THIRD DIVISION

[G.R. No. 143672. April 24, 2003.]

COMMISSIONER OF INTERNAL REVENUE , petitioner, vs . GENERAL

FOODS (PHILS.), INC. , respondent.

Rhodora J. Corcuera-Menzon for petitioner.

Ortega Del Castillo Bacorro Odulio Calma & Carbonell for respondent.

SYNOPSIS

Respondent corporation led its income tax return for the scal year ending
February 28, 1985. In said tax return, respondent claimed as deduction, among other
business expenses, the amount of P9,461,246 for media advertising for "Tang" one of its
products. The Commissioner disallowed 50% or P4,730,623 of the deduction claimed by
respondent. The latter led a motion for reconsideration, but the same was denied.
Respondent appealed to the Court of Tax Appeals, but the appeal was dismissed.
Aggrieved, respondent led a petition for review at the Court of Appeals which rendered a
decision reversing and setting aside the decision of the Court of Tax Appeals. Hence, the
present petition for review. The Commissioner of Internal Revenue presented to the Court
the lone issue of whether or not the subject media advertising expense for "Tang" incurred
by respondent was an ordinary and necessary expense fully deductible under the National
Internal Revenue Code (NIRC).
The Supreme Court reversed and set aside the decision of the Court of Appeals and
ordered private respondent General Foods (Phils); Inc., to pay its de ciency 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. The Court found the subject expense for the advertisement of a single
product to be inordinately large, and even if indeed it is necessary, it cannot be considered
an ordinary expense deductible under Section 29 (a) (1) (A) of the NIRC. According to the
Court, the subject advertisement is one designed to stimulate the future sale of
merchandise or use of services. Said venture of respondent to protect its brand franchise
was tantamount to efforts to establish a reputation and is akin to the acquisition of capital
assets, and should not, therefore, be considered as business expenses but as capital
expenditures which normally should be spread out over a reasonable period of time.

SYLLABUS

1. TAXATION; INCOME TAXATION; DEDUCTIONS FROM GROSS INCOME;

DEDUCTIONS FOR INCOME TAX PURPOSES PARTAKE OF THE NATURE OF TAX
EXEMPTIONS AND ARE THEREFORE STRICTLY CONSTRUED AGAINST THE TAXPAYER
AND LIBERALLY IN FAVOR OF THE TAXING AUTHORITY. — 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 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
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are
strictly construed, then deductions must also be strictly construed.
2. ID.; ID.; ID.; EXPENSES; ORDINARY AND NECESSARY TRADE BUSINESS OR
PROFESSIONAL EXPENSES; WHEN DEDUCTIBLE. — 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.
3. ID.; ID.; ID.; ID.; FACTORS IN DETERMINING THE REASONABLENESS OF AN
ADVERTISING EXPENSE. — There is yet to be a clear-cut criteria or xed 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.
4. ID.; ID.; ID.; ID.; ID.; SUBJECT EXPENSE FOR THE ADVERTISEMENT OF A SINGLE
PRODUCT FOUND TO BE INORDINATELY LARGE AND CANNOT BE CONSIDERED AS AN
ORDINARY EXPENSE EVEN IF IT IS NECESSARY. — In the case at bar, the P9,461,246
claimed as media advertising expense for "Tang" alone was almost one-half of its total
claim for "marketing expenses." Aside from that, respondent-corporation also claimed
P2,678,328 as "other advertising and promotions expense" and another P1,548,614, for
consumer promotion. Furthermore, the subject P9,461,246 media advertising expense for
"Tang" was almost double the amount of respondent corporation's P4,640,636 general
and administrative expenses. We nd 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.
HCTaAS

5. ID.; ID.; ID.; ID.; ID.; AN ADVERTISING TO STIMULATE THE FUTURE SALE OF
MERCHANDISE OR USE OF SERVICES IS NOT DEDUCTIBLE AS BUSINESS EXPENSE. —
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 which the taxpayer is a member. If the expenditures are
for the advertising of the rst 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. We agree with the Court of Tax Appeals
that the subject advertising expense was of the second kind. Not only was the amount
staggering; the respondent corporation itself also admitted, in its letter protest to the
Commissioner of Internal Revenue's assessment, that the subject media expense was
incurred in order to protect respondent corporation's brand franchise, a critical point
during the period under review.
6. ID.; ID.; ID.; ID.; ID.; CORPORATION'S EXPENSE TO PROTECT ITS BRAND
FRANCHISE IS CONSIDERED AS CAPITAL EXPENDITURE; CASE AT BAR. — The protection
of brand franchise is analogous to the maintenance of goodwill or title to one's property.
This is a capital expenditure which should be spread out over a reasonable period of time.
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 Respondent corporation's venture to protect its brand franchise was tantamount to efforts
to establish a reputation. 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. True, it is the taxpayer's prerogative to determine the amount of advertising
expenses it will incur and where to apply them. Said prerogative; however, is subject to
certain considerations. The rst relates to the extent to which the expenditures are actually
capital outlays; this necessitates an inquiry into the nature or purpose of such
expenditures. The second, which must be applied in harmony with the rst, relates to
whether the expenditures are ordinary and necessary. Concomitantly, for an expense to be
considered ordinary, it must be reasonable in amount. The Court of Tax Appeals ruled that
respondent corporation failed to meet the two foregoing limitations. We nd said ruling to
be well founded. Respondent corporation incurred the subject advertising expense in order
to protect its brand franchise. We consider this as a capital outlay since it created goodwill
for its business and/or product. The P9,461,246 media advertising expense for the
promotion of a single product, almost one-half of petitioner corporation's entire claim for
marketing expenses for that year under review, inclusive of other advertising and
promotion expenses of P2,678,328 and P1,548,614 for consumer promotion, is
doubtlessly unreasonable.

DECISION

CORONA , J : p

Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution

1 ofthe Court of Appeals reversing the decision 2 of the Court of Tax Appeals which in turn
denied the protest led by respondent General Foods (Phils.), Inc., regarding the
assessment made against the latter for deficiency taxes. aDHScI

The records reveal that, on June 14, 1985, respondent corporation, which is engaged
in the manufacture of beverages such as "Tang," "Calumet" and "Kool-Aid," led its income
tax return for the scal year ending February 28, 1985. In said tax return, respondent
corporation claimed as deduction, among other business expenses, the amount of
P9,461,246 for media advertising for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction
claimed by respondent corporation. Consequently, respondent corporation was assessed
de ciency income taxes in the amount of P2,635,141.42. The latter led a motion for
reconsideration but the same was denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax
Appeals but the appeal was dismissed:
With such a gargantuan expense for the advertisement of a singular
product, which even excludes "other advertising and promotions" expenses, we
are not prepared to accept that such amount is reasonable "to stimulate the
current sale of merchandise" regardless of Petitioner's explanation that such
expense "does not connote unreasonableness considering the grave economic
situation taking place after the Aquino assassination characterized by capital
ght, strong deterioration of the purchasing power of the Philippine peso and the
slacking demand for consumer products" (Petitioner's Memorandum, CTA
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 Records, p. 273). We are not convinced with such an explanation. The staggering
expense led us to believe that such expenditure was incurred "to create or
maintain some form of good will for the taxpayer's trade or business or for the
industry or profession of which the taxpayer is a member." The term "good will"
can hardly be said to have any precise signi cation; it is generally used to denote
the benefit arising from connection and reputation (Words and Phrases, Vol. 18, p.
556 citing Douhart vs. Loagan, 86 III. App. 294). As held in the case of Welch vs.
Helvering, efforts to establish reputation are akin to acquisition of capital assets
and, therefore, expenses related thereto are not business expenses but capital
expenditures. (Atlas Mining and Development Corp. vs. Commissioner of Internal
Revenue, supra). For sure such expenditure was meant not only to generate
present sales but more for future and prospective bene ts. Hence, "abnormally
large expenditures for advertising are usually to be spread over the period of years
during which the bene ts of the expenditures are received" (Mertens, supra, citing
Colonial Ice Cream Co., 7 BTA 154).

WHEREFORE, in all the foregoing, and nding no error in the case appealed
from, we hereby RESOLVE to DISMISS the instant petition for lack of merit and
ORDER the Petitioner to pay the respondent Commissioner the assessed amount
of P2,635,141.42 representing its de ciency income tax liability for the scal year
ended February 28, 1985." 3

Aggrieved, respondent corporation led a petition for review at the Court of Appeals
which rendered a decision reversing and setting aside the decision of the Court of Tax
Appeals:
Since it has not been su ciently established that the item it claimed as a
deduction is excessive, the same should be allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is
hereby GRANTED. Accordingly, the Decision, dated 8 February 1994 of respondent
Court of Tax Appeals is REVERSED and SET ASIDE and the letter, dated 31 May
1988 of respondent Commissioner of Internal Revenue is CANCELLED.
SO ORDERED. 4

Thus, the instant petition, wherein the Commissioner presents for the Court's
consideration a lone issue: whether or not the subject media advertising expense for
"Tang" incurred by respondent corporation was an ordinary and necessary expense fully
deductible under the National Internal Revenue Code (NIRC).
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; 5 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. 6
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.
We then proceed to resolve the singular issue in the case at bar. Was the media
advertising expense for "Tang" paid or incurred by respondent corporation for the scal
year ending February 28, 1985 "necessary and ordinary," hence, fully deductible under the
NIRC? Or was it a capital expenditure, paid in order to create "goodwill and reputation" for
respondent corporation and/or its products, which should have been amortized over a
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 reasonable period?
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.

Simply put, 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. 7
The parties 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 con ict as to whether or not it
was ordinary. To be deductible, an advertising expense should not only be necessary but
also ordinary. These two requirements must be met.
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: rst,
"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.
We agree.
There is yet to be a clear-cut criteria or xed 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.
In the case at bar, the P9,461,246 claimed as media advertising expense for "Tang"
alone was almost one-half of its total claim for "marketing expenses." Aside from that,
respondent-corporation also claimed P2,678,328 as "other advertising and promotions
expense" and another P1,548,614, for consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for "Tang" was
almost double the amount of respondent corporation's P4,640,636 general and
administrative expenses.
We nd 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.
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 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 which the taxpayer is a member. If the expenditures are
for the advertising of the rst 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. CIcTAE

We agree with the Court of Tax Appeals that the subject advertising expense was of
the second kind. Not only was the amount staggering; the respondent corporation itself
also admitted, in its letter protest 8 to the Commissioner of Internal Revenue's
assessment, that the subject media expense was incurred in order to protect respondent
corporation's brand franchise, a critical point during the period under review.
The protection of brand franchise is analogous to the maintenance of goodwill or
title to one's property. This is a capital expenditure which should be spread out over a
reasonable period of time. 9
Respondent corporation's venture to protect its brand franchise was tantamount to
efforts to establish a reputation. 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. 1 0
True, it is the taxpayer's prerogative to determine the amount of advertising
expenses it will incur and where to apply them. 1 1 Said prerogative, however, is subject to
certain considerations. The rst relates to the extent to which the expenditures are actually
capital outlays; this necessitates an inquiry into the nature or purpose of such
expenditures. 1 2 The second, which must be applied in harmony with the rst, relates to
whether the expenditures are ordinary and necessary. Concomitantly, for an expense to be
considered ordinary, it must be reasonable in amount. The Court of Tax Appeals ruled that
respondent corporation failed to meet the two foregoing limitations.
We nd said ruling to be well founded. Respondent corporation incurred the subject
advertising expense in order to protect its brand franchise. We consider this as a capital
outlay since it created goodwill for its business and/or product. The P9,461,246 media
advertising expense for the promotion of a single product, almost one-half of petitioner
corporation's entire claim for marketing expenses for that year under review, inclusive of
other advertising and promotion expenses of P2,678,328 and P1,548,614 for consumer
promotion, is doubtlessly unreasonable.
It has been a long standing policy and practice of the Court to respect the
conclusions of quasi-judicial agencies such as the Court of Tax Appeals, a highly
specialized body speci cally created for the purpose of reviewing tax cases. The CTA, by
the nature of its functions, is dedicated exclusively to the study and consideration of tax
problems. It has necessarily developed an expertise on the subject. We extend due
consideration to its opinion unless there is an abuse or improvident exercise of authority.
1 3 Since there is none in the case at bar, the Court adheres to the findings of the CTA.

Accordingly, we nd that the Court of Appeals committed reversible error when it

declared the subject media advertising expense to be deductible as an ordinary and
necessary expense on the ground that "it has not been established that the item being
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 claimed as deduction is excessive." It is not incumbent upon the taxing authority to prove
that the amount of items being claimed is unreasonable. The burden of proof to establish
the validity of claimed deductions is on the taxpayer. 1 4 In the present case, that burden
was not discharged satisfactorily.
WHEREFORE, premises considered, the instant petition is GRANTED. The assailed
decision of the Court of Appeals is hereby REVERSED and SET ASIDE. Pursuant to
Sections 248 and 249 of the Tax Code, respondent General Foods (Phils.), Inc. is hereby
ordered to pay its de ciency 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.
SO ORDERED.
Puno, Panganiban, Sandoval-Gutierrez and Carpio-Morales, JJ., concur.

Footnotes
1. Penned by Associate Justice Andres B. Reyes and concurred in by Associate Justices Quirino
D. Abad Santos, Jr. and Romeo A. Brawner of the Third Division.
2. Penned by Associate Judge Manuel K. Gruba and concurred in by Associate Judge Ramon O.
de Veyra.
3. Rollo, pp. 22-23.
4. Id., p. 24.
5. Commissioner of Internal Revenue vs. Visayan Electric Co., 23 SCRA 715 [1968].
6. Asiatic Petrolium Co. vs. Llanas, 49 Phil 466 [1926] cited in Davao Light & Power Co. vs.
Commissioner of Customs, 44 SCRA 122 [1972].
7. Zamora vs. Collector, 8 SCRA 163 [1963].

8. Dated June 14, 1988; Petition for Review, p. 8 citing BIR Records, pp. 198-199; Rollo, p. 15.
9. Mertens, Vol. 4A 25.38 p. 190 citing Colonial Ice Cream Co., 7 BTA 154.
10. Welch vs. Helvering, 290 US 111 [1933].
11. Revenue Audit Memorandum Order No. 1-87.
12. Mertens, Vol. 4A 25.38 p. 190, citing E.H. Sheldon & Co., 19 TC 481 [1952].

13. Commissioner vs. Court of Tax Appeals & Atlas Consolidated Mining and Development Co .,
204 SCRA 182 [1991].

14. Commissioner vs. Algue, Inc., 158 SCRA 9 [1988].

CD Technologies Asia, Inc. 2018 cdasiaonline.com