Aguinaldo Industries Corporation v CIR and CTA

GR L-29790 Feb. 25, 1982

Aguinaldo Industries bought a parcel of land for its fishnets division, a tax-exempt division. After finding
another more suitable land, it sold the same at a gain, which it recognized as miscellaneous income. Related
to this, it claimed 61k officers’ remuneration as a deduction. BIR disallowed this. Issue: should the officer’s
remuneration be allowed as a deduction? NO. Two standards must be satisfied: 1. That the service has
been actually rendered, and 2. That it be reasonable. There is no proof that the service has been rendered. It
cannot also be said that the expense is reasonable and necessary to derive the income.

Aguinaldo Industries is a domestic corporation engaged in the manufacture of fishing nets (tax exempt) and
the manufacture of furniture, each representing two different departments.

The company acquired a parcel of land in Muntinlupa, Rizal as part of the fishing net factory. The said parcel
of land was sold after another parcel of land in Marikina was acquired. The company derived benefit from
this sale. It was entered in the books of the fishnets division as Miscellaneous income to distinguish it from
its tax-exempt income.

The BIR examiner disallowed the 61,187 additional remuneration as a deduction from its gross income in the
fishnets division. Petitioner explains that that the expense represents allowance or bonus pursuant to its by-
laws. BIR assessed deficiency and the imposed 5% surcharge and 1% monthly interest on the said assessment.

1. Is the gain taxable? YES.

The petitioner had always implicitly admitted that the disputed capital gain was taxable, although subject to
the deduction of the bonus paid to its corporate officers. It was only after the said decision had been rendered
and on a motion for reconsideration thereof, that the issue of tax exemption was raised by the petitioner for the
first time.

2. Is the 61,187.48 Officer’s remuneration allowable as a deduction from gross income? NO.

Even if the officers’ remuneration is allowable under its by-laws, it cannot be allowed under tax laws. The
records show that the sale was effected through a broker who was paid by petitioner a commission of
P51,723.72 for his services. On the other hand, there is absolutely no evidence of any service actually
rendered by petitioner's officers which could be the basis of a grant to them of a bonus out of the profit
derived from the sale. This being so, the payment of a bonus to them out of the gain realized from the sale
cannot be considered as a selling expense; nor can it be deemed reasonable and necessary so as to make it
deductible for tax purposes.

Doctrine in Alhambra Cigar v CIR, 2 requisites must be satisfied:

1. must be actually rendered
2. reasonable allowance- must bear a relation to the measure of their actual service

3. Is the petitioner liable for 5% surcharge and 1% interest? YES.

5% is based on the whole of the income tax liability, including the deficiency tax from the time the tax
became due. This must be strictly observed since these are imposed to hasten tax collection, otherwise,
condonation for light reasons might render them nugatory. (purpose is penal)

1% monthly interest for late payment is also due from the time the tax should have been paid. This is to
compensate the State for the delay in the payment of taxes. (purpose is compensatory)