1- COMMISSIONER vs.

BOAC
149 SCRA 395
GR No. L-65773-74 April 30, 1987
"The source of an income is the property, activity or service that produced the income. For such source
to be considered as coming from the Philippines, it is sufficient that the income is derived from activity
within the Philippines."
FACTS: Petitioner CIR seeks a review of the CTA's decision setting aside petitioner's assessment of
deficiency income taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal
years 1959 to 1971. BOAC is a 100% British Government-owned corporation organized and existing
under the laws of the United Kingdom, and is engaged in the international airline business. During the
periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic
purposes in the Philippines. Consequently, it did not carry passengers and/or cargo to or from the
Philippines, although during the period covered by the assessments, it maintained a general sales agent
in the Philippines Wamer Barnes and Company, Ltd., and later Qantas Airways which was
responsible for selling BOAC tickets covering passengers and cargoes. The CTA sided with BOAC citing
that the proceeds of sales of BOAC tickets do not constitute BOAC income from Philippine sources since
no service of carriage of passengers or freight was performed by BOAC within the Philippines and,
therefore, said income is not subject to Philippine income tax. The CTA position was that income from
transportation is income from services so that the place where services are rendered determines the
source.
ISSUE: Are the revenues derived by BOAC from sales of ticket for air transportation, while having no
landing rights here, constitute income of BOAC from Philippine sources, and accordingly, taxable?
HELD: Yes. The source of an income is the property, activity or service that produced the income. For the
source of income to be considered as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the
activity that produces the income. The tickets exchanged hands here and payments for fares were also
made here in Philippine currency. The site of the source of payments is the Philippines. The flow of
wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by
the Philippine government. In consideration of such protection, the flow of wealth should share the
burden of supporting the government.
2- CIR vs Javier 199 SCRA 825 Taxation Law NIRC Remedies 50% Penalty for Fraudulent Returns
In 1977, Victoria Javier received a $1 Million remittance in her bank account from her sister abroad,
Dolores Ventosa. Melchor Javier, Jr., the husband of Victoria immediately withdrew the said amount and
then appropriated it for himself.

Later, the Mellon Bank, a foreign bank in the U.S.A. filed a complaint against the Javiers for estafa.
Apparently, Ventosa only sent $1,000.00 to her sister Victoria but due to a clerical error in Mellon Bank,
what was sent was the $1 Million.
Meanwhile, Javier filed his income tax return. In his return, he place a footnote which states:
Taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned
out to be an error and is now subject of litigation.
The Commissioner of Internal Revenue (CIR) then assessed Javier a tax liability amounting to P4.8
Million. The CIR also imposed a 50% penalty against Javier as the CIR deemed Javiers return as a
fraudulent return.
ISSUE: Whether or not Javier is liable to pay the 50% penalty.
HELD: No. It is true that a fraudulent return shall cause the imposition of a 50% penalty upon a taxpayer
filing such fraudulent return. However, in this case, although Javier may be guilty of estafa due to
misappropriating money that does not belong to him, as far as his tax return is concerned, there can be
no fraud. There is no fraud in the filing of the return. Javiers notation on his income tax return can be
considered as a mere mistake of fact or law but not fraud. Such notation was practically an invitation for
investigation and that Javier had literally laid his cards on the table. The government was never
defrauded because by such notation, Javier opened himself for investigation.
It must be noted that the fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to
induce another to give up some legal right.
3- CIR vs. Isabela Cultural Corporation
Post under case digests, Taxation at Friday, March 02, 2012 Posted by Schizophrenic Mind
Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice for
deficiency income tax and expanded withholding tax from BIR. It arose from the disallowance of ICCs
claimed expense for professional and security services paid by ICC; as well as the alleged
understatement of interest income on the three promissory notes due from Realty Investment Inc. The
deficiency expanded withholding tax was allegedly due to the failure of ICC to withhold 1% ewithholding tax on its claimed deduction for security services.
ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it brought
the case to CTA, which held that it is unappealable, since the final notice is not a decision. CTAs ruling
was reversed by CA, which was sustained by SC, and case was remanded to CTA. CTA rendered a
decision in favor of ICC. It ruled that the deductions for professional and security services were properly
claimed, it said that even if services were rendered in 1984 or 1985, the amount is not yet determined at
that time. Hence it is a proper deduction in 1986. It likewise found that it is the BIR which overstate the
interest income, when it applied compounding absent any stipulation.
Petitioner appealed to CA, which affirmed CTA, hence the petition.

Issue: Whether or not the expenses for professional and security services are deductible.
Held: No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must
have been paid or incurred during the taxable year. This requisite is dependent on the method of
accounting of the taxpayer. In the case at bar, ICC is using theaccrual method of accounting. Hence,
under this method, an expense is recognized when it is incurred. Under a Revenue Audit Memorandum,
when the method of accounting is accrual, expenses not being claimed as deductions by a taxpayer in
the current year when they are incurred cannot be claimed in the succeeding year.
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 test does not demand that the amount of
income or liability be known absolutely, only that a taxpayer has at its disposal the information
necessary to compute the amount with reasonable accuracy.
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. They cannot give as an
excuse the delayed billing, since it could have inquired into the amount of their obligation and
reasonably determine the amount.
4- see internet
5- CIR vs Baier Nickel
GR No. 153793 | August 29, 2006 | J. Ynares-Santiago
Facts:
CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of the CTA.
Juliane Baier-Nickel, a non-resident German, is the president of Jubanitex, a domestic corporation
engaged in the manufacturing, marketing and selling of embroidered textile products. Through
Jubanitexs general manager, Marina Guzman, the company appointed respondent as commission agent
with 10% sales commission on all sales actually concluded and collected through her efforts.
In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted the
10% withholding tax of P170, 777.26 and remitted to BIR. Respondent filed her income tax return but
then claimed a refund from BIR for the P170K, alleging this was mistakenly withheld by Jubanitex and
that her sales commission income was compensation for services rendered in Germany not Philippines
and thus not taxable here.
She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but decision
was reversed by CA on appeal, holding that the commission was received as sales agent not as President
and that the source of income arose from marketing activities in Germany.
Issue: W/N respondent is entitled to refund

Held:
No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or business, are
subject to the Philippine income taxation on their income received from all sources in the Philippines. In
determining the meaning of source, the Court resorted to origin of Act 2833 (the first Philippine
income tax law), the US Revenue Law of 1916, as amended in 1917.
US SC has said that income may be derived from three possible sources only: (1) capital and/or (2) labor;
and/or (3) the sale of capital assets. If the income is from labor, the place where the labor is done should
be decisive; if it is done in this country, the income should be from sources within the United States. If
the income is from capital, the place where the capital is employed should be decisive; if it is employed
in this country, the income should be from sources within the United States. If the income is from the
sale of capital assets, the place where the sale is made should be likewise decisive. Source is not a
place, it is an activity or property. As such, it has a situs or location, and if that situs or location is within
the United States the resulting income is taxable to nonresident aliens and foreign corporations.
The source of an income is the property, activity or service that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from
activity within the Philippines.
The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burden
of proving that the transaction subjected to tax is actually exempt from taxation.
In the instant case, respondent failed to give substantial evidence to prove that she performed the
incoming producing service in Germany, which would have entitled her to a tax exemption for income
from sources outside the Philippines. Petition granted.
6 - CIR v Japan Airlines (JAL) (Situs of Taxation)
Facts:
JAL is a foreign corporation engaged in the business of International air carriage. Since mid-July of 1957,
JAL had maintained an office at the Filipinas Hotel, Roxas Boulevard
Manila. The said office did not sell tickets but was merely for the promotion of the company. On July 17
1957, JAL constituted PAL as its agent in the Philippines. PAL sold tickets for and in behalf of JAL.
On June 1972, JAL then received deficiency income tax assessments notices and a demand letter from
petitioner for years 1959 through 1963. JAL protested against said assessments alleging that as a nonresident foreign corporation, it as taxable only on income from Philippines sources as determined by
section 37 of the Tax Code, there being no income on said years, JAL is not liable for taxes.
Issue: WON proceeds from sales of JAL tickets sold in the Philippines are taxable as income from
sources within the Philippines.
Held: The ticket sales are taxable. Citing the case of CIR v BOAC, the court reiterated that the source of
an income is the property, activity or service that produced the income. For the source of income to be

considered as coming from the Philippines, it is sufficient that the income is derived from activity within
the Philippines.
The absence of flight operations to and from the Philippines is not determinative of the source of
income or the situs of income taxation. The test of taxability is the source, and the source of the income
is that activity which produced the income. In this case, as JAL constitutes PAL as its agent, the sales of
JAL tickets made by PAL is taxable.
710- ESSO vs CIR
FACTS:
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. The Commissioner
disallowed the claim on the ground that the expenses should be capitalized and might be written off as a
loss only when a dry hole should result. Hence, ESSO filed an amended return where it asked for the
refund of P323,270 by reason of its abandonment, as dry holes, of several of its oil wells. It also claimed
as ordinary and necessary expenses in the same return amount representing margin fees it had paid to
the Central Bank on its profit remittances to its New York Office.
ISSUE: Whether the margin fees may be considered ordinary and necessary expenses when paid.

HELD:
For an item to be deductible as a business expense, the expense must be ordinary and necessary; it
must be paid or incurred within the taxable year; and it must be paid or incurred in carrying on a trade
or business. In addition, the taxpayer must substantially prove by evidence or records the deductions
claimed under law, otherwise, the same will be disallowed. There has been no attempt to define
ordinary and necessary with precision. However, as guiding principle in the proper adjudication of
conflicting claims, an expenses is considered necessary where the expenditure is appropriate and helpful
in the development of the taxpayers business. It is ordinary when it connotes a payment which is
normal in relation to the business of the taxpayer and the surrounding circumstances. Assuming that the
expenditure is ordinary and necessary in the operation of the taxpayers business; the expenditure, to
be an allowable deduction as a business expense, must be determined from the nature of the
expenditure itself, and on the extent and permanency of the work accomplished by the expenditure.
Herein, 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; which is
erroneous. Claims for deductions are a matter of legislative grace and do not turn on mere equitable
considerations.