Atlas To Fisher Tax Cases

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-26911 January 27, 1981
ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. L-26924 January 27, 1981
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION and COURT OF TAX
APPEALS, respondents.
DE CASTRO, J.:
These are two (2) petitions for review from the decision of the Court of Tax Appeals of October 25, 1966 in
CTA Case No. 1312 entitled "Atlas Consolidated Mining and Development Corporation vs. Commissioner
of Internal Revenue." One (L-26911) was filed by the Atlas Consolidated Mining & Development
Corporation, and in the other L-26924), the Commissioner of Internal Revenue is the petitioner.
This tax case (CTA No. 1312) arose from the 1957 and 1958 deficiency income tax assessments made by
the Commissioner of Internal Revenue, hereinafter referred to as Commissioner, where the Atlas
Consolidated Mining and Development Corporation, hereinafter referred to as Atlas, was assessed
P546,295.16 for 1957 and P215,493.96 for 1958 deficiency income taxes.
Atlas is a corporation engaged in the mining industry registered under the laws of the Philippines. On August
20, 1962, the Commissioner assessed against Atlas the sum of P546,295.16 and P215,493.96 or a total of
P761,789.12 as deficiency income taxes for the years 1957 and 1958. For the year 1957, it was the opinion
of the Commissioner that Atlas is not entitled to exemption from the income tax under Section 4 of Republic
Act 909 1 because same covers only gold mines, the provision of which reads:
New mines, and old mines which resume operation, when certified to as such by the
Secretary of Agriculture and Natural Resources upon the recommendation of the Director
of Mines, shall be exempt from the payment of income tax during the first three (3) years
of actual commercial production. Provided that, any such mine and/or mines making a
complete return of its capital investment at any time within the said period, shall pay income
tax from that year.
For the year 1958, the assessment of deficiency income tax of P761,789.12 covers the disallowance of
items claimed by Atlas as deductible from gross income.
On October 9, 1962, Atlas protested the assessment asking for its reconsideration and cancellation. 2
Acting on the protest, the Commissioner conducted a reinvestigation of the case.
On October 25, 1962, the Secretary of Finance ruled that the exemption provided in Republic Act 909
embraces all new mines and old mines whether gold or other minerals. 3 Accordingly, the Commissioner
recomputed Atlas deficiency income tax liabilities in the light of the ruling of the Secretary of Finance. On
June 9, 1964, the Commissioner issued a revised assessment entirely eliminating the assessment of
P546,295.16 for the year 1957. The assessment for 1958 was reduced from P215,493.96 to P39,646.82
from which Atlas appealed to the Court of Tax Appeals, assailing the disallowance of the following items
claimed as deductible from its gross income for 1958:
Transfer agent's fee.........................................................P59,477.42
Stockholders relation service fee....................................25,523.14
U.S. stock listing expenses..................................................8,326.70

Suit expenses..........................................................................6,666.65
Provision for contingencies..................................... .........60,000.00
Total....................................................................P159,993.91
After hearing, the Court of Tax Appeals rendered a decision on October 25, 1966 allowing the above
mentioned disallowed items, except the items denominated by Atlas as stockholders relation service fee
and suit expenses. 4 Pertinent portions of the decision of the Court of Tax Appeals read as follows:
Under the facts, circumstances and applicable law in this case, the unallowable deduction
from petitioner's gross income in 1958 amounted to P32,189.79.
Stockholders relation service fee.................................... P25,523.14
Suit and litigation expenses................................................ 6,666.65
Total................................................................................... P32,189.79
As the exemption of petitioner from the payment of corporate income tax under Section 4,
Republic Act 909, was good only up to the Ist quarter of 1958 ending on March 31 of the
same year, only three-fourth (3/4) of the net taxable income of petitioner is subject to
income tax, computed as follows:
1958
Total net income for 1958.................................P1,968,898.27
Net income corresponding to
taxable period April 1 to
Dec. 31, 1958, 3/4 of
P1,968,898.27..........................................................1,476,673.70
Add: 3/4 of promotion fees
of P25,523.14..............................................................P19,142.35
Litigation
expenses.........................................................................6, 666.65
Net income per decision..........................................11, 02,4 2.70
Tax due thereon.........................................................412,695.00
Less: Amount already assessed .............................405,468.00
DEFICIENCY INCOME TAX DUE............................P7,227.00
Add: 1/2 % monthly interest
from 6-20-59 to 6-20-62 (18%)....................................P1,300.89
TOTAL AMOUNT DUE & COLLECTIBLE............P8,526.22
From the Court of Tax Appeals' decision of October 25, 1966, both parties appealed to this Court by way
of two (2) separate petitions for review docketed as G. R. No. L-26911 (Atlas, petitioner) and G. R. No. L-
29924 (Commissioner, petitioner).
G. R. No. L-26911—Atlas appealed only that portion of the Court of Tax Appeals' decision disallowing the
deduction from gross income of the so-called stockholders relation service fee amounting to P25,523.14,
making a lone assignment of error that —
THE COURT OF TAX APPEALS ERRED IN ITS CONCLUSION THAT THE EXPENSE IN
THE AMOUNT OF P25,523.14 PAID BY PETITIONER IN 1958 AS ANNUAL PUBLIC
RELATIONS EXPENSES WAS INCURRED FOR ACQUISITION OF ADDITIONAL
CAPITAL, THE SAME NOT BEING SUPPORTED BY THE EVIDENCE.
It is the contention of Atlas that the amount of P25,523.14 paid in 1958 as annual public relations expenses
is a deductible expense from gross income under Section 30 (a) (1) of the National Internal Revenue Code.
Atlas claimed that it was paid for services of a public relations firm, P.K Macker & Co., a reputable public
relations consultant in New York City, U.S.A., hence, an ordinary and necessary business expense in order
to compete with other corporations also interested in the investment market in the United States. 5 It is the
stand of Atlas that information given out to the public in general and to the stockholder in particular by the
P.K MacKer & Co. concerning the operation of the Atlas was aimed at creating a favorable image and
goodwill to gain or maintain their patronage.
The decisive question, therefore, in this particular appeal taken by Atlas to this Court is whether or not the
expenses paid for the services rendered by a public relations firm P.K MacKer & Co. labelled as
stockholders relation service fee is an allowable deduction as business expense under Section 30 (a) (1)
of the National Internal Revenue Code.
The principle is recognized 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. As previously adverted to, the law allowing expenses as deduction
from gross income for purposes of the income tax is Section 30 (a) (1) of the National Internal Revenue
which allows a deduction of "all the ordinary and necessary expenses paid or incurred during the taxable
year in carrying on any trade or business." An item of expenditure, in order to be deductible under this
section of the statute, must fall squarely within its language.
We come, then, 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 in a trade or
business. 6 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. 7
While it is true that there is a number of decisions in the United States delving on the interpretation of the
terms "ordinary and necessary" as used in the federal tax laws, no adequate or satisfactory definition of
those terms is possible. Similarly, this Court has never attempted to define with precision the terms "ordinary
and necessary." There are however, certain guiding principles worthy of serious consideration in the proper
adjudication of conflicting claims. Ordinarily, an expense will be considered "necessary" where the
expenditure is appropriate and helpful in the development of the taxpayer's business. 8 It is "ordinary" when
it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding
circumstances. 9 The term "ordinary" does not require that the payments be habitual or normal in the sense
that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the
particular taxpayer affected. 10
There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the
particular facts and the relation of the payment to the type of business in which the taxpayer is engaged.
The intention of the taxpayer often may be the controlling fact in making the determination. 11 Assuming
that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to
the question as to whether the expenditure is an allowable deduction as a business expense must be
determined from the nature of the expenditure itself, which in turn depends on the extent and permanency
of the work accomplished by the expenditure. 12
It appears that on December 27, 1957, Atlas increased its capital stock from P15,000,000 to P18,325,000.
13 It was claimed by Atlas that its shares of stock worth P3,325,000 were sold in the United States because
of the services rendered by the public relations firm, P. K. Macker & Company. The Court of Tax Appeals
ruled that the information about Atlas given out and played up in the mass communication media resulted
in full subscription of the additional shares issued by Atlas; consequently, the questioned item, stockholders
relation service fee, was in effect spent for the acquisition of additional capital, ergo, a capital expenditure.
We sustain the ruling of the tax court that the expenditure of P25,523.14 paid to P.K. Macker & Co. as
compensation for services carrying on the selling campaign in an effort to sell Atlas' additional capital stock
of P3,325,000 is not an ordinary expense in line with the decision of U.S. Board of Tax Appeals in the case
of Harrisburg Hospital Inc. vs. Commissioner of Internal Revenue. 14 Accordingly, as found by the Court of
Tax Appeals, the said expense is not deductible from Atlas gross income in 1958 because expenses relating
to recapitalization and reorganization of the corporation (Missouri-Kansas Pipe Line vs. Commissioner of
Internal Revenue, 148 F. (2d), 460; Skenandos Rayon Corp. vs. Commissioner of Internal Revenue, 122
F. (2d) 268, Cert. denied 314 U.S. 6961), the cost of obtaining stock subscription (Simons Co., 8 BTA 631),
promotion expenses (Beneficial Industrial Loan Corp. vs. Handy, 92 F. (2d) 74), and commission or fees
paid for the sale of stock reorganization (Protective Finance Corp., 23 BTA 308) are capital expenditures.
That the expense in question was incurred to create a favorable image of the corporation in order to gain
or maintain the public's and its stockholders' patronage, does not make it deductible as business expense.
As held in the case of Welch vs. Helvering, 15 efforts to establish reputation are akin to acquisition of capital
assets and, therefore, expenses related thereto are not business expense but capital expenditures.
We do not agree with the contention of Atlas that the conclusion of the Court of Tax Appeals in holding that
the expense of P25,523.14 was incurred for acquisition of additional capital is not supported by the
evidence. The burden of proof that the expenses incurred are ordinary and necessary is on the taxpayer
16 and does not rest upon the Government. To avail of the claimed deduction under Section 30(a) (1) of
the National Internal Revenue Code, it is incumbent upon the taxpayer to adduce substantial evidence to
establish a reasonably proximate relation petition between the expenses to the ordinary conduct of the
business of the taxpayer. A logical link or nexus between the expense and the taxpayer's business must
be established by the taxpayer.
G. R. No. L-26924-In his petition for review, the Commissioner of Internal Revenue assigned as errors the
following:
THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION FROM

GROSS INCOME OF THE SO- CALLED TRANSFER AGENT'S FEES ALLEGEDLY PAID
BY RESPONDENT;
II
THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION FROM

GROSS INCOME OF LISTING EXPENSES ALLEGEDLY INCURRED BY
RESPONDENT;
III
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE AMOUNT OF P60,000
REPRESENTED BY RESPONDENT AS "PROVISION FOR CONTINGENCIES" WAS
ADDED BACK BY RESPONDENT TO ITS GROSS INCOME IN COMPUTING THE
INCOME TAX DUE FROM IT FOR 1958;
IV
THE COURT OF TAX APPEALS ERRED IN DISALLOWING ONLY THE AMOUNT OF

P6,666.65 AS SUIT EXPENSES, THE CORRECT AMOUNT THAT SHOULD HAVE BEEN
DISALLOWED BEING P17,499.98.
It is well to note that only in the Court of Tax Appeals did the Commissioner raise for the first time (in his
memorandum) the question of whether or not the business expenses deducted from Atlas gross income in
1958 may be allowed in the absence of proof of payments. 17 Before this Court, the Commissioner
reiterated the same as ground against deductibility when he claimed that the Court of Tax Appeals erred in
allowing the deduction of transfer agent's fee and stock listing fee from gross income in the absence of
proof of payment thereof.
The Commissioner contended that under Section 30 (a) (1) of the National Internal Revenue Code, it is a
requirement for an expense to be deductible from gross income that it must have been "paid or incurred
during the year" for which it is claimed; that in the absence of convincing and satisfactory evidence of
payment, the deduction from gross income for the year 1958 income tax return cannot be sustained; and
that the best evidence to prove payment, if at all any has been made, would be the vouchers or receipts
issued therefor which ATLAS failed to present.
Atlas admitted that it failed to adduce evidence of payment of the deduction claimed in its 1958 income tax
return, but explains the failure with the allegation that the Commissioner did not raise that question of fact
in his pleadings, or even in the report of the investigating examiner and/or letters of demand and
assessment notices of ATLAS which gave rise to its appeal to the Court of Tax Appeal. 18 It was
emphasized by Atlas that it went to trial and finally submitted this case for decision on the assumption that
inasmuch as the fact of payment was never raised as a vital issue by the Commissioner in his answer to
the petition for review in the Court of Tax Appeal, the issues is limited only to pure question of law—whether
or not the expenses deducted by petitioner from its gross income for 1958 are sanctioned by Section 30 (a)
(1) of the National Internal Revenue Code.
On this issue of whether or not the Commissioner can raise the fact of payment for the first time on appeal
in its memorandum in the Court of Tax Appeal, we fully agree with the ruling of the tax court that the
Commissioner on appeal cannot be allowed to adopt a theory distinct and different from that he has
previously pursued, as shown by the BIR records and the answer to the amended petition for review. 19 As
this Court said in the case of Commissioner of Customs vs. Valencia 20 such change in the nature of the
case may not be made on appeal, specially when the purpose of the latter is to seek a review of the action
taken by an administrative body, forming part of a coordinate branch of the Government, such as the
Executive department. In the case at bar, the Court of Tax Appeal found that the fact of payment of the
claimed deduction from gross income was never controverted by the Commissioner even during the initial
stages of routinary administrative scrutiny conducted by BIR examiners. 21 Specifically, in his answer to
the amended petition for review in the Court of Tax Appeal, the Commissioner did not deny the fact of
payment, merely contesting the legitimacy of the deduction on the ground that same was not ordinary and
necessary business expenses. 22
As consistently ruled by this Court, the findings of facts by the Court of Tax Appeal will not be reviewed in
the absence of showing of gross error or abuse. 23 We, therefore, hold that it was too late for the
Commissioner to raise the issue of fact of payment for the first time in his memorandum in the Court of Tax
Appeals and in this instant appeal to the Supreme Court. If raised earlier, the matter ought to have been
seriously delved into by the Court of Tax Appeals. On this ground, we are of the opinion that under all the
attendant circumstances of the case, substantial justice would be served if the Commissioner be held as
precluded from now attempting to raise an issue to disallow deduction of the item in question at this stage.
Failure to assert a question within a reasonable time warrants a presumption that the party entitled to assert
it either has abandoned or declined to assert it.
On the second assignment of error, aside from alleging lack of proof of payment of the expense deducted,
the Commissioner contended that such expense should be disallowed for not being ordinary and necessary
and not incurred in trade or business, as required under Section 30 (a) (1) of the National Internal Revenue
Code. He asserted that said fees were therefore incurred not for the production of income but for the
acquisition petition of capital in view of the definition that an expense is deemed to be incurred in trade or
business if it was incurred for the production of income, or in the expectation of producing income for the
business. In support of his contention, the Commissioner cited the ruling in Dome Mines, Ltd vs.
Commisioner of Internal Revenue 24 involving the same issue as in the case at bar where the U.S. Board
of Tax Appeal ruled that expenses for listing capital stock in the stock exchange are not ordinary and
necessary expenses incurred in carrying on the taxpayer's business which was gold mining and selling,
which business is strikingly similar to Atlas.
On the other hand, the Court of Tax Appeal relied on the ruling in the case of Chesapeake Corporation of
Virginia vs. Commissioner of Internal Revenue 25 where the Tax Court allowed the deduction of stock
exchange fee in dispute, which is an annually recurring cost for the annual maintenance of the listing.
We find the Chesapeake decision controlling with the facts and circumstances of the instant case. In Dome
Mines, Ltd case the stock listing fee was disallowed as a deduction not only because the expenditure did
not meet the statutory test but also because the same was paid only once, and the benefit acquired thereby
continued indefinitely, whereas, in the Chesapeake Corporation case, fee paid to the stock exchange was
annual and recurring. In the instant case, we deal with the stock listing fee paid annually to a stock exchange
for the privilege of having its stock listed. It must be noted that the Court of Tax Appeal rejected the Dome
Mines case because it involves a payment made only once, hence, it was held therein that the single
payment made to the stock exchange was a capital expenditure, as distinguished from the instant case,
where payments were made annually. For this reason, we hold that said listing fee is an ordinary and
necessary business expense
On the third assignment of error, the Commissioner contended that the Court of Tax Appeal erred when
it held that the amount of P60,000 as "provisions for contingencies" was in effect added back to Atlas
income.
On this issue, this Court has consistently ruled in several cases adverted to earlier, that in the absence of
grave abuse of discretion or error on the part of the tax court its findings of facts may not be disturbed by
the Supreme Court. 26 It is not within the province of this Court to resolve whether or not the P60,000
representing "provision for contingencies" was in fact added to or deducted from the taxable income. As
ruled by the Court of Tax Appeals, the said amount was in effect added to Atlas taxable income. 27 The
same being factual in nature and supported by substantial evidence, such findings should not be disturbed
in this appeal.
Finally, in its fourth assignment of error, the Commissioner contended that the CTA erred in disallowing
only the amount of P6,666.65 as suit expenses instead of P17,499.98.
It appears that petitioner deducted from its 1958 gross income the amount of P23,333.30 as attorney's fees
and litigation expenses in the defense of title to the Toledo Mining properties purchased by Atlas from
Mindanao Lode Mines Inc. in Civil Case No. 30566 of the Court of First Instance of Manila for annulment of
the sale of said mining properties. On the ground that the litigation expense was a capital expenditure under
Section 121 of the Revenue Regulation No. 2, the investigating revenue examiner recommended the
disallowance of P13,333.30. The Commissioner, however, reduced this amount of P6,666.65 which latter
amount was affirmed by the respondent Court of Tax Appeals on appeal.
There is no question that, as held by the Court of Tax Ap- peals, the litigation expenses under consideration
were incurred in defense of Atlas title to its mining properties. In line with the decision of the U.S. Tax Court
in the case of Safety Tube Corp. vs. Commissioner of Internal Revenue, 28 it is well settled that litigation
expenses incurred in defense or protection of title are capital in nature and not deductible. Likewise, it was
ruled by the U.S. Tax Court that expenditures in defense of title of property constitute a part of the cost of
the property, and are not deductible as expense. 29
Surprisingly, however, the investigating revenue examiner recommended a partial disallowance of

P13,333.30 instead of the entire amount of P23,333.30, which, upon review, was further reduced by the
Commissioner of Internal Revenue. Whether it was due to mistake, negligence or omission of the officials
concerned, the arithmetical error committed herein should not prejudice the Government. This Court will
pass upon this particular question since there is a clear error committed by officials concerned in the
computation of the deductible amount. As held in the case of Vera vs. Fernandez, 30 this Court emphatically
said that taxes are the lifeblood of the Government and their prompt and certain availability are imperious
need. Upon taxation depends the Government's ability to serve the people for whose benefit taxes are
collected. To safeguard such interest, neglect or omission of government officials entrusted with the
collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner as
private persons may be made to suffer individually on account of his own negligence, the presumption being
that they take good care of their personal affair. This should not hold true to government officials with
respect to matters not of their own personal concern. This is the philosophy behind the government's
exception, as a general rule, from the operation of the principle of estoppel. 31
WHEREFORE, judgment appealed from is hereby affirmed with modification that the amount of P17,499.98
(3/4 of P23,333.00) representing suit expenses be disallowed as deduction instead of P6,666.65 only. With
this amount as part of the net income, the corresponding income tax shall be paid thereon, with interest of
6% per annum from June 20, 1959 to June 20,1962.
SO ORDERED.
SUPREME COURT
Manila
EN BANC
G.R. No. L-12798 May 30, 1960
VISAYAN CEBU TERMINAL CO., INC., petitioner-appellant,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent-appellee.
Duterte and Rodriguez for petitioner.

Assistant Solicitor General Jose P. Alejandro and Atty. Sixto J. Javier for respondent.
CONCEPCION, J.:
Petitioner Visayan Cebu Terminal Co., Inc., seeks a review of the decision of the Court of Tax Appeals in
the above entitled case. The dispositive part of said decision reads as follows:
FOR THE FOREGOING CONSIDERATIONS, the decision appealed from is hereby

modified, and appellant is hereby ordered to pay the Collector of Internal Revenue, within
a reasonable period to be fixed by the latter, the sum of P15,517.00, computed below:
Net income per return P41,596.45

Disallowances:
(1) Salaries 500.00
(2) Representation Expenses:
As claimed by appellant 75,855.88
Allowed 10,000.00 65,855.88
(3) Miscellaneous expenses 5,768.00
————
Net income subject to tax P113,720.33
Tax due on P113,720.33:
P100,000.00 at 20% P20,000.00
P13,720.00 at 28% 3,842.00 P23,842.00
Less tax previously assessed and paid 8,325.00
————
Deficiency tax P15,517.00
With costs against appellant.
The facts, which are not disputed, are set forth in the aforementioned decision, from which we quote:
"The appellant, Visayan Terminal Co. Inc., is a corporation organized for the purpose of handling arrastre
operations in the port of Cebu. It was awarded the contract for the said arrastre operations by the Bureau
of Customs, pursuant to Act No. 3002, as amended.
"On March 1, 1952, appellant filed its income tax return for 1951 reporting a gross income of P420,633.40
and claimed deductions amounting to P379,036.95, leaving a net income of P41,596.45 on which it paid
income tax in the sum of P8,319.20. The sum of P379,036.95 claimed as deductions consisted of various
items, among which were the following:
1. Salaries —
(a) Salary and bonus of Juan
Eugenio Lo P1,875.00
(b) Salary of Felix Go Chan 250.00
(c) Salary of Teomino Tiu
Tiam 250.00 P 2,375.00
2. Representation expenses 75,855.88
3. Miscellaneous expenses
(a) Christmas bonus given to
various persons P1,500.00
(b) Tips to ships' officers 4,800.00 6,300.00
TOTAL P84,530.88
The said sums of P2,375.00, P75,855.88 and P6,300.00, representing salaries,
representation expenses and miscellaneous expenses, respectively, or a total of
P84,530.88, were disallowed by the Collector of Internal Revenue, thus giving rise to a
deficiency assessment of P18,991.00.
xxx xxx xxx
Upon request for reconsideration, the Collector modified the deficiency income tax
assessment by allowing the deduction from appellant's gross income of the salary of
Juan Eugenio Lo in the sum of P1,875.00 and miscellaneous expenses amounting to
P532.00, at the same time maintaining the disallowance of the full amount of P75,855.88
as representation expenses. The revised deficiency assessment is itemized in the letter
of the Collector dated March 26, 1955, and is reproduced below:
Net income as per return P41.596.45

Disallowances:
per investigation:
salaries of officers P 2,375.00
allowed per reaudit 1,875.00 500.00
per investigation and reaudit,
representation expenses 75,855.88
per investigation, miscellaneous
expenses 6,300.00
allowed per reaudit 532.00 5,768.00
——— ————
Net income subject to tax per
reaudit P123,720.33
Tax due on P123,720.33:
P100,000.00 at 20% P20,000.00
P23,720.00 at 28% 6,642.00 P26,642.00
————
Less tax previously assessed and paid 8,325.00
—————
Add: 5% surcharge 915.85
1% monthly interest from
5/31/53 to 4/30/55 4,212.91
Compromise for late payment 40.00
—————
Total amount due on April 30,1955 P23,485.76
Appellant has agreed to the disallowance of the sum P500.00 representing the salaries of
Felix Go Chan and Teotimo Tiu Tiam at P250.00 each, and the sum of P5,768.00,
representing miscellaneous expenses. The only issue raised in this appeal relates to the
deductibility of the sum of P75,855.88 as representation expenses.
Passing upon said issue, which is, also, the only one raised in this appeal, the lower court held that
"representation ... expenses fall under the category of business expenses which" are allowable deductions
from gross income if they meet the conditions prescribed by law", particularly section 30(a) (1) of the
National Internal Revenue Code; that, to be deductible, said business expenses must "ordinary and
necessary expenses paid or incurred in carrying on any trade or business"; that those expenses "must also,
meet the further test of reasonableness in amount", this test being "inherent in the phase `ordinary and
necessary'"; that some of the representation expenses claimed by appellant had been evidenced by
vouchers or chits, but others were reimbursed "without presentation of supporting papers; that the
aforementioned vouchers or chits were allegedly "destroyed when the house of Buenaventura M. Veloso,
treasurer of appellant, where the records were kept was burned"; that, accordingly, "it is not possible to
determine the actual amount covered by supporting papers and the amount without supporting papers";
that the court should, therefore, "determine from all available data the amount properly deductible as
representation expenses"; that "during the period of four (4) years from 1949 to 1952, appellant had gross
income, net income, net profits and claimed representation expenses as follows:
Year Gross Income Net Profit Representation

Expenses
1949 P722,135.42 P61,257.53 P83,703.54
1950 451,303.21 33,023.78 10,424.39
1951 420,479.39 41,596.45 75,855.88
1952 425,326.86 34,207.31 63,618.64
and that "from the above figures, we may infer that the sum of P10,000 may be considered
reasonably necessary for entertainment expenses of appellant in 1951, it having claimed
a little over the amount in 1950, when its gross income was more than its gross income in
1951 and 1952", and because "it allegedly spent for entertainment purposes in 1948 the
sum of P500.00 only." Hence, the lower court modified the assessment of the taxes due
from appellant herein the manner set forth in the beginning of this decision.
In its brief, appellant does not assail any of the premises upon which the aforementioned
conclusion of the lower court was predicated. What is more, it relied upon, and, even,
quoted some of the views expressed in the decision appealed from. Appellant, however,
maintains that said court had acted arbitrarily in considering the representation expenses
in 1950, not those incurred in 1949 and 1952, in fixing the amount deductible in 1951. This
pretense is clearly untenable. It appears: (a) that part of the alleged representation
expenses had never had any supporting paper; (b) that the vouchers and chits covering
other representation expenses had been allegedly destroyed; (c) that there is no
documentary evidence on record of any of the representation expenses in question; (d)
that no testimonial evidence has been introduced on any specific item of said alleged
expenses; (e) that there is no more than oral proof to the effect that payments had been
made to appellant's officers for representation expenses allegedly made by the latter and
about the general nature of such alleged expenses; (f) that the gross income in 1950
exceeded the gross income in 1951 and 1952, and (g) that the representation expenses in
1948 amounted to P500 only. Under these circumstances, the lower court was fully justified
in concluding that the representation expenses in 1951 should be slightly less than those
incurred in 1950.
Upon the other hand, appellant has not even tried to show why its representation expenses
in 1951 should be deemed bigger than the amount allowed by the lower court. In fact, the
latter had been patently fair and reasonable, if not rather liberal, in allowing appellant to
deduct P10,000.00 as representation expenses for 1951, there being absolutely no
concrete evidence of the sums then actually spent for purposes of representation. It may
not be amiss to note that the explanation to the effect that the supporting paper of some of
those expenses had been destroyed when the house of the treasurer was burned, can
hardly be regarded as satisfactory, for appellant's records are supposed to be kept in its
offices, not in the residence of one of its officers.
Being in accordance with the facts and the law, the decision appealed from is hereby
affirmed, with costs against petitioner-appellant, Visayan Cebu Terminal Co., Inc. It is so
ordered.
Paras, C J., Bengzon, Montemayor, Bautista Angelo, Labrador, Barrera, and Gutierrez
David JJ., concur.
SUPREME COURT
Manila
EN BANC
G.R. Nos. L-12010 and L-12113 October 20, 1959
KUENZLE & STREIFF, INC., petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondents.
Angel S. Gamboa for petitioner.

Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Jose P. Alejandro and Special
Attorney Librada del Rosario-Natividad for respondent.
BAUTISTA ANGELO, J.:
This is a petition for review of a decision of the Court of Tax Appeals, as later modified, declaring petitioner
liable for the total sum of P33,187.00 as deficiency income tax due for the years 1950, 1951 and 1952.
Petitioner is a domestic corporation engaged in the importation of textiles, hardware, sundries, chemicals,
pharmaceuticals, lumbers, groceries, wines and liquor; in insurance and lumber; and in some exports. In
the income tax returns for the years 1950, 1951 and 1952 it filed with respondent, petitioner deducted from
its gross income certain items representing salaries, directors' fees and bonuses of its non-resident
president and vice-president; bonuses of its resident officers and employees; and interests on earned but
unpaid salaries and bonuses of its officers and employees. The income tax computed in accordance with
these returns was duly paid by petitioner.
On July 2, 1953, after disallowing the deductions of the items representing director's fees, salaries and
bonuses of petitioner's non-resident president and vice-president; the bonus participation of certain resident
officers and employees; and the interests on earned but unpaid salaries and bonuses, respondent assessed
and demanded from petitioner the payment of deficiency income taxes in the sums of P26,370.00,
P53,865.00 and P44,112.00 for the years 1950, 1951 and 1952, respectively. Petitioner requested for the
re-examination of this assessment, and June 8, 1955, respondent modified the same by allowing as
deductible all items comprising directors' fees and salaries of the non-resident president and vice-president,
but disallowing the bonuses insofar as they exceed the salaries of the recipients, as well as the interests
on earned but unpaid salaries and bonuses. Hence, for the years 1950, 1951 and 1952, respondent made
a new assessment and demanded from petitioner as deficiency income taxes the amounts of P10,147.00,
P26,783.00 and P20,481.00, respectively. Petitioner having taken the case on appeal to the Court of Tax
Appeals, the latter modified the assessment of respondent as stated in the early part of this decision.
From this decision both parties have appealed, petitioner from that portion which holds that the measure of
the reasonableness of the bonuses paid to its non-resident president and vice-president should be applied
to the bonuses given to resident officers and employees in determining their deductibility and so only so
much of said bonuses as applied to the latter should be allowed as deduction, and respondent from that
portion of the decision which allows the deduction of so much of the bonuses which is in excess of the
yearly salaries paid to the respective recipients thereof.
The law involved here is Section 30 (a)(1) and (b)(1) of the National Internal Revenue Code, the pertinent
provisions of which we quote:
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;
(b) Interest:
(1) In general. — The amount of interest paid within the taxable year on indebtedness, except on
indebtedness incurred or continued to purchase or carry obligations the interest upon which is
exempt from taxation as income under this Title.
It would appear that all ordinary and necessary expenses paid or incurred in carrying on a trade or business,
including a reasonable allowance for salaries or other compensation for personal services actually
rendered, may be allowed as deductions in computing the taxable income during the year. It likewise
appears that the amount of interests paid within the taxable year on any indebtedness may also be deducted
from the gross income. Here it is admitted that the bonuses paid to the officers and employees of petitioner,
whether resident or non-resident, were paid to them as additional compensation for personal services
actually rendered and as such can be considered as ordinary and necessary expenses incurred in the
business within the meaning of the law, the only question in dispute being how much of said bonuses may
be considered reasonable in order that it may be allowed as deduction.
It should be noted that petitioner gave to its non-resident president and vice president for the years 1950
and 1951 bonuses equal to 133-1/2% of their annual salaries and bonuses equal to 125-2/3% for the year
1952, whereas with regard to its resident officers and employees it gave them much more on the alleged
reason that they deserved them because of their valuable contribution to the business of the corporation
which has made it possible for it to realize huge profits during the aforesaid years. And the Court of Tax
Appeals ruled that while the bonuses given to the non-resident officers are reasonable considering their
yearly salaries and the services actually rendered by them, the bonuses given to the resident officers and
employees are, however, quite excessive, the court saying on this point that "there is no special reason for
granting greater bonuses to such lower ranking officers than those given to Messrs. Kuenzle and Streiff."
Petitioner now disputes this ruling insofar as the resident officers and employees are concerned contending
that the same is not in accordance with the usual pattern to be followed in determining the reasonableness
of a given compensation because it ignores the nature, extent and quality of the services actually rendered
by its resident officers and employees.
It is a general rule that "Bonuses to employees made in good faith and as additional compensation for the
services actually rendered by the employees are deductible, provided such payments, when added to the
stipulated salaries, do not exceed a reasonable compensation for the services rendered" (4 Mertens, Law
of Federal Income Taxation, Sec. 25.50, p. 410). The condition precedents to the deduction of bonuses to
employees are: (1) the payment of the bonuses is in fact compensation; (2) it must be for personal services
actually rendered; and (3) the bonuses, when added to the salaries, are reasonable when measured by the
amount and quality of the services performed with relation to the business of the particular taxpayer" (Idem,
Sec. 25.44, p. 395). Here it is admitted that the bonuses are in fact compensation and were paid for services
actually rendered. The only question is whether the payment of said bonuses is reasonable.
There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends
upon many factors, one of them being "the amount and the quality of the services performed with relation
to the business." Other tests suggested are: payment must be "made in good faith"; "the character of the
taxpayer's business, the volume and amount of its net earnings, its locality, the type and extent of the
services rendered, the salary policy of the corporation"; "the size of the particular business"; "the employees'
qualifications and contributions to the business venture"; and "general economic conditions" (4 Mertens,
Law of Federal Income Taxation, Sec. 25.44, 25.49, 25.50, 25.51, pp. 407-412). However, "in determining
whether the particular salary or compensation payment is reasonable, the situation must be considered as
a whole.
Ordinarily, no single factor is decisive. It is important to keep in mind that it seldom happens that the
application of one test can give satisfactory answer, and that ordinarily it is the interplay of several factors,
properly weighted for the particular case, which must furnish the final answer" (Idem.).
Considering the different tests formulated above, was the trial court justified in holding that the
reasonableness of the amount of bonuses given to resident officers and employees should follow the same
pattern for determining the reasonableness of the amount of bonuses given to non-resident officers?
Petitioner contends that it is error to apply the same measure of reasonableness to both resident and non-
resident officers because the nature, extent and quality of the services performed by each with relation to
the business of the corporation widely differ, as can be plainly seen by considering the factors already
mentioned above, to wit, the character, size and volume of the business of the taxpayer, the profits made,
the volume and amount of its earnings, the salary policy of the taxpayer, the amount and quality of the
services performed, the employees qualifications and contributions to the business venture, and the general
economic conditions prevailing in the place of business. And elaborating on these factors in connection
with the business of petitioner, its counsel made a detailed exposition of the facts and figures showing in a
nutshell that through the efficient management, personal effort and valuable contribution rendered by the
resident officers and employees, the corporation realized huge profits during the year 1950, 1951 and 1952,
which entitle them to the bonuses that were given to them for those years, especially having in mind the
after-liberation policy of the corporation of giving salaries at low levels because of the unsettled conditions
that prevailed after the war and the imposition of controls on exports and imports and in the uses of foreign
exchange without prejudice of making up later for that shortcoming by giving them additional compensation
in the form of bonuses if the financial situation of the corporation would warrant. As the General Manager
Jung testified, the payments of bonuses were strictly based on the amount of work performed, the nature
of responsibility, the years of service, and the cost of living.
While it may be admitted that the resident officers and employees had performed their duty well and
rendered efficient service and for that reason were given greater amount of additional compensation in the
form of bonuses than what was given to the non-resident officers. The reason for this is that, in the opinion
of the management itself of the corporation, said non-resident officers had rendered the same amount of
efficient personal service and contribution to deserve equal treatment in compensation and other
emoluments with the particularity that their liberation yearly salaries had been much smaller.
Thus, according to counsel for petitioner, the following is the contribution made by said non-resident officers
of the corporation: "A.P. Kuenzle and H.A. Streiff, had dedicated abroad, especially in New York City, New
York, U.S.A. and Zurich, Switzerland, their full time and attention to the services of Kuenzle & Streiff, Inc.;
engaging themselves exclusively in the purchases abroad of the merchandise for the supply of the import
business of the Kuenzle & Streiff, Inc., taking care of its orders of the importation of the merchandise and
also of their shipments to the said company, making contacts and effecting transactions with the suppliers
abroad, and directing, controlling and supervising the business operations and affairs of the company by
directives. They have been the policy-makers for the company. All decisions to be made by the company
on important matters and anything and everything outside of the routinary have always been determined
by them and made only upon their instructions which had been strictly adhered to by the management of
the Company. A.P. Kuenzle and H.A. Streiff have been the president and vice president, respectively, of
the company for many years before 1950, 1951 and 1952 and during these particular years up to the
present." Indeed, the trial court was justified in expressing the view that "there is no special reason for
granting greater bonuses to such lower ranking officers than those given to Messrs. Kuenzle and Streiff."
We concur in this observation.
The contention of respondent that the trial court erred also in allowing the deduction bonuses in excess of
the yearly salaries of their respective recipients predicated upon his own decision that the deductible
amount of said bonuses should be only equal to their respective yearly salaries cannot also be sustained.
This claim cannot be justified considering the factors we have already mentioned that play in the
determination of the reasonableness of the bonuses or additional compensation that may be given to an
officer or an employee which, if properly considered, warrant the payment of the bonuses in question to the
extent allowed by the trial court. This is specially so considering the post-war policy of the corporation in
giving salaries at low levels because of the unsettled conditions resulting from war and the imposition of
government controls on imports and exports and on the use of foreign exchange which resulted in the
diminution of the amount of business and the consequent loss of profits on the part of the corporation. The
payment of bonuses in amounts a little more than the yearly salaries received considering the prevailing
circumstances is in our opinion reasonable.
As regards the amount of interests disallowed, we also find the ruling of the trial court justified. There is no
dispute that these items accrued on unclaimed salaries and bonus participation of shareholders and
employees. Under the law, in order that interest may be deductible, it must be paid "on indebtedness"
(Section 30, (b)(1) of the National Internal Revenue Code). It is therefore imperative to show that there is
an existing indebtedness which may be subjected to the payment of interest. Here the items involved are
unclaimed salaries and bonus participation which in our opinion cannot constitute indebtedness within the
meaning of the law because while they constitute an obligation on the part of the corporation, it is not the
latter's fault if they remained unclaimed. It is well settled rule that the term indebtedness is restricted to its
usual import which "is the amount which one has contracted to pay the use of borrowed money." Since the
corporation had at all times sufficient funds to pay the salaries of its employees, whatever an employee
may fail to collect cannot be considered an indebtedness for it is the concern of the employee to collect it
in due time. The willingness of the corporation to pay interest thereon cannot be considered a justification
to warrant deduction.
Wherefore, the decision appealed from is affirmed, without pronouncement as to costs.
Paras, C.J., Bengzon, Padilla, Montemayor, Labrador, Concepcion, Edencia, Barrera, and Gutierrez David,
JJ., concur.
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-29790 February 25, 1982
AGUINALDO INDUSTRIES CORPORATION (FISHING NETS DIVISIONS), petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
PLANA , J.:
This is a petition for review of the decision and resolution of the Court of Tax Appeals in CTA Case No.
1636 holding the petitioner liable for the sum of P17,123.93 as deficiency income tax for l957, plus 5%
surcharge and 1% monthly interest for late payment from December 15, 1957 until full payment is made.
As summarized by the respondent Court, the facts are:
... 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. (It was reported as part of the selling
expenses of the land in Muntinglupa, Rizal, the details of said transaction being as follows:
Selling price P432,031.00

of land
DEDUCT:
Purchase P71,120.00
price of land
Registration,
documentary
stamps
and other 191.05

expenses
Relocation 450.00
survey
P71,761.05
ADD
SELLING
EXPENSES
Commission 51,723.72
Documentary 2,294.05
stamps
Topographic 450.00
survey
Officer's 61,187.48 186,416.30

remuneration
NET PROFIT P
244,416.70
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:
From the net profits of the business of the Company shall be deducted for
allowance of the President — 3% for the first Vice President — 1 %, for
the second Vice President for the members of the Board of Directors —
10% to he divided equally among themselves, for the Secretary of the
Board for the General Manager for two Assistant General Managers
In this connection, petitioner explains that to arrive at the aforesaid 20% it gets 20'7o of the
profits from the furniture business and adds (the same) to 20 of the profit of the fish net
venture. The P61,187.48 which is the basis of the assessment of P17,133.00 does not
even represent the entire 20%, allocated as allowance in Section 3 of its by-laws but only
20% of the net profit of the non-exempt operation of the Fish Nets Division, that is, 20,%,
of P305,869.89, which is the sum total of P305,802.18 representing profit from the sale of
the Muntinglupa land, P45.21 representing interest on savings accounts, and P90.00
representing dividends from investment of the Fish Nets Division. (Pages 2-5, Decision.)
Upon the submission of the case for judgment on the basis of the pleadings and BIR official records, the
respondent Court rendered the questioned decision. Subsequently, on a motion for reconsideration filed by
petitioner, the respondent Court issued a resolution dated September 30, 1968 imposing a 5% surcharge
and 1% monthly interest on the deficiency assessment.
Dissatisfied, petitioner has come to this Court on errors assigned in its brief.
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.
It must be stressed however that at the administrative level, the petitioner implicitly admitted that the profit
it derived from the sale of its Muntinglupa land, a capital asset, was a taxable gain — which was precisely
the reason why for tax purposes the petitioner deducted therefrom the questioned bonus to its corporate
officers as a supposed item of expense incurred for the sale of the said land, apart from the P51,723.72
commission paid by the petitioner to the real estate agent who indeed effected the sale. The BIR therefore
had no occasion to pass upon the issue.
To allow a litigant to assume a different posture when he comes before the court and challenge the position
he had accepted at the administrative level, would be to sanction a procedure whereby the court — which
is supposed to review administrative determinations — would not review, but determine and decide for the
first time, a question not raised at the administrative forum. This cannot be permitted, for the same reason
that underlies the requirement of prior exhaustion of administrative remedies to give administrative
authorities the prior opportunity to decide controversies within its competence, and in much the same way
that, on the judicial level, issues not raised in the lower court cannot be raised for the first time on appeal.
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.
The remaining issues in this appeal are: (1) whether or not the bonus given to the officers of the petitioner
upon the sale of its Muntinglupa land is an ordinary and necessary business expense deductible for income
tax purposes; and (2) whether or not petitioner is hable for surcharge and interest for late payment.
Anent the first question, 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.
We now come to the issue regarding the imposition of 5% surcharge and 1% monthly interest for late
payment of the deficiency tax on petitioner's income which was earned in 1957 and assessed on May 30,
19-08.
The applicable law is Section 51 of the Tax Code which, before its amendment by Republic Act 2343
effective June 20, 1959, reads as follows:
SEC. 51. Assessment and payment of income tax Assessment of tax. — All assessments
shall be made by the Collector of In ternal Revenue and all persons and corporations
subject to tax shall be notified of the amount for which they are respectively liable on or
before the first day of May of each successive year.
(b) Time of payment. — The total amount of tax imposed by this Title shall be paid on or
before the fifteenth day of May following the close of the calendar year, by the person
subject to tax, and, in the case of a corporation, by the president, vice- president, or other
responsible officer thereof. If the return is made on the basis of a fiscal year, the total
amount of the tax shall be paid on or before the f if teenth day of the fifth month following
the close of the fiscal year.
xxx xxx xxx
(e) Surcharge and interest in case of delinquency. — To any sum or sums due and unpaid
after the dates prescribed in subsections (b), (c) and (d) for the payment of the same, there
shall be added the sum of five per centum on the amount of tax unpaid and interest at the
rate of one per centum a month upon said tax from the time the same became due, except
from the estates of insane, deceased, or insolvent persons.
Applying the foregoing provisions, the respondent Court said:
It should be observed that, under the old Section 51 (e), the 5% surcharge and interest on
deficiency was imposed from the time the tax became due, and said interest was imposable
in case of non-payment on time, not only on the basic income tax, but also on the deficiency
tax, since the deficiency was part and parcel of the taxpayer's income tax liability. It should
further be observed that, although the Commissioner (formerly Collector) of Internal
Revenue, under the old Section 51 (a) was required to assess the tax due, based on the
taxpayer's return, and notify the taxpayer of said assessment, still, under subsection (b) of
the same old Section 51, the time prescribed for the payment of tax was fixed, whether or
not a notice of the assessment was given to the taxpayer (See Central Azucarera Don
Pedro v. Court of Tax Appeals, et al. G.R. Nos. L-23236 & 23254, May 31, 1967).
Inasmuch as petitioner had filed its income tax return for 1957 on the fiscal year basis
ending June 30, 1957, the deficiency income tax in question should have been paid on or
before November 15, 1957-the fifteenth day of the fifth month following the close of the
fiscal year (See Sec. 51 (b), supra). It follows that petitioner is liable to the 5% surcharge
and 1% monthly interest for late payment, not from June 30, 1958, but from November 15,
1957. Consequently, the payment of surcharge and interest on deficiency being statutory
and therefore mandatory, petitioner is also hable, aside from the basic tax above
mentioned, for the 5% surcharge and 1% monthly interest for late payment of the deficiency
income tax from November 15, 1957 until paid. (CTA Resolution dated Sept. 30, 1968.)
The rule as to when interest and surcharges on delinquency tax payments become chargeable is wen
settled and the respondent Court applied it correctly. Construing the same provisions of the old Section 51
(e) and the Section 51 (d) of the Tax Code, as amended by Republic Act 2343, this Court held that the
interest and surcharges on deficiency taxes are imposable upon failure of the taxpayer to pay the tax on
the date fixed in the law for the payment thereof, which was, under the unamended Section 51 of the Tax
Code, the fifteenth day of the fifth month following the close of the fiscal year in the case of taxpayers whose
tax returns were made on the basis of fiscal years. [Commissioner of Internal Revenue vs. Connel Bros.
Co. (Phil.), 40 SCRA 416.]
The rule has to be so because a deficiency tax indicates non-payment of the correct tax, and such deficiency
exists not only from the assessment thereof but from the very time the taxpayer failed to pay the correct
amount of tax when it should have been paid (Ibid.) and the imposition thereof is mandatory even in the
absence of fraud or wilful failure to pay the tax is full.
As regards interest, the reason is —
The imposition of 1% monthly is but a just compensation to the State for the delay in paying
the tax and for the concomitant use by the taxpayer of funds that rightfully should be in the
government s hands. (U.S. vs. Goldstein, 189 F (2d) 752; Ross vs. U.S. 148 Fed. Supp.
330; U.S. vs. Joffray 97 Fed. (2d) 488.) The fact that the interest charged is made
proportionate to the period of delay constitutes the best evidence that such interest is not
penal but compensator (Castro vs. Collector of Internal Revenue, G.R. L-12174, Dec. 28,
1662, Resolution on Motion for Reconsideration.)
As regards the prescribed 5% surcharge, this Court has had occasion to cite the reason for the strict
enforcement thereof.
Strong reasons of policy support a strict observance of this rule. Tax laws imposing
penalties for deliquencies are clearly intended to hasten tax payments or to punish evasion
or neglect of duty in respect thereof. If delays in tax payments are to be condoned for light
reasons, the law imposing penalties for delinquencies would be rendered nugatory, and
the maintenance of the government and its multifarious activities would be as precarious
as taxpayers are wining or unwilling to pay their obligations to the state in time. Imperatives
of public welfare will not approve of this result. (Jamora vs. Meer, 74 PhiL 22.)
WHEREFORE, the judgment under review is affirmed in toto. Costs against the petitioner.
SO ORDERED.
SUPREME COURT
Manila
EN BANC
G.R. No. L-16552 March 30, 1962
COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ALBERTO M. K. JAMIR, respondent.
Office of the Solicitor General for petitioner.

Alberto M. K. Jamir for and in his own behalf as respondent.
CONCEPCION, J.:
This is an appeal by the Government from a decision of the Court of Tax Appeals.
In his income tax return for the year 1954, Alberto M. K. Jamir declared a gross income of P75,858.65 and
claimed deductions aggregating P58,134.50, thereby showing a net income of P17,774.15, upon which he
paid P1,634 as income tax. Upon examination of his aforementioned return, as well as of his books of
account and other records, Collector of Internal Revenue, however, assessed, as deficiency income tax
due from him, the sum of P16,395 computed as follows:
Net income as per return P17,724.15
Add : Disallowances —
1. Purchases overstated P1,118.95
2. Unrecorded income 31,274.91
3. Bank charges 45.67
4. Car depreciation 400.00
5. Salary of driver 720.00
6. Transportation 576.20
P34,135.73
Total adjustments . . . . . . . . . . . .
Net income as adjusted P51,859.89
Less personal and additional exemptions 6,000.00
<="" td="" size="1">
Net taxable income P45,859.88
Income tax due on P45,859.88 12,564.00
Less amount previously assessed and paid 1,634.00
50% surcharge 5,465.00
Total deficiency tax surcharge P16,395.00

===========
A reconsideration of this assessment having been denied, Jamir appealed to the Court of Tax Appeals,
which after due notice and hearing, rendered a decision reducing the amount due as deficiency income tax
for the year 1954 to P552,00, computed as follows: .
Net income per return P17,724.15

Add : Disallowances —
1. Overstated purchases P1,118.95
2. Bank charges 45.67
3. Car depreciation (1/4) 200.00
4. Salary of driver (1/4) 360.00
576.20 2,300.15
5. Transportation expenses
Net income as adjusted P20,024.97
Less personal and additional exemptions 6,000.00
Net taxable income P14,024.97

============
Income tax due on P14,024.97 P2,186.00
Less amount previously assessed and paid 1,634.00
Deficiency income tax P552.00
The main issue is whether Jamir had an undeclared income for the year 1954 aggregating P31,274.91,
consisting, according to appellant, of the sums of P1,281.24 and P29,993.67, representing the amounts by
which his expenses for February and May, 1954, respectively, had exceeded his income therefor. It appears
that, by using the so-called "expenditures method", the Government considered as an undeclared income
so much of Jamir's expenditures for said months as was in excess of his reported income for the same
months. Although the Court of Tax Appeals, in effect, sanctioned the adoption of the "expenditures method",
it held — and, we think, correctly — that, the same should be applied by deducting the aggregate yearly
expenditures from the declared yearly income, not the expenditures incurred each month from the declared
income therefor. In the case at bar, Jamir's total income for the year 1954 (P75,858.65) exceeded
(Pl7,774.15) the total deductions (P58,134.50) claimed by him. Indeed, Jamir explained and introduced
evidence to the effect that the said sums of P1,281.24 and P29,993.67 represented advances made to him
by customers in the months of February and May, 1954, and that the income derived from the corresponding
transactions were entered in his books of account in subsequent months, and this explanation was found
by the Court of Tax Appeals to have been proven satisfactorily. The records before us do not warrant a
different conclusion.
The next question raised by appellant refers to Jamir's claim for car depreciation and salary of his driver in
the sums of P800.00 and P1,440.00, respectively. Although petitioner had disallowed one-half (1/2) of these
claims, it appearing that the car was used by Jamir for personal and business purposes, the lower court
allowed, as deductions, three-fourths (3/4) of said amounts, the car having been used by Jamir "more for
business than for personal purpose". Petitioner assails this as an error, but, considering the attending
circumstances, we do not feel justified in disturbing the action taken by said Court.1äwphï1.ñët
It is next urged that the same should have upheld instead of eliminating, the 50% surcharge imposed in the
contested assessment, for alleged fraud on the part of Jamir. It appearing, however, that Jamir had not had
the undeclared income of P31,274.91, upon which the contested assessment is mainly based, it follows
necessarily that he was not guilty of the fraud imputed to him and that the 50% surcharge has been properly
eliminated.
WHEREFORE, the decision appealed from is hereby affirmed, without costs. It is so ordered.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Barrera, Paredes, Dizon and De Leon, JJ., concur.
EN BANC
[G.R. No. L-8505. May 30, 1956.]
THE COLLECTOR OF INTERNAL REVENUE, Petitioner, vs. THE PHILIPPINE EDUCATION CO.,
INC., Respondent.
DECISION
PARAS, J.:
There is no dispute as to the facts, since the same have been stipulated by the parties. The Philippine
Education Co., Inc., Respondent herein, lost all its pre-war books of accounts and records, with the
exception of a copy of the trial balance sheet of November 30, 1941. The accounting firm of Dalupan,
Sanchez & Co. was employed to prepare and prove Respondent’s war damage claim, as in fact it did so.
On October 29, 1948, the War Damage Commission made the first payment of P402,273.96 to the
Respondent which paid to Dalupan, Sanchez & Co. the sum of P13,045.48 as the latter’s stipulated fee. In
the income tax return filed by the Respondent for the fiscal year ending on March 31, 1949, the Respondent
claimed the sum of P13,045.48 as a deduction under section 30 of the National Internal Revenue Code.
Disallowing said deduction, the Collector of Internal Revenue, Petitioner herein, assessed against the
Respondent the sum of P2,405.14 as deficiency income tax on the amount of P13,045.48, including
surcharge, penalty and interest, payment of which was demanded from the Respondent. Refusing to
acquiesce in said ruling, the Respondent appealed to the Court of Tax Appeals which rendered a decision
reversing the view of the Petitioner and declaring the Respondent exempt from the deficiency income tax
in question.
The legal provision involved is section 30 of the National Internal Revenue Code which allows as deductions
“all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade
or business.” As pointed out by the Court of Tax Appeals, three conditions are imposed:ch (1) The expense
must be ordinary and necessary; y(2) it must be paid or incurred within the taxable year;yand (3) it must be
paid or incurred in carrying on a trade or business.
It is admitted that the sum of P13,045.13 was paid by the Respondent to Dalupan, Sanchez & Co. within
the fiscal year 1949. The questions to be decided are whether or not the expense in question was ordinary
and necessary and whether or not it was paid or incurred in carrying on Respondent’s business.
It is Petitioner’s theory that the Respondent is a corporation engaged in the purchase and sale of textbooks,
magazines, office and school supplies, and a variety of other merchandise and commodities; that it was
never normally and customarily engaged in filing petitions for war damage compensation; ch that, therefore,
the fee paid by it to the accounting firm of Dalupan, Sanchez & Co. was not incurred in the kind of business
transactions in which it is normally and customarily engaged.
In our opinion, this view is too narrow and technical. To carry on its business, even as specified by the
Petitioner, the Respondent not only must have sufficient assets but must preserve the same and recover
any that should be lost. The fee in question was paid by the Respondent to recover its lost assets
occasioned by the war and thereby to be so rehabilitated as to be able to carry on its business. The law
does not say that the expense must be for or on account of transactions in one’s trade or business.
As stated in Merten’s Law of Federal Income Taxation, Vol. IV, “ordinarily, an expense will be considered
necessary where the expenditure is appropriate and helpful in the development of the taxpayer’s business”
(page 35); “it is sufficient that the expense were incurred for purposes proper to the conduct of the corporate
affairs or for the purpose of realizing a profit or of minimizing a loss” (pp. 382-383); y“the term ‘ordinary’ as
used in these statutes does not require that the payments be habitual or normal in the sense that the same
taxpayer will have to make them often;ythe payment may be unique or non-recurring to the particular
taxpayer affected” (p. 316);yand “attorney’s fees for services rendered in the prosecution of claim before
the Mixed Claims Commission are deductible” (p. 346). There is no essential difference between attorney’s
fees and that paid to an accountant, as regards the benefit derived by the claimant. With particular reference
to attorney’s fees, the following cases were cited:c Commissioner of Internal Revenue vs. Ullmann 77 F
(2d) 827, 296, U.S. 631, 80 L fd. 449, 56 SCRA 155 (1935), and Commissioner of Internal Revenue vs.
Speyer 77 F (2d) 824, 296 U. S. 631, 80 L fd. 449, 56 SCRA 1955. The Petitioner observes, however, that
these cases are not applicable because there is no law of the United States Federal Government exempting
the proceeds of war damage claims from taxes. This observation is successfully answered by the
Respondent which has pointed out that the exemption provided in Republic Act No. 227 is a surplusage,
because even without said statutory exemption, a war damage compensation would still not be subject to
tax, not being an income. “The word ‘income’, as used in the sixteenth amendment, cannot be construed
to include property other than income, even if such property is described as income by an act of Congress.”
(Brewester vs. Walch, D. C. Conn. 268 F207, 216.) “Compensation for injury to capital is never ‘income,’
no matter when collected.” (H. Liebes & Co. vs. Commissioner of Internal Revenue, C. C. A. 9, 90 F 2nd
932.)
The Petitioner also resorts to the argument that Republic Act No. 227 gives taxpayers double benefits,
namely, that of deducting from the gross income the loss sustained, and that of exempting the recovered
amounts from income tax; and if the fees incurred in the recovery of war damage compensation can be
allowed as a deduction, it would work to the great prejudice and disadvantage of the Government. As ruled
by the Court of Tax Appeals, “the questioned item represent legitimate business expense incurred in the
recovery of losses and it has never been deducted by Petitioner (Respondent herein) as part of his war
losses.” And the Respondent, moreover, add “Besides, there is nothing in the stipulation of facts which
suggest even vaguely that there was in this case an infringement of the double-benefit theory. On the
contrary, the Respondent failed to deduct in any of its income tax returns its war losses, and even the
amount of its approved claim which the United States Philippine War Damage Commission did not pay for
lack of appropriation.”
Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed. So ordered, without costs.
Bengzon, Padilla, Montemayor, Reyes, A., Jugo, Bautista Angelo, Labrador, Concepcion, Reyes,
J.B.L., and Endencia, JJ., concur.
SUPREME COURT
Manila
EN BANC
G.R. No. L-16626 October 29, 1966

vs.
CARLOS PALANCA, JR., respondent.
Office of the Solicitor General for petitioner.

Manuel B. San Jose for respondent.
REGALA, J.:
This is an appeal by the Government from the decision of the Court of Tax Appeals in CTA Case No. 571
ordering the petitioner to refund to the respondent the amount of P20,624.01 representing alleged over-
payment of income taxes for the calendar year 1955. The facts are:
Sometime in July, 1950, the late Don Carlos Palanca, Sr. donated in favor of his son, the petitioner,
herein shares of stock in La Tondeña, Inc. amounting to 12,500 shares. For failure to file a return
on the donation within the statutory period, the petitioner was assessed the sums of P97,691.23,
P24,442.81 and P47,868.70 as gift tax, 25% surcharge and interest, respectively, which he paid on
June 22, 1955.
On March 1, 1956, the petitioner filed with the Bureau of Internal Revenue his income tax return for
the calendar year 1955, claiming, among others, a deduction for interest amounting to P9,706.45
and reporting a taxable income of P65,982.12. On the basis of this return, he was assessed the
sum of P21,052.91, as income tax, which he paid, as follows:
Taxes withheld by La Tondeña Inc. from Mr. Palanca's

wages P13,172.41
Payment under Income Tax Receipt No. 677395 dated

May 11, 1956 3,939.80
Payment under Income Tax Receipt dated August 14,

1956 3,939.80
P21,052.01
Subsequently, on November 10, 1956, the petitioner filed an amended return for the calendar year
1955, claiming therein an additional deduction in the amount of P47,868.70 representing interest
paid on the donee's gift tax, thereby reporting a taxable net income of P18,113.42 and a tax due
thereon in the sum of P3,167.00. The claim for deduction was based on the provisions of Section
30(b) (1) of the Tax Code, which authorizes the deduction from gross income of interest paid within
the taxable year on indebtedness. A claim for the refund of alleged overpaid income taxes for the
year 1955 amounting to P17,885.01, which is the difference between the amount of P21,052.01 he
paid as income taxes under his original return and of P3,167.00, was filed together with this
amended return. In a communication dated June 20, 1957, the respondent (BIR) denied the claim
for refund.
On August 27, 1957, the petitioner reiterated his claim for refund, and at the same time requested
that the case be elevated to the Appellate Division of the Bureau of Internal Revenue for decision.
The reiterated claim was denied on October 14, 1957.
On November 2, 1957, the petitioner requested that the case be referred to the Conference Staff
of the Bureau of Internal Revenue for review. Later, on November 6, 1957, he requested the
respondent to hold his action on the case in abeyance until after the Court of Tax Appeals renders
its division on a similar case. And on November 7, 1957, the respondent denied the claim for the
refund of the sum of P17,885.01.
Meanwhile, the Bureau of Internal Revenue considered the transfer of 12,500 shares of stock of La
Tondeña Inc. to be a transfer in contemplation of death pursuant to Section 88(b) of the National
Internal Revenue Code. Consequently, the respondent assessed against the petitioner the sum of
P191,591.62 as estate and inheritance taxes on the transfer of said 12,500 shares of stock. The
amount of P17,002.74 paid on June 22, 1955 by the petitioner as gift tax, including interest and
surcharge, under Official Receipt No. 2855 was applied to his estate and inheritance tax liability.
On the tax liability of P191,591.62, the petitioner paid the amount of P60,581.80 as interest for
delinquency as follows:
1% monthly interest on P76,724.38 P22,633.69

September 2, 1952 to February 16, 1955
1% monthly interest on P71,264.77 1,068.97

February 16, 1955 to March 31, 1955

September 2, 1952 to April 16, 1953

March 31, 1955 to June 22, 1955

April 16, 1953 to June 22, 1955
Total P60,581.80
On August 12, 1958, the petitioner once more filed an amended income tax return for the calendar
year 1955, claiming, in addition to the interest deduction of P9,076.45 appearing in his original
return, a deduction in the amount of P60,581.80, representing interest on the estate and inheritance
taxes on the 12,500 shares of stock, thereby reporting a net taxable income for 1955 in the amount
of P5,400.32 and an income tax due thereon in the sum of P428.00. Attached to this amended
return was a letter of the petitioner, dated August 11, 1958, wherein he requested the refund of
P20,624.01 which is the difference between the amounts of P21,052.01 he paid as income tax
under his original return and of P428.00.
Without waiting for the respondent's decision on this claim for refund, the petitioner filed his petition
for review before this Court on August 13, 1958. On July 24, 1959, the respondent denied the
petitioner's request for the refund of the sum of P20,624.01.
The Commissioner of Internal Revenue now seeks the reversal of the Court of Tax Appeal's ruling on the
aforementioned petition for review. Specifically, he takes issue with the said court's determination that the
amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible
from the gross income for that year under Section 30 (b) (1) of the Revenue Code, and, that said
respondent's claim for refund therefor has not prescribed.
On the first point, the Commissioner urges that a tax is not an indebtedness. Citing American cases, he
argues that there is a material and fundamental distinction between a "tax" and a "debt." (Meriwether v.
Garrett, 102 U.S. 427; Liberty Mutual Ins. Co. v. Johnson Shipyards Corporation, 5 AFTR pp. 5504, 5507;
City of Camden v. Allen, 26 N.J. Law, p. 398). He adopts the view that "debts are due to the government in
its corporate capacity, while taxes are due to the government in its sovereign capacity. A debt is a sum of
money due upon contract express or implied or one which is evidenced by a judgment. Taxes are imposts
levied by government for its support or some special purpose which the government has recognized." In
view of the distinction, then, the Commissioner submits that the deductibility of "interest on indebtedness"
from a person's income tax under Section 30(b) (1) cannot extend to "interest on taxes."
We find for the respondent. While "taxes" and "debts" are distinguishable legal concepts, in certain cases
as in the suit at bar, on account of their nature, the distinction becomes inconsequential. This qualification
is recognized even in the United States. Thus,
The term "debt" is properly used in a comprehensive sense as embracing not merely money due
by contract, but whatever one is bound to render to another, either for contract or the requirements
of the law. (Camden vs. Fink Coule and Coke Co., 61 ALR 584).
Where statutes impose a personal liability for a tax, the tax becomes at least in a broad sense, a
debt. (Idem.)
Some American authorities hold that, especially for remedial purposes, Federal taxes are debts.
(Tax Commission vs. National Malleable Castings Co., 35 ALR 1448)
In our jurisdiction, the rule is settled that although taxes already due have not, strictly speaking, the same
concept as debts, they are, however obligations that may be considered as such. (Sambrano vs. Court of
Tax Appeals, G.R. no. L-8652, March 30, 1957). In a more recent case Commissioner of Internal Revenue
vs. Prieto, G.R. No. L-13912, September 30, 1960, we explicitly announced that while the distinction
between "taxes" and "debts" was recognized in this jurisdiction, the variance in their legal conception does
not extend to the interests paid on them, at least insofar as Section 30 (b) (1) of the National Internal
Revenue Code is concerned. Thus,
Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that
there should be interest upon it, and that what is claimed as an interest deduction should have
been paid or accrued within the year. It is here conceded that the interest paid by respondent was
in consequence of the late payment of her donor's tax, and the same was paid within the year it is
sought to be deducted. The only question to be determined, as stated by the parties, is whether or
not such interest was paid upon an indebtedness within the contemplation of Section 30(b) (1) of
the Tax Code, the pertinent part of which reads:
Sec. 30. Deductions from gross income — In computing net income there shall be allowed
as deductions —
xxx xxx xxx
"Interest:
(1) In general. — The amount of interest paid within the taxable year on indebtedness,
except on indebtedness incurred or continued to purchase or carry obligations the interest
upon which is exempt from taxation as income under this Title.
The term "indebtedness" as used in the Tax Code of the United States containing similar
provisions as in the above-quoted section has been defined as the unconditional and
legally enforceable obligation for the payment of money. (Federal Taxes Vol. 2, p. 13, 019,
Prentice Hall, Inc.; Mertens' Law of Federal Income Taxation, Vol. 4, p. 542.) Within the
meaning of that definition, it is apparent that a tax may be considered an indebtedness. . .
. (Emphasis supplied)
"It follows that the interest paid by herein respondent for the late payment of her donor's
tax is deductible from her gross income under section 30 (b) of the Tax Code above-
quoted."
We do not see any element in this case which can justify a departure from or abandonment of the doctrine
in the Prieto case above. In both this and the said case, the taxpayer sought the allowance as deductible
items from the gross income of the amounts paid by them as interests on delinquent tax liabilities. Of course,
what was involved in the cited case was the donor's tax while the present suit pertains to interest paid on
the estate and inheritance tax. This difference, however, submits no appreciable consequence to the
rationale of this Court's previous determination that interests on taxes should be considered as interests on
indebtedness within the meaning of Section 30(b) (1) of the Tax Code. The interpretation we have placed
upon the said section was predicated on the congressional intent, not on the nature of the tax for which the
interest was paid.
On the issue of prescription: There were actually two claims for refund filed by the herein respondent, Carlos
Palanca, Jr., anent the case at bar. The first one was on November 10, 1956, when he filed a claim for
refund on the interest paid by him on the donee's gift tax of P17,885.10, as originally demanded by the
Bureau of Internal Revenue. The second one was the one filed by him on August 12, 1958, which was a
claim for refund on the interest paid by him on the estate and inheritance tax assessed by the same Bureau
in the amount of P20,624.01. Actually, this second assessment by the Bureau was for the same transaction
as that for which they assessed respondent Palanca the above donee's gift tax. The Bureau, however, on
further consideration, decided that the donation of the stocks in question was made in contemplation of
death, and hence, should be assessed as an inheritance. Thus the second assessment. The first claim was
denied by the petitioner for the first time on June 20, 1957. Thereafter, the said denial was twice reiterated,
on October 14, 1957 and November 7, 1957, upon respondent Palanca's plea for the reconsideration of the
ruling of June 20, 1957. The second claim was filed with the Court of Tax Appeals on August 13, 1958, or
even before the same had been denied by the petitioner. Respondent Palanca's second claim was denied
by the latter on July 24, 1959.
The petitioner contends that under Section 11 of Republic Act 1124, 1 the herein claimant's claim for refund
has prescribed since the same was filed outside the thirty-day period provided for therein. According to the
petitioner, the said prescriptive period commenced to run on October 14, 1947 when the denial by the
Bureau of Internal Revenue of the respondent Palanca's claim for refund, under his letter of November 10,
1956, became final. Considering that the case was filed with the Court of Tax Appeals only on August 13,
1958, then it is urged that the same had prescribed.
The petitioner also invokes prescription, at least with respect to the sum of P17,112.21, under Section 306
of the Tax Code.2 He claims that for the calendar year 1955, respondent Palanca paid his income tax as
follows:
Taxes withheld by La Tondeña Inc. from Mr. Palanca's

wages P13,172.41

May 11, 1956 3,939.89

August 14, 1956 3,939.89
P21,952.01
Therefore, the petitioner contends, the amounts paid by claimant Palanca under his withheld tax and under
Receipt No. 677395 dated May 11, 1956 may no longer be refunded since the claim therefor was filed in
court only on August 13, 1958, or beyond two years of their payment.
We find the petitioner's contention on prescription untenable.
In the first place, the 30-day period under Section 11 of Republic Act 1125 did not even commence to run
in this incident. It should be recalled that while the herein petitioner originally assessed the respondent-
claimant for alleged gift tax liabilities, the said assessment was subsequently abandoned and in its lieu, a
new one was prepared and served on the respondent-taxpayer. In this new assessment, the petitioner
charged the said respondent with an entirely new liability and for a substantially different amount from the
first. While initially the petitioner assessed the respondent for donee's gift tax in the amount of P170,002.74,
in the subsequent assessment the latter was asked to pay P191,591.62 for delinquent estate and
inheritance tax. Considering that it is the interest paid on this latter-assessed estate and inheritance tax that
respondent Palanca is claiming refund for, then the thirty-day period under the abovementioned section of
Republic Act 1125 should be computed from the receipt of the final denial by the Bureau of Internal Revenue
of the said claim. As has earlier been recited, respondent Palanca's claim in this incident was filed with the
Court of Tax Appeals even before it had been denied by the herein petitioner or the Bureau of Internal
Revenue. The case was filed with the said court on August 13, 1958 while the petitioner denied the claim
subject of the said case only on July 24, 1959.
In the second place, the claim at bar refers to the alleged overpayment by respondent Palanca of his 1955
income tax. Inasmuch as the said account was paid by him by installment, then the computation of the two-
year prescriptive period, under Section 306 of the National Internal Revenue Code, should be from the date
of the last installment. (Antonio Prieto, et al. vs. Collector of Internal Revenue, G.R. No. L-11976, August
29, 1961) Respondent Palanca paid the last installment on his 1955 income tax account on August 14,
1956. His claim for refund of the alleged overpayment on it was filed with the court on August 13, 1958. It
was, therefore, still timely instituted.
WHEREFORE, the decision appealed from is affirmed in full, without pronouncement on costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ.,
concur.
SUPREME COURT
Manila
EN BANC
G.R. Nos. 106949-50 December 1, 1995
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP), petitioner,

vs.
COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS,
respondents.
G.R. Nos. 106984-85 December 1, 1995
COMMISSIONER INTERNAL REVENUE, petitioner,

vs.
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES, THE COURT OF APPEALS and THE
COURT OF TAX APPEALS, respondents.
FELICIANO, J.:
The Paper Industries Corporation of the Philippines ("Picop"), which is petitioner in G.R. Nos. 106949-50
and private respondent in G.R. Nos. 106984-85, is a Philippine corporation registered with the Board of
Investments ("BOI") as a preferred pioneer enterprise with respect to its integrated pulp and paper mill, and
as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills.
On 21 April 1983, Picop received from the Commissioner of Internal Revenue ("CIR") two (2) letters of
assessment and demand both dated 31 March 1983: (a) one for deficiency transaction tax and for
documentary and science stamp tax; and (b) the other for deficiency income tax for 1977, for an aggregate
amount of P88,763,255.00. These assessments were computed as follows:
Transaction Tax
Interest payments on
money market
borrowings P 45,771,849.00
———————
35% Transaction tax due
thereon 16,020,147.00
Add: 25% surcharge 4,005,036.75
——————
T o t a l P 20,025,183.75
Add:
14% int. fr.
1-20-78 to
7-31-80 P 7,093,302.57
20% int, fr.
8-1-80 to
3-31-83 10,675,523.58
——————
17,768,826.15
——————
P 37,794,009.90
Documentary and Science Stamps Tax
Total face value of
debentures P100,000,000.00
Documentary Stamps
Tax Due
(P0.30 x P100,000.000 )
( P200 ) P 150,000.00
Science Stamps Tax Due
(P0.30 x P100,000,000 )
( P200 ) P 150,000.00
——————
T o t a l P 300,000.00
Add: Compromise for
non-affixture 300.00
——————
300,300.00
——————
TOTAL AMOUNT DUE AND COLLECTIBLE P 38,094,309.90
===========
Deficiency Income Tax for 1977
Net income per return P 258,166.00
Add: Unallowable deductions
1) Disallowed deductions
availed of under
R.A. No. 5186 P 44,332,980.00
2) Capitalized interest
expenses on funds
used for acquisition
of machinery & other
equipment 42,840,131.00
3) Unexplained financial
guarantee expense 1,237,421.00
4) Understatement
of sales 2,391,644.00
5) Overstatement of
cost of sales 604,018.00
——————
P91,406,194.00
Net income per investigation P91,664,360.00
Income tax due thereon 34,734,559.00
Less: Tax already assessed per return 80,358.00
——————
Deficiency P34,654,201.00
Add:
14% int. fr.
4-15-78 to
7-31-81 P 11,128,503.56
20% int. fr.
8-1-80 to
4-15-81 4,886,242.34
——————
P16,014,745.90
——————
TOTAL AMOUNT DUE AND COLLECTIBLE P 50,668,946.90 1
===========
On 26 April 1983, Picop protested the assessment of deficiency transaction tax and documentary and
science stamp taxes. Picop also protested on 21 May 1983 the deficiency income tax assessment for 1977.
These protests were not formally acted upon by respondent CIR. On 26 September 1984, the CIR issued
a warrant of distraint on personal property and a warrant of levy on real property against Picop, to enforce
collection of the contested assessments; in effect, the CIR denied Picop's protests.
Thereupon, Picop went before the Court of Tax Appeals ("CTA") appealing the assessments. After trial, the
CTA rendered a decision dated 15 August 1989, modifying the findings of the CIR and holding Picop liable
for the reduced aggregate amount of P20,133,762.33, which was itemized in the dispositive portion of the
decision as follows:
35% Transaction Tax P 16,020,113.20
Documentary & Science
Stamp Tax 300,300.00
Deficiency Income Tax Due 3,813,349.33
——————
TOTAL AMOUNT DUE AND PAYABLE P 20,133,762.53 2
===========
Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision
of the CTA. In two (2) Resolutions dated 7 February 1990 and 19 February 1990, respectively, the Court
referred the two (2) Petitions to the Court of Appeals. The Court of Appeals consolidated the two (2) cases
and rendered a decision, dated 31 August 1992, which further reduced the liability of Picop to
P6,338,354.70. The dispositive portion of the Court of Appeals decision reads as follows:
WHEREFORE, the appeal of the Commissioner of Internal Revenue is denied for lack of
merit. The judgment against PICOP is modified, as follows:
1. PICOP is declared liable for the 35% transaction tax in the amount of P3,578,543.51;
2. PICOP is absolved from the payment of documentary and science stamp tax of
P300,000.00 and the compromise penalty of P300.00;
3. PICOP shall pay 20% interest per annum on the deficiency income tax of P1,481,579.15,
for a period of three (3) years from 21 May 1983, or in the total amount of P888,947.49,
and a surcharge of 10% on the latter amount, or P88,984.75.
No pronouncement as to costs.
SO ORDERED.
Picop and the CIR once more filed separate Petitions for Review before the Supreme Court. These cases
were consolidated and, on 23 August 1993, the Court resolved to give due course to both Petitions in G.R.
Nos. 106949-50 and 106984-85 and required the parties to file their Memoranda.
Picop now maintains that it is not liable at all to pay any of the assessments or any part thereof. It assails
the propriety of the thirty-five percent (35%) deficiency transaction tax which the Court of Appeals held due
from it in the amount of P3,578,543.51. Picop also questions the imposition by the Court of Appeals of the
deficiency income tax of P1,481,579.15, resulting from disallowance of certain claimed financial guarantee
expenses and claimed year-end adjustments of sales and cost of sales figures by Picop's external auditors.
3
The CIR, upon the other hand, insists that the Court of Appeals erred in finding Picop not liable for surcharge
and interest on unpaid transaction tax and for documentary and science stamp taxes and in allowing Picop
to claim as deductible expenses:
(a) the net operating losses of another corporation (i.e., Rustan Pulp and Paper Mills, Inc.);
and
(b) interest payments on loans for the purchase of machinery and equipment.
The CIR also claims that Picop should be held liable for interest at fourteen percent (14%) per
annum from 15 April 1978 for three (3) years, and interest at twenty percent (20%) per annum for
a maximum of three (3) years; and for a surcharge of ten percent (10%), on Picop's deficiency
income tax. Finally, the CIR contends that Picop is liable for the corporate development tax
equivalent to five percent (5%) of its correct 1977 net income.
The issues which we must here address may be sorted out and grouped in the following manner:
I. Whether Picop is liable for:
(1) the thirty-five percent (35%) transaction tax;
(2) interest and surcharge on unpaid transaction tax; and
(3) documentary and science stamp taxes;
II. Whether Picop is entitled to deductions against income of:
(1) interest payments on loans for the purchase of

machinery and equipment;
(2) net operating losses incurred by the Rustan Pulp and

Paper Mills, Inc.; and
(3) certain claimed financial guarantee expenses; and
III. (1) Whether Picop had understated its sales and overstated its cost of
sales for 1977; and
(2) Whether Picop is liable for the corporate development

tax of five percent (5%) of its net income for 1977.
We will consider these issues in the foregoing sequence.
I.
(1) Whether Picop is liable

for the thirty-five percent
(35%) transaction tax.
With the authorization of the Securities and Exchange Commission, Picop issued commercial paper
consisting of serially numbered promissory notes with the total face value of P229,864,000.00 and a
maturity period of one (1) year, i.e., from 24 December 1977 to 23 December 1978. These promissory notes
were purchased by various commercial banks and financial institutions. On these promissory notes, Picop
paid interest in the aggregate amount of P45,771,849.00. In respect of these interest payments, the CIR
required Picop to pay the thirty-five percent (35%) transaction tax.
The CIR based this assessment on Presidential Decree No. 1154 dated 3 June 1977, which reads in part
as follows:
Sec. 1. The National Internal Revenue Code, as amended, is hereby further amended by
adding a new section thereto to read as follows:
Sec. 195-C. Tax on certain interest. — There shall be levied, assessed, collected and paid
on every commercial paper issued in the primary market as principal instrument, a
transaction tax equivalent to thirty-five percent (35%) based on the gross amount of interest
thereto as defined hereunder, which shall be paid by the borrower/issuer: Provided,
however, that in the case of a long-term commercial paper whose maturity exceeds more
than one year, the borrower shall pay the tax based on the amount of interest
corresponding to one year, and thereafter shall pay the tax upon accrual or actual payment
(whichever is earlier) of the untaxed portion of the interest which corresponds to a period
not exceeding one year.
The transaction tax imposed in this section shall be a final tax to be paid by the borrower
and shall be allowed as a deductible item for purposes of computing the borrower's taxable
income.
For purposes of this tax —
(a) "Commercial paper" shall be defined as an instrument evidencing indebtedness of any

person or entity, including banks and non-banks performing quasi-banking functions, which
is issued, endorsed, sold, transferred or in any manner conveyed to another person or
entity, either with or without recourse and irrespective of maturity. Principally, commercial
papers are promissory notes and/or similar instruments issued in the primary market and
shall not include repurchase agreements, certificates of assignments, certificates of
participations, and such other debt instruments issued in the secondary market.
(b) The term "interest" shall mean the difference between what the principal borrower
received and the amount it paid upon maturity of the commercial paper which shall, in no
case, be lower than the interest rate prevailing at the time of the issuance or renewal of the
commercial paper. Interest shall be deemed synonymous with discount and shall include
all fees, commissions, premiums and other payments which form integral parts of the
charges imposed as a consequence of the use of money.
In all cases, where no interest rate is stated or if the rate stated is lower than the prevailing
interest rate at the time of the issuance or renewal of commercial paper, the Commissioner
of Internal Revenue, upon consultation with the Monetary Board of the Central Bank of the
Philippines, shall adjust the interest rate in accordance herewith, and assess the tax on the
basis thereof.
The tax herein imposed shall be remitted by the borrower to the Commissioner of Internal
Revenue or his Collection Agent in the municipality where such borrower has its principal
place of business within five (5) working days from the issuance of the commercial paper.
In the case of long term commercial paper, the tax upon the untaxed portion of the interest
which corresponds to a period not exceeding one year shall be paid upon accrual payment,
whichever is earlier. (Emphasis supplied)
Both the CTA and the Court of Appeals sustained the assessment of transaction tax.
In the instant Petition, Picop reiterates its claim that it is exempt from the payment of the transaction tax by
virtue of its tax exemption under R.A. No. 5186, as amended, known as the Investment Incentives Act,
which in the form it existed in 1977-1978, read in relevant part as follows:
Sec. 8. Incentives to a Pioneer Enterprise. In addition to the incentives provided in the

preceding section, pioneer enterprises shall be granted the following incentive benefits:
(a) Tax Exemption. Exemption from all taxes under the National Internal Revenue Code,
except income tax, from the date the area of investment is included in the Investment
Priorities Plan to the following extent:
(1) One hundred per cent (100%) for the first five years;
(2) Seventy-five per cent (75%) for the sixth through the eighth years;
(3) Fifty per cent (50%) for the ninth and tenth years;
(4) Twenty per cent (20%) for the eleventh and twelfth years; and
(5) Ten per cent (10%) for the thirteenth through the fifteenth year.
xxx xxx xxx 4
We agree with the CTA and the Court of Appeals that Picop's tax exemption under R.A. No. 5186, as
amended, does not include exemption from the thirty-five percent (35%) transaction tax. In the first place,
the thirty-five percent (35%) transaction tax 5 is an income tax, that is, it is a tax on the interest income of
the lenders or creditors. In Western Minolco Corporation v. Commissioner of Internal Revenue, 6 the
petitioner corporation borrowed funds from several financial institutions from June 1977 to October 1977
and paid the corresponding thirty-five (35%) transaction tax thereon in the amount of P1,317,801.03,
pursuant to Section 210 (b) of the 1977 Tax Code. Western Minolco applied for refund of that amount
alleging it was exempt from the thirty-five (35%) transaction tax by reason of Section 79-A of C.A. No. 137,
as amended, which granted new mines and old mines resuming operation "five (5) years complete tax
exemptions, except income tax, from the time of its actual bonafide orders for equipment for commercial
production." In denying the claim for refund, this Court held:
The petitioner's contentions deserve scant consideration. The 35% transaction tax is
imposed on interest income from commercial papers issued in the primary money market.
Being a tax on interest, it is a tax on income.
As correctly ruled by the respondent Court of Tax Appeals:
Accordingly, we need not and do not think it necessary to discuss further

the nature of the transaction tax more than to say that the incipient scheme
in the issuance of Letter of Instructions No. 340 on November 24, 1975
(O.G. Dec. 15, 1975), i.e., to achieve operational simplicity and effective
administration in capturing the interest-income "windfall" from money
market operations as a new source of revenue, has lost none of its
animating principle in parturition of amendatory Presidential Decree No.
1154, now Section 210 (b) of the Tax Code. The tax thus imposed is
actually a tax on interest earnings of the lenders or placers who are
actually the taxpayers in whose income is imposed. Thus "the borrower
withholds the tax of 35% from the interest he would have to pay the lender
so that he (borrower) can pay the 35% of the interest to the Government."
(Citation omitted) . . . . Suffice it to state that the broad consensus of fiscal
and monetary authorities is that "even if nominally, the borrower is made
to pay the tax, actually, the tax is on the interest earning of the immediate
and all prior lenders/placers of the money. . . ." (Rollo, pp. 36-37)
The 35% transaction tax is an income tax on interest earnings to the lenders or placers.
The latter are actually the taxpayers. Therefore, the tax cannot be a tax imposed upon the
petitioner. In other words, the petitioner who borrowed funds from several financial
institutions by issuing commercial papers merely withheld the 35% transaction tax before
paying to the financial institutions the interests earned by them and later remitted the same
to the respondent Commissioner of Internal Revenue. The tax could have been collected
by a different procedure but the statute chose this method. Whatever collecting procedure
is adopted does not change the nature of the tax.
xxx xxx xxx 7
(Emphasis supplied)
Much the same issue was passed upon in Marinduque Mining Industrial Corporation v.
Commissioner of Internal Revenue 8 and resolved in the same way:
It is very obvious that the transaction tax, which is a tax on interest derived from commercial
paper issued in the money market, is not a tax contemplated in the above-quoted legal
provisions. The petitioner admits that it is subject to income tax. Its tax exemption should
be strictly construed.
We hold that petitioner's claim for refund was justifiably denied. The transaction tax,
although nominally categorized as a business tax, is in reality a withholding tax as positively
stated in LOI No. 340. The petitioner could have shifted the tax to the lenders or recipients
of the interest. It did not choose to do so. It cannot be heard now to complain about the tax.
LOI No. 340 is an extraneous or extrinsic aid to the construction of section 210 (b).
xxx xxx xxx 9
(Emphasis supplied)
It is thus clear that the transaction tax is an income tax and as such, in any event, falls outside the scope
of the tax exemption granted to registered pioneer enterprises by Section 8 of R.A. No. 5186, as amended.
Picop was the withholding agent, obliged to withhold thirty-five percent (35%) of the interest payable to its
lenders and to remit the amounts so withheld to the Bureau of Internal Revenue ("BIR"). As a withholding
agent, Picop is made personally liable for the thirty-five percent (35%) transaction tax 10 and if it did not
actually withhold thirty-five percent (35%) of the interest monies it had paid to its lenders, Picop had only
itself to blame.
Picop claims that it had relied on a ruling, dated 6 October 1977, issued by the CIR, which held that Picop
was not liable for the thirty-five (35%) transaction tax in respect of debenture bonds issued by Picop. Prior
to the issuance of the promissory notes involved in the instant case, Picop had also issued debenture bonds
P100,000,000.00 in aggregate face value. The managing underwriter of this debenture bond issue, Bancom
Development Corporation, requested a formal ruling from the Bureau of Internal Revenue on the liability of
Picop for the thirty-five percent (35%) transaction tax in respect of such bonds. The ruling rendered by the
then Acting Commissioner of Internal Revenue, Efren I. Plana, stated in relevant part:
It is represented that PICOP will be offering to the public primary bonds in the aggregate
principal sum of one hundred million pesos (P100,000,000.00); that the bonds will be
issued as debentures in denominations of one thousand pesos (P1,000.00) or multiples,
to mature in ten (10) years at 14% interest per annum payable semi-annually; that the
bonds are convertible into common stock of the issuer at the option of the bond holder at
an agreed conversion price; that the issue will be covered by a "Trust Indenture" with a
duly authorized trust corporation as required by the Securities and Exchange Commission,
which trustee will act for and in behalf of the debenture bond holders as beneficiaries; that
once issued, the bonds cannot be preterminated by the holder and cannot be redeemed
by the issuer until after eight (8) years from date of issue; that the debenture bonds will be
subordinated to present and future debts of PICOP; and that said bonds are intended to
be listed in the stock exchanges, which will place them alongside listed equity issues.
In reply, I have the honor to inform you that although the bonds hereinabove described are
commercial papers which will be issued in the primary market, however, it is clear from the
abovestated facts that said bonds will not be issued as money market instruments. Such
being the case, and considering that the purposes of Presidential Decree No. 1154, as can
be gleaned from Letter of Instruction No. 340, dated November 21, 1975, are (a) to regulate
money market transactions and (b) to ensure the collection of the tax on interest derived
from money market transactions by imposing a withholding tax thereon, said bonds do not
come within the purview of the "commercial papers" intended to be subjected to the 35%
transaction tax prescribed in Presidential Decree No. 1154, as implemented by Revenue
Regulations No. 7-77. (See Section 2 of said Regulation) Accordingly, PICOP is not subject
to 35% transaction tax on its issues of the aforesaid bonds. However, those investing in
said bonds should be made aware of the fact that the transaction tax is not being imposed
on the issuer of said bonds by printing or stamping thereon, in bold letters, the following
statement: "ISSUER NOT SUBJECT TO TRANSACTION TAX UNDER P.D. 1154.
BONDHOLDER SHOULD DECLARE INTEREST EARNING FOR INCOME TAX." 11
(Emphases supplied)
In the above quoted ruling, the CIR basically held that Picop's debenture bonds did not constitute
"commercial papers" within the meaning of P.D. No. 1154, and that, as such, those bonds were not subject
to the thirty-five percent (35%) transaction tax imposed by P.D. No. 1154.
The above ruling, however, is not applicable in respect of the promissory notes which are the subject matter
of the instant case. It must be noted that the debenture bonds which were the subject matter of
Commissioner Plana's ruling were long-term bonds maturing in ten (10) years and which could not be pre-
terminated and could not be redeemed by Picop until after eight (8) years from date of issue; the bonds
were moreover subordinated to present and future debts of Picop and convertible into common stock of
Picop at the option of the bondholder. In contrast, the promissory notes involved in the instant case are
short-term instruments bearing a one-year maturity period. These promissory notes constitute the very
archtype of money market instruments. For money market instruments are precisely, by custom and usage
of the financial markets, short-term instruments with a tenor of one (1) year or less. 12 Assuming, therefore,
(without passing upon) the correctness of the 6 October 1977 BIR ruling, Picop's short-term promissory
notes must be distinguished, and treated differently, from Picop's long-term debenture bonds.
We conclude that Picop was properly held liable for the thirty-five percent (35%) transaction tax due in
respect of interest payments on its money market borrowings.
At the same time, we agree with the Court of Appeals that the transaction tax may be levied only in respect
of the interest earnings of Picop's money market lenders accruing after P.D. No. 1154 went into effect, and
not in respect of all the 1977 interest earnings of such lenders. The Court of Appeals pointed out that:
PICOP, however contends that even if the tax has to be paid, it should be imposed only for
the interests earned after 20 September 1977 when PD 1154 creating the tax became
effective. We find merit in this contention. It appears that the tax was levied on interest
earnings from January to October, 1977. However, as found by the lower court, PD 1154
was published in the Official Gazette only on 5 September 1977, and became effective
only fifteen (15) days after the publication, or on 20 September 1977, no other effectivity
date having been provided by the PD. Based on the Worksheet prepared by the
Commissioner's office, the interests earned from 20 September to October 1977 was
P10,224,410.03. Thirty-five (35%) per cent of this is P3,578,543.51 which is all PICOP
should pay as transaction tax. 13 (Emphasis supplied)
P.D. No. 1154 is not, in other words, to be given retroactive effect by imposing the thirty-five percent (35%)
transaction tax in respect of interest earnings which accrued before the effectivity date of P.D. No. 1154,
there being nothing in the statute to suggest that the legislative authority intended to bring about such
retroactive imposition of the tax.
(2) Whether Picop is liable

for interest and surcharge
on unpaid transaction tax.
With respect to the transaction tax due, the CIR prays that Picop be held liable for a twenty-five percent
(25%) surcharge and for interest at the rate of fourteen percent (14%) per annum from the date prescribed
for its payment. In so praying, the CIR relies upon Section 10 of Revenue Regulation 7-77 dated 3 June
1977, 14 issued by the Secretary of Finance. This Section reads:
Sec. 10. Penalties. — Where the amount shown by the taxpayer to be due on its return or
part of such payment is not paid on or before the date prescribed for its payment, the
amount of the tax shall be increased by twenty-five (25%) per centum, the increment to be
a part of the tax and the entire amount shall be subject to interest at the rate of fourteen
(14%) per centum per annum from the date prescribed for its payment.
In the case of willful neglect to file the return within the period prescribed herein or in case
a false or fraudulent return is willfully made, there shall be added to the tax or to the
deficiency tax in case any payment has been made on the basis of such return before the
discovery of the falsity or fraud, a surcharge of fifty (50%) per centum of its amount. The
amount so added to any tax shall be collected at the same time and in the same manner
and as part of the tax unless the tax has been paid before the discovery of the falsity or
fraud, in which case the amount so added shall be collected in the same manner as the
tax.
In addition to the above administrative penalties, the criminal and civil penalties as provided
for under Section 337 of the Tax Code of 1977 shall be imposed for violation of any
provision of Presidential Decree No. 1154. 15 (Emphases supplied)
The 1977 Tax Code itself, in Section 326 in relation to Section 4 of the same Code, invoked by the
Secretary of Finance in issuing Revenue Regulation 7-77, set out, in comprehensive terms, the
rule-making authority of the Secretary of Finance:
Sec. 326. Authority of Secretary of Finance to Promulgate Rules and Regulations. — The
Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue,
shall promulgate all needful rules and regulations for the effective enforcement of the
provisions of this Code. (Emphasis supplied)
Section 4 of the same Code contains a list of subjects or areas to be dealt with by the Secretary of
Finance through the medium of an exercise of his quasi-legislative or rule-making authority. This
list, however, while it purports to be open-ended, does not include the imposition of administrative
or civil penalties such as the payment of amounts additional to the tax due. Thus, in order that it
may be held to be legally effective in respect of Picop in the present case, Section 10 of Revenue
Regulation 7-77 must embody or rest upon some provision in the Tax Code itself which imposes
surcharge and penalty interest for failure to make a transaction tax payment when due.
P.D. No. 1154 did not itself impose, nor did it expressly authorize the imposition of, a surcharge and penalty
interest in case of failure to pay the thirty-five percent (35%) transaction tax when due. Neither did Section
210 (b) of the 1977 Tax Code which re-enacted Section 195-C inserted into the Tax Code by P.D. No. 1154.
The CIR, both in its petition before the Court of Appeals and its Petition in the instant case, points to Section
51 (e) of the 1977 Tax Code as its source of authority for assessing a surcharge and penalty interest in
respect of the thirty-five percent (35%) transaction tax due from Picop. This Section needs to be quoted in
extenso:
Sec. 51. Payment and Assessment of Income Tax. —
(c) Definition of deficiency. — As used in this Chapter in respect of a tax imposed by this
Title, the term "deficiency" means:
(1) The amount by which the tax imposed by this Title exceeds the amount shown as the
tax by the taxpayer upon his return; but the amount so shown on the return shall first be
increased by the amounts previously assessed (or collected without assessment) as a
deficiency, and decreased by the amount previously abated, credited, returned, or
otherwise in respect of such tax; . . .
xxx xxx xxx
(e) Additions to the tax in case of non-payment. —
(1) Tax shown on the return. — Where the amount determined by the taxpayer as the tax
imposed by this Title or any installment thereof, or any part of such amount or installment
is not paid on or before the date prescribed for its payment, there shall be collected as a
part of the tax, interest upon such unpaid amount at the rate of fourteen per centum per
annum from the date prescribed for its payment until it is paid: Provided, That the maximum
amount that may be collected as interest on deficiency shall in no case exceed the amount
corresponding to a period of three years, the present provisions regarding prescription to
the contrary notwithstanding.
(2) Deficiency. — Where a deficiency, or any interest assessed in connection therewith

under paragraph (d) of this section, or any addition to the taxes provided for in Section
seventy-two of this Code is not paid in full within thirty days from the date of notice and
demand from the Commissioner of Internal Revenue, there shall be collected upon the
unpaid amount as part of the tax, interest at the rate of fourteen per centum per annum
from the date of such notice and demand until it is paid: Provided, That the maximum
amount that may be collected as interest on deficiency shall in no case exceed the amount
corresponding to a period of three years, the present provisions regarding prescription to
the contrary notwithstanding.
(3) Surcharge. — If any amount of tax included in the notice and demand from the
Commissioner of Internal Revenue is not paid in full within thirty days after such notice and
demand, there shall be collected in addition to the interest prescribed herein and in
paragraph (d) above and as part of the tax a surcharge of five per centum of the amount
of tax unpaid. (Emphases supplied)
Section 72 of the 1977 Tax Code referred to in Section 51 (e) (2) above, provides:
Sec. 72. Surcharges for failure to render returns and for rendering false and fraudulent
returns. — In case of willful neglect to file the return or list required by this Title within the
time prescribed by law, or in case a false or fraudulent return or list is wilfully made, the
Commissioner of Internal Revenue shall add to the tax or to the deficiency tax, in case any
payment has been made on the basis of such return before the discovery of the falsity or
fraud, as surcharge of fifty per centum of the amount of such tax or deficiency tax. In case
of any failure to make and file a return or list within the time prescribed by law or by the
Commissioner or other Internal Revenue Officer, not due to willful neglect, the
Commissioner of Internal Revenue shall add to the tax twenty-five per centum of its
amount, except that, when a return is voluntarily and without notice from the Commissioner
or other officer filed after such time, and it is shown that the failure to file it was due to a
reasonable cause, no such addition shall be made to the tax. The amount so added to any
tax shall be collected at the same time, in the same manner and as part of the tax unless
the tax has been paid before the discovery of the neglect, falsity, or fraud, in which case
the amount so added shall be collected in the same manner as the tax. (Emphases
supplied)
It will be seen that Section 51 (c) (1) and (e) (1) and (3), of the 1977 Tax Code, authorize the imposition of
surcharge and interest only in respect of a "tax imposed by this Title," that is to say, Title II on "Income Tax."
It will also be seen that Section 72 of the 1977 Tax Code imposes a surcharge only in case of failure to file
a return or list "required by this Title," that is, Title II on "Income Tax." The thirty-five percent (35%)
transaction tax is, however, imposed in the 1977 Tax Code by Section 210 (b) thereof which Section is
embraced in Title V on "Taxes on Business" of that Code. Thus, while the thirty-five percent (35%)
transaction tax is in truth a tax imposed on interest income earned by lenders or creditors purchasing
commercial paper on the money market, the relevant provisions, i.e., Section 210 (b), were not inserted in
Title II of the 1977 Tax Code. The end result is that the thirty-five percent (35%) transaction tax is not one
of the taxes in respect of which Section 51 (e) authorized the imposition of surcharge and interest and
Section 72 the imposition of a fraud surcharge.
It is not without reluctance that we reach the above conclusion on the basis of what may well have been an
inadvertent error in legislative draftsmanship, a type of error common enough during the period of Martial
Law in our country. Nevertheless, we are compelled to adopt this conclusion. We consider that the authority
to impose what the present Tax Code calls (in Section 248) civil penalties consisting of additions to the tax
due, must be expressly given in the enabling statute, in language too clear to be mistaken. The grant of
that authority is not lightly to be assumed to have been made to administrative officials, even to one as
highly placed as the Secretary of Finance.
The state of the present law tends to reinforce our conclusion that Section 51 (c) and (e) of the 1977 Tax
Code did not authorize the imposition of a surcharge and penalty interest for failure to pay the thirty-five
percent (35%) transaction tax imposed under Section 210 (b) of the same Code. The corresponding
provision in the current Tax Code very clearly embraces failure to pay all taxes imposed in the Tax Code,
without any regard to the Title of the Code where provisions imposing particular taxes are textually located.
Section 247 (a) of the NIRC, as amended, reads:
Title X
Statutory Offenses and Penalties
Chapter I
Additions to the Tax
Sec. 247. General Provisions. — (a) The additions to the tax or deficiency tax prescribed
in this Chapter shall apply to all taxes, fees and charges imposed in this Code. The amount
so added to the tax shall be collected at the same time, in the same manner and as part of
the tax. . . .
Sec. 248. Civil Penalties. — (a) There shall be imposed, in addition to the tax required to
be paid, penalty equivalent to twenty-five percent (25%) of the amount due, in the following
cases:
xxx xxx xxx
(3) failure to pay the tax within the time prescribed for its payment; or
xxx xxx xxx
(c) the penalties imposed hereunder shall form part of the tax and the entire amount shall
be subject to the interest prescribed in Section 249.
Sec. 249. Interest. — (a) In General. — There shall be assessed and collected on any
unpaid amount of tax, interest at the rate of twenty percent (20%) per annum or such higher
rate as may be prescribed by regulations, from the date prescribed for payment until the
amount is fully paid. . . . (Emphases supplied)
In other words, Section 247 (a) of the current NIRC supplies what did not exist back in 1977 when
Picop's liability for the thirty-five percent (35%) transaction tax became fixed. We do not believe we
can fill that legislative lacuna by judicial fiat. There is nothing to suggest that Section 247 (a) of the
present Tax Code, which was inserted in 1985, was intended to be given retroactive application by
the legislative authority. 16
(3) Whether Picop is Liable

for Documentary and
Science Stamp Taxes.
As noted earlier, Picop issued sometime in 1977 long-term subordinated convertible debenture bonds with
an aggregate face value of P100,000,000.00. Picop stated, and this was not disputed by the CIR, that the
proceeds of the debenture bonds were in fact utilized to finance the BOI-registered operations of Picop.
The CIR assessed documentary and science stamp taxes, amounting to P300,000.00, on the issuance of
Picop's debenture bonds. It is claimed by Picop that its tax exemption — "exemption from all taxes under
the National Internal Revenue Code, except income tax" on a declining basis over a certain period of time
— includes exemption from the documentary and science stamp taxes imposed under the NIRC.
The CIR, upon the other hand, stresses that the tax exemption under the Investment Incentives Act may
be granted or recognized only to the extent that the claimant Picop was engaged in registered operations,
i.e., operations forming part of its integrated pulp and paper project. 17 The borrowing of funds from the
public, in the submission of the CIR, was not an activity included in Picop's registered operations. The CTA
adopted the view of the CIR and held that "the issuance of convertible debenture bonds [was] not
synonymous [with] the manufactur[ing] operations of an integrated pulp and paper mill." 18
The Court of Appeals took a less rigid view of the ambit of the tax exemption granted to registered pioneer
enterprises. Said the Court of Appeals:
. . . PICOP's explanation that the debenture bonds were issued to finance its registered
operation is logical and is unrebutted. We are aware that tax exemptions must be applied
strictly against the beneficiary in order to deter their abuse. It would indeed be altogether
a different matter if there is a showing that the issuance of the debenture bonds had no
bearing whatsoever on the registered operations PICOP and that they were issued in
connection with a totally different business undertaking of PICOP other than its registered
operation. There is, however, a dearth of evidence in this regard. It cannot be denied that
PICOP needed funds for its operations. One of the means it used to raise said funds was
to issue debenture bonds. Since the money raised thereby was to be used in its registered
operation, PICOP should enjoy the incentives granted to it by R.A. 5186, one of which is
the exemption from payment of all taxes under the National Internal Revenue Code, except
income taxes, otherwise the purpose of the incentives would be defeated. Documentary
and science stamp taxes on debenture bonds are certainly not income taxes. 19 (Emphasis
supplied)
Tax exemptions are, to be sure, to be "strictly construed," that is, they are not to be extended beyond the
ordinary and reasonable intendment of the language actually used by the legislative authority in granting
the exemption. The issuance of debenture bonds is certainly conceptually distinct from pulping and paper
manufacturing operations. But no one contends that issuance of bonds was a principal or regular business
activity of Picop; only banks or other financial institutions are in the regular business of raising money by
issuing bonds or other instruments to the general public. We consider that the actual dedication of the
proceeds of the bonds to the carrying out of Picop's registered operations constituted a sufficient nexus
with such registered operations so as to exempt Picop from stamp taxes ordinarily imposed upon or in
connection with issuance of such bonds. We agree, therefore, with the Court of Appeals on this matter that
the CTA and the CIR had erred in rejecting Picop's claim for exemption from stamp taxes.
It remains only to note that after commencement of the present litigation before the CTA, the BIR took the
position that the tax exemption granted by R.A. No. 5186, as amended, does include exemption from
documentary stamp taxes on transactions entered into by BOI-registered enterprises. BIR Ruling No. 088,
dated 28 April 1989, for instance, held that a registered preferred pioneer enterprise engaged in the
manufacture of integrated circuits, magnetic heads, printed circuit boards, etc., is exempt from the payment
of documentary stamp taxes. The Commissioner said:
You now request a ruling that as a preferred pioneer enterprise, you are exempt from the
payment of Documentary Stamp Tax (DST).
In reply, please be informed that your request is hereby granted. Pursuant to Section 46
(a) of Presidential Decree No. 1789, pioneer enterprises registered with the BOI are
exempt from all taxes under the National Internal Revenue Code, except from all taxes
under the National Internal Revenue Code, except income tax, from the date the area of
investment is included in the Investment Priorities Plan to the following extent:
xxx xxx xxx
Accordingly, your company is exempt from the payment of documentary stamp tax to the
extent of the percentage aforestated on transactions connected with the registered
business activity. (BIR Ruling No. 111-81) However, if said transactions conducted by you
require the execution of a taxable document with other parties, said parties who are not
exempt shall be the one directly liable for the tax. (Sec. 173, Tax Code, as amended; BIR
Ruling No. 236-87) In other words, said parties shall be liable to the same percentage
corresponding to your tax exemption. (Emphasis supplied)
Similarly, in BIR Ruling No. 013, dated 6 February 1989, the Commissioner held that a registered
pioneer enterprise producing polyester filament yarn was entitled to exemption "from the
documentary stamp tax on [its] sale of real property in Makati up to December 31, 1989." It appears
clear to the Court that the CIR, administratively at least, no longer insists on the position it originally
took in the instant case before the CTA.
II
(1) Whether Picop is entitled

to deduct against current
income interest payments
on loans for the purchase
of machinery and equipment.
In 1969, 1972 and 1977, Picop obtained loans from foreign creditors in order to finance the purchase of
machinery and equipment needed for its operations. In its 1977 Income Tax Return, Picop claimed interest
payments made in 1977, amounting to P42,840,131.00, on these loans as a deduction from its 1977 gross
income.
The CIR disallowed this deduction upon the ground that, because the loans had been incurred for the
purchase of machinery and equipment, the interest payments on those loans should have been capitalized
instead and claimed as a depreciation deduction taking into account the adjusted basis of the machinery
and equipment (original acquisition cost plus interest charges) over the useful life of such assets.
Both the CTA and the Court of Appeals sustained the position of Picop and held that the interest deduction
claimed by Picop was proper and allowable. In the instant Petition, the CIR insists on its original position.
We begin by noting that interest payments on loans incurred by a taxpayer (whether BOI-registered or not)
are allowed by the NIRC as deductions against the taxpayer's gross income. Section 30 of the 1977 Tax
Code provided as follows:
Sec. 30. Deduction from Gross Income. — The following may be deducted from gross
income:
(a) Expenses:
xxx xxx xxx
(b) Interest:
(1) In general. — The amount of interest paid within the taxable year on
indebtedness, except on indebtedness incurred or continued to purchase
or carry obligations the interest upon which is exempt from taxation as
income under this Title: . . . (Emphasis supplied)
Thus, the general rule is that interest expenses are deductible against gross income and this
certainly includes interest paid under loans incurred in connection with the carrying on of the
business of the taxpayer. 20 In the instant case, the CIR does not dispute that the interest payments
were made by Picop on loans incurred in connection with the carrying on of the registered
operations of Picop, i.e., the financing of the purchase of machinery and equipment actually used
in the registered operations of Picop. Neither does the CIR deny that such interest payments were
legally due and demandable under the terms of such loans, and in fact paid by Picop during the tax
year 1977.
The CIR has been unable to point to any provision of the 1977 Tax Code or any other Statute that requires
the disallowance of the interest payments made by Picop. The CIR invokes Section 79 of Revenue
Regulations No. 2 as amended which reads as follows:
Sec. 79. Interest on Capital. — Interest calculated for cost-keeping or other purposes on
account of capital or surplus invested in the business, which does not represent a charge
arising under an interest-bearing obligation, is not allowable deduction from gross income.
(Emphases supplied)
We read the above provision of Revenue Regulations No. 2 as referring to so called "theoretical
interest," that is to say, interest "calculated" or computed (and not incurred or paid) for the purpose
of determining the "opportunity cost" of investing funds in a given business. Such "theoretical" or
imputed interest does not arise from a legally demandable interest-bearing obligation incurred by
the taxpayer who however wishes to find out, e.g., whether he would have been better off by lending
out his funds and earning interest rather than investing such funds in his business. One thing that
Section 79 quoted above makes clear is that interest which does constitute a charge arising under
an interest-bearing obligation is an allowable deduction from gross income.
It is claimed by the CIR that Section 79 of Revenue Regulations No. 2 was "patterned after" paragraph
1.266-1 (b), entitled "Taxes and Carrying Charges Chargeable to Capital Account and Treated as Capital
Items" of the U.S. Income Tax Regulations, which paragraph reads as follows:
(B) Taxes and Carrying Charges. — The items thus chargeable to capital accounts are —
(11) In the case of real property, whether improved or unimproved and whether productive
or nonproductive.
(a) Interest on a loan (but not theoretical interest of a taxpayer using his own funds). 21
The truncated excerpt of the U.S. Income Tax Regulations quoted by the CIR needs to be related to the
relevant provisions of the U.S. Internal Revenue Code, which provisions deal with the general topic of
adjusted basis for determining allowable gain or loss on sales or exchanges of property and allowable
depreciation and depletion of capital assets of the taxpayer:
Present Rule. The Internal Revenue Code, and the Regulations promulgated thereunder
provide that "No deduction shall be allowed for amounts paid or accrued for such taxes
and carrying charges as, under regulations prescribed by the Secretary or his delegate,
are chargeable to capital account with respect to property, if the taxpayer elects, in
accordance with such regulations, to treat such taxes or charges as so chargeable."
At the same time, under the adjustment of basis provisions which have just been discussed,
it is provided that adjustment shall be made for all "expenditures, receipts, losses, or other
items" properly chargeable to a capital account, thus including taxes and carrying charges;
however, an exception exists, in which event such adjustment to the capital account is not
made, with respect to taxes and carrying charges which the taxpayer has not elected to
capitalize but for which a deduction instead has been taken. 22 (Emphasis supplied)
The "carrying charges" which may be capitalized under the above quoted provisions of the U.S.
Internal Revenue Code include, as the CIR has pointed out, interest on a loan "(but not theoretical
interest of a taxpayer using his own funds)." What the CIR failed to point out is that such "carrying
charges" may, at the election of the taxpayer, either be (a) capitalized in which case the cost basis
of the capital assets, e.g., machinery and equipment, will be adjusted by adding the amount of such
interest payments or alternatively, be (b) deducted from gross income of the taxpayer. Should the
taxpayer elect to deduct the interest payments against its gross income, the taxpayer cannot at the
same time capitalize the interest payments. In other words, the taxpayer is not entitled to both the
deduction from gross income and the adjusted (increased) basis for determining gain or loss and
the allowable depreciation charge. The U.S. Internal Revenue Code does not prohibit the deduction
of interest on a loan obtained for purchasing machinery and equipment against gross income,
unless the taxpayer has also or previously capitalized the same interest payments and thereby
adjusted the cost basis of such assets.
We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred
for acquiring machinery and equipment. Neither does our 1977 NIRC compel the capitalization of interest
payments on such a loan. The 1977 Tax Code is simply silent on a taxpayer's right to elect one or the other
tax treatment of such interest payments. Accordingly, the general rule that interest payments on a legally
demandable loan are deductible from gross income must be applied.
The CIR argues finally that to allow Picop to deduct its interest payments against its gross income would
be to encourage fraudulent claims to double deductions from gross income:
[t]o allow a deduction of incidental expense/cost incurred in the purchase of fixed asset in
the year it was incurred would invite tax evasion through fraudulent application of double
deductions from gross income. 23 (Emphases supplied)
The Court is not persuaded. So far as the records of the instant cases show, Picop has not claimed
to be entitled to double deduction of its 1977 interest payments. The CIR has neither alleged nor
proved that Picop had previously adjusted its cost basis for the machinery and equipment
purchased with the loan proceeds by capitalizing the interest payments here involved. The Court
will not assume that the CIR would be unable or unwilling to disallow "a double deduction" should
Picop, having deducted its interest cost from its gross income, also attempt subsequently to adjust
upward the cost basis of the machinery and equipment purchased and claim, e.g., increased
deductions for depreciation.
We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picop's 1977
interest payments on its loans for capital equipment against its gross income for 1977.

income net operating losses
incurred by Rustan Pulp
and Paper Mills, Inc.
On 18 January 1977, Picop entered into a merger agreement with the Rustan Pulp and Paper Mills, Inc.
("RPPM") and Rustan Manufacturing Corporation ("RMC"). Under this agreement, the rights, properties,
privileges, powers and franchises of RPPM and RMC were to be transferred, assigned and conveyed to
Picop as the surviving corporation. The entire subscribed and outstanding capital stock of RPPM and RMC
would be exchanged for 2,891,476 fully paid up Class "A" common stock of Picop (with a par value of
P10.00) and 149,848 shares of preferred stock of Picop (with a par value of P10.00), to be issued by Picop,
the result being that Picop would wholly own both RPPM and RMC while the stockholders of RPPM and
RMC would join the ranks of Picop's shareholders. In addition, Picop paid off the obligations of RPPM to
the Development Bank of the Philippines ("DBP") in the amount of P68,240,340.00, by issuing 6,824,034
shares of preferred stock (with a par value of P10.00) to the DBP. The merger agreement was approved in
1977 by the creditors and stockholders of Picop, RPPM and RMC and by the Securities and Exchange
Commission. Thereupon, on 30 November 1977, apparently the effective date of merger, RPPM and RMC
were dissolved. The Board of Investments approved the merger agreement on 12 January 1978.
It appears that RPPM and RMC were, like Picop, BOI-registered companies. Immediately before merger
effective date, RPPM had over preceding years accumulated losses in the total amount of P81,159,904.00.
In its 1977 Income Tax Return, Picop claimed P44,196,106.00 of RPPM's accumulated losses as a
deduction against Picop's 1977 gross income. 24
Upon the other hand, even before the effective date of merger, on 30 August 1977, Picop sold all the
outstanding shares of RMC stock to San Miguel Corporation for the sum of P38,900,000.00, and reported
a gain of P9,294,849.00 from this transaction. 25
In claiming such deduction, Picop relies on section 7 (c) of R.A. No. 5186 which provides as follows:
Sec. 7. Incentives to Registered Enterprise. — A registered enterprise, to the extent

engaged in a preferred area of investment, shall be granted the following incentive benefits:
xxx xxx xxx
(c) Net Operating Loss Carry-over. — A net operating loss incurred in any of the first ten
years of operations may be carried over as a deduction from taxable income for the six
years immediately following the year of such loss. The entire amount of the loss shall be
carried over to the first of the six taxable years following the loss, and any portion of such
loss which exceeds the taxable income of such first year shall be deducted in like manner
from the taxable income of the next remaining five years. The net operating loss shall be
computed in accordance with the provisions of the National Internal Revenue Code, any
provision of this Act to the contrary notwithstanding, except that income not taxable either
in whole or in part under this or other laws shall be included in gross income. (Emphasis
supplied)
Picop had secured a letter-opinion from the BOI dated 21 February 1977 — that is, after the date
of the agreement of merger but before the merger became effective — relating to the deductibility
of the previous losses of RPPM under Section 7 (c) of R.A. No. 5186 as amended. The pertinent
portions of this BOI opinion, signed by BOI Governor Cesar Lanuza, read as follows:
2) PICOP will not be allowed to carry over the losses of Rustan prior to the legal dissolution
of the latter because at that time the two (2) companies still had separate legal
personalities;
3) After BOI approval of the merger, PICOP can no longer apply for the registration of the
registered capacity of Rustan because with the approved merger, such registered capacity
of Rustan transferred to PICOP will have the same registration date as that of Rustan. In
this case, the previous losses of Rustan may be carried over by PICOP, because with the
merger, PICOP assumes all the rights and obligations of Rustan subject, however, to the
period prescribed for carrying over of such
losses. 26 (Emphasis supplied)
Curiously enough, Picop did not also seek a ruling on this matter, clearly a matter of tax law, from
the Bureau of Internal Revenue. Picop chose to rely solely on the BOI letter-opinion.
The CIR disallowed all the deductions claimed on the basis of RPPM's losses, apparently on two (2)
grounds. Firstly, the previous losses were incurred by "another taxpayer," RPPM, and not by Picop in
connection with Picop's own registered operations. The CIR took the view that Picop, RPPM and RMC were
merged into one (1) corporate personality only on 12 January 1978, upon approval of the merger agreement
by the BOI. Thus, during the taxable year 1977, Picop on the one hand and RPPM and RMC on the other,
still had their separate juridical personalities. Secondly, the CIR alleged that these losses had been incurred
by RPPM "from the borrowing of funds" and not from carrying out of RPPM's registered operations. We
focus on the first ground. 27
The CTA upheld the deduction claimed by Picop; its reasoning, however, is less than crystal clear,
especially in respect of its view of what the U.S. tax law was on this matter. In any event, the CTA apparently
fell back on the BOI opinion of 21 February 1977 referred to above. The CTA said:
Respondent further averred that the incentives granted under Section 7 of R.A. No. 5186
shall be available only to the extent in which they are engaged in registered operations,
citing Section 1 of Rule IX of the Basic Rules and Regulations to Implement the Intent and
Provisions of the Investment Incentives Act, R.A. No. 5186.
We disagree with respondent. The purpose of the merger was to rationalize the container
board industry and not to take advantage of the net losses incurred by RPPMI prior to the
stock swap. Thus, when stock of a corporation is purchased in order to take advantage of
the corporation's net operating loss incurred in years prior to the purchase, the corporation
thereafter entering into a trade or business different from that in which it was previously
engaged, the net operating loss carry-over may be entirely lost. [IRC (1954), Sec. 382(a),
Vol. 5, Mertens, Law of Federal Income Taxation, Chap. 29.11a, p. 103]. 28 Furthermore,
once the BOI approved the merger agreement, the registered capacity of Rustan shall be
transferred to PICOP, and the previous losses of Rustan may be carried over by PICOP
by operation of law. [BOI ruling dated February 21, 1977 (Exh. J-1)] It is clear therefrom,
that the deduction availed of under Section 7(c) of R.A. No. 5186 was only proper." (pp.
38-43, Rollo of SP No. 20070) 29 (Emphasis supplied)
In respect of the above underscored portion of the CTA decision, we must note that the CTA in fact
overlooked the statement made by petitioner's counsel before the CTA that:
Among the attractions of the merger to Picop was the accumulated net operating loss carry-
over of RMC that it might possibly use to relieve it (Picop) from its income taxes, under
Section 7 (c) of R.A. 5186. Said section provides:
xxx xxx xxx
With this benefit in mind, Picop addressed three (3) questions to the BOI in a letter dated
November 25, 1976. The BOI replied on February 21, 1977 directly answering the three
(3) queries. 30 (Emphasis supplied)
The size of RPPM's accumulated losses as of the date of the merger — more than P81,000,000.00
— must have constituted a powerful attraction indeed for Picop.
The Court of Appeals followed the result reached by the CTA. The Court of Appeals, much like the CTA,
concluded that since RPPM was dissolved on 30 November 1977, its accumulated losses were
appropriately carried over by Picop in the latter's 1977 Income Tax Return "because by that time RPPMI
and Picop were no longer separate and different taxpayers." 31
After prolonged consideration and analysis of this matter, the Court is unable to agree with the CTA and
Court of Appeals on the deductibility of RPPM's accumulated losses against Picop's 1977 gross income.
It is important to note at the outset that in our jurisdiction, the ordinary rule — that is, the rule applicable in
respect of corporations not registered with the BOI as a preferred pioneer enterprise — is that net operating
losses cannot be carried over. Under our Tax Code, both in 1977 and at present, losses may be deducted
from gross income only if such losses were actually sustained in the same year that they are deducted or
charged off. Section 30 of the 1977 Tax Code provides:
Sec. 30. Deductions from Gross Income. — In computing net income, there shall be
allowed as deduction —
xxx xxx xxx
(d) Losses:
(1) By Individuals. — In the case of an individual, losses actually sustained during the
taxable year and not compensated for by an insurance or otherwise —
(A) If incurred in trade or business;
xxx xxx xxx
(2) By Corporations. — In a case of a corporation, all losses actually sustained and charged
off within the taxable year and not compensated for by insurance or otherwise.
(3) By Non-resident Aliens or Foreign Corporations. — In the case of a non-resident alien

individual or a foreign corporation, the losses deductible are those actually sustained during
the year incurred in business or trade conducted within the Philippines, . . . 32 (Emphasis
supplied)
Section 76 of the Philippine Income Tax Regulations (Revenue Regulation No. 2, as amended) is
even more explicit and detailed:
Sec. 76. When charges are deductible. — Each year's return, so far as practicable, both
as to gross income and deductions therefrom should be complete in itself, and taxpayers
are expected to make every reasonable effort to ascertain the facts necessary to make a
correct return. The expenses, liabilities, or deficit of one year cannot be used to reduce the
income of a subsequent year. A taxpayer has the right to deduct all authorized allowances
and it follows that if he does not within any year deduct certain of his expenses, losses,
interests, taxes, or other charges,
he can not deduct them from the income of the next or any succeeding year. . . .
xxx xxx xxx
. . . . If subsequent to its occurrence, however, a taxpayer first ascertains the amount of a

loss sustained during a prior taxable year which has not been deducted from gross income,
he may render an amended return for such preceding taxable year including such amount
of loss in the deduction from gross income and may in proper cases file a claim for refund
of the excess paid by reason of the failure to deduct such loss in the original return. A loss
from theft or embezzlement occurring in one year and discovered in another is ordinarily
deductible for the year in which sustained. (Emphases supplied)
It is thus clear that under our law, and outside the special realm of BOI-registered enterprises, there
is no such thing as a carry-over of net operating loss. To the contrary, losses must be deducted
against current income in the taxable year when such losses were incurred. Moreover, such losses
may be charged off only against income earned in the same taxable year when the losses were
incurred.
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 pioneer enterprises and only with respect to their registered operations.
The statutory purpose here may be seen to be the encouragement of the establishment and continued
operation of pioneer industries by allowing the registered enterprise to accumulate its operating losses
which may be expected during the early years of the enterprise and to permit the enterprise to offset such
losses against income earned by it in later years after successful establishment and regular operations. To
promote its economic development goals, the Republic foregoes or defers taxing the income of the pioneer
enterprise until after that enterprise has recovered or offset its earlier losses. We consider that the statutory
purpose can be served only if the accumulated operating losses are carried over and charged off against
income subsequently earned and accumulated by the same enterprise engaged in the same registered
operations.
In the instant case, to allow the deduction claimed by Picop would be to permit one corporation or enterprise,
Picop, to benefit from the operating losses accumulated by another corporation or enterprise, RPPM. RPPM
far 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 the much larger group of Picop's stockholders. To grant
Picop's claimed deduction would be to permit Picop to shelter its otherwise taxable income (an objective
which Picop had from the very beginning) which had not been earned by the registered enterprise which
had suffered the accumulated losses. In effect, to grant Picop's claimed deduction would be to permit Picop
to purchase a tax deduction and RPPM to peddle its accumulated operating losses. Under the CTA and
Court of Appeals decisions, Picop would benefit by immunizing P44,196,106.00 of its income from taxation
thereof although Picop had not run the risks and incurred the losses which had been encountered and
suffered by RPPM. Conversely, the income that would be shielded from taxation is not income that was,
after much effort, eventually generated by the same registered operations which earlier had sustained
losses. We consider and so hold that there is nothing in Section 7 (c) of R.A. No. 5186 which either requires
or permits such a result. Indeed, that result makes non-sense of the legislative purpose which may be seen
clearly to be projected by Section 7 (c), R.A. No. 5186.
The CTA and the Court of Appeals allowed the offsetting of RPPM's accumulated operating losses against
Picop's 1977 gross income, basically because towards the end of the taxable year 1977, upon the arrival
of the effective date of merger, only one (1) corporation, Picop, remained. The losses suffered by RPPM's
registered operations and the gross income generated by Picop's own registered operations now came
under one and the same corporate roof. We consider that this circumstance relates much more to form than
to substance. We do not believe that that single purely technical factor is enough to authorize and justify
the deduction claimed by Picop. Picop's claim for deduction is not only bereft of statutory basis; it does
violence to the legislative intent which animates the tax incentive granted by Section 7 (c) of R.A. No. 5186.
In granting the extraordinary privilege and incentive of a net operating loss carry-over to BOI-registered
pioneer enterprises, the legislature could not have intended to require the Republic to 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.
Both the CTA and the Court of Appeals appeared much impressed not only with corporate technicalities
but also with the U.S. tax law on this matter. It should suffice, however, simply to note that in U.S. tax law,
the availability to companies generally of operating loss carry-overs and of operating loss carry-backs is
expressly provided and regulated in great detail by statute. 33 In our jurisdiction, save for Section 7 (c) of
R.A. No. 5186, no statute recognizes or permits loss carry-overs and loss carry-backs. Indeed, as already
noted, our tax law expressly rejects the very notion of loss carry-overs and carry-backs.
We conclude that the deduction claimed by Picop in the amount of P44,196,106.00 in its 1977 Income Tax
Return must be disallowed.

income certain claimed
financial guarantee expenses.
In its Income Tax Return for 1977, Picop also claimed a deduction in the amount of P1,237,421.00 as
financial guarantee expenses.
This deduction is said to relate to chattel and real estate mortgages required from Picop by the Philippine
National Bank ("PNB") and DBP as guarantors of loans incurred by Picop from foreign creditors. According
to Picop, the claimed deduction represents registration fees and other expenses incidental to registration
of mortgages in favor of DBP and PNB.
In support of this claimed deduction, Picop allegedly showed its own vouchers to BIR Examiners to prove
disbursements to the Register of Deeds of Tandag, Surigao del Sur, of particular amounts. In the
proceedings before the CTA, however, Picop did not submit in evidence such vouchers and instead
presented one of its employees to testify that the amount claimed had been disbursed for the registration
of chattel and real estate mortgages.
The CIR disallowed this claimed deduction upon the ground of insufficiency of evidence. This disallowance
was sustained by the CTA and the Court of Appeals. The CTA said:
No records are available to support the abovementioned expenses. The vouchers merely
showed that the amounts were paid to the Register of Deeds and simply cash account.
Without the supporting papers such as the invoices or official receipts of the Register of
Deeds, these vouchers standing alone cannot prove that the payments made were for the
accrued expenses in question. The best evidence of payment is the official receipts issued
by the Register of Deeds. The testimony of petitioner's witness that the official receipts and
cash vouchers were shown to the Bureau of Internal Revenue will not suffice if no records
could be presented in court for proper marking and identification. 34 Emphasis supplied)
The Court of Appeals added:
The mere testimony of a witness for PICOP and the cash vouchers do not suffice to
establish its claim that registration fees were paid to the Register of Deeds for the
registration of real estate and chattel mortgages in favor of Development Bank of the
Philippines and the Philippine National Bank as guarantors of PICOP's loans. The witness
could very well have been merely repeating what he was instructed to say regardless of
the truth, while the cash vouchers, which we do not find on file, are not said to provide the
necessary details regarding the nature and purpose of the expenses reflected therein.
PICOP should have presented, through the guarantors, its owner's copy of the registered
titles with the lien inscribed thereon as well as an official receipt from the Register of Deeds
evidencing payment of the registration fee. 35 (Emphasis supplied)
We must support the CTA and the Court of Appeals in their foregoing rulings. A taxpayer has the burden of
proving entitlement to a claimed deduction. 36 In the instant case, even Picop's own vouchers were not
submitted in evidence and the BIR Examiners denied that such vouchers and other documents had been
exhibited to them. Moreover, cash vouchers can only confirm the fact of disbursement but not necessarily
the purpose thereof. 37 The best evidence that Picop should have presented to support its claimed
deduction were the invoices and official receipts issued by the Register of Deeds. Picop not only failed to
present such documents; it also failed to explain the loss thereof, assuming they had existed before. 38
Under the best evidence rule, 39 therefore, the testimony of Picop's employee was inadmissible and was
in any case entitled to very little, if any, credence.
We consider that entitlement to Picop's claimed deduction of P1,237,421.00 was not adequately shown
and that such deduction must be disallowed.
III
(1) Whether Picop had understated

its sales and overstated its
cost of sales for 1977.
In its assessment for deficiency income tax for 1977, the CIR claimed that Picop had understated its sales
by P2,391,644.00 and, upon the other hand, overstated its cost of sales by P604,018.00. Thereupon, the
CIR added back both sums to Picop's net income figure per its own return.
The 1977 Income Tax Return of Picop set forth the following figures:
Sales (per Picop's Income Tax Return):
Paper P 537,656,719.00
Timber P 263,158,132.00
———————
Total Sales P 800,814,851.00
============
Upon the other hand, Picop's Books of Accounts reflected higher sales figures:
Sales (per Picop's Books of Accounts):

Paper P 537,656,719.00
Timber P 265,549,776.00
———————
Total Sales P 803,206,495.00
============
The above figures thus show a discrepancy between the sales figures reflected in Picop's Books
of Accounts and the sales figures reported in its 1977 Income Tax Return, amounting to:
P2,391,644.00.
The CIR also contended that Picop's cost of sales set out in its 1977 Income Tax Return, when compared
with the cost figures in its Books of Accounts, was overstated:
Cost of Sales
(per Income Tax Return) P607,246,084.00
Cost of Sales
(per Books of Accounts) P606,642,066.00
———————
Discrepancy P 604,018.00
============
Picop did not deny the existence of the above noted discrepancies. In the proceedings before the CTA,
Picop presented one of its officials to explain the foregoing discrepancies. That explanation is perhaps best
presented in Picop's own words as set forth in its Memorandum before this Court:
. . . that the adjustment discussed in the testimony of the witness, represent the best and
most objective method of determining in pesos the amount of the correct and actual export
sales during the year. It was this correct and actual export sales and costs of sales that
were reflected in the income tax return and in the audited financial statements. These
corrections did not result in realization of income and should not give rise to any deficiency
tax.
xxx xxx xxx
What are the facts of this case on this matter? Why were adjustments necessary at the
year-end?
Because of PICOP's procedure of recording its export sales (reckoned in U.S. dollars) on
the basis of a fixed rate, day to day and month to month, regardless of the actual exchange
rate and without waiting when the actual proceeds are received. In other words, PICOP
recorded its export sales at a pre-determined fixed exchange rate. That pre-determined
rate was decided upon at the beginning of the year and continued to be used throughout
the year.
At the end of the year, the external auditors made an examination. In that examination, the
auditors determined with accuracy the actual dollar proceeds of the export sales received.
What exchange rate was used by the auditors to convert these actual dollar proceeds into
Philippine pesos? They used the average of the differences between (a) the recorded fixed
exchange rate and (b) the exchange rate at the time the proceeds were actually received.
It was this rate at time of receipt of the proceeds that determined the amount of pesos
credited by the Central Bank (through the agent banks) in favor of PICOP. These
accumulated differences were averaged by the external auditors and this was what was
used at the year-end for income tax and other government-report purposes. (T.s.n., Oct.
17/85, pp. 20-25) 40
The above explanation, unfortunately, at least to the mind of the Court, raises more questions than it
resolves. Firstly, the explanation assumes that all of Picop's sales were export sales for which U.S. dollars
(or other foreign exchange) were received. It also assumes that the expenses summed up as "cost of sales"
were all dollar expenses and that no peso expenses had been incurred. Picop's explanation further
assumes that a substantial part of Picop's dollar proceeds for its export sales were not actually surrendered
to the domestic banking system and seasonably converted into pesos; had all such dollar proceeds been
converted into pesos, then the peso figures could have been simply added up to reflect the actual peso
value of Picop's export sales. Picop offered no evidence in respect of these assumptions, no explanation
why and how a "pre-determined fixed exchange rate" was chosen at the beginning of the year and
maintained throughout. Perhaps more importantly, Picop was unable to explain why its Books of Accounts
did not pick up the same adjustments that Picop's External Auditors were alleged to have made for purposes
of Picop's Income Tax Return. Picop attempted to explain away the failure of its Books of Accounts to reflect
the same adjustments (no correcting entries, apparently) simply by quoting a passage from a case where
this Court refused to ascribe much probative value to the Books of Accounts of a corporate taxpayer in a
tax case. 41 What appears to have eluded Picop, however, is that its Books of Accounts, which are kept by
its own employees and are prepared under its control and supervision, reflect what may be deemed to be
admissions against interest in the instant case. For Picop's Books of Accounts precisely show higher sales
figures and lower cost of sales figures than Picop's Income Tax Return.
It is insisted by Picop that its Auditors' adjustments simply present the "best and most objective" method of
reflecting in pesos the "correct and ACTUAL export sales" 42 and that the adjustments or "corrections" "did
not result in realization of [additional] income and should not give rise to any deficiency tax." The
correctness of this contention is not self-evident. So far as the record of this case shows, Picop did not
submit in evidence the aggregate amount of its U.S. dollar proceeds of its export sales; neither did it show
the Philippine pesos it had actually received or been credited for such U.S. dollar proceeds. It is clear to
this Court that the testimonial evidence submitted by Picop fell far short of demonstrating the correctness
of its explanation.
Upon the other hand, the CIR has made out at least a prima facie case that Picop had understated its sales
and overstated its cost of sales as set out in its Income Tax Return. For the CIR has a right to assume that
Picop's Books of Accounts speak the truth in this case since, as already noted, they embody what must
appear to be admissions against Picop's own interest.
Accordingly, we must affirm the findings of the Court of Appeals and the CTA.
(2) Whether Picop is liable for

the corporate development
tax of five percent (5%)
of its income for 1977.
The five percent (5%) corporate development tax is an additional corporate income tax imposed in Section
24 (e) of the 1977 Tax Code which reads in relevant part as follows:
(e) Corporate development tax. — In addition to the tax imposed in subsection (a) of this
section, an additional tax in an amount equivalent to 5 per cent of the same taxable net
income shall be paid by a domestic or a resident foreign corporation; Provided, That this
additional tax shall be imposed only if the net income exceeds 10 per cent of the net worth,
in case of a domestic corporation, or net assets in the Philippines in case of a resident
foreign corporation: . . . .
The additional corporate income tax imposed in this subsection shall be collected and paid
at the same time and in the same manner as the tax imposed in subsection (a) of this
section.
Since this five percent (5%) corporate development tax is an income tax, Picop is not exempted
from it under the provisions of Section 8 (a) of R.A. No. 5186.
For purposes of determining whether the net income of a corporation exceeds ten percent (10%) of its net
worth, the term "net worth" means the stockholders' equity represented by the excess of the total assets
over liabilities as reflected in the corporation's balance sheet provided such balance sheet has been
prepared in accordance with generally accepted accounting principles employed in keeping the books of
the corporation. 43
The adjusted net income of Picop for 1977, as will be seen below, is P48,687,355.00. Its net worth figure
or total stockholders' equity as reflected in its Audited Financial Statements for 1977 is P464,749,528.00.
Since its adjusted net income for 1977 thus exceeded ten percent (10%) of its net worth, Picop must be
held liable for the five percent (5%) corporate development tax in the amount of P2,434,367.75.
Recapitulating, we hold:
(1) Picop is liable for the thirty-five percent (35%) transaction tax in the amount of P3,578,543.51.
(2) Picop is not liable for interest and surcharge on unpaid transaction tax.
(3) Picop is exempt from payment of documentary and science stamp taxes in the amount of P300,000.00
and the compromise penalty of P300.00.
(4) Picop is entitled to its claimed deduction of P42,840,131.00 for interest payments on loans for, among
other things, the purchase of machinery and equipment.
(5) Picop's claimed deduction in the amount of P44,196,106.00 for the operating losses previously incurred
by RPPM, is disallowed for lack of merit.
(6) Picop's claimed deduction for certain financial guarantee expenses in the amount P1,237,421.00 is
disallowed for failure adequately to prove such expenses.
(7) Picop has understated its sales by P2,391,644.00 and overstated its cost of sales by P604,018.00, for
1977.
(8) Picop is liable for the corporate development tax of five percent (5%) of its adjusted net income for 1977
in the amount of P2,434,367.75.
Considering conclusions nos. 4, 5, 6, 7 and 8, the Court is compelled to hold Picop liable for deficiency
income tax for the year 1977 computed as follows:
Deficiency Income Tax
Net Income Per Return P 258,166.00
Add:
Unallowable Deductions
(1) Deduction of net

operating losses
incurred by RPPM P 44,196,106.00
(2) Unexplained financial

guarantee expenses P 1,237,421.00
(3) Understatement of
Sales P 2,391,644.00
(4) Overstatement of
Cost of Sales P 604,018.00
——————
Total P 48,429,189.00
——————
Net Income as Adjusted P 48,687,355.00
===========
Income Tax Due Thereon 44 P 17,030,574.00
Less:
Tax Already Assessed per

Return 80,358.00
——————
Deficiency Income Tax P 16,560,216.00
Add:
Five percent (5%) Corporate

Development Tax P 2,434,367.00
Total Deficiency Income Tax P 18,994,583.00
===========
Add:
Five percent (5%) surcharge 45 P 949,729.15
——————
Total Deficiency Income Tax
with surcharge P 19,944,312.15
Add:
Fourteen percent (14%)
interest from 15 April
1978 to 14 April 1981 46 P 8,376,610.80
Fourteen percent (14%)
interest from 21 April
1983 to 20 April 1986 47 P 11,894,787.00
——————
Total Deficiency Income Tax
Due and Payable P 40,215,709.00
===========
WHEREFORE, for all the foregoing, the Decision of the Court of Appeals is hereby MODIFIED and Picop
is hereby ORDERED to pay the CIR the aggregate amount of P43,794,252.51 itemized as follows:
(1) Thirty-five percent (35%)
transaction tax P 3,578,543.51
(2) Total Deficiency Income

Tax Due 40,215,709.00
———————
Aggregate Amount Due and Payable P 43,794,252.51
============
No pronouncement as to costs.
SO ORDERED.
SUPREME COURT
Manila
EN BANC
G.R. No. L-25299 July 29, 1969

vs.
ITOGON-SUYOC MINES, INC., and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and
Special Attorney Oscar S. de Castro for petitioner.
Ramon O. Reynoso, Jr. and Melchor R. Flores for respondents.
FERNANDO, J.:
The question presented for determination in this petition for the review of a decision of the Court of Tax
Appeals, one that is of first impression, would not have arisen had respondent Itogon-Suyoc Mines, Inc.,
the taxpayer involved, duly paid in full its liability according to its income tax return for the fiscal year 1960-
61. Instead, it deducted right away the amount represented by claim for refund filed eight (8) months back,
for the previous year's income tax, for which it was not liable at all, so it alleged, as it suffered a loss instead,
a claim subsequently favorably acted on by petitioner Commissioner of Internal Revenue but after the date
of such payment of the 1960-1961 tax. Accordingly, an interest in the amount of P1,512.83 was charged
by petitioner Commissioner of Internal Revenue on the sum withheld on the ground that no deduction on
such refund should be allowed before its approval. When the matter was taken up before the Court of Tax
Appeals, the above assessment representing interest was set aside in the decision of September 30, 1965.
That is the decision now an appeal by petitioner Commissioner of Internal Revenue. We sustain the Court
of Tax Appeals.
Respondent Itogon-Suyoc Mines, Inc., a mining corporation duly organized and existing in accordance with
the laws of the Philippines, filed on January 13, 1961, its income tax return for the fiscal year 1959-1960. It
declared a taxable income of P114,368.04 and a tax due thereon amounting to P26,310.41, for which it
paid on the same day, the amount of P13,155.20 as the first installment of the income tax due. On May 17,
1961, petitioner filed an amended income tax return, reporting therein a net loss of P331,707.33. It thus
sought a refund from the Commissioner of Internal Revenue, now the petitioner.1äwphï1.ñët
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 to the tune of P97,345.00, but deducting the amount of
P13,155.20 representing alleged tax credit for overpayment of the preceding fiscal year 1959-1960. 0n
December 18, 1962, petitioner Commissioner of Internal Revenue assessed against the respondent the
amount of P1,512.83 as 1% monthly interest on the aforesaid amount of P13,155.20 from January 16, 1962
to December 31, 1962. The basis for such an assessment was the absence of legal right to deduct said
amount before the refund or tax credit thereof was approved by petitioner Commissioner of Internal
Revenue. 1
Such an assessment was contested by respondent before the Court of Tax Appeals. As already noted, it
prevailed. The decision of September 30, 1965, now on appeal, explains why. Thus: "Respondent assessed
against the petitioner the amount of P1,512.83 as 1% monthly interest on the sum of P13,155.20 from
January 16, 1962 to December 31, 1962 on the ground that petitioner had no legal right to deduct the said
amount from its income tax liability for the fiscal year 1960-1961 until the refund or tax credit thereof has
been approved by respondent. As aforestated, petitioner paid the amount of P13,155.20 as first installment
on its reported income tax liability for the fiscal year 1959-1960. But, it turned out that instead of deriving a
net gain, it sustained a net loss during the said fiscal year. Accordingly, it filed an amended income tax
return and a claim for the refund of the sum of P13,155.20, which sum it subsequently, deducted from its
income tax liability for the succeeding fiscal year 1960-1961. The overpayment for the fiscal year 1959-
1960 and the deduction of the overpaid amount from its 1960-1961 tax liability are not denied by
respondent. In this circumstance, we find it unfair and unjust for the Commissioner to exact an interest on
the said 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." 2
That is the question before us in this petition for review by the Commissioner of Internal Revenue. He
argues that the Court of Tax Appeals should not have absolved respondent corporation "from liability to pay
the sum of P1,512.83 as 1% monthly interest for delinquency in the payment of income tax for the fiscal
year 1960-1961." 3 As noted at the outset, we find such contention far from persuasive.
It could not be error for the Court of Tax Appeals, considering the admitted fact of overpayment, entitling
respondent to refund, to hold that petitioner should not repose an interest on the aforesaid sum of
P13,155.20 "which after all was paid to and received by the government even before the incidence of the
tax in question." It would be, according to the Court of Tax Appeals, "unfair and unjust" to do so. We agree
but we go farther. The imposition of such an interest by petitioner is not supported by law.
The National Internal Revenue Code provides that interest upon the amount determined as a deficiency
shall be assessed and shall be paid upon notice and demand from the Commissioner of Internal Revenue
at the specified. 4 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 any amount due as tax, such amount, if not yet
refunded, may be deducted from the tax to be paid. 5
There is no question respondent was entitled to a refund. Instead of waiting for the sum involved to be
delivered to it, it deducted the said amount from the tax that it had to pay. That it had a right to do according
to the law. It is true a doubt could have arisen due to the fact that as of the time such a deduction was
made, the Commissioner of Internal Revenue had not as yet approved such a refund. It is an admitted fact
though that respondent was clearly entitled to it, and petitioner did not allege otherwise. Nor could he do
so. Under all the circumstances disclosed therefore, the applicability of the legal provision allowing such a
deduction from the amount of the tax to be paid cannot be disputed.
This conclusion is in accordance with the principle announced in Castro v. Collector of Internal Revenue. 6
While the case is not directly in point, it yields an implication that makes even more formidable the case for
respondent taxpayer. As there held, the imposition of the monthly interest was considered as not
constituting a penalty "but a just compensation to the state for the delay in paying the tax, and for the
concomitant use by the taxpayer of funds that rightfully should be in the government's hands ...."
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 overpayment for the fiscal year 1959-1960, the sum of P13,155.20
had 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.
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 ground for this appeal.
WHEREFORE, the decision of September 30, 1965 of the Court of Tax Appeals is affirmed. Without
pronouncement as to costs.1äwphï1.ñët
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Capistrano and Teehankee,
JJ., concur.
Barredo, J., took no part.
SUPREME COURT
Manila
EN BANC
G.R. No. L-12174 April 26, 1962
MARIA B. CASTRO, petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent.
Rosendo J. Tansinsin and Manuel O. Chan for petitioner.

Office of the Solicitor General and Special Attorney Librada del Rosario-Natividad for respondent.
REYES, J.B.L., J.:
Appeal from a decision of the Court of Tax Appeals (in its C.T.A. Case 141) holding petitioner Maria B.
Castro liable under the War Profits Tax Law, Republic Act No. 55, and ordering her to pay a deficiency war
profits tax (including surcharges and interest) in the amount of P1,360,514.66, and costs.
The background of this case is set forth in great detail in the decision appealed from. We quote:
Petitioner Maria B. Castro, who is authorized to manage her own property, is a duly licensed
merchant. Pursuant to the provisions of Section 4 (b) and (c) of Republic Act No. 55, she filed with
the Bureau of Internal Revenue on February 28, 1947, her war profits tax returns which showed a
net worth on February 26, 1945 in the amount of P431,884.00 and a net worth on December 8,
1941 in the sum of P409,581.57. Although there is indicated an increase in net worth in the amount
of P22,302.43, she is totally exempted from paying any war profits tax therefor as the deduction of
six per centum (6%) per annum of the net worth on December 8, 1941 therefrom would show only
a taxable increase in net worth in the amount of P5,574.61 which is not taxable under the said law.
On November 22, 1947, however, Criminal Case No. 4976 was filed against her in the Court of
First Instance of Manila for violation of Section 4, in connection with Section 8, of the War Profits
Tax Law, for allegedly defrauding the Republic of the Philippines in the total amount of
P1,048,687.76. The criminal action, was filed at the instance of respondent and simultaneous with
the filing of said action, the petitioner received for the first time the notice of assessment dated
November 19, 1947 by registered mail from the Collector of Internal Revenue. The said letter of
demand was based on the report of Supervising Examiner Felipe Aquino of the Bureau of Internal
Revenue, who recommended that the petitioner be assessed and made to pay the sum of
P1,048,687.76 as war profits tax and surcharge, computed as follows: .
P 885,694.63
Increase in net worth
Cumulative tax on P500,000 P 352,000.00
90% tax on P385,694.63 347,125.17
Total Tax P 699,125.17
Add 50% surcharge 349,562.59
Total amount due and collectible P1,048,687.76
Petitioner through counsel filed a motion to quash the criminal action against her and during the
pendency of the same, she amended on December 20, 1947, her original war profits tax returns
making it to appear that her true net worth on February 26, 1945 was P315,438.32 while her net
worth on December 8, 1941 was left unchanged at P409,581.57. According to the amended return,
there was therefore a decrease in net worth in the amount of P94,143.25 instead of an increase of
P22,302.43 as originally reported.
On February 9, 1948, the motion of petitioner to quash the information was denied by the Court of
First Instance of Manila. At the sheduled hearing of the case on the merits on March 7, 1949, the
City Fiscal of Manila manifested in open court that after a re-investigation of the case "the amount
of the tax due and for which the accused stands charged for evading payment is only about
P700,000.00, instead of P1,048,687.76 as stated in the information." However, at the continuation
of the hearing of the case on February 22, 1950, Supervising Examiner Felipe Aquino of the Bureau
of Internal Revenue, who testified for the prosecution, declared in answer to questions propounded
by the City Fiscal "that as a result of a detailed reinvestigation conducted by his office, it was found
out that no war profits tax was due from the accused in connection with the present case."
Whereupon, City Fiscal Angeles moved for the dismissal of the case. Finding the petition for
dismissal to be well taken, the Court of First Instance of Manila, in an Order dated February 22,
1950, dismissed Criminal Case No. 4976 against petitioner.
After the dismissal of the Criminal Case, another report was submitted by the same Supervising
Examiner Felipe Aquino to his superiors wherein he changed his previous stand taken before the
Court of First Instance of Manila, on the basis of which report another letter of demand for
P2,008,293.53 as war profits tax was issued against petitioner on January 24, 1950. Barely one
month thereafter, another report was again submitted by the same Supervising Examiner Felipe
Aquino to his superiors, on the basis of which another letter of demand for war profits tax was
issued by respondent against petitioner for the sum of P2,229,976.94 or an increase of
P221,683.31 over that assessment of January 24, 1950. The case was again referred to the City
Fiscal's Office for another prosecution based on the earlier demand but the same was again
dropped.
Following insistent requests of petitioner for reinvestigation of her case, the then Secretary of
Finance Pio Pedrosa created a committee on April 11, 1950 to review or re-examine the
assessment for war profits tax issued against the petitioner. This committee, otherwise known as
the Pedrosa Committee, was chairmanned by Atty. Artemio M. Lobrin of the Bureau of Internal
Revenue, with Messrs. Melecio R. Domingo and Roman M. Umali of the same office, Vivencio L.
de Peralta of the General Auditing Office and Jose P. Alejandro of the Office of the Solicitor
General, as members. After a thorough investigation of the case, the Pedrosa Committee on
September 12, 1950, submitted its report, recommending the collection of the amount of
P3,593,950.78 as war profits tax due from petitioner inclusive of surcharge and interests, broken
down as follows: .
Taxable increase in net worth P1,762,203.95
War profits tax due thereon P1,526,093.75
50% surcharge 763,406.88
Total war profits tax and surcharge P2,289,140.63
15% surcharge 343,371.09
1% monthly interest thereon from April

1947 961,439.06
to September 30, 1950 (42%)
Total amount collectible on

September 30, 1950 P3,593,950.78
The findings and recommendations of the Pedrosa Committee were forwarded to the President of the
Philippines for approval and on September 22, 1950, the President approved the same in toto.
Accordingly, on September 23, 1950 the respondent demanded from the petitioner Maria B. Castro the
payment of the total amount of P3,593,950.78 as war profits tax computed in detail as follows: .
Net worth on February 26, 1945

as per amended war profits tax returns P 315,438.32.
Add: (a) Undeclared cash on

P1,871,542.13
February 25, 1945: As per this report
Amount declared 64,097.52 1,807,444.61

(b) Overdeclared accounts
payable: As per amended return P 106,000.00
Amount per this report 30,000.00 76,000.00
Net worth on February 26, 1945 P2,198,882.93
Less: Net worth on December 8, 1941:
Net worth as per amended return P 409,581.57
Less: Accounts payable 43,547.22 P 366,034.35
Increase in net worth as per this report P1,832,848.58
Less: 6% per annum on P366,034.35 from December 8, 1941 to

70,644.63
February 26, 1945
War profits tax due thereon:.
On P 50,000.00 (P6,000 exempt) 50% P 22,000.00
On 30,000.00 60% 30,000.00
On 200,000.00 70% 140,000.00
On 200,000.00 80% 160,000.00
On 500,000.00 90% 450,000.00
On 762,203.95 95% 724,093.75
P 1,762,203.95 P1,526,093.75
50% surcharge 763,046.88
15% surcharge 343,371.09
1% monthly interest from April 1, 1947

961,439.06
to September 30, 1950 (42%)
Total war profits tax and 50% surcharge (carried forward) P2,289,140.63
Total amount collectible on September 30, 1950 P3,593.950.78
In order to enforce collection of this last mentioned assessment of P3,593,950.78, the respondent caused
to be advertised on October 18, 1950, the sale at public auction on November 22, and 27, 1950, of various
real properties of petitioner to satisfy the war profits tax assessed against her. The petitioner, in order to
stop the scheduled sale at public auction, filed on October 18, 1950, before the Court of First Instance of
Manila a petition for preliminary injunction (Civil Case No. 12356) against the Collector of Internal Revenue,
praying, among others, that an order be issued enjoining said official from proceeding with the collection by
summary methods of the war profits tax demanded. Over the objection of respondent that the Court of First
Instance had no jurisdiction to entertain the complaint nor to issue a writ of injunction, the said Court entered
an order dated November 8, 1950 declaring that it had authority proceed with the case but denied the
petition for preliminary injunction. Inasmuch as no preliminary injunction was issued by the Court,
respondent proceeded with the distraint and levy and sale at public auction of the properties of petitioner.
These properties, which are situated in the Cities of Manila, Pasay and Tagaytay and in the Municipalities
of Caloocan and Makati, Rizal, and Moncada, Tarlac, and described more particularly in Exhibits C, C-1,
C-2, C-3, C-4 and C-5 of the petition for injunction filed with this Court, were offered for sale on November
22, and 27, 1950 as scheduled, to answer for the war profits tax liability of petitioner to the Republic of the
Philippines in the assessed sum of P3,593,950.78, inclusive of surcharges and interest from April 1, 1947
to September 30, 1950.
For lack of bidders on the scheduled dates of sale, the following properties (except those in Tagaytay) with
their corresponding assessed value, were forfeited to the Government under Section 328 of the National
Internal Revenue Code: .
Property Assessed Value
Manila P233,460.00
Balintawak 521,390.00
Pasay 18,320.00
Makati 4,830.00
Tarlac 12,530.00
Tagaytay 62,930.00
In another sale at public auction on April 23, 1954, the property of petitioner situated in Caloocan, Rizal,
with an assessed value of P4,990.00 was also offered for sale to answer for her war profits tax liability.
There being no bidders in this sale as in the previous sale, this last mentioned real property of petitioner
was also forfeited to the Government.
The petitioner has not exercised her right of legal redemption with respect to all these real properties with
a total assessed value of P858,440.00 which were sold at public auction by the respondent and forfeited in
favor of the Government for lack of bidders.
Parenthetically, it may be stated that the hearing of Civil Case No. 12356 before the Court of First Instance
of Manila for Preliminary Injunction was not continued to its final determination by said court as the Supreme
Court in a decision promulgated on October 31, 1951 declared the lower court without jurisdiction to proceed
with the trial. (Saturnino David v. The Honorable Simeon Ramos and Maria B. Castro, G.R. No. L-4300)..
In the course of the summary methods employed by the respondent to enforce the collection of the war
profits tax liability of petitioner, the respondent also distrained and advertised for sale the properties of the
Marvel Building Corporation in which the petitioner had a substantial interest. To counter-act the move, the
said corporation through counsel filed on November 31, 1950, Civil Case No. 12555 in the Court of First
Instance of Manila wherein it sought to enjoin the respondent Collector of Internal Revenue from selling at
public auction its various properties described in the complaint. While the corporation was able to secure
the injunction from the lower court, the same was dissolved by the Supreme Court in its decision in G.R.
No. L-5081, Marvel Building Corporation v. Saturnino David, promulgated on February 24, 1954. Petitioner
Maria B. Castro was declared therein as the sole and exclusive owner of all shares of stock of the Marvel
Building Corporation and all the other partners are her dummies.
In the meantime, petitioner filed on December 10, 1951, Civil Case No. 15316 with the Court of First
Instance of Manila against the respondent Collector of Internal Revenue for the recovery of the properties
advertised for saleon November 22 and 27, 1950 which for lack of bidders were forfeited to theGovernment.
However, before the case could be tried on the merits before said Court, the Court of Tax Appeals was
created by Republic Act No. 1125 and pursuant to Section 22 thereof, the record of the case was remanded
for finaldisposition to this Court. This last mentioned case is now pending hearing before this Court.
At this juncture, it should be stated that again on December 22, 1951, an additional war profits tax was
assessed against the petitioner in the sum of P20,425.00 based allegedly on certain amounts receivable
which petitioner received from Magdalena Estate, Inc. Consequently, the total war profits taxliability of
petitioner, exclusive of surcharge and interest, as found by the Pedrosa Committee was increased to
P1,546,518.75, itemized as follows: .1äwphï1.ñët
Tax due as per Pedrosa Committee P1,526,093.75
Additional war profits tax on account of undeclared amount

receivable from the Magdalena Estates, Inc. 20,425.00
Total war profits tax exclusive of surcharge and interest.

P1,546,518.75
To satisfy, fully the amount of the war profits tax assessed against petitioner, the respondent on September
29, 1954, caused to be advertised for sale at public auction for November 2, 1954, other real properties of
petitioner situated in Manila. These properties are described in detail in Appendix B of the petition for review
filed with this Court. According to the "Amended Notice of Sale" (Appendix B, Petition for Review), the
properties were seized, distrained and levied upon from petitioner "in satisfaction of internal revenue taxes
and penalties amounting to P4,539,556.26, computed as of April 30, 1954" due from her in favor of the
Republic of the Philippines. For lack of bidders at the time of the scheduled sale on November 2, 1954, the
properties in question were forfeited to the Government under Section 328 of the National Internal Revenue
Code for the total amount of P3,547,892.41 which was allegedly the balance of petitioner's tax liability as
of that date.
Before the expiration of the one-year period provided for in Section 328 of the National Internal Revenue
Code within which petitioner may redeem the real properties forfeited in favor of the Government in the sale
at public auction held on November 2, 1954, the petitioner filed with this Court on September 30, 1955, a
petition for the annulment of said sale and forfeiture on the ground that her properties were advertised for
sale on tax claim of the Government far in excess of the alleged war profits tax, surcharges and penalties
fixed by respondent. Respondent filed his opposition to the petition and after due hearing where evidence
was adduced in support of the petition as well as opposition thereto, this Court, in a resolution dated October
31, 1955, declared the auction sale of November 2, 1954 as well as the resulting forfeiture, null and void
and of no legal force and effect because of the admitted discrepancy in the amount of tax stated in the
notice of sale for which the properties were auctioned and the actual amount of tax assessed and
demanded.
The said resolution being without prejudice to such action and proceedings a respondent may take in
accordance with law, respondent demanded from petitioner the amount of P3,594,881.51 not later than
November 10, 1955 or he would again proceed with the resale of her properties on December 12, 1955. To
stop the sale, petitioner filed a petition for injunction with this Court on November 22, 1955 requesting that
respondent be enjoined from proceeding with the resale of her properties scheduled on December 12,
1955; that the said properties be released to her; and that she be declared not liable for the war profits tax
assessed and demanded of her. After due hearing of this petition and the opposition thereto, this Court, in
a resolution dated December 10, 1955, denied the injunction and held in abeyance the determination of
other questions until after the case shall have been heard on the merits. The properties were therefore
advertised for sale on December 12, 1955 to answer for a war profits tax liability of petitioner to the Republic
of the Philippines for the alleged amount of P3,594,307.51 computed as of that date. For lack of bidders,
the same were forfeited to the Government. Those properties and the amounts for which they were forfeited
are as follows:.
Aguinaldo Building P2,026,517.10
Wise & Co. Building 670,291.47
Zobel Mansion 408,501.24
Shellborne Hotel 489,491.70
Total P3,594,801.51
Add: Prior forfeitures 888,440.00
P4,453,241.51
After due hearing and reception of evidence, the Tax Court annulled the last tax sale of December, 1955,
covering the found Manila buildings, on account of irregularities in the notices of sale; but for the rest, it
found against petitioner and assessed her tax liability as follows: .
"Net worth on Feb. 26, 1945

as per amended war profits tax return P 315,438.32
Add: (a) Underdeclared cash on February 26,

1945:
As per Pedrosa Committee report P1,871,542.13
Amount declared 64,097.52 1,807.444.61
(b) Accounts Payable: As per amended

P 106,000.00
return
Amount per Pedrosa Committee Report-

P30,000.00
Accounts payable to Lao Kang Suy 106.000.00
recognized by Court-P76,000.00
Net worth on Feb. 26, 1945 P2,122,883.93
Less: Net worth on December 8, 1941:
Net worth as per amended return P 409,581.57
Less Accounts payable P43,547.22 366,034.35
Increase in net worth P1,756,848.58
Less 6% per annum on P366,034.35

from Dec. 8, 1941 to Feb. 26, 1945 70,644.63
Add: Undeclared accounts receivable

from
Magdalena Estate, Inc. as of Feb. 26,
1945 that
was discovered in June, 1951 only 21,500.00
Total taxable increase in net worth P1,707,703.95
War Profits tax due thereon:
On P50,000.00 (P6,000.00 Exempt) @

P 22,000.00
50%
50,000.00 @ 60% 30,000.00
200,000.00 @ 70% 140,000.00
200,000.00 @ 80% 160,000.00
500,000.00 @ 90% 450,000.00
707,703.95 @ 95% 672,318.75
Total . . . . . . . . . . . . . P1,474,318.75
50% surcharge on P1,474,318.75 P 737,159.37
15% surcharge on P1,474,318.75 221,147.81
1% monthly on P1,474,318.75 from 4/l/47 to 11/22/50 644,768.73
Total amount collectible on 11/22/50 . . . . . . . . P3,077,394.66
Less: Values of properties sold:
On Nov. 22, 1950 P1,556,000
On Nov. 27, 1950 150,900
April 20, 1954 9,980 1,716,880.00
Total due as of December 12, 1955 P1,360,514.66

From this decision, Maria Castro appealed to this Court..
The nineteen alleged errors committed by the Court of Tax Appeals and discussed by appellant in her
printed brief actually revolve around four main defenses: (a) that the War Profits Tax Law (R.A. No. 55) is
unconstitutional and void; (b) that said law was improperly applied to the case of the appellant; (c) that even
if appellant were subject to the tax liability declared by the court below, such liability was totally extinguished
by the levy and forfeiture of certain properties of hers; and (d) that appellant's acquittal in the criminal case
instituted against her for violation of the War Profits Tax Law is a bar to the collection of the taxes assessed,
and specially of the 50% surcharge. (a) Petitioner's attack on the constitutionality of Republic Act No. 55,
commonly known as the War Profits Tax Law, on account of its retrospective operation (Errors XVIII), is
now foreclosed by our decision in Republic vs.Oasan Vda. de Fernandez, G.R. No. L-9141, September 25,
1956, wherein thisCourt upheld the validity of the statute; and no reasons are alleged that would justify a
departure from the ruling made in that case..
(b) Petitioner Castro complains (Errors I and VI) that the Tax Court had declared subject to the war profits
tax her cash transactions from June, 1945to December 31, 1946, when Republic Act No. 55 levies that tax
only on the value of the taxpayer's assets (including real and personal property and/orcash in banks) as of
February 26, 1945, minus his liabilities..
This argument misconceives the process whereby the Tax Court (and the Pedrosa Committee) arrived at
the petitioner's net worth as of February 26,1945. Because of the difficulty in determining the taxpayer's
cash on hand on said date (since her books and records did not show her invested capital in 1945), said
tax authorities adopted the method of starting from her reported cash on hand on December 31, 1946, and
working backwards to February,1945, by adding to the reported cash the disbursements made by Castro
during1945 and 1946, and then deducting her receipts from the same period. We see nothing fundamentally
erroneous in this method for, as pointed out in the appealed decision, "if cash on hand at the beginning of
the period, plus receipts during the period minus disbursements during the period, equals cash on hand at
the end of the period, the converse must necessarily be true.".
Such method is in effect but an application (in reverse) of the inventory or networth system that, contrary to
appellants contention (Error XIII), has been approved by this Court in Perez vs. Collector of Internal
Revenue, G.R. No. L-10507, May 30, 1958; Collector vs. A. P. Reyes, L-11534, November 25, 1958; and
Commissioner of Internal Revenue vs. Avelino, L-14847, September 19, 1961.
The analysis of petitioner's transactions for 1945 and 1946 merely laid the basis for determining the
undisclosed cash funds in her possession as of February 26, 1945 (amounting to P1,807,444.61), and it is
this cash thatwas found subject to the war profits tax.
It is urged, however, that even if this finding were correct, still, under Republic Act No. 55, only "cash in
banks" is expressly mentioned as taxable, and appellant infers that cash on hand not so deposited was not
intended to be subject to war profits tax. This thesis appears unmeritorious: cash heldby the taxpayer on
February 26, 1945 clearly falls under the description of "assets, including real and personal property" that
section 2 of the Act expressly order included in determining the taxable net worth. If "cash in banks" is
expressly mentioned by the Act, it is not because cash on hand was intended to be excluded, but because
"cash in banks" is not, strictly, speaking, part of the assets of the taxpayer, but assets of the banks where
the cash is deposited. It is well established that a so-called "bank deposit" is in reality a loan to the bank,
the latter acquiring title to the amount "deposited", subject to its withdrawal (or recall of the loan) on the
dates specified. Taxpayer's "assets", therefore, would not per se include cash deposited in banks by the
taxpayer; and its inclusion had to be expressly prescribed by the statute in order to remove all doubt as to
its taxability.
Petitioner endeavored to show (Errors VII to XI) that part of the amount of cash thus arrived at actually
originated in receipts from transactions made by her after February 26, 1945 but which were not disclosed
in the books and accounts. Aside from the fact that this claim in her behalf contradicted her admission to
the Pedrosa Committee that all her 1946 receipts were recorded in her books (v. Respondent's Exhibit 6-
A), it lay within the exclusive discretion of the Tax Court to believe or not to believe her evidence and
statements, and those of her witnesses regarding the source of the cash in question; and the rule is well
settled that in cases of this kind, only errors of law, and not rulings on the weight of evidence, are reviewable
by this Court. The same principle precludes us from interfering with the Tax Court's refusal to credit the
other deductions claimed by petitioner as amounts obtained from loans from various individuals. The Court
of Tax Appeals found those items unproved, except the P76,000.00 payable to Lao Kang Suy, which is
accepted, although it had been rejected by the Pedrosa Committee.
Similarly, the finding that the petitioner had disbursed in 1946 P1,025,000.00 on account of her subscription
to the stock of the Marvel Building Corporation (Error XII) may not be disturbed by us.
(c) The third main ground of appeal is predicated on the acquittal of petitioner in case No. 4976 of the Court
of First Instance of Manila, wherein she was criminally prosecuted for failure to render a true and accurate
return of the war profits tax due from her, with intent to evade payment of the tax. She contends
(Assignments of Error II to IV) that the acquittal should operate as a bar to the imposition of the tax and
specially the 50% surcharge provided by section 6 of the War Profits law (R.A. No. 55), invoking the ruling
in Coffey v. U.S., 29 L. Ed. 436.
With regard to the tax proper, the state correctly points out in its brief that the acquittal in the criminal case
could not operate to discharge petitioner from the duty to pay the tax, since that duty is imposed by statute
prior to and independently of any attempts on the part of the taxpayer to evade payment. The obligation to
pay the tax is not a mere consequence of the felonious acts charged in the information, nor is it a mere civil
liability derived from crime that would be wiped out by the judicial declaration that the criminal acts charged
did not exist.
As to the 50% surcharge, the very United States Supreme Court that rendered the Coffey decision has
subsequently pointed out that additions of this kind to the main tax are not penalties but civil administrative
sanctions, provided primarily as a safeguard for the protection of the state revenue and to reimburse the
government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud
(Helvering vs. Mitchell, 303 U.S. 390, 82 L. Ed. 917; Spies vs. U.S. 317 U.S. 492). This is made plain by
the fact that such surcharges are enforceable, like the primary tax itself, by distraint or civil suit, and that
they are provided in a section of R.A. No. 55 (section 5) that is separate and distinct from that providing for
criminal prosecution (section 7). We conclude that the defense of jeopardy and estoppel by reason of the
petitioner's acquittal is untenable and without merit. Whether or not there was fraud committed by the
taxpayer justifying the imposition of the surcharge is an issue of fact to be inferred from the evidence and
surrounding circumstances; and the finding of its existence by the Tax Court is conclusive upon us.
(Gutierrez v. Collector, G.R. No. L-9771, May 31, 1951 ; Perez vs. Collector, supra).
(d) The fourth main ground adduced on behalf of the petitioner (Errors II and XlV) is that the sale and
forfeiture to the government (due to lack of bidders) of the properties of petitioner in Manila, Balintawak,
Pasay, Makati, Tarlac, Tagaytay and Caloocan which had been levied upon by the respondent Collector of
Internal Revenue and advertised for sale in 1950 and 1954, constitutes a full discharge of petitioner's tax
liabilities. In so arguing, she relies on the provisions of paragraph 1 of Section 328 of the Internal Revenue
Code, reading as follows: .
SEC. 328. Forfeiture to Government for Want of Bidder. - In case there is no bidder for real property
exposed for sale as herein above provided or if the highest bid is for an amount insufficient to pay
the taxes, penalties, and costs, the provincial or city treasurer shall declare the property forfeited
to the Government in satisfaction of the claim in question and within two days thereafter shall make
a return of his proceedings and the forfeiture, which shall be spread upon the records of his office,
and appellant contends that in the provision to the effect that in the absence of bidders, the property is to
be "forfeited to the Government in satisfaction of the claim in question", the term "satisfaction" signifies
nothing but full discharge of the taxes, penalties, and costs claimed by the state. Carried to its logical
conclusion, this theory would permit a clever taxpayer, who is able to conceal most or the more valuable
part of his property from the revenue officers, to escape payment of his tax liability by sacrificing an
insignificant portion of his holdings; and we can not agree that in providing that the forfeiture of the
taxpayer's distrained or levied property, for lack of adequate bids, should operate in satisfaction of the total
tax claims even beyond the value of the property forfeited. That the satisfaction prescribed in section 328
of the Revenue Code was intended to mean only a discharge pro tanto is confirmed by the provisions of
section 330 of the Revenue Code to the effect that "remedy by distraint of personal property and levy on
realty may be repeated if necessary until the full amount due including all expenses, is collected". This
section makes no distinction between forfeitures to the Government and sales to third persons, and we are
satisfied that no distinction was intended and that none is warranted.
Nor do we see that the petitioner has any ground for complaining that the properties forfeited were
undervalued (Error XV). The relation between assessed value and market price being variable, it is not a
matter of notice. However, the Court of Tax Appeals appraised the forfeited properties at double their
assessed evaluation, and thereby credited her with a part payment on account of her tax liability in the
amount of P1,716,880.00. There is no adequate evidence that they were worth more, petitioner's own
estimates of value being obviously unreliable, due to her direct interest in the matter under investigation.
Since the burden of proof lay evidently on the taxpayer, she is not in a position to complain in this regard.
It may be noted in this connection that the validity of the levy and sale of her properties in November of
1950 and April 1954 is assailed by appellant in her fifth assignment of error; but as this point was not raised
in the Court below, the same can not be entertained for the first time on appeal.
(e) As pointed out by the counsel for the Government, appellant's stand that the undeclared cash should
be averaged or spread out for the years 1945, 1946 and 1947 (Error XVI) assumes that what was being
subjected to tax was her undeclared income during said years, which is not correct, as previously declared
in this opinion. If her expenditures during 1945 and 1946 were scrutinized and analyzed, it was merely to
determine the actual value of her taxable net worth as of February 26, 1945, that was subject to the war
profits tax, as representing accumulated profits earned during the occupation years.
Finally, no argument is needed to show that unless taxes are to be left at the discretion of the taxpayer, she
can not be allowed to seek refuge or relief by pleading (Error XVII) the alleged inefficient and erratic manner
in which her books of account and supporting papers had been prepared, contrary to the requirements of
the revenue laws; and that it is incredible that a trader like the appellant should be able to do business
running into millions of pesos without knowing exactly her financial condition.
Appellant's alleged Error XIX, being merely pro forma, requires no discussion.
Finding no reversible error in the decision appealed from, we hereby affirm the same, with costs against
appellant.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes and Dizon, JJ., concur.
SUPREME COURT
Manila
EN BANC
G.R. No. L-11622 January 28, 1961
THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
DOUGLAS FISHER AND BETTINA FISHER, and the COURT OF TAX APPEALS, respondents.
x---------------------------------------------------------x
G.R. No. L-11668 January 28, 1961.
DOUGLAS FISHER AND BETTINA FISHER, petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE, and the COURT OF TAX APPEALS, respondents.
BARRERA, J.:
This case relates to the determination and settlement of the hereditary estate left by the deceased Walter
G. Stevenson, and the laws applicable thereto. Walter G. Stevenson (born in the Philippines on August 9,
1874 of British parents and married in the City of Manila on January 23, 1909 to Beatrice Mauricia
Stevenson another British subject) died on February 22, 1951 in San Francisco, California, U.S.A. whereto
he and his wife moved and established their permanent residence since May 10, 1945. In his will executed
in San Francisco on May 22, 1947, and which was duly probated in the Superior Court of California on April
11, 1951, Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal
properties acquired by the spouses while residing in the Philippines, described and preliminary assessed
as follows:
Gross Estate
Real Property — 2 parcels of land in Baguio,
covered by T.C.T. Nos. 378 and 379 P43,500.00
Personal Property
(1) 177 shares of stock of Canacao Estate at
P10.00 each 1,770.00
(2) 210,000 shares of stock of Mindanao
Mother Lode Mines, Inc. at P0.38 per share 79,800.00
(3) Cash credit with Canacao Estate Inc. 4,870.88
(4) Cash, with the Chartered Bank of India,
Australia & China 851.97
Total Gross Assets P130,792.85
On May 22, 1951, ancillary administration proceedings were instituted in the Court of First Instance of
Manila for the settlement of the estate in the Philippines. In due time Stevenson's will was duly admitted to
probate by our court and Ian Murray Statt was appointed ancillary administrator of the estate, who on July
11, 1951, filed a preliminary estate and inheritance tax return with the reservation of having the properties
declared therein finally appraised at their values six months after the death of Stevenson. Preliminary return
was made by the ancillary administrator in order to secure the waiver of the Collector of Internal Revenue
on the inheritance tax due on the 210,000 shares of stock in the Mindanao Mother Lode Mines Inc. which
the estate then desired to dispose in the United States. Acting upon said return, the Collector of Internal
Revenue accepted the valuation of the personal properties declared therein, but increased the appraisal of
the two parcels of land located in Baguio City by fixing their fair market value in the amount of P52.200.00,
instead of P43,500.00. After allowing the deductions claimed by the ancillary administrator for funeral
expenses in the amount of P2,000.00 and for judicial and administration expenses in the sum of P5,500.00,
the Collector assessed the state the amount of P5,147.98 for estate tax and P10,875,26 or inheritance tax,
or a total of P16,023.23. Both of these assessments were paid by the estate on June 6, 1952.
On September 27, 1952, the ancillary administrator filed in amended estate and inheritance tax return in
pursuance f his reservation made at the time of filing of the preliminary return and for the purpose of availing
of the right granted by section 91 of the National Internal Revenue Code.
In this amended return the valuation of the 210,000 shares of stock in the Mindanao Mother Lode Mines,
Inc. was reduced from 0.38 per share, as originally declared, to P0.20 per share, or from a total valuation
of P79,800.00 to P42,000.00. This change in price per share of stock was based by the ancillary
administrator on the market notation of the stock obtaining at the San Francisco California) Stock Exchange
six months from the death of Stevenson, that is, As of August 22, 1931. In addition, the ancillary
administrator made claim for the following deductions:
Funeral expenses ($1,04326) P2,086.52

Judicial Expenses:
(a) Administrator's Fee P1,204.34
(b) Attorney's Fee 6.000.00
(c) Judicial and Administration
expenses as of August 9, 1952 1,400.05
8,604.39
Real Estate Tax for 1951 on Baguio
real properties (O.R. No. B-1 686836) 652.50
Claims against the estate:
($5,000.00) P10,000.00 P10,000.00
Plus: 4% int. p.a. from Feb. 2 to 22,
1951 22.47 10,022.47
Sub-Total P21,365.88
In the meantime, on December 1, 1952, Beatrice Mauricia Stevenson assigned all her rights and interests
in the estate to the spouses, Douglas and Bettina Fisher, respondents herein.
On September 7, 1953, the ancillary administrator filed a second amended estate and inheritance tax return
(Exh. "M-N"). This return declared the same assets of the estate stated in the amended return of September
22, 1952, except that it contained new claims for additional exemption and deduction to wit: (1) deduction
in the amount of P4,000.00 from the gross estate of the decedent as provided for in Section 861 (4) of the
U.S. Federal Internal Revenue Code which the ancillary administrator averred was allowable by way of the
reciprocity granted by Section 122 of the National Internal Revenue Code, as then held by the Board of Tax
Appeals in case No. 71 entitled "Housman vs. Collector," August 14, 1952; and (2) exemption from the
imposition of estate and inheritance taxes on the 210,000 shares of stock in the Mindanao Mother Lode
Mines, Inc. also pursuant to the reciprocity proviso of Section 122 of the National Internal Revenue Code.
In this last return, the estate claimed that it was liable only for the amount of P525.34 for estate tax and
P238.06 for inheritance tax and that, as a consequence, it had overpaid the government. The refund of the
amount of P15,259.83, allegedly overpaid, was accordingly requested by the estate. The Collector denied
the claim. For this reason, action was commenced in the Court of First Instance of Manila by respondents,
as assignees of Beatrice Mauricia Stevenson, for the recovery of said amount. Pursuant to Republic Act
No. 1125, the case was forwarded to the Court of Tax Appeals which court, after hearing, rendered decision
the dispositive portion of which reads as follows:
In fine, we are of the opinion and so hold that: (a) the one-half (½) share of the surviving
spouse in the conjugal partnership property as diminished by the obligations properly
chargeable to such property should be deducted from the net estate of the deceased Walter
G. Stevenson, pursuant to Section 89-C of the National Internal Revenue Code; (b) the
intangible personal property belonging to the estate of said Stevenson is exempt from
inheritance tax, pursuant to the provision of section 122 of the National Internal Revenue
Code in relation to the California Inheritance Tax Law but decedent's estate is not entitled
to an exemption of P4,000.00 in the computation of the estate tax; (c) for purposes of estate
and inheritance taxation the Baguio real estate of the spouses should be valued at
P52,200.00, and 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. should
be appraised at P0.38 per share; and (d) the estate shall be entitled to a deduction of
P2,000.00 for funeral expenses and judicial expenses of P8,604.39.
From this decision, both parties appealed.
The Collector of Internal Revenue, hereinafter called petitioner assigned four errors allegedly committed by
the trial court, while the assignees, Douglas and Bettina Fisher hereinafter called respondents, made six
assignments of error. Together, the assigned errors raise the following main issues for resolution by this
Court:
(1) Whether or not, in determining the taxable net estate of the decedent, one-half (½) of the net estate
should be deducted therefrom as the share of tile surviving spouse in accordance with our law on conjugal
partnership and in relation to section 89 (c) of the National Internal revenue Code;
(2) Whether or not the estate can avail itself of the reciprocity proviso embodied in Section 122 of the
National Internal Revenue Code granting exemption from the payment of estate and inheritance taxes on
the 210,000 shares of stock in the Mindanao Mother Lode Mines Inc.;
(3) Whether or not the estate is entitled to the deduction of P4,000.00 allowed by Section 861, U.S. Internal
Revenue Code in relation to section 122 of the National Internal Revenue Code;
(4) Whether or not the real estate properties of the decedent located in Baguio City and the 210,000 shares
of stock in the Mindanao Mother Lode Mines, Inc., were correctly appraised by the lower court;
(5) Whether or not the estate is entitled to the following deductions: P8,604.39 for judicial and administration
expenses; P2,086.52 for funeral expenses; P652.50 for real estate taxes; and P10,0,22.47 representing
the amount of indebtedness allegedly incurred by the decedent during his lifetime; and
(6) Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid
the government and to be refundable to it.
In deciding the first issue, the lower court applied a well-known doctrine in our civil law that in the absence
of any ante-nuptial agreement, the contracting parties are presumed to have adopted the system of conjugal
partnership as to the properties acquired during their marriage. The application of this doctrine to the instant
case is being disputed, however, by petitioner Collector of Internal Revenue, who contends that pursuant
to Article 124 of the New Civil Code, the property relation of the spouses Stevensons ought not to be
determined by the Philippine law, but by the national law of the decedent husband, in this case, the law of
England. It is alleged by petitioner that English laws do not recognize legal partnership between spouses,
and that what obtains in that jurisdiction is another regime of property relation, wherein all properties
acquired during the marriage pertain and belong Exclusively to the husband. In further support of his stand,
petitioner cites Article 16 of the New Civil Code (Art. 10 of the old) to the effect that in testate and intestate
proceedings, the amount of successional rights, among others, is to be determined by the national law of
the decedent.
In this connection, let it be noted that since the mariage of the Stevensons in the Philippines took place in
1909, the applicable law is Article 1325 of the old Civil Code and not Article 124 of the New Civil Code
which became effective only in 1950. It is true that both articles adhere to the so-called nationality theory of
determining the property relation of spouses where one of them is a foreigner and they have made no prior
agreement as to the administration disposition, and ownership of their conjugal properties. In such a case,
the national law of the husband becomes the dominant law in determining the property relation of the
spouses. There is, however, a difference between the two articles in that Article 124 1 of the new Civil Code
expressly provides that it shall be applicable regardless of whether the marriage was celebrated in the
Philippines or abroad while Article 13252 of the old Civil Code is limited to marriages contracted in a foreign
land.
It must be noted, however, that what has just been said refers to mixed marriages between a Filipino citizen
and a foreigner. In the instant case, both spouses are foreigners who married in the Philippines. Manresa, 3
in his Commentaries, has this to say on this point:
La regla establecida en el art. 1.315, se refiere a las capitulaciones otorgadas en Espana

y entre espanoles. El 1.325, a las celebradas en el extranjero cuando alguno de los
conyuges es espanol. En cuanto a la regla procedente cuando dos extranjeros se casan
en Espana, o dos espanoles en el extranjero hay que atender en el primer caso a la
legislacion de pais a que aquellos pertenezean, y en el segundo, a las reglas generales
consignadas en los articulos 9 y 10 de nuestro Codigo. (Emphasis supplied.)
If we adopt the view of Manresa, the law determinative of the property relation of the Stevensons, married
in 1909, would be the English law even if the marriage was celebrated in the Philippines, both of them being
foreigners. But, as correctly observed by the Tax Court, the pertinent English law that allegedly vests in the
decedent husband full ownership of the properties acquired during the marriage has not been proven by
petitioner. Except for a mere allegation in his answer, which is not sufficient, the record is bereft of any
evidence as to what English law says on the matter. In the absence of proof, the Court is justified, therefore,
in indulging in what Wharton calls "processual presumption," in presuming that the law of England on this
matter is the same as our law.4
Nor do we believe petitioner can make use of Article 16 of the New Civil Code (art. 10, old Civil Code) to
bolster his stand. A reading of Article 10 of the old Civil Code, which incidentally is the one applicable,
shows that it does not encompass or contemplate to govern the question of property relation between
spouses. Said article distinctly speaks of amount of successional rights and this term, in speaks in our
opinion, properly refers to the extent or amount of property that each heir is legally entitled to inherit from
the estate available for distribution. It needs to be pointed out that the property relation of spouses, as
distinguished from their successional rights, is governed differently by the specific and express provisions
of Title VI, Chapter I of our new Civil Code (Title III, Chapter I of the old Civil Code.) We, therefore, find that
the lower court correctly deducted the half of the conjugal property in determining the hereditary estate left
by the deceased Stevenson.
On the second issue, petitioner disputes the action of the Tax Court in the exempting the respondents from
paying inheritance tax on the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. in virtue of
the reciprocity proviso of Section 122 of the National Internal Revenue Code, in relation to Section 13851
of the California Revenue and Taxation Code, on the ground that: (1) the said proviso of the California
Revenue and Taxation Code has not been duly proven by the respondents; (2) the reciprocity exemptions
granted by section 122 of the National Internal Revenue Code can only be availed of by residents of foreign
countries and not of residents of a state in the United States; and (3) there is no "total" reciprocity between
the Philippines and the state of California in that while the former exempts payment of both estate and
inheritance taxes on intangible personal properties, the latter only exempts the payment of inheritance tax..
To prove the pertinent California law, Attorney Allison Gibbs, counsel for herein respondents, testified that
as an active member of the California Bar since 1931, he is familiar with the revenue and taxation laws of
the State of California. When asked by the lower court to state the pertinent California law as regards
exemption of intangible personal properties, the witness cited article 4, section 13851 (a) and (b) of the
California Internal and Revenue Code as published in Derring's California Code, a publication of the
Bancroft-Whitney Company inc. And as part of his testimony, a full quotation of the cited section was offered
in evidence as Exhibits "V-2" by the respondents.
It is well-settled that foreign laws do not prove themselves in our jurisdiction and our courts are not
authorized to take judicial notice of them.5 Like any other fact, they must be alleged and proved. 6
Section 41, Rule 123 of our Rules of Court prescribes the manner of proving foreign laws before our
tribunals. However, although we believe it desirable that these laws be proved in accordance with said rule,
we held in the case of Willamette Iron and Steel Works v. Muzzal, 61 Phil. 471, that "a reading of sections
300 and 301 of our Code of Civil Procedure (now section 41, Rule 123) will convince one that these sections
do not exclude the presentation of other competent evidence to prove the existence of a foreign law." In
that case, we considered the testimony of an attorney-at-law of San Francisco, California who quoted
verbatim a section of California Civil Code and who stated that the same was in force at the time the
obligations were contracted, as sufficient evidence to establish the existence of said law. In line with this
view, we find no error, therefore, on the part of the Tax Court in considering the pertinent California law as
proved by respondents' witness.
We now take up the question of reciprocity in exemption from transfer or death taxes, between the State of
California and the Philippines.F
Section 122 of our National Internal Revenue Code, in pertinent part, provides:
... And, provided, further, That no tax shall be collected under this Title in respect of
intangible personal property (a) if the decedent at the time of his death was a resident of a
foreign country which at the time of his death did not impose a transfer of tax or death tax
of any character in respect of intangible personal property of citizens of the Philippines not
residing in that foreign country, or (b) if the laws of the foreign country of which the decedent
was a resident at the time of his death allow a similar exemption from transfer taxes or
death taxes of every character in respect of intangible personal property owned by citizens
of the Philippines not residing in that foreign country." (Emphasis supplied).
On the other hand, Section 13851 of the California Inheritance Tax Law, insofar as pertinent, reads:.
"SEC. 13851, Intangibles of nonresident: Conditions. Intangible personal property is

exempt from the tax imposed by this part if the decedent at the time of his death was a
resident of a territory or another State of the United States or of a foreign state or country
which then imposed a legacy, succession, or death tax in respect to intangible personal
property of its own residents, but either:.
(a) Did not impose a legacy, succession, or death tax of any character in respect to
intangible personal property of residents of this State, or
(b) Had in its laws a reciprocal provision under which intangible personal property of a non-
resident was exempt from legacy, succession, or death taxes of every character if the
Territory or other State of the United States or foreign state or country in which the
nonresident resided allowed a similar exemption in respect to intangible personal property
of residents of the Territory or State of the United States or foreign state or country of
residence of the decedent." (Id.)
It is clear from both these quoted provisions that the reciprocity must be total, that is, with respect to transfer
or death taxes of any and every character, in the case of the Philippine law, and to legacy, succession, or
death taxes of any and every character, in the case of the California law. Therefore, if any of the two states
collects or imposes and does not exempt any transfer, death, legacy, or succession tax of any character,
the reciprocity does not work. This is the underlying principle of the reciprocity clauses in both laws.
In the Philippines, upon the death of any citizen or resident, or non-resident with properties therein, there
are imposed upon his estate and its settlement, both an estate and an inheritance tax. Under the laws of
California, only inheritance tax is imposed. On the other hand, the Federal Internal Revenue Code imposes
an estate tax on non-residents not citizens of the United States, 7 but does not provide for any exemption
on the basis of reciprocity. Applying these laws in the manner the Court of Tax Appeals did in the instant
case, we will have a situation where a Californian, who is non-resident in the Philippines but has intangible
personal properties here, will the subject to the payment of an estate tax, although exempt from the payment
of the inheritance tax. This being the case, will a Filipino, non-resident of California, but with intangible
personal properties there, be entitled to the exemption clause of the California law, since the Californian
has not been exempted from every character of legacy, succession, or death tax because he is, under our
law, under obligation to pay an estate tax? Upon the other hand, if we exempt the Californian from paying
the estate tax, we do not thereby entitle a Filipino to be exempt from a similar estate tax in California
because under the Federal Law, which is equally enforceable in California he is bound to pay the same,
there being no reciprocity recognized in respect thereto. In both instances, the Filipino citizen is always at
a disadvantage. We do not believe that our legislature has intended such an unfair situation to the detriment
of our own government and people. We, therefore, find and declare that the lower court erred in exempting
the estate in question from payment of the inheritance tax.
We are not unaware of our ruling in the case of Collector of Internal Revenue vs. Lara (G.R. Nos. L-9456
& L-9481, prom. January 6, 1958, 54 O.G. 2881) exempting the estate of the deceased Hugo H. Miller from
payment of the inheritance tax imposed by the Collector of Internal Revenue. It will be noted, however, that
the issue of reciprocity between the pertinent provisions of our tax law and that of the State of California
was not there squarely raised, and the ruling therein cannot control the determination of the case at bar.
Be that as it may, we now declare that in view of the express provisions of both the Philippine and California
laws that the exemption would apply only if the law of the other grants an exemption from legacy,
succession, or death taxes of every character, there could not be partial reciprocity. It would have to be
total or none at all.
With respect to the question of deduction or reduction in the amount of P4,000.00 based on the U.S. Federal
Estate Tax Law which is also being claimed by respondents, we uphold and adhere to our ruling in the Lara
case (supra) that the amount of $2,000.00 allowed under the Federal Estate Tax Law is in the nature of a
deduction and not of an exemption regarding which reciprocity cannot be claimed under the provision of
Section 122 of our National Internal Revenue Code. Nor is reciprocity authorized under the Federal Law. .
On the issue of the correctness of the appraisal of the two parcels of land situated in Baguio City, it is
contended that their assessed values, as appearing in the tax rolls 6 months after the death of Stevenson,
ought to have been considered by petitioner as their fair market value, pursuant to section 91 of the National
Internal Revenue Code. It should be pointed out, however, that in accordance with said proviso the
properties are required to be appraised at their fair market value and the assessed value thereof shall be
considered as the fair market value only when evidence to the contrary has not been shown. After all review
of the record, we are satisfied that such evidence exists to justify the valuation made by petitioner which
was sustained by the tax court, for as the tax court aptly observed:
"The two parcels of land containing 36,264 square meters were valued by the administrator
of the estate in the Estate and Inheritance tax returns filed by him at P43,500.00 which is
the assessed value of said properties. On the other hand, defendant appraised the same
at P52,200.00. It is of common knowledge, and this Court can take judicial notice of it, that
assessments for real estate taxation purposes are very much lower than the true and fair
market value of the properties at a given time and place. In fact one year after decedent's
death or in 1952 the said properties were sold for a price of P72,000.00 and there is no
showing that special or extraordinary circumstances caused the sudden increase from the
price of P43,500.00, if we were to accept this value as a fair and reasonable one as of
1951. Even more, the counsel for plaintiffs himself admitted in open court that he was
willing to purchase the said properties at P2.00 per square meter. In the light of these facts
we believe and therefore hold that the valuation of P52,200.00 of the real estate in Baguio
made by defendant is fair, reasonable and justified in the premises." (Decision, p. 19).
In respect to the valuation of the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc., (a
domestic corporation), respondents contend that their value should be fixed on the basis of the market
quotation obtaining at the San Francisco (California) Stock Exchange, on the theory that the certificates of
stocks were then held in that place and registered with the said stock exchange. We cannot agree with
respondents' argument. The situs of the shares of stock, for purposes of taxation, being located here in the
Philippines, as respondents themselves concede and considering that they are sought to be taxed in this
jurisdiction, consistent with the exercise of our government's taxing authority, their fair market value should
be taxed on the basis of the price prevailing in our country.
Upon the other hand, we find merit in respondents' other contention that the said shares of stock
commanded a lesser value at the Manila Stock Exchange six months after the death of Stevenson. Through
Atty. Allison Gibbs, respondents have shown that at that time a share of said stock was bid for at only P.325
(p. 103, t.s.n.). Significantly, the testimony of Atty. Gibbs in this respect has never been questioned nor
refuted by petitioner either before this court or in the court below. In the absence of evidence to the contrary,
we are, therefore, constrained to reverse the Tax Court on this point and to hold that the value of a share
in the said mining company on August 22, 1951 in the Philippine market was P.325 as claimed by
respondents..
It should be noted that the petitioner and the Tax Court valued each share of stock of P.38 on the basis of
the declaration made by the estate in its preliminary return. Patently, this should not have been the case,
in view of the fact that the ancillary administrator had reserved and availed of his legal right to have the
properties of the estate declared at their fair market value as of six months from the time the decedent died..
On the fifth issue, we shall consider the various deductions, from the allowance or disallowance of which
by the Tax Court, both petitioner and respondents have appealed..
Petitioner, in this regard, contends that no evidence of record exists to support the allowance of the sum of
P8,604.39 for the following expenses:.
1) Administrator's fee P1,204.34

2) Attorney's fee 6,000.00
3) Judicial and Administrative expenses 2,052.55
Total Deductions P8,604.39
An examination of the record discloses, however, that the foregoing items were considered deductible by
the Tax Court on the basis of their approval by the probate court to which said expenses, we may presume,
had also been presented for consideration. It is to be supposed that the probate court would not have
approved said items were they not supported by evidence presented by the estate. In allowing the items in
question, the Tax Court had before it the pertinent order of the probate court which was submitted in
evidence by respondents. (Exh. "AA-2", p. 100, record). As the Tax Court said, it found no basis for
departing from the findings of the probate court, as it must have been satisfied that those expenses were
actually incurred. Under the circumstances, we see no ground to reverse this finding of fact which, under
Republic Act of California National Association, which it would appear, that while still living, Walter G.
Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to the additional
amount of P86.52 for funeral expenses which was disapproved by the court a quo for lack of evidence.
In connection with the deduction of P652.50 representing the amount of realty taxes paid in 1951 on the
decedent's two parcels of land in Baguio City, which respondents claim was disallowed by the Tax Court,
we find that this claim has in fact been allowed. What happened here, which a careful review of the record
will reveal, was that the Tax Court, in itemizing the liabilities of the estate, viz:
1) Administrator's fee P1,204.34

2) Attorney's fee 6,000.00
3) Judicial and Administration expenses as of August 9,
1952 2,052.55
Total P9,256.89
added the P652.50 for realty taxes as a liability of the estate, to the P1,400.05 for judicial and administration
expenses approved by the court, making a total of P2,052.55, exactly the same figure which was arrived at
by the Tax Court for judicial and administration expenses. Hence, the difference between the total of
P9,256.98 allowed by the Tax Court as deductions, and the P8,604.39 as found by the probate court, which
is P652.50, the same amount allowed for realty taxes. An evident oversight has involuntarily been made in
omitting the P2,000.00 for funeral expenses in the final computation. This amount has been expressly
allowed by the lower court and there is no reason why it should not be. .
We come now to the other claim of respondents that pursuant to section 89(b) (1) in relation to section
89(a) (1) (E) and section 89(d), National Internal Revenue Code, the amount of P10,022.47 should have
been allowed the estate as a deduction, because it represented an indebtedness of the decedent incurred
during his lifetime. In support thereof, they offered in evidence a duly certified claim, presented to the
probate court in California by the Bank of California National Association, which it would appear, that while
still living, Walter G. Stevenson obtained a loan of $5,000.00 secured by pledge on 140,000 of his shares
of stock in the Mindanao Mother Lode Mines, Inc. (Exhs. "Q-Q4", pp. 53-59, record). The Tax Court
disallowed this item on the ground that the local probate court had not approved the same as a valid claim
against the estate and because it constituted an indebtedness in respect to intangible personal property
which the Tax Court held to be exempt from inheritance tax.
For two reasons, we uphold the action of the lower court in disallowing the deduction.
Firstly, we believe that the approval of the Philippine probate court of this particular indebtedness of the
decedent is necessary. This is so although the same, it is averred has been already admitted and approved
by the corresponding probate court in California, situs of the principal or domiciliary administration. It is true
that we have here in the Philippines only an ancillary administration in this case, but, it has been held, the
distinction between domiciliary or principal administration and ancillary administration serves only to
distinguish one administration from the other, for the two proceedings are separate and independent. 8 The
reason for the ancillary administration is that, a grant of administration does not ex proprio vigore, have any
effect beyond the limits of the country in which it was granted. Hence, we have the requirement that before
a will duly probated outside of the Philippines can have effect here, it must first be proved and allowed
before our courts, in much the same manner as wills originally presented for allowance therein.9 And the
estate shall be administered under letters testamentary, or letters of administration granted by the court,
and disposed of according to the will as probated, after payment of just debts and expenses of
administration.10 In other words, there is a regular administration under the control of the court, where claims
must be presented and approved, and expenses of administration allowed before deductions from the
estate can be authorized. Otherwise, we would have the actuations of our own probate court, in the
settlement and distribution of the estate situated here, subject to the proceedings before the foreign court
over which our courts have no control. We do not believe such a procedure is countenanced or
contemplated in the Rules of Court.
Another reason for the disallowance of this indebtedness as a deduction, springs from the provisions of
Section 89, letter (d), number (1), of the National Internal Revenue Code which reads:
(d) Miscellaneous provisions — (1) No deductions shall be allowed in the case of a non-
resident not a citizen of the Philippines unless the executor, administrator or anyone of the
heirs, as the case may be, includes in the return required to be filed under section ninety-
three the value at the time of his death of that part of the gross estate of the non-resident
not situated in the Philippines."
In the case at bar, no such statement of the gross estate of the non-resident Stevenson not situated in the
Philippines appears in the three returns submitted to the court or to the office of the petitioner Collector of
Internal Revenue. The purpose of this requirement is to enable the revenue officer to determine how much
of the indebtedness may be allowed to be deducted, pursuant to (b), number (1) of the same section 89 of
the Internal Revenue Code which provides:
(b) Deductions allowed to non-resident estates. — In the case of a non-resident not a

citizen of the Philippines, by deducting from the value of that part of his gross estate which
at the time of his death is situated in the Philippines —
(1) Expenses, losses, indebtedness, and taxes. — That proportion of the deductions
specified in paragraph (1) of subjection (a) of this section 11 which the value of such part
bears the value of his entire gross estate wherever situated;"
In other words, the allowable deduction is only to the extent of the portion of the indebtedness which is
equivalent to the proportion that the estate in the Philippines bears to the total estate wherever situated.
Stated differently, if the properties in the Philippines constitute but 1/5 of the entire assets wherever situated,
then only 1/5 of the indebtedness may be deducted. But since, as heretofore adverted to, there is no
statement of the value of the estate situated outside the Philippines, no part of the indebtedness can be
allowed to be deducted, pursuant to Section 89, letter (d), number (1) of the Internal Revenue Code.
For the reasons thus stated, we affirm the ruling of the lower court disallowing the deduction of the alleged
indebtedness in the sum of P10,022.47.
In recapitulation, we hold and declare that:
(a) only the one-half (1/2) share of the decedent Stevenson in the conjugal partnership
property constitutes his hereditary estate subject to the estate and inheritance taxes;
(b) the intangible personal property is not exempt from inheritance tax, there existing no
complete total reciprocity as required in section 122 of the National Internal Revenue Code,
nor is the decedent's estate entitled to an exemption of P4,000.00 in the computation of
the estate tax;
(c) for the purpose of the estate and inheritance taxes, the 210,000 shares of stock in the
Mindanao Mother Lode Mines, Inc. are to be appraised at P0.325 per share; and
(d) the P2,000.00 for funeral expenses should be deducted in the determination of the net
asset of the deceased Stevenson.
In all other respects, the decision of the Court of Tax Appeals is affirmed.
Respondent's claim for interest on the amount allegedly overpaid, if any actually results after a
recomputation on the basis of this decision is hereby denied in line with our recent decision in Collector of
Internal Revenue v. St. Paul's Hospital (G.R. No. L-12127, May 29, 1959) wherein we held that, "in the
absence of a statutory provision clearly or expressly directing or authorizing such payment, and none has
been cited by respondents, the National Government cannot be required to pay interest."
WHEREFORE, as modified in the manner heretofore indicated, the judgment of the lower court is hereby
affirmed in all other respects not inconsistent herewith. No costs. So ordered.
Paras, C.J., Bengzon, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Gutierrez David, Paredes
and Dizon, JJ., concur.

Atlas To Fisher Tax Cases

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Republic of the Philippines

G.R. No. L-26911 January 27, 1981

ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION, petitioner,

G.R. No. L-26924 January 27, 1981

COMMISSIONER OF INTERNAL REVENUE, petitioner,

Transfer agent's fee.........................................................P59,477.42

Stockholders relation service fee....................................25,523.14

U.S. stock listing expenses..................................................8,326.70

Provision for contingencies..................................... .........60,000.00

Stockholders relation service fee.................................... P25,523.14

Suit and litigation expenses................................................ 6,666.65

Total net income for 1958.................................P1,968,898.27

Net income corresponding to

taxable period April 1 to

Dec. 31, 1958, 3/4 of

Add: 3/4 of promotion fees

Net income per decision..........................................11, 02,4 2.70

Tax due thereon.........................................................412,695.00

Less: Amount already assessed .............................405,468.00

DEFICIENCY INCOME TAX DUE............................P7,227.00

Add: 1/2 % monthly interest

from 6-20-59 to 6-20-62 (18%)....................................P1,300.89

TOTAL AMOUNT DUE & COLLECTIBLE............P8,526.22

THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION FROM

THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION FROM

THE COURT OF TAX APPEALS ERRED IN DISALLOWING ONLY THE AMOUNT OF

Surprisingly, however, the investigating revenue examiner recommended a partial disallowance of

G.R. No. L-12798 May 30, 1960

VISAYAN CEBU TERMINAL CO., INC., petitioner-appellant,

Duterte and Rodriguez for petitioner.

FOR THE FOREGOING CONSIDERATIONS, the decision appealed from is hereby

Net income per return P41,596.45

With costs against appellant.

xxx xxx xxx

Net income as per return P41.596.45

Year Gross Income Net Profit Representation

G.R. Nos. L-12010 and L-12113 October 20, 1959

KUENZLE & STREIFF, INC., petitioner,

Angel S. Gamboa for petitioner.

BAUTISTA ANGELO, J.:

Wherefore, the decision appealed from is affirmed, without pronouncement as to costs.

G.R. No. L-29790 February 25, 1982

AGUINALDO INDUSTRIES CORPORATION (FISHING NETS DIVISIONS), petitioner,

As summarized by the respondent Court, the facts are:

... Aguinaldo Industries Corporation is a domestic corporation engaged in two lines of

Selling price P432,031.00

and other 191.05

Officer's 61,187.48 186,416.30

Upon recommendation of aforesaid examiner that the said sum of P61,187.48 be

In computing net income there shall be allowed as deductions —

. . . . whenever a controversy arises on the deductibility, for purposes of income tax, of

Then, this Court quoted with approval the appealed decision:

xxx xxx xxx

Applying the foregoing provisions, the respondent Court said:

As regards interest, the reason is —

G.R. No. L-16552 March 30, 1962

COLLECTOR OF INTERNAL REVENUE, petitioner,

Office of the Solicitor General for petitioner.

Net income as per return P17,724.15

Net income as adjusted P51,859.89

Less personal and additional exemptions 6,000.00

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Net taxable income P45,859.88