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Next four cases under A.

Deductions in General

Gancayco vs. CIR (April 20, 1961)

FACTS: Gancayco was issued a notice of tax liability by the CIR. The question whether the sum
of P16,860.31 is due from Gancayco as deficiency income tax for 1949 hinges on the validity of
his claim for deduction of two (2) items, namely: (a) for farming expenses, P27,459.00; and (b) for
representation expenses, P8,933.45.

ISSUE: WON the farming and representation expenses are deductible from his gross income.

HELD: Farming expenses are not deductible, not being an ordinary expense, but a capital
expenditure. Representation expenses are partially deductible only to the extent receipts were

Section 30 of the Tax Code partly reads:

(a) Expenses: (1) In General — All the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually rendered; traveling expenses while
away from home in the pursuit of a trade or business; and rentals or other payments required to
be made as a condition to the continued use or possession, for the purposes of the trade or
business, of property to which the taxpayer has not taken or is not taking title or in which he has
no equity. (Emphasis supplied.)

• On farming expenses:
1) No evidence has been presented as to the nature of the said "farming expenses" other
than the bare statement of petitioner that they were spent for the "development and
cultivation of (his) property". No specification has been made as to the actual amount
spent for purchase of tools, equipment or materials, or the amount spent for
improvement. Respondent claims that the entire amount was spent exclusively for
clearing and developing the farm which were necessary to place it in a productive state.
It is not, therefore, an ordinary expense but a capital expenditure. Accordingly, it is not
deductible but it may be amortized, in accordance with section 75 of Revenue
Regulations No. 2, cited above.

2) See also, section 31 of the Revenue Code which provides that in computing net income,
no deduction shall in any case be allowed in respect of any amount paid out for new
buildings or for permanent improvements, or betterments made to increase the value of
any property or estate.

3) Authorities on the subject state:

o The cost of farm machinery, equipment and farm building represents a capital
investment and is not an allowable deduction as an item of expense. Amounts
expended in the development of farms, orchards, and ranches prior to the time when
the productive state is reached may be regarded as investments of capital. (Merten's
Law of Federal Income Taxation, supra, sec. 25.108, p. 525.)
o Expenses for clearing off and grading lots acquired is a capital expenditure,
representing part of the cost of the land and was not deductible as an expense.
(Liberty Banking Co. v. Heiner 37 F [2d] 703 [8AFTR 100111] [CCA 3rd]; The B.L.
Marble Chair Company v. U.S., 15 AFTR 746).
o An item of expenditure, in order to be deductible under this section of the statute
providing for the deduction of ordinary and necessary business expenses, must fall
squarely within the language of the statutory provision. This section is intended
primarily, although not always necessarily, to cover expenditures of a recurring
nature where the benefit derived from the payment is realized and exhausted within
the taxable year. Accordingly, if the result of the expenditure is the acquisition of an
asset which has an economically useful life beyond the taxable year, no deduction of
such payment may be obtained under the provisions of the statute. In such cases, to
the extent that a deduction is allowable, it must be obtained under the provisions of
the statute which permit deductions for amortization, depreciation, depletion or loss.
(W.B. Harbeson Co. 24 BTA, 542; Clark Thread Co., 28 BTA 1128 aff'd 100 F [2d]
257 [CCA 3rd, 1938]; 4 Merten's Law of Federal Income Taxation, Sec. 25.17, pp.

• On representation expenses:
o Gancayco's claim for representation expenses aggregated P31,753.97, of which
P22,820.52 was allowed, and P8,933.45 disallowed. Such disallowance is justified by
the record, for, apart from the absence of receipts, invoices or vouchers of the
expenditures in question, petitioner could not specify the items constituting the same,
or when or on whom or on what they were incurred. The case of Cohan v.
Commissioner, 39 F (2d) 540, cited by petitioner is not in point, because in that case
there was evidence on the amounts spent and the persons entertained and the
necessity of entertaining them, although there were no receipts an vouchers of the
expenditures involved therein. Such is not the case of petitioner herein.

Western Minolco Corporation vs CIR (Aug 16, 1983)

FACTS: Western Minolco is a domestic corporation engaged in mining. It borrowed funds from
several financial institutions from June to October 1977 and paid the corresponding 35%
transaction tax due thereon in the amount of P1,317,801.03, The tax was paid pursuant to
Section 210 (b) of the National Internal Revenue Code of 1977. On February 16, 1978, the
petitioner applied for the refund of the P1,317,801.03 alleging that it was not liable to pay the 35%
transaction tax under its Certificate of Qualification for Tax Exemption No. 34 issued by the
Secretary of Agriculture and Natural Resources, and pursuant to The Mining Act (CA 137) and
the Mineral Resources Development Decree of 1974 (PD 463) , as implemented by Consolidated
Mines Administrative Order of the Secretary of Natural Resources dated May 17, 1974.

ISSUE: WON Western Minolco is exempt from transaction tax.

HELD: No. The statutory provisions on tax exemptions clearly exclude the 35% transaction tax.

Presidential Decree No. 237 on Compensating Tax, Section I of P.D. No. 238 on Conditionally
Free Importations, and Section 53 of P.D. No. 463 all refer to tax exemptions for importations of
machineries, tools for production, plants to convert mineral ores into saleable form, spare parts,
supplies, materials, accessories, explosives, chemicals and transportation and communication
facilities, to be used in mining operations. Section 53 of P.D. No. 463 likewise refers to tax
exemptions for mining claims and improvements thereon, and mineral products, except income
tax. The petitioner's Certificate of Qualification for Tax Exemption No. 34 exempts "... from
payment of all taxes except income tax, payable by him in the conduct of his business and in the
importation of machineries, spare parts and or equipment listed in the stamped "Annex I " which
are considered to be indispensable in the operation and will be used by said operator lessee
exclusively in the mineral land mentioned above.

Petitioner submits that inasmuch as taxes in general constitute allowable deductions from gross
income in the determination of taxable net income, the 35% transaction tax is a business tax and
not an income tax because the Revenue Code itself classifies it as "Business Tax" under Title V,
and that P. D. No. 1154 expressly states that the transaction tax shall be allowed as a deductible
item for purposes of determining the borrower's taxable income.
The petitioner's contentions deserve scant consideration, The 35%, transaction tax is imposed on
interest income from commercial papers issued in the primary money market. Being a tax on
interest, it is a tax on income.

The 35% transaction tax is an income tax on interest earnings to the lenders or placers The latter
are actually the taxpayers. Therefore, the tax cannot be a tax imposed upon petitioner. In other
words, the petitioner who borrowed funds from several financial institutions by issuing commercial
papers merely withheld the 35% transaction tax before paying to the financial institutions the
interests earned by them and later remitted the same to the respondent Commissioner of Internal
Revenue. The tax could have been collected by a different procedure but the statute chose this
method. Whatever collecting procedure is adopted does not change the nature of the tax.

The petitioner also submits that the 35% transaction tax is a business tax because it is imposed
under Title V, entitled -,Taxes on Business" and classified specially under Chapter II, entitled "Tax
on Business."

The location of the 35%, tax in the Tax Code does not necessarily determine its nature, Again, we
agree with the Solicitor General that the legislative body must have realized later that. the subject
tax was inappropriately included among the taxes on business because Section 210 of the Tax
Code has been repealed by Presidential Decree No. 1739, which now imposes a tax of 20% on
interests from deposits and yields from deposit substitutes such as commercial papers issued in
the primary market as principal instrument and provides for them in Section 24(cc) under Chapter
III, Tax on Corporations, Title II-Income. Tax.

Commissioner of Customs vs. Philippine Acetylene Company (May 29, 1971)

PAC is a domestic corporation engaged in transporting liquefied petroleum gas (LPG) obtained
from the Caltex refinery in Bauan, Batangas and to the company’s plant in Manila. The gas does
not undergo any chemical change and is sold to consumers in the same state as when it was
acquired from the refinery, except that before it is sold the gas is pumped into smaller cylinders,
which are labeled with the company's trademark "Philigas."

PAC imported one custom-built LPG tank for which it paid special import tax under protest.

ISSUE: WON PAC is exempted from paying the special import tax.


Section 6 of Republic Act No. 1394, insofar as it is pertinent to the issue, provides: The tax
provided for in Sec. 1 of this Act shall not be imposed against the importation into the Philippines
of machinery and/or raw materials to be used by new and necessary industries as determined in
accordance with RA 901; ...; machinery, equipment, accessories and spare parts, for the use of
industries, miners, mining enterprises planters and farmers; ...

The term 'industries' is used in two distinct groups. The first group of exempted industries refers
exclusively to those falling under the new and necessary industries as defined in Republic Act No.
901. In the second, the term "industries" is classed together with the terms miners, mining
enterprises, planters and farmers.

The respondents make much of the interpretation of the term "industries" by the Secretary of
Finance in his First Indorsement dated November 19, 1956, to wit:

Any Productive enterprise which employs relatively large amounts of capital and/or labor falls
under the term 'industries' as used in Section 6 of Republic Act No. 1394.
Assuming ng the correctness of such interpretation, what should be noted is that it stresses the
productive aspect of the enterprise. The operation for which the respondent company employs
the gas tank in question does not involve manufacturing or production. It is nothing but
packaging; the liquefied gas, when obtained from the refinery, has to be placed in some kind of
container for transportation to Manila. When sold to consumers, it undergoes no change or
transformation, but is merely placed in smaller cylinders for convenience. The process is certainly
not production in any sense.

Commissioner of Internal Revenue vs. Arnoldus Carpentry Shop, Inc. (March 25, 1988)

Arnoldus is a domestic corporation that makes and sells furniture, cabinets, and other woodwork.
Sold locally and exported abroad. For this business venture, private respondent kept samples or
models of its woodwork on display from where its customers may refer to when placing their

As per BIR examination on March 1979, the total gross sales of private respondent for the year
1977 from both its local and foreign dealings amounted to P5,162,787.59. From this amount,
private respondent reported in its quarterly percentage tax returns P2,471,981.62 for its gross
local sales. The balance of P2,690,805.97, which is 52% of the total gross sales, was considered
as its gross export sales. In dsaid report, the BIR examiners also said Arnoldus is considered a
contractor and not a manufacturer, therefore subject to the 3% contractor’s percentage tax on
sales, and not . Because of this, Arnoldus received a notice of tax deficiency.

ISSUE: WON the Court of Tax Appeals erred in holding that private respondent is a manufacturer
and not a contractor and therefore not liable for the amount of P108,720.92, as deficiency
contractor's tax, inclusive of surcharge and interest, for the year 1977.


1) Arnoldus is a manufacturer, not a contractor.

a. Tax Code Definition

Section 205 (16) [now Sec. 170 (q)] of the Tax Code defines "independent
contractors" as: ... persons . . . whose activity consists essentially of the sale of all
kinds of services for a fee regardless of whether or not the performance of the
service calls for the exercise or use of the physical or mental faculties of such
contractors or their employees.

Private respondent's business does not fall under this definition.

Petitioner contends that the fact that private respondent "designs and makes
samples or models that are 'displayed' or presented or 'submitted' to prospective
buyers who 'might choose' therefrom" signifies that what private respondent is selling
is a kind of service its shop is capable of rendering in terms of woodwork skills and

The facts of the case do not support petitioner's claim. Petitioner is ignoring the fact
that private respondent sells goods which it keeps in stock and not services.

b. New Civil Code definition

Article 1467 states: A contract for the delivery at a certain price of an article Which
the vendor in the ordinary course of his business manufactures or procures for the -
general market, whether the same is on hand at the time or not, is a contract of sale,
but if the goods are to be manufactured specially for the customer and upon his
special order, and not for the general market, it is a contract for a piece of work.
As can be clearly seen from the wordings of Art. 1467, what determines whether the
contract is one of work or of sale is whether the thing has been manufactured
specially for the customer and upon his special order." Thus, if the thing is specially
done at the order of another, this is a contract for a piece of work. If, on the other
hand, the thing is manufactured or procured for the general market in the ordinary
course of one's business, it is a b contract of sale.

Jurisprudence has followed this criterion. As held in Commissioner of Internal

Revenue v. Engineering Equipment and Supply Co., "the distinction between a
contract of sale and one for work, labor and materials is tested by the inquiry whether
the thing transferred is one not in existence and which never would have existed but
for the order of the party desiring to acquire it, or a thing which would have existed
and has been the subject of sale to some other persons even if the order had not
been given."

These findings were merely attendant facts to show what the Court was really driving at — the
habituality of the production of the goods involved for the general public.

In the instant case, it may be that what is involved is a CARPENTRY SHOP. But, in the same
vein, there are also attendant facts herein to show habituality of the production for the general

If there is an express mention or if the taxpayer falls within the purview of the exemption by clear
legislative intent, then the rule on strict construction will not apply. In the present case the
respondent Tax Court did not err in classifying private respondent as a "manufacturer". Clearly,
the 'latter falls with the term 'manufacturer' mentioned in Art. 202 (d) and (e) of the Tax Code. As
the only question raised by petitioner in relation to this tax exemption claim by private respondent
is the classification of the latter as a manufacturer, this Court affirms the holding of respondent
Tax Court that private respondent is entitled to the percentage tax exemption on its export sales.

There is nothing illegal in taking advantage of tax exemptions. When the private respondent was
still exporting less and producing locally more, the petitioner did not question its classification as a
manufacturer. But when in 1977 the private respondent produced locally less and exported more,
petitioner did a turnabout and imposed the contractor's tax. By classifying the private respondent
as a contractor, petitioner would likewise take away the tax exemptions granted under Sec. 202
for manufacturers.