Bañas Jr. v. Court of Appeals [G.R. No. 102967.

February 10, 2000]

FACTS: Petitioner entered into a deed of sale purportedly on installment. He discounted the promissory note covering the future installments for
purposes of taxation.

ISSUE: Whether or not the promissory note should be declared cash transaction for purposes of taxation.

RULING: YES. A negotiable instrument is deemed a substitute for money and for value. According to Sec. 25 of NIL: “value is any consideration
sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on
demand or at a future time”. Although the proceed of a discounted promissory note is not considered part of the initial payment, it is still taxable income
for the year it was converted into cash.

Commissioner of Internal Revenue vs. Central Luzon Drug Corporation

G.R. No. 159647 April 15, 2005

Facts: Respondents operated six drugstores under the business name Mercury Drug. From January to December 1996 respondent granted 20%
sales discount to qualified senior citizens on their purchases of medicines pursuant to RA 7432 for a total of ₱ 904,769.

On April 15, 1997, respondent filed its annual Income Tax Return for taxable year 1996 declaring therein net losses. On Jan. 16, 1998 respondent filed
with petitioner a claim for tax refund/credit of ₱ 904,769.00 allegedly arising from the 20% sales discount. Unable to obtain affirmative response from
petitioner, respondent elevated its claim to the Court of Tax Appeals. The court dismissed the same but upon reconsideration, the latter reversed its
earlier ruling and ordered petitioner to issue a Tax Credit Certificate in favor of respondent citing CA GR SP No. 60057 (May 31, 2001, Central Luzon
Drug Corp. vs. CIR) citing that Sec. 229 of RA 7432 deals exclusively with illegally collected or erroneously paid taxes but that there are other
situations which may warrant a tax credit/refund.

CA affirmed Court of Tax Appeal's decision reasoning that RA 7432 required neither a tax liability nor a payment of taxes by private establishments
prior to the availment of a tax credit. Moreover, such credit is not tantamount to an unintended benefit from the law, but rather a just compensation for
the taking of private property for public use.

Issue: Whether or not respondent, despite incurring a net loss, may still claim the 20% sales discount as a tax credit.

Ruling: Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the privilege of obtaining a 20% discount on their purchase of medicine
from any private establishment in the country. The latter may then claim the cost of the discount as a tax credit. Such credit can be claimed even if the
establishment operates at a loss.

A tax credit generally refers to an amount that is “subtracted directly from one’s total tax liability.” It is an “allowance against the tax itself” or “a
deduction from what is owed” by a taxpayer to the government.
A tax credit should be understood in relation to other tax concepts. One of these is tax deduction – which is subtraction “from income for tax purposes,”
or an amount that is “allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due.” In other
words, whereas a tax credit reduces the tax due, tax deduction reduces the income subject to tax in order to arrive at the taxable income.

A tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax credit can be applied. Without that liability, any
tax credit application will be useless. There will be no reason for deducting the latter when there is, to begin with, no existing obligation to the
government. However, as will be presented shortly, the existence of a tax credit or its grant by law is not the same as the availment or use of such
credit. While the grant is mandatory, the availment or use is not. If a net loss is reported by, and no other taxes are currently due from, a business
establishment, there will obviously be no tax liability against which any tax credit can be applied. For the establishment to choose the immediate
availment of a tax credit will be premature and impracticable
Commissioner of Internal Revenue vs. Central Luzon Drug Corporation

GR No. 159647, April 15, 2005Facts:

Respondent is a domestic corporation engaged in the retailing of medicines and other pharmaceutical products. In 1996 it operated six (6) drugstores
under the business name and style “Mercury Drug.” From January to December 1996 respondent granted 20% sales discount to qualified senior
citizens on their purchases of medicines pursuant to RA 7432. For said period respondent granted a total of ₱ 904,769.On April 15, 1997, respondent
filed its annual ITR for taxable year 1996 declaring therein net losses. On Jan. 16, 1998 respondent filed with petitioner a claim for tax refund/credit of
₱ 904,769.00 alledgedly arising from the 20% sales discount. Unable to obtain affirmative response from petitioner, respondent elevated its claim to
the CTA via Petition for Review. CTA dismissed the same but on MR, CTA reversed its earlier ruling and ordered petitioner to issue a Tax Credit
Certificate in favor of respondent citing CAGR SP No. 60057 (May 31, 2001, Central Luzon Drug Corp. vs. CIR) citing that Sec.229 of RA 7432 deals
exclusively with illegally collected or erroneously paid taxes but that there are other situations which may warrant a tax credit/refund.CA affirmed CTA
decision reasoning that RA 7432 required neither a tax liability nor a payment of taxes by private establishments prior to the availment of a tax credit.
Moreover, such credit is not tantamount to an unintended benefit from the law, but rather a just compensation for the taking of private property for
public use.

ISSUE: W/N respondent, despite incurring a net loss, may still claim the 20% sales discount as a tax credit.

RULING: Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the privilege of obtaining a 20% discount on their purchase of medicine
from any private establishment in the country. The latter may then claim the cost of the discount as a tax credit. Such credit can be claimed even if the
establishment operates at a loss. A tax credit generally refers to an amount that is “subtracted directly from one’s total tax liability.” It is an “allowance
against the tax itself” or “a deduction from what is owed” by a taxpayer to the government. A tax credit should be understood in relation to other tax
concepts. One of these is tax deduction

– which is subtraction “from income for tax purposes,” or an amount that is “allowed by law to reduce income prior to the application of the tax rate
to compute the amount of tax which is due.” In other words, whereas a tax credit reduces the tax due, tax deduction reduces the income subject
to tax in order to arrive at the taxable income. Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability
before the tax credit can be applied. Without that liability, any tax credit application will be useless. There will be no reason for deducting the
latter when there is, to begin with, no existing obligation to the government. However, as will be presented shortly, the existence of a tax credit
or its grant by law is not the same as the availment or use of such credit. While the grant is mandatory, the availment or use is not. If a net
loss is reported by, and no other taxes are currently due from, a business establishment, there will obviously be no tax liability against which any
tax credit can be applied. For the establishment to choose the immediate availment of a tax credit will be premature and
impracticable. Nevertheless, the irrefutable fact remains that, under RA7432, Congress has granted without conditions a tax
credit benefit to all covered establishments. However, for the losing establishment to immediately apply such credit, where no tax is due, will be
an improvident usance.
– In addition, while a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary, for the existence
or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact replete with provisions granting or
allowing tax credits even though no taxes have been previously paid. Petition is denied.

COMMISSIONER OF IR VS CENTRAL LUZON DRUG CORPGR 148512 June 26, 2006

FACTS: This is a petition for review under Rule 45 of Rules of Court seeking the nullification of CA decision granting respondent’s claim for tax
equal to the amount of the 20% that it extended to senior citizens on the latter’s purchases pursuant to Senior Citizens Act. Respondent deducted the
total amount of Php219,778 from its gross income for the taxable year 1995 whereby respondent did not pay tax for that year reporting a net loss
of Php20,963 in its corporate income tax. In 1996, claiming that the Php219,778 should be applied as a tax credit, respondent claimed for refund in the
amount of Php150, 193.ISSUE:Whether or not the 20% discount granted by the respondent to qualified senior citizens may be claimed as tax credit or
as deduction from gross sales?

RULING: “Tax credit” is explicitly provided for in Sec4 of RA 7432. The discount given to Senior citizens is a tax credit, not a deduction from the
gross sales of the establishment concerned. The tax credit that is contemplated under this Act is a form of just compensation, not a remedy for taxes
that were erroneously or illegally assessed and collected. In the same vein, prior payment of any tax liability is a pre-condition before a taxable entity
can benefit from tax credit. The credit may be availed of upon payment, if any. Where there is no tax liability or where a private establishment reports a
net loss for the period, the tax credit can be availed of and carried over to the next taxable year.
BICOLANDIA DRUG CORPORATION, petitioner vs. COMMISSIONER OF INTERNAL REVENUE, respondent. G.R. No. 142299,

June 22, 2006; Azcuna, J.

Petitioner claimed the 20% discount granted to senior citizens as a deduction from its gross income thereby giving it a tax relief equivalent
to 35% (corporate income tax rate) of the deduction. Later if filed a claim for refund of overpaid income tax due to the error in computation of its tax
liability maintaining the position that the discounts should have been treated pursuant to R.A. No. 7432.

The CTA ordered the refund but on lesser amount. The CTA made a recomputation of the income tax liability of the petitioner by allowing
as tax credit the “cost of the discount” only which is computed by getting the percentage of cost of sales to total sales and multiplying it with total
discounts granted. This ruling was affirmed by the CA.

Issues: What is the amount allowed as tax credit? b) Can the discount be claimed by the taxpayer as a tax refund?

Reading of the provisions of Section 4(a) of R.A. No. 7432, is as follows:

“Sec. 4. Privilege for the Senior Citizens – The senior citizens shall be entitled to the following:

The grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services, hotels and similar lodging
establishments, restaurants and recreations centers and purchase of medicines anywhere in the country: Provided, That private establishments may
claim the cost as tax credit.”

The term “cost” when applied to the discounts granted, is susceptible to various interpretations. The BIR by virtue of RR No. 2-94 interpreted it to mean
the tax cost which is the very reason why it was treated as a deduction from gross income. The economic effect of this treatment is the same as
allowing 35% (tax cost) of the discount as tax credit.

The CTA, on the other hand, interpreted it to be the cost of the goods sold corresponding to the discounts to the extent that they could have increased
the sales if no discounts were granted. Said in another way, were it not for the discounts there could have been additional sales in the same amount as
the discounts, so the cost is the cost of goods sold corresponding to these additional sales were it not for the discount. The CTA, in determining the
amount allowed as a tax credit, came out with this formula, viz:

Total Cost of Goods Sold x Total discounts granted = Cost of Discount

Total Sales

The SC is not convinced with either of the two interpretations advances. The SC ruled that the entity granting the discount is entitled to claim the entire
amount of discount. The “cost” referred to in Section 4(a) of R.A. No. 7432 refers to the amount of the 20% discount extended to senior citizens in their
purchase of medicines. This amount shall be applied as a tax credit, and may be deducted from the tax liability of the entity concerned. If there is no
current tax due, of the establishment reports a net loss for the period, the credit may be carried over to the succeeding taxable year. (CIR vs. Central
Drug Corp. April 15, 2005, 456 SCRA 414)

Anent the second issue, the SC ruled that the remedy of refund is not available. The law expressly provides that the discount given to senior citizens
may be claimed as a tax credit, and not a refund. Thus, where the words of a statute are clear, plain and free from ambiguity, it must be given its literal
meaning and applied without attempted interpretation. (Fianza vs. People’s Law Enforcement Board, G.R. No. 109638, March 31, 1995, 243 SCRA
165). Accordingly, the SC directed issuance of tax credit certificates to petitioner instead of the refund prayed for. arellano law

This bring us to the issue of whether what is being asked to be refunded is the “discount” or the overpaid income tax. Which is to be applied first in
paying the income tax liability of the petitioner, the tax credit or the amount of money tendered? It must be born in mind that there was an overpayment
of the tax because of the re-computation that was made, treating this time the discount as tax credit instead of treating of it as deduction from gross
income. The amount of the tax credit however, is not sufficient to offset petitioner’s income tax hence, a substantial amount was also paid for the years
covered. Were it not for wrong treatment of the discount, there could have been no overpayment made. Will the overpayment not constitute an
erroneously paid tax thereby giving the taxpayer the right to file a claim for refund under Section 204 and 229 of the NIRC?

Another important point in this case is – if the discount is not allowed to be refunded but it is allowed to be refunded but it is allowed to be
granted as a tax credit certificate, as in this case, then there seems to be a circumvention of the rule laid down in Central Drug (2005). This is because
a tax credit certificate can not be used for payment of other tax liabilities or at the option of the owner can sale the same. Will his not be equivalent to
the grant of cold cash to the taxpayer and therefore the effect is the same as that of a refund. What is not allowed directly should not be allowed
indirectly. Or it might be that the SC is of the impression that tax credit certificate issued will only be used for future income tax liability which seems to
be the inclination in the succeeding case.
CIR vs. Central Luzon Drug Corp

G.R. No. 159610 June 12, 2008

Facts: After incurring net loss, Central Luzon Drug Corp filed a claim for refund or credit of overpaid income tax for the taxable year 1997 in the
amount ofP2,660,829.00 alleging that the overpaid tax was the result of the wrongful implementation of RA 7432. They treated the 20% sales discount
as a deduction from gross sales in compliance with RR 2-94 instead of treating it as a tax credit as provided under Section 4(a) of RA 7432.

On 6 April 2000, they filed a Petition for Review with the CTA in order to toll the running of the two-year statutory period within which to file a judicial
claim. Respondent reasoned that RR 2-94, which is a mere implementing administrative regulation, cannot modify, alter or amend the clear mandate
of RA 7432. Consequently, Section 2(i) of RR 2-94 is without force and effect for being inconsistent with the law it seeks to implement.

However, the CIR stated that the construction given to a statute by a specialized administrative agency like the BIR is entitled to great respect
and should be accorded great weight. When RA 7432 allowed senior citizens’ discounts to be claimed as tax credit, it was silent as to the mechanics of
availing the same. For clarification, the BIR issued RR 2-94 and defined the term “tax credit” as a deduction from the establishment's gross income and
not from its tax liability in order to avoid an absurdity that is not intended by the law.

Issue: Whether the refund will be allowed.

Ruling: The petition lacks merit.

The Court has squarely ruled that the 20% senior citizens’ discount required by RA 7432 may be claimed as a tax credit and not merely a
tax deduction from gross sales or gross income. Under RA 7432, Congress granted the tax credit benefit to all covered establishments without
conditions. The net loss incurred in a taxable year does not preclude the grant of tax credit because by its nature, the tax credit may still be deducted
from a future, not a present, tax liability. However, the senior citizens’ discount granted as a tax credit cannot be refunded.

Tax credit is defined as a peso-for-peso reduction from a taxpayer’s tax liability. It is a direct subtraction from the tax payable to the
government. On the other hand, RR 2-94 treated the amount of senior citizens’ discount as a tax deduction which is only a subtraction from gross
income resulting to a lower taxable income. RR 2-94 treats the senior citizens’ discount in the same manner as the allowable deductions provided in
Section 34, Chapter VII of the National Internal Revenue Code. RR 2-94 affords merely a fractional reduction in the taxes payable to the government
depending on the applicable tax rate.

Section 4(a) of RA 7432 expressly provides that private establishments may claim the cost as a tax credit. A tax credit can only be utilized
as payment for future internal revenue tax liabilities of the taxpayer while a tax refund, issued as a check or a warrant, can be encashed. A tax refund
can be availed of immediately while a tax credit can only be utilized if the taxpayer has existing or future tax liabilities.

Tax Case Digest: CIR V. Isabela Cultural Corp. (2007)

DIVISION
G.R. No. 172231 February 12, 2007
YNARES-SANTIAGO, J.

Lessons Applicable: Accrual method, burden of proof in accrual method, deductibility of ordinary and necessary trade, business, or professional
expenses, all events test

Laws Applicable:

FACTS: BIR disallowed Isabela Cultural Corp. deductible expenses for services which were rendered in 1984 and 1985 but only billed, paid and
claimed as a deduction on 1986.

After CA sent its demand letters, Isabela protested.

CTA found it proper to be claimed in 1986 and affirmed by CA

ISSUE: W/N Isabela who uses accrual method can claim on 1986 only

HELD: case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability under Assessment Notice No. FAS-1-86-90-
000680.

NO
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; - 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

(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.

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.

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.

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.

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.

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. - failed to prove the burden

CIR vs. Isabela Cultural Corporation

Isabela Cultural Corp.(ICC for brevity) , a domestic corporation received from BIR assessment notice no. FAS-1-86-90000680 (680 for brevity) for
deficiency income tax in the amount of PhP 333,196.86 and assessment notice no. FAS-1-86-90-000681 (681 for brevity) for deficiency expanded
withholding tax in the amount of PhP 4,897.79, inclusive of surcharge and interest both for the taxable year 1986. The deficiency income tax of PhP
333,196 arose from BIR disallowance of ICC claimed expenses deductions for professional and security services billed to and paid by ICC in 1986.

The deficiency expanded withholding tax of PhP4,897.79 was allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its
claimed PhP244,890 deduction for security services.

Court of Tax Appeal and Court of Appeal affirmed that the professional services were rendered to ICC in 1984 and 1985, the cost of the service was
not yet determinable at that time, hence, it could be considered as deductible expenses only in 1986 when ICC received the billing statement for said
service. It further ruled that ICC did not state its interest income from the promissory notes of Realty Investment and that ICC properly withheld the
remitted taxes on the payment for security services for the taxable year 1986.

Petitioner contend that since ICC is using the accrual method of accounting, the expenses for the professional services that accrued in 1984 and 9185
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.

ISSUE (1): WON CA is correct in sustaining the deduction of the expenses for professionals and security services form ICC gross income?

HELD: NO

Revenue Audit Memorandum Order No.1-2000 provides that under the accrual method of accounting, expenses not being claimed as deductions by a
tax payer in the current year when they are incurred cannot be claimed as deductions from the income for the succeeding year.

ISSUE (2): WON CA correctly held that ICC did not understate its interest income from the promissory notes of Realty Investment, Inc; that ICC
withheld the required 1% withholding tax from the deduction for security services.
HELD: Sustaining the finding of the CTA and CA that no such understatement exist and that only simple interest computation and not a
compounded one should have been applied by the BIR. There is no indeed no stipulation between the latter and ICC on the application of compound
interest. Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should not further earn interest.

CIR v ISABELA CULTURAL CORPORATION

FACTS: ICC was assessed for deficiency income tax [ BIR disallowed expense deductions for professional and security services by 1) auditing
services by SGV & Co. 2) legal services Bengzon law office 3) El Tigre Security services] and deficiency expanded withholding tax, when it failed to
withhold 1% expanded withholding tax. The CTA cancelled and set aside the assessment notices holding that the claimed deductions for professional
and security services were properly claimed in 1986 since it was only in that year when the bills demanding payment were sent to ICC. It also found
that the ICC withheld 1% expanded withholding tax for security services. The CA affirmed hence the case at bar.

ISSUE: W/N the aforementioned may be deducted

HELD: for the auditing and legal services NO but for the security services YES

The requisites for 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 and other pertinent papers.

The requisite that it must have been paid or incurred during the taxable year is qualified by Sec. 45 of NIRC which states that “the deduction provide for
in this title shall be taken for the taxable year in which ‘paid or incurred’ dependent upon the method of accounting upon the basis of which the net
income is computed x x x”.

ICC uses the accrual method. RAM No. 1-2000 provides that under the accrual method, expenses not claimed as deductions in the current year when
they are incurred CANNOT be claimed as deduction from income for the succeeding year. The accrual method relies upon the taxpayer’s right to
receive amount or its obligation to pay them NOT the actual receipt or payment. Amounts of income accrue where the right to receive them become
fixed, where there is created an enforceable liability. Liabilities are accrued when fixed and determinable in amount.

The accrual of income and expense is permitted when the ALL-EVENTS TEST has been met. The test requires that: 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. It does not require that the amount be
absolutely known only that the taxpayer has information necessary to compute the amount with reasonable accuracy. The test is satisfied where
computation remains uncertain if its basis is unchangeable. The amount of liability does not have to be determined exactly, it must be determined with
reasonable accuracy.

In the case at bar, the expenses for legal services pertain to the years 1984 and 1985. The firm has been retained since 1960. From the nature of the
claimed deduction 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 compensation for its services. Exercising due diligence, they could have inquired into the amount of their obligation. It could have
reasonably determined the amount of legal and retainer fees owing to their familiarity with the rates charged.

The professional fees of SGV cannot be validly claimed as deductions in 1986. ICC failed to present evidence showing that even with only reasonable
accuracy, it cannot determine the professional fees which the company would charge.

CIR V GENERAL FOODS

Facts: Respondent corporation General Foods (Phils), which is engaged in the manufacture of “Tang”, “Calumet” and “Kool-Aid”, filed its income
tax return for the fiscal year ending February 1985 and claimed as deduction, among other business expenses, P9,461,246 for media advertising for
“Tang”.

The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of P2,635,141.42 against General Foods,
prompting the latter to file an MR which was denied. General Foods later on filed a petition for review at CA, which reversed and set aside an
earlier decision by CTA dismissing the company’s appeal.

Issue: W/N the subject media advertising expense for “Tang” was ordinary and necessary expense fully deductible under the NIRC

Held: No. Tax exemptions must be construed in stricissimi 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. Deductions for income taxes partake of the nature
of tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly construed.
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.

While the subject advertising expense was paid or incurred within the corresponding taxable year and was incurred in carrying on a trade or business,
hence necessary, the parties’ views conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be
necessary but also ordinary.

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.

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.

The Court finds 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.

The company’s media advertising expense for the promotion of a single product is doubtlessly unreasonable considering it comprises almost one-half
of the company’s entire claim for marketing expenses for that year under review. Petition granted, judgment reversed and set aside.

CIR v. General Foods (Phils) Inc. G.R. No. 143672.

April 24, 2003 Topic: Deductions- Expenses

Facts:

1. CIR Commissioner, petitioner, assails the resolution of the Court of Appeals reversing the decision of the Court of Tax Appeals which
denied the protest filed by respondent General Foods (Phils.), Inc., regarding the assessment made against the latter for deficiency taxes.
2. On June 14, 1985, General Foods, manufacturer of beverages such as “Tang,” “Calumet” and “Kool- Aid,” filed its ITR for the fiscal year
ending February 28, 1985. In said tax return, it claimed as a deduction for business expenses, the amount of P9,461,246 for media
advertising for “Tang.”
3. On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed by respondent corporation.
4. 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.
5. To be deductible, an advertising expense should not only be necessary but also ordinary. These two requirements must be met.
6. 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:
a) “reasonableness” of the amount incurred
b) 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.

7. Consequently, General Foods 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.

8. On September 1989, General Foods appealed to the CTA but the appeal was dismissed.9.

General foods, filed a petition for review at the CA which rendered a decision reversing and setting aside the decision of the CTA: claiming that the
deduction was not sufficiently established as excessive.

Issue: WON 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).
Held: No, CA 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.

Ratio:1 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

CIR v. GENERAL FOODS [G.R. No. 143672. April 24, 2003.]

FACTS: In its income tax return, respondent corporation claimed as deduction, among other business expenses, the amount for media advertising
for ‘Tang,’ one of its products.

ISSUE: WON the subject media advertising expense for ‘Tang’ incurred by respondent was an ordinary and necessary expense fully deductible
under the NIRC

HELD: Not deductible. Deductions for income tax purposes partake of the nature of tax exemptions; hence, must be strictly construed. To be
deductible from gross income, the subject advertising expense must be ordinary and necessary. There being no hard and fast rule on the

reasonableness of an advertising expense, 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. The amount claimed as media advertising expense for ‘Tang’ alone was almost one-half
of its total claim for marketing expenses. Furthermore, it was almost double the amount of respondent corporation's general and administrative
expenses. The subject expense for the advertisement of a single product is inordinately large. Said venture of respondent to protect its brand franchise
was tantamount to efforts to establish a reputation, and should not, therefore, be considered as business expense but as capital expenditure, which
normally should be spread out over a reasonable period of time.

C.M. HOSKINS v. CIR G.R. No. L-28383. June 22, 1976.]

FACTS: Petitioner-appellant, a domestic corporation engaged in the development and management of subdivisions, sale of subdivision lots and
collection of installments due for a fee which the real estate owners pay as compensation for each of the services rendered, failed to pay the real
estate broker's tax on its income derived from the supervision and collection fees. Consequently, the Commissioner of Internal Revenue demanded the
payment of the percentage tax plus surcharge, contending that said income is subject to the real estate broker's percentage tax. On the other hand,
petitioner-appellant claimed that the supervision and collection fees do not form part of its taxable gross compensation.

ISSUE: WON the supervision and collection fees received by a real estate broker are deductible from its gross compensation

HELD: No. With respect to the collection fees, the services rendered by Hoskins in collecting the amounts due on the sales of lots on the
installment plan are incidental to its brokerage service in selling the lots. If the broker's commissions on the cash sales of lots are subject to the
brokerage percentage tax, its commissions on installment sales should likewise be taxable. As to the supervision fees for the development and
management of the subdivisions, which fees were paid out of the proceeds of the sales of the subdivision lots, they, too, are subject to the

real estate broker's percentage tax. The development, management and supervision services were necessary to bring about the sales of the lots and
were inseparably linked thereto. Hence, there is basis for holding that the operation of subdivisions is really incidental to the main business of the
broker, which is the sale of the lots on commission.

C.M. HOSKINS&CO, INC. v CIR

Facts: Petitioner, a domestic corporation engaged in the real estate business as brokers, managing agents and administrators, filed its income tax
return for its fiscal year ending September 30, 1957 showing a net income of P92,540.25 and a tax liability due thereon of P18,508.00, which it paid in
due course. Upon verification of its return, CIR, disallowed four items of deduction in petitioner's tax returns and assessed against it an income tax
deficiency in the amount of P28,054.00 plus interests. The Court of Tax Appeals upon reviewing the assessment at the taxpayer's petition, upheld
respondent's disallowance of the principal item of petitioner's having paid to Mr. C. M. Hoskins, its founder and controlling stockholder the amount of
P99,977.91 representing 50% of supervision fees earned by it and set aside respondent's disallowance of three other minor items.

Petitioner questions in this appeal the Tax Court's findings that the disallowed payment to Hoskins was an inordinately large one, which bore a close
relationship to the recipient's dominant stockholdings and therefore amounted in law to a distribution of its earnings and profits.

Issue: Whether the 50% supervision fee paid to Hoskin may be deductible for income tax purposes.

Ruling: NO.
Ratio: Hoskin owns 99.6% of the CM Hoskins & Co. He was also the President and Chairman of the Board. That as chairman of the Board of
Directors, he received a salary of P3,750.00 a month, plus a salary bonus of about P40,000.00 a year and an amounting to an annual compensation of
P45,000.00 and an annual salary bonus of P40,000.00, plus free use of the company car and receipt of other similar allowances and benefits, the Tax
Court correctly ruled that the payment by petitioner to Hoskins of the additional sum of P99,977.91 as his equal or 50% share of the 8% supervision
fees received by petitioner as managing agents of the real estate, subdivision projects of Paradise Farms, Inc. and Realty Investments, Inc. was
inordinately large and could not be accorded the treatment of ordinary and necessary expenses allowed as deductible items within the
purview of the Tax Code.

The fact that such payment was authorized by a standing resolution of petitioner's board of directors, since "Hoskins had personally conceived and
planned the project" cannot change the picture. There could be no question that as Chairman of the board and practically an absolutely controlling
stockholder of petitioner, Hoskins wielded tremendous power and influence in the formulation and making of the company's policies and decisions.
Even just as board chairman, going by petitioner's own enumeration of the powers of the office, Hoskins, could exercise great power and influence
within the corporation, such as directing the policy of the corporation, delegating powers to the president and advising the corporation in determining
executive salaries, bonus plans and pensions, dividend policies, etc.

It is a general rule that 'Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees
are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered.
The conditions precedent to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact compensation; (2) it must be for
personal services actually rendered; and (3) the bonuses, when added to the salaries, are 'reasonable when measured by the amount and quality of
the services performed with relation to the business of the particular taxpayer.

There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors, one of them being the
amount and quality of the services performed with relation to the business.' Other tests suggested are: payment must be 'made in good faith'; 'the
character of the taxpayer's business, the volume and amount of its net earnings, its locality, the type and extent of the services rendered, the salary
policy of the corporation'; 'the size of the particular business'; 'the employees' qualifications and contributions to the business venture'; and 'general
economic conditions. However, 'in determining whether the particular salary or compensation payment is reasonable, the situation must be considered
as whole. Ordinarily, no single factor is decisive. . . . it is important to keep in mind that it seldom happens that the application of one test can give
satisfactory answer, and that ordinarily it is the interplay of several factors, properly weighted for the particular case, which must furnish the final
answer."

Petitioner's case fails to pass the test. On the right of the employer as against respondent Commissioner to fix the compensation of its officers and
employees, we there held further that while the employer's right may be conceded, the question of the allowance or disallowance thereof as deductible
expenses for income tax purposes is subject to determination by CIR. As far as petitioner's contention that as employer it has the right to fix the
compensation of its officers and employees and that it was in the exercise of such right that it deemed proper to pay the bonuses in question, all that
We need say is this: that right may be conceded, but for income tax purposes the employer cannot legally claim such bonuses as deductible expenses
unless they are shown to be reasonable. To hold otherwise would open the gate of rampant tax evasion.

Lastly, We must not lose sight of the fact that the question of allowing or disallowing as deductible expenses the amounts paid to corporate officers by
way of bonus is determined by respondent exclusively for income tax purposes. Concededly, he has no authority to fix the amounts to be paid to
corporate officers by way of basic salary, bonus or additional remuneration — a matter that lies more or less exclusively within the sound discretion of
the corporation itself. But this right of the corporation is, of course, not absolute. It cannot exercise it for the purpose of evading payment of taxes
legitimately due to the State."

GANCAYCO v. COLLECTOR [G.R. No. L-13325. April 20, 1961.]

FACTS: Petitioner Santiago Gancayco seeks the review of a decision of the Court of Tax Appeals, requiring him to pay deficiency income tax. The
question whether the sum is due from Gancayco as deficiency income tax hinges on the validity of his claim for deduction of two (2) items, namely:

(a) for farming expenses; and

(b) for representation expenses.

ISSUE: WON the two claimed deductions are allowable

HELD: No. In computing net income, no deduction shall be allowed in respect of any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of any property or estate. The cost of farm machinery, equipment and farm building
represents a capital investment and is not an allowable deduction as an item of expense. Hence, the farming expenses allegedly incurred for clearing
and developing the farm which were necessary to place it in a productive state, were not an ordinary expense but a capital

expenditure. Accordingly, they are not deductible. As for Gancayco's claim for representation expenses, a fraction was disallowed. Such disallowance
is justified by the record, for, apart from the absence of receipts, invoices or vouchers of the expenditures, petitioner could not specify the items
constituting the same, or when or on whom or on what they were incurred.
CIR v. ITOGON-SUYOC MINES, INC.

FACTS: Respondent Itogon-Suyoc Mines, Inc., the taxpayer involved, duly paid in full its liability according to its income tax return for the fiscal year
1960-61. Instead, it deducted right away the amount represented by claim for refund filed eight (8) months back, for the previous year's income tax, for
which it was not liable at all, so it alleged, as it suffered a loss instead, a claim subsequently favorably acted on by petitioner Commissioner of Internal
Revenue but after the date of such payment of the 1960-1961 tax. Accordingly, an interest in the amount of P1,512.83 was charged by petitioner
Commissioner of Internal Revenue on the sum withheld on the ground that no deduction on such refund should be allowed before its approval. When
the matter was taken up before the Court of Tax Appeals, the above assessment representing interest was set aside in the decision of September 30,
1965.

ISSUE/S: Whether CTA should not have absolved respondent corporation "from liability to pay the sum of P1,512.83 as 1% monthly interest for
delinquency in the payment of income tax for the fiscal year 1960-1961."

HELD: No. It could not be error for the Court of Tax Appeals, considering the admitted fact of overpayment, entitling respondent to refund, to hold
that petitioner should not repose an interest on the aforesaid sum of P13,155.20 "which after all was paid to and received by the government

even before the incidence of the tax in question." It would be, according to the Court of Tax Appeals, "unfair and unjust" to do so. We agree but we go
farther. The imposition of such an interest by petitioner is not supported by law.

The National Internal Revenue Code provides that interest upon the amount determined as a deficiency shall be assessed and shall be paid upon
notice and demand from the Commissioner of Internal Revenue. There is no question respondent was entitled to a refund. Instead of waiting for the
sum involved to be delivered to it, it deducted the said amount from the tax that it had to pay. That it had a right to do according to the law. It is true a
doubt could have arisen due to the fact that as of the time such a deduction was made, the Commissioner of Internal Revenue had not as yet approved
such a refund. It is an admitted fact though that respondent was clearly entitled to it, and petitioner did not allege otherwise. Nor could he do so. Under
all the circumstances disclosed therefore, the applicability of the legal provision allowing such a deduction from the amount of the tax to be paid cannot
be disputed.

DOCTRINE: It could not be error for the Court of Tax Appeals, considering the admitted fact of overpayment, entitling respondent to refund, to hold that
petitioner should not repose an interest on the aforesaid sum of P13,155.20 "which after all was paid to and received by the government even before
the incidence of the tax in question."

Commissioner vs. Itogon-Suyoc

Mines GR L-25299, 29 July 1969 En Banc, Fernando (J): 9 concur, 1 took no part

Facts: Itogon-Suyoc Mines filed its income tax return for the fiscal year 1959 to 1960. Four months later, it filed an amended income tax return,
reporting a loss. It thus sought a refund from the Commissioner. When it filed its income tax return on the next year, it deducted an amount
representing alleged tax credit for overpayment for the preceding fiscal year. The Commissioner imposed an amount P1,512.83 as 1% monthly interest
on the amount of P13,155.20 from January to December 1962. The basis for such assessment was allegedly the absence of a legal right to deduct
said amount before the tax credit or refund is approved by the Commissioner. Issue: Whether the assessment on interest was justified.

Held: The Tax Code provides that interest upon the amount determined as a deficiency shall be assessed and shall be paid upon notice and
demand from the Commissioner at the rate therein specified. It made clear, however, in an earlier provision found in the same section that if in any
preceding year, the taxpayer was entitled to a refund of any amount due as tax, such amount, if not refunded, may be deducted from the tax to
Taxation Law I, 2004 (5) Digests (Berne Guerrero) be paid. Although the imposition of monthly interest does not constitute penalty but a just
compensation to the State for the delay in paying the tax and for the concomitant use by the taxpayer of funds that rightfully should be in government’s
hands; in light of the overpayment for 1959 and 1960, it cannot be said that the taxpayer was guilty of delay enabling it to utilize the money. The
company is entitled to refund.