G.R. No.

175651, September 14, 2016

PILMICO-MAURI FOODS CORP., Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

RESOLUTION

Taxation; Deficiency Tax; According to Section 4 of Revenue Regulation (RR) No. 15-
2006, after the taxpayer’s payment of the assessed basic deficiency tax, the docket of
the case shall be forwarded to the Commissioner of Internal Revenue (CIR), thru the
Deputy Commissioner for Operations Group, for issuance of a termination letter.—
According to Section 4 of RR No. 15-2006, after the taxpayer’s payment of the
assessed basic deficiency tax, the docket of the case shall forwarded to the CIR, thru
the Deputy Commissioner for Operations Group, for issuance of a termination letter.
However, as of this Resolution’s writing, none of the parties have presented the said
termination letter. Hence, the Court cannot outrightly dismiss the instant petition on
the ground of mootness.

Same; Deductible Expenses; As long as the expense is: (a) both ordinary and
necessary; (b) incurred in carrying a business or trade; and (c) paid or incurred within
the taxable year, then, it shall be allowed as a deduction from the gross income.—PMFC
cites Atlas Consolidated Mining & Dev. Corp. v. CIR, 102 SCRA 246 (1981), to contend
that the statutory test, as provided in Section 29 of the 1977 NIRC, is sufficient to
allow the deductibility of a business expense from the gross income. As long as the
expense is: (a) both ordinary and necessary; (b) incurred in carrying a business or
trade; and (c) paid or incurred within the taxable year, then, it shall be allowed as a
deduction from the gross income.

Same; Same; While official receipts are not the only pieces of evidence which can prove
deductible expenses, if presented, they shall be subjected to examination.—It is, thus,
clear that Section 29 of the 1977 NIRC does not exempt the taxpayer from
substantiating claims for deductions. While official receipts are not the only pieces of
evidence which can prove deductible expenses, if presented, they shall be subjected to
examination. PMFC submitted official receipts as among its evidence, and the CTA
doubted their veracity. PMFC was, however, unable to persuasively explain and prove
through other documents the discrepancies in the said receipts. Consequently, the CTA
disallowed the deductions claimed, and in its ruling, invoked Section 238 of the 1977
NIRC considering that official receipts are matters provided for in the said section.

Courts; Court of Tax Appeals; In the absence of any clear and convincing proof to the
contrary, the Supreme Court (SC) must presume that the Court of Tax Appeals (CTA)
rendered a decision which is valid in every respect.—The Court recognizes that the CTA,
which by the very nature of its function is dedicated exclusively to the consideration of
tax problems, has necessarily developed an expertise on the subject, and its
conclusions will not be overturned unless there has been an abuse or improvident
exercise of authority. Such findings can only be disturbed on appeal if they are not
supported by substantial evidence or there is a showing of gross error or abuse on the
part of the tax court. In the absence of any clear and convincing proof to the contrary,
the Court must presume that the CTA rendered a decision which is valid in every
respect.

Statutes; Liberal Construction; Revenue laws are not intended to be liberally construed.
—Revenue laws are not intended to be liberally construed. Taxes are the lifeblood of the
government and in Holmes’ memorable metaphor, the price we pay for civilization;
hence, laws relative thereto must be faithfully and strictly implemented. While the 1977
NIRC required substantiation requirements for claimed deductions to be allowed, PMFC
insists on leniency, which is not warranted under the circumstances. Pilmico-Mauri
Foods Corp. vs. Commissioner of Internal Revenue, 802 SCRA 618, G.R. No. 175651
September 14, 2016

REYES, J.:

Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of
Court pursuant to Republic Act (R.A.) No. 1125,2 Section 19,3 as amended by R.A. No.
9282,4 Section 12.5 The petition filed by Pilmico-Mauri Foods Corp. (PMFC) against the
Commissioner of Internal Revenue (CIR) assails the Decision6 and Resolution7 of the
Court of Appeals (CTA) en banc, dated August 29, 2006 and December 4, 2006,
respectively, in C.T.A. EB No. 97.

Antecedents

The CTA aptly summed up the facts of the case as follows:ChanRoblesVirtualawlibrary

[PMFC] is a corporation, organized and existing under the laws of the Philippines, with
principal place of business at Aboitiz Corporate Center, Banilad, Cebu City.

The books of accounts of [PMFC] pertaining to 1996 were examined by the [CIR] thru
Revenue Officer Eugenio D. Maestrado of Revenue District No. 81 (Cebu City North
District) for deficiency income, value-added [tax] (VAT) and withholding tax liabilities.

As a result of the investigation, the following assessment notices were issued against
[PMFC]:

chanRoblesvirtualLawlibrary

(a) Assessment Notice No. 81-WT-13-96-98-11-126, dated November 26, 1998,

demanding payment for deficiency withholding taxes for the year 1996 in the sum
of P384,925.05 (inclusive of interest and other penalties);
(b) Assessment Notice No. 81-VAT-13-96-98-11-127, dated November 26, 1998,
 demanding payment of deficiency value-added tax in the sum of P5,017,778.01
(inclusive of interest and other penalties); [and]
(c) Assessment Notice No. 81-IT-13-96[-]98-11-128, dated November 26, 1998,
demanding payment of. deficiency income tax for the year 1996 in the sum of
P4,359,046.96 (inclusive of interest and other penalties).

The foregoing Assessment Notices were all received by [PMFC] on December 1, 1998.
On December 29, 1998, [PMFC] filed a protest letter against the aforementioned
deficiency tax assessments through the Regional Director, Revenue Region No. 13,
Cebu City.

In a final decision of the [CIR] on the disputed assessments dated July 3, 2000, the
deficiency tax liabilities of [PMFC] were reduced from P9,761,750.02 to P3,020,259.30,
broken down as follows:

) Deficiency withholding tax from P384,925.05 to P197,780.67;

b) Deficiency value-added tax from P5,017,778.01 to P1,642,145.79; and
c) Deficiency Income Tax from P4,359,046.96 to P1,180,332.84.

xxxx
On the basis of the foregoing facts[, PMFC] filed its Petition for Review on August 9,
2000. In the "Joint Stipulation of Facts" filed on March 7, 2001, the parties have agreed
that the following are the issues to be resolved: hanRoblesVirtualawlibrary

I. Whether or not [PMFC] is liable for the payment of deficiency income, value-
added, expanded withholding, final withholding and withholding tax (on
compensation).

II. On the P1,180,382.84 deficiency income tax

A. Whether or not the P5,895,694.66 purchases of raw materials are
unsupported[;]

B. Whether or not the cancelled invoices and expenses for taxes, repairs and
freight are unsupported[;]

C. Whether or not commission, storage and trucking charges claimed are

deductible[; and]

D. Whether or not the alleged deficiency income tax for the year 1996 was
correctly computed.

    x x x x
 
V. Whether or not [CIR's] decision on the 1996 internal revenue tax liabilities of [PMFC]
is contrary to law and the facts.
After trial on the merits, the [CTA] in Division rendered the assailed Decision affirming
the assessments but in the reduced amount of P2,804,920.36 (inclusive of surcharge
and deficiency interest) representing [PMFC's] Income, VAT and Withholding Tax
deficiencies for the taxable year 1996 plus 20% delinquency interest per annum until
fully paid. The [CTA] in Division ruled as follows:ChanRoblesVirtualawlibrary
"However, [PMFC'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 of the National Internal Revenue Code of 1997]
provides:

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 P25.00 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 P100.00 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 receipt is issued to cover
payment made as rentals, commissions, compensations 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 purchaser, 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 three (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. x x x
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 such 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,
[PMFC's] claim that the NIRC of 1977 did not require substantiation requirements is
erroneous.

In fact, in its effort to prove the above-mentioned purchases of raw materials, [PMFC]
presented the following sales invoices:

chanRoblesvirtualLawlibrary
Exhibit Number Invoice No. Date Gross Amount 10% VAT Net Amount
B-3 2072 04/18/96 P2,312,670.00 P210,242.73 P2,102,427.27
B-7,
B-11 2026 Undated 2,762,099.10 251,099.92 2,510,999.18
P5,074,769.10 P461,342.65 P4,613,426.45
The mere fact that [PMFC] submitted the foregoing sales invoices belies [its] claim that
the NIRC of 1977 did not require that deductions must be substantiated by adequate
records.

From the total purchases of P5,893,694.64 which have been disallowed, it seems that a
portion thereof amounting to P1,280,268.19 (729,663.64 + 550,604.55) has no
supporting sales invoices because of [PMFC's] failure to present said invoices.

A scrutiny of the invoices supporting the remaining balance of P4,613,426.45

(P5,893,694.64 less P1,280,268.19) revealed the following:

chanRoblesvirtualLawlibrary

a) In Sales Invoice No. 2072 marked as Exhibit B-3, the name Pilmico Foods
Corporation was erased and on top of it the name [PMFC] was inserted but with a
counter signature therein;
b) For undated Sales Invoice No. 2026, [PMFC] presented two exhibits marked as
Exhibits B-7 and B-11. Exhibit B-11 is the original sales invoice whereas Exhibit B-7
is a photocopy thereof. Both exhibits contained the word Mauri which was inserted
on top and between the words Pilmico and Foods. The only difference is that in the
original copy (Exhibit B-11), there was a counter signature although the ink used
was different from that used in the rest of the writings in the said invoice; while in
the photocopied invoice (Exhibit B-7), no such counter signature appeared. [PMFC]
did not explain why the said countersignature did not appear in the photocopied
invoice considering it was just a mere reproduction of the original copy.

The sales invoices contain alterations particularly in the name of the purchaser giving
rise to serious doubts regarding their authenticity and if they were really issued to
[PMFC]. Exhibit B-11 does not even have any date indicated therein, which is a clear
violation of Section 238 of the NIRC of 1977 which required that the official receipts
must show the date of the transaction.

Furthermore, [PMFC] should have presented documentary evidence establishing that

Pilmico Foods Corporation did not claim the subject purchases as deduction from its
gross income. After all, the records revealed that both [PMFC] and its parent company,
Pilmico Foods Corporation, have the same AVP Comptroller in the person of Mr. Eugenio
Gozon, who is in-charge of the financial records of both entities x x x.

Similarly, the official receipts presented by [PMFC] x x x, cannot be considered as valid

proof of [PMFC's] claimed deduction for raw materials purchases. The said receipts
did not conform to the requirements provided for under Section 238 of the
NIRC of 1977, as amended. First the official receipts were not in the name of
[PMFC] but in the name of Golden Restaurant. And second, these receipts
were issued by PFC and not the alleged seller, JTE.

Likewise, [PMFC's] allegations regarding the offsetting of accounts between [PMFC],

PFC and JTE is untenable. The following circumstances contradict [PMFC's] proposition:
1) the Credit Agreement itself does not provide for the offsetting arrangement;
2) [PMFC] was not even a party to the credit agreement; and 3) the official receipts in
question pertained to the year 1996 whereas the Credit Agreement (Exhibit M) and the
Real Estate Mortgage Agreement (Exhibit N) submitted by [PMFC] to prove the fact of
the offsetting of accounts, were both executed only in 1997.
Besides, in order to support its claim, [PMFC] should have presented the following vital
documents, namely, 1) Written Offsetting Agreement; 2) proof of payment by [PMFC]
to Pilmico Foods Corporation; and 3) Financial Statements for the year 1996 of Pilmico
Foods Corporation to establish the fact that Pilmico Foods Corporation did not deduct
the amount of raw materials being claimed by [PMFC].

Considering that the official receipts and sales invoices presented by [PMFC] failed to
comply with the requirements of Section 238 of the NIRC of 1977, the disallowance by
the [CIR] of the claimed deduction for raw materials is proper.
[PMFC] filed a Motion for Partial Consideration on January 21, 2005 x x x but x x x
[PMFC's] Motion for Reconsideration was denied in a Resolution dated May 19, 2005 for
lack of merit, x x x.8 (Citation omitted, italics ours and emphasis in the original)
Unperturbed, PMFC then filed a petition for review before the CTA en banc, which
adopted the CTA First Division's ruling and ratiocinations. Additionally, the CTA en
banc declared that:ChanRoblesVirtualawlibrary
The language of [Section 238] of the 1977 NIRC, as amended, is clear. It requires that
for each sale valued at P100.00 or more, the name, business style and address of the
purchaser, customer or client shall be indicated and that the purchaser is required to
keep and preserve the same in his place of business. The purpose of the law in
requiring the preservation by the purchaser of the official receipts or sales invoices for a
period of three years is two-fold: 1) to enable said purchaser to substantiate his
claimed deductions from the gross income, and 2) to enable the Bureau of Internal
Revenue to verify the accuracy of the gross income of the seller from external sources
such as the customers of said seller. Hence, [PMFC's] argument that there was no
substantiation requirement under the 1977 NIRC is without basis.

Moreover, the Supreme Court had ruled that in claiming deductions for business
expenses [,] it is not enough to prove the business test but a claimant must
substantially prove by evidence or records the deductions claimed under the law, thus:
The principle is recognized 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. As previously
adverted to, the law allowing expenses as deduction from gross income for purposes of
the income tax is Section 30 (a) (l) of the National Internal Revenue which allows a
deduction of "all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business.["] An item of expenditure, in order to
be deductible under this section of the statute must fall squarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be

deductible as a business expense, three conditions are imposed, namely: (1) the
expense must be ordinary and necessary; (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In
addition, not only must the taxpayer meet the business test, he must
substantially prove by evidence or records the deductions claimed under the
law, otherwise, the same will be disallowed. The mere allegation of the taxpayer
that an item of expense is ordinary and necessary does not justify its deduction. x x x
And in proving claimed deductions from gross income, the Supreme Court held
that invoices and official receipts are the best evidence to substantiate deductible
business expenses. x x x
xxxx

The irregularities found on the official receipts and sales invoices submitted in evidence
by [PMFC], i.e. not having been issued in the name of [PMFC] as the purchaser and the
fact that the same were not issued by the alleged seller himself directly to the
purchaser, rendered the same of no probative value.

Parenthetically, the "Cohan Rule" which according to [PMFC] was adopted by the

Supreme Court in the case of Visayan Cebu Terminal v. Collector, x x x, is not
applicable because in both of these cases[,] there were natural calamities that
prevented the taxpayers therein to fully substantiate their claimed deductions. In the
Visayan Cebu Terminal case, there was a fire that destroyed some of the supporting
documents for the claimed expenses. There is no such circumstance in [PMFC's] case,
hence, the ruling therein is not applicable. It is noteworthy that notwithstanding the
destruction of some of the supporting documents in the aforementioned Visayan Cebu
Terminal case, the Supreme Court[,] in denying the appeal[,] issued the following
caveat noting the violation of the provision of the Tax Code committed by [PMFC]
therein:ChanRoblesVirtualawlibrary
"It may not be amiss to note that the explanation to the effect that the supporting
paper of some of those expenses had been destroyed when the house of the treasurer
was burned, can hardly be regarded as satisfactory, for appellant's records are
supposed to be kept in its offices, not in the residence of one of its officers." x x x
From the above-quoted portion of the Supreme Court's Decision, it is clear that
compliance with the mandatory record-keeping requirements of the National Internal
Revenue Code should not be taken lightly. Raw materials are indeed deductible
provided they are duly supported by official receipts or sales invoices prepared and
issued in accordance with the invoicing requirements of the National Internal Revenue
Code. x x x [PMFC] failed to show compliance with the requirements of Section
238 of the 1977 NIRC as shown by the fact that the sales invoices presented
by [it] were not in its name but in the name of Pilmico Foods Corporation.

xxxx

In the Joint Stipulation of Facts filed on March 7, 2001, the parties have agreed that
with respect to the deficiency income tax assessment, the following are the issues to be
resolved:
Whether or not the P5,895,694.66 purchases of raw materials are
unsupported;
xxxx

Clearly, the issue of proper substantiation of the deduction from gross income

pertaining to the purchases of raw materials was properly raised even before [PMFC]
began presenting its evidence. [PMFC] was aware that the [CIR] issued the assessment
from the standpoint of lack of supporting documents for the claimed deduction and the
fact that the assessments were not based on the deductibility of the cost of raw
materials. There is no difference in the basis of the assessment and the issue presented
to the [CTA] in Division for resolution since both pertain to the issue of proper
supporting documents for ordinary and necessary business expenses.9 (Citation
omitted, italics ours and emphasis in the original)
PMFC moved for reconsideration. Pending its resolution, the CIR issued Revenue
Regulation (RR) No. 15-2006,10 the abatement program of which was availed by PMFC
on October 27, 2006. Out of the total amount of P2,804,920.36 assessed as income,
value-added tax (VAT) and withholding tax deficiencies, plus surcharges and deficiency
interests, PMFC paid the CIR P1,101,539.63 as basic deficiency tax. The PMFC, thus,
awaits the CIR's approval of the abatement, which can render moot the resolution of
the instant petition.11chanrobleslaw

Meanwhile, the CTA en banc denied the motion for reconsideration12 of PMFC, in its
Resolution13 dated December 4, 2006.

Issues

In the instant petition, what is essentially being assailed is the CTA en banc's
concurrence with the CTA First Division's ruling, which affirmed but reduced the CIR's
income deficiency tax assessment against PMFC. More specifically, the following errors
are ascribed to the CTA:ChanRoblesVirtualawlibrary
I

The Honorable CTA First Division deprived PMFC of due process of law and the CTA
assumed an executive function when it substituted a legal basis other than that stated
in the assessment and pleading of the CIR, contrary to law.

II

The decision of the Honorable CTA First Division must conform to the pleadings and the
theory of the action under which the case was tried. A judgment going outside the
issues and purporting to adjudicate something on which the parties were not heard is
invalid. Since the legal basis cited by the CTA supporting the validity of the assessment
was never raised by the CIR, PMFC was deprived of its constitutional right to be
apprised of the legal basis of the assessment.

III

The nature of evidence required to prove an ordinary expense like raw materials is
governed by Section 2914 of the 1977 National Internal Revenue Code (NIRC) and not
by Section 238 as found by the CTA.15chanroblesvirtuallawlibrary

In support of the instant petition, PMFC claims that the deficiency income tax
assessment issued against it was anchored on Sect on 34(A)(l)(b)16 of the 1997 NIRC.
In disallowing the deduction of the purchase of raw materials from PMFC's gross
income, the CIR never made any reference to Section 238 of the 1977 NIRC relative to
the mandatory requirement of keeping records of official receipts, upon which the CTA
had misplaced reliance. Had substantiation requirements under Section 23 the 1977
NIRC been made an issue during the trial, PMFC could have presented official receipts
or invoices, or could have compelled its suppliers to issue the same.17chanrobleslaw

PMFC further argues that in determining the deductibility of the purchase of raw
materials from gross income, Section 29 of the 1977 NIRC is the applicable provision.
According to the said section, for the deduction to be allowed, the expenses must be
(a) both ordinary and necessary; (b) incurred in carrying on a trade or business; and
(c) paid or incurred within the taxable year. PMFC, thus, claims that prior to the
promulgation of the 1997 NIRC, the law does not require the production of official
receipts to prove an expense.18chanrobleslaw

In its Comment,19 the Office of the Solicitor General (OSG) counters that the arguments
advanced by PMFC are mere reiterations of those raised in the proceedings below.
Further, PMFC was fully apprised of the assailed tax assessments and had all the
opportunities to prove its claims.20chanrobleslaw

The OSG also avers that in the Joint Stipulation of Facts filed before the CTA First
Division on March 7, 2001, it was stated that one of the issues for resolution was
"whether or not the Php5,895,694.66 purchases of raw materials are unsupported."
Hence, PMFC was aware that the CIR issued the assessments due to lack of supporting
documents for the deductions claimed. Essentially then, even in the proceedings before
the CIR, the primary issue has always been the lack or inadequacy of supporting
documents for ordinary and necessary business expenses.21chanrobleslaw

The OSG likewise points out that PMFC failed to satisfactorily discharge the burden of
proving the propriety of the tax deductions claimed. Further, there were discrepancies
in the names of the sellers and purchasers i indicated in the receipts casting doubts on
their authenticity.22chanrobleslaw

Ruling of the Court

The Court affirms but modifies the herein assailed decision and resolution.

Preliminary matters

On December 19, 2006, PMFC filed before the Court a motion for extension of time to
file a petition for review.23 In the said motion, PMFC informed the Court that it had
availed of the CIR's tax abatement program, the details of which were provided for in
RR No. 15-2006. PMFC paid the CIR the amount of P1,101,539.63 as basic deficiency
tax. PMFC manifested that if the abatement application would be approved by the CIR,
the instant petition filed before the Court may be rendered superfluous.

According to Section 4 of RR No. 15-2006, after the taxpayer's payment of the

assessed basic deficiency tax, the docket of the case shall forwarded to the CIR, thru
the Deputy Commissioner for Operations Group, for issuance of a termination letter.
However, as of this Resolution's writing, none of the parties have presented the said
termination letter. Hence, the Court cannot outrightly dismiss the instant petition on
the ground of mootness.

On the procedural issues raised by PMFC

The first and second issues presented by PMFC are procedural in nature. They both
pertain to the alleged omission of due process of law by the CTA since in its rulings, it
invoked Section 238 of the 1977 NIRC, while in the proceedings below, the CIR's tax
deficiency assessments issued against PMFC were instead anchored on Section 34 of
the 1997 NIRC.
Due process was not violated.

In CIR v. Puregold Duty Free, Inc.,24 the Court is emphatic

that:ChanRoblesVirtualawlibrary
It is well settled that matters that were neither alleged in the pleadings nor raised
during the proceedings below cannot be ventilated for the first time on appeal and are
barred by estoppel. To allow the contrary would constitute a violation of the other
party's right to due process, and is contrary to the principle of fair play. x x x
x x x Points of law, theories, issues, and arguments not brought to the attention of the
trial court ought not to be considered by a reviewing court, as these cannot be raised
for the first time on appeal. To consider the alleged facts and arguments belatedly
raised would amount to trampling on the basic principles of fair play, justice, and due
process.25cralawred (Citations omitted)
In the case at bar, the CIR issued assessment notices against PMFC for deficiency
income, VAT and withholding tax for the year 1996. PMFC assailed the assessments
before the Bureau of Internal Revenue and late before the CTA.

In the Joint Stipulation of Facts, dated March 7, 2001, filed before CTA First Division,
the CIR and PMFC both agreed that among the issues for resolution was "whether or
not the P5,895,694.66 purchases of raw materials are unsupported."26 Estoppel, thus,
operates against PMFC anent its argument that the issue of lack or inadequacy of
documents to justify the costs of purchase of raw materials as deductions from the
gross income had not been presented in the proceedings below, hence, barred for being
belatedly raised only on appeal.

Further, in issuing the assessments, the CIR had stated the material facts and the law
upon which they were based. In the petition for review filed by PMFC before the CTA, it
was the former's burden to properly invoke the applicable legal provisions in pursuit of
its goal to reduce its tax liabilities. The CTA, on the other hand, is not bound to rule
solely on the basis of the laws cited by the CIR. Were it otherwise, the tax court's
appellate power of review shall be rendered useless. An absurd situation would arise
leaving the CTA with only two options, to wit: (a) affirming the CIR's legal findings; or
(b) altogether absolving the taxpayer from liability if the CIR relied on misplaced legal
provisions. The foregoing is not what the law intends.

To reiterate, PMFC was at the outset aware that the lack or inadequacy of supporting
documents to justify the deductions claimed from the gross income was among the
issues raised for resolution before the CTA. With PMFC's acquiescence to the Joint
Stipulation of Facts filed before the CTA and thenceforth, the former's participation in
the proceedings with all opportunities it was afforded to ventilate its claims, the alleged
deprivation of due process is bereft of basis.

On the applicability of Section 29 of the 1977 NIRC

The third issue raised by PMFC is substantive in nature. At its core is the alleged
application of Section 29 of the 1977 NIRC as regards the deductibility from the gross
income of the cost of raw materials purchased by PMFC.

It bears noting that while the CIR issued the assessments on the basis of Section 34 of
the 1997 NIRC, the CTA and PMFC are in agreement that the 1977 NIRC finds
application.

However, while the CTA ruled on the basis of Section 238 of the 1977 NIRC, PMFC now
insists that Section 29 of the same code should be applied instead. Citing Atlas
Consolidated Mining and Development Corporation v. CIR,27 PMFC argues that Section
29 imposes less stringent requirements and the presentation of official receipts as
evidence of the claimed deductions dispensable. PMFC further posits that the
mandatory nature of the submission of official receipts as proof is a mere innovation in
the 19 NIRC, which cannot be applied retroactively.28chanrobleslaw

PMFC's argument fails.

The Court finds that the alleged differences between the requirements of Section 29 of
the 1977 NIRC invoked by PMFC, on one hand, and Section 238 relied upon by the CTA,
on the other, are more imagined than real.

In CIR v. Pilipinas Shell Petroleum Corporation,29 the Count enunciated

that:ChanRoblesVirtualawlibrary
It is a rule in statutory construction that every part of the statute must be interpreted
with reference to the context, i.e., that every part of the statute must be considered
together with the other parts, and kept subservient to the general intent of the whole
enactment. The law must not be read in truncated parts, its provisions must be read in
relation to the whole law. The particular words, clauses and phrases should not be
studied as detached and isolated expression, but the whole and every part of the
statute must be considered in fixing the meaning of any of its parts and in order to
produce a harmonious whole.30 (Citations omitted)
The law, thus, intends for Sections 29 and 238 of the 1977 NIRC to be read together,
and not for one provision to be accorded preference over the other.

It is undisputed that among the evidence adduced by PMFC on it behalf are the official
receipts of alleged purchases of raw materials. Thus, the CTA cannot be faulted for
making references to the same, and for applying Section 238 of the 1977 NIRC in
rendering its judgment. Required or not, the official receipts were submitted by PMFC
as evidence. Inevitably, the said receipts were subjected to scrutiny, and the CTA
exhaustively explained why it had found them wanting.

PMFC cites Atlas31 to contend that the statutory test, as provided in Section 29 of the

1977 NIRC, is sufficient to allow the deductibility of a business expense from the gross
income. As long as the expense is: (a) both ordinary and necessary; (b) incurred in
carrying a business or trade; and (c) paid or incurred within the taxable year, then, it
shall be allowed as a deduction from the gross income.32chanrobleslaw

Let it, however, be noted that in Atlas, the Court likewise declared
that:ChanRoblesVirtualawlibrary
In addition, not only must the taxpayer meet the business test, he must
substantially prove by evidence or records the deductions claimed under the
law, otherwise, the same will be disallowed. The mere allegation of the
taxpayer that an item of expense is ordinary and necessary does not justify its
deduction.33 (Citation omitted and italics ours)
It is, thus, clear that Section 29 of the 1977 NIRC does not exempt the taxpayer from
substantiating claims for deductions. While official receipts are not the only pieces of
evidence which can prove deductible expenses, if presented, they shall be subjected to
examination. PMFC submitted official receipts as among its evidence, and the CTA
doubted their veracity. PMFC was, however, unable to persuasively explain and prove
through other documents the discrepancies in the said receipts. Consequently, the CTA
disallowed the deductions claimed, and in its ruling, invoked Section 238 of the 1977
NIRC considering that official receipts are matters provided for in the said section.

Conclusion

The Court recognizes that the CTA, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an expertise
on the subject, and its conclusions will not be overturned unless there has been an
abuse or improvident exercise of authority. Such findings can only be disturbed on
appeal if they are not supported by substantial evidence or there is a showing of gross
error or abuse on the part of the tax court. In the absence of any clear and convincing
proof to the contrary, the Court must presume that the CTA rendered a decision which
is valid in every respect.34chanrobleslaw

Further, revenue laws are not intended to be liberally construed. Taxes are the lifeblood
of the government and in Holmes' memorable metaphor, the price we pay for
civilization; hence, laws relative thereto must be faithfully and strictly
implemented.35 While the 1977 NIRC required substantiation requirements for claimed
deductions to be allowed, PMFC insists on leniency, which is not warranted under the
circumstances.

Lastly, the Court notes too that PMFC's tax liabilities have been me than substantially
reduced to P2,804,920.36 from the CIR's initial assessment of
P9,761,750.02.36chanrobleslaw

In precis, the affirmation of the herein assailed decision and resolution is in order.

However, the Court finds it proper to modify the herein assail decision and resolution to
conform to the interest rates prescribed in Nacar v. Gallery Frames, et al.37 The total
amount of P2,804,920.36 to be paid PMFC to the CIR shall be subject to an interest of
six percent (6%) per annum to be computed from the finality of this Resolution until full
payment.

WHEREFORE, the instant petition is DENIED. The Decision dated August 29, 2006 and
Resolution dated December 4, 2006 of the Court of Tax Appeals en banc in C.T.A. EB
No. 97 are AFFIRMED. However, MODIFICATION thereof, the legal interest of six
percent (6%) per annum reckoned from the finality of this Resolution until full
satisfaction, is here imposed upon the amount of P2,804,920.36 to be paid by Pilmico-
Mauri Foods Corporation to the Commissioner of Internal Revenue.

SO ORDERED.c
 G.R. No. L-26911. January 27, 1981.*

ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION, petitioner,

vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

No. L-26924. January 27, 1981.*

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ATLAS CONSOLIDATED

MINING & DEVELOPMENT CORPORATION and COURT OF TAX APPEALS,
respondents.

Taxation; Basic requisites for deductibility of business expenses.—We come, then, to

the statutory test of deductibility where it is axiomatic that to be deductible as a
business expense, three conditions are imposed, namely: (1) the expense must be
ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3)
it must be paid or incurred in carrying in a trade or business. In addition, not only must
the taxpayer meet the business test, he must substantially prove by evidence or
records the deductions claimed under the law, otherwise, the same will be disallowed.
The mere allegation of the taxpayer that an item of expense is ordinary and necessary
does not justify its deduction.

Same; There is no hard and fast rule for deductibility of any specific type of business
expense.—There is thus no hard and fast rule on the matter. The right to a deduction
depends in each case on the particular facts and the relation of the payment to the type
of business in which the taxpayer is engaged. The intention of the taxpayer often may
be the controlling fact in making the determination. Assuming that the expenditure is
ordinary and necessary in the operation of the taxpayer’s business, the answer to the
question as to whether the expenditure is an allowable deduction as a business ex-
pense must be determined from the nature of the expenditure itself, which in turn
depends on the extent and permanency of the work accomplished by the expenditure.

Same; Expenses paid to advertising firm to promote sale of capital stock for acquisition
of additional capital is not deductible from taxable income.—That the expense in
question was incurred to create a favorable image of the corporation in order to gain or
maintain the public’s and its stockholders’ patronage, does not make it deductible as
business expense. 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 expense but capital expenditures.

Same; Commissioner of Internal Revenue cannot raise for the first time on appeal the
issue of the fact of payment—stock transfer agent’s fees—of a corporate expense.—On
this issue of whether or not the Commissioner can raise the fact of payment for the first
time on appeal in its memorandum in the Court of Tax Appeals, We fully agree with the
ruling of the tax court that the Commissioner on appeal cannot be allowed to adopt a
theory distinct and different from that he has previously pursued, as shown by the BIR
records and the answer to the amended petition for review. As this Court said in the
case of Commissioner of Customs vs. Valencia such change in the nature of the case
may not be made on appeal, specially when the purpose of the latter is to seek a
review of the action taken by an administrative body, forming part of a coordinate
branch of the Government, such as the Executive department. In the case at bar, the
Court of Tax Appeal found that the fact of payment of the claimed deduction from gross
income was never controverted by the Commissioner even during the initial stages of
routinary administrative scrutiny conducted by BIR examiners. Specifically, in his
answer to the amended petition for review in the Court of Tax Appeal, the
Commissioner did not deny the fact of payment, merely contesting the legitimacy of the
deduction on the ground that same was not ordinary and necessary business expenses.

Same; Stock transfer fee where a recurring expense is an allowable deduction from
taxable income.—We find the Chesapeake decision controlling with the facts and
circumstances of the instant case. In Dome Mines, Ltd. case the stock listing fee was
disallowed as a deduction not only because the expenditure did not meet the statutory
test but also because the same was paid only once, and the benefit acquired thereby
continued indefinitely, whereas, in the Chesapeake Corporation case, fee paid to the
stock exchange was annual and recurring. In the instant case, We deal with the stock
listing fee paid annually to a stock exchange for the privilege of having its stock listed.
It must be noted that the Court of Tax Appeal rejected the Dome Mines case because it
involves a payment made only once, hence, it was held a capital expenditure, as
distinguished from the instant case, where payments were made annually. For this
reason, We hold that said listing fee is an ordinary and necessary business expense.

Same; Where a contingency fee was in fact added back to income is a question of fact
in regard which the Court of Tax Appeals’ finding will, as a rule, be respected.—On this
issue, this Court has consistently ruled in several cases adverted to earlier, that in the
absence of grave abuse of discretion or error on the part of the tax court its findings of
facts may not be disturbed by the Supreme Court. It is not within the province of this
Court to resolve whether or not the P60,000 representing “provision for contingencies”
was in fact added to or deducted from the taxable income. As ruled by the Court of Tax
Appeals, the said amount was in effect added to Atlas taxable income. The same being
factual in nature and supported by substantial evidence, such findings should not be
disturbed in this appeal.

Same; Litigation expense incurred in defense of title to property is capital in nature and
not deductible.—There is no question that, as held by the Court of Tax Appeals, the
litigation expenses under consideration were incurred in defense of Atlas title to its
mining properties. In line with the decision of the U.S. Tax Court in the case of Safety
Tube Corp. vs. Commissioner of Internal Revenue, it is well settled that litigation
expenses incurred in defense or protection of title are capital in nature and not
deductible. Likewise, it was ruled by the U.S. Tax Court that expenditures in defense of
title of property constitute a part of the cost of the property, and are not deductible as
expense.

Same; Taxes are the lifeblood of the nation. Neglect or omission of tax officials in
collection of taxes should not be allowed to visit harm on the treasury and is deemed an
exception to the rule on estoppel.—As held in the case of Vera vs. Fernandez, this Court
emphatically said that taxes are the lifeblood of the Government and their prompt and
certain availability are imperious need. Upon taxation depends the Government’s ability
to serve the people for whose benefit taxes are collected. To safeguard such interest,
neglect or omission of government officials entrusted with the collection of taxes should
not be allowed to bring harm or detriment to the people, in the same manner as private
persons may be made to suffer individually on account of his own negligence, the
presumption being that they take good care of their personal affair. This should not
hold true to government officials with respect to matters not of their own personal
concern. This is the philosophy behind the government’s exception, as a general rule,
from the operation of the principle of estoppel.

PETITIONS for review from the decision of the Court of Tax Appeals.

The facts are stated in the opinion of the Court.

DE CASTRO, J.:

These are two (2) petitions for review from the decision of the Court of Tax Appeals of
October 25, 1966 in CTA Case No. 1312 entitled “Atlas Consolidated Mining and
Development Corporation vs. Commissioner of Internal Revenue.” One (L-26911) was
filed by the Atlas Consolidated Mining & Development Corporation, and in the other (L-
26924), the Commissioner of Internal Revenue is the petitioner.

This tax case (CTA No. 1312) arose from the 1957 and 1958 deficiency income tax
assessments made by the Commissioner of Internal Revenue, hereinafter referred to as
Commissioner, where the Atlas Consolidated Mining and Development Corporation,
hereinafter referred to as Atlas, was assessed P546,295.16 for 1957 and P215,493.96
for 1958 deficiency income taxes.

Atlas is a corporation engaged in the mining industry registered under the laws of the
Philippines. On August 20, 1962, the Commissioner assessed against Atlas the sum of
P546,295.16 and P215,493.96 or a total of P761,789.12 as deficiency income taxes for
the years 1957 and 1958. For the year 1957, it was the opinion of the Commissioner
that Atlas is not entitled to exemption from the income tax under Section 4 of Republic
Act 9091 because same covers only gold mines, the provision of which reads:
“New mines, and old mines which resume operation, when certified to as such by the
Secretary of Agriculture and Natural Resources upon the recommendation of the
Director of Mines, shall be exempt from the payment of income tax during the first
three (3) years of actual commercial production. Provided that, any such mine and/or
mines making a complete return of its capital investment at any time within the said
period, shall pay income tax from that year.”

For the year 1958, the assessment of deficiency income tax of P761,789.12 covers the
disallowance of items claimed by Atlas as deductible from gross income.

On October 9, 1962, Atlas protested the assessment asking for its reconsideration and
cancellation.2 Acting on the protest, the Commissioner conducted a reinvestigation of
the case.

On October 25, 1962, the Secretary of Finance ruled that the exemption provided in
Republic Act 909 embraces all new mines and old mines whether gold or other
minerals.3 Accordingly, the Commissioner recomputed Atlas deficiency income tax
liabilities in the light of the ruling of the Secretary of Finance. On June 9, 1964, the
Commissioner issued a revised assessment entirely eliminating the assessment of
P546,295.16 for the year 1957. The assessment for 1958 was reduced from
P215,493.96 to P39,646.82 from which Atlas appealed to the Court of Tax Appeals,
assailing the disallowance of the follow-ing items claimed as deductible from its gross
income for 1958:

Transfer agent’s fee .......................................................

P59,477.42

Stockholders relation service fee ...................................

25,523.14

U.S. stock listing expenses ............................................

8,326.70

Suit expenses ..................................................................

6,666.65

Provision for contingencies ...........................................

60,000.00

     Total ......................................................................

P159,993.91
After hearing, the Court of Tax Appeals rendered a decision on October 25, 1966
allowing the abovementioned disallowed items, except the items denominated by Atlas
as stockholders relation service fee and suit expenses.4 Pertinent portions of the
decision of the Court of Tax Appeals read as follows:

“Under the facts, circumstances and applicable law in this case, the unallowable
deduction from petitioner’s gross income in 1958 amounted to P32,189.79.

Stockholders relation

     service fee .......................................................

P25,523.14

Suit and litigation expenses ..........................................................

6,666.65

Total ................................................................

P32,189.79

“As the exemption of petitioner from the payment of corporate income tax under
Section 4, Republic Act 909, was good only up to the 1st quarter of 1958 ending on
March 31 of the same year, only three-fourth (3/4) of the net taxable income of
petitioner is subject to income tax, computed as follows:

1958

Total net income for 1958 ....................................................

P1,968,898.27

Net income corresponding to

     taxable period April 1 to

     Dec. 31, 1958, 3/4 of

     P1,968,898.27 ..................................................................

1,476,673.70

Add: 3/4 of promotion fees

     of P25,523.14...................................................................

P19,142.35
     Litigation

     expenses .....................................................................

6,666.65

Net income per decision .......................................................

P1,502,482.70

Tax due thereon ....................................................................

412,695.00

Less: Amount already assessed.............................................

405,468.00

DEFICIENCY INCOME TAX DUE

P 7,227.00

Add: 1/2% monthly interest

     from 6-20-59 to 6-20-62 (18%)

P 1,300.89

TOTAL AMOUNT DUE & COLLECTIBLE.

P 8,526.22”

From the Court of Tax Appeals’ decision of October 25, 1966, both parties appealed to
this Court by way of two (2) separate petitions for review docketed as G. R. No. L-
26911 (Atlas, petitioner) and G. R. No. L-29924 (Commissioner, petitioner).

G. R. No. L-26911—Atlas appealed only that portion of the Court of Tax Appeals’
decision disallowing the deduction from gross income of the so-called stockholders
relation service fee amounting to P25,523.14, making a lone assignment of error that—

“THE COURT OF TAX APPEALS ERRED IN ITS CONCLUSION THAT THE EXPENSE IN THE
AMOUNT OF P25,523.14 PAID BY PETITIONER IN 1958 AS ANNUAL PUBLIC RELATIONS
EXPENSES WAS INCURRED FOR ACQUISITION OF ADDITIONAL CAPITAL, THE SAME
NOT BEING SUPPORTED BY THE EVIDENCE.”
It is the contention of Atlas that the amount of P25,523.14 paid in 1958 as annual
public relations expenses is a deductible expense from gross income under Section
30(a) (1) of the National Internal Revenue Code. Atlas claimed that it was paid for
services of a public relations firm, P.K. Macker & Co., a reputable public relations
consultant in New York City, U.S.A., hence, an ordinary and necessary business
expense in order “to compete with other corporations also interested in the investment
market in the United States.”5 It is the stand of Atlas that information given out to the
public in general and to the stockholder in particular by the P.K. Macker & Co.
concerning the operation of the Atlas was aimed at creating a favorable image and
goodwill to gain or maintain their patronage.

The decisive question, therefore, in this particular appeal taken by Atlas to this Court is
whether or not the expenses paid for the services rendered by a public relations firm
P.K. Macker & Co. labelled as stockholders relation service fee is an allowable deduction
as business expense under Section 30 (a) (1) of the National Internal Revenue Code.

The principle is recognized 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. As previously
adverted to, the law allowing expenses as deduction from gross income for purposes of
the income tax is Section 30 (a) (1) of the National Internal Revenue which allows a
deduction of “all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business.” An item of expenditure, in order to
be deductible under this section of the statute, must fall squarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be

deductible as a business expense, three conditions are imposed, namely: (1) the
expense must be ordinary and necessary, (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in carrying in a trade or business.6 In
addition, not only must the taxpayer meet the business test, he must substantially
prove by evidence or records the deductions claimed under the law, otherwise, the
same will be disallowed. The mere allegation of the taxpayer that an item of expense is
ordinary and necessary does not justify its deduction.7

While it is true that there is a number of decisions in the United States delving on the
interpretation of the terms “ordinary and necessary” as used in the federal tax laws, no
adequate or satisfactory definition of those terms is possible. Similarly, this Court has
never attempted to define with precision the terms “ordinary and necessary.” There are
however, certain guiding principles worthy of serious consideration in the proper
adjudication of conflicting claims. Ordinarily, an expense will be considered “necessary”
where the expenditure is appropriate and helpful in the development of the taxpayer’s
business.8 It is “ordinary” when it connotes a payment which is normal in relation to
the business of the taxpayer and the surrounding circumstances.9 The term “ordinary”
does not require that the payments be habitual or normal in the sense that the same
taxpayer will have to make them often; the payment may be unique or non-recurring to
the particular taxpayer affected.10

There is thus no hard and fast rule on the matter. The right to a deduction depends in
each case on the particular facts and the relation of the payment to the type of
business in which the taxpayer is engaged. The intention of the taxpayer often may be
the controlling fact in making the determination.11 Assuming that the expenditure is
ordinary and necessary in the operation of the taxpayer’s business, the answer to the
question as to whether the expenditure is an allowable deduction as a business expense
must be determined from the nature of the expenditure itself, which in turn depends on
the extent and permanency of the work accomplished by the expenditure.12

It appears that on December 27, 1957, Atlas increased its capital stock from
P15,000,000 to P18,325,000.13 It was claimed by Atlas that its shares of stock worth
P3,325,000 were sold in the United States because of the services rendered by the
public relations firm, P. K. Macker & Company. The Court of Tax Appeals ruled that the
information about Atlas given out and played up in the mass communication media
resulted in full subscription of the additional shares issued by Atlas; consequently, the
questioned item, stockholders relation service fee, was in effect spent for the
acquisition of additional capital, ergo, a capital expenditure.

We sustain the ruling of the tax court that the expenditure of P25,523.14 paid to P.K.
Macker & Co. as compensation for services carrying on the selling campaign in an effort
to sell Atlas’ additional capital stock of P3,325,000 is not an ordinary expense in line
with the decision of U.S. Board of Tax Appeals in the case of Harrisburg Hospital, Inc.
vs. Commissioner of Internal Revenue.14 Accordingly, as found by the Court of Tax
Appeals, the said expense is not deductible from Atlas gross income in 1958 because
expenses relating to recapitalization and reorganization of the corporation (Missouri-
Kansas Pipe Line vs. Commissioner of Internal Revenue, 148 F. (2d), 460; Skenandos
Rayon Corp. vs. Commissioner of Internal Revenue, 122 F. (2d) 268, Cert. denied 314
U.S. 6961), the cost of obtaining stock subscription (Simons Co., 8 BTA 631),
promotion expenses (Beneficial Industrial Loan Corp. vs. Handy, 92 F. (2d) 74), and
commission or fees paid for the sale of stock reorganization (Protective Finance Corp.,
23 BTA 308) are capital expenditures.

That the expense in question was incurred to create a favorable image of the
corporation in order to gain or maintain the public’s and its stockholders’ patronage,
does not make it deductible as business expense. As held in the case of Welch vs.
Helvering,15 efforts to establish reputation are akin to acquisition of capital assets and,
therefore, expenses related thereto are not business expense but capital expenditures.

We do not agree with the contention of Atlas that the conclusion of the Court of Tax
Appeals in holding that the expense of P25,523.14 was incurred for acquisition of
additional capital is not supported by the evidence. The burden of proof that the
expenses incurred are ordinary and necessary is on the tax-payer16 and does not rest
upon the Government. To avail of the claimed deduction under Section 30(a) (1) of the
National Internal Revenue Code, it is incumbent upon the taxpayer to adduce
substantial evidence to establish a reasonably proximate relation between the expenses
to the ordinary conduct of the business of the taxpayer. A logical link or nexus between
the expense and the taxpayer’s business must be established by the taxpayer.

G. R. No. L-26924—In his petition for review, the Commissioner of Internal Revenue
assigned as errors the following:

“THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION FROM GROSS
INCOME OF THE SO-CALLED TRANSFER AGENT’S FEES ALLEGEDLY PAID BY
RESPONDENT;

II

“THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION FROM GROSS
INCOME OF LISTING EXPENSES ALLEGEDLY INCURRED BY RESPONDENT;

III

“THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE AMOUNT OF P60,000
REPRESENTED BY RESPONDENT AS “PROVISION FOR CONTINGENCIES” WAS ADDED
BACK BY RESPONDENT TO ITS GROSS INCOME IN COMPUTING THE INCOME TAX DUE
FROM IT FOR 1958;

IV

“THE COURT OF TAX APPEALS ERRED IN DISALLOWING ONLY THE AMOUNT OF

P6,666.65 AS SUIT EXPENSES, THE CORRECT AMOUNT THAT SHOULD HAVE BEEN
DISALLOWED BEING P17,499.98.
It is well to note that only in the Court of Tax Appeals did the Commissioner raise for
the first time (in his memorandum) the question of whether or not the business
expenses deducted from Atlas gross income in 1958 may be allowed in the absence of
proof of payments.17 Before this Court, the Commissioner reiterated the same as
ground against deductibility when he claimed that the Court of Tax Appeals erred in
allowing the deduction of transfer agent’s fee and stock listing fee from gross income in
the absence of proof of payment thereof. The Commissioner contended that under
Section 30 (a) (1) of the National Internal Revenue Code, it is a requirement for an
expense to be deductible from gross income that it must have been “paid or incurred
during the year” for which it is claimed; that in the absence of convincing and
satisfactory evidence of payment, the deduction from gross income for the year 1958
income tax return cannot be sustained; and that the best evidence to prove payment, if
at all any has been made, would be the vouchers or receipts issued therefor which
ATLAS failed to present.

Atlas admitted that it failed to adduce evidence of payment of the deduction claimed in
its 1958 income tax return, but explains the failure with the allegation that the
Commissioner did not raise that question of fact in his pleadings, or even in the report
of the investigating examiner and/or letters of demand and assessment notices of
ATLAS which gave rise to its appeal to the Court of Tax Appeal.18 It was emphasized
by Atlas that it went to trial and finally submitted this case for decision on the
assumption that inasmuch as the fact of payment was never raised as a vital issue by
the Commissioner in his answer to the petition for review in the Court of Tax Appeal,
the issues is limited only to pure question of law—whether or not the expenses
deducted by petitioner from its gross income for 1958 are sanctioned by Section 30 (a)
(1) of the National Internal Revenue Code.

On this issue of whether or not the Commissioner can raise the fact of payment for the
first time on appeal in its memorandum in the Court of Tax Appeal, We fully agree with
the ruling of the tax court that the Commissioner on appeal cannot be allowed to adopt
a theory distinct and different from that he has previously pursued, as shown by the
BIR records and the answer to the amended petition for review.19 As this Court said in
the case of Commissioner of Customs vs. Valencia20 such change in the nature of the
case may not be made on appeal, specially when the purpose of the latter is to seek a
review of the action taken by an administrative body, forming part of a coordinate
branch of the Government, such as the Executive department. In the case at bar, the
Court of Tax Appeal found that the fact of payment of the claimed deduction from gross
income was never controverted by the Commissioner even during the initial stages of
routinary administrative scrutiny conducted by BIR examiners.21 Specifically, in his
answer to the amended petition for review in the Court of Tax Appeal, the
Commissioner did not deny the fact of payment, merely contesting the legitimacy of the
deduction on the ground that same was not ordinary and necessary business
expenses.22
As consistently ruled by this Court, the findings of facts by the Court of Tax Appeal will
not be reviewed in the absence of showing of gross error or abuse.23 We, therefore,
hold that it was too late for the Commissioner to raise the issue of fact of payment for
the first time in his memorandum in the Court of Tax Appeals and in this instant appeal
to the Supreme Court. If raised earlier, the matter ought to have been seriously delved
into by the Court of Tax Appeals. On this ground, We are of the opinion that under all
the attendant circumstances of the case, substantial justice would be served if the
Commissioner be held as precluded from now attempting to raise an issue to disallow
deduction of the item in question at this stage. Failure to assert a question within a
reasonable time warrants a presumption that the party entitled to assert it either has
abandoned or declined to assert it.

On the second assignment of error, aside from alleging lack of proof of payment of the
expense deducted, the Commissioner contended that such expense should be
disallowed for not being ordinary and necessary and not incurred in trade or business,
as required under Section 30 (a) (1) of the National Internal Revenue Code. He
asserted that said fees were therefore incurred not for the production of income but for
the acquisition of capital in view of the definition that an expense is deem-ed to be
incurred in trade or business if it was incurred for the production of income, or in the
expectation of producing income for the business. In support of his contention, the
Commissioner cited the ruling in Dome Mines, Ltd. vs. Commissioner of Internal
Revenue24 involving the same issue as in the case at bar where the U.S. Board of Tax
Appeal ruled that expenses for listing capital stock in the stock exchange are not
ordinary and necessary expenses incurred in carrying on the taxpayer’s business which
was gold mining and selling, which business is strikingly similar to Atlas.

On the other hand, the Court of Tax Appeal relied on the ruling in the case of
Chesapeake Corporation of Virginia vs. Commissioner of Internal Revenue25 where the
Tax Court allowed the deduction of stock exchange fee in dispute, which is an annually
recurring cost for the annual maintenance of the listing.

We find the Chesapeake decision controlling with the facts and circumstances of the
instant case. In Dome Mines, Ltd. case the stock listing fee was disallowed as a
deduction not only because the expenditure did not meet the statutory test but also
because the same was paid only once, and the benefit acquired thereby continued
indefinitely, whereas, in the Chesapeake Corporation case, fee paid to the stock
exchange was annual and recurring. In the instant case, We deal with the stock listing
fee paid annually to a stock exchange for the privilege of having its stock listed. It must
be noted that the Court of Tax Appeal rejected the Dome Mines case because it involves
a payment made only once, hence, it was held therein that the single payment made to
the stock exchange was a capital expenditure, as distinguished from the instant case,
where payments were made annually. For this reason, We hold that said listing fee is
an ordinary and necessary business expense.
On the third assignment of error, the Commissioner contended that the Court of Tax
Appeal erred when it held that the amount of P60,000 as “provisions for contingencies”
was in effect added back to Atlas income.

On this issue, this Court has consistently ruled in several cases adverted to earlier, that
in the absence of grave abuse of discretion or error on the part of the tax court its
findings of facts may not be disturbed by the Supreme Court.26 It is not within the
province of this Court to resolve whether or not the P60,000 representing “provision for
contingencies” was in fact added to or deducted from the taxable income. As ruled by
the Court of Tax Appeals, the said amount was in effect added to Atlas taxable
income.27 The same being factual in nature and supported by substantial evidence,
such findings should not be disturbed in this appeal.

Finally, in its fourth assignment of error, the Commissioner contended that the CTA
erred in disallowing only the amount of P6,666.65 as suit expenses instead of
P17,499.98.

It appears that petitioner deducted from its 1958 gross income the amount of
P23,333.30 as attorney’s fees and litigation expenses in the defense of title to the
Toledo Mining properties purchased by Atlas from Mindanao Lode Mines Inc. in Civil
Case No. 30566 of the Court of First Instance of Manila for annulment of the sale of
said mining properties. On the ground that the litigation expense was a capital
expenditure under Section 121 of the Revenue Regulation No. 2, the investigating
revenue examiner recommended the disallowance of P13,333.30. The Commissioner,
however, reduced this amount of P6,666.65 which latter amount was affirmed by the
respondent Court of Tax Appeals on appeal.

There is no question that, as held by the Court of Tax Appeals, the litigation expenses
under consideration were incurred in defense of Atlas title to its mining properties. In
line with the decision of the U.S. Tax Court in the case of Safety Tube Corp. vs.
Commissioner of Internal Revenue,28 it is well settled that litigation expenses incurred
in defense or protection of title are capital in nature and not deductible. Likewise, it was
ruled by the U.S. Tax Court that expenditures in defense of title of property constitute a
part of the cost of the property, and are not deductible as expense.29

Surprisingly, however, the investigating revenue examiner recommended a partial

disallowance of P13,333.30 instead of the entire amount of P23,333.30, which, upon
review, was further reduced by the Commissioner of Internal Revenue. Whether it was
due to mistake, negligence or omission of the officials concerned, the arithmetical error
committed herein should not prejudice the Government. This Court will pass upon this
particular question since there is a clear error committed by officials concerned in the
computation of the deductible amount. As held in the case of Vera vs. Fernandez,30
this Court emphatically said that taxes are the lifeblood of the Government and their
prompt and certain availability are imperious need. Upon taxation depends the
Government’s ability to serve the people for whose benefit taxes are collected. To
safeguard such interest, neglect or omission of government officials entrusted with the
collection of taxes should not be allowed to bring harm or detriment to the people, in
the same manner as private persons may be made to suffer individually on account of
his own negligence, the presumption being that they take good care of their personal
affair. This should not hold true to government officials with respect to matters not of
their own personal concern. This is the philosophy behind the government’s exception,
as a general rule, from the operation of the principle of estoppel.31

WHEREFORE, judgment appealed from is hereby affirmed with modification that the
amount of P17,499.98 (3/4 of P23,333.00) representing suit expenses be disallowed as
deduction instead of P6,666.65 only. With this amount as part of the net income, the
corresponding income tax shall be paid thereon, with interest of 6% per annum from
June 20, 1959 to June 20, 1962.

SO ORDERED.

G.R. No. L-31305 May 10, 1990

HOSPITAL DE SAN JUAN DE DIOS, INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

Valdez, Ereso, Polido & Associates for petitioner.

Taxation; Court of Tax Appeals; Evidence; Factual finding by the Court of Appeals that
the interests and dividends received by petitioner were merely incidental income to
petitioner’s main activity which is the operation of its hospital and nursing school hence
the conclusion is inevitable that petitioner’s activities never went beyond that of a
passive investor which under existing jurisprudence do not come within the purview of
carrying on any trade or business binding on the Supreme Court.—The Court of Tax
Appeals found that the interests and dividends received by the petitioner “were merely
incidental income to petitioner’s main activity, which is the operation of its hospital and
nursing schools [hence] the conclusion is inevitable that petitioner’s activities never
went beyond that of a passive investor, which under existing jurisprudence do not come
within the purview of carrying on any ‘trade or business.’ ” (pp. 47-48, Rollo.) That
factual finding is binding on this Court.

Same; Same; Same; Court of Tax Appeals correctly ruled that said income should not
share in the allocation of administrative expenses.—And, as the principle of allocating
expenses is grounded on the premise that the taxable income was derived from
carrying on a trade or business, as distinguished from mere receipt of interests and
dividends from one’s investments, the Court of Tax Appeals correctly ruled that said
income should not share in the allocation of administrative expenses. Hospital De San
Juan De Dios, Inc. vs. Commissioner of Internal Revenue, 185 SCRA 273, G.R. No.
31305 May 10, 1990
GRIÑO-AQUINO, J.:

In a letter dated January 15, 1959, the Commissioner of Internal Revenue assessed
and demanded from the petitioner, Hospital De San Juan De Dios, Inc., payment of
P51,462 as deficiency income taxes for 1952 to 1955.

The petitioner protested against the assessment and requested the Commissioner to
cancel and withdraw it. After reviewing the assessment, the Commissioner advised
petitioner on November 8, 1960 that the deficiency income tax assessment against it
was reduced to only P16,852.41. Still the petitioner, through its auditors, insisted on
the cancellation of the revised assessment. The request was, however, denied.

On September 18, 1965, petitioner sought a review of the assessment by the Court of
Tax Appeals (hereafter "CTA"). In a decision dated August 29, 1969, the CTA upheld
the Commissioner. It held that the expenses incurred by the petitioner for handling its
funds or income consisting solely of dividends and interests, were not expenses
incurred in "carrying on any trade or business," hence, not deductible as business or
administrative expenses.

Petitioner filed a motion for reconsideration of the CTA decision. When its motion was
denied, it filed this petition for review.

The background of the controversy is stated in the decision of the CTA as follows:

There is no dispute that petitioner is engaged in both taxable and non-

taxable operations. The income derived from the operations of the
hospital and the nursing school are exempt from income tax while the rest
of petitioner's income are subject thereto. Its taxable or non-operating
income consists of rentals, interests and dividends received from its
properties and investments. In the computation of its taxable income for
the years 1952 to 1955, petitioner allowed all its taxable income to share
in the allocation of administrative expenses. Respondent disallowed,
however, the interests and dividends from sharing in the allocation of
administrative expense on the ground that the expenses incurred in the
administration or management of petitioner's investments are not
allowable business expenses inasmuch as they were not incurred in
'carrying on any trade or business' within the contemplation of Section 30
(a) (1) of the Revenue Code. Consequently, petitioner was assessed
deficiency income taxes for the years in question. (pp. 45-46, Rollo.)

The applicable law is Section 30 of the Revenue Code which provides:

Sec. 30. Deductions from Gross Income. In computing net income there
shad be allowed as deduction —

(A) Expenses:

(i) 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 . . . (Emphasis supplied). (p. 46, Rollo.)

The Court of Tax Appeals found, however, that:

. . . petitioner failed to establish by competent proof that its receipt of

interests and dividends constituted the carrying on of a "trade or
business" so as to warrant the deductibility of the expenses incurred in
their realization. No evidence whatsoever was presented by petitioner to
show how it handled its investment, the manner it bought, sold and
reinvested its securities, how it made decisions, and whether it consulted
brokers, investment or statistical services. Neither is there any showing of
the extent of its activities in stocks or bonds, and participation, if any,
direct or indirect, in the management of the corporations where it made
investments. In effect, there is total absence of any indication of a
business-like management or operation of its interests and dividends.
(See Roebling vs. Comm. of Int. Rev., 37 BTA 82). Instead, petitioner
merely relied on the assumption that "if it is to handle its investment
portfolio profitably", it has either to engage the services of an investment
banker or administer it from within but the latter necessarily involves
studying the securities market, the tax aspects of the investments, hiring
accountants, collectors, clerical help, etc. without showing that it was
actually performing these varied activities. Petitioner could have easily
required any of its responsible officials to testify on this regard but it
failed to do so. Under these circumstances and coupled with the fact that
the interests and dividends here in question are merely incidental income
to petitioner's main activity, which is the operation of its hospital and
nursing schools, the conclusion becomes inevitable that petitioner's
activities never go beyond that of a passive investor, which under existing
jurisprudence do not come within the purview of carrying on any "trade or
business". (pp. 47-48, Rollo.)

The Court of Tax Appeals found that the interests and dividends received by the
petitioner "were merely incidental income to petitioner's main activity, which is the
operation of its hospital and nursing schools [hence] the conclusion is inevitable that
petitioner's activities never went beyond that of a passive investor, which under
existing jurisprudence do not come within the purview of carrying on any 'trade or
business'." (pp. 47-48, Rollo) That factual finding is binding on this Court. And, as the
principle of allocating expenses is grounded on the premise that the taxable income was
derived from carrying on a trade or business, as distinguished from mere receipt of
interests and dividends from one's investments, the Court of Tax Appeals correctly
ruled that said income should not share in the allocation of administrative expenses (p.
49, Rollo).

Hospital de San Juan De Dios, Inc., according to its Articles of Incorporation, was
established for purposes "Which are benevolent, charitable and religious, and not for
financial gain" (p. 12, Petitioner's Brief). It is not carrying on a trade or business for the
word "business" in its ordinary and common use means "human efforts which have for
their end living or reward; it is not commonly used as descriptive of charitable,
religious, educational or social agencies" or "any particular occupation or employment
habitually engaged in especially for livelihood or gain" or "activities where profit is the
purpose or livelihood is the motive." (Collector of Internal Revenue vs. Manila Lodge
BPOE 105 Phil. 986).

The fact that petitioner was assessed a real estate dealer's fixed tax of P640 on its
rental income does not alter its status as a charitable, non-stock, non-profit
corporation.

WHEREFORE, finding no reversible error in the decision of the Court of Tax Appeals, the
same is affirmed in toto. Costs against the petitioner. This decision is immediately
executory.

SO ORDERED.

G.R. Nos. L-28508-9 July 7, 1989

ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil

Company), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Padilla Law Office for petitioner.

Taxation; Police Power; Margin fee is not a tax but an exaction designed to curb the
excessive demands upon international reserves; Definition of Margin Levy;
Distinguished from tax.—Apart from the above consideration, there are at least two
cases where we have held that a margin fee is not a tax but an exaction designed to
curb the excessive demands upon our international reserve. In Caltex (Phil.) Inc. v.
Acting Commissioner of Customs, the Court stated through Justice Jose P. Bengzon: A
margin levy on foreign exchange is a form of exchange control or restriction designed
to discourage imports and encourage exports, and ultimately ‘curtail any excessive
demand upon the international reserve’ in order to stabilize the currency. Originally
adopted to cope with balance of payment pressures, exchange restrictions have come
to serve various purposes, such as limiting nonessential imports, protecting domestic
industry—and when combined with the use of multiple currency rates—providing a
source of revenue to the government, and are in many developing countries regarded
as a more or less inevitable concomitant of their economic development programs. The
different measures of exchange control or restriction cover different phases of foreign
exchange transactions, i.e., in quantitative restriction, the control is on the amount of
foreign exchange allowable. In the case of the margin levy, the immediate impact is on
the rate of foreign exchange; in fact, its main function is to control the exchange rate
without changing the par value of the peso as fixed in the Bretton Woods Agreement
Act. For a member nation is not supposed to alter its exchange rate (at par value) to
correct a merely temporary disequilibrium in its balance of payments. By its nature, the
margin levy is part of the rate of exchange as fixed by the government. As to the
contention that the margin levy is a tax on the purchase of foreign exchange and hence
should not form part of the exchange rate, suffice it to state that We have already held
the contrary for the reason that a tax is levied to provide revenue for government
operations, while the proceeds of the margin fee are applied to strengthen our country’s
international reserves.

Same; Same; Same; Export tax; No merit in the argument that the 20% retention of
exporter’s foreign exchange constitutes an export tax; Reasons; Margin Fee imposed in
the exercise of police power.—Earlier, in Chamber of Agriculture and Natural Resources
of the Philippines v. Central Bank, the same idea was expressed, though in connection
with a different levy, through Justice J.B.L. Reyes: Neither do we find merit in the
argument that the 20% retention of exporter’s foreign exchange constitutes an export
tax. A tax is a levy for the purpose of providing revenue for government operations,
while the proceeds of the 20% retention, as we have seen, are applied to strengthen
the Central Bank’s international reserve. We conclude then that the margin fee was
imposed by the State in the exercise of its police power and not the power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be
considered necessary and ordinary business expenses and therefore still deductible
from its gross income. The fees were paid for the remittance by ESSO as part of the
profits to the head office in the United States. Such remittance was an expenditure
necessary and proper for the conduct of its corporate affairs.

Same; Same; Same; Deductions; Expenses, elements of.—We come, then, to the
statutory test of deductibility where it is axiomatic that to be deductible as a business
expense, three conditions are imposed, namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be
paid or incurred in carrying on a trade or business. In addition, not only must the
taxpayer meet the business test, he must substantially prove by evidence or records
the deductions claimed under the law, otherwise, the same will be disallowed. The mere
allegation of the taxpayer that an item of expense is ordinary and necessary does not
justify its deduction.

Same; Same; Same; Same; Margin fees are not expenses in connection with the
business of the petitioners; Reasons.—There is thus no hard and fast rule on the
matter. The right to a deduction depends in each case on the particular facts and the
relation of the payment to the type of business in which the taxpayer is engaged. The
intention of the taxpayer often may be the controlling fact in making the determination.
Assuming that the expenditure is ordinary and necessary in the operation of the
taxpayer’s business, the answer to the question as to whether the expenditure is an
allowable deduction as a business expense must be determined from the nature of the
expenditure itself, which in turn depends on the extent and permanency of the work
accomplished by the expenditure.

Same; Same; Same; Same; Rule that claims for deductions are a matter of legislative
grace; Burden of justifying a deduction lies on the taxpayer.—Since the margin fees in
question were incurred for the remittance of funds to petitioner’s Head Office in New
York, which is a separate and distinct income taxpayer from the branch in the
Philippines, for its disposal abroad, it can never be said therefore that the margin fees
were appropriate and helpful in the development of petitioner’s business in the
Philippines exclusively or were incurred for purposes proper to the conduct of the affairs
of petitioner’s branch in the Philippines exclusively or for the purpose of realizing a
profit or of minimizing a loss in the Philippines exclusively. If at all, the margin fees
were incurred for purposes proper to the conduct of the corporate affairs of Standard
Vacuum Oil Company in New York, but certainly not in the Philippines.

Same; Same; Same; Same; Expenses; Esso, having assumed an expense properly
attributable to its head office, cannot claim the same as an ordinary and necessary
expense paid or incurred in carrying on its own trade or business.—ESSO has not
shown that the remittance to the head office of part of its profits was made in
furtherance of its own trade or business. The petitioner merely presumed that all
corporate expenses are necessary and appropriate in the absence of a showing that
they are illegal or ultra vires. This is error. The public respondent is correct when it
asserts that “the paramount rule is that claims for deductions are a matter of legislative
grace and do not turn on mere equitable considerations x x x. The taxpayer in every
instance has the burden of justifying the allowance of any deduction claimed.” It is clear
that ESSO, having assumed an expense properly attributable to its head office, cannot
now claim this as an ordinary and necessary expense paid or incurred in carrying on its
own trade or business. Esso Standard Eastern, Inc. vs. Comm'r. of Internal Revenue,
175 SCRA 149, G.R. Nos. 28508-9 July 7, 1989

CRUZ, J.:

On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's

claims for refund of overpaid income taxes of P102,246.00 for 1959 and P434,234.93
for 1960 in CTA Cases No. 1251 and 1558 respectively.

In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as
part of its ordinary and necessary business expenses, the amount it had spent for
drilling and exploration of its petroleum concessions. This claim was disallowed by the
respondent Commissioner of Internal Revenue on the ground that the expenses should
be capitalized and might be written off as a loss only when a "dry hole" should result.
ESSO then filed an amended return where it asked for the refund of P323,279.00 by
reason of its abandonment as dry holes of several of its oil wells. Also claimed as
ordinary and necessary expenses in the same return was the amount of P340,822.04,
representing margin fees it had paid to the Central Bank on its profit remittances to its
New York head office.

On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the
claimed deduction for the margin fees paid.

In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year
1960, in the amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the
period from April 18,1961 to April 18, 1964, for a total of P434,232.92. The deficiency
arose from the disallowance of the margin fees of Pl,226,647.72 paid by ESSO to the
Central Bank on its profit remittances to its New York head office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit
of P221,033.00 representing its overpayment on its income tax for 1959 and paying
under protest the additional amount of P213,201.92. On August 13, 1964, it claimed
the refund of P39,787.94 as overpayment on the interest on its deficiency income tax.
It argued that the 18% interest should have been imposed not on the total deficiency of
P367,944.00 but only on the amount of P146,961.00, the difference between the total
deficiency and its tax credit of P221,033.00.

This claim was denied by the CIR, who insisted on charging the 18% interest on the
entire amount of the deficiency tax. On May 4,1965, the CIR also denied the claims of
ESSO for refund of the overpayment of its 1959 and 1960 income taxes, holding that
the margin fees paid to the Central Bank could not be considered taxes or allowed as
deductible business expenses.

ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending
that the margin fees were deductible from gross income either as a tax or as an
ordinary and necessary business expense. It also claimed an overpayment of its tax by
P434,232.92 in 1960, for the same reason. Additionally, ESSO argued that even if the
amount paid as margin fees were not legally deductible, there was still an overpayment
by P39,787.94 for 1960, representing excess interest.

After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and
P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess interest. This
portion of the decision was appealed by the CIR but was affirmed by this Court
in Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502- 03, promulgated on
April 18, 1989. ESSO for its part appealed the CTA decision denying its claims for the
refund of the margin fees P102,246.00 for 1959 and P434,234.92 for 1960. That is the
issue now before us.

II

The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the
Central Bank of the Philippines to Establish a Margin Over Banks' Selling Rates of
Foreign Exchange, is a police measure or a revenue measure. If it is a revenue
measure, the margin fees paid by the petitioner to the Central Bank on its profit
remittances to its New York head office should be deductible from ESSO's gross income
under Sec. 30(c) of the National Internal Revenue Code. This provides that all taxes
paid or accrued during or within the taxable year and which are related to the
taxpayer's trade, business or profession are deductible from gross income.

The petitioner maintains that margin fees are taxes and cites the background and
legislative history of the Margin Fee Law showing that R.A. 2609 was nothing less than
a revival of the 17% excise tax on foreign exchange imposed by R.A. 601. This was a
revenue measure formally proposed by President Carlos P. Garcia to Congress as part
of, and in order to balance, the budget for 1959-1960. It was enacted by Congress as
such and, significantly, properly originated in the House of Representatives. During its
two and a half years of existence, the measure was one of the major sources of
revenue used to finance the ordinary operating expenditures of the government. It was,
moreover, payable out of the General Fund.
On the claimed legislative intent, the Court of Tax Appeals, quoting established
principles, pointed out that —

We are not unmindful of the rule that opinions expressed in debates, actual proceedings
of the legislature, steps taken in the enactment of a law, or the history of the passage
of the law through the legislature, may be resorted to as an aid in the interpretation of
a statute which is ambiguous or of doubtful meaning. The courts may take into
consideration the facts leading up to, coincident with, and in any way connected with,
the passage of the act, in order that they may properly interpret the legislative intent.
But it is also well-settled jurisprudence that only in extremely doubtful matters of
interpretation does the legislative history of an act of Congress become important. As a
matter of fact, there may be no resort to the legislative history of the enactment of a
statute, the language of which is plain and unambiguous, since such legislative history
may only be resorted to for the purpose of solving doubt, not for the purpose of
creating it. [50 Am. Jur. 328.]

Apart from the above consideration, there are at least two cases where we have held
that a margin fee is not a tax but an exaction designed to curb the excessive demands
upon our international reserve.

In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through

Justice Jose P. Bengzon:

A margin levy on foreign exchange is a form of exchange control or

restriction designed to discourage imports and encourage exports, and
ultimately, 'curtail any excessive demand upon the international reserve'
in order to stabilize the currency. Originally adopted to cope with balance
of payment pressures, exchange restrictions have come to serve various
purposes, such as limiting non-essential imports, protecting domestic
industry and when combined with the use of multiple currency rates
providing a source of revenue to the government, and are in many
developing countries regarded as a more or less inevitable concomitant of
their economic development programs. The different measures of
exchange control or restriction cover different phases of foreign exchange
transactions, i.e., in quantitative restriction, the control is on the amount
of foreign exchange allowable. In the case of the margin levy, the
immediate impact is on the rate of foreign exchange; in fact, its main
function is to control the exchange rate without changing the par value of
the peso as fixed in the Bretton Woods Agreement Act. For a member
nation is not supposed to alter its exchange rate (at par value) to correct
a merely temporary disequilibrium in its balance of payments. By its
nature, the margin levy is part of the rate of exchange as fixed by the
government.

As to the contention that the margin levy is a tax on the purchase of foreign exchange
and hence should not form part of the exchange rate, suffice it to state that We have
already held the contrary for the reason that a tax is levied to provide revenue for
government operations, while the proceeds of the margin fee are applied to strengthen
our country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central
Bank, 3 the same idea was expressed, though in connection with a different levy,
through Justice J.B.L. Reyes:

Neither do we find merit in the argument that the 20% retention of

exporter's foreign exchange constitutes an export tax. A tax is a levy for
the purpose of providing revenue for government operations, while the
proceeds of the 20% retention, as we have seen, are applied to
strengthen the Central Bank's international reserve.

We conclude then that the margin fee was imposed by the State in the exercise of its
police power and not the power of taxation.

Alternatively, ESSO prays that if margin fees are not taxes, they should
nevertheless be considered necessary and ordinary business expenses and
therefore still deductible from its gross income. The fees were paid for the
remittance by ESSO as part of the profits to the head office in the Unites States. Such
remittance was an expenditure necessary and proper for the conduct of its corporate
affairs.

The applicable provision is Section 30(a) of the National Internal Revenue Code reading
as follows:

SEC. 30. Deductions from gross income in computing net income there
shall be allowed as deductions

(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 purpose 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.

(2) Expenses allowable to non-resident alien individuals and foreign

corporations. — In the case of a non-resident alien individual or a foreign
corporation, the expenses deductible are the necessary expenses paid or
incurred in carrying on any business or trade conducted within the
Philippines exclusively.

In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner

of Internal Revenue, 4 the Court laid down the rules on the deductibility of business
expenses, thus:

The principle is recognized 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. As previously adverted to, the law
allowing expenses as deduction from gross income for purposes of the
income tax is Section 30(a) (1) of the National Internal Revenue which
allows a deduction of 'all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business.' An
item of expenditure, in order to be deductible under this section of the
statute, must fall squarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic

that to be deductible as a business expense, three conditions are
imposed, namely: (1) the expense must be ordinary and necessary, (2) it
must be paid or incurred within the taxable year, and (3) it must be paid
or incurred in carrying on a trade or business. In addition, not only must
the taxpayer meet the business test, he must substantially prove by
evidence or records the deductions claimed under the law, otherwise, the
same will be disallowed. The mere allegation of the taxpayer that an item
of expense is ordinary and necessary does not justify its deduction.

While it is true that there is a number of decisions in the United States

delving on the interpretation of the terms 'ordinary and necessary' as
used in the federal tax laws, no adequate or satisfactory definition of
those terms is possible. Similarly, this Court has never attempted to
define with precision the terms 'ordinary and necessary.' There are
however, certain guiding principles worthy of serious consideration in the
proper adjudication of conflicting claims. Ordinarily, an expense will be
considered 'necessary' where the expenditure is appropriate and helpful in
the development of the taxpayer's business. It is 'ordinary' when it
connotes a payment which is normal in relation to the business of the
taxpayer and the surrounding circumstances. The term 'ordinary' does not
require that the payments be habitual or normal in the sense that the
same taxpayer will have to make them often; the payment may be unique
or non-recurring to the particular taxpayer affected.

There is thus no hard and fast rule on the matter. The right to a deduction
depends in each case on the particular facts and the relation of the
payment to the type of business in which the taxpayer is engaged. The
intention of the taxpayer often may be the controlling fact in making the
determination. Assuming that the expenditure is ordinary and necessary
in the operation of the taxpayer's business, the answer to the question as
to whether the expenditure is an allowable deduction as a business
expense must be determined from the nature of the expenditure itself,
which in turn depends on the extent and permanency of the work
accomplished by the expenditure.

In the light of the above explanation, we hold that the Court of Tax Appeals did not err
when it held on this issue as follows:

Considering the foregoing test of what constitutes an ordinary and

necessary deductible expense, it may be asked: Were the margin fees
 paid by petitioner on its profit remittance to its Head Office in New York
appropriate and helpful in the taxpayer's business in the Philippines? Were
the margin fees incurred for purposes proper to the conduct of the affairs
of petitioner's branch in the Philippines? Or were the margin fees incurred
for the purpose of realizing a profit or of minimizing a loss in the
Philippines? Obviously not. As stated in the Lopez case, the margin fees
are not expenses in connection with the production or earning of
petitioner's incomes in the Philippines. They were expenses incurred in the
disposition of said incomes; expenses for the remittance of funds after
they have already been earned by petitioner's branch in the Philippines for
the disposal of its Head Office in New York which is already another
distinct and separate income taxpayer.

xxx

Since the margin fees in question were incurred for the remittance of
funds to petitioner's Head Office in New York, which is a separate and
distinct income taxpayer from the branch in the Philippines, for its
disposal abroad, it can never be said therefore that the margin fees were
appropriate and helpful in the development of petitioner's business in the
Philippines exclusively or were incurred for purposes proper to the conduct
of the affairs of petitioner's branch in the Philippines exclusively or for the
purpose of realizing a profit or of minimizing a loss in the Philippines
exclusively. If at all, the margin fees were incurred for purposes proper to
the conduct of the corporate affairs of Standard Vacuum Oil Company in
New York, but certainly not in the Philippines.

ESSO has not shown that the remittance to the head office of part of its profits was
made in furtherance of its own trade or business. The petitioner merely presumed that
all corporate expenses are necessary and appropriate in the absence of a showing that
they are illegal or ultra vires. This is error. The public respondent is correct when it
asserts that "the paramount rule is that claims for deductions are a matter of legislative
grace and do not turn on mere equitable considerations ... . The taxpayer in every
instance has the burden of justifying the allowance of any deduction claimed." 5

It is clear that ESSO, having assumed an expense properly attributable to its head
office, cannot now claim this as an ordinary and necessary expense paid or incurred in
carrying on its own trade or business.

WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims
for refund of P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs
against the petitioner.

SO ORDERED.
G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

Taxation; Nature of taxes; Purpose of taxation; Collection of taxes should be made in

accordance with law.—Taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance. On the other hand, such collection should be
made in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved.

Same; Appeal; Appeal from a decision of the Commissioner of Internal Revenue with
the Court of Tax Appeals is 30 days from receipt thereof.—The above chronology shows
that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may
be made within thirty days after receipt of the decision or ruling challenged.

Same; Warrant of distraint and levy; Rule that the warrant of distraint and levy is proof
of the finality of the assessment; Exception is where there is a letter of protest after
receipt of notice of assessment.—It is true that as a rule the warrant of distraint and
levy is "proof of the finality of the assessment" and "renders hopeless a request for
reconsideration," being "tantamount to an outright denial thereof and makes the said
request deemed rejected." But there is a special circumstance in the case at bar that
prevents application of this accepted doctrine. The proven fact is that four days after
the private respondent received the petitioner's notice of assessment, it filed its letter
of protest. This was apparently not taken into account before the warrant of distraint
and levy was issued; indeed, such protest could not be located in the office of the
petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it
was, if at all, considered by the tax authorities. During the intervening period, the
warrant was premature and could therefore not be served.

Same; Same; Same; Same; Protest filed, not pro forma, and was based on strong legal
considerations; Case at bar.—As the Court of Tax Appeals correctly noted, the protest
filed by private respondent was not pro forma and was based on strong legal
considerations. It thus had the effect of suspending on January 18, 1965, when it was
filed, the reglementary period which started on the date the assessment was received,
viz., January 14, 1965. The period started running again only on April 7, 1965, when
the private respondent was definitely informed of the implied rejection of the said
protest and the warrant was finally served on it. Hence, when the appeal was filed on
April 23, 1965, only 20 days of the reglementary period had been consumed.

Same; Income Tax; Payments in promotional fees, not fictitious; Claimed deduction of
P75,000 proper; Strict business procedures not applied in a family corporation.—We
find that these suspicions were adequately met by the private respondent when its
President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the
payments were not made in one lump sum but periodically and in different amounts as
each payee's need arose. It should be remembered that this was a family corporation
where strict business procedures were not applied and immediate issuance of receipts
was not required. Even so, at the end of the year, when the books were to be closed,
each payee made an accounting of all of the fees received by him or her, to make up
the total of P75,000.00. Admittedly, everything seemed to be informal. This
arrangement was understandable, however, in view of the close relationship among the
persons in the family corporation.

Same; Same; Same; Same; Amount of promotional fees, not excessive.—We agree
with the respondent court that the amount of the promotional fees was not excessive.
The total commission paid by the Philippine Sugar Estate Development Co. to the
private respondent was P1 25,000.00. After deducting the said fees, Algue still had a
balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00
was 60% of the total commission. This was a reasonable proportion, considering that it
was the payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate properties.

Same; Same; Same; Same; Burden on taxpayer to prove validity of the claimed
deduction, successfully discharged; Payment of the fees was necessary and reasonable.
—The Solicitor General is correct when he says that the burden is on the taxpayer to
prove the validity of the claimed deduction. In the present case, however, we find that
the onus has been discharged satisfactorily. The private respondent has proved that the
payment of the fees was necessary and reasonable in the light of the efforts exerted by
the payees in inducing investors and prominent businessmen to venture in an
experimental enterprise and involve themselves in a new business requiring millions of
pesos. This was no mean feat and should be, as it was, sufficiently recompensed.

Same; Same; Rationale of taxation.—It is said that taxes are what we pay for civilized
society. Without taxes, the government would be paralyzed for lack of the motive
power to activate and operate it. Hence, despite the natural reluctance to surrender
part of one's hard-earned income to the taxing authorities, every person who is able to
must contribute his share in the running of the government. The government, for its
part, is expected to respond in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral and material values, This
symbiotic relationship is the rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by those in the seat of power.
Commissioner of lnternal Revenue vs. Algue, Inc., 158 SCRA 9, No. L-28896 February
17, 1988

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for government
itself. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly
disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate
business expenses in its income tax returns. The corollary issue is whether or not the
appeal of the private respondent from the decision of the Collector of Internal Revenue
was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic
corporation engaged in engineering, construction and other allied activities, received a
letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency
income taxes for the years 1958 and 1959.1 On January 18, 1965, Algue flied a letter of
protest or request for reconsideration, which letter was stamp received on the same
day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy
was presented to the private respondent, through its counsel, Atty. Alberto Guevara,
Jr., who refused to receive it on the ground of the pending protest. 3 A search of the
protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy
and gave a photostat to BIR agent Ramon Reyes, who deferred service of the
warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not
taking any action on the protest and it was only then that he accepted the warrant of
distraint and levy earlier sought to be served.5 Sixteen days later, on April 23, 1965,
Algue filed a petition for review of the decision of the Commissioner of Internal Revenue
with the Court of Tax Appeals.6

The above chronology shows that the petition was filed seasonably. According to Rep.
Act No. 1125, the appeal may be made within thirty days after receipt of the decision or
ruling challenged.7 It is true that as a rule the warrant of distraint and levy is "proof of
the finality of the assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright denial thereof and makes the said
request deemed rejected." 10 But there is a special circumstance in the case at bar that
prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's
notice of assessment, it filed its letter of protest. This was apparently not taken into
account before the warrant of distraint and levy was issued; indeed, such protest could
not be located in the office of the petitioner. It was only after Atty. Guevara gave the
BIR a copy of the protest that it was, if at all, considered by the tax authorities. During
the intervening period, the warrant was premature and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent
was not pro forma and was based on strong legal considerations. It thus had the effect
of suspending on January 18, 1965, when it was filed, the reglementary period which
started on the date the assessment was received, viz., January 14, 1965. The period
started running again only on April 7, 1965, when the private respondent was definitely
informed of the implied rejection of the said protest and the warrant was finally served
on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the
reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly
disallowed because it was not an ordinary reasonable or necessary business expense.
The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the
said amount had been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These were collected by
the Payees for their work in the creation of the Vegetable Oil Investment Corporation of
the Philippines and its subsequent purchase of the properties of the Philippine Sugar
Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these
promotional fees to be personal holding company income 12 but later conformed to the
decision of the respondent court rejecting this assertion.13 In fact, as the said court
found, the amount was earned through the joint efforts of the persons among whom it
was distributed It has been established that the Philippine Sugar Estate Development
Company had earlier appointed Algue as its agent, authorizing it to sell its land,
factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara,
Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for
the formation of the Vegetable Oil Investment Corporation, inducing other persons to
invest in it.14 Ultimately, after its incorporation largely through the promotion of the
said persons, this new corporation purchased the PSEDC properties.15 For this sale,
Algue received as agent a commission of P126,000.00, and it was from this commission
that the P75,000.00 promotional fees were paid to the aforenamed individuals.16

There is no dispute that the payees duly reported their respective shares of the fees in
their income tax returns and paid the corresponding taxes thereon.17 The Court of Tax
Appeals also found, after examining the evidence, that no distribution of dividends was
involved.18

The petitioner claims that these payments are fictitious because most of the payees are
members of the same family in control of Algue. It is argued that no indication was
made as to how such payments were made, whether by check or in cash, and there is
not enough substantiation of such payments. In short, the petitioner suggests a tax
dodge, an attempt to evade a legitimate assessment by involving an imaginary
deduction.

We find that these suspicions were adequately met by the private respondent when its
President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the
payments were not made in one lump sum but periodically and in different amounts as
each payee's need arose. 19 It should be remembered that this was a family corporation
where strict business procedures were not applied and immediate issuance of receipts
was not required. Even so, at the end of the year, when the books were to be closed,
each payee made an accounting of all of the fees received by him or her, to make up
the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This
arrangement was understandable, however, in view of the close relationship among the
persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not
excessive. The total commission paid by the Philippine Sugar Estate Development Co.
to the private respondent was P125,000.00. 21 After deducting the said fees, Algue still
had a balance of P50,000.00 as clear profit from the transaction. The amount of
P75,000.00 was 60% of the total commission. This was a reasonable proportion,
considering that it was the payees who did practically everything, from the formation of
the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar
Estate properties. This finding of the respondent court is in accord with the following
provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there

shall be allowed as deductions —

(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; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary

and necessary expenses paid or incurred in carrying on any trade
or business may be included a reasonable allowance for salaries or
other compensation for personal services actually rendered. The
test of deductibility in the case of compensation payments is whether they
are reasonable and are, in fact, payments purely for service. This test and
deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its
practical application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the
purchase price of services, is not deductible. (a) An ostensible salary paid
by a corporation may be a distribution of a dividend on stock. This is likely
to occur in the case of a corporation having few stockholders, Practically
all of whom draw salaries. If in such a case the salaries are in excess of
those ordinarily paid for similar services, and the excessive payment
correspond or bear a close relationship to the stockholdings of the officers
of employees, it would seem likely that the salaries are not paid wholly for
services rendered, but the excessive payments are a distribution of
earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No.
18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ
of Algue nor were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to
prove the validity of the claimed deduction. In the present case, however, we find that
the onus has been discharged satisfactorily. The private respondent has proved that the
payment of the fees was necessary and reasonable in the light of the efforts exerted by
the payees in inducing investors and prominent businessmen to venture in an
experimental enterprise and involve themselves in a new business requiring millions of
pesos. This was no mean feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and operate it.
Hence, despite the natural reluctance to surrender part of one's hard earned income to
the taxing authorities, every person who is able to must contribute his share in the
running of the government. The government for its part, is expected to respond in the
form of tangible and intangible benefits intended to improve the lives of the people and
enhance their moral and material values. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a

requirement in all democratic regimes that it be exercised reasonably and in accordance
with the prescribed procedure. If it is not, then the taxpayer has a right to complain
and the courts will then come to his succor. For all the awesome power of the tax
collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it
has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner
was filed on time with the respondent court in accordance with Rep. Act No. 1125. And
we also find that the claimed deduction by the private respondent was permitted under
the Internal Revenue Code and should therefore not have been disallowed by the
petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in

toto, without costs.

SO ORDERED.

G.R. No. 172231             February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
ISABELA CULTURAL CORPORATION, Respondent.

Taxation; Tax Deductions; 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 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 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.”

Same; Same; 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.—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.

Same; Same; The propriety of an accrual must be judged by the fact that a taxpayer
knew, or could reasonably be expected to have known, at the closing of its books for
the taxable year.—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 fact 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.

Same; Same; 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 tax exemption, then it must also be strictly construed.—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.

Same; Same; 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.—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.

Same; Same; Isabela Cultural Corporation (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. 12000, they cannot be validly deducted from its gross income
for the said year and were therefore properly disallowed by the BIR.—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.
Commissioner of Internal Revenue vs. Isabela Cultural Corporation, 515 SCRA 556,
G.R. No. 172231 February 12, 2007

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.

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-1-86-90-000681 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.

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

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. GENERAL FOODS

(PHILS.), INC., Respondent.

Taxation; Statutory Construction; 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; Deductions for income tax purposes partake of the nature
of tax exemptions, hence strictly construed.—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
income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions
are strictly construed, then deductions must also be strictly construed.

Same; Income Taxation; Advertising Expenses; Requisites for Deductions from Gross
Income for Advertising Expense.—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.

Same; Same; Same; There is yet to be a clear-cut criteria or fixed test for determining
the reasonableness of an advertising expense.—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.

Same; Same; Same; Words and Phrases; 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.—
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 expenditures are for advertising of the second
kind, then normally they should be spread out over a reasonable period of time.

Same; Same; Same; Protection of brand franchise is analogous to the maintenance of

goodwill or title to one’s property, a capital expenditure which 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. 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. 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.

Same; Same; Same; The taxpayer’s prerogative to determine the amount of

advertising expenses it will incur and where to apply them is subject to certain
considerations, one of which relates to the extent to which the expenditures are
actually capital outlays, and the second relates to whether the expenditures are
ordinary and necessary; For an expense to be considered ordinary, it must be
reasonable in amount.—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 first 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
first, 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.

Same; Same; Same; Administrative Law; Court of Tax Appeals; 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 specifically created
for the purpose of reviewing tax cases.—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 specifically 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. Since there is none in the case at bar, the Court
adheres to the findings of the CTA.

Same; Same; Same; Burden of Proof; 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.—Accordingly, we find
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 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. In the present case, that burden was not
discharged satisfactorily. Commissioner of Internal Revenue vs. General Foods (Phils.),
Inc., 401 SCRA 545, G.R. No. 143672 April 24, 2003

DECISION

CORONA, J.:

Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution 1 of

the Court of Appeals reversing the decision 2 of the Court of Tax Appeals which in turn
denied the protest filed by respondent General Foods (Phils.), Inc., regarding the
assessment made against the latter for deficiency taxes. chanrob1es virtua1 1aw 1ibrary

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," filed its
income tax return for the fiscal 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." cralaw virtua1aw library

On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction
claimed by respondent corporation. Consequently, respondent corporation was
assessed deficiency income taxes in the amount of P2,635,141.42. The latter filed 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: chanrob1es virtual 1aw library

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 fight, strong deterioration of the
purchasing power of the Philippine peso and the slacking demand for consumer
products" (Petitioner’s Memorandum, CTA 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 signification; it is generally used to
denote the benefit arising from connection and reputation (Words and Phrases, Vol. 18,
p. 556 citing Douhart v. Loagan, 86 III. App. 294). As held in the case of Welch v.
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. v. Commissioner of Internal Revenue, supra). For
sure such expenditure was meant not only to generate present sales but more for
future and prospective benefits. Hence, "abnormally large expenditures for advertising
are usually to be spread over the period of years during which the benefits of the
expenditures are received" (Mertens, supra, citing Colonial Ice Cream Co., 7 BTA 154).

WHEREFORE, in all the foregoing, and finding 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 deficiency income tax liability for the fiscal year ended February 28,
1985." 3

Aggrieved, respondent corporation filed 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:chanrob1es virtual 1aw library

Since it has not been sufficiently 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 fiscal
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 reasonable period? chanrob1es virtua1 1aw 1ibrary

Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides: chanrob1es virtual 1aw library

(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 conflict 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: 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.

We agree.

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.

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 find 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 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. chanrob1es virtua1 1aw 1ibrary

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. 10

True, it is the taxpayer’s prerogative to determine the amount of advertising expenses

it will incur and where to apply them. 11 Said prerogative, however, is subject to
certain considerations. The first relates to the extent to which the expenditures are
actually capital outlays; this necessitates an inquiry into the nature or purpose of such
expenditures. 12 The second, which must be applied in harmony with the first, 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 find 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
specifically 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. 13 Since there
is none in the case at bar, the Court adheres to the findings of the CTA.

Accordingly, we find 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
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. 14 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 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.
chanrob1es virtua1 1aw 1ibrary

SO ORDERED.

G.R. No. L-16626            October 29, 1966

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
CARLOS PALANCA, JR., respondent.

Office of the Solicitor General for petitioner.

Manuel B. San Jose for respondent.

Taxation; Income tax; Interest paid on delinquent gift, estate and inheritance tax is
deductible.—In Commissioner of Internal Revenue vs. Prieto, L-13912, September 30,
1960, it was held that, while the distinction between "taxes" and "debts" was
recognized in this jurisdiction, the variance in their legal concept does not extend to the
interests paid on them, at least insofar as Section 30(b)(1) of the Tax Code is
concerned. The rule in the Prieto case, that the interest on the donor's tax is deductible,
is applicable to interest paid on the estate and inheritance taxes. The rationale of this
Court's previous determination, that interests on taxes should be considered as
interests of indebtedness within the meaning of Section 30(b) (1) of the Tax Code,
applies to the said taxes.

Same; Taxes and debts.—Although taxes already due are not the same as debts, they
are, however, obligations that may be considered as such,

Same; Prescription of claim for refund.—Where the claim for refund was filed with the
Tax Court even before it had been denied by the Bureau of Internal Revenue, then the
thirty-day period for prescription under Section 11 of Republic Act No. 1125 did not
even commence to run. Where the tax account was paid by installment, then the
computation of the two-year prescriptive period under Section 306 of the Tax Code,
should be from the date of the last installment. Commissioner of Internal Revenue vs.
Palanca, 18 SCRA 496, No. L-16626 October 29, 1966

REGALA, J.:

This is an appeal by the Government from the decision of the Court of Tax Appeals in
CTA Case No. 571 ordering the petitioner to refund to the respondent the amount of
P20,624.01 representing alleged over-payment of income taxes for the calendar year
1955. The facts are:

Sometime in July, 1950, the late Don Carlos Palanca, Sr. donated in favor of his
son, the petitioner, herein shares of stock in La Tondeña, Inc. amounting to
12,500 shares. For failure to file a return on the donation within the statutory
period, the petitioner was assessed the sums of P97,691.23, P24,442.81 and
P47,868.70 as gift tax, 25% surcharge and interest, respectively, which he paid
on June 22, 1955.

On March 1, 1956, the petitioner filed with the Bureau of Internal Revenue his
income tax return for the calendar year 1955, claiming, among others, a
deduction for interest amounting to P9,706.45 and reporting a taxable income of
P65,982.12. On the basis of this return, he was assessed the sum of P21,052.91,
as income tax, which he paid, as follows:

Taxes withheld by La Tondeña Inc. from Mr.

Palanca's wages P13,172.41

Payment under Income Tax Receipt No. 677395

dated May 11, 1956 3,939.80

Payment under Income Tax Receipt dated

August 14, 1956 3,939.80

P21,052.01

Subsequently, on November 10, 1956, the petitioner filed an amended return for
the calendar year 1955, claiming therein an additional deduction in the amount
of P47,868.70 representing interest paid on the donee's gift tax, thereby
reporting a taxable net income of P18,113.42 and a tax due thereon in the sum
of P3,167.00. The claim for deduction was based on the provisions of Section
30(b) (1) of the Tax Code, which authorizes the deduction from gross income of
interest paid within the taxable year on indebtedness. A claim for the refund of
alleged overpaid income taxes for the year 1955 amounting to P17,885.01,
which is the difference between the amount of P21,052.01 he paid as income
taxes under his original return and of P3,167.00, was filed together with this
amended return. In a communication dated June 20, 1957, the respondent (BIR)
denied the claim for refund.

On August 27, 1957, the petitioner reiterated his claim for refund, and at the
same time requested that the case be elevated to the Appellate Division of the
Bureau of Internal Revenue for decision. The reiterated claim was denied on
October 14, 1957.

On November 2, 1957, the petitioner requested that the case be referred to the
Conference Staff of the Bureau of Internal Revenue for review. Later, on
November 6, 1957, he requested the respondent to hold his action on the case in
abeyance until after the Court of Tax Appeals renders its division on a similar
case. And on November 7, 1957, the respondent denied the claim for the refund
of the sum of P17,885.01.

Meanwhile, the Bureau of Internal Revenue considered the transfer of 12,500

shares of stock of La Tondeña Inc. to be a transfer in contemplation of death
pursuant to Section 88(b) of the National Internal Revenue Code. Consequently,
the respondent assessed against the petitioner the sum of P191,591.62 as estate
and inheritance taxes on the transfer of said 12,500 shares of stock. The amount
of P17,002.74 paid on June 22, 1955 by the petitioner as gift tax, including
interest and surcharge, under Official Receipt No. 2855 was applied to his estate
and inheritance tax liability. On the tax liability of P191,591.62, the petitioner
paid the amount of P60,581.80 as interest for delinquency as follows:

1% monthly interest on P76,724.38 P22,633.69

September 2, 1952 to February 16,
1955

1% monthly interest on P71,264.77 1,068.97

February 16, 1955 to March 31,
1955

1% monthly interest on P114,867.24 4,287.99

September 2, 1952 to April 16, 1953

1% monthly interest on P50,832.77 1,372.48

March 31, 1955 to June 22, 1955

1% monthly interest on P119,155.23 31,218.67

April 16, 1953 to June 22, 1955
 Total P60,581.80

On August 12, 1958, the petitioner once more filed an amended income tax
return for the calendar year 1955, claiming, in addition to the interest deduction
of P9,076.45 appearing in his original return, a deduction in the amount of
P60,581.80, representing interest on the estate and inheritance taxes on the
12,500 shares of stock, thereby reporting a net taxable income for 1955 in the
amount of P5,400.32 and an income tax due thereon in the sum of P428.00.
Attached to this amended return was a letter of the petitioner, dated August 11,
1958, wherein he requested the refund of P20,624.01 which is the difference
between the amounts of P21,052.01 he paid as income tax under his original
return and of P428.00.

Without waiting for the respondent's decision on this claim for refund, the
petitioner filed his petition for review before this Court on August 13, 1958. On
July 24, 1959, the respondent denied the petitioner's request for the refund of
the sum of P20,624.01.

The Commissioner of Internal Revenue now seeks the reversal of the Court of Tax
Appeal's ruling on the aforementioned petition for review. Specifically, he takes issue
with the said court's determination that the amount paid by respondent Palanca for
interest on his delinquent estate and inheritance tax is deductible from the gross
income for that year under Section 30 (b) (1) of the Revenue Code, and, that said
respondent's claim for refund therefor has not prescribed.

On the first point, the Commissioner urges that a tax is not an indebtedness. Citing
American cases, he argues that there is a material and fundamental distinction between
a "tax" and a "debt." (Meriwether v. Garrett, 102 U.S. 427; Liberty Mutual Ins. Co. v.
Johnson Shipyards Corporation, 5 AFTR pp. 5504, 5507; City of Camden v. Allen, 26
N.J. Law, p. 398). He adopts the view that "debts are due to the government in its
corporate capacity, while taxes are due to the government in its sovereign capacity. A
debt is a sum of money due upon contract express or implied or one which is evidenced
by a judgment. Taxes are imposts levied by government for its support or some special
purpose which the government has recognized." In view of the distinction, then, the
Commissioner submits that the deductibility of "interest on indebtedness" from a
person's income tax under Section 30(b) (1) cannot extend to "interest on taxes."

We find for the respondent. While "taxes" and "debts" are distinguishable legal
concepts, in certain cases as in the suit at bar, on account of their nature, the
distinction becomes inconsequential. This qualification is recognized even in the United
States. Thus,

The term "debt" is properly used in a comprehensive sense as embracing not

merely money due by contract, but whatever one is bound to render to another,
either for contract or the requirements of the law. (Camden vs. Fink Coule and
Coke Co., 61 ALR 584).

Where statutes impose a personal liability for a tax, the tax becomes at least in a
broad sense, a debt. (Idem.)
 Some American authorities hold that, especially for remedial purposes, Federal
taxes are debts. (Tax Commission vs. National Malleable Castings Co., 35 ALR
1448)

In our jurisdiction, the rule is settled that although taxes already due have not, strictly
speaking, the same concept as debts, they are, however obligations that may be
considered as such. (Sambrano vs. Court of Tax Appeals, G.R. no. L-8652, March 30,
1957). In a more recent case Commissioner of Internal Revenue vs. Prieto, G.R. No. L-
13912, September 30, 1960, we explicitly announced that while the distinction between
"taxes" and "debts" was recognized in this jurisdiction, the variance in their legal
conception does not extend to the interests paid on them, at least insofar as Section 30
(b) (1) of the National Internal Revenue Code is concerned. Thus,

Under the law, for interest to be deductible, it must be shown that there be an
indebtedness, that there should be interest upon it, and that what is claimed as
an interest deduction should have been paid or accrued within the year. It is
here conceded that the interest paid by respondent was in consequence of the
late payment of her donor's tax, and the same was paid within the year it is
sought to be deducted. The only question to be determined, as stated by the
parties, is whether or not such interest was paid upon an indebtedness within the
contemplation of Section 30(b) (1) of the Tax Code, the pertinent part of which
reads:

Sec. 30. Deductions from gross income — In computing net income there
shall be allowed as deductions —

xxx           xxx           xxx

"Interest:

(1) In general. — The amount of interest paid within the taxable year on
indebtedness, except on indebtedness incurred or continued to purchase
or carry obligations the interest upon which is exempt from taxation as
income under this Title.

The term "indebtedness" as used in the Tax Code of the United States
containing similar provisions as in the above-quoted section has been
defined as the unconditional and legally enforceable obligation for the
payment of money. (Federal Taxes Vol. 2, p. 13, 019, Prentice Hall, Inc.;
Mertens' Law of Federal Income Taxation, Vol. 4, p. 542.) Within the
meaning of that definition, it is apparent that a tax may be considered an
indebtedness. . . . (Emphasis supplied)

"It follows that the interest paid by herein respondent for the late
payment of her donor's tax is deductible from her gross income under
section 30 (b) of the Tax Code above-quoted."

We do not see any element in this case which can justify a departure from or
abandonment of the doctrine in the Prieto case above. In both this and the said case,
the taxpayer sought the allowance as deductible items from the gross income of the
amounts paid by them as interests on delinquent tax liabilities. Of course, what was
involved in the cited case was the donor's tax while the present suit pertains to interest
paid on the estate and inheritance tax. This difference, however, submits no
appreciable consequence to the rationale of this Court's previous determination that
interests on taxes should be considered as interests on indebtedness within the
meaning of Section 30(b) (1) of the Tax Code. The interpretation we have placed upon
the said section was predicated on the congressional intent, not on the nature of the
tax for which the interest was paid.

On the issue of prescription: There were actually two claims for refund filed by the
herein respondent, Carlos Palanca, Jr., anent the case at bar. The first one was on
November 10, 1956, when he filed a claim for refund on the interest paid by him on the
donee's gift tax of P17,885.10, as originally demanded by the Bureau of Internal
Revenue. The second one was the one filed by him on August 12, 1958, which was a
claim for refund on the interest paid by him on the estate and inheritance tax assessed
by the same Bureau in the amount of P20,624.01. Actually, this second assessment by
the Bureau was for the same transaction as that for which they assessed respondent
Palanca the above donee's gift tax. The Bureau, however, on further consideration,
decided that the donation of the stocks in question was made in contemplation of
death, and hence, should be assessed as an inheritance. Thus the second assessment.
The first claim was denied by the petitioner for the first time on June 20, 1957.
Thereafter, the said denial was twice reiterated, on October 14, 1957 and November 7,
1957, upon respondent Palanca's plea for the reconsideration of the ruling of June 20,
1957. The second claim was filed with the Court of Tax Appeals on August 13, 1958, or
even before the same had been denied by the petitioner. Respondent Palanca's second
claim was denied by the latter on July 24, 1959.

The petitioner contends that under Section 11 of Republic Act 1124,1 the herein
claimant's claim for refund has prescribed since the same was filed outside the thirty-
day period provided for therein. According to the petitioner, the said prescriptive period
commenced to run on October 14, 1947 when the denial by the Bureau of Internal
Revenue of the respondent Palanca's claim for refund, under his letter of November 10,
1956, became final. Considering that the case was filed with the Court of Tax Appeals
only on August 13, 1958, then it is urged that the same had prescribed.

The petitioner also invokes prescription, at least with respect to the sum of P17,112.21,
under Section 306 of the Tax Code.2 He claims that for the calendar year 1955,
respondent Palanca paid his income tax as follows:

Taxes withheld by La Tondeña Inc. from Mr.

Palanca's wages P13,172.41

Payment under Income Tax Receipt No. 677395

dated May 11, 1956 3,939.89

Payment under Income Tax Receipt No. 742334

dated August 14, 1956 3,939.89

P21,952.01
Therefore, the petitioner contends, the amounts paid by claimant Palanca under his
withheld tax and under Receipt No. 677395 dated May 11, 1956 may no longer be
refunded since the claim therefor was filed in court only on August 13, 1958, or beyond
two years of their payment.

We find the petitioner's contention on prescription untenable.

In the first place, the 30-day period under Section 11 of Republic Act 1125 did not even
commence to run in this incident. It should be recalled that while the herein petitioner
originally assessed the respondent-claimant for alleged gift tax liabilities, the said
assessment was subsequently abandoned and in its lieu, a new one was prepared and
served on the respondent-taxpayer. In this new assessment, the petitioner charged the
said respondent with an entirely new liability and for a substantially different amount
from the first. While initially the petitioner assessed the respondent for donee's gift tax
in the amount of P170,002.74, in the subsequent assessment the latter was asked to
pay P191,591.62 for delinquent estate and inheritance tax. Considering that it is the
interest paid on this latter-assessed estate and inheritance tax that respondent Palanca
is claiming refund for, then the thirty-day period under the abovementioned section of
Republic Act 1125 should be computed from the receipt of the final denial by the
Bureau of Internal Revenue of the said claim. As has earlier been recited, respondent
Palanca's claim in this incident was filed with the Court of Tax Appeals even before it
had been denied by the herein petitioner or the Bureau of Internal Revenue. The case
was filed with the said court on August 13, 1958 while the petitioner denied the claim
subject of the said case only on July 24, 1959.

In the second place, the claim at bar refers to the alleged overpayment by respondent
Palanca of his 1955 income tax. Inasmuch as the said account was paid by him by
installment, then the computation of the two-year prescriptive period, under Section
306 of the National Internal Revenue Code, should be from the date of the last
installment. (Antonio Prieto, et al. vs. Collector of Internal Revenue, G.R. No. L-11976,
August 29, 1961) Respondent Palanca paid the last installment on his 1955 income tax
account on August 14, 1956. His claim for refund of the alleged overpayment on it was
filed with the court on August 13, 1958. It was, therefore, still timely instituted.

WHEREFORE, the decision appealed from is affirmed in full, without pronouncement on

costs.

G.R. No. L-13912             September 30, 1960

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
CONSUELO L. VDA. DE PRIETO, respondent.
Office of the Solicitor General Edilberto Barot, Solicitor F.R. Rosete and Special Atty. B.
Gatdula, Jr. for petitioner.
Formilleza and Latorre for respondent.

1.TAXATION; DEFICIENCY INCOME TAX; REQUISITES IN ORDER THAT INTEREST MAY

BE DEDUCTIBLE.—For interest to be allowed as deduction from gross income, it must
be shown that there be indebtedness, that there should be interest upon it, and that
what is claimed as an interest deduction should have been paid or accrued within the
year.

2.ID.; ID.; ID.; TAX AS AN INDEBTEDNESS; INTEREST PAID FOR LATE PAYMENT OF
DONOR'S TAX DEDUCTIBLE—The term "indebtedness" as used in the Tax Code of the
United States containing similar provisions as in section 30 (b) (1) of our Tax Code, has
been defined as an unconditional and legally enforceable obligation for the payment of
money. Within the meaning of that definition a tax may be considered an indebtedness.
Hence, interest paid for late payment of donor's tax is deductible from gross income
under said "section.

3.ID.; ID.; ID.; WHEN SECTION 80 OF REVENUE REGULATION No. 2 IS NOT

APPLICABLE.—Although section 80 of Revenue Regulation No. 2 (known as Income Tax
Regulations) promulgated by the Department of Finance, which provides that "the word
'taxes' means taxes proper and no deductions should be allowed for amounts
representing interest, surcharge, or penalties incident to delinquency," implements
section 30 (c) of the Tax Code governing deductions of taxes, the same is inapplicable
to a case where the taxpayer seeks to come under section 30 (b) of the same Code
providing for deduction of interest on indebtedness.

4.ID.; ID.; ID.; ID.; TAXPAYER NOT PRECLUDED FROM CLAIMING INTEREST PAYMENT
AS DEDUCTION.—Although interest payment for delinquency taxes is not deductible as
tax under section 30 (c) of the Tax Code and section 80 of the Income Tax Regulations,
the taxpayer is not precluded thereby from claiming said interest payment as deduction
under section 30 (b) of the same code. The Commissioner of Internal Revenue vs. Vda.
de Prieto, 109 Phil. 592, No. L-13912 September 30, 1960

GUTIERREZ DAVID, J.:

This is an appeal from a decision of the Court of tax Appeals reversing the decision of
the Commissioner of Internal Revenue which held herein respondent Consuelo L. Vda.
de Prieto liable for the payment of the sum of P21,410.38 as deficiency income tax,
plus penalties and monthly interest.

The case was submitted for decision in the court below upon a stipulation of facts,
which for brevity is summarized as follows: On December 4, 1945, the respondent
conveyed by way of gifts to her four children, namely, Antonio, Benito, Carmen and
Mauro, all surnamed Prieto, real property with a total assessed value of P892,497.50.
After the filing of the gift tax returns on or about February 1, 1954, the petitioner
Commissioner of Internal Revenue appraised the real property donated for gift tax
purposes at P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift
tax, interest and compromises due thereon. Of the total sum of P117,706.50 paid by
respondent on April 29, 1954, the sum of P55,978.65 represents the total interest on
account of deliquency. This sum of P55,978.65 was claimed as deduction, among
others, by respondent in her 1954 income tax return. Petitioner, however, disallowed
the claim and as a consequence of such disallowance assessed respondent for 1954 the
total sum of P21,410.38 as deficiency income tax due on the aforesaid P55,978.65,
including interest up to March 31, 1957, surcharge and compromise for the late
payment.

Under the law, for interest to be deductible, it must be shown that there be an
indebtedness, that there should be interest upon it, and that what is claimed as an
interest deduction should have been paid or accrued within the year. It is here
conceded that the interest paid by respondent was in consequence of the late payment
of her donor's tax, and the same was paid within the year it is sought to be declared.
The only question to be determined, as stated by the parties, is whether or not such
interest was paid upon an indebtedness within the contemplation of section 30 (b) (1)
of the Tax Code, the pertinent part of which reads:

SEC. 30 Deductions from gross income. — In computing net income there shall
be allowed as deductions —

xxx     xxx     xxx

(b) Interest:

(1) In general. — The amount of interest paid within the taxable year on
indebtedness, except on indebtedness incurred or continued to purchase or carry
obligations the interest upon which is exempt from taxation as income under this
Title.

The term "indebtedness" as used in the Tax Code of the United States containing
similar provisions as in the above-quoted section has been defined as an unconditional
and legally enforceable obligation for the payment of money.1awphîl.nèt (Federal Taxes
Vol. 2, p. 13,019, Prentice-Hall, Inc.; Merten's Law of Federal Income Taxation, Vol. 4,
p. 542.) Within the meaning of that definition, it is apparent that a tax may be
considered an indebtedness. As stated by this Court in the case of Santiago
Sambrano vs. Court of Tax Appeals and Collector of Internal Revenue (101 Phil., 1; 53
Off. Gaz., 4839) —

Although taxes already due have not, strictly speaking, the same concept as
debts, they are, however, obligations that may be considered as such.

The term "debt" is properly used in a comprehensive sense as embracing not

merely money due by contract but whatever one is bound to render to another,
either for contract, or the requirement of the law. (Camben vs. Fink Coule and
Coke Co. 61 LRA 584)

Where statute imposes a personal liability for a tax, the tax becomes, at least in
a board sense, a debt. (Idem).
 A tax is a debt for which a creditor's bill may be brought in a proper case.
(State vs. Georgia Co., 19 LRA 485).

It follows that the interest paid by herein respondent for the late payment of her
donor's tax is deductible from her gross income under section 30(b) of the Tax Code
above quoted.

The above conclusion finds support in the established jurisprudence in the United States
after whose laws our Income Tax Law has been patterned. Thus, under sec. 23(b) of
the Internal Revenue Code of 1939, as amended 1 , which contains similarly worded
provisions as sec. 30(b) of our Tax Code, the uniform ruling is that interest on taxes is
interest on indebtedness and is deductible. (U.S. vs. Jaffray, 306 U.S. 276. See also
Lustig vs. U.S., 138 F. Supp. 870; Commissioner of Internal Revenue vs. Bryer, 151 F.
2d 267, 34 AFTR 151; Penrose vs. U.S. 18 F. Supp. 413, 18 AFTR 1289; Max Thomas
Davis, et al. vs. Commissioner of Internal Revenue, 46 U.S. Boared of Tax Appeals
Reports, p. 663, citing U.S. vs. Jaffray, 6 Tax Court of United States Reports, p. 255;
Armour vs. Commissioner of Internal Revenue, 6 Tax Court of the United States
Reports, p. 359; The Koppers Coal Co. vs. Commissioner of Internal Revenue, 7 Tax
Court of United States Reports, p. 1209; Toy vs. Commissioner of Internal Revenue;
Lucas vs. Comm., 34 U.S. Board of Tax Appeals Reports, 877; Evens and Howard Fire
Brick Co. vs. Commissioner of Internal Revenue, 3 Tax Court of United States Reports,
p. 62). The rule applies even though the tax is nondeductible. (Federal Taxes, Vol. 2,
Prentice Hall, sec. 163, 13,022; see also Merten's Law of Federal Income Taxation, Vol.
5, pp. 23-24.)

To sustain the proposition that the interest payment in question is not deductible for
the purpose of computing respondent's net income, petitioner relies heavily on section
80 of Revenue Regulation No. 2 (known as Income Tax Regulation) promulgated by the
Department of Finance, which provides that "the word `taxes' means taxes proper and
no deductions should be allowed for amounts representing interest, surcharge, or
penalties incident to delinquency." The court below, however, held section 80 as
inapplicable to the instant case because while it implements sections 30(c) of the Tax
Code governing deduction of taxes, the respondent taxpayer seeks to come under
section 30(b) of the same Code providing for deduction of interest on indebtedness. We
find the lower court's ruling to be correct. Contrary to petitioner's belief, the portion of
section 80 of Revenue Regulation No. 2 under consideration has been part and parcel of
the development to the law on deduction of taxes in the United States. (See Capital
Bldg. and Loan Assn. vs. Comm., 23 BTA 848. Thus, Mertens in his treatise says:
"Penalties are to be distinguished from taxes and they are not deductible under the
heading of taxs." . . . Interest on state taxes is not deductible as taxes." (Vol. 5, Law on
Federal Income Taxation, pp. 22-23, sec. 27.06, citing cases.) This notwithstanding,
courts in that jurisdiction, however, have invariably held that interest on deficiency
taxes are deductible, not as taxes, but as interest. (U.S. vs. Jaffray, et al., supra; see
also Mertens, sec. 26.09, Vol. 4, p. 552, and cases cited therein.) Section 80 of
Revenue Regulation No. 2, therefore, merely incorporated the established application of
the tax deduction statute in the United States, where deduction of "taxes" has always
been limited to taxes proper and has never included interest on delinquent taxes,
penalties and surcharges.
To give to the quoted portion of section 80 of our Income Tax Regulations the meaning
that the petitioner gives it would run counter to the provision of section 30(b) of the
Tax Code and the construction given to it by courts in the United States. Such effect
would thus make the regulation invalid for a "regulation which operates to create a rule
out of harmony with the statute, is a mere nullity." (Lynch vs. Tilden Produce Co., 265
U.S. 315; Miller vs. U.S., 294 U.S. 435.) As already stated, section 80 implements only
section 30(c) of the Tax Code, or the provision allowing deduction of taxes, while herein
respondent seeks to be allowed deduction under section 30(b), which provides for
deduction of interest on indebtedness.

In conclusion, we are of the opinion and so hold that although interest payment for
delinquent taxes is not deductible as tax under Section 30(c) of the Tax Code and
section 80 of the Income Tax Regulations, the taxpayer is not precluded thereby from
claiming said interest payment as deduction under section 30(b) of the same Code.

In view of the foregoing, the decision sought to be reviewed is affirmed, without

pronouncement as to costs.

G.R. Nos. 106949-50 December 1, 1995

PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP), petitioner,

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

G.R. Nos. 106984-85 December 1, 1995

COMMISSIONER INTERNAL REVENUE, petitioner,

vs.
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES, THE COURT OF
APPEALS and THE COURT OF TAX APPEALS, respondents.

Taxation; Picop’s tax exemption under R.A. No. 5186, as amended, does not include
exemption from the thirty-five (35%) percent transaction tax.—We agree with the CTA
and the Court of Appeals that Picop’s tax exemption under R.A. No. 5186, as amended,
does not include exemption from the thirty-five percent (35%) transaction tax. In the
first place, the thirty-five percent (35%) transaction tax is an income tax, that is, it is a
tax on the interest income of the lenders or creditors.

Same; Transaction tax is an income tax and as such falls outside the scope of the tax
exemption granted to registered pioneer enterprises by Section 8 of R.A. 5186, as
amended.—It is thus clear that the transaction tax is an income tax and as such, in any
event, falls outside the scope of the tax exemption granted to registered pioneer
enterprises by Section 8 of R.A. No. 5186, as amended Picop was the withholding
agent, obliged to withhold thirty-five percent (35%) of the interest payable to its
lenders and to remit the amounts so withheld to the Bureau of Internal Revenue
(“BIR”). As a withholding agent, Picop is made personally liable for the thirty-five
percent (35%) transaction tax and if it did not actually withhold thirty-five percent
(35%) of the interest monies it had paid to its lenders, Picop had only itself to blame.

Same; P.D. No. 1154 is not to be given retroactive effect by imposing the thirty five
percent transaction tax in respect of interest earnings which accrued before the
effectivity date of P.D. No. 1154.—P.D. No. 1154 is not, in other words, to be given
retroactive effect by imposing the thirty-five percent (35%) transaction tax in respect
of interest earnings which accrued before the effectivity date of P.D. No. 1154, there
being nothing in the statute to suggest that the legislative authority intended to bring
about such retroactive imposition of the tax.

Same; P.D. No. 1154 did not itself impose nor did it expressly authorize the imposition
of a surcharge and penalty interest in case of failure to pay the thirty-five percent
transaction tax when due.—P.D. No 1154 did not itself impose, nor did it expressly
authorize the imposition of, a surcharge and penalty interest in case of failure to pay
the thirty five percent (35%) transaction tax when due Neither did Section 210 (b) of
the 1977 Tax Code which re-enacted Section 195-C inserted into the Tax Code by P.D.
No. 1154.

Same; The thirty-five percent transaction tax is not one of the taxes in respect of which
Section 51(e) authorized the imposition of surcharge and interest and Section 71 the
imposition of a fraud surcharge.—It will be seen that Section 51 (c)(1) and (e)(1) and
(3), of the 1977 Tax Code, authorize the imposition of surcharge and interest only in
respect of a “tax imposed by this Title,” that is to say, Title II on “Income Tax.” It will
also be seen that Section 72 of the 1977 Tax Code imposes a surcharge only in case of
failure to file a return or list “required by this Title,” that is,Title II on “Income Tax.”
The thirty-five percent (35%) transaction tax is, however, imposed in the 1977 Tax
Code by Section 210 (b) thereof which Section is embraced in Title V on “Taxes on
Business” of that Code. Thus, while the thirty-five percent (35%) transaction tax is in
truth a tax imposed on interest income earned by lenders or creditors purchasing
commercial paper on the money market, the relevant provisions, i.e., Section 210 (b),
were not inserted in Title II of the 1977 Tax Code. The end result is that the thirty-five
percent (35%) transaction tax is not one of the taxes in respect of which Section 51 (e)
authorized the imposition of surcharge and interest and Section 72 the imposition of a
fraud surcharge.

Same; Tax Exemptions; Tax exemptions are strictly construed.—Tax exemptions are, to
be sure, to be “strictly construed,” that is, they are not to be extended beyond the
ordinary and reasonable intendment of the language actually used by the legislative
authority in granting the exemption. The issuance of debenture bonds is certainly
conceptually distinct from pulping and paper manufacturing operations. But no one
contends that issuance of bonds was a principal or regular business activity of Picop;
only banks or other financial institutions are in the regular business of raising money by
issuing bonds or other instruments to the general public. We consider that the actual
dedication of the proceeds of the bonds to the carrying out of Picop’s registered
operations constituted a sufficient nexus with such registered operations so as to
exempt Picop from stamp taxes ordinarily imposed upon or in connection with issuance
of such bonds. We agree, therefore, with the Court of Appeals on this matter that the
CTA and the CIR had erred in rejecting Picop’s claim for exemption from stamp taxes.
Same; Same; The rule in respect of corporations not registered with the BOI as a
preferred pioneer enterprise is that net operating losses cannot be carried over.—It is
important to note at the outset that in our jurisdiction, the ordinary rule—that is, the
rule applicable in respect of corporations not registered with the BOI as a preferred
pioneer enterprise—is that net operating losses cannot be carried over. Under our Tax
Code, both in 1977 and at present, losses may be deducted from gross income only if
such losses were actually sustained in the same year that they are deducted or charged
off.

Same; Same; Losses must be deducted against current income in the taxable year
when such losses were incurred.—It is thus clear that under our law, and outside the
special realm of BOI-registered enterprises, there is no such thing as a carry-over of
net operating loss. To the contrary, losses must be deducted against current income in
the taxable year when such losses were incurred. Moreover, such losses may be
charged off only against income earned in the same taxable year when the losses were
incurred.

Same; Same; A taxpayer has the burden of proving entitlement to a claimed deduction.
—A taxpayer has the burden of proving entitlement to a claimed deduction. In the
instant case, even Picop’s own vouchers were not submitted in evidence and the BIR
Examiners denied that such vouchers and other documents had been exhibited to them.
Moreover, cash vouchers can only confirm the fact of disbursement but not necessarily
the purpose thereof. The best evidence that Picop should have presented to support its
claimed deduction were the invoices and official receipts issued by the Register of
Deeds. Picop not only failed to present such documents; it also failed to explain the loss
thereof, assuming they had existed before. Under the best evidence rule, therefore, the
testimony of Picop’s employee was inadmissible and was in any case entitled to very
little, if any, credence. Paper Industries Corporation of the Philippines vs. Court of
Appeals, 250 SCRA 434, G.R. Nos. 106949-50, G.R. Nos. 106984-85 December 1, 1995

FELICIANO, J.:

The Paper Industries Corporation of the Philippines ("Picop"), which is petitioner in G.R.
Nos. 106949-50 and private respondent in G.R. Nos. 106984-85, is a Philippine
corporation registered with the Board of Investments ("BOI") as a
preferred  pioneer  enterprise with respect to its integrated pulp and paper mill, and as a
preferred non-pioneer enterprise with respect to its integrated plywood and veneer
mills.

On 21 April 1983, Picop received from the Commissioner of Internal Revenue ("CIR")
two (2) letters of assessment and demand both dated 31 March 1983: (a) one for
deficiency transaction tax and for documentary and science stamp tax; and (b) the
other for deficiency income tax for 1977, for an aggregate amount of P88,763,255.00.
These assessments were computed as follows:

Transaction Tax

Interest payments on

money market
borrowings P 45,771,849.00
———————

35% Transaction tax due

thereon 16,020,147.00

Add: 25% surcharge 4,005,036.75

——————

T o t a l P 20,025,183.75

Add:

14% int. fr.

1-20-78 to

7-31-80 P 7,093,302.57

20% int, fr.

8-1-80 to

3-31-83 10,675,523.58

——————

17,768,826.15

——————

P 37,794,009.90

Documentary and Science Stamps Tax

Total face value of

debentures P100,000,000.00

Documentary Stamps

Tax Due

(P0.30 x P100,000.000 )

( P200 ) P 150,000.00
Science Stamps Tax Due

(P0.30 x P100,000,000 )

( P200 ) P 150,000.00

——————

T o t a l P 300,000.00

Add: Compromise for

non-affixture 300.00

——————

300,300.00

——————

TOTAL AMOUNT DUE AND COLLECTIBLE P 38,094,309.90

===========

Deficiency Income Tax for 1977

Net income per return P 258,166.00

Add: Unallowable deductions

1) Disallowed deductions

availed of under

R.A. No. 5186 P 44,332,980.00

2) Capitalized interest

expenses on funds

used for acquisition

of machinery & other

equipment 42,840,131.00

3) Unexplained financial
guarantee expense 1,237,421.00

4) Understatement

of sales 2,391,644.00

5) Overstatement of

cost of sales 604,018.00

——————

P91,406,194.00

Net income per investigation P91,664,360.00

Income tax due thereon 34,734,559.00

Less: Tax already assessed per return 80,358.00

——————

Deficiency P34,654,201.00

Add:

14% int. fr.

4-15-78 to

7-31-81 P 11,128,503.56

20% int. fr.

8-1-80 to

4-15-81 4,886,242.34

——————

P16,014,745.90

——————

TOTAL AMOUNT DUE AND COLLECTIBLE P 50,668,946.90 1

===========
On 26 April 1983, Picop protested the assessment of deficiency transaction tax and
documentary and science stamp taxes. Picop also protested on 21 May 1983 the
deficiency income tax assessment for 1977. These protests were not formally acted
upon by respondent CIR. On 26 September 1984, the CIR issued a warrant of distraint
on personal property and a warrant of levy on real property against Picop, to enforce
collection of the contested assessments; in effect, the CIR denied Picop's protests.

Thereupon, Picop went before the Court of Tax Appeals ("CTA") appealing the
assessments. After trial, the CTA rendered a decision dated 15 August 1989, modifying
the findings of the CIR and holding Picop liable for the reduced aggregate amount of
P20,133,762.33, which was itemized in the dispositive portion of the decision as
follows:

35% Transaction Tax P 16,020,113.20

Documentary & Science

Stamp Tax 300,300.00

Deficiency Income Tax Due 3,813,349.33

——————

TOTAL AMOUNT DUE AND PAYABLE P 20,133,762.53 2

===========

Picop and the CIR both went to the Supreme Court on separate Petitions for Review of
the above decision of the CTA. In two (2) Resolutions dated 7 February 1990 and 19
February 1990, respectively, the Court referred the two (2) Petitions to the Court of
Appeals. The Court of Appeals consolidated the two (2) cases and rendered a decision,
dated 31 August 1992, which further reduced the liability of Picop to P6,338,354.70.
The dispositive portion of the Court of Appeals decision reads as follows:

WHEREFORE, the appeal of the Commissioner of Internal Revenue is

denied for lack of merit. The judgment against PICOP is modified, as
follows:

1. PICOP is declared liable for the 35% transaction tax in the amount of
P3,578,543.51;

2. PICOP is absolved from the payment of documentary and science

stamp tax of P300,000.00 and the compromise penalty of P300.00;

3. PICOP shall pay 20% interest  per annum  on the deficiency income tax
of P1,481,579.15, for a period of three (3) years from 21 May 1983, or in
the total amount of P888,947.49, and a surcharge of 10% on the latter
amount, or P88,984.75.
 No pronouncement as to costs.

SO ORDERED.

Picop and the CIR once more filed separate Petitions for Review before the Supreme
Court. These cases were consolidated and, on 23 August 1993, the Court resolved to
give due course to both Petitions in G.R. Nos. 106949-50 and 106984-85 and required
the parties to file their Memoranda.

Picop now maintains that it is not liable at all to pay any of the assessments or any part
thereof. It assails the propriety of the thirty-five percent (35%) deficiency transaction
tax which the Court of Appeals held due from it in the amount of P3,578,543.51. Picop
also questions the imposition by the Court of Appeals of the deficiency income tax of
P1,481,579.15, resulting from disallowance of certain claimed financial guarantee
expenses and claimed year-end adjustments of sales and cost of sales figures by
Picop's external auditors. 3

The CIR, upon the other hand, insists that the Court of Appeals erred in finding Picop
not liable for surcharge and interest on unpaid transaction tax and for documentary and
science stamp taxes and in allowing Picop to claim as deductible expenses:

(a) the net operating losses of another corporation (i.e., Rustan Pulp and
Paper Mills, Inc.); and

(b) interest payments on loans for the purchase of machinery and

equipment.

The CIR also claims that Picop should be held liable for interest at fourteen
percent (14%) per annum from 15 April 1978 for three (3) years, and interest at
twenty percent (20%) per annum for a maximum of three (3) years; and for a
surcharge of ten percent (10%), on Picop's deficiency income tax. Finally, the
CIR contends that Picop is liable for the corporate development tax equivalent to
five percent (5%) of its correct 1977 net income.

The issues which we must here address may be sorted out and grouped in the following
manner:

I. Whether Picop is liable for:

(1) the thirty-five percent (35%) transaction tax;

(2) interest and surcharge on unpaid transaction tax; and

(3) documentary and science stamp taxes;

II. Whether Picop is entitled to deductions against income of:

(1) interest payments on loans for the

purchase of machinery and equipment;
 (2) net operating losses incurred by the Rustan
Pulp and Paper Mills, Inc.; and

(3) certain claimed financial guarantee expenses; and

III. (1) Whether Picop had understated its sales and

overstated its cost of sales for 1977; and

(2) Whether Picop is liable for the corporate

development tax of five percent (5%) of its net
income for 1977.

We will consider these issues in the foregoing sequence.

I.

(1) Whether Picop is liable

for the thirty-five percent
(35%) transaction tax.

With the authorization of the Securities and Exchange Commission, Picop issued
commercial paper consisting of serially numbered promissory notes with the total face
value of P229,864,000.00 and a maturity period of one (1) year, i.e., from 24
December 1977 to 23 December 1978. These promissory notes were purchased by
various commercial banks and financial institutions. On these promissory notes, Picop
paid interest in the aggregate amount of P45,771,849.00. In respect of these interest
payments, the CIR required Picop to pay the thirty-five percent (35%) transaction tax.

The CIR based this assessment on Presidential Decree No. 1154 dated 3 June 1977,
which reads in part as follows:

Sec. 1. The National Internal Revenue Code, as amended, is hereby

further amended by adding a new section thereto to read as follows:

Sec. 195-C. Tax on certain interest. — There shall be levied, assessed,

collected and paid on every commercial paper issued in the primary
market as principal instrument, a transaction tax equivalent to thirty-five
percent (35%) based on the gross amount of interest thereto as defined
hereunder, which shall be paid by the borrower/issuer: Provided,
however, that in the case of a long-term commercial paper whose
maturity exceeds more than one year, the borrower shall pay the tax
based on the amount of interest corresponding to one year, and
thereafter shall pay the tax upon accrual or actual payment (whichever is
earlier) of the untaxed portion of the interest which corresponds to a
period not exceeding one year.

The transaction tax imposed in this section shall be a final tax to be paid
by the borrower and shall be allowed as a deductible item for purposes of
computing the borrower's taxable income.
 For purposes of this tax —

(a) "Commercial paper" shall be defined as an instrument evidencing

indebtedness of any person or entity, including banks and non-banks
performing quasi-banking functions, which is issued, endorsed, sold,
transferred or in any manner conveyed to another person or entity, either
with or without recourse and irrespective of
maturity. Principally, commercial papers are promissory notes  and/or
similar instruments issued in the primary market and shall not include
repurchase agreements, certificates of assignments, certificates of
participations, and such other debt instruments issued in the secondary
market.

(b) The term "interest" shall mean the difference between what the
principal borrower received and the amount it paid upon maturity of the
commercial paper which shall, in no case, be lower than the interest rate
prevailing at the time of the issuance or renewal of the commercial paper.
Interest shall be deemed synonymous with discount and shall include all
fees, commissions, premiums and other payments which form integral
parts of the charges imposed as a consequence of the use of money.

In all cases, where no interest rate is stated or if the rate stated is lower
than the prevailing interest rate at the time of the issuance or renewal of
commercial paper, the Commissioner of Internal Revenue, upon
consultation with the Monetary Board of the Central Bank of the
Philippines, shall adjust the interest rate in accordance herewith, and
assess the tax on the basis thereof.

The tax  herein imposed shall be remitted by the borrower to the

Commissioner of Internal Revenue or his Collection Agent in the
municipality where such borrower has its principal place of business within
five (5) working days from the issuance of the commercial paper. In the
case of long term commercial paper, the tax upon the untaxed portion of
the interest which corresponds to a period not exceeding one year shall be
paid upon accrual payment, whichever is earlier. (Emphasis supplied)

Both the CTA and the Court of Appeals sustained the assessment of transaction
tax.

In the instant Petition, Picop reiterates its claim that it is exempt from the payment of
the transaction tax by virtue of its tax exemption under R.A. No. 5186, as amended,
known as the Investment Incentives Act, which in the form it existed in 1977-1978,
read in relevant part as follows:

Sec. 8. Incentives to a Pioneer Enterprise. In addition to the incentives

provided in the preceding section, pioneer enterprises shall be granted the
following incentive benefits:
 (a) Tax Exemption. Exemption from all taxes under the National Internal
Revenue Code, except income tax, from the date the area of investment
is included in the Investment Priorities Plan to the following extent:

(1) One hundred per cent (100%) for the first five years;

(2) Seventy-five per cent (75%) for the sixth through the eighth years;

(3) Fifty per cent (50%) for the ninth and tenth years;

(4) Twenty per cent (20%) for the eleventh and twelfth years; and

(5) Ten per cent (10%) for the thirteenth through the fifteenth year.

xxx xxx xxx 4

We agree with the CTA and the Court of Appeals that Picop's tax exemption under R.A.
No. 5186, as amended, does not include exemption from the thirty-five percent (35%)
transaction tax. In the first place, the thirty-five percent (35%) transaction tax 5 is an
income tax, that is, it is a tax on the interest income of the lenders or creditors.
In Western Minolco Corporation v. Commissioner of Internal Revenue, 6 the petitioner
corporation borrowed funds from several financial institutions from June 1977 to
October 1977 and paid the corresponding thirty-five (35%) transaction tax thereon in
the amount of P1,317,801.03, pursuant to Section 210 (b) of the 1977 Tax Code.
Western Minolco applied for refund of that amount alleging it was exempt from the
thirty-five (35%) transaction tax by reason of Section 79-A of C.A. No. 137, as
amended, which granted new mines and old mines resuming operation "five (5) years
complete tax exemptions, except income tax, from the time of its
actual bonafide orders for equipment for commercial production." In denying the claim
for refund, this Court held:

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.

As correctly ruled by the respondent Court of Tax Appeals:

Accordingly, we need not and do not think it necessary to

discuss further the nature of the transaction tax more than
to say that the incipient scheme in the issuance of Letter of
Instructions No. 340 on November 24, 1975 (O.G. Dec. 15,
1975), i.e., to achieve operational simplicity and effective
administration in capturing the interest-income "windfall"
from money market operations as a new source of revenue,
has lost none of its animating principle in parturition of
amendatory Presidential Decree No. 1154, now Section 210
(b) of the Tax Code. The tax thus imposed is actually a tax
on interest earnings of the lenders or placers who are
 actually the taxpayers in whose income is imposed. Thus
"the borrower withholds the tax of 35% from the interest he
would have to pay the lender so that he (borrower) can pay
the 35% of the interest to the Government." (Citation
omitted) . . . . Suffice it to state that the broad consensus of
fiscal and monetary authorities is that "even if nominally,
the borrower is made to pay the tax, actually, the tax is on
the interest earning of the immediate and all prior
lenders/placers of the money. . . ." (Rollo, pp. 36-37)

The 35% transaction tax is an income tax on interest earnings to the

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

xxx xxx xxx 7

(Emphasis supplied)

Much the same issue was passed upon in Marinduque Mining Industrial
Corporation v. Commissioner of Internal Revenue  8  and resolved in the same
way:

It is very obvious that the transaction tax, which is a tax on interest

derived from commercial paper issued in the money market, is not a tax
contemplated in the above-quoted legal provisions. The petitioner admits
that it is subject to income tax. Its tax exemption should be strictly
construed.

We hold that petitioner's claim for refund was justifiably denied. The

transaction tax, although nominally categorized as a business tax, is in
reality a withholding tax as positively stated in LOI No. 340. The petitioner
could have shifted the tax to the lenders or recipients of the interest. It
did not choose to do so. It cannot be heard now to complain about the
tax. LOI No. 340 is an extraneous or extrinsic aid to the construction of
section 210 (b).

xxx xxx xxx 9

(Emphasis supplied)

It is thus clear that the transaction tax is an income tax and as such, in any event, falls
outside the scope of the tax exemption granted to registered pioneer enterprises by
Section 8 of R.A. No. 5186, as amended. Picop was the withholding agent, obliged to
withhold thirty-five percent (35%) of the interest payable to its lenders and to remit the
amounts so withheld to the Bureau of Internal Revenue ("BIR"). As a withholding agent,
Picop is made personally liable  for the thirty-five percent (35%) transaction
tax 10 and if it did not actually withhold thirty-five percent (35%) of the interest monies
it had paid to its lenders, Picop had only itself to blame.

Picop claims that it had relied on a ruling, dated 6 October 1977, issued by the CIR,
which held that Picop was not liable for the thirty-five (35%) transaction tax in respect
of debenture bonds issued by Picop. Prior to the issuance of the promissory notes
involved in the instant case, Picop had also issued debenture bonds P100,000,000.00 in
aggregate face value. The managing underwriter of this debenture bond issue, Bancom
Development Corporation, requested a formal ruling from the Bureau of Internal
Revenue on the liability of Picop for the thirty-five percent (35%) transaction tax in
respect of such bonds. The ruling rendered by the then Acting Commissioner of Internal
Revenue, Efren I. Plana, stated in relevant part:

It is represented that PICOP will be offering to the public primary bonds in

the aggregate principal sum of one hundred million pesos
(P100,000,000.00); that the bonds will be issued as debentures in
denominations of one thousand pesos (P1,000.00) or multiples, to mature
in ten (10) years at 14% interest  per annum  payable semi-annually;
that the bonds are convertible into common stock of the issuer at the
option of the bond holder at an agreed conversion price; that the issue
will be covered by a "Trust Indenture" with a duly authorized trust
corporation as required by the Securities and Exchange Commission,
which trustee will act for and in behalf of the debenture bond holders as
beneficiaries; that once issued, the bonds cannot be preterminated by the
holder and cannot be redeemed by the issuer until after eight (8) years
from date of issue; that the debenture bonds will be subordinated to
present and future debts of PICOP; and that said bonds are intended to be
listed in the stock exchanges, which will place them alongside listed equity
issues.

In reply, I have the honor to inform you that although the bonds
hereinabove described are commercial papers which will be issued in the
primary market, however, it is clear from the abovestated facts that said
bonds will not be issued as money market instruments. Such being the
case, and considering that the purposes of Presidential Decree No. 1154,
as can be gleaned from Letter of Instruction No. 340, dated November 21,
1975, are (a) to regulate money market transactions and (b) to ensure
the collection of the tax on interest derived from money market
transactions by imposing a withholding tax thereon, said bonds do not
come within the purview of the  "commercial papers"  intended to be
subjected to the 35% transaction tax prescribed in Presidential Decree
No. 1154, as implemented by Revenue Regulations No. 7-77.
(See Section 2 of said Regulation) Accordingly, PICOP is not subject to
35% transaction tax on its issues of the aforesaid bonds. However, those
investing in said bonds should be made aware of the fact that the
transaction tax is not being imposed on the issuer of said bonds by
 printing or stamping thereon, in bold letters, the following statement:
"ISSUER NOT SUBJECT TO TRANSACTION TAX UNDER P.D. 1154.
BONDHOLDER SHOULD DECLARE INTEREST EARNING FOR INCOME
TAX." 11 (Emphases supplied)

In the above quoted ruling, the CIR basically held that Picop's debenture bonds did not
constitute "commercial papers" within the meaning of P.D. No. 1154, and that, as such,
those bonds were not subject to the thirty-five percent (35%) transaction tax imposed
by P.D. No. 1154.

The above ruling, however, is not applicable in respect of the promissory notes which
are the subject matter of the instant case. It must be noted that the debenture bonds
which were the subject matter of Commissioner Plana's ruling were long-term bonds
maturing in ten (10) years and which could not be pre-terminated and could not be
redeemed by Picop until after eight (8) years from date of issue; the bonds were
moreover subordinated to present and future debts of Picop and convertible into
common stock of Picop at the option of the bondholder. In contrast, the promissory
notes involved in the instant case are short-term instruments bearing a one-year
maturity period. These promissory notes constitute the very archtype of money market
instruments. For money market instruments are precisely, by custom and usage of the
financial markets, short-term instruments with a tenor of one (1) year or
less. 12 Assuming, therefore, (without passing upon) the correctness of the 6 October
1977 BIR ruling, Picop's short-term promissory notes must be distinguished, and
treated differently, from Picop's long-term debenture bonds.

We conclude that Picop was properly held liable for the thirty-five percent (35%)
transaction tax due in respect of interest payments on its money market borrowings.

At the same time, we agree with the Court of Appeals that the transaction tax may be
levied only in respect of the interest earnings of Picop's money market lenders accruing
after P.D. No. 1154 went into effect, and not in respect of all the 1977 interest earnings
of such lenders. The Court of Appeals pointed out that:

PICOP, however contends that even if the tax has to be paid, it should be
imposed only for the interests earned after 20 September 1977 when PD
1154 creating the tax became effective. We find merit in this
contention. It appears that the tax was levied on interest earnings from
January to October, 1977. However, as found by the lower court, PD 1154
was published in the Official Gazette only on 5 September 1977,
and became effective only fifteen (15) days after the publication, or on 20
September 1977, no other effectivity date having been provided by the
PD. Based on the Worksheet prepared by the Commissioner's office, the
interests earned from 20 September to October 1977 was
P10,224,410.03.  Thirty-five (35%) per cent of this is P3,578,543.51
which is all PICOP should pay as transaction tax. 13 (Emphasis supplied)

P.D. No. 1154 is not, in other words, to be given retroactive effect by imposing the
thirty-five percent (35%) transaction tax in respect of interest earnings which accrued
before the effectivity date of P.D. No. 1154, there being nothing in the statute to
suggest that the legislative authority intended to bring about such retroactive
imposition of the tax.

(2) Whether Picop is liable

for interest and surcharge
on unpaid transaction tax.

With respect to the transaction tax due, the CIR prays that Picop be held liable for a
twenty-five percent (25%) surcharge and for interest at the rate of fourteen percent
(14%)  per annum  from the date prescribed for its payment. In so praying, the CIR
relies upon Section 10 of Revenue Regulation 7-77 dated 3 June 1977, 14 issued by the
Secretary of Finance. This Section reads:

Sec. 10. Penalties. — Where the amount shown by the taxpayer to be due

on its return or part of such payment is not paid on or before the date
prescribed for its payment, the amount of the tax shall be increased by
twenty-five (25%) per centum, the increment to be a part of the tax and
the entire amount shall be subject to interest at the rate of fourteen
(14%) per centum per annum from the date prescribed for its payment.

In the case of willful neglect to file the return within the period prescribed
herein or in case a false or fraudulent return is willfully made, there shall
be added to the tax or to the deficiency tax in case any payment has been
made on the basis of such return before the discovery of the falsity or
fraud, a surcharge of fifty (50%) per centum of its amount. The amount
so added to any tax shall be collected at the same time and in the same
manner and as part of the tax unless the tax has been paid before the
discovery of the falsity or fraud, in which case the amount so added shall
be collected in the same manner as the tax.

In addition to the above administrative penalties, the criminal and civil

penalties  as provided for under Section 337 of the Tax Code of 1977 shall
be imposed for violation of any provision of Presidential Decree No.
1154. 15 (Emphases supplied)

The 1977 Tax Code itself, in Section 326 in relation to Section 4 of the same
Code, invoked by the Secretary of Finance in issuing Revenue Regulation 7-77,
set out, in comprehensive terms, the rule-making authority of the Secretary of
Finance:

Sec. 326. Authority of Secretary of Finance to Promulgate Rules and

Regulations. — The Secretary of Finance, upon recommendation of the
Commissioner of Internal Revenue, shall promulgate all needful rules and
regulations for the effective enforcement of the provisions of this Code.
(Emphasis supplied)

Section 4 of the same Code contains a list of subjects or areas to be dealt with
by the Secretary of Finance through the medium of an exercise of his quasi-
legislative or rule-making authority. This list, however, while it purports to be
open-ended, does not include the imposition of administrative or civil penalties
 such as the payment of amounts additional to the tax due. Thus, in order that it
may be held to be legally effective in respect of Picop in the present case,
Section 10 of Revenue Regulation 7-77 must embody or rest upon some
provision in the Tax Code itself which imposes surcharge and penalty interest for
failure to make a transaction tax payment when due.

P.D. No. 1154 did not itself impose, nor did it expressly authorize the imposition of, a
surcharge and penalty interest in case of failure to pay the thirty-five percent (35%)
transaction tax when due. Neither did Section 210 (b) of the 1977 Tax Code which re-
enacted Section 195-C inserted into the Tax Code by P.D. No. 1154.

The CIR, both in its petition before the Court of Appeals and its Petition in the instant
case, points to Section 51 (e) of the 1977 Tax Code as its source of authority for
assessing a surcharge and penalty interest in respect of the thirty-five percent (35%)
transaction tax due from Picop. This Section needs to be quoted in extenso:

Sec. 51. Payment and Assessment of Income Tax. —

(c) Definition of deficiency. — As used in this Chapter in respect of a tax

imposed by this Title, the term "deficiency" means:

(1) The amount by which the tax imposed by this Title  exceeds the
amount shown as the tax by the taxpayer upon his return; but the
amount so shown on the return shall first be increased by the amounts
previously assessed (or collected without assessment) as a deficiency, and
decreased by the amount previously abated, credited, returned, or
otherwise in respect of such tax; . . .

xxx xxx xxx

(e) Additions to the tax in case of non-payment. —

(1) Tax shown on the return. — Where the amount determined by the

taxpayer as the tax imposed by this Title or any installment thereof, or
any part of such amount or installment is not paid on or before the date
prescribed for its payment, there shall be collected as a part of the tax,
interest upon such unpaid amount at the rate of fourteen  per centum per
annum from the date prescribed for its payment until it is paid: Provided,
That the maximum amount that may be collected as interest on deficiency
shall in no case exceed the amount corresponding to a period of three
years, the present provisions regarding prescription to the contrary
notwithstanding.

(2) Deficiency. — Where a deficiency, or any interest assessed in

connection therewith under paragraph (d) of this section, or any addition
to the taxes provided for in Section seventy-two of this Code is not paid in
full within thirty days from the date of notice and demand from the
Commissioner of Internal Revenue, there shall be collected upon the
unpaid amount as part of the tax, interest at the rate of fourteen per
 centum per annum  from the date of such notice and demand until it is
paid: Provided, That the maximum amount that may be collected as
interest on deficiency shall in no case exceed the amount corresponding to
a period of three years, the present provisions regarding prescription to
the contrary notwithstanding.

(3) Surcharge. — If any amount of tax included in the notice and demand

from the Commissioner of Internal Revenue is not paid in full within thirty
days after such notice and demand, there shall be collected in addition to
the interest prescribed herein and in paragraph (d) above and as part of
the tax a surcharge of five per centum of the amount of tax unpaid.
(Emphases supplied)

Section 72 of the 1977 Tax Code referred to in Section 51 (e) (2) above,
provides:

Sec. 72. Surcharges for failure to render returns and for rendering false
and fraudulent returns. — In case of willful neglect to file the return or list
required by this Title within the time prescribed by law, or in case a false
or fraudulent return or list is wilfully made, the Commissioner of Internal
Revenue shall add to the tax or to the deficiency tax, in case any payment
has been made on the basis of such return before the discovery of the
falsity or fraud, as surcharge of fifty per centum of the amount of such
tax or deficiency tax. In case of any failure to make and file a return or
list within the time prescribed by law or by the Commissioner or other
Internal Revenue Officer, not due to willful neglect, the Commissioner of
Internal Revenue shall add to the tax twenty-five per centum of its
amount, except that, when a return is voluntarily and without notice from
the Commissioner or other officer filed after such time, and it is shown
that the failure to file it was due to a reasonable cause, no such addition
shall be made to the tax. The amount so added to any tax shall be
collected at the same time, in the same manner and as part of the tax
unless the tax has been paid before the discovery of the neglect, falsity,
or fraud, in which case the amount so added shall be collected in the
same manner as the tax. (Emphases supplied)

It will be seen that Section 51 (c) (1) and (e) (1) and (3), of the 1977 Tax Code,
authorize the imposition of surcharge and interest only in respect of a "tax imposed by
this Title," that is to say, Title II on  "Income Tax." It will also be seen that Section 72 of
the 1977 Tax Code imposes a surcharge only in case of failure to file a return or list
"required by this Title," that is, Title II on  "Income Tax." The thirty-five percent (35%)
transaction tax is, however, imposed in the 1977 Tax Code by Section 210 (b) thereof
which Section is embraced in Title V on "Taxes on Business" of that Code. Thus, while
the thirty-five percent (35%) transaction tax is in truth a tax
imposed on  interest income earned by lenders or creditors purchasing commercial
paper on the money market, the relevant provisions, i.e., Section 210 (b),
were not inserted in Title II of the 1977 Tax Code. The end result is that the thirty-five
percent (35%) transaction tax is not one of the taxes in respect of which Section 51 (e)
authorized the imposition of surcharge and interest and Section 72 the imposition of a
fraud surcharge.
It is not without reluctance that we reach the above conclusion on the basis of what
may well have been an inadvertent error in legislative draftsmanship, a type of error
common enough during the period of Martial Law in our country. Nevertheless, we are
compelled to adopt this conclusion. We consider that the authority to impose what the
present Tax Code calls (in Section 248) civil penalties consisting of additions to the tax
due, must be expressly given in the enabling statute, in language too clear to be
mistaken. The grant of that authority is not lightly to be assumed to have been made to
administrative officials, even to one as highly placed as the Secretary of Finance.

The state of the present law tends to reinforce our conclusion that Section 51 (c) and
(e) of the 1977 Tax Code did not authorize the imposition of a surcharge and penalty
interest for failure to pay the thirty-five percent (35%) transaction tax imposed under
Section 210 (b) of the same Code. The corresponding provision in the current  Tax Code
very clearly embraces failure to pay all taxes imposed in the Tax Code,  without any
regard to the Title of the Code where provisions imposing particular taxes are textually
located. Section 247 (a) of the NIRC, as amended, reads:

Title X

Statutory Offenses and Penalties

Chapter I

Additions to the Tax

Sec. 247. General Provisions. — (a) The additions to the tax or deficiency

tax prescribed in this Chapter shall apply to all taxes, fees and charges
imposed in this Code. The amount so added to the tax shall be collected
at the same time, in the same manner and as part of the tax. . . .

Sec. 248. Civil Penalties. — (a) There shall be imposed, in addition to the

tax required to be paid, penalty equivalent to twenty-five percent (25%)
of the amount due, in the following cases:

x x x           x x x          x x x

(3) failure to pay the tax within the time prescribed for its
payment; or

xxx xxx xxx

(c) the penalties imposed hereunder shall form part of the tax and the
entire amount shall be subject to the interest prescribed in Section 249.

Sec. 249. Interest. — (a) In General. — There shall be assessed and

collected on any unpaid amount of tax, interest at the rate of twenty
percent (20%) per annum  or such higher rate as may be prescribed by
regulations, from the date prescribed for payment until the amount is fully
paid. . . . (Emphases supplied)
 In other words, Section 247 (a) of the current NIRC supplies what did not exist
back in 1977 when Picop's liability for the thirty-five percent (35%) transaction
tax became fixed. We do not believe we can fill that legislative lacuna by judicial
fiat. There is nothing to suggest that Section 247 (a) of the present Tax Code,
which was inserted in 1985, was intended to be given retroactive application by
the legislative authority. 16

(3) Whether Picop is Liable

for Documentary and
Science Stamp Taxes.

As noted earlier, Picop issued sometime in 1977 long-term subordinated convertible

debenture bonds with an aggregate face value of P100,000,000.00. Picop stated, and
this was not disputed by the CIR, that the proceeds of the debenture bonds were in fact
utilized to finance the BOI-registered operations of Picop. The CIR assessed
documentary and science stamp taxes, amounting to P300,000.00, on the issuance of
Picop's debenture bonds. It is claimed by Picop that its tax exemption — "exemption
from all taxes under the National Internal Revenue Code, except income tax" on a
declining basis over a certain period of time — includes exemption from the
documentary and science stamp taxes imposed under the NIRC.

The CIR, upon the other hand, stresses that the tax exemption under the Investment
Incentives Act may be granted or recognized only to the extent that the claimant Picop
was engaged in registered operations, i.e., operations forming part of its integrated
pulp and paper project. 17 The borrowing of funds from the public, in the submission of
the CIR, was not an activity included in Picop's registered operations. The CTA adopted
the view of the CIR and held that "the issuance of convertible debenture bonds [was]
not synonymous [with] the manufactur[ing] operations of an integrated pulp and paper
mill." 18

The Court of Appeals took a less rigid view of the ambit of the tax exemption granted to
registered pioneer enterprises. Said the Court of Appeals:

. . . PICOP's explanation that the debenture bonds were issued to finance

its registered operation is logical and is unrebutted. We are aware that tax
exemptions must be applied strictly against the beneficiary in order to
deter their abuse. It would indeed be altogether a different matter if there
is a showing that the issuance of the debenture bonds had no bearing
whatsoever on the registered operations PICOP and that they were issued
in connection with a totally different business undertaking of PICOP other
than its registered operation. There is, however, a dearth of evidence in
this regard. It cannot be denied that PICOP needed funds for its
operations. One of the means it used to raise said funds was to issue
debenture bonds. Since the money raised thereby was to be used in its
registered operation, PICOP should enjoy the incentives granted to it by
R.A. 5186, one of which is the exemption from payment of all taxes under
the National Internal Revenue Code, except income taxes, otherwise the
purpose of the incentives would be defeated. Documentary and science
stamp taxes on debenture bonds are certainly not income
taxes. 19 (Emphasis supplied)
Tax exemptions are, to be sure, to be "strictly construed," that is, they are not to be
extended beyond the ordinary and reasonable intendment of the language actually used
by the legislative authority in granting the exemption. The issuance of debenture bonds
is certainly conceptually distinct from pulping and paper manufacturing operations. But
no one contends that issuance of bonds was a principal or regular business activity of
Picop; only banks or other financial institutions are in the regular business of raising
money by issuing bonds or other instruments to the general public. We consider that
the actual dedication of the proceeds of the bonds to the carrying out of Picop's
registered operations constituted a sufficient nexus with such registered operations so
as to exempt Picop from stamp taxes ordinarily imposed upon or in connection with
issuance of such bonds. We agree, therefore, with the Court of Appeals on this matter
that the CTA and the CIR had erred in rejecting Picop's claim for exemption from stamp
taxes.

It remains only to note that after commencement of the present litigation before the
CTA, the BIR took the position that the tax exemption granted by R.A. No. 5186, as
amended, does include exemption from documentary stamp taxes on transactions
entered into by BOI-registered enterprises. BIR Ruling No. 088, dated 28 April 1989, for
instance, held that a registered preferred pioneer enterprise engaged in the
manufacture of integrated circuits, magnetic heads, printed circuit boards, etc., is
exempt from the payment of documentary stamp taxes. The Commissioner said:

You now request a ruling that as a preferred pioneer enterprise, you are
exempt from the payment of Documentary Stamp Tax (DST).

In reply, please be informed that your request is hereby granted.

Pursuant to Section 46 (a) of Presidential Decree No. 1789, pioneer
enterprises registered with the BOI are exempt from all taxes under the
National Internal Revenue Code, except from all taxes under the National
Internal Revenue Code, except income tax, from the date the area of
investment is included in the Investment Priorities Plan to the following
extent:

xxx xxx xxx

Accordingly,  your company is exempt from the payment of documentary

stamp tax to the extent of the percentage aforestated on transactions
connected with the registered business activity. (BIR Ruling No. 111-81)
However, if said transactions conducted by you require the execution of a
taxable document with other parties, said parties who are not exempt
shall be the one directly liable for the tax. (Sec. 173, Tax Code, as
amended; BIR Ruling No. 236-87) In other words, said parties shall be
liable to the same percentage corresponding to your tax exemption.
(Emphasis supplied)

Similarly, in BIR Ruling No. 013, dated 6 February 1989, the Commissioner held
that a registered pioneer enterprise producing polyester filament yarn was
entitled to exemption "from the documentary stamp tax on [its] sale of real
property in Makati up to December 31, 1989." It appears clear to the Court that
 the CIR, administratively at least, no longer insists on the position it originally
took in the instant case before the CTA.

II

(1) Whether Picop is entitled

to deduct against current
income interest payments
on loans for the purchase
of machinery and equipment.

In 1969, 1972 and 1977, Picop obtained loans from foreign creditors in order to finance
the purchase of machinery and equipment needed for its operations. In its 1977
Income Tax Return, Picop claimed interest payments made in 1977, amounting to
P42,840,131.00, on these loans as a deduction from its 1977 gross income.

The CIR disallowed this deduction upon the ground that, because the loans had been
incurred for the purchase of machinery and equipment, the interest payments on those
loans should have been capitalized instead and claimed as a depreciation deduction
taking into account the adjusted basis of the machinery and equipment (original
acquisition cost plus interest charges) over the useful life of such assets.

Both the CTA and the Court of Appeals sustained the position of Picop and held that the
interest deduction claimed by Picop was proper and allowable. In the instant Petition,
the CIR insists on its original position.

We begin by noting that interest payments on loans incurred by a taxpayer (whether

BOI-registered or not) are allowed by the NIRC as deductions against the taxpayer's
gross income. Section 30 of the 1977 Tax Code provided as follows:

Sec. 30. Deduction from Gross Income. — The following may be deducted

from gross income:

(a) Expenses:

xxx xxx xxx

(b) Interest:

(1) In general. — The amount of interest paid within the

taxable year on indebtedness, except on indebtedness
incurred or continued to purchase or carry obligations the
interest upon which is exempt from taxation as income
under this Title: . . . (Emphasis supplied)

Thus, the general rule is that interest expenses are deductible against gross
income and this certainly includes interest paid under loans incurred in
connection with the carrying on of the business of the taxpayer. 20 In the instant
case, the CIR does not dispute that the interest payments were made by Picop
 on loans incurred in connection with the carrying on of the registered operations
of Picop, i.e., the financing of the purchase of machinery and equipment actually
used in the registered operations of Picop. Neither does the CIR deny that such
interest payments were legally due and demandable under the terms of such
loans, and in fact paid by Picop during the tax year 1977.

The CIR has been unable to point to any provision of the 1977 Tax Code or any other
Statute that requires the disallowance of the interest payments made by Picop. The CIR
invokes Section 79 of Revenue Regulations No. 2 as amended which reads as follows:

Sec. 79. Interest on Capital. — Interest  calculated for cost-keeping or

other purposes on account of capital or surplus invested in the
business, which does not represent a charge arising under an interest-
bearing obligation, is not allowable deduction from gross income.
(Emphases supplied)

We read the above provision of Revenue Regulations No. 2 as referring to so

called "theoretical interest," that is to say, interest "calculated" or computed
(and not incurred or paid) for the purpose of determining the "opportunity cost"
of investing funds in a given business. Such "theoretical" or imputed interest
does not  arise from a legally demandable interest-bearing obligation incurred by
the taxpayer who however wishes to find out, e.g., whether he would have been
better off by lending out his funds and earning interest rather than investing
such funds in his business. One thing that Section 79 quoted above makes clear
is that interest which does constitute a charge arising under an interest-bearing
obligation is  an allowable deduction from gross income.

It is claimed by the CIR that Section 79 of Revenue Regulations No. 2 was "patterned
after" paragraph 1.266-1 (b), entitled "Taxes and Carrying Charges Chargeable to
Capital Account and Treated as Capital Items" of the U.S. Income Tax Regulations,
which paragraph reads as follows:

(B) Taxes and Carrying Charges. — The items thus chargeable to capital

accounts are —

(11) In the case of real property, whether improved or unimproved and

whether productive or nonproductive.

(a) Interest on a loan (but not theoretical interest of a taxpayer using his
own funds). 21

The truncated excerpt of the U.S. Income Tax Regulations quoted by the CIR needs to
be related to the relevant provisions of the U.S. Internal Revenue Code, which
provisions deal with the general topic of adjusted basis for determining allowable gain
or loss on sales or exchanges of property and allowable depreciation and depletion of
capital assets of the taxpayer:

Present Rule. The Internal Revenue Code, and the Regulations

promulgated thereunder provide that "No deduction shall be allowed for
 amounts paid or accrued for such taxes and carrying charges  as, under
regulations prescribed by the Secretary or his delegate, are chargeable to
capital account with respect to property, if the taxpayer elects, in
accordance with such regulations, to treat such taxes or charges as so
chargeable."

At the same time, under the adjustment of basis provisions which have
just been discussed, it is provided that adjustment shall be made for all
"expenditures, receipts, losses, or other items" properly chargeable to a
capital account, thus including taxes and carrying charges; however, an
exception exists, in which event such adjustment to the capital account is
not made, with respect to taxes and carrying charges which the taxpayer
has not elected to capitalize but for which a deduction instead has been
taken. 22 (Emphasis supplied)

The "carrying charges" which may be capitalized under the above quoted
provisions of the U.S. Internal Revenue Code include, as the CIR has pointed
out, interest on a loan "(but not theoretical interest of a taxpayer using his own
funds)." What the CIR failed to point out is that such "carrying charges" may, at
the election of the taxpayer, either be (a) capitalized  in which case the cost basis
of the capital assets, e.g., machinery and equipment, will be adjusted by adding
the amount of such interest payments or alternatively, be (b) deducted from
gross income of the taxpayer. Should the taxpayer elect to deduct the interest
payments against its gross income, the taxpayer cannot at the same
time capitalize the interest payments. In other words, the taxpayer
is not entitled to both the deduction from gross income and the adjusted
(increased) basis for determining gain or loss and the allowable depreciation
charge. The U.S. Internal Revenue Code does not prohibit the deduction of
interest on a loan obtained for purchasing machinery and equipment against
gross income, unless the taxpayer has also or previously capitalized the same
interest payments and thereby adjusted the cost basis of such assets.

We have already noted that our 1977 NIRC does not prohibit the deduction of interest
on a loan incurred for acquiring machinery and equipment. Neither does our 1977 NIRC
compel the capitalization of interest payments on such a loan. The 1977 Tax Code is
simply silent on a taxpayer's right to elect one or the other tax treatment of such
interest payments. Accordingly, the general rule that interest payments on a legally
demandable loan are deductible from gross income must be applied.

The CIR argues finally that to allow Picop to deduct its interest payments against its
gross income would be to encourage fraudulent claims to double deductions from gross
income:

[t]o allow a deduction of incidental expense/cost incurred in the purchase

of fixed asset in the year it was incurred would invite tax
evasion through fraudulent application of double deductions from gross
income. 23 (Emphases supplied)

The Court is not persuaded. So far as the records of the instant cases show,
Picop has not claimed to be entitled to double deduction of its 1977 interest
 payments. The CIR has neither alleged nor proved that Picop had previously
adjusted its cost basis for the machinery and equipment purchased with the loan
proceeds by capitalizing the interest payments here involved. The Court will not
assume that the CIR would be unable or unwilling to disallow "a double
deduction" should Picop, having deducted its interest cost from its gross income,
also attempt subsequently to adjust upward the cost basis of the machinery and
equipment purchased and claim, e.g., increased deductions for depreciation.

We conclude that the CTA and the Court of Appeals did not err in allowing the
deductions of Picop's 1977 interest payments on its loans for capital equipment against
its gross income for 1977.

(2) Whether Picop is entitled

to deduct against current
income net operating losses
incurred by Rustan Pulp
and Paper Mills, Inc.

On 18 January 1977, Picop entered into a merger agreement with the Rustan Pulp and
Paper Mills, Inc. ("RPPM") and Rustan Manufacturing Corporation ("RMC"). Under this
agreement, the rights, properties, privileges, powers and franchises of RPPM and RMC
were to be transferred, assigned and conveyed to Picop as the surviving corporation.
The entire subscribed and outstanding capital stock of RPPM and RMC would be
exchanged for 2,891,476 fully paid up Class "A" common stock of Picop (with a par
value of P10.00) and 149,848 shares of preferred stock of Picop (with a par value of
P10.00), to be issued by Picop, the result being that Picop would wholly own both RPPM
and RMC while the stockholders of RPPM and RMC would join the ranks of Picop's
shareholders. In addition, Picop paid off the obligations of RPPM to the Development
Bank of the Philippines ("DBP") in the amount of P68,240,340.00, by issuing 6,824,034
shares of preferred stock (with a par value of P10.00) to the DBP. The merger
agreement was approved in 1977 by the creditors and stockholders of Picop, RPPM and
RMC and by the Securities and Exchange Commission. Thereupon, on 30 November
1977, apparently the effective date of merger, RPPM and RMC were dissolved. The
Board of Investments approved the merger agreement on 12 January 1978.

It appears that RPPM and RMC were, like Picop, BOI-registered companies. Immediately
before merger effective date, RPPM had over preceding years accumulated losses in the
total amount of P81,159,904.00. In its 1977 Income Tax Return, Picop claimed
P44,196,106.00 of RPPM's accumulated losses as a deduction against Picop's 1977
gross income. 24

Upon the other hand, even before the effective date of merger, on 30 August 1977,
Picop sold all the outstanding shares of RMC stock to San Miguel Corporation for the
sum of P38,900,000.00, and reported a gain of P9,294,849.00 from this transaction. 25

In claiming such deduction, Picop relies on section 7 (c) of R.A. No. 5186 which
provides as follows:
 Sec. 7. Incentives to Registered Enterprise. — A registered enterprise, to
the extent engaged in a preferred area of investment, shall be granted the
following incentive benefits:

xxx xxx xxx

(c) Net Operating Loss Carry-over. — A net operating loss incurred in any
of the first ten years of operations may be carried over as a deduction
from taxable income for the six years immediately following the year of
such loss. The entire amount of the loss shall be carried over to the first
of the six taxable years following the loss, and any portion of such loss
which exceeds the taxable income of such first year shall be deducted in
like manner from the taxable income of the next remaining five
years. The net operating loss shall be computed in accordance with the
provisions of the National Internal Revenue Code, any provision of this
Act to the contrary notwithstanding, except that income not taxable either
in whole or in part under this or other laws shall be included in gross
income. (Emphasis supplied)

Picop had secured a letter-opinion from the BOI dated 21 February 1977 — that
is, after the date of the agreement of merger but before the merger became
effective — relating to the deductibility of the previous losses of RPPM under
Section 7 (c) of R.A. No. 5186 as amended. The pertinent portions of this BOI
opinion, signed by BOI Governor Cesar Lanuza, read as follows:

2) PICOP will not be allowed to carry over the losses of Rustan prior to
the legal dissolution of the latter because at that time the two (2)
companies still had separate legal personalities;

3) After BOI approval of the merger, PICOP can no longer apply for the
registration of the registered capacity of Rustan because with the
approved merger, such registered capacity of Rustan transferred to PICOP
will have the same registration date as that of Rustan. In this case, the
previous losses of Rustan may be carried over by PICOP, because with the
merger, PICOP assumes all the rights and obligations of Rustan subject,
however, to the period prescribed for carrying over of such
losses. 26 (Emphasis supplied)

Curiously enough, Picop did not also seek a ruling on this matter, clearly a
matter of tax law, from the Bureau of Internal Revenue. Picop chose to rely
solely on the BOI letter-opinion.

The CIR disallowed all the deductions claimed on the basis of RPPM's losses, apparently
on two (2) grounds. Firstly, the previous losses were incurred by "another taxpayer,"
RPPM, and not by Picop in connection with Picop's own registered operations. The CIR
took the view that Picop, RPPM and RMC were merged into one (1) corporate
personality only on 12 January 1978, upon approval of the merger agreement by the
BOI. Thus, during the taxable year 1977, Picop on the one hand and RPPM and RMC on
the other, still had their separate juridical personalities. Secondly, the CIR alleged that
these losses had been incurred by RPPM "from the borrowing of funds" and not from
carrying out of RPPM's registered operations. We focus on the first ground. 27

The CTA upheld the deduction claimed by Picop; its reasoning, however, is less than
crystal clear, especially in respect of its view of what the U.S. tax law was on this
matter. In any event, the CTA apparently fell back on the BOI opinion of 21 February
1977 referred to above. The CTA said:

Respondent further averred that the incentives granted under Section 7 of

R.A. No. 5186 shall be available only to the extent in which they are
engaged in registered operations, citing Section 1 of Rule IX of the Basic
Rules and Regulations to Implement the Intent and Provisions of the
Investment Incentives Act, R.A. No. 5186.

We disagree with respondent. The purpose of the merger was to

rationalize the container board industry and not to take advantage of the
net losses incurred by RPPMI prior to the stock swap. Thus, when stock of
a corporation is purchased in order to take advantage of the corporation's
net operating loss incurred in years prior to the purchase, the corporation
thereafter entering into a trade or business different from that in which it
was previously engaged, the net operating loss carry-over may be entirely
lost. [IRC (1954), Sec. 382(a), Vol. 5, Mertens, Law of Federal Income
Taxation, Chap. 29.11a, p. 103]. 28 Furthermore, once the BOI approved
the merger agreement, the registered capacity of Rustan shall be
transferred to PICOP, and the previous losses of Rustan may be carried
over by PICOP by operation of law. [BOI ruling dated February 21, 1977
(Exh. J-1)] It is clear therefrom, that the deduction availed of under
Section 7(c) of R.A. No. 5186 was only proper." (pp. 38-43, Rollo  of SP
No. 20070) 29 (Emphasis supplied)

In respect of the above underscored portion of the CTA decision, we must note
that the CTA in fact overlooked the statement made by petitioner's counsel
before the CTA that:

Among the attractions of the merger to Picop was the accumulated net
operating loss carry-over of RMC that it might possibly use to relieve it
(Picop) from its income taxes, under Section 7 (c) of R.A. 5186. Said
section provides:

xxx xxx xxx

With this benefit in mind, Picop addressed three (3) questions to the BOI
in a letter dated November 25, 1976. The BOI replied on February 21,
1977 directly answering the three (3) queries. 30 (Emphasis supplied)

The size of RPPM's accumulated losses as of the date of the merger — more than
P81,000,000.00 — must have constituted a powerful attraction indeed for Picop.
The Court of Appeals followed the result reached by the CTA. The Court of Appeals,
much like the CTA, concluded that since RPPM was dissolved on 30 November 1977, its
accumulated losses were appropriately carried over by Picop in the latter's 1977 Income
Tax Return "because by that time RPPMI and Picop were no longer separate and
different taxpayers." 31

After prolonged consideration and analysis of this matter, the Court is unable to agree
with the CTA and Court of Appeals on the deductibility of RPPM's accumulated losses
against Picop's 1977 gross income.

It is important to note at the outset that in our jurisdiction, the ordinary rule — that is,
the rule applicable in respect of corporations not registered with the BOI as a preferred
pioneer enterprise — is that net operating losses cannot be carried over. Under our Tax
Code, both in 1977 and at present, losses may be deducted from gross income only if
such losses were actually sustained in the same year that they are deducted or charged
off. Section 30 of the 1977 Tax Code provides:

Sec. 30. Deductions from Gross Income. — In computing net income,

there shall be allowed as deduction —

xxx xxx xxx

(d) Losses:

(1) By Individuals. — In the case of an individual, losses actually

sustained during the taxable year and not compensated for by an
insurance or otherwise —

(A) If incurred in trade or business;

xxx xxx xxx

(2) By Corporations. — In a case of a corporation, all losses actually

sustained and charged off within the taxable year and not compensated
for by insurance or otherwise.

(3) By Non-resident Aliens or Foreign Corporations. — In the case of a

non-resident alien individual or a foreign corporation, the losses
deductible are those actually sustained during the year  incurred in
business or trade conducted within the Philippines, . . . 32 (Emphasis
supplied)

Section 76 of the Philippine Income Tax Regulations (Revenue Regulation No. 2,

as amended) is even more explicit and detailed:

Sec. 76. When charges are deductible. — Each year's return, so far as

practicable, both as to gross income and deductions therefrom should be
complete in itself, and taxpayers are expected to make every reasonable
effort to ascertain the facts necessary to make a correct return. The
 expenses, liabilities, or deficit of one year cannot be used to reduce the
income of a subsequent year. A taxpayer has the right to deduct all
authorized allowances and it follows that if he does not within any year
deduct certain of his expenses,  losses, interests, taxes, or other charges,
he can not deduct them from the income of the next or any succeeding
year. . . .

xxx xxx xxx

. . . . If subsequent to its occurrence, however, a taxpayer first ascertains

the amount of a loss sustained during a prior taxable year which has not
been deducted from gross income, he may render an amended return for
such preceding taxable year including such amount of loss in the
deduction from gross income and may in proper cases file a claim for
refund of the excess paid by reason of the failure to deduct such loss in
the original return. A loss from theft or embezzlement occurring in one
year and discovered in another is ordinarily deductible for the year in
which sustained. (Emphases supplied)

It is thus clear that under our law, and outside the special realm of BOI-
registered enterprises, there is no such thing as a carry-over of net operating
loss. To the contrary, losses must be deducted against current income in the
taxable year when such losses were incurred. Moreover, such losses may be
charged off only against income earned in the same taxable year when the
losses were incurred.

Thus it is that R.A. No. 5186 introduced the carry-over of net operating losses as a very
special incentive to be granted only to registered pioneer enterprises and only with
respect to their registered operations. The statutory purpose here may be seen to be
the encouragement of the establishment and continued operation of pioneer industries
by allowing the registered enterprise to accumulate its operating losses which may be
expected during the early years of the enterprise and to permit the enterprise to offset
such losses against income earned by it in later years after successful establishment
and regular operations. To promote its economic development goals, the Republic
foregoes or defers taxing the income of the pioneer enterprise until after that enterprise
has recovered or offset its earlier losses. We consider that the statutory purpose can be
served only if the accumulated operating losses are carried over and charged off
against income subsequently earned and accumulated by the same enterprise engaged
in the same registered operations.

In the instant case, to allow the deduction claimed by Picop would be to permit one
corporation or enterprise, Picop, to benefit from the operating losses accumulated by
another corporation or enterprise, RPPM. RPPM far from benefiting from the tax
incentive granted by the BOI statute, in fact gave up the struggle and went out of
existence and its former stockholders joined the much larger group of Picop's
stockholders. To grant Picop's claimed deduction would be to permit Picop to shelter its
otherwise taxable income (an objective which Picop had from the very beginning) which
had not been earned by the registered enterprise which had suffered the accumulated
losses. In effect, to grant Picop's claimed deduction would be to permit Picop to
purchase a tax deduction and RPPM to peddle its accumulated operating losses. Under
the CTA and Court of Appeals decisions, Picop would benefit by immunizing
P44,196,106.00 of its income from taxation thereof although Picop had not run the
risks and incurred the losses which had been encountered and suffered by RPPM.
Conversely, the income that would be shielded from taxation is not income that was,
after much effort, eventually generated by the same registered operations which earlier
had sustained losses. We consider and so hold that there is nothing in Section 7 (c) of
R.A. No. 5186 which either requires or permits such a result. Indeed, that result makes
non-sense of the legislative purpose which may be seen clearly to be projected by
Section 7 (c), R.A. No. 5186.

The CTA and the Court of Appeals allowed the offsetting of RPPM's accumulated
operating losses against Picop's 1977 gross income, basically because towards the end
of the taxable year 1977, upon the arrival of the effective date of merger, only one (1)
corporation, Picop, remained. The losses suffered by RPPM's registered operations and
the gross income generated by Picop's own registered operations now came under one
and the same corporate roof. We consider that this circumstance relates much more to
form than to substance. We do not believe that that single purely technical factor is
enough to authorize and justify the deduction claimed by Picop. Picop's claim for
deduction is not only bereft of statutory basis; it does violence to the legislative intent
which animates the tax incentive granted by Section 7 (c) of R.A. No. 5186. In granting
the extraordinary privilege and incentive of a net operating loss carry-over to BOI-
registered pioneer enterprises, the legislature could not have intended to require the
Republic to forego tax revenues in order to benefit a corporation which had run no risks
and suffered no losses, but had merely purchased another's losses.

Both the CTA and the Court of Appeals appeared much impressed not only with
corporate technicalities but also with the U.S. tax law on this matter. It should suffice,
however, simply to note that in U.S. tax law, the availability to companies generally of
operating loss carry-overs and of operating loss carry-backs is expressly provided and
regulated in great detail by statute. 33 In our jurisdiction, save for Section 7 (c) of R.A.
No. 5186, no statute recognizes or permits loss carry-overs and loss carry-backs.
Indeed, as already noted, our tax law expressly rejects the very notion of loss carry-
overs and carry-backs.

We conclude that the deduction claimed by Picop in the amount of P44,196,106.00 in

its 1977 Income Tax Return must be disallowed.

(3) Whether Picop is entitled

to deduct against current
income certain claimed
financial guarantee expenses.

In its Income Tax Return for 1977, Picop also claimed a deduction in the amount of
P1,237,421.00 as financial guarantee expenses.

This deduction is said to relate to chattel and real estate mortgages required from Picop
by the Philippine National Bank ("PNB") and DBP as guarantors of loans incurred by
Picop from foreign creditors. According to Picop, the claimed deduction represents
registration fees and other expenses incidental to registration of mortgages in favor of
DBP and PNB.
In support of this claimed deduction, Picop allegedly showed its own vouchers to BIR
Examiners to prove disbursements to the Register of Deeds of Tandag, Surigao del Sur,
of particular amounts. In the proceedings before the CTA, however, Picop did not
submit in evidence such vouchers and instead presented one of its employees to testify
that the amount claimed had been disbursed for the registration of chattel and real
estate mortgages.

The CIR disallowed this claimed deduction upon the ground of insufficiency of evidence.
This disallowance was sustained by the CTA and the Court of Appeals. The CTA said:

No records are available to support the abovementioned expenses. The

vouchers merely showed that the amounts were paid to the Register of
Deeds and simply cash account. Without the supporting papers such as
the invoices or official receipts of the Register of Deeds, these vouchers
standing alone cannot prove that the payments made were for the
accrued expenses in question.  The best evidence of payment is the official
receipts issued by the Register of Deeds. The testimony of petitioner's
witness that the official receipts and cash vouchers were shown to the
Bureau of Internal Revenue will not suffice if no records could be
presented in court for proper marking and identification. 34 Emphasis
supplied)

The Court of Appeals added:

The mere testimony of a witness for PICOP and the cash vouchers do not
suffice to establish its claim that registration fees were paid to the
Register of Deeds for the registration of real estate and chattel mortgages
in favor of Development Bank of the Philippines and the Philippine
National Bank as guarantors of PICOP's loans. The witness could very well
have been merely repeating what he was instructed to say regardless of
the truth, while the cash vouchers, which we do not find on file, are not
said to provide the necessary details regarding the nature and purpose of
the expenses reflected therein. PICOP should have presented, through the
guarantors, its owner's copy of the registered titles with the lien inscribed
thereon as well as an official receipt from the Register of Deeds
evidencing payment of the registration fee. 35 (Emphasis supplied)

We must support the CTA and the Court of Appeals in their foregoing rulings. A
taxpayer has the burden of proving entitlement to a claimed deduction. 36 In the instant
case, even Picop's own vouchers were not submitted in evidence and the BIR Examiners
denied that such vouchers and other documents had been exhibited to them. Moreover,
cash vouchers can only confirm the fact of disbursement but not necessarily the
purpose thereof. 37 The best evidence that Picop should have presented to support its
claimed deduction were the invoices and official receipts issued by the Register of
Deeds. Picop not only failed to present such documents; it also failed to explain the loss
thereof, assuming they had existed before. 38 Under the best evidence rule, 39 therefore,
the testimony of Picop's employee was inadmissible and was in any case entitled to
very little, if any, credence.
We consider that entitlement to Picop's claimed deduction of P1,237,421.00 was not
adequately shown and that such deduction must be disallowed.

III

(1) Whether Picop had understated

its sales and overstated its
cost of sales for 1977.

In its assessment for deficiency income tax for 1977, the CIR claimed that Picop had
understated its sales by P2,391,644.00 and, upon the other hand, overstated its cost of
sales by P604,018.00. Thereupon, the CIR added back both sums to Picop's net income
figure per its own return.

The 1977 Income Tax Return of Picop set forth the following figures:

Sales (per Picop's Income Tax Return):

Paper P 537,656,719.00

Timber P 263,158,132.00

———————

Total Sales P 800,814,851.00

============

Upon the other hand, Picop's Books of Accounts reflected higher sales figures:

Sales (per Picop's Books of Accounts):

Paper P 537,656,719.00

Timber P 265,549,776.00

———————

Total Sales P 803,206,495.00

============

The above figures thus show a discrepancy between the sales figures reflected in
Picop's Books of Accounts and the sales figures reported in its 1977 Income Tax
Return, amounting to: P2,391,644.00.

The CIR also contended that Picop's cost of sales set out in its 1977 Income Tax Return,
when compared with the cost figures in its Books of Accounts, was overstated:
 Cost of Sales
(per Income Tax Return) P607,246,084.00
Cost of Sales
(per Books of Accounts) P606,642,066.00

———————

Discrepancy P 604,018.00
============

Picop did not deny the existence of the above noted discrepancies. In the proceedings
before the CTA, Picop presented one of its officials to explain the foregoing
discrepancies. That explanation is perhaps best presented in Picop's own words as set
forth in its Memorandum before this Court:

. . . that the adjustment discussed in the testimony of the witness,

represent the best and most objective method of determining in pesos the
amount of the correct and actual export sales during the year. It was this
correct and actual export sales and costs of sales that were reflected in
the income tax return and in the audited financial statements. These
corrections did not result in realization of income and should not give rise
to any deficiency tax.

xxx xxx xxx

What are the facts of this case on this matter? Why were adjustments
necessary at the year-end?

Because of PICOP's procedure of recording its export sales (reckoned in

U.S. dollars) on the basis of a fixed rate, day to day and month to month,
regardless of the actual exchange rate and without waiting when the
actual proceeds are received. In other words, PICOP recorded its export
sales at a pre-determined fixed exchange rate. That pre-determined rate
was decided upon at the beginning of the year and continued to be used
throughout the year.

At the end of the year, the external auditors made an examination. In

that examination, the auditors determined with accuracy the actual dollar
proceeds of the export sales received. What exchange rate was used by
the auditors to convert these actual dollar proceeds into Philippine pesos?
They used the average of the differences between (a) the recorded fixed
exchange rate and (b) the exchange rate at the time the proceeds were
actually received. It was this rate at time of receipt of the proceeds that
determined the amount of pesos credited by the Central Bank (through
the agent banks) in favor of PICOP. These accumulated differences were
averaged by the external auditors and this was what was used at the
year-end for income tax and other government-report purposes. (T.s.n.,
Oct. 17/85, pp. 20-25) 40
The above explanation, unfortunately, at least to the mind of the Court, raises more
questions than it resolves. Firstly, the explanation assumes that all of Picop's sales were
export sales for which U.S. dollars (or other foreign exchange) were received. It also
assumes that the expenses summed up as "cost of sales" were all dollar expenses and
that no peso expenses had been incurred. Picop's explanation further assumes that a
substantial part of Picop's dollar proceeds for its export sales were not actually
surrendered to the domestic banking system and seasonably converted into pesos; had
all such dollar proceeds been converted into pesos, then the peso figures could have
been simply added up to reflect the actual peso value of Picop's export sales. Picop
offered no evidence in respect of these assumptions, no explanation why and how a
"pre-determined fixed exchange rate" was chosen at the beginning of the year and
maintained throughout. Perhaps more importantly, Picop was unable to explain why its
Books of Accounts did not pick up the same adjustments that Picop's External Auditors
were alleged to have made for purposes of Picop's Income Tax Return. Picop attempted
to explain away the failure of its Books of Accounts to reflect the same adjustments (no
correcting entries, apparently) simply by quoting a passage from a case where this
Court refused to ascribe much probative value to the Books of Accounts of a corporate
taxpayer in a tax case. 41 What appears to have eluded Picop, however, is that its Books
of Accounts, which are kept by its own employees and are prepared under its control
and supervision, reflect what may be deemed to be admissions against interest in the
instant case. For Picop's Books of Accounts precisely show higher  sales figures
and lower cost of sales figures than Picop's Income Tax Return.

It is insisted by Picop that its Auditors' adjustments simply present the "best and most
objective" method of reflecting in pesos the "correct and ACTUAL export sales" 42 and
that the adjustments or "corrections" "did not result in realization of [additional] income
and should not give rise to any deficiency tax." The correctness of this contention is not
self-evident. So far as the record of this case shows, Picop did not submit in evidence
the aggregate amount of its U.S. dollar proceeds of its export sales; neither did it show
the Philippine pesos it had actually received or been credited for such U.S. dollar
proceeds. It is clear to this Court that the testimonial evidence submitted by Picop fell
far short of demonstrating the correctness of its explanation.

Upon the other hand, the CIR has made out at least a  prima facie case that Picop had
understated its sales and overstated its cost of sales as set out in its Income Tax
Return. For the CIR has a right to assume that Picop's Books of Accounts speak the
truth in this case since, as already noted, they embody what must appear to be
admissions against Picop's own interest.

Accordingly, we must affirm the findings of the Court of Appeals and the CTA.

(2) Whether Picop is liable for

the corporate development
tax of five percent (5%)
of its income for 1977.

The five percent (5%) corporate development tax is an additional corporate income tax
imposed in Section 24 (e) of the 1977 Tax Code which reads in relevant part as follows:
 (e) Corporate development tax. — In addition to the tax imposed in
subsection (a) of this section, an additional tax in an amount equivalent to
5 per cent of the same taxable net income shall be paid by a domestic or
a resident foreign corporation; Provided, That this additional tax shall be
imposed only if the net income exceeds 10 per cent of the net worth, in
case of a domestic corporation, or net assets in the Philippines in case of a
resident foreign corporation: . . . .

The additional corporate income tax imposed in this subsection shall be

collected and paid at the same time and in the same manner as the tax
imposed in subsection (a) of this section.

Since this five percent (5%) corporate development tax is an income tax, Picop
is not exempted from it under the provisions of Section 8 (a) of R.A. No. 5186.

For purposes of determining whether the net income of a corporation exceeds ten
percent (10%) of its net worth, the term "net worth" means the stockholders' equity
represented by the excess of the total assets over liabilities as reflected in the
corporation's balance sheet provided such balance sheet has been prepared in
accordance with generally accepted accounting principles employed in keeping the
books of the corporation. 43

The adjusted net income of Picop for 1977, as will be seen below, is P48,687,355.00.
Its net worth figure or total stockholders' equity as reflected in its Audited Financial
Statements for 1977 is P464,749,528.00. Since its adjusted net income for 1977 thus
exceeded ten percent (10%) of its net worth, Picop must be held liable for the five
percent (5%) corporate development tax in the amount of P2,434,367.75.

Recapitulating, we hold:

(1) Picop is liable for the thirty-five percent (35%) transaction tax in the amount of
P3,578,543.51.

(2) Picop is not liable for interest and surcharge on unpaid transaction tax.

(3) Picop is exempt from payment of documentary and science stamp taxes in the
amount of P300,000.00 and the compromise penalty of P300.00.

(4) Picop is entitled to its claimed deduction of P42,840,131.00 for interest payments
on loans for, among other things, the purchase of machinery and equipment.

(5) Picop's claimed deduction in the amount of P44,196,106.00 for the operating losses
previously incurred by RPPM, is disallowed for lack of merit.

(6) Picop's claimed deduction for certain financial guarantee expenses in the amount
P1,237,421.00 is disallowed for failure adequately to prove such expenses.

(7) Picop has understated its sales by P2,391,644.00 and overstated its cost of sales by
P604,018.00, for 1977.
(8) Picop is liable for the corporate development tax of five percent (5%) of its adjusted
net income for 1977 in the amount of P2,434,367.75.

Considering conclusions nos. 4, 5, 6, 7 and 8, the Court is compelled to hold Picop liable
for deficiency income tax for the year 1977 computed as follows:

Deficiency Income Tax

Net Income Per Return P 258,166.00

Add:

Unallowable Deductions

(1) Deduction of net

operating losses
incurred by RPPM P 44,196,106.00

(2) Unexplained financial

guarantee expenses P 1,237,421.00

(3) Understatement of
Sales P 2,391,644.00

(4) Overstatement of
Cost of Sales P 604,018.00

——————

Total P 48,429,189.00

——————

Net Income as Adjusted P 48,687,355.00

===========

Income Tax Due Thereon 44 P 17,030,574.00

Less:

Tax Already Assessed per

Return 80,358.00

——————

Deficiency Income Tax P 16,560,216.00

 Add:

Five percent (5%) Corporate

Development Tax P 2,434,367.00

Total Deficiency Income Tax P 18,994,583.00

===========

Add:

Five percent (5%) surcharge 45 P 949,729.15

——————

Total Deficiency Income Tax

with surcharge P 19,944,312.15

Add:

Fourteen percent (14%)

interest from 15 April

1978 to 14 April 1981 46 P 8,376,610.80

Fourteen percent (14%)

interest from 21 April

1983 to 20 April 1986 47 P 11,894,787.00

——————

Total Deficiency Income Tax

Due and Payable P 40,215,709.00

===========

WHEREFORE, for all the foregoing, the Decision of the Court of Appeals is hereby
MODIFIED and Picop is hereby ORDERED to pay the CIR the aggregate amount of
P43,794,252.51 itemized as follows:

(1) Thirty-five percent (35%)

transaction tax P 3,578,543.51

(2) Total Deficiency Income

Tax Due 40,215,709.00

———————

Aggregate Amount Due and Payable P 43,794,252.51

============

No pronouncement as to costs.

SO ORDERED.

G.R. No. 148083             July 21, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BICOLANDIA DRUG CORPORATION (Formerly known as ELMAS DRUG
CO.), respondent.

Administrative Law; The interpretation of an administrative government agency, which

is tasked to implement the statute, is accorded great respect and ordinarily controls the
construction of the courts; Courts will not hesitate to set aside an executive
interpretation when it is clearly erroneous.—The interpretation of an administrative
government agency, which is tasked to implement the statute, is accorded great
respect and ordinarily controls the construction of the courts. Be that as it may, the
definition laid down in the questioned Revenue Regulations can still be subjected to
scrutiny. Courts will not hesitate to set aside an executive interpretation when it is
clearly erroneous. There is no need for interpretation when there is no ambiguity in the
rule, or when the language or words used are clear and plain or readily understandable
to an ordinary reader. The definition of the term “tax credit” is plain and clear, and the
attempt of Revenue Regulations No. 2-94 to define it differently is the root of the
conflict.

Same; Revenue Regulations No. 2-94 is still subordinate to R.A. 7432 and in cases of
conflict, the implementing rule will not prevail over the law it seeks to implement.—
Revenue Regulations No. 2-94 is still subordinate to R.A. No. 7432, and in cases of
conflict, the implementing rule will not prevail over the law it seeks to implement. While
seemingly conflicting laws must be harmonized as far as practicable, in this particular
case, the conflict cannot be resolved in the manner the petitioner wishes. There is a
great divide separating the idea of “tax credit” and “tax deduction,” as seen in the
definition in Black’s Law Dictionary.
Same; Revenue Regulations No. 2-94 is null and void for failing to conform to the law it
sought to implement.—From the above discussion, it must be concluded that Revenue
Regulations No. 2-94 is null and void for failing to conform to the law it sought to
implement. In case of discrepancy between the basic law and a rule or regulation issued
to implement said law, the basic law prevails because said rule or regulation cannot go
beyond the terms and provisions of the basic law. Revenue Regulations No. 2-94 being
null and void, it must be ruled then that under R.A. No. 7432, which was effective at
the time, respondent is entitled to its claim of a tax credit, and the ruling of the Court
of Appeals must be affirmed.

Same; Administrative rules, regulations and orders have the efficacy and force of law
so long as they do not contravene any statute or the Constitution.—This case should
remind all heads of executive agencies which are given the power to promulgate rules
and regulations, that they assume the roles of lawmakers. It is well-settled that a
regulation should not conflict with the law it implements. Thus, those drafting the
regulations should study well the laws their rules will implement, even to the extent of
reviewing the minutes of the deliberations of Congress about its intent when it drafted
the law. They may also consult the Secretary of Justice or the Solicitor General for their
opinions on the drafted rules. Administrative rules, regulations and orders have the
efficacy and force of law so long as they do not contravene any statute or the
Constitution. It is then the duty of the agencies to ensure that their rules do not deviate
from or amend acts of Congress, for their regulations are always subordinate to law.
Commissioner of Internal Revenue vs. Bicolandia Drug Corporation, 496 SCRA 176,
G.R. No. 148083 July 21, 2006

DECISION

VELASCO, JR., J.:

In cases of conflict between the law and the rules and regulations implementing the
law, the law shall always prevail. Should Revenue Regulations deviate from the law
they seek to implement, they will be struck down.

The Facts

In 1992, Republic Act No. 7432, otherwise known as "An Act to Maximize the
Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges
and For Other Purposes," granted senior citizens several privileges, one of which was
obtaining a 20 percent discount from all establishments relative to the use of
transportation services, hotels and similar lodging establishments, restaurants and
recreation centers and purchase of medicines anywhere in the country.1 The law also
provided that the private establishments giving the discount to senior citizens may
claim the cost as tax credit.2 In compliance with the law, the Bureau of Internal
Revenue issued Revenue Regulations No. 2-94, which defined "tax credit" as follows:

Tax Credit – refers to the amount representing the 20% discount granted to a
qualified senior citizen by all establishments relative to their utilization of
transportation services, hotels and similar lodging establishments, restaurants,
halls, circuses, carnivals and other similar places of culture, leisure and
amusement, which discount shall be deducted by the said establishments from
 their gross income for income tax purposes and from their gross sales for value-
added tax or other percentage tax purposes.3

In 1995, respondent Bicolandia Drug Corporation, a corporation engaged in the

business of retailing pharmaceutical products under the business style of "Mercury
Drug," granted the 20 percent sales discount to qualified senior citizens purchasing
their medicines in compliance with R.A. No. 7432.4 Respondent treated this discount as
a deduction from its gross income in compliance with Revenue Regulations No. 2-94,
which implemented R.A. No. 7432.5 On April 15, 1996, respondent filed its 1995
Corporate Annual Income Tax Return declaring a net loss position with nil income tax
liability.6

On December 27, 1996, respondent filed a claim for tax refund or credit in the amount
of PhP 259,659.00 with the Appellate Division of the Bureau of Internal Revenue—
because its net losses for the year 1995 prevented it from benefiting from the
treatment of sales discounts as a deduction from gross sales during the said taxable
year.7 It alleged that the petitioner Commissioner of Internal Revenue erred in
treating the 20 percent sales discount given to senior citizens as a deduction
from its gross income for income tax purposes or other percentage tax
purposes rather than as a tax credit.8

On April 6, 1998, respondent appealed to the Court of Tax Appeals in order to toll the
running of two (2)-year prescriptive period to file a claim for refund pursuant to Section
230 of the Tax Code then.9 Respondent argued that since Section 4 of R.A. No. 7432
provided that discounts granted to senior citizens may be claimed as tax credit, Section
2(i) of Revenue Regulations No. 2-94, which referred to the tax credit as the amount
representing the 20 percent discount that "shall be deducted by the said establishments
from their gross income for income tax purposes and from their gross sales for value-
added tax or other percentage tax purposes,"10 is illegal, void and without effect for
being inconsistent with the statute it implements.

Petitioner maintained that Revenue Regulations No. 2-94 is valid since the law tasked
the Department of Finance, among other government offices, with the issuance of the
necessary rules and regulations to carry out the objectives of the law.11

Ruling of the Court of Tax Appeals

The Court of Tax Appeals declared that the provisions of R.A. No. 7432 would prevail
over Section 2(i) of Revenue Regulations No. 2-94, whose definition of "tax credit"
deviated from the intendment of the law; and as a result, partially granted the
respondent's claim for a refund. After examining the evidence on record, the Court of
Tax Appeals reduced the claimed 20 percent sales discount, thus reducing the refund to
be given. It ruled that "Respondent is hereby ORDERED to REFUND in favor of
Petitioner the amount of P236,321.52, representing overpaid income tax for the year
1995."12

Ruling of the Court of Appeals

On appeal, the Court of Appeals modified the decision of the Court of Tax Appeals as
the law provided for a tax credit, not a tax refund. The fallo of the Decision states:
 WHEREFORE, premises considered, the present appeal is hereby GRANTED and
the Decision of the Court of Tax Appeals in C.T.A. Case No. 5599 is hereby
MODIFIED in the sense that the award of tax refund is ANNULLED and SET
ASIDE. Instead, the petitioner is hereby ORDERED to issue a tax credit certificate
in favor of the respondent in the amount of P 236,321.52.

No pronouncement as to costs.13

The Issue

Petitioner now argues that the Court of Appeals erred in holding that the 20 percent
sales discount granted to qualified senior citizens by the respondent pursuant to R.A.
No. 7432 may be claimed as a tax credit, instead of a deduction from gross income or
gross sales.14

The Court's Ruling

The petition is not meritorious.

Redefining "Tax Credit" as "Tax Deduction"

The problem stems from the issuance of Revenue Regulations No. 2-94, which was
supposed to implement R.A. No. 7432, and the radical departure it made when it
defined the "tax credit" that would be granted to establishments that give 20 percent
discount to senior citizens. Under Revenue Regulations No. 2-94, the tax credit is "the
amount representing the 20 percent discount granted to a qualified senior citizen by all
establishments relative to their utilization of transportation services, hotels and similar
lodging establishments, restaurants, drugstores, recreation centers, theaters, cinema
houses, concert halls, circuses, carnivals and other similar places of culture, leisure and
amusement, which discount shall be deducted by the said establishments from their
gross income for income tax purposes and from their gross sales for value-added tax or
other percentage tax purposes."15 It equated "tax credit" with "tax deduction," contrary
to the definition in Black's Law Dictionary, which defined tax credit as:

An amount subtracted from an individual's or entity's tax liability to arrive at the

total tax liability. A tax credit reduces the taxpayer's liability x x x, compared to
a deduction which reduces taxable income upon which the tax liability is
calculated. A credit differs from deduction to the extent that the former is
subtracted from the tax while the latter is subtracted from income before the tax
is computed.16

The interpretation of an administrative government agency, which is tasked to

implement the statute, is accorded great respect and ordinarily controls the
construction of the courts.17 Be that as it may, the definition laid down in the
questioned Revenue Regulations can still be subjected to scrutiny. Courts will not
hesitate to set aside an executive interpretation when it is clearly erroneous. There is
no need for interpretation when there is no ambiguity in the rule, or when the language
or words used are clear and plain or readily understandable to an ordinary reader.18 The
definition of the term "tax credit" is plain and clear, and the attempt of Revenue
Regulations No. 2-94 to define it differently is the root of the conflict.

Tax Credit is not Tax Refund

Petitioner argues that the tax credit is in the nature of a tax refund and should be
treated as a return for tax payments erroneously or excessively assessed against a
taxpayer, in line with Section 204(c) of Republic Act No. 8424, or the National Internal
Revenue Code of 1997. Petitioner claims that there should first be payment of the tax
before the tax credit can be claimed. However, in the National Internal Revenue Code,
we see at least one instance where this is not the case. Any VAT-registered person,
whose sales are zero-rated or effectively zero-rated may, within two (2) years after the
close of the taxable quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid attributable to such sales,
except transitional input tax, to the extent that such input tax has not been applied
against output tax.19 It speaks of a tax credit for tax due, so payment of the tax has not
yet been made in that particular example.

The Court of Appeals expressly recognized the differences between a "tax credit" and a
"tax refund," and stated that the same are not synonymous with each other, which is
why it modified the ruling of the Court of Tax Appeals.

Revenue Regulations No. 2-94 vs. R.A. No. 7432 and

R.A. No. 7432 vs. the National Internal Revenue Code

Petitioner contends that since R.A. No. 7432 used the word "may," the availability of
the tax credit to private establishments is only permissive and not absolute or
mandatory. From that starting point, petitioner further argues that the definition of the
term "tax credit" in Revenue Regulations No. 2-94 was validly issued under the
authority granted by the law to the Department of Finance to formulate the needed
guidelines. It further explained that Revenue Regulations No. 2-94 can be harmonized
with R.A No. 7432, such that the definition of the term "tax credit" in Revenue
Regulations No. 2-94 is controlling. It claims that to do otherwise would result in
Section 4(a) of R.A. No. 7432 impliedly repealing Section 204 (c) of the National
Internal Revenue Code.

These arguments must also fail.

Revenue Regulations No. 2-94 is still subordinate to R.A. No. 7432, and in cases of
conflict, the implementing rule will not prevail over the law it seeks to implement. While
seemingly conflicting laws must be harmonized as far as practicable, in this particular
case, the conflict cannot be resolved in the manner the petitioner wishes. There is a
great divide separating the idea of "tax credit" and "tax deduction," as seen in the
definition in Black's Law Dictionary.

The claimed absurdity of Section 4(a) of R.A. No. 7432 impliedly repealing Section
204(c) of the National Internal Revenue Code could only come about if it is accepted
that a tax credit is akin to a tax refund wherein payment of taxes must be made in
order for it to be claimed. But as shown in Section 112(a) of the National Internal
Revenue Code, it is not always necessary for payment to be made for a tax credit to be
available.

Looking into R.A. No. 7432

Finally, petitioner argues that should private establishments, which count respondent in
their number, be allowed to claim tax credits for discounts given to senior citizens, they
would be earning and not just be reimbursed for the discounts given.

It cannot be denied that R.A. No. 7432 has a laudable goal. Moreover, it cannot be
argued that it was the intent of lawmakers for private establishments to be the primary
beneficiaries of the law. However, while the purpose of the law to benefit senior citizens
is praiseworthy, the concerns of the affected private establishments were also
considered by the lawmakers. As in other cases wherein private property is taken by
the State for public use, there must be just compensation. In this particular case, it
took the form of the tax credit granted to private establishments, purposely chosen by
the lawmakers. In the similar case of Commissioner of Internal Revenue v. Central
Luzon Drug Corporation,20 scrutinizing the deliberations of the Bicameral Conference
Committee Meeting on Social Justice on February 5, 1992 which finalized R.A. No.
7432, the discussions of the lawmakers clearly showed the intent that the cost of the
20 percent discount may be claimed by the private establishments as a tax credit. An
excerpt from the deliberations is as follows:

SEN. ANGARA. In the case of private hospitals they got the grant of 15%
discount, provided that, the private hospitals can claim the expense as a tax
credit.

REP. AQUINO. Yah could be allowed as deductions in the preparation of

(inaudible) income.

SEN. ANGARA. I-tax credit na lang natin para walang cash-out?

REP. AQUINO. Oo, tax credit. Tama. Okay. Hospitals ba o lahat ng

establishments na covered.

THE CHAIRMAN. Sa kuwan lang yon, as private hospitals lang.

REP. AQUINO. Ano ba yung establishments na covered?

SEN. ANGARA. Restaurant, lodging houses, recreation centers.

REP. AQUINO. All establishments covered siguro?

SEN. ANGARA. From all establishments. Alisin na natin `yung kuwan kung
ganon. Can we go back to Section 4 ha?

REP. AQUINO. Oho.

 SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20%
discount from all establishments et cetera, et cetera, provided that said
establishments may claim the cost as a tax credit. Ganon ba `yon?

REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim it.

THE CHAIRMAN. Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan – deduction, Okay.21

It is clear that the lawmakers intended the grant of a tax credit to complying private
establishments like the respondent.

If the private establishments appear to benefit more from the tax credit than originally
intended, it is not for petitioner to say that they shouldn't. The tax credit may actually
have provided greater incentive for the private establishments to comply with R.A. No.
7432, or quicker relief from the cut into profits of these businesses.

Revenue Regulations No. 2-94 Null and Void

From the above discussion, it must be concluded that Revenue Regulations No. 2-94 is
null and void for failing to conform to the law it sought to implement. In case of
discrepancy between the basic law and a rule or regulation issued to implement said
law, the basic law prevails because said rule or regulation cannot go beyond the terms
and provisions of the basic law.22

Revenue Regulations No. 2-94 being null and void, it must be ruled then that under
R.A. No. 7432, which was effective at the time, respondent is entitled to its claim of a
tax credit, and the ruling of the Court of Appeals must be affirmed.

But even as this particular case is decided in this manner, it must be noted that the
concerns of the petitioner regarding tax credits granted to private establishments giving
discounts to senior citizens have been addressed. R.A. No. 7432 has been amended by
Republic Act No. 9257, the "Expanded Senior Citizens Act of 2003." In this, the term
"tax credit" is no longer used. The 20 percent discount granted by hotels and similar
lodging establishments, restaurants and recreation centers, and in the purchase of
medicines in all establishments for the exclusive use and enjoyment of senior citizens is
treated in the following manner:

The establishment may claim the discounts granted under (a), (f), (g) and (h) as
tax deduction based on the net cost of the goods sold or services
rendered: Provided, That the cost of the discount shall be allowed as deduction
from gross income for the same taxable year that the discount is
granted. Provided, further, that the total amount of the claimed tax deduction
net of value added tax if applicable, shall be included in their gross sales receipts
for tax purposes and shall be subject to proper documentation and to the
provisions of the National Internal Revenue Code, as amended.23
This time around, there is no conflict between the law and the implementing Revenue
Regulations. Under Revenue Regulations No. 4-2006, "(o)nly the actual amount of the
discount granted or a sales discount not exceeding 20% of the gross selling price can
be deducted from the gross income, net of value added tax, if applicable, for income
tax purposes, and from gross sales or gross receipts of the business enterprise
concerned, for VAT or other percentage tax purposes."24 Under the new law, there is no
tax credit to speak of, only deductions.

Petitioner can find some vindication in the amendment made to R.A. No. 7432 by R.A.
No. 9257, which may be more in consonance with the principles of taxation, but as it
was R.A. No. 7432 in force at the time this case arose, this law controls the result in
this particular case, for which reason the petition must fail.

This case should remind all heads of executive agencies which are given the power to
promulgate rules and regulations, that they assume the roles of lawmakers. It is well-
settled that a regulation should not conflict with the law it implements. Thus, those
drafting the regulations should study well the laws their rules will implement, even to
the extent of reviewing the minutes of the deliberations of Congress about its intent
when it drafted the law. They may also consult the Secretary of Justice or the Solicitor
General for their opinions on the drafted rules. Administrative rules, regulations and
orders have the efficacy and force of law so long as they do not contravene any statute
or the Constitution.25 It is then the duty of the agencies to ensure that their rules do not
deviate from or amend acts of Congress, for their regulations are always subordinate to
law.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision of the Court of

Appeals is AFFIRMED. There is no pronouncement as to costs.

SO ORDERED.

G.R. No. L-18282             May 29, 1964

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PRISCILA ESTATE, INC., and THE COURT OF APPEALS, respondents.

Office of the Solicitor General for petitioner.

Sison, Dominguez and Mijares for respondents.

Taxation; Income tax; Allowable deductions; Cost of old building compulsorily

demolished is deductible.—The value of a demolished uninsured building is deductible
from gross income where the removal, instead of being voluntary, was forced.upon the
taxpayer by the city authorities because the structure was a fire hazard.
Same; Same; Same; Depreciation basis of building bought by taxpayer is the
construction cost.—Where a building acquired by a corporation from the vendors in
exchange for shares of its stock is revalued on the basis of its construction cost, which
revaluation imports an obligation between the assessed value and the revalued
construction cost, it is held that the depreciation logically has to be on the basis of the
construction cost and not on the assessed value of the building, since the corporate
investment would ultimately be the construction cost.

Same; Same; Court of Tax Appeals findings on amount of depreciation not reviewable.
—Depreciation is a question of fact and where the appellant does not claim that the tax
court, in applying certain rates and basis to arrive at the allowed amounts of
depreciation, was arbitrary or had abused its discretion, the findings of the tax court on
the depreciation of assets should not be disturbed. Commissioner of Internal Revenue
vs. Priscila, Estate, Inc., 11 SCRA 130, No. L-18282 May 29, 1964

REYES, J.B.L., J.:

Review of the decision of the Court of Tax Appeals in its case No. 334 ordering the
petitioner, Commissioner of Internal Revenue to refund to the respondent, Priscila
Estate, Inc., a domestic corporation engaged in the business of leasing real estate, the
sum of P3,045.19, as overpaid income tax for 1950.

The corporation duly filed its income tax returns for the years 1949, 1950 and 1951. On
13 June 1952, however, it amended its income tax returns for 1951 and paid the tax
corresponding to the assessment made by the petitioner on the basis of the returns, as
amended; and on 13 September 1952, the company claimed a refund of P4,941.00 as
overpaid income tax for the year 1950 for having deducted from gross income only the
sum of P6,013.85 instead of P39,673.25 as its loss in the sale of a lot and building.
Thereupon, the Commissioner of Internal Revenue conducted an investigation of the
company's income tax returns for 1949 through 1951 and, thereafter, granted a tax
credit of P1,443.00 for 1950 but assessed on 3 November 1953 deficiency income taxes
of P3,575.49 for 1949 and P22,166.10 for 1951.

The Priscila Estate, Inc., contested the deficiency assessments and when the
Commissioner of Internal Revenue refused to reconsider them, the former brought suit
to the tax court which after trial, rendered the decision that, in 1961, the Commissioner
elevated to this Supreme Court for review.

The first assignment of error refers to the allowance of a deduction in the 1949 income
tax returns of the respondent corporation the amount of P11,237.35 representing the
cost of a "barong-barong" (a make-shift building), situated at the corner of Azcarraga
Street and Rizal Avenue, Manila, which was demolished on 31 December 1949 and a
new one built in its place. The petitioner claims that the value of the demolished
building should not be deducted from gross income but added to the cost of the building
replacing it because its demolition or removal was to make way for the erection of
another in its place. 1äwphï1.ñët

The foregoing argument is erroneous inasmuch as the tax court found that the removal
of the "barong-barong", instead of being voluntary, was forced upon the corporation by
the city engineer because the structure was a fire hazard; that the rental income of the
old building was about P3,730.00 per month, and that the corporation had no funds but
had to borrow, in order to construct a new building. All these facts, taken together,
belie any intention on the part of the corporation to demolish the old building merely for
the purpose of erecting another in its place. Since the demolished building was not
compensated for by insurance or otherwise, its loss should be charged off as deduction
from gross income. (Sec. 30[2], Internal Revenue Code.)

The second to the fifth assignments of error pertain to depreciation.

Particularly contested by the petitioner is the basis for depreciation of Building Priscila
No. 3. This building, with an assessed value of P70,343.00 but with a construction cost
of P110,600.00, was acquired by the respondent corporation from the spouses, Carlos
Moran Sison and Priscila F. Sison, in exchange for shares of stock. According to the
petitioner, the basis for commuting the depreciation of this building should be limited to
the capital invested, which is the assessed value. On the other hand, the respondent
based its computation on its construction cost, revaluing the property on this basis by a
board resolution in order to "give justice to the Sison spouse Since this revaluation
would import an obligation of the corporation to pay the Sison spouses, as vendors, the
difference between the assessed value and the revalued construction cost, as provided
in resolution Exhibit F-1 (otherwise the revaluation would make no sense), the
corporate investment would ultimately be the construction cost which is undisputed),
and depreciation logically had to be on that basis. That the revaluation may import
additional profit to the vendor spouses is a matter related to their own income tax, and
not to that of respondent corporation.

The Collector also questions the rates of depreciation which the tax court applied to the
other properties, consisting of store and office building, houses, a garage, library books,
furniture and fixtures and transportation equipment.

Depreciation is a question of fact,1 and is "not measured by a theoretical yardstick, but

should be determined by a consideration of the actual facts ... ." (Landon vs. CIR of
State of Kansas, 260 Fed. 433 [1920]], quoted in Sec. 23.32, Mertens, Federal Income
Taxation). The petitioner himself on page 26 of his appeal brief, asserts that "what
consist of the depreciable amount (sic) is elusive and is a question of fact."

Since the petitioner does not claim that the tax court, in applying certain rates and
basis to arrive at the allowed amounts of depreciation of the various properties, was,
arbitrary or had abused its discretion, and since the Supreme Court, before the Revised
Rules, limited its review of decisions of the Court of Tax Appeals to questions of law
only (Sanchez v. Commissioner of Customs, L-8556, 30 Sept. 1957; Gutierrez v. Court
of Tax Appeals, L-9738 & L-9771, 31 May 1957), the findings of the tax court on the
depreciation of the several assets should not be disturbed.

In the sixth and last assignment of error, the petitioner argues that the refund to the
respondent is barred by the two-year prescriptive period under Section 306 of the
Internal Revenue Code because the action for refund was filed on 5 December 1956
while the respondent's 1950 income tax was paid on 15 August 1951. The petitioner's
argument would have been tenable but for his failure to plead prescription in a motion
to dismiss or as a defense in his answer, said failure is deemed a waiver of the defense
of prescription (Sec. 10, Rule 9, Rules of Court).
Finding no reversible error in the decision under review, the same is hereby affirmed.
No costs.

G.R. No. 118794 May 8, 1996

PHILIPPINE REFINING COMPANY (now known as "UNILEVER PHILIPPINES

[PRC], INC."), petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS, and THE COMMISSIONER OF
INTERNAL REVENUE, respondents.

 Taxation; ”Bad Debts”; Conditions before debts could be considered as ”worthless.”—

This pronouncement of respondent Court of Appeals relied on the ruling of this Court in
Collector vs. Goodrich International Rubber Co., which established the rule in
determining the “worthlessness of a debt.” In said case, we held that for debts to be
considered as “worthless,” and thereby qualify as “bad debts” making them deductible,
the taxpayer should show that: (1) there is a valid and subsisting debt; (2) the debt
must be actually ascertained to be worthless and uncollectible during the taxable year;
(3) the debt must be charged off during the taxable year; and (4) the debt must arise
from the business or trade of the taxpayer. Additionally, before a debt can be
considered worthless, the taxpayer must also show that it is indeed uncollectible even
in the future.

Same; Same; Evidence; While a creditor is not required to file suit against foreign
debtors which could only be sued in their country, it is at least expected by the law to
produce reasonable proof that the debts are uncollectible although diligent efforts were
exerted to collect the same.—Regarding the accounts of C. Itoh in the amount of
P19,272.22, Crocklaan B.V. in the sum of P77,690.00, and Craig, Mostyn Pty. Ltd. with
a balance of P23,738.00, petitioner contends that these debtors being foreign
corporations, it can sue them only in their country of incorporation; and since this will
entail expenses more than the amounts of the debts to be collected, petitioner did not
file any collection suit but opted to write them off as bad debts. Petitioner was unable to
show proof of its efforts to collect the debts, even by a single demand letter therefor.
While it is not required to file suit, it is at least expected by the law to produce
reasonable proof that the debts are uncollectible although diligent efforts were exerted
to collect the same.

Same; Same; State Immunity; The mere fact that AFPCES is a government agency
does not preclude the creditor from filing suit since said agency, while discharging
proprietary functions, does not enjoy immunity from suit.—With regard to the account
of AFPCES for unpaid supplies in the amount of P13,833.62, petitioner asserts that
since the debtor is an agency of the government, PRC did not file a collection suit
therefor. Yet, the mere fact that AFPCES is a government agency does not preclude PRC
from filing suit since said agency, while discharging proprietary functions, does not
enjoy immunity from suit. Such pretension of petitioner cannot pass judicial muster.
Same; Same; Administrative Law; The Court of Tax Appeals is a highly specialized body
specifically created for the purpose of reviewing tax cases and, through its expertise, it
is undeniably competent to determine the issue of whether or not the debt is deductible
through the evidence presented before it.—The contentions of PRC that nobody is in a
better position to determine when an obligation becomes a bad debt than the creditor
itself, and that its judgment should not be substituted by that of respondent court as it
is PRC which has the facilities in ascertaining the collectibility or uncollectibility of these
debts, are presumptuous and uncalled for. The Court of Tax Appeals is a highly
specialized body specifically created for the purpose of reviewing tax cases. Through its
expertise, it is undeniably competent to determine the issue of whether or not the debt
is deductible through the evidence presented before it.

Same; Same; Same; The findings of the CTA will not ordinarily be reviewed absent a
showing of gross error or abuse on its part.—Because of this recognized expertise, the
findings of the CTA will not ordinarily be reviewed absent a showing of gross error or
abuse on its part. The findings of fact of the CTA are binding on this Court and in the
absence of strong reasons for this Court to delve into facts, only questions of law are
open for determination. Were it not, therefore, due to the desire of this Court to satisfy
petitioner’s calls for clarification and to use this case as a vehicle for exemplification,
this appeal could very well have been summarily dismissed.

Same; Same; The fact that a taxpayer appealed the assessment to the CTA and that
the same was modified does not relieve it of the penalties incident to delinquency.—As
correctly pointed out by the Solicitor General, the deficiency tax assessment in this
case, which was the subject of the demand letter of respondent Commissioner dated
April 11, 1989, should have been paid within thirty (30) days from receipt thereof. By
reason of petitioner’s default thereon, the delinquency penalties of 25% surcharge and
interest of 20% accrued from April 11, 1989. The fact that petitioner appealed the
assessment to the CTA and that the same was modified does not relieve petitioner of
the penalties incident to delinquency. The reduced amount of P237,381.25 is but a part
of the original assessment of P1,892,584.00.

Same; Same; Tax laws imposing penalties for delinquencies are intended to hasten tax
payments by punishing evasions or neglect of duty in respect thereof.—Our attention
has also been called to two of our previous rulings and these we set out here for the
benefit of petitioner and whosoever may be minded to take the same stance it has
adopted in this case. Tax laws imposing penalties for delinquencies, so we have long
held, are intended to hasten tax payments by punishing evasions or neglect of duty in
respect thereof. If penalties could be condoned for flimsy reasons, the law imposing
penalties for delinquencies would be rendered nugatory, and the maintenance of the
Government and its multifarious activities will be adversely affected.

Same; Same; It is mandatory to collect penalty and interest at the stated rate in case
of delinquency.—We have likewise explained that it is mandatory to collect penalty and
interest at the stated rate in case of delinquency. The intention of the law is to
discourage delay in the payment of taxes due the Government and, in this sense, the
penalty and interest are not penal but compensatory for the concomitant use of the
funds by the taxpayer beyond the date when he is supposed to have paid them to the
Government. Unquestionably, petitioner chose to turn a deaf ear to these injunctions.
Philippine Refining Company vs. Court of Appeals, 256 SCRA 667, G.R. No. 118794 May
8, 1996

REGALADO, J.:p

This is an appeal by certiorari from the decision of respondent Court of

Appeals1 affirming the decision of the Court of Tax Appeals which disallowed petitioner's
claim for deduction as bad debts of several accounts in the total sum of P395,324.27,
and imposing a 25% surcharge and 20% annual delinquency interest on the alleged
deficiency income tax liability of petitioner.

Petitioner Philippine Refining Company (PRC) was assessed by respondent

Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for the year
1985 in the amount of P1,892,584.00, computed as follows:

Deficiency Income Tax

Net Income per investigation P197,502,568.00

Add: Disallowances
Bad Debts P 713,070.93
Interest Expense P 2,666,545.49
—————— ——————
P3,379,616.00

Net Taxable Income 200,882,184.00

Tax Due Thereon 70,298,764.00

Less: Tax Paid 69,115,899.00
Deficiency Income Tax 1,182,865.00
Add: 20% Interest (60% max.) 709,719.00
——————

Total Amount Due and Collectible P1,892,584.002

The assessment was timely protested by petitioner on April 26, 1989, on the ground
that it was based on the erroneous disallowances of "bad debts" and "interest expense"
although the same are both allowable and legal deductions. Respondent Commissioner,
however, issued a warrant of garnishment against the deposits of petitioner at a branch
of City Trust Bank, in Makati, Metro Manila, which action the latter considered as a
denial of its protest.

Petitioner accordingly filed a petition for review with the Court of Tax Appeals (CTA) on
the same assignment of error, that is, that the "bad debts" and "interest expense" are
legal and allowable deductions. In its decision3 of February 3, 1993 in C.T.A. Case No.
4408, the CTA modified the findings of the Commissioner by reducing the deficiency
income tax assessment to P237,381.26, with surcharge and interest incident to
delinquency. In said decision, the Tax Court reversed and set aside the
Commissioner's disallowance of the interest expense of P2,666,545.19 but
maintained the disallowance of the supposed bad debts of thirteen (13)
debtors in the total sum of P395,324.27.

Petitioner then elevated the case to respondent Court of Appeals which, as earlier
stated, denied due course to the petition for review and dismissed the same on August
24, 1994 in CA-G.R. SP No. 31190,4 on the following ratiocination:

We agree with respondent Court of Tax Appeals:

Out of the sixteen (16) accounts alleged as bad debts, We

find that only three (3) accounts have met the requirements
of the worthlessness of the accounts, hence were properly
written off as: bad debts, namely:

1. Petronila Catap P 29,098.30

(Pet Mini Grocery)

2. Esther Guinto 254,375.54

(Esther Sari-sari Store)

3. Manuel Orea 34,272.82

(Elman Gen. Mdsg.)

—————

TOTAL P 317,746.66

xxx xxx xxx

With regard to the other accounts, namely:

1. Remoblas Store P 11,961.00

2. Tomas Store 16,842.79

3. AFPCES 13,833.62
4. CM Variety Store 10,895.82
5. U' Ren Mart Enterprise 10,487.08
6. Aboitiz Shipping Corp. 89,483.40
7. J. Ruiz Trucking 69,640.34
8. Renato Alejandro 13,550.00
9. Craig, Mostyn Pty. Ltd. 23,738.00
10. C. Itoh 19,272.22
11. Crocklaan B.V. 77,690.00
12. Enriched Food Corp. 24,158.00
13. Lucito Sta. Maria 13,772.00

—————

TOTAL P 395,324.27
 We find that said accounts have not satisfied the requirements of the
"worthlessness of a debt". Mere testimony of the Financial Accountant of
the Petitioner explaining the worthlessness of said debts is seen by this
Court as nothing more than a self-serving exercise which lacks probative
value. There was no iota of documentary evidence (e.g., collection letters
sent, report from investigating fieldmen, letter of referral to their legal
department, police report/affidavit that the owners were bankrupt due to
fire that engulfed their stores or that the owner has been murdered. etc.),
to give support to the testimony of an employee of the Petitioner. Mere
allegations cannot prove the worthlessness of such debts in 1985. Hence,
the claim for deduction of these thirteen (13) debts should be rejected.5

1. This pronouncement of respondent Court of Appeals relied on the ruling of this Court
in Collector vs. Goodrich International Rubber Co.,6 which established the rule in
determining the "worthlessness of a debt." In said case, we held that for debts to be
considered as "worthless," and thereby qualify as "bad debts" making them deductible,
the taxpayer should show that (1) there is a valid and subsisting debt. (2) the debt
must be actually ascertained to be worthless and uncollectible during the taxable year;
(3) the debt must be charged off during the taxable year; and (4) the debt must arise
from the business or trade of the taxpayer. Additionally, before a debt can be
considered worthless, the taxpayer must also show that it is indeed uncollectible even
in the future.

Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that
he exerted diligent efforts to collect the debts, viz.: (1) sending of statement of
accounts; (2) sending of collection letters; (3) giving the account to a lawyer for
collection; and (4) filing a collection case in court.

On the foregoing considerations, respondent Court of Appeals held that petitioner did
not satisfy the requirements of "worthlessness of a debt" as to the thirteen (13)
accounts disallowed as deductions.

It appears that the only evidentiary support given by PRC for its aforesaid claimed
deductions was the explanation or justification posited by its financial adviser or
accountant, Guia D. Masagana. Her allegations were not supported by any documentary
evidence, hence both the Court of Appeals and the CTA ruled that said contentions  per
se cannot prove that the debts were indeed uncollectible and can be considered as bad
debts as to make them deductible. That both lower courts are correct is shown by
petitioner's own submission and the discussion thereof which we have taken time and
patience to cull from the antecedent proceedings in this case, albeit bordering on
factual settings.

The accounts of Remoblas Store in the amount of P11,961.00 and CM Variety Store in
the amount of P10,895.82 are uncollectible, according to petitioner, since the stores
were burned in November, 1984 and in early 1985, respectively, and there are no
assets belonging to the debtors that can be garnished by PRC.7 However, PRC failed to
show any documentary evidence for said allegations. Not a single document was offered
to show that the stores were burned, even just a police report or an affidavit attesting
to such loss by fire. In fact, petitioner did not send even a single demand letter to the
owners of said stores.
The account of Tomas Store in the amount of P16,842.79 is uncollectible, claims
petitioner PRC, since the owner thereof was murdered and left no visible assets which
could satisfy the debt. Withal, just like the accounts of the two other stores just
mentioned, petitioner again failed to present proof of the efforts exerted to collect the
debt, other than the aforestated asseverations of its financial adviser.

The accounts of Aboitiz Shipping Corporation and J. Ruiz Trucking in the amounts of
P89,483.40 and P69,640.34, respectively, both of which allegedly arose from the
hijacking of their cargo and for which they were given 30% rebates by PRC, are claimed
to be uncollectible. Again, petitioner failed to present an iota of proof, not even a copy
of the supposed policy regulation of PRC that it gives rebates to clients in case of loss
arising from fortuitous events or  force majeure, which rebates it now passes off as
uncollectible debts.

As to the account of P13,550.00 representing the balance collectible from Renato

Alejandro, a former employee who failed to pay the judgment against him, it is
petitioner's theory that the same can no longer be collected since his whereabouts are
unknown and he has no known property which can be garnished or levied upon. Once
again, petitioner failed to prove the existence of the said case against that debtor or to
submit any documentation to show that Alejandro was indeed bound to pay any
judgment obligation.

The amount of P13,772.00 corresponding to the debt of Lucito Sta. Maria is allegedly
due to the loss of his stocks through robbery and the account is uncollectible due to his
insolvency. Petitioner likewise failed to submit documentary evidence, not even the
written reports of the alleged investigation conducted by its agents as testified to by its
aforenamed financial adviser.

Regarding the accounts of C. Itoh in the amount of P19,272.22, Crocklaan B.V. in the
sum of P77,690.00, and Craig, Mostyn Pty. Ltd. with a balance of P23,738.00,
petitioner contends that these debtors being foreign corporations, it can sue them only
in their country of incorporation; and since this will entail expenses more than the
amounts of the debts to be collected, petitioner did not file any collection suit but opted
to write them off as bad debts. Petitioner was unable to show proof of its efforts to
collect the debts, even by a single demand letter therefor. While it is not required to file
suit, it is at least expected by the law to produce reasonable proof that the debts are
uncollectible although diligent efforts were exerted to collect the same.

The account of Enriched Food Corporation in the amount of P24,158.00 remains unpaid,
although petitioner claims that it sent several letters. This is not sufficient to sustain its
position. even if true, but even smacks of insouciance on its part. On top of that, it was
unable to show a single copy of the alleged demand letters sent to the said corporation
or any of its corporate officers.

With regard to the account of AFPCES for unpaid supplies in the amount of P13,833.62,
petitioner asserts that since the debtor is an agency of the government, PRC did not file
a collection suit therefor. Yet, the mere fact that AFPCES is a government agency does
not preclude PRC from filing suit since said agency, while discharging proprietary
functions, does not enjoy immunity from suit. Such pretension of petitioner cannot pass
judicial muster.
No explanation is offered by petitioner as to why the unpaid account of U' Ren Mart
Enterprise in the amount of P10,487.08 was written off as a bad debt. However, the
decision of the CTA includes this debtor in its findings on the lack of documentary
evidence to justify the deductions claimed, since the worthlessness of the debts
involved are sought to be established by the mere self-serving testimony of its financial
consultant.

The contentions of PRC that nobody is in a better position to determine when an

obligation becomes a bad debt than the creditor itself, and that its judgment should not
be substituted by that of respondent court as it is PRC which has the facilities in
ascertaining the collectibility or uncollectibility of these debts, are presumptuous and
uncalled for. The Court of Tax Appeals is a highly specialized body specifically created
for the purpose of reviewing tax cases. Through its expertise, it is undeniably
competent to determine the
issue of whether or not the debt is deductible through the evidence presented before
it.8

Because of this recognized expertise, the findings of the CTA will not ordinarily be
reviewed absent a showing of gross error or abuse on its part.9 The findings of fact of
the CTA are binding on this Court and in the absence of strong reasons for this Court to
delve into facts, only questions of law are open for determination. 10 Were it not,
therefore, due to the desire of this Court to satisfy petitioner's calls for clarification and
to use this case as a vehicle for exemplification, this appeal could very well have been
summarily dismissed.

The Court vehemently rejects the absurd thesis of petitioner that despite the
supervening delay in the tax payment, nothing is lost on the part of the Government
because in the event that these debts are collected, the same will be returned as taxes
to it in the year of the recovery. This is an irresponsible statement which deliberately
ignores the fact that while the Government may eventually recover revenues under that
hypothesis, the delay caused by the non-payment of taxes under such a contingency
will obviously have a disastrous effect on the revenue collections necessary for
governmental operations during the period concerned.

2. We need not tarry at length on the second issue raised by petitioner. It argues that
the imposition of the 25% surcharge and the 20% delinquency interest due to delay in
its payment of the tax assessed is improper and unwarranted, considering that the
assessment of the Commissioner was modified by the CTA and the decision of said
court has not yet become final and executory.

Regarding the 25% surcharge penalty, Section 248 of the Tax Code provides:

Sec. 248. Civil Penalties. — (a) There shall be imposed, in addition to the

tax required to be paid, a penalty equivalent to twenty-five percent (25%)
of the amount due, in the following cases:

xxx xxx xxx

(3) Failure to pay the tax within the time prescribed for its payment.
With respect to the penalty of 20% interest, the relevant provision is found in Section
249 of the same Code, as follows:

Sec. 249. Interest. — (a) In general. — There shall be assessed and

collected on any unpaid amount of tax, interest at the rate of twenty
percent (20%) per annum, or such higher rate as may be prescribed by
regulations, from the date prescribed for payment until the amount is fully
paid.

xxx xxx xxx

(c) Delinquency interest. — In case of failure pay:

(1) The amount of the tax due on any return required to be

filed, or

(2) The amount of the tax due for which no return is required, or

(3) A deficiency tax, or any surcharge or interest thereon, on the due date
appearing in the notice and demand of the Commissioner,

there shall be assessed and collected, on the unpaid amount, interest at

the rate prescribed in paragraph (a) hereof until the amount is fully paid,
which interest shall form part of the tax. (emphasis supplied)

xxx xxx xxx

As correctly pointed out by the Solicitor General, the deficiency tax assessment in this
case, which was the subject of the demand letter of respondent Commissioner dated
April 11,1989, should have been paid within thirty (30) days from receipt thereof. By
reason of petitioner's default thereon, the delinquency penalties of 25% surcharge and
interest of 20% accrued from April 11, 1989. The fact that petitioner appealed the
assessment to the CTA and that the same was modified does not relieve petitioner of
the penalties incident to delinquency. The reduced amount of P237,381.25 is but a part
of the original assessment of P1,892,584.00.

Our attention has also been called to two of our previous rulings and these we set out
here for the benefit of petitioner and whosoever may be minded to take the same
stance it has adopted in this case. Tax laws imposing penalties for delinquencies, so we
have long held, are intended to hasten tax payments by punishing evasions or neglect
of duty in respect thereof. If penalties could be condoned for flimsy reasons, the law
imposing penalties for delinquencies would be rendered nugatory, and the maintenance
of the Government and its multifarious activities will be adversely affected. 11

We have likewise explained that it is mandatory to collect penalty and interest at the
stated rate in case of delinquency. The intention of the law is to discourage delay in the
payment of taxes due the Government and, in this sense, the penalty and interest are
not penal but compensatory for the concomitant use of the funds by the taxpayer
beyond the date when he is supposed to have paid them to the
Government. 12 Unquestionably, petitioner chose to turn a deaf ear to these injunctions.

ACCORDINGLY, the petition at bar is DENIED and the judgment of respondent Court of
Appeals is hereby AFFIRMED, with treble costs against petitioner.

SO ORDERED.