REPUBLIC OF THE PHILIPPINES, REPRESENTED BY
ENERGY REGULATORY BOARD petitioner, vs. MANILA
ELECTRIC COMPANY, respondent.
[G.R. No. 141314. November 15, 2002]
Facts
The ERB held that income tax should not be treated as
operating expense as this should be borne by the
stockholders who are recipients of the income or profits
realized from the operation of their business hence, should
not be passed on to the consumers.[5]
Further, in applying the net average investment method,
the ERB adopted the recommendation of COA that in
computing the rate base, only the proportionate value of the
property should be included, determined in accordance with
the number of months the same was actually used in service
during the test year.[6]
The court set as ide the order insofar as it redirect the
reduction of the Meralco rates by an average of P.0167 and
the refund of such amount to MERALCO’s customers.
Petitioners are now before the Court seeking a reversal of
the decision of the Court of Appeals by arguing primarily
that the Court of Appeals erred: a) in ruling that income tax
paid by MERALCO should be treated as part of its
operating expenses and thus considered in determining the
amount of increase in rates imposed by MERALCO and
b) in rejecting the net average investment method used by
the COA and the ERB and instead adopted the average
investment method used by MERALCO.
Issue: WON the income tax of MERALCO Be considered or
computed as operating expense.
Ruling: No.
The ERB correctly ruled that income tax should not be
included in the computation of operating expenses of a
public utility.
Income tax paid by a public utility is inconsistent with the
nature of operating expenses.
In general, operating expenses are those which are
reasonably incurred in connection with business operations
to yield revenue or income. They are items of expenses
which contribute or are attributable to the production of
income or revenue.
As correctly put by the ERB, operating expenses should be a
requisite of or necessary in the operation of a utility,
recurring, and that it redounds to the service or benefit of
customers.[26]
In determining whether or not a rate yields a fair return to
the utility, the operating expenses of the utility must be
considered.
The return allowed to a public utility in accordance with the
prescribed rate must be sufficient to provide for the
payment of such reasonable operating expenses incurred by
the public utility in the provision of its services to the
public.
Thus, the public utility is allowed a return on capital over
and above operating expenses. However, only such expenses
and in such amounts as are reasonable for the efficient
operation of the utility should be allowed for determination
of the rates to be charged by a public utility.
Income tax, it should be stressed, is imposed on an
individual or entity as a form of excise tax or a tax on the
privilege of earning income.[27]
In exchange for the protection extended by the State to
the taxpayer, the government collects taxes as a source of
revenue to finance its activities. Clearly, by its nature,
income tax payments of a public utility are not expenses
which contribute to or are incurred in connection with the
production of profit of a public utility.
Income tax should be borne by the taxpayer alone as
they are payments made in exchange for benefits received by
the taxpayer from the State. No benefit is derived by the
customers of a public utility for the taxes paid by such entity
and no direct contribution is made by the payment of income
tax to the operation of a public utility for purposes of
generating revenue or profit.
Accordingly, the burden of paying income tax should be
Meralcos alone and should not be shifted to the consumers by
including the same in the computation of its operating
expenses.
The principle behind the inclusion of operating expenses
in the determination of a just and reasonable rate is to allow
the public utility to recoup the reasonable amount of
expenses it has incurred in connection with the services it
provides. It does not give the public utility the license to
indiscriminately charge any and all types of expenses
incurred without regard to the nature thereof, i.e., whether
or not the expense is attributable to the production of services
by the public utility. To charge consumers for expenses
incurred by a public utility which are not related to the
service or benefit derived by the customers from the public
utility is unjustified and inequitable.
An approach allowing the indiscriminate inclusion of
income tax payments as operating expenses may create an
undesirable precedent and serve as a blanket authority for
public utilities to charge their income tax payments to
operating expenses and unjustly shift the tax burden to the
customer. To be sure, public utility taxation in the United
States is going through the eye of criticism. Some
commentators are of the view that by allowing the public
utility to collect its income tax payment from its customers,
a form of sales tax is, in effect, imposed on the public for
consumption of public utility services. By charging their
income tax payments to their customers, public utilities
virtually become tax collectors rather than taxpayers.[31] In
the cases at bar, MERALCO has not justified why its
income tax should be treated as an operating expense to
enable it to derive a fair return for its services.
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
ISABELA CULTURAL CORPORATION, Respondent.
G.R. No. 172231 February 12, 2007
Facts
Petitioner CIR assails the order of the CTA and CA in
cancelling the assessment notices for deficiency income tax
and expanded withholding tax issued by the BIR against
respondent.
the CTA rendered a decision canceling and setting aside the
assessment notices issued against ICC. It held that the
claimed deductions for professional and security services
were properly claimed by ICC in 1986 because it was only in
the said year when the bills demanding payment were sent
to ICC.
Hence, even if some of these professional services were
rendered to ICC in 1984 or 1985, it could not declare the
same as deduction for the said years as the amount thereof
could not be determined at that time.
Petitioner filed a petition for review with the Court of
Appeals, which affirmed the CTA decision,10 holding that
although the professional services (legal and auditing
services) were rendered to ICC in 1984 and 1985, the cost of
the services was not yet determinable at that time, hence, it
could be considered as deductible expenses only in 1986
when ICC received the billing statements for said services.
It further ruled that ICC did not understate its interest
income from the promissory notes of Realty Investment,
Inc., and that ICC properly withheld and remitted taxes on
the payments for security services for the taxable year 1986.
Hence 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
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: Can respondent deduct expenses made from a
previous taxable year to the current taxable year?
Ruling: 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;
(c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer; and
(d) it must be supported by receipts, records or other
pertinent papers.11
The requisite that it must have been paid or incurred
during the taxable year is further qualified by Section 45 of
the National Internal Revenue Code (NIRC) which states
that: "[t]he deduction provided for in this Title shall be
taken for the taxable year in which ‘paid or accrued’ or ‘paid
or incurred’, dependent upon the method of accounting upon
the basis of which the net income is computed x x x".
Accounting methods for tax purposes comprise a set of rules
for determining when and how to report income and
deductions.12 In the instant case, the accounting method
used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides
that under the accrual method of accounting, expenses not
being claimed as deductions by a taxpayer in the current
year when they are incurred cannot be claimed as deduction
from income for the succeeding year. Thus, a taxpayer who
is authorized to deduct certain expenses and other allowable
deductions for the current year but failed to do so cannot
deduct the same for the next year.13
ACCRUAL METHOD
The accrual method relies upon the taxpayer’s right to
receive amounts or its obligation to pay them, in opposition
to actual receipt or payment, which characterizes the cash
method of accounting. Amounts of income accrue where the
right to receive them become fixed, where there is created
an enforceable liability. Similarly, liabilities are accrued
when fixed and determinable in amount, without regard to
indeterminacy merely of time of payment.14
For a taxpayer using the accrual method, the determinative
question is, when do the facts present themselves in such a
manner that the taxpayer must recognize income or
expense?
The accrual of income and expense is permitted when the
all-events test has been met.
This test requires: (1) fixing of a right to income or liability
to pay; and (2) the availability of the reasonable accurate
determination of such income or liability.
The all-events test requires the right to income or liability
be fixed, and the amount of such income or liability be
determined with reasonable accuracy. However, the test
does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal
the information necessary to compute the amount with
reasonable accuracy.
The all-events test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is satisfied
where a computation may be unknown, but is not as much
as unknowable, within the taxable year. The amount of
liability does not have to be determined exactly; it must be
determined with "reasonable accuracy." Accordingly, the
term "reasonable accuracy" implies something less than an
exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that
a taxpayer knew, or could reasonably be expected to have
known, at the closing of its books for the taxable year.
In the instant case, the expenses for professional fees
consist of expenses for legal and auditing services.
The expenses for legal services pertain to the 1984 and 1985
legal and retainer fees of the law firm Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson, and for
reimbursement of the expenses of said firm in connection
with ICC’s tax problems for the year 1984. As testified by
the Treasurer of ICC, the firm has been its counsel since the
1960’s.19 From the nature of the claimed deductions and the
span of time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees
charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the
expense during the taxable year when they could have been
claimed as deductions cannot thus be attributed solely to
the delayed billing of these liabilities by the firm. For one,
ICC, in the exercise of due diligence could have inquired
into the amount of their obligation to the firm, especially so
that it is using the accrual method of accounting. For
another, it could have reasonably determined the amount of
legal and retainer fees owing to its familiarity with the
rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a
question of fact and that the taxpayer bears the burden of
establishing the accrual of an expense or income. However,
ICC failed to discharge this burden. As to when the firm’s
performance of its services in connection with the 1984 tax
problems were completed, or whether ICC exercised
reasonable diligence to inquire about the amount of its
liability, or whether it does or does not possess the
information necessary to compute the amount of said
liability with reasonable accuracy, are questions of fact
which ICC never established. It simply relied on the defense
of delayed billing by the firm and the company, which under
the circumstances, is not sufficient to exempt it from being
charged with knowledge of the reasonable amount of the
expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for
auditing the financial statements of ICC for the year 1985
cannot be validly claimed as expense deductions in 1986.
This is so because ICC failed to present evidence showing
that even with only "reasonable accuracy," as the standard
to ascertain its liability to SGV & Co. in the year 1985, it
cannot determine the professional fees which said company
would charge for its services.
ICC thus failed to discharge the burden of proving that the
claimed expense deductions for the professional services
were allowable deductions for the taxable year 1986. Hence,
per Revenue Audit Memorandum Order No. 1-2000, they
cannot be validly deducted from its gross income for the said
year and were therefore properly disallowed by the BIR.
ESSO STANDARD EASTERN, INC., (formerly, Standard-
Vacuum Oil Company), petitioner,
vs.
THE COMMISSIONER OF INTERNAL
REVENUE, respondent.
G.R. Nos. L-28508-9 July 7, 1989
Facts
Petitioner ESSO deducted from its gross income for 1959, as
part of its ordinary and necessary business expenses, the
amount it had spent for drilling and exploration of its
petroleum concessions.
This claim was disallowed by the respondent Commissioner
of Internal Revenue on the ground that the expenses should
be capitalized and might be written off as a loss only when a
"dry hole" should result.
ESSO then filed an amended return where it asked for the
refund of P323,279.00 by reason of its abandonment as dry
holes of several of its oil wells.
Also claimed as ordinary and necessary expenses in the
same return was the amount of P340,822.04, representing
margin fees it had paid to the Central Bank on its profit
remittances to its New York head office.
ESSO insisted on charging the 18% interest on the entire
amount of the deficiency tax. On May 4,1965, the CIR also
denied the claims of ESSO for refund of the overpayment of
its 1959 and 1960 income taxes, holding that the margin
fees paid to the Central Bank could not be considered taxes
or allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of
P102,246.00 for 1959, contending that the margin fees were
deductible from gross income either as a tax or as an
ordinary and necessary business expense.
It also claimed an overpayment of its tax by P434,232.92 in
1960, for the same reason. Additionally, ESSO argued that
even if the amount paid as margin fees were not legally
deductible, there was still an overpayment by P39,787.94
for 1960, representing excess interest.
After trial, the CTA denied petitioner's claim for refund of
P102,246.00 for 1959 and P434,234.92 for 1960 but
sustained its claim for P39,787.94 as excess interest.
WON the Margin fees is an exercise of taxation or police
power
Ruling: Police Power
In Caltex (Phil.) Inc. v. Acting Commissioner of
Customs, 2 the Court stated through Justice Jose P.
Bengzon:
A margin levy on foreign exchange is a form of exchange
control or restriction designed to discourage imports and
encourage exports, and ultimately, 'curtail any excessive
demand upon the international reserve' in order to stabilize
the currency. Originally adopted to cope with balance of
payment pressures, exchange restrictions have come to
serve various purposes, such as limiting non-essential
imports, protecting domestic industry and when combined
with the use of multiple currency rates providing a source of
revenue to the government, and are in many developing
countries regarded as a more or less inevitable concomitant
of their economic development programs. The different
measures of exchange control or restriction cover different
phases of foreign exchange transactions, i.e., in quantitative
restriction, the control is on the amount of foreign exchange
allowable. In the case of the margin levy, the immediate
impact is on the rate of foreign exchange; in fact, its main
function is to control the exchange rate without changing
the par value of the peso as fixed in the Bretton Woods
Agreement Act. For a member nation is not supposed to
alter its exchange rate (at par value) to correct a merely
temporary disequilibrium in its balance of payments. By its
nature, the margin levy is part of the rate of exchange as
fixed by the government.
We conclude then that the margin fee was imposed by the
State in the exercise of its police power and not the power of
taxation.
Issue: WON the same (margin fees) be considered necessary
and ordinary business expenses hence deductible from its
gross income
Ruling: NO.
The applicable provision is Section 30(a) of the National
Internal Revenue Code reading as follows:
SEC. 30. Deductions from gross income in
computing net income there shall be
allowed as deductions
(a) Expenses:
(1) In general. — All the ordinary and
necessary expenses paid or incurred
during the taxable year in carrying on any
trade or business, including a reasonable
allowance for salaries or other
compensation for personal services
actually rendered; traveling expenses
while away from home in the pursuit of a
trade or business; and rentals or other
payments required to be made as a
condition to the continued use or
possession, for the purpose of the trade or
business, of property to which the taxpayer
has not taken or is not taking title or in
which he has no equity.
(2) Expenses allowable to non-resident
alien individuals and foreign corporations.
— In the case of a non-resident alien
individual or a foreign corporation, the
expenses deductible are the necessary
expenses paid or incurred in carrying on
any business or trade conducted within the
Philippines exclusively.
In the case of Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue, 4 the
Court laid down the rules on the deductibility of business
expenses, thus:
to the statutory test of deductibility where it is axiomatic
that to be deductible as a business expense, three conditions
are imposed, namely:
(1) the expense must be ordinary and necessary,
(2) it must be paid or incurred within the taxable year, and
(3) it must be paid or incurred in carrying on a trade or
business. In addition, not only must the taxpayer meet the
business test, he must substantially prove by evidence or
records the deductions claimed under the law, otherwise,
the same will be disallowed. The mere allegation of the
taxpayer that an item of expense is ordinary and necessary
does not justify its deduction.
Hence,
Were the margin fees paid by petitioner on
its profit remittance to its Head Office in
New York appropriate and helpful in the
taxpayer's business in the Philippines?
Were the margin fees incurred for
purposes proper to the conduct of the
affairs of petitioner's branch in the
Philippines? Or were the margin fees
incurred for the purpose of realizing a
profit or of minimizing a loss in the
Philippines? Obviously not. As stated in
the Lopez case, the margin fees are not
expenses in connection with the production
or earning of petitioner's incomes in the
Philippines. They were expenses incurred
in the disposition of said incomes;
expenses for the remittance of funds after
they have already been earned by
petitioner's branch in the Philippines for
the disposal of its Head Office in New York
which is already another distinct and
separate income taxpayer.
xxx
Since the margin fees in question were
incurred for the remittance of funds to
petitioner's Head Office in New York,
which is a separate and distinct income
taxpayer from the branch in the
Philippines, for its disposal abroad, it can
never be said therefore that the margin
fees were appropriate and helpful in the
development of petitioner's business in the
Philippines exclusively or were incurred
for purposes proper to the conduct of the
affairs of petitioner's branch in the
Philippines exclusively or for the purpose
of realizing a profit or of minimizing a loss
in the Philippines exclusively. If at all, the
margin fees were incurred for purposes
proper to the conduct of the corporate
affairs of Standard Vacuum Oil Company
in New York, but certainly not in the
Philippines.
ESSO has not shown that the remittance to the head office
of part of its profits was made in furtherance of its own
trade or business. The petitioner merely presumed that all
corporate expenses are necessary and appropriate in the
absence of a showing that they are illegal or ultra vires.
AGUINALDO INDUSTRIES CORPORATION (FISHING
NETS DIVISIONS), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE
COURT OF TAX APPEALS, respondents.
G.R. No. L-29790 February 25, 1982
Facts
... Aguinaldo Industries Corporation is a domestic
corporation engaged in two lines of business, namely: (a) the
manufacture of fishing nets, a tax-exempt industry, and (b)
the manufacture of furniture Its business of manufacturing
fishing nets is handled by its Fish Nets Division, while the
manufacture of Furniture is operated by its Furniture
Division. For accounting purposes, each division is provided
with separate books of accounts as required by the
Department of Finance. Under the company's accounting
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
Previously, petitioner acquired a parcel of land in
Muntinglupa, Rizal, as site of the fishing net factory. This
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
suitable for the needs of petitioner, it sold the Muntinglupa
property, Petitioner derived profit from this sale which was
entered in the books of the Fish Nets Division as
miscellaneous income to distinguish it from its tax-exempt
income.
For the year 1957, petitioner filed two separate income tax
returns — one for its Fish Nets Division and another for its
Furniture Division. After investigation of these returns, the
examiners of the Bureau of Internal Revenue found that the
Fish Nets Division deducted from its gross income for that
year the amount of P61,187.48 as additional remuneration
paid to the officers of petitioner. The examiner further found
that this amount was taken from the net profit of an
isolated transaction (sale of aforementioned land) not in the
course of or carrying on of petitioner's trade or business.
Upon recommendation of aforesaid examiner that the said
sum of P61,187.48 be disallowed as deduction from gross
income, petitioner asserted in its letter of February 19,
1958, that said amount should be allowed as deduction
because it was paid to its officers as allowance or bonus
pursuant to Section 3 of its by-laws which provides as
follows:
Petitioner argues that the profit derived from the sale of its
Muntinglupa land is not taxable for it is tax-exempt income,
considering that its Fish Nets Division enjoys tax exemption
as a new and necessary industry under Republic Act 901.
Issue: WON the profit in the sale of its muntinlupa property
is Tax exempt in connection to its Tax it’s fish net division
which is Tax exempt under RA901
Ruling: No
In the instant case, up to the time the questioned decision of
the respondent Court was rendered, 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. It was thus not
one of the issues raised by petitioner in his petition and
supporting memorandum in the Court of Tax Appeals.
We therefore hold that petitioner's belated claim for tax
exemption was properly rejected.
ISSUE: WON the said amount deducted and paid to its
officers as allowance or bonus pursuant to its by laws can be
deducted or considered as an ordinary and necessary
business expense deductible for income tax purposes.
Ruling:
No. the applicable legal provision is Sec. 30 (a) (1) of the
Tax Code which reads:
In computing net income there shall be
allowed as deductions —
(a) Expenses:
(1) In general. All the
Ordinary
and necessary expenses
paid or incurred during
the taxable year in
carrying on any trade or
business, including a
reasonable allowance for
personal services actually
rendered. ...
On the basis of the foregoing standards, the bonus given to
the officers of the petitioner as their share of the profit
realized from the sale of petitioner's Muntinglupa land
cannot be deemed a deductible expense for tax purposes,
even if the aforesaid sale could be considered as a
transaction for Carrying on the trade or business of the
petitioner and the grant of the bonus to the corporate
officers pursuant to petitioner's by-laws could, as an intra-
corporate matter, be sustained. 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. As stated by this Court in Alhambra Cigar and
Cigarette Manufacturing Co. vs. Collector of Internal
Revenue, G.R. No. L-12026, May 29, 1959, construing
Section 30 (a) (1) of the Tax Code:
. . . . whenever a controversy arises on the
deductibility, for purposes of income tax, of
certain items for alleged compensation of
officers of the taxpayer, two (2) questions
become material, namely: (a) Have
personal services been actually rendered
 by said officers? (b) In the affirmative case,
what is the reasonable allowance' therefor
Then, this Court quoted with approval the appealed
decision:
. . . these extraordinary and unusual
amounts paid by petitioner to these
directors in the guise and form of
compensation for their supposed services
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.
This posture is in line with the doctrine in the law of
taxation that the taxpayer must show that its claimed
deductions clearly come within the language of the law since
allowances, like exemptions, are matters of legislative
grace.
COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. GENERAL FOODS (PHILS.),
INC., respondent.
[G.R. No. 143672. April 24, 2003]
Facts
The records reveal that, on June 14, 1985, respondent
corporation, which is engaged in the manufacture of
beverages such as Tang, Calumet and Kool-Aid, filed its
income tax return for the fiscal year ending February 28,
1985. In said tax return, respondent corporation claimed as
deduction, among other business expenses, the amount
of P9,461,246 for media advertising for Tang.
On May 31, 1988, the Commissioner disallowed 50%
or P4,730,623 of the deduction claimed by respondent
corporation.
On September 29, 1989, respondent corporation appealed to
the Court of Tax Appeals but the appeal was dismissed:
Aggrieved, respondent corporation filed a petition for review
at the Court of Appeals which rendered a decision reversing
and setting aside the decision of the Court of Tax Appeals:
The petitioner now comes before the court questions the
allowance made by the CA in considering the media
advertising expense for Tang as an ordinary and necessary
expense, deductible under the NIRC.
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 respondents
business. Otherwise, the expense must be considered a
capital expenditure to be spread out over a reasonable time.
Issue: Is the media expenses for tang deductible expenses?
Or was it a capital expenditure, paid in order to create
goodwill and reputation for respondent corporation and/or
its products, which should have been amortized over a
reasonable period?
Ruling: No
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the
NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional
expenses.-
(a) In general.- There shall be allowed as
deduction from gross income all
ordinary and necessary expenses
paid or incurred during the
taxable year in carrying on, or
which are directly attributable to,
the development, management,
operation and/or conduct of the
trade, business or exercise of a
profession.
Simply put, to be deductible from gross income, the
subject advertising expense must comply with the following
requisites: (a) the expense must be ordinary and necessary;
(b) it must have been paid or incurred during the taxable
year; (c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent papers.[7]
The parties agreed that the expense is necessary on the
trade or business but was it ordinary?
These two requirements must be met.
There is yet to be a clear-cut criteria or fixed test for
determining the reasonableness of an advertising expense.
There being no hard and fast rule on the matter, the right to
a deduction depends on a number of factors such as but not
limited to: the type and size of business in which the taxpayer
is engaged; the volume and amount of its net earnings; the
nature of the expenditure itself; the intention of the taxpayer
and the general economic conditions. It is the interplay of
these, among other factors and properly weighed, that will
yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media
advertising expense for Tang alone was almost one-half of its
total claim for marketing expenses. Aside from that,
respondent-corporation also claimed P2,678,328 as other
advertising and promotions expense and another P1,548,614,
for consumer promotion.
Furthermore, the subject P9,461,246 media advertising
expense for Tang was almost double the amount of
respondent corporations P4,640,636 general and
administrative expenses.
We find the subject expense for the advertisement of a
single product to be inordinately large. Therefore, even if it is
necessary, it cannot be considered an ordinary expense
deductible under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to
stimulate the current sale of merchandise or use of services
and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves
expenditures incurred, in whole or in part, to create or
maintain some form of goodwill for the taxpayers 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.
We agree with the Court of Tax Appeals that the subject
advertising expense was of the second kind. Not only was the
amount staggering; the respondent corporation itself also
admitted, in its letter protest[8] to the Commissioner of
Internal Revenues assessment, that the subject media
expense was incurred in order to protect respondent
corporations brand franchise, a critical point during the
period under review.
The protection of brand franchise is analogous to the
maintenance of goodwill or title to ones property. This is a
capital expenditure which should be spread out over a
reasonable period of time.[9]
Respondent corporations venture to protect its brand
franchise was tantamount to efforts to establish a reputation.
This was akin to the acquisition of capital assets and
therefore expenses related thereto were not to be considered
as business expenses but as capital expenditures.[10]
Respondent corporation incurred the subject advertising
expense in order to protect its brand franchise. We consider
this as a capital outlay since it created goodwill for its
business and/or product. The P9,461,246 media advertising
expense for the promotion of a single product, almost one-
half of petitioner corporations entire claim for marketing
expenses for that year under review, inclusive of other
advertising and promotion expenses of P2,678,328
andP1,548,614 for consumer promotion, is doubtlessly
unreasonable.
CARMELINO F. PANSACOLA, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
G.R. No. 159991 November 16, 2006
Facts
On April 13, 1998, petitioner Carmelino F. Pansacola filed
his income tax return for the taxable year 1997 that
reflected an overpayment of P5,950. In it he claimed the
increased amounts of personal and additional exemptions
under Section 354 of the NIRC, although his certificate of
income tax withheld on compensation indicated the lesser
allowed amounts5 on these exemptions. Both the CTA and
the CA denied his petitioner for lack of merit.
Issue: Could the exemptions under Section 35 of the NIRC,
which took effect on January 1, 1998, be availed of for the
taxable year 1997?
Ruling: No.
In the case of petitioner, the availability of the
aforementioned deductions if he is thus entitled, would be
reflected on his tax return filed on or before the 15th day of
April 1999 as mandated by Section 51 (C) (1).24 Since the
NIRC took effect on January 1, 1998, the increased amounts
of personal and additional exemptions under Section 35, can
only be allowed as deductions from the individual taxpayer’s
gross or net income, as the case maybe, for the taxable year
1998 to be filed in 1999. The NIRC made no reference that
the personal and additional exemptions shall apply on
income earned before January 1, 1998.
The policy declarations in its enactment do not indicate it
was a social legislation that adjusted personal and
additional exemptions according to the poverty threshold
level nor is there any indication that its application should
retroact. At the time petitioner filed his 1997 return and
paid the tax due thereon in April 1998, the increased
amounts of personal and additional exemptions in Section
35 were not yet available. It has not yet accrued as of
December 31, 1997, the last day of his taxable year.
Petitioner’s taxable income covers his income for the
calendar year 1997. The law cannot be given retroactive
effect. It is established that tax laws are prospective in
application, unless it is expressly provided to apply
retroactively.26 In the NIRC, we note, there is no specific
mention that the increased amounts of personal and
additional exemptions under Section 35 shall be given
retroactive effect. Conformably too, personal and additional
exemptions are considered as deductions from gross income.
Deductions for income tax purposes partake of the nature of
tax exemptions, hence strictly construed27 against the
taxpayer28 and cannot be allowed unless granted in the
most explicit and categorical language29 too plain to be
mistaken.30 They cannot be extended by mere implication or
inference.31 And, where a provision of law speaks
categorically, the need for interpretation is obviated, no
plausible pretense being entertained to justify non-
compliance. All that has to be done is to apply it in every
case that falls within its terms.32
Prefatorily, personal and additional exemptions under
Section 35 of the NIRC are fixed amounts to which certain
individual taxpayers (citizens, resident aliens)12 are
entitled. Personal exemptions are the theoretical personal,
living and family expenses of an individual allowed to be
deducted from the gross or net income of an individual
taxpayer. These are arbitrary amounts which have been
calculated by our lawmakers to be roughly equivalent to the
minimum of subsistence,13 taking into account the personal
status and additional qualified dependents of the taxpayer.
They are fixed amounts in the sense that the amounts have
been predetermined by our lawmakers as provided under
Section 35 (A) and (B). Unless and until our lawmakers
make new adjustments on these personal exemptions, the
amounts allowed to be deducted by a taxpayer are fixed as
predetermined by Congress.
Section 31 defines "taxable income" as the pertinent items of
gross income specified in the NIRC, less the deductions
and/or personal and additional exemptions, if any,
authorized for such types of income by the NIRC or other
special laws. As defined in Section 22 (P),20 "taxable year"
means the calendar year, upon the basis of which the net
income is computed under Title II of the NIRC. Section
4321 also supports the rule that the taxable income of an
individual shall be computed on the basis of the calendar
year. In addition, Section 4522 provides that the deductions
provided for under Title II of the NIRC shall be taken for
the taxable year in which they are "paid or accrued" or "paid
or incurred."
COMMISSIONER OF INTERNAL REVENUE,
Petitioner,
CENTRAL LUZON DRUG
CORPORATION,
Respondent
G.R. No. 159610
Facts
Respondented ran drugs stores known as mercury drug
On 19 March 1999, respondent filed with the petitioner a
claim for refund or credit of overpaid income tax for the
taxable year 1997 in the amount
of P2,660,829.00.[10] Respondent alleged that the overpaid
tax was the result of the wrongful implementation of RA
7432. Respondent 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, respondent 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.
In his Answer, petitioner 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.
THE CTA ruled in favor of respondent treating the 20%
senior citizen discount as a tax credit, deductible from gross
income. In quoting its previous decisions, the CTA ruled
that RR 2-94 engraved a new meaning to the phrase tax
credit as deductible from gross income which is a deviation
from the plain intendment of the law. An administrative
regulation must not contravene but should conform to the
standards that the law prescribes.[
The CA affirmed in TOTO.
It reasoned that under the verba legis rule, if the statute is
clear, plain, and free from ambiguity, it must be given its
literal meaning and applied without interpretation. This
principle rests on the presumption that the words used by the
legislature in a statute correctly express its intent and
preclude the court from construing it differently.[18]
The Court of Appeals distinguished tax credit as an amount
subtracted from a taxpayers total tax liability to arrive at the
tax due while a tax deduction reduces the taxpayers taxable
income upon which the tax liability is computed. A credit
differs from deduction in that the former is subtracted from
tax while the latter is subtracted from income before the tax
is computed.[19]
The Court of Appeals found no legal basis to support
petitioners opinion that actual payment by the taxpayer or
actual receipt by the government of the tax sought to be
credited or refunded is a condition sine qua non for
the availment of tax credit as enunciated in Section 229[20] of
the Tax Code. The Court of Appeals stressed that Section 229
of the Tax Code pertains to illegally collected or erroneously
paid taxes while RA 7432 is a special law which uses the
method of tax credit in the context of just compensation.
Further, RA 7432 does not require prior tax payment as a
condition for claiming the cost of the sales discount as tax
credit.
Issue: IS the 20% senior citizens sales discount a taxes
credit deductible from future income tax liabilities instead
of a mere deduction from gross income or gross sales?
Ruling: Tax credit
In two similar cases involving the same parties where
respondent lodged its claim for tax credit on the senior
citizens discount granted in 1995[22] and 1996,[23] this 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
taxpayers 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.
In Commissioner of Internal Revenue v. Central Luzon Drug
Corporation,[24] the Court ruled that petitioners definition in
RR 2-94 of a tax credit is clearly erroneous. To deny the tax
credit, despite the plain mandate of the law, is indefensible.
InCommissioner of Internal Revenue v. Central Luzon Drug
Corporation, the Court declared, When the law says that the
cost of the discount may be claimed as a tax credit, it means
that the amount when claimed ― shall be treated as a
reduction from any tax liability, plain and simple. The Court
further stated that the law cannot be amended by a mere
regulation because administrative agencies in issuing these
regulations may not enlarge, alter or restrict the provisions
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
regulation, the definition provided in Section 2(i) of RR 2-94
cannot be given effect.
The tax credit may still be deducted
from a future, not a present, tax liability.

In the petition filed before this Court, petitioner alleged that
respondent incurred a net loss from its business operations
in 1997; hence, it did not pay any income tax. Since no tax
payment was made, it follows that no tax credit can also be
claimed because tax credits are usually applied against a tax
liability.[25]
In Commissioner of Internal Revenue v. Central Luzon Drug
Corporation,[26] the Court stressed that prior payment of tax
liability is not a pre-condition before a taxable entity can
avail of the tax credit. The Court declared, 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.[27] It is irrefutable that under
RA 7432, Congress has granted the tax credit benefit to all
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
on this point is clear and without any qualifications.[29]
Hence, respondent is entitled to claim the amount
of P2,376,805.63 as tax credit despite incurring net loss from
business operations for the taxable year 1997.
The senior citizens discount may be claimed
as a tax credit and not a refund.
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.
On 26 February 2004, RA 9257, otherwise known as the
Expanded Senior Citizens Act of 2003, was signed into law
and became effective on 21 March 2004.
Contrary to the provision in RA 7432 where the senior
citizens discount granted by all covered establishments can
be claimed as tax credit, RA 9257 now specifically provides
that this discount should be treated as tax deduction.
With the effectivity of RA 9257 on 21 March 2004, there is
now a new tax treatment for senior citizens discount granted
by all covered establishments. This discount should be
considered as a deductible expense from gross income and no
longer as tax credit.[32] The present case, however, covers the
taxable year 1997 and is thus governed by the old law, RA
7432.
DEVELOPMENT BANK OF THE
PHILIPPINES, petitioner, vs. COMMISSION ON
AUDIT, respondent.
[G.R. No. 144516. February 11, 2004]
Facts
In 1983, the Bank established a Special Loan Program
availed thru the facilities of the DBP Provident Fund and
funded by placements from the Gratuity Plan Fund. This
Special Loan Program was adopted as part of the benefit
program of the Bank to provide financial assistance to
qualified members to enhance and protect the value of their
gratuity benefits because Philippine retirement laws and
the Gratuity Plan do not allow partial payment of
retirement benefits. The program was suspended in 1986
but was revived in 1991 thru DBP Board Resolution No. 066
dated January 5, 1991.
Under the Special Loan Program, a prospective retiree is
allowed the option to utilize in the form of a loan a portion
of his outstanding equity in the gratuity fund and to invest
it in a profitable investment or undertaking. The earnings of
the investment shall then be applied to pay for the interest
due on the gratuity loan which was initially set at 9% per
annum subject to the minimum investment rate resulting
from the updated actuarial study. The excess or balance of
the interest earnings shall then be distributed to the
investor-members.
Pursuant to the investment scheme, DBP-TSD paid to the
investor-members a total of P11,626,414.25 representing the
net earnings of the investments for the years 1991 and
1992. The payments were disallowed by the Auditor under
Audit Observation Memorandum No. 93-2 dated March 1,
1993, on the ground that the distribution of income of the
Gratuity Plan Fund (GPF) to future retirees of DBP is
irregular and constituted the use of public funds for private
purposes which is specifically proscribed under Section 4 of
P.D. 1445.[8]
AOM No. 93-2 did not question the authority of the Bank to
set-up the [Gratuity Plan] Fund and have it invested in the
Trust Services Department of the Bank.[9] Apart from
requiring the recipients of the P11,626,414.25 to refund
their dividends, the Auditor recommended that the DBP
record in its books as miscellaneous income the income of
the Gratuity Plan Fund (Fund).The Auditor reasoned that
the Fund is still owned by the Bank, the Board of Trustees
is a mere administrator of the Fund in the same way that
the Trust Services Department where the fund was invested
was a mere investor and neither can the employees, who
have still an inchoate interest [i]n the Fund be considered
as rightful owner of the Fund.[10]
The COA alleges that DBP is the actual owner of the Fund
and its income, on the following grounds: (1) DBP made the
contributions to the Fund; (2) the trustees of the Fund are
merely administrators; and (3) DBP employees only have an
inchoate right to the Fund.
The DBP counters that the Fund is the subject of a trust,
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
DBPs books of account.[26]
Issue: WON the income of the FUND is income of DBP
Ruling:
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
of the Fund will not revert to DBP even if the trust is
subsequently modified or terminated. The Agreement states
that the principal and income must be used to satisfy all of
the liabilities to the beneficiary officials and employees
under the Gratuity Plan, as follows:
As COA correctly observed, the right of the employees to
claim their gratuities from the Fund is still inchoate. RA
1616 does not allow employees to receive their gratuities
until they retire. However, this does not invalidate the trust
created by DBP or the concomitant transfer of legal title to
the trustees. As far back as in Government v.
Abadilla,[42] the Court held that it is not always necessary
that the cestui que trust should be named, or even be in
esse at the time the trust is created in his favor. It is enough
that the beneficiaries are sufficiently certain or
identifiable.[43]
The Agreement indisputably transferred legal title over the
income and properties of the Fund to the Funds
trustees. Thus, COAs directive to record the income of the
Fund in DBPs books of account as the miscellaneous income
of DBP constitutes grave abuse of discretion. The income of
the Fund does not form part of the revenues or profits of
DBP, and DBP may not use such income for its own
benefit. The principal and income of the Fund together
constitute the res or subject matter of the trust.The
Agreement established the Fund precisely so that it would
eventually be sufficient to pay for the retirement benefits of
DBP employees under RA 1616 without additional outlay
from DBP. COA itself acknowledged the authority of DBP to
set up the Fund.However, COAs subsequent directive would
divest the Fund of income, and defeat the purpose for the
Funds creation.
Nevertheless, the Court upholds the COAs disallowance
of the P11,626,414.25 in dividends distributed under the
SLP.
According to DBP Board Resolution No. 0036 dated 25
January 1991, the SLP allows a prospective retiree to utilize
in the form of a loan, a portion of their outstanding equity in
the Gratuity Plan Fund and to invest [the] proceeds in a
profitable investment or undertaking.[48] The basis of the
loanable amount was an employees gratuity fund
credit,[49] that is to say, what an employee would receive if he
retired at the time he availed of the loan.
As Chairman Zalamea himself noted, neither the Gratuity
Plan nor our laws on retirement allow the partial payment
of retirement benefits ahead of actual retirement. It appears
that DBP sought to circumvent these restrictions through
the SLP, which released a portion of an employees
retirement benefits to him in the form of a loan. Certainly,
the DBP did this for laudable reasons, to address the
concerns of DBP employees on the devaluation of their
retirement benefits. The remaining question is whether RA
1616 and the Gratuity Plan allow this scheme.
The right to retirement benefits accrues only upon
certain prerequisites. First, the conditions imposed by the
applicable law in this case, RA 1616 must be
fulfilled.[51] Second, there must be actual
retirement.[52] Retirement means there is a bilateral act of
the parties, a voluntary agreement between the employer
and the employees whereby the latter after reaching a certain
age agrees and/or consents to severe his employment with
the former.[53]
Severance of employment is a condition sine qua non for
the release of retirement benefits. Retirement benefits are
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
nature of a reward granted by the State to a government
employee who has given the best years of his life to the
service of his country.[55]
The Gratuity Plan likewise provides that the gratuity
benefit of a qualified DBP employee shall only be released
upon retirement under th(e) Plan.[56] As the COA correctly
pointed out, this means that retirement benefits can only be
demanded and enjoyed when the employee shall have met the
last requisite, that is, actual retirement under the Gratuity
Plan.[57]
There was thus no basis for the loans granted to DBP
employees under the SLP. The rights of the recipient DBP
employees to their retirement gratuities were still inchoate,
if not a mere expectancy, when they availed of the SLP. No
portion of their retirement benefits could be considered as
actually earned or outstanding before retirement. Prior to
retirement, an employee who has served the requisite
number of years is only eligible for, but not yet entitled to,
retirement benefits.
ROGELIO REYES petitioner
Versus
NATIONAL LABOR RELATIONS
COMMISSION, Fifth Division, and Promulgated:
UNIVERSAL ROBINA CORPORATION
GROCERY DIVISION
Respondent
G.R. No. 160233 2007
Facts
Petitioner was employed as a salesman at private
respondents Grocery Division in Davao City on August 12,
1977. He was eventually appointed as unit manager of Sales
Department-South Mindanao District, a position he held
until his retirement on November 30, 1997.
Insisting that his retirement benefits and 13th month pay
must be based on the average monthly salary of P42,766.19,
which consists of P10,919.22 basic salary and P31,846.97
average monthly commission, petitioner refused to accept
the check[5] issued by private respondent in the amount
of P200,322.21.[6] Instead, he filed a complaint before the
arbitration branch of the NLRC for retirement benefits,
13th month pay, tax refund, earned sick and vacation leaves,
financial assistance, service incentive leave pay, damages
and attorneys fees.
Petitioner contends that the commissions form part of the
basic salary, citing the case of Philippine Duplicators, Inc. v.
National Labor Relations Commission,[11] wherein the Court
held that commissions earned by salesmen form part of their
basic salary.[12]
Private respondent counters that petitioner knew that the
overriding commission is not included in the basic salary
because it had not been considered as such for a long time in
the computation of the 13th month pay, leave commissions,
absences and tardiness. Petitioner himself stated in the
complaint that his basic salary is P10,919.22, thus, he is
estopped from claiming otherwise.
Issue: WON the commission of petitioner for part of his
basic salary

Ruling:

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
leave);
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.