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REPUBLIC OF THE PHILIPPINES, REPRESENTED BY Thus, the public utility is allowed a return on capital over

ENERGY REGULATORY BOARD petitioner, vs. MANILA and above operating expenses. However, only such expenses
ELECTRIC COMPANY, respondent. and in such amounts as are reasonable for the efficient
operation of the utility should be allowed for determination
[G.R. No. 141314. November 15, 2002] of the rates to be charged by a public utility.
Facts Income tax, it should be stressed, is imposed on an
individual or entity as a form of excise tax or a tax on the
The ERB held that income tax should not be treated as
privilege of earning income.[27]
operating expense as this should be borne by the
stockholders who are recipients of the income or profits In exchange for the protection extended by the State to
realized from the operation of their business hence, should the taxpayer, the government collects taxes as a source of
not be passed on to the consumers.[5] revenue to finance its activities. Clearly, by its nature,
income tax payments of a public utility are not expenses
Further, in applying the net average investment method,
which contribute to or are incurred in connection with the
the ERB adopted the recommendation of COA that in
production of profit of a public utility.
computing the rate base, only the proportionate value of the
property should be included, determined in accordance with Income tax should be borne by the taxpayer alone as
the number of months the same was actually used in service they are payments made in exchange for benefits received by
during the test year.[6] the taxpayer from the State. No benefit is derived by the
customers of a public utility for the taxes paid by such entity
The court set as ide the order insofar as it redirect the and no direct contribution is made by the payment of income
reduction of the Meralco rates by an average of P.0167 and tax to the operation of a public utility for purposes of
the refund of such amount to MERALCO’s customers. generating revenue or profit.
Petitioners are now before the Court seeking a reversal of Accordingly, the burden of paying income tax should be
the decision of the Court of Appeals by arguing primarily Meralcos alone and should not be shifted to the consumers by
that the Court of Appeals erred: a) in ruling that income tax including the same in the computation of its operating
paid by MERALCO should be treated as part of its expenses.
operating expenses and thus considered in determining the
amount of increase in rates imposed by MERALCO and The principle behind the inclusion of operating expenses
in the determination of a just and reasonable rate is to allow
b) in rejecting the net average investment method used by the public utility to recoup the reasonable amount of
the COA and the ERB and instead adopted the average expenses it has incurred in connection with the services it
investment method used by MERALCO. provides. It does not give the public utility the license to
indiscriminately charge any and all types of expenses
Issue: WON the income tax of MERALCO Be considered or
incurred without regard to the nature thereof, i.e., whether
computed as operating expense.
or not the expense is attributable to the production of services
Ruling: No. by the public utility. To charge consumers for expenses
incurred by a public utility which are not related to the
The ERB correctly ruled that income tax should not be service or benefit derived by the customers from the public
included in the computation of operating expenses of a utility is unjustified and inequitable.
public utility.
An approach allowing the indiscriminate inclusion of
Income tax paid by a public utility is inconsistent with the income tax payments as operating expenses may create an
nature of operating expenses. undesirable precedent and serve as a blanket authority for
public utilities to charge their income tax payments to
In general, operating expenses are those which are operating expenses and unjustly shift the tax burden to the
reasonably incurred in connection with business operations customer. To be sure, public utility taxation in the United
to yield revenue or income. They are items of expenses States is going through the eye of criticism. Some
which contribute or are attributable to the production of commentators are of the view that by allowing the public
income or revenue. utility to collect its income tax payment from its customers,
a form of sales tax is, in effect, imposed on the public for
As correctly put by the ERB, operating expenses should be a
consumption of public utility services. By charging their
requisite of or necessary in the operation of a utility,
income tax payments to their customers, public utilities
recurring, and that it redounds to the service or benefit of
virtually become tax collectors rather than taxpayers.[31] In
the cases at bar, MERALCO has not justified why its
In determining whether or not a rate yields a fair return to income tax should be treated as an operating expense to
the utility, the operating expenses of the utility must be enable it to derive a fair return for its services.
The return allowed to a public utility in accordance with the vs.
prescribed rate must be sufficient to provide for the ISABELA CULTURAL CORPORATION, Respondent.
payment of such reasonable operating expenses incurred by
G.R. No. 172231 February 12, 2007
the public utility in the provision of its services to the
public. Facts
Petitioner CIR assails the order of the CTA and CA in Accounting methods for tax purposes comprise a set of rules
cancelling the assessment notices for deficiency income tax for determining when and how to report income and
and expanded withholding tax issued by the BIR against deductions.12 In the instant case, the accounting method
respondent. used by ICC is the accrual method.

the CTA rendered a decision canceling and setting aside the

Revenue Audit Memorandum Order No. 1-2000, provides
assessment notices issued against ICC. It held that the
that under the accrual method of accounting, expenses not
claimed deductions for professional and security services
being claimed as deductions by a taxpayer in the current
were properly claimed by ICC in 1986 because it was only in
year when they are incurred cannot be claimed as deduction
the said year when the bills demanding payment were sent
from income for the succeeding year. Thus, a taxpayer who
to ICC.
is authorized to deduct certain expenses and other allowable
Hence, even if some of these professional services were deductions for the current year but failed to do so cannot
rendered to ICC in 1984 or 1985, it could not declare the deduct the same for the next year.13
same as deduction for the said years as the amount thereof
could not be determined at that time. ACCRUAL METHOD
Petitioner filed a petition for review with the Court of
Appeals, which affirmed the CTA decision,10 holding that The accrual method relies upon the taxpayer’s right to
although the professional services (legal and auditing receive amounts or its obligation to pay them, in opposition
services) were rendered to ICC in 1984 and 1985, the cost of to actual receipt or payment, which characterizes the cash
the services was not yet determinable at that time, hence, it method of accounting. Amounts of income accrue where the
could be considered as deductible expenses only in 1986 right to receive them become fixed, where there is created
when ICC received the billing statements for said services. an enforceable liability. Similarly, liabilities are accrued
when fixed and determinable in amount, without regard to
It further ruled that ICC did not understate its interest indeterminacy merely of time of payment.14
income from the promissory notes of Realty Investment,
Inc., and that ICC properly withheld and remitted taxes on For a taxpayer using the accrual method, the determinative
the payments for security services for the taxable year 1986. question is, when do the facts present themselves in such a
manner that the taxpayer must recognize income or
Hence the petitioner before the court 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 The accrual of income and expense is permitted when the
during the said years and the failure of ICC to do so bars it all-events test has been met.
from claiming said expenses as deduction for the taxable
year 1986. This test requires: (1) fixing of a right to income or liability
to pay; and (2) the availability of the reasonable accurate
Issue: Can respondent deduct expenses made from a determination of such income or liability.
previous taxable year to the current taxable year?

Ruling: No. The all-events test requires the right to income or liability
be fixed, and the amount of such income or liability be
The requisites for the deductibility of ordinary and determined with reasonable accuracy. However, the test
necessary trade, business, or professional expenses,like does not demand that the amount of income or liability be
expenses paid for legal and auditing services, are: known absolutely, only that a taxpayer has at his disposal
the information necessary to compute the amount with
reasonable accuracy.
(a) the expense must be ordinary and necessary;
The all-events test is satisfied where computation remains
(b) it must have been paid or incurred during the taxable uncertain, if its basis is unchangeable; the test is satisfied
year; where a computation may be unknown, but is not as much
as unknowable, within the taxable year. The amount of
(c) it must have been paid or incurred in carrying on the liability does not have to be determined exactly; it must be
trade or business of the taxpayer; and determined with "reasonable accuracy." Accordingly, the
term "reasonable accuracy" implies something less than an
(d) it must be supported by receipts, records or other exact or completely accurate amount.[15]
pertinent papers.11
The propriety of an accrual must be judged by the facts that
The requisite that it must have been paid or incurred a taxpayer knew, or could reasonably be expected to have
during the taxable year is further qualified by Section 45 of known, at the closing of its books for the taxable year.
the National Internal Revenue Code (NIRC) which states
that: "[t]he deduction provided for in this Title shall be In the instant case, the expenses for professional fees
taken for the taxable year in which ‘paid or accrued’ or ‘paid consist of expenses for legal and auditing services.
or incurred’, dependent upon the method of accounting upon
the basis of which the net income is computed x x x". 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 amount it had spent for drilling and exploration of its
reimbursement of the expenses of said firm in connection petroleum concessions.
with ICC’s tax problems for the year 1984. As testified by
the Treasurer of ICC, the firm has been its counsel since the This claim was disallowed by the respondent Commissioner
1960’s.19 From the nature of the claimed deductions and the of Internal Revenue on the ground that the expenses should
span of time during which the firm was retained, ICC can be be capitalized and might be written off as a loss only when a
expected to have reasonably known the retainer fees "dry hole" should result.
charged by the firm as well as the compensation for its legal
ESSO then filed an amended return where it asked for the
services. The failure to determine the exact amount of the
refund of P323,279.00 by reason of its abandonment as dry
expense during the taxable year when they could have been
holes of several of its oil wells.
claimed as deductions cannot thus be attributed solely to
the delayed billing of these liabilities by the firm. For one, Also claimed as ordinary and necessary expenses in the
ICC, in the exercise of due diligence could have inquired same return was the amount of P340,822.04, representing
into the amount of their obligation to the firm, especially so margin fees it had paid to the Central Bank on its profit
that it is using the accrual method of accounting. For remittances to its New York head office.
another, it could have reasonably determined the amount of
legal and retainer fees owing to its familiarity with the
ESSO insisted on charging the 18% interest on the entire
rates charged by their long time legal consultant.
amount of the deficiency tax. On May 4,1965, the CIR also
denied the claims of ESSO for refund of the overpayment of
As previously stated, the accrual method presents largely a its 1959 and 1960 income taxes, holding that the margin
question of fact and that the taxpayer bears the burden of fees paid to the Central Bank could not be considered taxes
establishing the accrual of an expense or income. However, or allowed as deductible business expenses.
ICC failed to discharge this burden. As to when the firm’s
performance of its services in connection with the 1984 tax
ESSO appealed to the CTA and sought the refund of
problems were completed, or whether ICC exercised
P102,246.00 for 1959, contending that the margin fees were
reasonable diligence to inquire about the amount of its
deductible from gross income either as a tax or as an
liability, or whether it does or does not possess the
ordinary and necessary business expense.
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 It also claimed an overpayment of its tax by P434,232.92 in
of delayed billing by the firm and the company, which under 1960, for the same reason. Additionally, ESSO argued that
the circumstances, is not sufficient to exempt it from being even if the amount paid as margin fees were not legally
charged with knowledge of the reasonable amount of the deductible, there was still an overpayment by P39,787.94
expenses for legal and auditing services. for 1960, representing excess interest.

In the same vein, the professional fees of SGV & Co. for After trial, the CTA denied petitioner's claim for refund of
auditing the financial statements of ICC for the year 1985 P102,246.00 for 1959 and P434,234.92 for 1960 but
cannot be validly claimed as expense deductions in 1986. sustained its claim for P39,787.94 as excess interest.

This is so because ICC failed to present evidence showing WON the Margin fees is an exercise of taxation or police
that even with only "reasonable accuracy," as the standard power
to ascertain its liability to SGV & Co. in the year 1985, it
Ruling: Police Power
cannot determine the professional fees which said company
would charge for its services. In Caltex (Phil.) Inc. v. Acting Commissioner of
Customs, 2 the Court stated through Justice Jose P.
ICC thus failed to discharge the burden of proving that the Bengzon:
claimed expense deductions for the professional services
were allowable deductions for the taxable year 1986. Hence, A margin levy on foreign exchange is a form of exchange
per Revenue Audit Memorandum Order No. 1-2000, they control or restriction designed to discourage imports and
cannot be validly deducted from its gross income for the said encourage exports, and ultimately, 'curtail any excessive
year and were therefore properly disallowed by the BIR. 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
ESSO STANDARD EASTERN, INC., (formerly, Standard-
serve various purposes, such as limiting non-essential
Vacuum Oil Company), petitioner,
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
REVENUE, respondent.
countries regarded as a more or less inevitable concomitant
of their economic development programs. The different
G.R. Nos. L-28508-9 July 7, 1989 measures of exchange control or restriction cover different
phases of foreign exchange transactions, i.e., in quantitative
Facts restriction, the control is on the amount of foreign exchange
allowable. In the case of the margin levy, the immediate
Petitioner ESSO deducted from its gross income for 1959, as impact is on the rate of foreign exchange; in fact, its main
part of its ordinary and necessary business expenses, the function is to control the exchange rate without changing
the par value of the peso as fixed in the Bretton Woods business test, he must substantially prove by evidence or
Agreement Act. For a member nation is not supposed to records the deductions claimed under the law, otherwise,
alter its exchange rate (at par value) to correct a merely the same will be disallowed. The mere allegation of the
temporary disequilibrium in its balance of payments. By its taxpayer that an item of expense is ordinary and necessary
nature, the margin levy is part of the rate of exchange as does not justify its deduction.
fixed by the government.
We conclude then that the margin fee was imposed by the
State in the exercise of its police power and not the power of Were the margin fees paid by petitioner on
taxation. its profit remittance to its Head Office in
New York appropriate and helpful in the
Issue: WON the same (margin fees) be considered necessary
taxpayer's business in the Philippines?
and ordinary business expenses hence deductible from its
Were the margin fees incurred for
gross income
purposes proper to the conduct of the
Ruling: NO. affairs of petitioner's branch in the
Philippines? Or were the margin fees
incurred for the purpose of realizing a
The applicable provision is Section 30(a) of the National
profit or of minimizing a loss in the
Internal Revenue Code reading as follows:
Philippines? Obviously not. As stated in
the Lopez case, the margin fees are not
SEC. 30. Deductions from gross income in expenses in connection with the production
computing net income there shall be or earning of petitioner's incomes in the
allowed as deductions Philippines. They were expenses incurred
in the disposition of said incomes;
(a) Expenses: expenses for the remittance of funds after
they have already been earned by
(1) In general. — All the ordinary and petitioner's branch in the Philippines for
necessary expenses paid or incurred the disposal of its Head Office in New York
during the taxable year in carrying on any which is already another distinct and
trade or business, including a reasonable separate income taxpayer.
allowance for salaries or other
compensation for personal services xxx
actually rendered; traveling expenses
while away from home in the pursuit of a Since the margin fees in question were
trade or business; and rentals or other incurred for the remittance of funds to
payments required to be made as a petitioner's Head Office in New York,
condition to the continued use or which is a separate and distinct income
possession, for the purpose of the trade or taxpayer from the branch in the
business, of property to which the taxpayer Philippines, for its disposal abroad, it can
has not taken or is not taking title or in never be said therefore that the margin
which he has no equity. fees were appropriate and helpful in the
development of petitioner's business in the
(2) Expenses allowable to non-resident Philippines exclusively or were incurred
alien individuals and foreign corporations. for purposes proper to the conduct of the
— In the case of a non-resident alien affairs of petitioner's branch in the
individual or a foreign corporation, the Philippines exclusively or for the purpose
expenses deductible are the necessary of realizing a profit or of minimizing a loss
expenses paid or incurred in carrying on in the Philippines exclusively. If at all, the
any business or trade conducted within the margin fees were incurred for purposes
Philippines exclusively. proper to the conduct of the corporate
affairs of Standard Vacuum Oil Company
In the case of Atlas Consolidated Mining and Development in New York, but certainly not in the
Corporation v. Commissioner of Internal Revenue, 4 the Philippines.
Court laid down the rules on the deductibility of business
expenses, thus: ESSO has not shown that the remittance to the head office
of part of its profits was made in furtherance of its own
to the statutory test of deductibility where it is axiomatic trade or business. The petitioner merely presumed that all
that to be deductible as a business expense, three conditions corporate expenses are necessary and appropriate in the
are imposed, namely: absence of a showing that they are illegal or ultra vires.
(1) the expense must be ordinary and necessary,
(2) it must be paid or incurred within the taxable year, and NETS DIVISIONS), petitioner,
(3) it must be paid or incurred in carrying on a trade or COMMISSIONER OF INTERNAL REVENUE and THE
business. In addition, not only must the taxpayer meet the COURT OF TAX APPEALS, respondents.
G.R. No. L-29790 February 25, 1982 raised by the petitioner for the first time. It was thus not
one of the issues raised by petitioner in his petition and
Facts supporting memorandum in the Court of Tax Appeals.

... Aguinaldo Industries Corporation is a domestic We therefore hold that petitioner's belated claim for tax
corporation engaged in two lines of business, namely: (a) the exemption was properly rejected.
manufacture of fishing nets, a tax-exempt industry, and (b)
the manufacture of furniture Its business of manufacturing ISSUE: WON the said amount deducted and paid to its
fishing nets is handled by its Fish Nets Division, while the officers as allowance or bonus pursuant to its by laws can be
manufacture of Furniture is operated by its Furniture deducted or considered as an ordinary and necessary
Division. For accounting purposes, each division is provided business expense deductible for income tax purposes.
with separate books of accounts as required by the
Department of Finance. Under the company's accounting Ruling:
method, the net income from its Fish Nets Division,
miscellaneous income of the Fish Nets Division, and the
income of the Furniture Division are computed individually No. the applicable legal provision is Sec. 30 (a) (1) of the
Tax Code which reads:

Previously, petitioner acquired a parcel of land in

Muntinglupa, Rizal, as site of the fishing net factory. This In computing net income there shall be
allowed as deductions —
transaction was entered in the books of the Fish Nets
Division of the Company. Later, when another parcel of
land in Marikina Heights was found supposedly more (a) Expenses:
suitable for the needs of petitioner, it sold the Muntinglupa
property, Petitioner derived profit from this sale which was (1) In general. All the
entered in the books of the Fish Nets Division as Ordinary
miscellaneous income to distinguish it from its tax-exempt and necessary expenses
income. paid or incurred during
the taxable year in
For the year 1957, petitioner filed two separate income tax carrying on any trade or
returns — one for its Fish Nets Division and another for its business, including a
Furniture Division. After investigation of these returns, the reasonable allowance for
examiners of the Bureau of Internal Revenue found that the personal services actually
Fish Nets Division deducted from its gross income for that rendered. ...
year the amount of P61,187.48 as additional remuneration
paid to the officers of petitioner. The examiner further found On the basis of the foregoing standards, the bonus given to
that this amount was taken from the net profit of an the officers of the petitioner as their share of the profit
isolated transaction (sale of aforementioned land) not in the realized from the sale of petitioner's Muntinglupa land
course of or carrying on of petitioner's trade or business. cannot be deemed a deductible expense for tax purposes,
even if the aforesaid sale could be considered as a
Upon recommendation of aforesaid examiner that the said transaction for Carrying on the trade or business of the
sum of P61,187.48 be disallowed as deduction from gross petitioner and the grant of the bonus to the corporate
income, petitioner asserted in its letter of February 19, officers pursuant to petitioner's by-laws could, as an intra-
1958, that said amount should be allowed as deduction corporate matter, be sustained. The records show that the
because it was paid to its officers as allowance or bonus sale was effected through a broker who was paid by
pursuant to Section 3 of its by-laws which provides as petitioner a commission of P51,723.72 for his services. On
follows: 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
Petitioner argues that the profit derived from the sale of its
Muntinglupa land is not taxable for it is tax-exempt income, derived from the sale. This being so, the payment of a bonus
considering that its Fish Nets Division enjoys tax exemption to them out of the gain realized from the sale cannot be
as a new and necessary industry under Republic Act 901. considered as a selling expense; nor can it be deemed
reasonable and necessary so as to make it deductible for tax
Issue: WON the profit in the sale of its muntinlupa property purposes. As stated by this Court in Alhambra Cigar and
is Tax exempt in connection to its Tax it’s fish net division Cigarette Manufacturing Co. vs. Collector of Internal
which is Tax exempt under RA901 Revenue, G.R. No. L-12026, May 29, 1959, construing
Section 30 (a) (1) of the Tax Code:
Ruling: No
. . . . whenever a controversy arises on the
In the instant case, up to the time the questioned decision of deductibility, for purposes of income tax, of
the respondent Court was rendered, the petitioner had certain items for alleged compensation of
always implicitly admitted that the disputed capital gain officers of the taxpayer, two (2) questions
was taxable, although subject to the deduction of the bonus become material, namely: (a) Have
paid to its corporate officers. It was only after the said personal services been actually rendered
decision had been rendered and on a motion for
reconsideration thereof, that the issue of tax exemption was
by said officers? (b) In the affirmative case, its products, which should have been amortized over a
what is the reasonable allowance' therefor reasonable period?

Ruling: No
Then, this Court quoted with approval the appealed
decision: Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the
NIRC provides:
. . . these extraordinary and unusual
amounts paid by petitioner to these (A) Expenses.-
directors in the guise and form of
compensation for their supposed services
(1) Ordinary and necessary trade, business or professional
as such, without any relation to the
measure of their actual services, cannot be
regarded as ordinary and necessary
expenses within the meaning of the law. (a) In general.- There shall be allowed as
deduction from gross income all
ordinary and necessary expenses
This posture is in line with the doctrine in the law of
paid or incurred during the
taxation that the taxpayer must show that its claimed
taxable year in carrying on, or
deductions clearly come within the language of the law since
which are directly attributable to,
allowances, like exemptions, are matters of legislative
the development, management,
operation and/or conduct of the
trade, business or exercise of a
REVENUE, petitioner, vs. GENERAL FOODS (PHILS.),
INC., respondent.
Simply put, to be deductible from gross income, the
subject advertising expense must comply with the following
[G.R. No. 143672. April 24, 2003] requisites: (a) the expense must be ordinary and necessary;
(b) it must have been paid or incurred during the taxable
Facts year; (c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer; and (d) it must be
The records reveal that, on June 14, 1985, respondent supported by receipts, records or other pertinent papers.[7]
corporation, which is engaged in the manufacture of
beverages such as Tang, Calumet and Kool-Aid, filed its The parties agreed that the expense is necessary on the
income tax return for the fiscal year ending February 28, trade or business but was it ordinary?
1985. In said tax return, respondent corporation claimed as
These two requirements must be met.
deduction, among other business expenses, the amount
of P9,461,246 for media advertising for Tang. There is yet to be a clear-cut criteria or fixed test for
determining the reasonableness of an advertising expense.
On May 31, 1988, the Commissioner disallowed 50%
There being no hard and fast rule on the matter, the right to
or P4,730,623 of the deduction claimed by respondent
a deduction depends on a number of factors such as but not
limited to: the type and size of business in which the taxpayer
On September 29, 1989, respondent corporation appealed to is engaged; the volume and amount of its net earnings; the
the Court of Tax Appeals but the appeal was dismissed: nature of the expenditure itself; the intention of the taxpayer
and the general economic conditions. It is the interplay of
Aggrieved, respondent corporation filed a petition for review these, among other factors and properly weighed, that will
at the Court of Appeals which rendered a decision reversing yield a proper evaluation.
and setting aside the decision of the Court of Tax Appeals:
In the case at bar, the P9,461,246 claimed as media
The petitioner now comes before the court questions the advertising expense for Tang alone was almost one-half of its
allowance made by the CA in considering the media total claim for marketing expenses. Aside from that,
advertising expense for Tang as an ordinary and necessary respondent-corporation also claimed P2,678,328 as other
expense, deductible under the NIRC. advertising and promotions expense and another P1,548,614,
for consumer promotion.
The Commissioner maintains that the subject advertising
expense was not ordinary on the ground that it failed the Furthermore, the subject P9,461,246 media advertising
two conditions set by U.S. jurisprudence: first, expense for Tang was almost double the amount of
reasonableness of the amount incurred and second, the respondent corporations P4,640,636 general and
amount incurred must not be a capital outlay to create administrative expenses.
goodwill for the product and/or private respondents
business. Otherwise, the expense must be considered a We find the subject expense for the advertisement of a
capital expenditure to be spread out over a reasonable time. single product to be inordinately large. Therefore, even if it is
necessary, it cannot be considered an ordinary expense
Issue: Is the media expenses for tang deductible expenses? deductible under then Section 29 (a) (1) (A) of the NIRC.
Or was it a capital expenditure, paid in order to create
Advertising is generally of two kinds: (1) advertising to
goodwill and reputation for respondent corporation and/or
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 April 1999 as mandated by Section 51 (C) (1).24 Since the
expenditures incurred, in whole or in part, to create or NIRC took effect on January 1, 1998, the increased amounts
maintain some form of goodwill for the taxpayers trade or of personal and additional exemptions under Section 35, can
business or for the industry or profession of which the only be allowed as deductions from the individual taxpayer’s
taxpayer is a member. If the expenditures are for the gross or net income, as the case maybe, for the taxable year
advertising of the first kind, then, except as to the question 1998 to be filed in 1999. The NIRC made no reference that
of the reasonableness of amount, there is no doubt such the personal and additional exemptions shall apply on
expenditures are deductible as business expenses. If, income earned before January 1, 1998.
however, the expenditures are for advertising of the second
kind, then normally they should be spread out over a The policy declarations in its enactment do not indicate it
reasonable period of time. was a social legislation that adjusted personal and
additional exemptions according to the poverty threshold
We agree with the Court of Tax Appeals that the subject level nor is there any indication that its application should
advertising expense was of the second kind. Not only was the retroact. At the time petitioner filed his 1997 return and
amount staggering; the respondent corporation itself also paid the tax due thereon in April 1998, the increased
admitted, in its letter protest[8] to the Commissioner of amounts of personal and additional exemptions in Section
Internal Revenues assessment, that the subject media 35 were not yet available. It has not yet accrued as of
expense was incurred in order to protect respondent December 31, 1997, the last day of his taxable year.
corporations brand franchise, a critical point during the Petitioner’s taxable income covers his income for the
period under review. calendar year 1997. The law cannot be given retroactive
effect. It is established that tax laws are prospective in
The protection of brand franchise is analogous to the application, unless it is expressly provided to apply
maintenance of goodwill or title to ones property. This is a retroactively.26 In the NIRC, we note, there is no specific
capital expenditure which should be spread out over a mention that the increased amounts of personal and
reasonable period of time.[9] additional exemptions under Section 35 shall be given
Respondent corporations venture to protect its brand retroactive effect. Conformably too, personal and additional
franchise was tantamount to efforts to establish a reputation. exemptions are considered as deductions from gross income.
This was akin to the acquisition of capital assets and Deductions for income tax purposes partake of the nature of
therefore expenses related thereto were not to be considered tax exemptions, hence strictly construed27 against the
as business expenses but as capital expenditures.[10] taxpayer28 and cannot be allowed unless granted in the
most explicit and categorical language29 too plain to be
Respondent corporation incurred the subject advertising mistaken.30 They cannot be extended by mere implication or
expense in order to protect its brand franchise. We consider inference.31 And, where a provision of law speaks
this as a capital outlay since it created goodwill for its categorically, the need for interpretation is obviated, no
business and/or product. The P9,461,246 media advertising plausible pretense being entertained to justify non-
expense for the promotion of a single product, almost one- compliance. All that has to be done is to apply it in every
half of petitioner corporations entire claim for marketing case that falls within its terms.32
expenses for that year under review, inclusive of other
advertising and promotion expenses of P2,678,328 Prefatorily, personal and additional exemptions under
andP1,548,614 for consumer promotion, is doubtlessly Section 35 of the NIRC are fixed amounts to which certain
unreasonable. individual taxpayers (citizens, resident aliens)12 are
entitled. Personal exemptions are the theoretical personal,
CARMELINO F. PANSACOLA, Petitioner, living and family expenses of an individual allowed to be
vs. deducted from the gross or net income of an individual
COMMISSIONER OF INTERNAL REVENUE, Respondent. taxpayer. These are arbitrary amounts which have been
calculated by our lawmakers to be roughly equivalent to the
G.R. No. 159991 November 16, 2006 minimum of subsistence,13 taking into account the personal
Facts status and additional qualified dependents of the taxpayer.
They are fixed amounts in the sense that the amounts have
On April 13, 1998, petitioner Carmelino F. Pansacola filed been predetermined by our lawmakers as provided under
his income tax return for the taxable year 1997 that Section 35 (A) and (B). Unless and until our lawmakers
reflected an overpayment of P5,950. In it he claimed the make new adjustments on these personal exemptions, the
increased amounts of personal and additional exemptions amounts allowed to be deducted by a taxpayer are fixed as
under Section 354 of the NIRC, although his certificate of predetermined by Congress.
income tax withheld on compensation indicated the lesser
allowed amounts5 on these exemptions. Both the CTA and Section 31 defines "taxable income" as the pertinent items of
the CA denied his petitioner for lack of merit. gross income specified in the NIRC, less the deductions
and/or personal and additional exemptions, if any,
Issue: Could the exemptions under Section 35 of the NIRC, authorized for such types of income by the NIRC or other
which took effect on January 1, 1998, be availed of for the special laws. As defined in Section 22 (P),20 "taxable year"
taxable year 1997? means the calendar year, upon the basis of which the net
income is computed under Title II of the NIRC. Section
Ruling: No. 4321 also supports the rule that the taxable income of an
individual shall be computed on the basis of the calendar
In the case of petitioner, the availability of the year. In addition, Section 4522 provides that the deductions
aforementioned deductions if he is thus entitled, would be provided for under Title II of the NIRC shall be taken for
reflected on his tax return filed on or before the 15th day of
the taxable year in which they are "paid or accrued" or "paid
or incurred." The Court of Appeals found no legal basis to support
petitioners opinion that actual payment by the taxpayer or
COMMISSIONER OF INTERNAL REVENUE, actual receipt by the government of the tax sought to be
Petitioner, credited or refunded is a condition sine qua non for
CENTRAL LUZON DRUG the availment of tax credit as enunciated in Section 229[20] of
CORPORATION, the Tax Code. The Court of Appeals stressed that Section 229
Respondent of the Tax Code pertains to illegally collected or erroneously
G.R. No. 159610 paid taxes while RA 7432 is a special law which uses the
method of tax credit in the context of just compensation.
Facts Further, RA 7432 does not require prior tax payment as a
condition for claiming the cost of the sales discount as tax
Respondented ran drugs stores known as mercury drug
On 19 March 1999, respondent filed with the petitioner a Issue: IS the 20% senior citizens sales discount a taxes
claim for refund or credit of overpaid income tax for the credit deductible from future income tax liabilities instead
taxable year 1997 in the amount of a mere deduction from gross income or gross sales?
of P2,660,829.00.[10] Respondent alleged that the overpaid
tax was the result of the wrongful implementation of RA Ruling: Tax credit
7432. Respondent treated the 20% sales discount as a
deduction from gross sales in compliance with RR 2-94 In two similar cases involving the same parties where
instead of treating it as a tax credit as provided under respondent lodged its claim for tax credit on the senior
Section 4(a) of RA 7432. citizens discount granted in 1995[22] and 1996,[23] this Court
has squarely ruled that the 20% senior citizens discount
On 6 April 2000, respondent filed a Petition for Review with required by RA 7432 may be claimed as a tax credit and not
the CTA in order to toll the running of the two-year merely a tax deduction from gross sales or gross
statutory period within which to file a judicial claim. income. Under RA 7432, Congress granted the tax credit
Respondent reasoned that RR 2-94, which is a mere benefit to all covered establishments without conditions.
implementing administrative regulation, cannot modify, The net loss incurred in a taxable year does not preclude the
alter or amend the clear mandate of RA 7432. Consequently, grant of tax credit because by its nature, the tax credit may
Section 2(i) of RR 2-94 is without force and effect for being still be deducted from a future, not a present, tax liability.
inconsistent with the law it seeks to implement. However, the senior citizens discount granted as a tax credit
cannot be refunded.
In his Answer, petitioner stated that the construction given
to a statute by a specialized administrative agency like the Tax credit is defined as a peso-for-peso reduction from a
BIR is entitled to great respect and should be accorded great taxpayers tax liability. It is a direct subtraction from the tax
weight. When RA 7432 allowed senior citizens discounts to payable to the government. On the other hand, RR 2-94
be claimed as tax credit, it was silent as to the mechanics of treated the amount of senior citizens discount as a tax
availing the same. For clarification, the BIR issued RR 2-94 deduction which is only a subtraction from gross income
and defined the term tax credit as a deduction from the resulting to a lower taxable income. RR 2-94 treats the senior
establishment's gross income and not from its tax liability in citizens discount in the same manner as the allowable
order to avoid an absurdity that is not intended by the law. deductions provided in Section 34, Chapter VII of the
National Internal Revenue Code. RR 2-94 affords merely a
THE CTA ruled in favor of respondent treating the 20% fractional reduction in the taxes payable to the government
senior citizen discount as a tax credit, deductible from gross depending on the applicable tax rate.
income. In quoting its previous decisions, the CTA ruled
that RR 2-94 engraved a new meaning to the phrase tax In Commissioner of Internal Revenue v. Central Luzon Drug
credit as deductible from gross income which is a deviation Corporation,[24] the Court ruled that petitioners definition in
from the plain intendment of the law. An administrative RR 2-94 of a tax credit is clearly erroneous. To deny the tax
regulation must not contravene but should conform to the credit, despite the plain mandate of the law, is indefensible.
standards that the law prescribes.[ InCommissioner of Internal Revenue v. Central Luzon Drug
The CA affirmed in TOTO. Corporation, the Court declared, When the law says that the
cost of the discount may be claimed as a tax credit, it means
It reasoned that under the verba legis rule, if the statute is that the amount when claimed ― shall be treated as a
clear, plain, and free from ambiguity, it must be given its reduction from any tax liability, plain and simple. The Court
literal meaning and applied without interpretation. This further stated that the law cannot be amended by a mere
principle rests on the presumption that the words used by the regulation because administrative agencies in issuing these
legislature in a statute correctly express its intent and regulations may not enlarge, alter or restrict the provisions
preclude the court from construing it differently.[18] of the law it administers; it cannot engraft additional
requirements not contemplated by the legislature. Hence,
there being a dichotomy in the law and the revenue
The Court of Appeals distinguished tax credit as an amount regulation, the definition provided in Section 2(i) of RR 2-94
subtracted from a taxpayers total tax liability to arrive at the cannot be given effect.
tax due while a tax deduction reduces the taxpayers taxable
income upon which the tax liability is computed. A credit The tax credit may still be deducted
differs from deduction in that the former is subtracted from from a future, not a present, tax liability.
tax while the latter is subtracted from income before the tax
is computed.[19]
gratuity benefits because Philippine retirement laws and
In the petition filed before this Court, petitioner alleged that the Gratuity Plan do not allow partial payment of
respondent incurred a net loss from its business operations retirement benefits. The program was suspended in 1986
in 1997; hence, it did not pay any income tax. Since no tax but was revived in 1991 thru DBP Board Resolution No. 066
payment was made, it follows that no tax credit can also be dated January 5, 1991.
claimed because tax credits are usually applied against a tax
liability.[25] Under the Special Loan Program, a prospective retiree is
allowed the option to utilize in the form of a loan a portion
In Commissioner of Internal Revenue v. Central Luzon Drug of his outstanding equity in the gratuity fund and to invest
Corporation,[26] the Court stressed that prior payment of tax it in a profitable investment or undertaking. The earnings of
liability is not a pre-condition before a taxable entity can the investment shall then be applied to pay for the interest
avail of the tax credit. The Court declared, Where there is no due on the gratuity loan which was initially set at 9% per
tax liability or where a private establishment reports a net annum subject to the minimum investment rate resulting
loss for the period, the tax credit can be availed of and carried from the updated actuarial study. The excess or balance of
over to the next taxable year.[27] It is irrefutable that under the interest earnings shall then be distributed to the
RA 7432, Congress has granted the tax credit benefit to all investor-members.
covered establishments without conditions. Therefore,
neither a tax liability nor a prior tax payment is required for
the existence or grant of a tax credit.[28] The applicable law Pursuant to the investment scheme, DBP-TSD paid to the
on this point is clear and without any qualifications.[29] investor-members a total of P11,626,414.25 representing the
Hence, respondent is entitled to claim the amount net earnings of the investments for the years 1991 and
of P2,376,805.63 as tax credit despite incurring net loss from 1992. The payments were disallowed by the Auditor under
Audit Observation Memorandum No. 93-2 dated March 1,
business operations for the taxable year 1997.
1993, on the ground that the distribution of income of the
The senior citizens discount may be claimed Gratuity Plan Fund (GPF) to future retirees of DBP is
as a tax credit and not a refund. irregular and constituted the use of public funds for private
purposes which is specifically proscribed under Section 4 of
P.D. 1445.[8]
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 AOM No. 93-2 did not question the authority of the Bank to
tax liabilities of the taxpayer while a tax refund, issued as a set-up the [Gratuity Plan] Fund and have it invested in the
check or a warrant, can be encashed. A tax refund can be Trust Services Department of the Bank.[9] Apart from
availed of immediately while a tax credit can only be utilized requiring the recipients of the P11,626,414.25 to refund
if the taxpayer has existing or future tax liabilities. their dividends, the Auditor recommended that the DBP
record in its books as miscellaneous income the income of
On 26 February 2004, RA 9257, otherwise known as the the Gratuity Plan Fund (Fund).The Auditor reasoned that
Expanded Senior Citizens Act of 2003, was signed into law the Fund is still owned by the Bank, the Board of Trustees
and became effective on 21 March 2004. is a mere administrator of the Fund in the same way that
the Trust Services Department where the fund was invested
Contrary to the provision in RA 7432 where the senior was a mere investor and neither can the employees, who
citizens discount granted by all covered establishments can have still an inchoate interest [i]n the Fund be considered
be claimed as tax credit, RA 9257 now specifically provides as rightful owner of the Fund.[10]
that this discount should be treated as tax deduction.
The COA alleges that DBP is the actual owner of the Fund
With the effectivity of RA 9257 on 21 March 2004, there is and its income, on the following grounds: (1) DBP made the
now a new tax treatment for senior citizens discount granted contributions to the Fund; (2) the trustees of the Fund are
by all covered establishments. This discount should be merely administrators; and (3) DBP employees only have an
considered as a deductible expense from gross income and no inchoate right to the Fund.
longer as tax credit.[32] The present case, however, covers the
taxable year 1997 and is thus governed by the old law, RA The DBP counters that the Fund is the subject of a trust,
7432. and that the Agreement transferred legal title over the
Fund to the trustees. The income of the Fund does not
accrue to DBP. Thus, such income should not be recorded in
DEVELOPMENT BANK OF THE DBPs books of account.[26]
AUDIT, respondent. Issue: WON the income of the FUND is income of DBP

[G.R. No. 144516. February 11, 2004] Ruling:

Facts Clearly, the trustees received and collected any income and
profit derived from the Fund, and they maintained separate
books of account for this purpose. The principal and income
In 1983, the Bank established a Special Loan Program of the Fund will not revert to DBP even if the trust is
availed thru the facilities of the DBP Provident Fund and subsequently modified or terminated. The Agreement states
funded by placements from the Gratuity Plan Fund. This that the principal and income must be used to satisfy all of
Special Loan Program was adopted as part of the benefit the liabilities to the beneficiary officials and employees
program of the Bank to provide financial assistance to under the Gratuity Plan, as follows:
qualified members to enhance and protect the value of their
As COA correctly observed, the right of the employees to nature of a reward granted by the State to a government
claim their gratuities from the Fund is still inchoate. RA employee who has given the best years of his life to the
1616 does not allow employees to receive their gratuities service of his country.[55]
until they retire. However, this does not invalidate the trust
created by DBP or the concomitant transfer of legal title to The Gratuity Plan likewise provides that the gratuity
the trustees. As far back as in Government v. benefit of a qualified DBP employee shall only be released
Abadilla,[42] the Court held that it is not always necessary upon retirement under th(e) Plan.[56] As the COA correctly
that the cestui que trust should be named, or even be in pointed out, this means that retirement benefits can only be
esse at the time the trust is created in his favor. It is enough demanded and enjoyed when the employee shall have met the
that the beneficiaries are sufficiently certain or last requisite, that is, actual retirement under the Gratuity
identifiable.[43] Plan.[57]

The Agreement indisputably transferred legal title over the There was thus no basis for the loans granted to DBP
income and properties of the Fund to the Funds employees under the SLP. The rights of the recipient DBP
trustees. Thus, COAs directive to record the income of the employees to their retirement gratuities were still inchoate,
Fund in DBPs books of account as the miscellaneous income if not a mere expectancy, when they availed of the SLP. No
of DBP constitutes grave abuse of discretion. The income of portion of their retirement benefits could be considered as
the Fund does not form part of the revenues or profits of actually earned or outstanding before retirement. Prior to
DBP, and DBP may not use such income for its own retirement, an employee who has served the requisite
benefit. The principal and income of the Fund together number of years is only eligible for, but not yet entitled to,
constitute the res or subject matter of the trust.The retirement benefits.
Agreement established the Fund precisely so that it would ROGELIO REYES petitioner
eventually be sufficient to pay for the retirement benefits of
DBP employees under RA 1616 without additional outlay Versus
from DBP. COA itself acknowledged the authority of DBP to
set up the Fund.However, COAs subsequent directive would NATIONAL LABOR RELATIONS
divest the Fund of income, and defeat the purpose for the COMMISSION, Fifth Division, and Promulgated:
Nevertheless, the Court upholds the COAs disallowance Respondent
of the P11,626,414.25 in dividends distributed under the
SLP. G.R. No. 160233 2007

According to DBP Board Resolution No. 0036 dated 25 Facts

January 1991, the SLP allows a prospective retiree to utilize
Petitioner was employed as a salesman at private
in the form of a loan, a portion of their outstanding equity in
respondents Grocery Division in Davao City on August 12,
the Gratuity Plan Fund and to invest [the] proceeds in a
1977. He was eventually appointed as unit manager of Sales
profitable investment or undertaking.[48] The basis of the
Department-South Mindanao District, a position he held
loanable amount was an employees gratuity fund
until his retirement on November 30, 1997.
credit,[49] that is to say, what an employee would receive if he
retired at the time he availed of the loan. Insisting that his retirement benefits and 13th month pay
As Chairman Zalamea himself noted, neither the Gratuity must be based on the average monthly salary of P42,766.19,
Plan nor our laws on retirement allow the partial payment which consists of P10,919.22 basic salary and P31,846.97
of retirement benefits ahead of actual retirement. It appears average monthly commission, petitioner refused to accept
that DBP sought to circumvent these restrictions through the check[5] issued by private respondent in the amount
the SLP, which released a portion of an employees of P200,322.21.[6] Instead, he filed a complaint before the
retirement benefits to him in the form of a loan. Certainly, arbitration branch of the NLRC for retirement benefits,
the DBP did this for laudable reasons, to address the 13th month pay, tax refund, earned sick and vacation leaves,
concerns of DBP employees on the devaluation of their financial assistance, service incentive leave pay, damages
retirement benefits. The remaining question is whether RA and attorneys fees.
1616 and the Gratuity Plan allow this scheme. Petitioner contends that the commissions form part of the
The right to retirement benefits accrues only upon basic salary, citing the case of Philippine Duplicators, Inc. v.
certain prerequisites. First, the conditions imposed by the National Labor Relations Commission,[11] wherein the Court
applicable law in this case, RA 1616 must be held that commissions earned by salesmen form part of their
fulfilled.[51] Second, there must be actual basic salary.[12]
retirement.[52] Retirement means there is a bilateral act of
the parties, a voluntary agreement between the employer Private respondent counters that petitioner knew that the
and the employees whereby the latter after reaching a certain overriding commission is not included in the basic salary
age agrees and/or consents to severe his employment with because it had not been considered as such for a long time in
the former.[53] the computation of the 13th month pay, leave commissions,
absences and tardiness. Petitioner himself stated in the
Severance of employment is a condition sine qua non for complaint that his basic salary is P10,919.22, thus, he is
the release of retirement benefits. Retirement benefits are estopped from claiming otherwise.
not meant to recompense employees who are still in the
employ of the government. That is the function of salaries
and other emoluments.[54] Retirement benefits are in the
Issue: WON the commission of petitioner for part of his
basic salary


The Court thus clarified that in Philippine Duplicators, the

salesmens commissions, comprising a pre-determined
percentage of the selling price of the goods sold by each
salesman, were properly included in the term basic
salary for purposes of computing the 13th month pay. The
salesmens commission are not overtime payments, nor
profit-sharing payments nor any other fringe benefit,[17] but
a portion of the salary structure which represents an
automatic increment to the monetary value initially
assigned to each unit of work rendered by a salesman.

For the purpose of computing retirement pay, one-

half month salary shall include all of the following:

1) 15 days salary based on the

latest salary rate;
2) cash equivalent of 5 days of
service incentive leave (or vacation
3) 1/12 of the 13th month pay;
4) other benefits as may be
agreed upon by employer and
employee for inclusion.

But, it shall not include the following:

1) cost of living allowance;

2) profit-sharing payments; and
3) other monetary benefits which
are not considered as part of or
integrated into the regular salary
of the employees

Petitioner filed for optional retirement upon

reaching the age of 60. However, the basis in computing his
retirement benefits is his latest salary rate of P10,919.22 as
the commissions he received are in the form of profit-sharing
payments specifically excluded by the foregoing rules.

Aside from the fact that as unit manager petitioner did not
enter into actual sale transactions, but merely supervised
the salesmen under his control, the disputed commissions
were not regularly received by him. Only when the
salesmen were able to collect from the sale transactions can
petitioner receive the commissions. Conversely, if no
collections were made by the salesmen, then petitioner
would receive no commissions at all.[24] In fine, the
commissions which petitioner received were not part of his
salary structure but were profit-sharing payments and had
no clear, direct or necessary relation to the amount of work
he actually performed. The collection made by the salesmen
from the sale transactions was the profit of private
respondent from which petitioner had a share in the form of
a commission.

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