposition of the said controversy were
available to the petitioner. Petitioner should have endeavored to
make the facts clear to this court. Sad to say, it failed to dispute the
same with clear and convincing proof. x x x19
We affirm the aforequoted ruling of the CTA En Banc.
The rule that tax deductions, being in the nature of tax exemptions,
are to be construed in strictissimi juris against the taxpayer is well
settled.20 Corollary to this rule is the principle that when a taxpayer
claims a deduction, he must point to some specific provision of the
statute in which that deduction is authorized and must be able to
prove that he is entitled to the deduction which the law allows.21 An
item of expenditure, therefore, must fall squarely within the
language of the law in order to be deductible.22 A mere averment
that the taxpayer has incurred a loss does not automatically warrant
a deduction from its gross income.
As the CTA En Banc held, Tambunting did not properly prove that it
had incurred losses. The subasta books it presented were not the
proper evidence of such losses from the auctions because they did
not reflect the true amounts of the proceeds of the auctions due to
certain items having been left unsold after the auctions. The
rematado books did not also prove the amounts of capital because
the figures reflected therein were only the amounts given to the
pawnees. It is interesting to note, too, that the amounts received by
the pawnees were not the actual values of the pawned articles but
were only fractions of the real values.
As to business expenses, Section 29 (a) (1) (A) of the NIRC of 1977
provides:
(a) Expenses. — (1) Business expenses.— (A) In general. — All
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, profession or business, rentals or other payments
required to be made as a condition to the continued use or
possession, for the purpose of the trade, profession or business, of
property to which the taxpayer has not taken or is not taking title or
in which he has no equity.
The requisites for the deductibility of ordinary and necessary trade
or business expenses, like those paid for security and janitorial
services, management and professional fees, and rental expenses,
are that: (a) the expenses must be ordinary and necessary; (b) they
must have been paid or incurred during the taxable year; (c) they
must have been paid or incurred in carrying on the trade or business
of the taxpayer; and (d) they must be supported by receipts, records
or other pertinent papers.23
In denying Tambunting’s claim for deduction of its security and
janitorial expenses, management and professional fees, and its
rental expenses, the CTA En Banc explained:
Contrary to petitioner’s contention, the security/janitorial expenses
paid to Pathfinder Investigation were not duly substantiated. The
certification issued by Mr. Balisado was not the proper document
required by law to substantiate its expenses. Petitioner should have
presented the official receipts or invoices to prove its claim as
provided for under Section 238 of the National Internal Revenue
Code of 1977, as amended, to wit:
"SEC. 238. Issuance of receipts or sales or commercial invoices. —
All persons subject to an internal revenue tax shall for each sale or
transfer of merchandise or for services rendered valued at ₱25.00
or more, issue receipts or sales or commercial invoices, prepared at
least in duplicate, showing the date of transaction, quantity, unit
cost and description of merchandise or nature of service; Provided,
That in the case of sales, receipts or transfers in the amount of
₱100.00 or more, or, regardless of amount, where the sale or
transfer is made by persons subject to value-added tax to other
persons also subject to value-added tax; or, where the receipts is
issued to cover payment made as rentals, commissions,
compensation or fees, receipts or invoices shall be issued which
shall show the name, business style, if any, and address of the
purchaser, customer, or client. The original of each receipt or
invoice shall be issued to the purchases, customer or client at the
time the transaction is effected, who, if engaged in business or in
the exercise of profession, shall keep and preserve the same in his
place of business for a period of 3 years from the close of the
taxable year in which such invoice or receipt was issued, while the
duplicate shall be kept and preserved by the issuer, also in his place
of business, for a like period.
With regard to the misclassified items of expenses, petitioner's
statements were self-serving, likewise it failed to substantiate its
allegations by clear and convincing evidence as provided under the
foregoing provision of law.
Bearing in mind the principle in taxation that deductions from gross
income partake the nature of tax exemptions which are construed
in strictissimi juris against the taxpayer, the Court en banc is not
inclined to believe the self-serving statements of petitioner
regarding the misclassified items of office supplies, advertising and
rent expenses.
Among the expenses allegedly incurred, courts may consider only
those supported by credible evidence and which appear to have
been genuinely incurred in connection with the trade or business of
the taxpayer.24
xxxx
As previously discussed, the proper substantiation requirement for
an expense to be allowed is the official receipt or invoice. While the
rental payments were subjected to the applicable expanded
withholding taxes, such returns are not the documents required by
law to substantiate the rental expense. Petitioner should have
submitted official receipts to support its claim.
Moreover, the issue on the submission of cash vouchers as evidence
to prove expenses incurred has been addressed by this Court in the
assailed Resolution, to wit:
"The trend then was to allow deductions based on cash vouchers
which are signed by the payees. It bears to note that the cases cited
by petitioner are pronouncements by this Court in 1980, 1982 and
1989.
However, latest jurisprudence has deviated from such
interpretation of the law. Thus, this Court held in the case of
Pilmico-Mauri Foods Corporation vs. Commissioner of Internal
Revenue C.T.A. Case No. 6151, December 15, 2004;
[P]etitioner’s contention that the NIRC of 1977 did not impose
substantiation requirements on deductions from gross income is
bereft of merit. Section 238 of the 1977 Tax Code [now Section 237]
provides:
xxxx
From the foregoing provision of law, a person who is subject to an
internal revenue tax shall issue receipts, sales or commercial
invoices, prepared at least in duplicate. The provision likewise
imposed a responsibility upon the purchaser to keep and preserve
the original copy of the invoice or receipt for a period of three years
from the close of the taxable year in which the invoice or receipt
was issued. The rationale behind the latter requirement is the duty
of the taxpayer to keep adequate records of each and every
transaction entered into in the conduct of its business. So that when
their books of accounts are subjected to a tax audit examination, all
entries therein could be shown as adequately supported and proven
as legitimate business transactions. Hence, petitioner’s claim that
the NIRC of 1977 did not require substantiation requirements is
erroneous."
In order that the cash vouchers may be given probative value, these
must be validated with official receipts.25
xxxx
Petitioner’s management and professional fees were disallowed as
these were supported merely by cash vouchers, which the Court’s
Division correctly found to have little probative value.26
Again, we affirm the foregoing holding of the CTA En Banc for the
reasons therein stated. To reiterate, deductions for income tax
purposes partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by convincing
evidence that he is entitled to the deduction claimed.27 Tambunting
did not discharge its burden of substantiating its claim for
deductions due to the inadequacy of its documentary support of its
claim. Its reliance on withholding tax returns, cash vouchers, lessor’s
certifications, and the contracts of lease was futile because such
documents had scant probative value. As the CTA En Banc succinctly
put it, the law required Tambunting to support its claim for
deductions with the corresponding official receipts issued by the
service providers concerned.
Regarding proof of loss due to fire, the text of Section 29(d) (2) & (3)
of P.D. 1158 (NIRC of 1977) then in effect, is clear enough, to wit:
(2) By corporation. — In the case of a corporation, all losses
actually sustained and charged off within the taxable year
and not compensated for by insurance or otherwise.
(3) Proof of loss. — In the case of a non-resident alien
individual or foreign corporation, the losses deductible are
those actually sustained during the year incurred in business
or trade conducted within the Philippines, and losses
actually sustained during the year in transactions entered
into for profit in the Philippines although not connected
with their business or trade, when such losses are not
compensated for by insurance or otherwise. The Secretary
of Finance, upon recommendation of the Commissioner of
Internal Revenue, is hereby authorized to promulgate rules
and regulations prescribing, among other things, the time
and manner by which the taxpayer shall submit a
declaration of loss sustained from casualty or from robbery,
theft, or embezzlement during the taxable year: Provided,
That the time to be so prescribed in the regulations shall not
be less than 30 days nor more than 90 days from the date of
the occurrence of the casualty or robbery, theft, or
embezzlement giving rise to the loss.
The implementing rules for deductible losses are found in Revenue
Regulations No. 12-77, as follows:
SECTION 1. Nature of deductible losses.— Any loss arising from
fires, storms or other casualty, and from robbery, theft or
embezzlement, is allowable as a deduction under Section 30 (d) for
the taxable year in which the loss is sustained. The term "casualty"
is the complete or partial destruction of property resulting from an
identifiable event of a sudden, unexpected, or unusual nature. It
denotes accident, some sudden invasion by hostile agency, and
excludes progressive deterioration through steadily operating
cause. Generally, theft is the criminal appropriation of another’s
property for the use of the taker. Embezzlement is the fraudulent
appropriation of another's property by a person to whom it has
been entrusted or into whose hands it has lawfully come.
SECTION 2. Requirements of substantiation. — The taxpayer bears
the burden of proving and substantiating his claim for deduction for
losses allowed under Section 30 (d) and should comply with the
following substantiation requirements:
(a) A declaration of loss which must be filed with the
Commissioner of Internal Revenue or his deputies within a
certain period prescribed in these regulations after the
occurrence of the casualty, robbery, theft or embezzlement.
(b) Proof of the elements of the loss claimed, such as the
actual nature and occurrence of the event and amount of
the loss.
SECTION 3. Declaration of loss. — Within forty-five days after the
date of the occurrence of casualty or robbery, theft or
embezzlement, a taxpayer who sustained loss therefrom and who
intends to claim the loss as a deduction for the taxable year in which
the loss was sustained shall file a sworn declaration of loss with the
nearest Revenue District Officer. The sworn declaration of loss shall
contain, among other things, the following information:
(a) The nature of the event giving rise to the loss and the
time of its occurrence;
(b) A description of the damaged property and its location;
(c) The items needed to compute the loss such as cost or
other basis of the property; depreciation allowed or
allowable if any; value of property before and after the
event; cost of repair;
(d) Amount of insurance or other compensation received or
receivable.
Evidence to support these items should be furnished, if available.
Examples are purchase contracts and deeds, receipted bills for
improvements, and pictures and competent appraisals of the
property before and after the casualty.
SECTION 4. Proof of loss.— (a) In general. — The declaration of loss,
being one of the essential requirements of substantiation of a claim
for a loss deduction, is subject to verification and does not
constitute sufficient proof of the loss that will justify its deductibility
for income tax purposes. Therefore, the mere filing of a declaration
of loss does not automatically entitle the taxpayer to deduct the
alleged loss from gross income. The failure, however, to submit the
said declaration of loss within the period prescribed in these
regulations will result in the disallowance of the casualty loss
claimed in the taxpayer's income tax return. The taxpayer should
therefore file a declaration of loss and should be prepared to
support and substantiate the information reported in the said
declaration with evidence which he should gather immediately or as
soon as possible after the occurrence of the casualty or event
causing the loss.
xxxx
(b) Casualty loss. — Photographs of the property as it existed before
it was damaged will be helpful in showing the condition and value of
the property prior to the casualty. Photographs taken after the
casualty which show the extent of damage will be helpful in
establishing the condition and value of the property after it was
damaged. Photographs showing the condition and value of the
property after it was repaired, restored or replaced may also be
helpful.
Furthermore, since the valuation of the property is of extreme
importance in determining the amount of loss sustained, the
taxpayer should be prepared to come forward with documentary
proofs, such as cancelled checks, vouchers, receipts and other
evidence of cost.
The foregoing evidence should be kept by the taxpayer as part of his
tax records and be made available to a revenue examiner, upon
audit of his income tax return and the declaration of loss.
the accounting entry for the losses; and (d) the list of properties
lost, were not enough. What were required were for Tambunting to
submit the sworn declaration of loss mandated by Revenue
Regulations 12-77. Its failure to do so was prejudicial to the claim
because the sworn declaration of loss was necessary to forewarn
the BIR that it had suffered a loss whose extent it would be claiming
as a deduction of its tax liability, and thus enable the BIR to conduct
its own investigation of the incident leading to the loss. Indeed, the
documents Tambunting submitted to the BIR could not serve the
purpose of their submission without the sworn declaration of loss.
WHEREFORE, the Court AFFIRMS the decision promulgated on April
24, 2006; and ORDERS petitioner to pay the costs of suit.

(c) Robbery, theft or embezzlement losses. - To support the SO ORDERED.

deduction for losses arising from robbery, theft or embezzlement,
the taxpayer must prove by credible. evidence all the elements of
the loss, the amount of the loss, and the proper year of the
deduction. The taxpayer bears the burden of proof, and no
deduction will be allowed unless he shows the property was stolen,
rather than misplaced or lost. A mere disappearance of property is
not enough, nor is a mere error or shortage in accounts.

Failure to report theft or robbery to the police may be a factor

against the taxpayer. On the other hand, a mere report of alleged
theft or robbery to the police authorities is not a conclusive proof of
the loss arising therefrom. (Bold underscoring supplied for
emphasis)

In the context of the foregoing rules, the CT A En Bane aptly

rejected Tam bunting's claim for deductions due to losses from fire
and theft. The documents it had submitted to support the claim,
namely: (a) the certification from the Bureau of Fire Protection in
Malolos; (b) the certification from the Police Station in Malolos; (c)
17. Soriano vs. Secretary of Finance
FACTS:
On 19 May 2008, the Senate filed its Senate Committee Report No.
53 on Senate Bill No. (S.B.) 2293. On 21 May 2008, former President
Gloria M. Arroyo certified the passage of the bill as urgent through a
letter addressed to then Senate President Manuel Villar. On the
same day, the bill was passed on second reading IN the Senate and,
on 27 May 2008, on third reading. The following day, 28 May 2008,
the Senate sent S.B. 2293 to the House of Representatives for the
latter's concurrence.
On 04 June 2008, S.B. 2293 was adopted by the House of
Representatives as an amendment to House Bill No. (H.B.) 3971.
On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22,
24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended,
Otherwise Known as the National Internal Revenue Code of 1997,"
was approved and signed into law by President Arroyo. The
following are the salient features of the new law:
1. It increased the basic personal exemption from ₱20,000 for a
single individual, ₱25,000 for the head of the family, and ₱32,000
for a married individual to P50,000 for each individual.
2. It increased the additional exemption for each dependent not
exceeding four from ₱8,000 to ₱25,000.
3. It raised the Optional Standard Deduction (OSD) for individual
taxpayers from 10% of gross income to 40% of the gross receipts or
gross sales.
4. It introduced the OSD to corporate taxpayers at no more than
40% of their gross income.
5. It granted MWEs exemption from payment of income tax on their
minimum wage, holiday pay, overtime pay, night shift differential
pay and hazard pay.
Section 9 of the law provides that it shall take effect 15 days
following its publication in the Official Gazette or in at least two
newspapers of general circulation. Accordingly, R.A. 9504 was
published in the Manila Bulletin and Malaya on 21 June 2008. On 6
July 2008, the end of the 15-day period, the law took effect.
RR 10-2008
On 24 September 2008, the BIR issued RR 10-2008, dated 08 July
2008, implementing the provisions of R.A. 9504. The relevant
portions of the said RR read as follows:
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further
amended to read as follows:
Sec. 2.78.1. Withholding of Income Tax on Compensation Income.
xxxx
The amount of 'de minimis' benefits conforming to the ceiling
herein prescribed shall not be considered in determining the
₱30,000.00 ceiling of 'other benefits' excluded from gross income
under Section 32 (b) (7) (e) of the Code. Provided that, the excess of
the 'de minimis' benefits over their respective ceilings prescribed by
these regulations shall be considered as part of 'other benefits' and
the employee receiving it will be subject to tax only on the excess
over the ₱30,000.00 ceiling. Provided, further, that MWEs receiving
'other benefits' exceeding the ₱30,000.00 limit shall be taxable on
the excess benefits, as well as on his salaries, wages and allowances,
just like an employee receiving compensation income beyond the
SMW.
(B) Exemptions from Withholding Tax on Compensation. - The
following income payments are exempted from the requirements of
withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector
and being paid the Statutory Minimum Wage (SMW), as fixed by
Regional Tripartite Wage and Productivity Board (RTWPB)/National
Wages and Productivity Commission (NWPC), applicable to the
place where he/she is assigned.
Comment of the OSG
The Office of the Solicitor General (OSG) filed a Consolidated
Comment and took the position that the application of R.A. 9504
was intended to be prospective, and not retroactive. This was
supposedly the general rule under the rules of statutory
construction: law will only be applied retroactively if it clearly
provides for retroactivity, which is not provided in this instance.
Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-
2008 providing for the prorated application of the personal and
additional exemptions for taxable year 2008 to begin only effective
6 July 2008 for being contrary to Section 4 of Republic Act No.
9504.2
Petitioners argue that the prorated application of the personal and
additional exemptions under RR 10-2008 is not "the legislative
intendment in this jurisdiction."3 They stress that Congress has
always maintained a policy of "full taxable year treatment"4 as
regards the application of tax exemption laws. They allege further
that R.A. 9504 did not provide for a prorated application of the new
set of personal and additional exemptions.
ISSUES:
Assailing the validity of RR 10-2008, all four Petitions raise common
issues, which may be distilled into three major ones:
First, whether the increased personal and additional exemptions
provided by R.A. 9504 should be applied to the entire taxable year
2008 or prorated, considering that R.A. 9504 took effect only on 6
July 2008.
Second, whether an MWE is exempt for the entire taxable year 2008
or from 6 July 2008 only.
Third, whether Sections 1 and 3 of RR 10-2008 are consistent with
the law in providing that an MWE who receives other benefits in
excess of the statutory limit of ₱30,000 19 is no longer entitled to
the exemption provided by R.A. 9504.
HELD:
I.
Whether the increased personal and additional exemptions
provided by R.A. 9504 should be applied to the entire taxable year
2008 or prorated, considering that the law took effect only on 6 July
2008
The personal and additional exemptions established by R.A. 9504
should be applied to the entire taxable year 2008.
Umali is applicable.
Umali v. Estanislao supports this Comi's stance that R.A. 9504
should be applied on a full-year basis for the entire taxable year
2008. In Umali, Congress enacted R.A. 7167 amending the 1977
National Internal Revenue Code (NIRC). The amounts of basic
personal and additional exemptions given to individual income
taxpayers were adjusted to the poverty threshold level. R.A. 7167
came into law on 30 January 1992. Controversy arose when the
Commission of Internal Revenue (CIR) promulgated RR 1-92 stating
that the regulation shall take effect on compensation income
earned beginning 1 January 1992. The issue posed was whether the
increased personal and additional exemptions could be applied to
compensation income earned or received during calendar year
1991, given that R.A. 7167 came into law only on 30 January 1992,
when taxable year 1991 had already closed.
This Court ruled in the affirmative, considering that the increased
exemptions were already available on or before 15 April 1992, the
date for the filing of individual income tax returns. Further, the law
itself provided that the new set of personal and additional
exemptions would be immediately available upon its effectivity.
While R.A. 7167 had not yet become effective during calendar year
1991, the Court found that it was a piece of social legislation that
was in part intended to alleviate the economic plight of the lower-
income taxpayers. For that purpose, the new law provided for
adjustments "to the poverty threshold level" prevailing at the time
of the enactment of the law.
We now arrive at this important point: the policy of full taxable year
treatment is established, not by the amendments introduced by
R.A. 9504, but by the provisions of the 1997 Tax Code, which
adopted the policy from as early as 1969.
There is, of course, nothing to prevent Congress from again
adopting a policy that prorates the effectivity of basic personal and
additional exemptions. This policy, however, must be explicitly
provided for by law - to amend the prevailing law, which provides
for full-year treatment. As already pointed out, R.A. 9504 is totally
silent on the matter. This silence cannot be presumed by the BIR as
providing for a half-year application of the new exemption levels.
Such presumption is unjust, as incomes do not remain the same
from month to month, especially for the MWEs.
Therefore, there is no legal basis for the BIR to reintroduce the
prorating of the new personal and additional exemptions. In so
doing, respondents overstepped the bounds of their rule-making
power. It is an established rule that administrative regulations are
valid only when these are consistent with the law. Respondents
cannot amend, by mere regulation, the laws they administer. To do
so would violate the principle of non-delegability of legislative
powers.
The prorated application of the new set of personal and additional
exemptions for the year 2008, which was introduced by
respondents, cannot even be justified under the exception to the
canon of non-delegability; that is, when Congress makes a
delegation to the executive branch. The delegation would fail the
two accepted tests for a valid delegation of legislative power; the
completeness test and the sufficient standard test. The first test
requires the law to be complete in all its terms and conditions, such
that the only thing the delegate will have to do is to enforce it. The
sufficient standard test requires adequate guidelines or limitations
in the law that map out the boundaries of the delegate's authority
and canalize the delegation.
In this case, respondents went beyond enforcement of the law,
given the absence of a provision in R.A. 9504 mandating the
prorated application of the new amounts of personal and additional
exemptions for 2008. Further, even assuming that the law intended
a prorated application, there are no parameters set forth in R.A.
9504 that would delimit the legislative power surrendered by
Congress to the delegate. In contrast, Section 23(d) of the 1939 Tax
Code authorized not only the prorating of the exemptions in case of
change of status of the taxpayer, but also authorized the Secretary
of Finance to prescribe the corresponding rules and regulations.
II.
Whether an MWE is exempt for the entire taxable year 2008 or
from 6 July 2008 only
The MWE is exempt for the entire taxable year 2008.
As in the case of the adjusted personal and additional exemptions,
the MWE exemption should apply to the entire taxable year 2008,
and not only from 6 July 2008 onwards. We see no reason why
Umali cannot be made applicable to the MWE exemption, which is
undoubtedly a piece of social legislation. It was intended to alleviate
the plight of the working class, especially the low-income earners. In
concrete terms, the exemption translates to a ₱34 per day benefit,
as pointed out by Senator Escudero in his sponsorship speech.50
As it stands, the calendar year 2008 remained as one taxable year
for an individual taxpayer. Therefore, RR 10-2008 cannot declare
the income earned by a minimum wage earner from 1 January 2008
to 5 July 2008 to be taxable and those earned by him for the rest of
that year to be tax-exempt. To do so would be to contradict the
NIRC and jurisprudence, as taxable income would then cease to be
determined on a yearly basis.
III.
Whether Sections 1 and 3 of RR 10-2008 are consistent with the law
in declaring that an MWE who receives other benefits in excess of
the statutory limit of ₱30,000 is no longer entitled to the exemption
provided by R.A. 9504, is consistent with the law.
Sections 1 and 3 of RR 10-2008 add a requirement not found in the
law by effectively declaring that an MWE who receives other
benefits in excess of the statutory limit of ₱30,000 is no longer
entitled to the exemption provided by R.A. 9504.
Nowhere in the above provisions of R.A. 9504 would one find the
qualifications prescribed by the assailed provisions of RR 10-2008.
The provisions of the law are clear and precise; they leave no room
for interpretation - they do not provide or require any other
qualification as to who are MWEs.
To be exempt, one must be an MWE, a term that is clearly defined.
Section 22(HH) says he/she must be one who is paid the statutory
minimum wage if he/she works in the private sector, or not more
than the statutory minimum wage in the non-agricultural sector
where he/she is assigned, if he/she is a government employee.
Thus, one is either an MWE or he/she is not. Simply put, MWE is the
status acquired upon passing the litmus test - whether one receives
wages not exceeding the prescribed minimum wage.
CONCLUSION tax credits by (i) all individual taxpayers whose incomes for taxable
year 2008 were the subject of the prorated increase in personal and
The foregoing considered, we find that respondents committed additional tax exemption; and (ii) all MWEs whose minimum wage
grave abuse of discretion in promulgating Sections 1 and 3 of RR 10- incomes were subjected to tax for their receipt of the 13th month
2008, insofar as they provide for (a) the prorated application of the pay and other bonuses and benefits exceeding the threshold
personal and additional exemptions for taxable year 2008 and for amount under Section 32(B)(7)(e) of the 1997 Tax Code.
the period of applicability of the MWE exemption for taxable year
2008 to begin only on 6 July 2008; and (b) the disqualification of
MWEs who earn purely compensation income, whether in the
private or public sector, from the privilege of availing themselves of
the MWE exemption in case they receive compensation-related
benefits exceeding the statutory ceiling of ₱30,000.

WHEREFORE, the Court resolves to

(a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus;

and

(b) DECLARE NULL and VOID the following provisions of Revenue

Regulations No. 10-2008:

(i) Sections 1 and 3, insofar as they disqualify MWEs who earn

purely compensation income from the privilege of the MWE
exemption in case they receive bonuses and other compensation-
related benefits exceeding the statutory ceiling of ₱30,000;

(ii) Section 3 insofar as it provides for the prorated application of the

personal and additional exemptions under R.A. 9504 for taxable
year 2008, and for the period of applicability of the MWE exemption
to begin only on 6 July 2008.

(c) DIRECT respondents Secretary of Finance and Commissioner of

Internal Revenue to grant a refund, or allow the application of the
refund by way of withholding tax adjustments, or allow a claim for