G.R. No.

L-29790 February 25, 1982

AGUINALDO INDUSTRIES CORPORATION (FISHING NETS DIVISIONS), petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

Facts:

Aguinaldo Industries Corporation is a domestic corporation engaged in two lines of business, namely: (a)
the manufacture of fishing nets, a tax-exempt industry, and (b) the manufacture of furniture.

Aguinaldo Industries then acquired a parcel of land to be used as its fishing net factory but later on sold
when the company transferred to its Marikina Heights. The company derived profits from the sale of
the land. Upon submission of income returns, examiners found that it deducted the amount of
P61,187.48 as additional remuneration paid to the officers of the company from the sale of the land.
Examiners pushed for the disallowance of the deductible, however, company argues that it is a
deduction because it was paid to its officers as allowance or bonus pursuant to its by-laws. CTA issued a
decision of the disallowance and upon filing a motion for reconsideration, CTA additionally imposed
surcharges and interests.

Issue;

WON the deduction made for the allowance of its officers from the sale of the land is a deductible
expense to the income made from the sale considering that it is included in their by-laws and WON the
imposition of surcharge and interest is proper.

Held:

It was held by the SC that the allowance given to its officers should not be a deductible from the income
it derived from the sale. The allowances that can only be made as a deductible expense should be
reasonable and it should for actual rendered services. The records show that the sale was effected
through a broker who was paid by petitioner a commission of P51,723.72 for his services. On the other
hand, there is absolutely no evidence of any service actually rendered by petitioner's officers which
could be the basis of a grant to them of a bonus out of the profit derived from the sale. This being so, the
payment of a bonus to them out of the gain realized from the sale cannot be considered as a selling
expense; nor can it be deemed reasonable and necessary so as to make it deductible for tax purposes.
With regard to the surcharges and interests, the SC upheld the same as the company failed to pay the
correct taxes on time . The interest is but a just compensation to the State for the delay in paying the tax
and for the concomitant use by the taxpayer of funds that rightfully should be in the government s hands
while the surcharges is to impose penalties for deliquencies and are clearly intended to hasten tax
payments or to punish evasion or neglect of duty in respect thereof. If delays in tax payments are to be
condoned for light reasons, the law imposing penalties for delinquencies would be rendered nugatory,
and the maintenance of the government and its multifarious activities would be as precarious as
taxpayers are wining or unwilling to pay their obligations to the state in time. Imperatives of public
welfare will not approve of this result.
CIR vs. ISABELA CULTURAL CORP. G.R. No. 172231

Facts:

BIR assesed the corporation for deficiency income tax for security and proffesional fees it paid on 1986
but was rendered on 1984 and 1985. Company argued that they only include the deduction on 1986 as
it was the only time which it was billed to them by the entitied who rendered the services and to which
it would be the only time they would know how much would be the expense that will be treated as a
deduction. Also, BIR assessed interest income and included compounded interest in the computation.
Company argued that there was no stipulation of compounded interest in the arrangement and it was
only BIR who made the assumption of the compounded interest. CIR argues that the company is using
the since the company 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. While for the interest income CIR invokes the presumption of validity of the
assessment notices.

Issue/s:

WON CIR is correct in the assesment and its disallowance of the deductions or expense made on 1986
for services rendered ion 1984 and 1985 and WON there is understatement of interest income.

Held:

It was held by the SC that the CIR was correct. The company is using the accrual method. 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.

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 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. In the case
at bar, the firm who provided the services has been its counsel since 1960s. 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 company should have also exercised due diligence and 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 which was also same with the audit
firm. While on the other hand the security services was just rendered on 1986 and the expenses for the
same is just proper to be deducted as an expense. The understatement of interest income was also set
aside because there no stipulation of compunded interest. BIR should have not assumed compounded
interest because Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary,
interest due should not further earn interest.
G.R. No. 129130 December 9, 2005

FAR EAST BANK AND TRUST COMPANY, Petitioner,

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, Respondents.

Facts:

FEABTC merged with Cavite Developtment Bank. Before the merger CDB acquired assets in the course of
which it allegedly withheld the creditable tax from the sales proceeds which amounted to ₱755,715.00.
in said years, CDB filed income tax returns which reflected that CDB incurred negative taxable income or
losses for both years. Since there was no tax against which to credit or offset the taxes withheld by CDB,
the result was that CDB, according to petitioner, had excess creditable withholding tax. FEBTC being the
surviving entity of the merger files for refund and presented the following documents; (1) confirmation
receipts, payment orders, and official receipts issued by the Central Bank and the BIR with CDB as the
payor; (2) Income Tax Returns for 1990 and 1991 with attached financial statements filed by petitioner
with the BIR; and, (3) a list prepared by the Accounting Department of petitioner purportedly showing
the CDB schedule of creditable withholding tax applied for refund for 1990 and 1991. CTA and CA denied
the request for refund for insufficiency of evidence and for failure of FEBTS to file the required
witholding tax return as evidence of entitilement.

ISSUE

WON FEBTC is entitled to the refund.

HELD

The SC held that FEBTC is NOT entitled to the refund. A taxpayer must thus do two things to be able to
successfully make a claim for the tax refund: (a) declare the income payments it received as part of its
gross income and (b) establish the fact of withholding.

Section 10. Claims for tax credit or refund. -- Claims for tax credit or refund of income tax deducted and
withheld on income payments shall be given due course only when it is shown on the return that the
income payment received was declared as part of the gross income and the fact of withholding is
established by a copy of the statement duly issued by the payor to the payee (BIR Form No. 1743.1)
showing the amount paid and the amount of tax withheld therefrom.

In the case at bar, FEBTC did not file the required witholding tax return. BIR Form No. 1743.1 establishes
the fact of withholding. Other documents presented by FEBTC are self-serving. It was emphasized that
tax refunds, like tax exemptions, are construed strictly against the taxpayer and liberally in favor of the
taxing authority.

G.R. No. 143672 April 24, 2003

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
GENERAL FOODS (PHILS.), INC., respondent.

Facts:

General Foods Inc. is a domestic corporation engaged in the manufacture of beverages such as “Tang”
“Calumet” and “Kool-Aid” The company filed its income tax return on 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." Commissioner disallowed 50% of the deduction or
P4,730,623 arguing that the expense was not ordinary and should be spread over the period of years
during which the benefits of the expenditures are received. Company appealed to CTA but the appeal
was dismissed with the accompanying deficiency income tax liability. Aggrieved, company filed petition
for review to CA which reversed and set aside the decision. CIR elevated the case to SC.

Issue:

WON the entire expenditure made by the company for its “Tang” advertisement is a deductible expense.

Held:

It was held by the SC that the entire expenditure made by the company for its Tang advertisement is NOT
a deductible expense. 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.
Both parties admitted that it was incurred in carrying on the trade or business of the taxpayer, however
their views conflict whether or not it was ordinary. In short, to be deductible, an advertising expense
should not only be necessary but also ordinary. These two requirements must be met.

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. The expense was so large
that even if it was necessary, it cannot be considered as an ordinary 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 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 expenditure was the second kind, it should be spread out over a reasonable period of
time. The company also admitted in its letter protest that the subject media expense was incurred in
order to protect the corporation’s brand franchise. 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.
NEXT CASE NEXT PAGE

G.R. No. 148512 June 26, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
CENTRAL LUZON DRUG CORPORATION, Respondent

Facts:

The company applied as deductible to its gross income the total expenditure it incurred in extending
20% discount to senior citizens. Also, since the company reported a net loss for the year 1995, as a
consequence it did not pay income tax for 1995. Also it claimed on 1996 pursuant to RA 7432, the total
amount of (P219,778) minus its 35% income tax (P69,585) or P150,193 or its income tax payable should
be applied as tax credit and since there is no tax to be paid, the company is now claiming for refund. CTA
denied the refund claiming that even if the law treats the 20% sales discounts granted to senior citizens
as a tax credit, the same cannot apply when there is no tax liability or the amount of the tax credit is
greater than the tax due. In the latter case, the tax credit will only be to the extent of the tax liability.
Also, no refund can be granted as no tax was erroneously, illegally and actually collected based on the
provisions of Section 230, now Section 229, of the Tax Code. Furthermore, the law does not state that a
refund can be claimed by the private establishment concerned as an alternative to the tax credit.
Aggrieved, company filed a petition for review before the CA, CA rendered a Decision stating that Section
229 of the Tax Code does not apply in this case. It concluded that the 20% discount given to senior
citizens which is treated as a tax credit pursuant to Sec. 4(a) of R.A. No. 7432 is considered just
compensation and, as such, may be carried over to the next taxable period if there is no current tax
liability. CIR elevated the case to SC.

Issue

WON the 20% discount extended to senior citizens is a deductible expense to the gross income and
WON the same can be refunded, and if not be applied as tax credit to succeeding taxable period.

Held

It was held by the SC that CA and the CTA correctly ruled that based on the plain wording of the law
discounts given under R.A. No. 7432 should be treated as tax credits, not deductions from income.

Sec. 229 of the Tax Code does not apply to cases that fall under Sec. 4 of R.A. No. 7432 because the
former provision governs exclusively all kinds of refund or credit of internal revenue taxes that were
erroneously or illegally imposed and collected pursuant to the Tax Code while the latter extends the tax
credit benefit to the private establishments concerned even before tax payments have been made. The
tax credit that is contemplated under the Act is a form of just compensation, not a remedy for taxes that
were erroneously or illegally assessed and collected. In the same vein, prior payment of any tax liability is
not a precondition before a taxable entity can benefit from the tax credit. The credit may be availed of
upon payment of the tax due, if any. Where there is no tax liability or where a private establishment
reports a net loss for the period, the tax credit can be availed of and carried over to the next taxable
year.

It must also be stressed that unlike in Sec. 229 of the Tax Code wherein the remedy of refund is available
to the taxpayer, Sec. 4 of the law speaks only of a tax credit, not a refund.
The tax credit benefit granted to the establishments can be deemed as their just compensation for
private property taken by the State for public use. The privilege enjoyed by the senior citizens does not
come directly from the State, but rather from the private establishments concerned