CIR v CENTRAL LUZON DRUG GR 148512, 26 June 2006 establishments, restaurants and recreation centers and purchase of

medicines anywhere in the country: Provided, That private establishments

Facts: may claim the cost as tax credit.

Central Luzon Drug Corporation has been a retailer of medicines and other The CA and the CTA correctly ruled that based on the plain wording of the
pharmaceutical products since December 19, 1994. In 1995, it opened three law discounts given under R.A. No. 7432 should be treated as tax credits, not
(3) drugstores as a franchisee under the business name and style of "Mercury deductions from income.
Drug."
It is a fundamental rule in statutory construction that the legislative intent
For the period January 1995 to December 1995, in conformity to the must be determined from the language of the statute itself especially when
mandate of Sec. 4(a) of R.A. No. 7432, petitioner granted a 20% discount on the words and phrases therein are clear and unequivocal. The statute in
the sale of medicines to qualified senior citizens amounting to P219,778. such a case must be taken to mean exactly what it says. 5 Its literal meaning
should be followed; to depart from the meaning expressed by the words is to
alter the statute.
Pursuant to Revenue Regulations No. 2-94 implementing R.A. No. 7432,
which states that the discount given to senior citizens shall be deducted by
the establishment from its gross sales for value-added tax and other The above provision explicitly employed the word "tax credit." Nothing in the
percentage tax purposes, respondent deducted the total amount of P219,778 provision suggests for it to mean a "deduction" from gross sales. To construe
from its gross income for the taxable year 1995. For said taxable period, it otherwise would be a departure from the clear mandate of the law.
respondent reported a net loss of P20,963 in its corporate income tax return.
As a consequence, respondent did not pay income tax for 1995. Thus, the 20% discount required by the Act to be given to senior citizens is a
tax credit, not a deduction from the gross sales of the establishment
Subsequently, on December 27, 1996, claiming that according to Sec. 4(a) of concerned. As a corollary to this, the definition of ‘tax credit’ found in Section
R.A. No. 7432, the amount of P219,778 should be applied as a tax credit, 2(1) of Revenue Regulations No. 2-94 is erroneous as it refers to tax credit as
respondent filed a claim for refund in the amount of P150,193. the amount representing the 20% discount that "shall be deducted by the
said establishment from their gross sales for value added tax and other
percentage tax purposes." This definition is contrary to what our lawmakers
CTA dismissed: even if the law treats the 20% sales discounts granted to had envisioned with regard to the treatment of the discount granted to senior
senior citizens as a tax credit, the same cannot apply when there is no tax citizens.
liability or the amount of the tax credit is greater than the tax due. In the
latter case, the tax credit will only be to the extent of the tax liability.
GQ1: What is the difference between deductions and credit.
CA set aside CTA decision: It concluded that the 20% discount given to
senior citizens which is treated as a tax credit pursuant to Sec. 4(a) of R.A. Tax credit shall mean that the amount -- when claimed – shall be treated as
No. 7432 is considered just compensation and, as such, may be carried over a reduction from any tax liability. Whereby a tax deduction is the value
to the next taxable period if there is no current tax liability deducted to the income which reduces the net income resulting to lower
payment of taxes.
Issue: Whether the 20% sales discount may be claimed as a tax credit or as a
deduction from gross sales. GQ2: What is the treatment of the senior citizen’s discount? (As per this
case)
Ruling: It is Tax Credit
The tax credit benefit granted to the establishments can be deemed as their
just compensation for private property taken by the State for public use. The
Sec. 4(a) of R.A. No. 7432 provides: privilege enjoyed by the senior citizens does not come directly from the State,
but rather from the private establishments concerned.
Sec. 4. Privileges for the Senior citizens. – The senior citizens shall be entitled
to the following:

(a) the grant of twenty percent (20%) discount from all establishments
relative to utilization of transportations services, hotels and similar lodging
BICOLANDIA DRUG CORP. v. CIR, G.R. No. 142299, 22 June 2006
The term "cost" in the above provision refers to the amount of the
FACTS: 20% discount extended by a private establishment to senior citizens in their
The controversy primarily involves the proper interpretation of purchase of medicines. This amount shall be applied as a tax credit, and may
the term "cost" in Section 4 of Republic Act (R.A.) No. 7432 be deducted from the tax liability of the entity concerned. If there is no
Bicolandia Drug Corporation (Bcolandia) is a domestic corporation current tax due or the establishment reports a net loss for the period, the
principally engaged in the retail of pharmaceutical products under the credit may be carried over to the succeeding taxable year.
business style of "Mercury Drug." GUIDE QUESTION: What is the treatment of Senior Citizens Discount?
Pursuant to the provisions of R.A. No. 7432 or the “Senior Citizens This is in line with the interpretation of the Court in Commissioner of
Act," and Revenue Regulations No. 2-94, Bicolandia granted to qualified Internal Revenue v. Central Luzon Drug Corporation wherein it affirmed that
senior citizens a 20% sales discount on their purchase of medicines. R.A. No. 7432 allows private establishments to claim as tax credit the
When Bicolandia filed its corresponding corporate annual income tax amount of discounts they grant to senior citizens.
returns for taxable years 1993 and 1994, it claimed as a deduction from its In this regard, petitioner's claim for refund must be denied. The law
gross income for the 20% sales discount it granted to senior citizens. expressly provides that the discount given to senior citizens may be claimed
However, alleging error in the computation and claiming that the as a tax credit, and not a refund. Thus, where the words of a statute are
aforementioned 20% sales discount should have been treated as a tax credit clear, plain and free from ambiguity, it must be given its literal meaning and
pursuant to R.A. No. 7432 instead of a deduction from gross income, applied without attempted interpretation.
Bicolandia filed a claim for refund or credit of overpaid income tax for 1993
and 1994.
Bicolandia filed a Petition for Review with the CTA in order to toll the
running of the two-year prescriptive period for claiming for a tax refund
under Section 230, now Section 229, of the Tax Code. It contended that
Section 4 of R.A. No. 7432 provides in clear and unequivocal language that
discounts granted to senior citizens may be claimed as a tax credit. Revenue
Regulations No. 2-94, therefore, which is merely an implementing regulation
cannot modify, alter or depart from the clear mandate of Section 4 of R.A. No.
7432, and, thus, is null and void for being inconsistent with the very statute
it seeks to implement.
CIR, on the other hand, maintained that the section providing for a
20% sales discount to senior citizens is a misnomer as it runs counter to the
solemn duty of the government to collect taxes. The CIR likewise pointed out
that the provision in question employs the word "may," thereby implying that
the availability of the remedy of tax credit is not absolute and mandatory and
it does not confer an absolute right on the taxpayer to avail of the tax credit
scheme if he so chooses.

ISSUES:
The matter to be determined is the amount of tax credit that may be
claimed by a taxable entity which grants a 20% sales discount to qualified
senior citizens on their purchase of medicines pursuant to Section 4(a) of
R.A. No. 7432

RULING:
Sec. 4. Privileges for the Senior citizens. - The senior citizens shall be
entitled to the following:
a) the grant of twenty percent (20%) discount from all establishments
relative to utilization of transportation services, hotels and similar
lodging establishments, restaurants and recreation centers and
purchase of medicines anywhere in the country: Provided, That
private establishments may claim the cost as tax credit.
 COMMISSIONER OF INTERNAL REVENUE vs. CENTRAL LUZON DRUG term "tax credit" as a deduction from the establishment's gross
CORPORATION income and not from its tax liability in order to avoid an
G.R. No. 159610; June 12, 2008; CARPIO, J.: absurdity that is not intended by the law.

FACTS: - DECISION OF THE CTA (April 15, 2002): Ordered the CIR to issue
- Central Luzon Drug Corporation (CLDC) is a domestic corporation a tax credit certificate in the amount of P2,376,805.63 in favor
engaged in the retail of medicines and other pharmaceutical of CLDC.
products.  RATIONALE: In a number of analogous cases, it has
 In 1997, CLDC operated eight drugstores under the business consistently ruled that the 20% senior citizens' discount
name and style "Mercury Drug." should be treated as tax credit instead of a mere deduction
from gross income.
- RA 7432: "An Act to Maximize the Contribution of Senior Citizens to  In quoting its previous decisions, the CTA ruled that RR 2-94
Nation Building, Grant Benefits and Special Privileges and for Other engraved a new meaning to the phrase "tax credit" as deductible
Purposes." The law was passed on April 23, 1992. from gross income which is a deviation from the plain
intendment of the law. An administrative regulation must not
- Pursuant to the provisions of RA 7432 and Revenue Regulations No. contravene but should conform to the standards that the law
(RR) 2-94 issued by the BIR, CLDC granted 20% sales discount to prescribes.
qualified senior citizens on their purchases of medicines covering the  The CTA also ruled that CLDC has properly substantiated its
calendar year 1997. The sales discount granted to senior citizens claim for tax credit by documentary evidence.
totaled P2,798,508.00.  However, between the Summary Report presented by CLDC and
the audited amount presented by the independent CPA, the CTA
- April 15, 1998: CLDC filed its 1997 Corporate Annual Income Tax deemed it proper to consider the lesser of two amounts.
Return reflecting a nil income tax liability due to net loss incurred
from business operations of P2,405,140.00. CLDC filed its 1997 - Aggrieved by the CTA's decision, the CIR elevated the case before the
Income Tax Return under protest. Court of Appeals.

- March 19, 1999: CLDC filed with the CIR a claim for refund or credit - DECISION OF THE CA (August 13, 2003): Affirmed the CTA's
of overpaid income tax for the taxable year 1997 in the amount of decision in toto.
P2,660,829.00.  RATIONALE: Under the verba legis rule, if the statute is clear,
 CLDC alleged that the overpaid tax was the result of the wrongful plain, and free from ambiguity, it must be given its literal
implementation of RA 7432. meaning and applied without interpretation. This principle rests
 CLDC treated the 20% sales discount as a deduction from gross on the presumption that the words used by the legislature in a
sales in compliance with RR 2-94 instead of treating it as a tax statute correctly express its intent and preclude the court from
credit as provided under Section 4(a) of RA 7432. construing it differently.
 The CA distinguished tax credit and tax deduction.
- On April 6, 2000, CLDC filed a Petition for Review with the CTA in a) TAX CREDIT: An amount subtracted from a taxpayer's total
order to toll the running of the two-year statutory period within tax liability to arrive at the tax due; CREDIT IS
which to file a judicial claim. SUBTRACTED FROM TAX.
 CLDC reasoned that RR 2-94, which is a mere implementing b) TAX DEDUCTION: Reduces the taxpayer's taxable income
administrative regulation, cannot modify, alter or amend the upon which the tax liability is computed; DEDUCTION IS
clear mandate of RA 7432. SUBTRACTED FROM INCOME BEFORE THE TAX IS
 Consequently, Section 2(i) of RR 2-94 is without force and effect COMPUTED.
for being inconsistent with the law it seeks to implement.  The CA found no legal basis to support the CIR’s opinion that
actual payment by the taxpayer or actual receipt by the
- CIR’s Answer: The construction given to a statute by a specialized government of the tax sought to be credited or refunded is a
administrative agency like the BIR is entitled to great respect and condition sine qua non for the availment of tax credit The Court
should be accorded great weight. of Appeals stressed that Section 229 of the Tax Code pertains to
 When RA 7432 allowed senior citizens' discounts to be claimed illegally collected or erroneously paid taxes while RA 7432 is a
as tax credit, it was silent as to the mechanics of availing the special law which uses the method of tax credit in the context of
same. For clarification, the BIR issued RR 2-94 and defined the just compensation. Further, RA 7432 does not require prior tax
 payment as a condition for claiming the cost of the sales An amount subtracted from a Reduces the taxpayer's taxable
discount as tax credit. taxpayer's total tax liability to income upon which the tax
ISSUE: arrive at the tax due liability is computed
Is the 20% senior citizens’ sales discount a tax credit or a tax deduction? CREDIT IS SUBTRACTED DEDUCTION IS SUBTRACTED
FROM TAX FROM INCOME BEFORE THE
RULING: TAX IS COMPUTED

The 20% senior citizens' discount required by RA 7432 may be

claimed as a tax credit and not merely a tax deduction from gross b) What is the treatment of senior’s citizen discount?
sales or gross income.
TAX DEDUCTION: Pursuant to the effectivity of RA 9257 on March 21, 2004.
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.

RA 9257 now specifically provides that all covered

establishments may claim the senior citizens' discount as tax
deduction.

On 26 February 2004, RA 9257, otherwise known as the "Expanded

Senior Citizens Act of 2003," was signed into law and became effective on
March 21, 2004. RA 9257 has amended RA 7432.

The establishment may claim the discounts granted under (a), (f), (g)
and (h) as tax deduction based on the net cost of the goods sold or services
rendered: Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is
granted. Provided, further, That the total amount of the claimed tax
deduction net of value added tax if applicable, shall be included in their gross
sales receipts for tax purposes and shall be subject to proper documentation
and to the provisions of the National Internal Revenue Code, as amended."

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 March 21, 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. The present case, however,
covers the taxable year 1997 and is thus governed by the old law, RA 7432.

GUIDE QUESTIONS:

a) What is the difference between deductions and credit?

TAX CREDIT TAX DEDUCTION

 G.R. No. 183408 July 12, 2017
RULING:
COMMISSIONER OF INTERNAL REVENUE, Petitioner 1) The crop method recognizes that the harvesting and selling of
vs. crops do not fall within the same year that they are planted or grown. This
LANCASTER PHILIPPINES, INC., Respondent method is especially relevant to farmers, or those engaged in the business of
producing crops that, pursuant to RAM No. 2-95, would then be able to
FACTS: compute their taxable income on the basis of their crop year. The rule enjoins
Petitioner Commissioner of Internal Revenue (CIR) In 1999, issued the recognition of the expense (or the deduction of the cost) of crop
Letter of Authority (LOA) authorizing its revenue officers to examine production in the year that the crops are sold (when income is realized).
Lancaster’s books of accounts and other accounting records for all internal 2) Yes. In the present case, we find it wholly justifiable for Lancaster, as a
revenue taxes due from taxable year 1998 to an unspecified date. After the business engaged in the production and marketing of tobacco, to adopt the
conduct of an examination pursuant to the LOA, the BIR issued a crop method of accounting. A taxpayer is authorized to employ what it finds
Preliminary Assessment Notice (PAN)8 which cited Lancaster for: 1) suitable for its purpose so long as it consistently does so, and in this case,
overstatement of its purchases for the fiscal year April 1998 to March1999; Lancaster does appear to have utilized the method regularly for many
and 2) noncompliance with the generally accepted accounting principle of decades already. Considering that the crop year of Lancaster starts from
proper matching of cost and revenue.9 More concretely, the BIR disallowed October up to September of the following year, it follows that all of its
the purchases of tobacco from farmers covered by Purchase Invoice Vouchers expenses in the crop production made within the crop year starting from
(PIVs) for the months of February and March 1998 as deductions against October 1997 to September 1998, including the February and March 1998
income for the fiscal year April 1998 to March 1999. purchases covered by purchase invoice vouchers, are rightfully deductible for
Lancaster argued that the February and March 1998 purchases income tax purposes in the year when the gross income from the crops are
should not have been disallowed. It maintained that the situation of farmers realized. The records show that the February and March 1998 purchases
engaged in producing tobacco, like Lancaster, is unique in that the costs, i.e., were recorded by Lancaster as advances and later taken up as purchases by
purchases, are taken as of a different period and posted in the year in which the close of the crop year in September 1998, or as stated very clearly above,
the gross income from the crop is realized. Lancaster concluded that it within the fiscal year 1999.
correctly posted the subject purchases in the fiscal year ending March 1999
as it was only in this year that the gross income from the crop was realized.
Lancaster received from the BIR a final assessment notice (FAN),
captioned Formal Letter of Demand and Audit Result/Assessment .Notice
LTAID II IT-98-00007, dated 11 October 2002, which assessed Lancaster’s
deficiency income tax amounting to Pl l,496,770.18, as a consequence of the
disallowance of purchases claimed for the taxable year ending 31. March
1999.
Lancaster duly protested the FAN. There being no action taken by
the Commissioner on its protest, Lancaster filed on 21 August 2003 a
petition for review18 before the CTA Division.
In its petition before the CTA Division, Lancaster essentially
reiterated its arguments in the protest against the assessment, maintaining
that the tobacco purchases in February and March 1998 are deductible in its
fiscal year ending 31 March 1999.
The CTA Division granted the petition of Lancaster, The CIR move
but failed to obtain reconsideration of the CTA Division ruling.
Aggrieved, the CIR sought recourse from the CTA En Banc to seek a reversal
of the decision and the resolution of the CTA Division.
However, the CTA En Banc found no reversible error in the CTA
Division’s ruling, thus, it affirmed the cancellation of the assessment against
Lancaster. The CTA En Banc likewise denied the motion for reconsideration
from its Decision.

ISSUES:
1) What is crop-method?
2) Was this method validly adopted by the taxpayer?
CIR vs ISABELA CULTURAL CORPORATION accounting upon the basis of which the net income is computed x x x”. In the
G.R.NO. 172231 FEBRUARY 12, 2007 instant case, the accounting method used by ICC is the accrual method.
FACTS: Revenue Audit Memorandum Order No. 1-2000, provides that under the
ICC, a domestic corporation, received from BIR two notices for deficiency of accrual method of accounting, expenses not being claimed as deductions by
(1) income tax amounting to P333, 196.86 and (2) expanded withholding tax a taxpayer in the current year when they are incurred cannot be claimed as
amounting to P4, 897.79, both for 1986. Income tax deficiency arose from deduction from income for the succeeding year. For a taxpayer using the
the BIR’s disallowance of ICC’s claimed expense deductions for professional accrual method, the determinative question is, when do the facts present
and security services billed to and paid by ICC in 1986 and alleged themselves in such a manner that the taxpayer must recognize income or
understatement of ICC’s interest income on the 3 promissory notes due to expense?
Realty Investment, Inc. Expanded withholding tax (EWT) deficiency (with
interest and surcharge) was allegedly due to failure of ICC to withhold 1% The accrual of income and expense is permitted when the all-events
EWT on its claimed P244,890.00 deduction for security services. ICC sought test has been met. This test requires: (1) fixing of a right to income or
reconsideration of the assessments on March 1990 but received final notice liability to pay; and (2) the availability of the reasonable accurate
before seizure (demanding payment of amounts) on February 1995. Thus, determination of such income or liability. The all-events test requires the
brought to CTA which held that petition is premature because final notice right to income or liability be fixed, and the amount of such income or
cannot be considered final decision appealable to tax court. liability be determined with reasonable accuracy. (ANSWER TO GUIDE
QUESTION NO. 1) However, the amount of liability does not have to be
The CA reversed holding that demand letter of BIR amounts to final determined exactly; it must be determined with “reasonable accuracy.”
decision on the protested assessments and may be questioned before CTA. Accordingly, the term “reasonable accuracy” implies something less than an
SC sustained CA and remanded case to CTA on July 2001.On 2003, CTA exact or completely accurate amount. The propriety of an accrual must be
decided to cancel and set aside the assessment notices against ICC – claimed judged by the facts that a taxpayer knew, or could reasonably be expected to
deductions were properly claimed in 1986 because it was only that year that have known, at the closing of its books for the taxable year. Accrual method
the bills were sent to ICC. Hence, even if some of the services were rendered of accounting presents largely a question of fact; such that the taxpayer
to ICC in 1984 or 1985, it could not declare the same because amounts bears the burden of proof of establishing the accrual of an item of income or
cannot be determined at that time. The CTA also held that ICC did not deduction. Corollaryly, it is a governing principle in taxation that tax
understate its interest income on the subject promissory notes. It found that exemptions must be construed in strictissimi juris against the taxpayer and
it was the BIR which made an overstatement of said income when it liberally in favor of the taxing authority; and one who claims an exemption
compounded the interest income receivable by ICC from the promissory notes must be able to justify the same by the clearest grant of organic or statute
of Realty Investment, Inc., despite the absence of a stipulation in the contract law.
providing for a compounded interest; nor of a circumstance, like delay in
payment or breach of contract, that would justify the application of In the instant case, the expenses for professional fees consist of
compounded interest. Petition for review was filed with the CA, which expenses for legal and auditing services. The expenses for legal services
sustained CTA decision. Hence, the petition before the SC. 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
ISSUE/S: the expenses of said firm in connection with ICC’s tax problems for the year
Whether or not the expenses for professional and security services should be 1984. (ANSWER TO QUESTION NO. 2) As testified by the Treasurer of ICC,
deducted from ICC’s gross income. the firm has been its counsel since the 1960’s. ICC can be expected to have
reasonably known the retainer fees charged by the firm as well as the
HELD: compensation for its legal services.
The requisites for the deductibility of ordinary and necessary trade, business,
or professional expenses, like expenses paid for legal and auditing services, As previously stated, the accrual method presents largely a question
are: of fact and that the taxpayer bears the burden of establishing the accrual of
(a) the expense must be ordinary and necessary; an expense or income. However, ICC failed to discharge this burden. It
(b) it must have been paid or incurred during the taxable year; simply relied on the defense of delayed billing by the firm and the company,
(c) it must have been paid or incurred in carrying on the trade or business of which under the circumstances, is not sufficient to exempt it from being
the taxpayer; and charged with knowledge of the reasonable amount of the expenses for legal
(d) it must be supported by receipts, records or other pertinent papers. and auditing services.
The requisite that it must have been paid or incurred during the taxable year
is further qualified by Section 45 of the NIRC which states that: “[t]he In the same vein, the professional fees of SGV & Co. for auditing the financial
deduction provided for in this Title shall be taken for the taxable year in statements of ICC for the year 1985 cannot be validly claimed as expense
which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of 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. As to the
expenses for security services, the records show that these expenses were
incurred by ICC in 1986 and could therefore be properly claimed as
deductions for the said year. (ANSWER TO GUIDE QUESTION NO. 2) The
court sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a
compounded one should have been applied by the BIR.
GUIDE QUESTIONS
1. What is all-events test?
2. When were the expenses incurred?
3. When were they recorded as expense?
The expenses were recorded in 1986.
4. Can the expenses of the taxpayer be recognized in the year they were
recorded?
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.
Unless, if the taxpayer 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.
ING BANK v CIR GR 167679, 22 July 2015 Moreover, in the fairly recent case of LG Electronics Philippines, Inc. v.
Commissioner of Internal Revenue, the Court confirmed that only cases that
Facts: involve final and executory judgments are excluded from the tax amnesty
program as explicitly provided under Section 8 of Republic Act No. 9480.
This is a Petition for Review appealing the April 5, 2005 Decision of the Court
of Tax Appeals En Banc,. The August 9, 2004 Decision held petitioner ING Thus, petitioner ING Bank is not disqualified from availing itself of the tax
Bank, N.V. Manila Branch (ING Bank) liable for (a) deficiency documentary amnesty under the law during the pendency of its appeal before this court.
stamp tax for the taxable years 1996 and 1997 in the total amount of
₱238,545,052.38 inclusive of surcharges; (b) deficiency onshore tax for the 2. No
taxable year 1996 in the total amount of ₱997,333.89 inclusive of surcharges
and interest; and (c) deficiency withholding tax on compensation for the An expense is accrued and deducted for tax purposes when (1) the obligation
taxable years 1996 and 1997 in the total amount of ₱564,542.67 inclusive of to pay is already fixed; (2) the amount can be determined with reasonable
interest. accuracy; and (3) it is already knowable or the taxpayer can reasonably be
expected to have known at the closing of its books for the taxable year.
While this case was pending before this court, ING Bank filed a Manifestation
and Motion stating that it availed itself of the government’s tax amnesty Section 29(j) of the 1977 National Internal Revenue Code (Section 34(K) of the
program under Republic Act No. 9480 with respect to its deficiency 1997 National Internal Revenue Code) expressly requires, as a condition for
documentary stamp tax and deficiency onshore tax liabilities. deductibility of an expense, that the tax required to be withheld on the
amount paid or payable is shown to have been remitted to the Bureau of
Issue: 1. Whether ING Bank is entitled to immunities and privileges under Internal Revenue by the taxpayer constituted as a withholding agent of the
the RA 9480. government.

2. Whether petitioner ING Bank is liable for deficiency withholding tax on The provision of Section 72 of the 1977 National Internal Revenue Code
accrued bonuses for the taxable years 1996 and 1997. (Section 79 of the 1997 National Internal Revenue Code) regarding
withholding on wages must be read and construed in harmony with Section
Ruling: 29(j) of the 1977 National Internal Revenue Code (Section 34(K) of the 1997
National Internal Revenue Code) on deductions from gross income. This is in
accordance with the rule on statutory construction that an interpretation is
1. Yes to be sought which gives effect to the whole of the statute, such that every
part is made effective, harmonious, and sensible, if possible, and not
[N]either the law nor the implementing rules state that a court ruling that defeated nor rendered insignificant, meaningless, and nugatory. If we go by
has not attained finality would preclude the availment of the benefits of the the theory of petitioner ING Bank, then the condition imposed by Section
Tax Amnesty Law. Both R.A. 9480 and DOF Order No. 29-07 are quite 29(j) would have been rendered nugatory, or we would in effect have created
precise in declaring that "[t]ax cases subject of final and executory judgment an exception to this mandatory requirement when there was none in the law.
by the courts" are the ones excepted from the benefits of the law. In fact, we
have already pointed out the erroneous interpretation of the law in Philippine Reading together the two provisions, we hold that the obligation of the
Banking Corporation (Now: Global Business Bank, Inc.) v. Commissioner of payor/employer to deduct and withhold the related withholding tax arises at
Internal Revenue, viz: the time the income was paid or accrued or recorded as an expense in the
payor’s/employer’s books, whichever comes first.
The BIR’s inclusion of "issues and cases which were ruled by any court (even
without finality) in favor of the BIR prior to amnesty availment of the Petitioner ING Bank accrued or recorded the bonuses as deductible expense
taxpayer" as one of the exceptions in RMC 19-2008 is misplaced. RA 9480 is in its books. Therefore, its obligation to withhold the related withholding tax
specifically clear that the exceptions to the tax amnesty program include "tax due from the deductions for accrued bonuses arose at the time of accrual
cases subject of final and executory judgment by the courts." The present and not at the time of actual payment.
case has not become final and executory when Metrobank availed of the tax
amnesty program.
Here, petitioner ING Bank already recognized a definite liability on its part
considering that it had deducted as business expense from its gross income
the accrued bonuses due to its employees. Underlying its accrual of the
bonus expense was a reasonable expectation or probability that the bonus
would be achieved. In this sense, there was already a constructive payment
for income tax purposes as these accrued bonuses were already allotted or
made available to its officers and employees.

GQ1: When were the expenses incurred? When were they recorded as
expense?

The expenses were incurred in the taxable years 1996-1995. All 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; travelling expenses
while away from home in the pursuit of a trade, profession or business,
rentals or other payments required to be made as a condition to the
continued use or possession, for the purpose of the trade, profession or
business, of property to which the taxpayer has not taken or is not taking
title or in which he has no equity.

GQ2: Can the expenses of the taxpayer be recognized in the year they
were recorded?

If the taxpayer is on cash basis, the expense is deductible in the year it was
paid, regardless of the year it was incurred. If he is on the accrual method,
he can deduct the expense upon accrual thereof. An item that is reasonably
ascertained as to amount and acknowledged to be due has "accrued"; actual
payment is not essential to constitute "expense."
CIR v. General Foods, Inc, G.R. No. 143672, 24 April 2003 on the matter, the right to a deduction depends on a number of factors such
as but not limited to:
FACTS: i. the type and size of business in which the taxpayer is engaged;
The records reveal that, on June 14, 1985, General Foods Inc, which ii. the volume and amount of its net earnings;
is engaged in the manufacture of beverages such as “Tang,” “Calumet” and iii. the nature of the expenditure itself;
“Kool-Aid,” filed its income tax return for the fiscal year ending February 28, iv. the intention of the taxpayer and the general economic conditions.
1985. In said tax return, respondent corporation claimed as deduction, It is the interplay of these, among other factors and properly
among other business expenses, the amount of P9,461,246 for media weighed, that will yield a proper evaluation.
advertising for “Tang.”
The CIR disallowed 50% or P4,730,623 of the deduction claimed by In the case at bar, the P9,461,246 claimed as media advertising
respondent corporation. Consequently, General Foods Inc was assessed expense for “Tang” alone was almost one-half of its total claim for “marketing
deficiency income taxes in the amount of P2, 635,141.42. The latter filed a expenses.” Aside from that, respondent-corporation also claimed P2,678,328
motion for reconsideration but the same was denied. as “other advertising and promotions expense” and another P1,548,614, for
General Foods Inc appealed to the Court of Tax Appeals but the consumer promotion. Furthermore, the subject P9,461,246 media advertising
appeal was dismissed. The CTA found that the claim of General Foods Inc expense for “Tang” was almost double the amount of respondent
was an abnormally large expenditure. The CTA ordered General Foods Inc to corporation’s P4,640,636 general and administrative expenses.
pay the CIR the assessed amount representing its deficiency income tax
liability The Court ruled that the subject expense for the advertisement of a
On appeal, the CA reversed the decision of the CTA because it has single product to be inordinately large. Therefore, even if it is necessary, it
not been sufficiently established that the item it claimed as a deduction is cannot be considered an ordinary expense deductible under then Section 29
excessive, the same should be allowed. (a) (1) (A) of the NIRC.
The CIR maintains that the subject advertising expense was not Advertising is generally of two kinds:
ordinary on the ground that it failed the two conditions set by U.S. (1) advertising to stimulate the current sale of merchandise or use of
jurisprudence: first, “reasonableness” of the amount incurred and second, services and
the amount incurred must not be a capital outlay to create “goodwill” for the (2) advertising designed to stimulate the future sale of merchandise or
product and/or private respondent’s business. Otherwise, the expense must use of services.
be considered a capital expenditure to be spread out over a reasonable time.
The second type involves expenditures incurred, in whole or in part,
ISSUE: to create or maintain some form of goodwill for the taxpayer’s trade or
Was the media advertising expense for “Tang” paid or incurred by business or for the industry or profession of which the taxpayer is a member.
respondent corporation for the fiscal year ending February 28, 1985 If the expenditures are for the advertising of the first kind, then, except as to
“necessary and ordinary,” hence, fully deductible under the NIRC? Or was it the question of the reasonableness of amount, there is no doubt such
a capital expenditure, paid in order to create “goodwill and reputation” for expenditures are deductible as business expenses. If, however, the
respondent corporation and/or its products, which should have been expenditures are for advertising of the second kind, then normally they
amortized over a reasonable period? should be spread out over a reasonable period of time.

RULING: The subject advertising expense in this case was of the second kind
To be deductible under Section 34 (A) (1), formerly Section 29 (a) (1)
(A), of the NIRC, the subject advertising expense must comply with the True, it is the taxpayer’s prerogative to determine the amount of
following requisites: advertising expenses it will incur and where to apply them. Said prerogative,
(a) the expense must be ordinary and necessary; however, is subject to certain considerations. The first relates to the extent to
(b) it must have been paid or incurred during the taxable year; which the expenditures are actually capital outlays; this necessitates an
(c) it must have been paid or incurred in carrying on the trade or inquiry into the nature or purpose of such expenditures . The second,
business of the taxpayer; and which must be applied in harmony with the first, relates to whether the
(d) it must be supported by receipts, records or other pertinent papers. expenditures are ordinary and necessary. Concomitantly, for an expense to
be considered ordinary, it must be reasonable in amount.
Thus, an advertising expense should not only be necessary but also
ordinary. These two requirements must be met. GUIDE QUESTIONS: Can the expenses be recognized in the year they
were recorded? NO. Should the expenses be disallowed? YES.
There is yet to be a clear-cut criteria or fixed test for determining the The media advertising expense for the promotion of a single product,
reasonableness of an advertising expense. There being no hard and fast rule almost one-half of General Foods Inc. entire claim for marketing expenses for
that year under review, inclusive of other advertising and promotion
expenses and consumer promotion, is doubtlessly unreasonable.
C. M. HOSKINS & CO., INC. vs. COMMISSIONER OF INTERNAL REVENUE
G.R. No. L-24059; November 28, 1969; TEEHANKEE, J.: If such payment of P99,977.91 were to be allowed as a deductible
item, then Hoskins would receive on these three items alone (salary, bonus
DOCTRINE: Payment by the taxpayer to its controlling stockholder of 50% of and supervision fee) a total of P184,977.91, which would be double the
its supervision fees or the amount of P99,977.91 is not a deductible ordinary petitioner's reported net income for the year of P92,540.25. As correctly
and necessary expense and should be treated as a distribution of earnings observed by respondent. If independently, a one-time P100,000.00-fee to plan
and profits of the taxpayer. and lay down the rules for supervision of a subdivision project were to be
paid to an experienced realtor such as Hoskins, its fairness and deductibility
FACTS: by the taxpayer could be conceded; but here 50% of the supervision fee of
- C.M. Hoskins & Co., Inc. (C.M. Hoskins Inc.) is a domestic petitioner was being paid by it to Hoskins every year since 1955 up to 1963
corporation engaged in the real estate business as brokers, managing and for as long as its contract with the subdivision owner subsisted,
agents and administrators. regardless of whether services were actually rendered by Hoskins, since his
services to petitioner included such planning and supervision and were
- C.M. Hoskins Inc. filed its income tax return for its fiscal year ending already handsomely paid for by petitioner.
September 30, 1957 showing a net income of P92,540.25 and a tax
liability due thereon of P18,508.00, which it paid in due course. The case before us is similar to previous cases of disallowances as
deductible items of officers' extra fees, bonuses and commissions, upheld by
- Upon verification of its return, the CIR, disallowed four items of this Court as not being within the purview of ordinary and necessary
deduction in C.M. Hoskins Inc's tax returns and assessed against it expenses and not passing the TEST OF REASONABLE COMPENSATION.
an income tax deficiency in the amount of P28,054.00 plus interests.
In Kuenzle & Streiff, Inc. vs. Commissioner of Internal Revenue, the
- Upon reviewing the assessment at the taxpayer’s petition, the Court reaffirmed the TEST OF REASONABLENESS, enunciated in the earlier
COURT OF TAX APPEALS UPHELD THE CIR’S DISALLOWANCE. 1967 case involving the same parties, that: "It is a general rule that
 The principal item of C.M. Hoskins Inc 's having paid to Mr. C. 'Bonuses to employees made in good faith and as additional
M. Hoskins, its founder and controlling stockholder the amount compensation for the services actually rendered by the employees are
of P99,977.91 representing 50% of supervision fees earned by it deductible, provided such payments, when added to the stipulated
and set aside respondent's disallowance of three other minor salaries, do not exceed a reasonable compensation for the services
items. rendered'.
 The Tax Court therefore determined C.M. Hoskins Inc's tax
deficiency to be in the amount of P27,145.00. The conditions precedent to the deduction of bonuses to employees:
1) The payment of the bonuses is in fact compensation;
ISSUE: 2) It must be for personal services actually rendered; and
Can the expenses be recognized? NO. 3) The bonuses, when added to the salaries, are 'reasonable when
measured by the amount and quality of the services performed
RULING: with relation to the business of the particular taxpayer'
Considering that in addition to being Chairman of the board of
directors of C.M. Hoskins Inc, which bears his name, Hoskins, who owned There is no fixed test for determining the reasonableness of a given
99.6% of its total authorized capital stock while the four other officers- bonus as compensation. This depends upon many factors, one of them being
stockholders of the firm owned a total of four-tenths of 1%, or one-tenth of 'the amount and quality of the services performed with relation to the
1% each, with their respective nominal shareholdings of one share each was business.' Other tests suggested are: payment must be 'made in good faith';
also salesman-broker for his company, receiving a 50% share of the sales 'the character of the taxpayer's business, the volume and amount of its net
commissions earned by petitioner, besides his monthly salary of P3,750.00 earnings, its locality, the type and extent of the services rendered, the salary
amounting to an annual compensation of P45,000.00 and an annual salary policy of the corporation'; 'the size of the particular business'; 'the employees'
bonus of P40,000.00, plus free use of the company car and receipt of other qualifications and contributions to the business venture'; and 'general
similar allowances and benefits, the Tax Court correctly ruled that the economic conditions'. However, 'in determining whether the particular salary
payment by petitioner to Hoskins of the additional sum of P99,977.91 as his or compensation payment is reasonable, the situation must be considered as
equal or 50% share of the 8% supervision fees received by C.M. Hoskins Inc. whole. Ordinarily, no single factor is decisive. It is important to keep in mind
as managing agents of the real estate, subdivision projects of Paradise that it seldom happens that the application of one test can give satisfactory
Farms, Inc. and Realty Investments, Inc. was inordinately large and could answer, and that ordinarily it is the interplay of several factors, properly
not be accorded the treatment of ordinary and necessary expenses allowed as weighted for the particular case, which must furnish the final answer."
deductible items within the purview of Section 30 (a) (i) of the Tax Code.
 Petitioner's case fails to pass the test. On the right of the employer as
against respondent Commissioner to fix the compensation of its officers and
employees, we there held further that while the employer's right may be
conceded, the question of the allowance or disallowance thereof as deductible
expenses for income tax purposes is subject to determination by respondent
Commissioner of Internal Revenue. Thus: "As far as petitioner's contention
that as employer it has the right to fix the compensation of its officers and
employees and that it was in the exercise of such right that it deemed proper
to pay the bonuses in question, all that We need say is this: that right may
be conceded, but for income tax purposes the employer cannot legally claim
such bonuses as deductible expenses unless they are shown to be
reasonable. To hold otherwise would open the gate of rampant tax evasion.

Lastly, We must not lose sight of the fact that the question of allowing
or disallowing as deductible expenses the amounts paid to corporate
officers by way of bonus is determined by respondent exclusively for
income tax purposes. Concededly, he has no authority to fix the
amounts to be paid to corporate officers by way of basic salary, bonus
or additional remuneration — a matter that lies more or less
exclusively within the sound discretion of the corporation itself. But
this right of the corporation is, of course, not absolute. It cannot
exercise it for the purpose of evading payment of taxes legitimately
due to the State.
 G.R. No. L-13325 April 20, 1961
Referring to the item of P27,459, for farming expenses allegedly
SANTIAGO GANCAYCO, petitioner, incurred by Gancayco, the decision appealed from has the following to
vs. say:
THE COLLECTOR OF INTERNAL REVENUE, respondent.
No evidence has been presented as to the nature of the said "farming
FACTS: expenses" other than the bare statement of petitioner that they were
Petitioner Santiago Gancayco seeks the review of a decision of the Court of spent for the "development and cultivation of (his) property". No
Tax Appeals, requiring him to pay P16,860.31, plus surcharge and interest, specification has been made as to the actual amount spent for purchase
by way of deficiency income tax for the year 1949. of tools, equipment or materials, or the amount spent for improvement.
Respondent claims that the entire amount was spent exclusively for
On May 10, 1950, Gancayco filed his income tax return for the year 1949. clearing and developing the farm which were necessary to place it in a
Two (2) days later, respondent Collector of Internal Revenue issued the productive state. It is not, therefore, an ordinary expense but a capitol
corresponding notice advising him that his income tax liability for that year expenditure. Accordingly, it is not deductible but it may be amortized,
amounted P9,793.62, which he paid on May 15, 1950. A year later, on May in accordance with section 75 of Revenue Regulations No. 2, cited
14, 1951, respondent wrote the communication notifying Gancayco, inter above. See also, section 31 of the Revenue Code which provides that in
alia, that, upon investigation, there was still due from him, a efficiency computing net income, no deduction shall in any case be allowed in
income tax for the year 1949, the sum of P29,554.05. respect of any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of any
On April 15, 1956, respondent issued a warrant of distraint and levy against property or estate. (Emphasis supplied.)
the properties of Gancayco for the satisfaction of his deficiency income tax
liability, and accordingly, the municipal treasurer of Catanauan, Quezon The cost of farm machinery, equipment and farm building represents a
issued on May 29, 1956, a notice of sale of said property at public auction on capital investment and is not an allowable deduction as an item of
June 19, 1956. expense. Amounts expended in the development of farms, orchards, and
ranches prior to the time when the productive state is reached may be
Gancayco received from the municipal treasurer of Catanauan, Quezon, a regarded as investments of capital. (Merten's Law of Federal Income
notice of auction sale of his properties, to take place on August 29, 1956. On Taxation, supra, sec. 25.108, p. 525.)
motion of Gancayco, the Court of Tax Appeals, by resolution dated August
27, 1956, "cancelled" the aforementioned sale and enjoined respondent and Expenses for clearing off and grading lots acquired is a capital
the municipal treasurer of Catanauan, Quezon, from proceeding with the expenditure, representing part of the cost of the land and was not
same. After appropriate proceedings, the Court of Tax Appeals rendered, on deductible as an expense. (Liberty Banking Co. v. Heiner 37 F [2d] 703
November 14, 1957, the decision which is being contended. Gancayco [8AFTR 100111] [CCA 3rd]; The B.L. Marble Chair Company v. U.S., 15
maintains that the right to collect the deficiency income tax in question is AFTR 746).
barred by the statute of limitations.
An item of expenditure, in order to be deductible under this section of
Gancayco argues that the five-year period for the judicial action should be the statute providing for the deduction of ordinary and necessary
counted from May 12, 1950, the date of the original assessment, because the business expenses, must fall squarely within the language of the
income tax for 1949, he says, could have been collected from him since then. statutory provision. This section is intended primarily, although not
Said assessment was, however, not for the deficiency income tax involved in always necessarily, to cover expenditures of a recurring nature where
this proceedings, but for P9,793.62, which he paid forthwith. Hence, there the benefit derived from the payment is realized and exhausted within
never had been any cause for a judicial action against him, and, per force, no the taxable year. Accordingly, if the result of the expenditure is the
statute of limitations to speak of, in connection with said sum of P9,793.62. acquisition of an asset which has an economically useful life beyond the
taxable year, no deduction of such payment may be obtained under the
ISSUE: Should the expenses be disallowed? NO. provisions of the statute. In such cases, to the extent that a deduction
is allowable, it must be obtained under the provisions of the statute
HELD: which permit deductions for amortization, depreciation, depletion or
loss. (W.B. Harbeson Co. 24 BTA, 542; Clark Thread Co., 28 BTA 1128
The question whether the sum of P16,860.31 is due from Gancayco as aff'd 100 F [2d] 257 [CCA 3rd, 1938]; 4 Merten's Law of Federal Income
deficiency income tax for 1949 hinges on the validity of his claim for Taxation, Sec. 25.17, pp. 337-338.)
deduction of two (2) items, namely: (a) for farming expenses,
P27,459.00; and (b) for representation expenses, P8,933.45.
Gancayco's claim for representation expenses aggregated P31,753.97, of
which P22,820.52 was allowed, and P8,933.45 disallowed. Such
disallowance is justified by the record, for, apart from the absence of
receipts, invoices or vouchers of the expenditures in question,
petitioner could not specify the items constituting the same, or when or
on whom or on what they were incurred. The case of Cohan v.
Commissioner, 39 F (2d) 540, cited by petitioner is not in point,
because in that case there was evidence on the amounts spent and the
persons entertained and the necessity of entertaining them, although
there were no receipts an vouchers of the expenditures involved
therein. Such is not the case of petitioner herein.
H. TAMBUNTING, INC. VS. CIR, (a) the expenses must be ordinary and necessary;
GR NO. 173373 29 JULY 2013 (b) they must have been paid or incurred during the taxable year;
FACTS (c) they must have been paid or incurred in carrying on the
Petitioner is a domestic corporation duly licensed and trade or business of the taxpayer;
authorized to engage in the pawnshop business. BIR issued (d) they must be supported by receipts, records or other pertinent
assessment notices and demand letters for deficiency percentage tax, income papers.
tax and compromise penalties for taxable year 1997. Tambunting instituted In denying Tambunting’s claim for deduction of its security and
an administrative protest against the assessment notices and demand letters janitorial expenses, management and professional fees, and its rental
with the Commissioner of Internal Revenue. Tambunting brought a petition expenses, the CTA En Banc explained: the security/janitorial expenses paid
for review in the CTA, pursuant to Section 228 of the National Internal to Pathfinder Investigation were not duly substantiated. The certification
Revenue Code of 1997, citing the inaction of the Commissioner of Internal issued by Mr. Balisado was not the proper document required by law to
Revenue on its protest within the 180-day period prescribed by law. substantiate its expenses. Petitioner should have presented the official
CTA En Banc denied Tambunting’s petition for review. The CTA En receipts or invoices to prove its claim as provided for under Section 238 of
Banc also denied Tambunting’s motion for reconsideration for its lack of the National Internal Revenue Code of 1977.
merit. Hence, this petition to the Supreme Court. Among the expenses allegedly incurred, courts may consider only
ISSUE/S those supported by credible evidence and which appear to have been
Whether the Court of Tax Appeals correctly sustained in whole or in genuinely incurred in connection with the trade or business of the
part the findings of CIR with respect to Loss on Auction Sale, Security & taxpayer. As previously discussed, the proper substantiation requirement for
Janitorial Services and Rent Expenses, and Loss on fire an expense to be allowed is the official receipt or invoice. While the rental
RULING payments were subjected to the applicable expanded withholding taxes, such
Loss on Auction Sale returns are not the documents required by law to substantiate the rental
To prove the loss on auction sale, petitioner submitted in evidence its expense. Petitioner should have submitted official receipts to support its
"Rematado" and "Subasta" books and the "Schedule of Losses on Auction claim. In order that the cash vouchers may be given probative value, these
Sale". The "Rematado" book contained a record of items foreclosed by the must be validated with official receipts.
pawnshop while the "Subasta" book contained a record of the auction sale of Loss on fire
pawned items foreclosed. The gain or loss on auction sale represents the The implementing rules for deductible losses are found in Revenue
difference between the capital (the amount loaned to the pawnee, the unpaid Regulations No. 12-77, as follows:
interest and other expenses incurred in connection with such loan) and the SECTION 2. Requirements of substantiation. — The taxpayer bears
price for which the pawned articles were sold, as reflected in the "Subasta" the burden of proving and substantiating his claim for deduction for
Book. losses allowed under Section 30 (d) and should comply with the following
In this case, petitioner's reliance on the entries made in the "Subasta" substantiation requirements:
book were not sufficient to substantiate the claimed deduction of loss (a) A sworn declaration of loss which must be filed with the Commissioner of
on auction sale. As admitted by the petitioner, the contents in the Internal Revenue or his deputies within a certain period prescribed in these
"Rematado" and "Subasta" books do not reflect the true amounts of the total regulations after the occurrence of the casualty, robbery, theft or
capital and the auction sale, respectively. Be that as it may, petitioner still embezzlement.
failed to adduce evidence to substantiate the other expenses alleged to have (b) Proof of the elements of the loss claimed, such as the actual nature and
been incurred in connection with the sale of pawned items. occurrence of the event and amount of the loss.
The rule that tax deductions, being in the nature of tax exemptions, are In the context of the foregoing rules, the CTA En Banc aptly rejected
to be construed in strictissimi juris against the taxpayer is well settled. Tam bunting's claim for deductions due to losses from fire and theft. The
Corollary to this rule is the principle that when a taxpayer claims a documents it had submitted to support the claim, namely: (a) the
deduction, he must point to some specific provision of the statute in which certification from the Bureau of Fire Protection in Malolos; (b) the
that deduction is authorized and must be able to prove that he is certification from the Police Station in Malolos; (c) the accounting entry for
entitled to the deduction which the law allows. An item of the losses; and (d) the list of properties lost, were not enough. What were
expenditure, therefore, must fall squarely within the language of the law in required were for Tambunting to submit the sworn declaration of loss
order to be deductible. A mere averment that the taxpayer has incurred a mandated by Revenue Regulations 12-77. Its failure to do so was prejudicial
loss does not automatically warrant a deduction from its gross income. to the claim because the sworn declaration of loss was necessary to forewarn
Business Expense: Security & Janitorial Services and Rent Expense the BIR that it had suffered a loss whose extent it would be claiming as a
As to business expenses, it is under Section 29 (a) (1) (A) of the NIRC deduction of its tax liability, and thus enable the BIR to conduct its own
of 1977. The requisites for the deductibility of ordinary and necessary trade investigation of the incident leading to the loss. Indeed, the documents
or business expenses, like those paid for security and janitorial services, Tambunting submitted to the BIR could not serve the purpose of their
management and professional fees, and rental expenses, are that: submission without the sworn declaration of loss.
GUIDE QUESTION
Should the expenses be disallowed?
Yes. To be entitled to claim a tax deduction, the taxpayer must
competently establish the factual and documentary bases of its claim. In this
case, H. Tambunting Pawnshop failed to provide enough proof for such
deductions. The principle is that when a taxpayer claims a deduction, he
must point to some specific provision of the statute in which that deduction
is authorized and must be able to prove that he is entitled to the deduction
which the law allows. An item of expenditure, therefore, must fall squarely
within the language of the law in order to be deductible. A mere averment
that the taxpayer has incurred a loss does not automatically warrant a
deduction from its gross income.
CIR v ITOGON-SUYOC MINES GR L-25299, 29 July 1969 any amount due as tax, such amount, if not yet refunded, may be deducted
from the tax to be paid. 
Facts:
There is no question respondent was entitled to a refund. Instead of waiting
Respondent Itogon-Suyoc Mines, Inc., a mining corporation duly organized for the sum involved to be delivered to it, it deducted the said amount from
and existing in accordance with the laws of the Philippines, filed on January the tax that it had to pay. That it had a right to do according to the law. It is
13, 1961, its income tax return for the fiscal year 1959-1960. It declared a true a doubt could have arisen due to the fact that as of the time such a
taxable income of P114,368.04 and a tax due thereon amounting to deduction was made, the Commissioner of Internal Revenue had not as yet
P26,310.41, for which it paid on the same day, the amount of P13,155.20 as approved such a refund. It is an admitted fact though that respondent was
the first installment of the income tax due. On May 17, 1961, petitioner filed clearly entitled to it, and petitioner did not allege otherwise. Nor could he do
an amended income tax return, reporting therein a net loss of P331,707.33. so. Under all the circumstances disclosed therefore, the applicability of the
It thus sought a refund from the Commissioner of Internal Revenue. legal provision allowing such a deduction from the amount of the tax to be
paid cannot be disputed.
On February 14, 1962, respondent Itogon-Suyoc Mines, Inc. filed its income
tax return for the fiscal year 1960-1961, setting forth its income tax liability This conclusion is in accordance with the principle announced in Castro v.
to the tune of P97,345.00, but deducting the amount of P13,155.20 Collector of Internal Revenue. While the case is not directly in point, it yields
representing alleged tax credit for overpayment of the preceding fiscal year an implication that makes even more formidable the case for respondent
1959-1960. 0n December 18, 1962, petitioner Commissioner of Internal taxpayer. As there held, the imposition of the monthly interest was
Revenue assessed against the respondent the amount of P1,512.83 as 1% considered as not constituting a penalty "but a just compensation to the
monthly interest on the aforesaid amount of P13,155.20 from January 16, state for the delay in paying the tax, and for the concomitant use by the
1962 to December 31, 1962. The basis for such an assessment was the taxpayer of funds that rightfully should be in the government's hands ...."
absence of legal right to deduct said amount before the refund or tax credit
thereof was approved by petitioner Commissioner of Internal Revenue. What is therefore sought to be avoided is for the taxpayer to make use of
funds that should have been paid to the government. Here, in view of the
Such an assessment was contested by respondent before the Court of Tax overpayment for the fiscal year 1959-1960, the sum of P13,155.20 had
Appeals. As already noted, it prevailed. already formed part of the public funds. It cannot be said, therefore, that
respondent taxpayer was guilty of any delay enabling it to utilize a sum of
money that should have been in the government treasury.
Issue: Whether Itogon-Suyoc mines is liable for the payment of Php 1,512.83
as 1% monthly interest for delinquency in payment of income tax for 1960-
1961. How then, as a matter of pure law, even if we lay to one side the demands of
fairness and justice, which to the Court of Tax Appeals seem to be
uppermost, can its decision be overturned? Accordingly, we find no valid
Ruling: No ground for this appeal.

It could not be error for the Court of Tax Appeals, considering the admitted
fact of overpayment, entitling respondent to refund, to hold that petitioner
should not repose an interest on the aforesaid sum of P13,155.20 "which
after all was paid to and received by the government even before the
incidence of the tax in question." It would be, according to the Court of Tax
Appeals, "unfair and unjust" to do so. The imposition of such an interest by
petitioner is not supported by law.

GQ1: Should the expenses be disallowed?

Yes. The National Internal Revenue Code provides that interest upon the
amount determined as a deficiency shall be assessed and shall be paid upon
notice and demand from the Commissioner of Internal Revenue at the
specified. It is made clear, however, in an earlier provision found in the same
section that if in any preceding year, the taxpayer was entitled to a refund of
H. TAMBUNTING INC. v. CIR, G.R. NO. 173373, 29 July 2013 Bearing in mind the principle in taxation that deductions from gross
(ORDINARY LOSSES) income partake the nature of tax exemptions which are construed in
strictissimi juris against the taxpayer, the Court en banc is not inclined to
FACTS: believe the self-serving statements of Tambunting regarding the misclassified
Tambunting Inc., a domestic corporation duly licensed and items of office supplies, advertising and rent expenses.
authorized to engage in the pawnshop business, appeals the adverse decision To reiterate, deductions for income tax purposes partake of the
whereby the CTA En Banc affirmed the decision of the CTA First Division nature of tax exemptions and are strictly construed against the taxpayer,
ordering it to pay deficiency income taxes. BIR issued assessment notices who must prove by convincing evidence that he is entitled to the deduction
and demand letters, assessing Tambunting for deficiency percentage tax, claimed.
income tax and compromise penalties for taxable year 1997. Tambunting did not discharge its burden of substantiating its claim
Tambunting instituted an administrative protest against the for deductions due to the inadequacy of its documentary support of its claim.
assessment notices and demand letters with the CIR. However, due to CIR’s Its reliance on withholding tax returns, cash vouchers, lessor’s certifications,
inaction, Tambuting brought the issue before the CTA First Division. and the contracts of lease was futile because such documents had scant
CTA First Division Ruling: probative value. As the CTA En Banc succinctly put it, the law required
The court ordered Tambunting to pay the amount representing the Tambunting to support its claim for deductions with the corresponding
deficiency income tax for the year 1997 plus 20% delinquency interest official receipts issued by the service providers concerned.
computed from August 29, 2000 until full payment thereof pursuant to
Section 249 (C) of the National Internal Revenue Code. However, the
compromise penalties in the sum of P49,000.00 is hereby CANCELLED for
lack of legal basis.
After its MoR was denied for lack of Merit. Tambunting filed a
petition for review in the CTA En Banc, arguing that the First Division erred
in disallowing its deductions on the ground that it had not substantiated
them by sufficient evidence.
CTA En Banc Ruling:
The CTA En Banc dismissed the petition filed by Tambunting. It also
denied Tambunting’s MoR for its lack of Merit.

ISSUE:
Whether the CTA erred in disallowing the deductions (in relation to
ordinary losses)

RULING:
The CTA did not err in disallowing the deductions. The Court
affirmed the ruling of the CTA En Banc.
As to business expenses, Section 29 (a) (1) (A) of the NIRC of 1977,
the requisites for the deductibility of ordinary and necessary trade or
business expenses, like those paid for security and janitorial services,
management and professional fees, and rental expenses, are that:
(a) the expenses must be ordinary and necessary;
(b) they must have been paid or incurred during the taxable year;
(c) they must have been paid or incurred in carrying on the trade or
business of the taxpayer; and
(d) they must be supported by receipts, records or other pertinent
papers.

In denying Tambunting’s claim for deduction of its security and

janitorial expenses, management and professional fees, and its rental
expenses, the CTA En Banc found that the statements of Tambunting were
self-serving.
 PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP) vs. - On April 21, 1983, PICOP received from the CIR two (2) letters of
COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and assessment and demand both dated March 31 1983:
COURT OF TAX APPEALS a) FIRST LETTER: For deficiency transaction tax and for
G.R. Nos. 106949-50; December 1, 1995; FELICIANO, J.: documentary and science stamp tax; and
b) SECOND LETTER: For deficiency income tax for 1977, for an
FACTS: aggregate amount of P88,763,255.00.
- Paper Industries Corporation of the Philippines ("PICOP"), is a
Philippine corporation registered with the Board of Investments - PICOP protested both the assessment of deficiency transaction tax
("BOI") as a preferred pioneer enterprise with respect to its integrated and documentary and science stamp taxes and the deficiency income
pulp and paper mill, and as a preferred non-pioneer enterprise with tax assessment for 1977. However, these protests were not formally
respect to its integrated plywood and veneer mills. acted upon by the CIR.

- Rustan Pulp and Paper Mills, Inc. ("RPPM") and Rustan - On September 26, 1984, the CIR issued a warrant of distraint on
Manufacturing Corporation ("RMC”) were also BOI-registered personal property and a warrant of levy on real property against
companies. PICOP, to enforce collection of the contested assessments; in effect,
the CIR denied PICOP 's protests. PICOP went before the CTA
- On January 18, 1977, PICOP entered into a merger agreement with appealing the assessments.
the RPPM and RMC.
 Under this agreement, the rights, properties, privileges, powers - DECISION OF THE CTA (August 15, 1989): MODIFIED THE
and franchises of RPPM and RMC were to be transferred, FINDINGS OF THE CIR AND HELD PICOP LIABLE FOR THE
assigned and conveyed to PICOP as the surviving corporation. REDUCED AGGREGATE AMOUNT OF P20,133,762.33.
 The entire subscribed and outstanding capital stock of RPPM
and RMC would be exchanged for 2,891,476 fully paid up Class - PICOP and the CIR both went to the Supreme Court but the
"A" common stock of PICOP (with a par value of P10.00) and Supreme Court referred the two Petitions to the Court of Appeals.
149,848 shares of preferred stock of Picop (with a par value of The Court of Appeals consolidated the two cases.
P10.00), to be issued by PICOP, the result being that Picop would
wholly own both RPPM and RMC while the stockholders of RPPM - DECISION OF THE CA (August 31, 1992): FURTHER REDUCED THE
and RMC would join the ranks of PICOP's shareholders. LIABILITY OF PICOP TO P6,338,354.70.
 In addition, PICOP paid off the obligations of RPPM to the
Development Bank of the Philippines ("DBP") in the amount of - PICOP and the CIR again more filed separate Petitions for Review
P68,240,340.00, by issuing 6,824,034 shares of preferred stock before the Supreme Court. These cases were consolidated and, on
(with a par value of P10.00) to the DBP. August 1993, the Court resolved to give due course to both Petitions
and required the parties to file their Memoranda.
- The merger agreement was approved in 1977 by the creditors and
stockholders of PICOP, RPPM and RMC and by the Securities and - PICOP now maintains that it is not liable at all to pay any of the
Exchange Commission. assessments or any part thereof. Picop relies on section 7 (c) of R.A.
No. 5186. PICOP had secured a letter-opinion from the BOI dated
- IMMEDIATELY BEFORE THE MERGER EFFECTIVE DATE: February 21, 1977 — that is, after the date of the agreement of
1. RPPM had over preceding years accumulated losses in the total merger but before the merger became effective — relating to the
amount of P81,159,904.00 deductibility of the previous losses of RPPM. PICOP chose to rely
2. PICOP sold all the outstanding shares of RMC stock to San solely on the BOI letter-opinion.
Miguel Corporation for the sum of P38,900,000.00, and reported
a gain of P9,294,849.00 from this transaction (August 30, 1977) - The CIR insists that the Court of Appeals erred in finding PICOP not
liable for surcharge and interest on unpaid transaction tax and for
- On November 30, 1977, apparently the effective date of merger, documentary and science stamp taxes and in allowing Picop to claim
RPPM and RMC were dissolved. The Board of Investments approved as deductible expenses the net operating losses of another
the merger agreement on January 12, 1978. corporation (i.e., Rustan Pulp and Paper Mills, Inc.).
 The CIR disallowed all the deductions claimed on the basis of
- In its 1977 Income Tax Return, PICOP claimed P44,196,106.00 of RPPM's losses, because the previous losses were incurred by
RPPM's accumulated losses as a deduction against Picop's 1977 "another taxpayer," RPPM, and not by Picop in connection with
gross income. Picop's own registered operations.
  The CIR took the view that Picop, RPPM and RMC were merged pioneer enterprise until after that enterprise has recovered or offset its earlier
into one (1) corporate personality only on January 12, 1978, losses. We consider that the statutory purpose can be served only if the
upon approval of the merger agreement by the BOI. Thus, during accumulated operating losses are carried over and charged off against
the taxable year 1977, Picop on the one hand and RPPM and income subsequently earned and accumulated by the same enterprise
RMC on the other, still had their separate juridical personalities. engaged in the same registered operations.

ISSUES: In the instant case, to allow the deduction claimed by Picop would be
Is Picop entitled to deductions against income of net operating losses to permit one corporation or enterprise, Picop, to benefit from the operating
incurred by the Rustan Pulp and Paper Mills, Inc.? The deduction claimed losses accumulated by another corporation or enterprise, RPPM. RPPM far
by Picop is disallowed. from benefiting from the tax incentive granted by the BOI statute, in fact gave
up the struggle and went out of existence and its former stockholders joined
RULING: the much larger group of Picop's stockholders. To grant Picop's claimed
After prolonged consideration and analysis of this matter, the Court deduction would be to permit Picop to shelter its otherwise taxable income
is unable to agree with the CTA and Court of Appeals on the deductibility of (an objective which Picop had from the very beginning) which had not been
RPPM's accumulated losses against Picop's 1977 gross income. earned by the registered enterprise which had suffered the accumulated
losses. In effect, to grant Picop's claimed deduction would be to permit Picop
It is important to note at the outset that in our jurisdiction, the to purchase a tax deduction and RPPM to peddle its accumulated operating
ordinary rule — that is, the rule applicable in respect of corporations losses. The income that would be shielded from taxation is not income that
not registered with the BOI as a preferred pioneer enterprise — is that was, after much effort, eventually generated by the same registered
net operating losses cannot be carried over. Under our Tax Code, both operations which earlier had sustained losses. We consider and so hold that
in 1977 and at present, losses may be deducted from gross income there is nothing in Section 7 (c) of R.A. No. 5186 which either requires or
only if such losses were actually sustained in the same year that they permits such a result. Indeed, that result makes non-sense of the legislative
are deducted or charged off. (Section 30 of the 1977 Tax Code) purpose which may be seen clearly to be projected by Section 7 (c), R.A. No.
5186.
If subsequent to its occurrence, however, a taxpayer first ascertains
the amount of a loss sustained during a prior taxable year which has not The CTA and the Court of Appeals allowed the offsetting of RPPM's
been deducted from gross income, he may render an amended return for accumulated operating losses against Picop's 1977 gross income, basically
such preceding taxable year including such amount of loss in the deduction because towards the end of the taxable year 1977, upon the arrival of the
from gross income and may in proper cases file a claim for refund of the effective date of merger, only one (1) corporation, Picop, remained. The losses
excess paid by reason of the failure to deduct such loss in the original return. suffered by RPPM's registered operations and the gross income generated by
A loss from theft or embezzlement occurring in one year and discovered in Picop's own registered operations now came under one and the same
another is ordinarily deductible for the year in which sustained. corporate roof. We consider that this circumstance relates much more to
form than to substance. We do not believe that that single purely technical
It is thus clear that under our law, and outside the special factor is enough to authorize and justify the deduction claimed by Picop.
realm of BOI-registered enterprises, there is no such thing as a carry- Picop's claim for deduction is not only bereft of statutory basis; it does
over of net operating loss. To the contrary, losses must be deducted violence to the legislative intent which animates the tax incentive granted by
against current income in the taxable year when such losses were Section 7 (c) of R.A. No. 5186. In granting the extraordinary privilege and
incurred. Moreover, such losses may be charged off only against incentive of a net operating loss carry-over to BOI-registered pioneer
income earned in the same taxable year when the losses were enterprises, the legislature could not have intended to require the Republic to
incurred. forego tax revenues in order to benefit a corporation which had run no risks
and suffered no losses, but had merely purchased another's losses.
Thus it is that R.A. No. 5186 introduced the carry-over of net
operating losses as a very special incentive to be granted only to registered Both the CTA and the Court of Appeals appeared much impressed
pioneer enterprises and only with respect to their registered operations. The not only with corporate technicalities but also with the U.S. tax law on this
statutory purpose here may be seen to be the encouragement of the matter. It should suffice, however, simply to note that in U.S. tax law, the
establishment and continued operation of pioneer industries by allowing the availability to companies generally of operating loss carry-overs and of
registered enterprise to accumulate its operating losses which may be operating loss carry-backs is expressly provided and regulated in great detail
expected during the early years of the enterprise and to permit the enterprise by statute. 33 In our jurisdiction, save for Section 7 (c) of R.A. No. 5186, no
to offset such losses against income earned by it in later years after statute recognizes or permits loss carry-overs and loss carry-backs. Indeed,
successful establishment and regular operations. To promote its economic as already noted, our tax law expressly rejects the very notion of loss carry-
development goals, the Republic foregoes or defers taxing the income of the overs and carry-backs.