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G.R. No.

L-29790 February 25, 1982


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
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:

price of
























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 bylaws 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, vicepresident, 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.
G.R. No. L-25043

April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and
as judicial co-guardians of JOSE ROXAS, petitioners,
Leido, Andrada, Perez and Associates for petitioners.
Office of the Solicitor General for respondents.
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by
hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of
Nasugbu, Batangas province;

(2) A residential house and lot located at Wright St., Malate, Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas
and Jose Roxas, formed a partnership called Roxas y Compania.
At the conclusion of the Second World War, the tenants who have all been tilling the lands in
Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels which
they actually occupied. For its part, the Government, in consonance with the constitutional mandate
to acquire big landed estates and apportion them among landless tenants-farmers, persuaded the
Roxas brothers to part with their landholdings. Conferences were held with the farmers in the early
part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for
distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey and
subdivision expenses.
It turned out however that the Government did not have funds to cover the purchase price, and so a
special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y
Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be
sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for
the same price but by installment, and contracted with the Rehabilitation Finance Corporation to pay
its loan from the proceeds of the yearly amortizations paid by the farmers.
In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and
P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale
of capital asset held for more than one year pursuant to Section 34 of the Tax Code.
During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate,
Manila, which they inherited from their grandparents. After Antonio and Eduardo got married, they
resided somewhere else leaving only Jose in the old house. In fairness to his brothers, Jose paid to
Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.
On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment
of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for
late payment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty for
late payment. The assessment for real estate dealer's tax was based on the fact that Roxas y Cia.
received house rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the
Tax Code, an owner of a real estate who derives a yearly rental income therefrom in the amount of
P3,000.00 or more is considered a real estate dealer and is liable to pay the corresponding fixed tax.
The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities
against Roxas y Cia., on the fact that said partnership made profits from the purchase and sale of

In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas
Brothers for the years 1953 and 1955, as follows:

Antonio Roxas
Eduardo Roxas
Jose Roxas



The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported
50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the
tenants, and the disallowance of deductions from gross income of various business expenses and
contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia.
subdivided its Nasugbu farm lands and sold them to the farmers on installment, the Commissioner
considered the partnership as engaged in the business of real estate, hence, 100% of the profits
derived therefrom was taxed.
The following deductions were disallowed:
Tickets for Banquet in honor of
S. Osmea
Gifts of San Miguel beer

P 40.00

Contributions to
Philippine Air Force Chapel


Manila Police Trust Fund


Philippines Herald's fund for Manila's

neediest families


Contributions to Contribution to
Our Lady of Fatima Chapel,


Contributions to
Pasay City Firemen Christmas Fund


Pasay City Police Dept. X'mas fund


Contributions to

Baguio City Police Christmas fund


Pasay City Firemen Christmas fund


Pasay City Police Christmas fund


Contributions to
Hijas de Jesus' Retiro de Manresa


Philippines Herald's fund for Manila's

neediest families


Contributions to Philippines
Herald's fund for Manila's
neediest families



Contributions to Philippines
Herald's fund for Manila's
neediest families


The Roxas brothers protested the assessment but inasmuch as said protest was denied, they
instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal
and rendered judgment on July 31, 1965 sustaining the assessment except the demand for the
payment of the fixed tax on dealer of securities and the disallowance of the deductions for
contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The Tax
Court's judgment reads:
WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners
Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the
respondent Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00 and
P11,857.00, respectively, as deficiency income taxes for the years 1953 and 1955, plus 5%
surcharge and 1% monthly interest as provided for in Sec. 51(a) of the Revenue Code; and
modified with respect to the partnership Roxas y Cia. in the sense that it should pay only
P150.00, as real estate dealer's tax. With costs against petitioners.
Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of
Internal Revenue did not appeal.
The issues:
(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence
100% taxable?

(2) Are the deductions for business expenses and contributions deductible?
(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?
The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real
estate dealer because it engaged in the business of selling real estate. The business activity alluded
to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-occupants on
installment. To bolster his stand on the point, he cites one of the purposes of Roxas y Cia. as
contained in its articles of partnership, quoted below:
4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer
a ella en el futuro, alquilandoles por los plazos y demas condiciones, estime convenientes y
vendiendo aquellas que a juicio de sus gerentes no deben conservarse;
The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal
Revenue cannot be favorably accepted by Us in this isolated transaction with its peculiar
circumstances in spite of the fact that there were hundreds of vendees. Although they paid for their
respective holdings in installment for a period of ten years, it would nevertheless not make the
vendor Roxas y Cia. a real estate dealer during the ten-year amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled
them for generations was not only in consonance with, but more in obedience to the request and
pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty
of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its
haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and
prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y
Cia. shouldered the Government's burden, went out of its way and sold lands directly to the farmers
in the same way and under the same terms as would have been the case had the Government done
it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing
the people's gratitude.
The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order
to maintain the general public's trust and confidence in the Government this power must be used
justly and not treacherously. It does not conform with Our sense of justice in the instant case for the
Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly
answering the urgent call.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence,
pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain
derived from the sale thereof is capital gain, taxable only to the extent of 50%.
Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in
honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The
deduction were claimed as representation expenses. Representation expenses are deductible from
gross income as expenditures incurred in carrying on a trade or business under Section 30(a) of the
Tax Code provided the taxpayer proves that they are reasonable in amount, ordinary and necessary,
and incurred in connection with his business. In the case at bar, the evidence does not show such

link between the expenses and the business of Roxas y Cia. The findings of the Court of Tax
Appeals must therefore be sustained.
The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen,
and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for
Manila's neediest families and Our Lady of Fatima chapel at Far Eastern University.
The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio
City Police are not deductible for the reason that the Christmas funds were not spent for public
purposes but as Christmas gifts to the families of the members of said entities. Under Section 39(h),
a contribution to a government entity is deductible when used exclusively for public purposes. For
this reason, the disallowance must be sustained. On the other hand, the contribution to the Manila
Police trust fund is an allowable deduction for said trust fund belongs to the Manila Police, a
government entity, intended to be used exclusively for its public functions.
The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on
the ground that the Philippines Herald is not a corporation or an association contemplated in Section
30 (h) of the Tax Code. It should be noted however that the contributions were not made to the
Philippines Herald but to a group of civic spirited citizens organized by the Philippines Herald solely
for charitable purposes. There is no question that the members of this group of citizens do not
receive profits, for all the funds they raised were for Manila's neediest families. Such a group of
citizens may be classified as an association organized exclusively for charitable purposes mentioned
in Section 30(h) of the Tax Code.
Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima
chapel at the Far Eastern University on the ground that the said university gives dividends to its
stockholders. Located within the premises of the university, the chapel in question has not been
shown to belong to the Catholic Church or any religious organization. On the other hand, the lower
court found that it belongs to the Far Eastern University, contributions to which are not deductible
under Section 30(h) of the Tax Code for the reason that the net income of said university injures to
the benefit of its stockholders. The disallowance should be sustained.
Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because
although it earned a rental income of P8,000.00 per annum in 1952, said rental income came from
Jose Roxas, one of the partners. Section 194 of the Tax Code, in considering as real estate dealers
owners of real estate receiving rentals of at least P3,000.00 a year, does not provide any
qualification as to the persons paying the rentals. The law, which states:

. . . "Real estate dealer" includes any person engaged in the business of buying, selling,
exchanging, leasing or renting property on his own account as principal and holding himself
out as a full or part-time dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three thousand pesos or more a year: . .
. (Emphasis supplied) .
is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point is

To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and
Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00
and P49.00, respectively, computed as follows: *

Net income per return


Add: 1/3 share, profits in Roxas y


P 153,249.15

Less amount declared


Amount understated

P 7,113.69

Contributions disallowed

P 7,228.69

Less 1/3 share of contributions

amounting to P21,126.06 disallowed
from partnership but allowed to


Net income per review


Less: Exemptions


Net taxable income


Tax due


Tax paid



P 109.00

Net income per return

Add: 1/3 share, profits in Roxas y Cia

P 153,249.15

Less profits declared


Amount understated

P 7,196.57

Less 1/3 share in contributions

amounting to P21,126.06 disallowed
from partnership but allowed to
Net income per review
Less: Exemptions



Net taxable income


Tax Due


Tax paid




Net income per return


Add: 1/3 share, profits in Roxas y

Less amount reported


Amount understated


Less 1/3 share of contributions

disallowed from partnership but
allowed as deductions to partners


Net income per review


Less: Exemption


Net income subject to tax


Tax due


Tax paid



P 49.00

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay the
sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and
Jose Roxas are ordered to pay the respective sums of P109.00, P91.00 and P49.00 as their
individual deficiency income tax all corresponding for the year 1955. No costs. So ordered.
[G.R. No. 197117, April 10, 2013]
REVENUE, Respondent.

Before the Court is a petition for review on certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure
filed by First Lepanto Taisho Corporation, now FLT Prime Insurance Corporation (petitioner), assailing the
March 1, 2011 Decision2 and the May 27, 2011 Resolution3 of the Court of Tax Appeals (CTA) En Banc, in
CTA E.B. No. 563, which affirmed the May 21, 2009 Decision of the CTA-Second Division.
The Facts:
Petitioner is a non-life insurance corporation and considered as a Large Taxpayer under Revenue
Regulations No. 6-85, as amended by Revenue Regulations No. 12-94 effective 1994.4 After submitting its
corporate income tax return for taxable year ending December 31, 1997, petitioner received a Letter of
Authority, dated October 30, 1998, from respondent Commissioner of Internal Revenue (CIR) to allow it to
examine their books of account and other accounting records for 1997 and other unverified prior years.
On December 29, 1999, CIR issued internal revenue tax assessments for deficiency income, withholding,
expanded withholding, final withholding, value-added, and documentary stamp taxes for taxable year 1997.
On February 24, 2000, petitioner protested the said tax assessments.
During the pendency of the case, particularly on February 15, 2008, petitioner filed its Motion for Partial
Withdrawal of Petition for Review of Assessment Notice Nos. ST-INC-97-0220-99; ST-VAT-97-0222-99 and
ST-DST-97-0217-00, in view of the tax amnesty program it had availed. The CTA Second Division granted
the said motion in a Resolution,5 dated March 31, 2008.
Consequently, on May 21, 2009, the CTA Second Division partially granted the petition. 6 It directed
petitioner to pay CIR a reduced tax liability of P1,994,390.86. The dispositive portion reads:
chanroble svirtuallawlibrary

WHEREFORE, in view of the foregoing considerations, the instant Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, petitioner is hereby ORDERED TO PAYdeficiency withholding tax on
compensation, expanded withholding tax and final tax in the reduced amount of P1,994,390.86, computed
as follows:

Basic Tax


Tax on



Tax ST-EWT97-0218-99





Tax ST-FT-970219-99






P1,206,316.41 P301,579.11



P312.227.34 P1,279,978.03

P486,495.34 P1,994,390.86

Petitioners Motion for Partial Reconsideration7 was likewise denied by the CTA Second Division in its October

29, 2009 Resolution.8

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Unsatisfied, petitioner filed a Petition for Review before the CTA En Banc.9

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On March 1, 2011, the CTA En Banc affirmed the decision of the CTA Second Division. 10

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Petitioner contended that it was not liable to pay Withholding Tax on Compensation on the P500,000.00
Directors Bonus to their directors, specifically, Rodolfo Bausa, Voltaire Gonzales, Felipe Yap, and Catalino
Macaraig, Jr., because they were not employees and the amount was already subjected to Expanded
Withholding Tax. The CTA En Banc, however, ruled that Section 5 of Revenue Regulation No. 12-86
expressly identified a director to be an employee.
As to transportation, subsistence and lodging, and representation expenses, the expenses would not be
subject to withholding tax only if the same were reimbursement for actual expenses of the company. In the
present case, the CTA En Banc declared that petitioner failed to prove that they were so.
As to deficiency expanded withholding taxes on compensation, petitioner failed to substantiate that the
commissions earned totaling P905,428.36, came from reinsurance activities and should not be subject to
withholding tax. Petitioner likewise failed to prove its direct loss expense, occupancy cost and
service/contractors and purchases.
As to deficiency final withholding taxes, petitioner failed to present proof of remittance to establish that it
had remitted the final tax on dividends paid as well as the payments for services rendered by the Malaysian
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As to the imposition of delinquency interest under Section 249 (c) (3) of the 1997 National Internal Revenue
Code (NIRC), records reveal that petitioner failed to pay the deficiency taxes within thirty (30) days from
receipt of the demand letter, thus, delinquency interest accrued from such non-payment.
Petitioner moved for partial reconsideration, but the CTA En Banc denied the same in its May 27, 2011
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Hence, this petition.13


The principal issue in this case is whether the CTA En Banc erred in holding petitioner liable for:

deficiency withholding taxes on compensation on directors bonuses under Assessment

No. ST-WC-97-0021-99;


deficiency expanded withholding taxes on transportation, subsistence and lodging, and

representation expense; commission expense; direct loss expense; occupancy cost; and
service/contractor and purchases under Assessment No. ST-EWT-97-0218-99;
crala wlibrary


deficiency final withholding taxes on payment of dividends and computerization expenses

to foreign entities under Assessment No. ST-FT-97-0219-99; and


delinquency interest under Section 249 (c) (3) of the NIRC.

The Court finds no merit in the petition.

For taxation purposes, a director is considered an employee under Section 5 of Revenue Regulation No. 1286,14 to wit:
chanroble svirtuallawlibrary

An individual, performing services for a corporation, whether as an officer and director or merely as a
director whose duties are confined to attendance at and participation in the meetings of the Board of
Directors, is an employee.
The non-inclusion of the names of some of petitioners directors in the companys Alpha List does notipso
facto create a presumption that they are not employees of the corporation, because the imposition of

withholding tax on compensation hinges upon the nature of work performed by such individuals in the
company. Moreover, contrary to petitioners attestations, Revenue Regulation No. 2-98, 15 specifically, Section
2.57.2. A (9) thereof,16 cannot be applied to this case as the latter is a later regulation while the accounting
books examined were for taxable year 1997.
As to the deficiency withholding tax assessment on transportation, subsistence and lodging, and
representation expense, commission expense, direct loss expense, occupancy cost, service/contractor and
purchases, the Court finds no cogent reason to deviate from the findings of the CTA En Banc. As correctly
observed by the CTA Second Division and the CTA En Banc, petitioner was not able to sufficiently establish
that the transportation expenses reflected in their books were reimbursement from actual transportation
expenses incurred by its employees in connection with their duties as the only document presented was a
Schedule of Transportation Expenses without pertinent supporting documents. Without said documents,
such as but not limited to, receipts, transportation-related vouchers and/or invoices, there is no way of
ascertaining whether the amounts reflected in the schedule of expenses were disbursed for transportation.
With regard to commission expense, no additional documentary evidence, like the reinsurance agreements
contracts, was presented to support petitioners allegation that the expenditure originated from reinsurance
activities that gave rise to reinsurance commissions, not subject to withholding tax. As to occupancy costs,
records reveal that petitioner failed to compute the correct total occupancy cost that should be subjected to
withholding tax, hence, petitioner is liable for the deficiency.
As to service/contractors and purchases, petitioner contends that both parties already stipulated that it
correctly withheld the taxes due. Thus, petitioner is of the belief that it is no longer required to present
evidence to prove the correct payment of taxes withheld. As correctly ruled by the CTA Second Division
and En Banc, however, stipulations cannot defeat the right of the State to collect the correct taxes due on an
individual or juridical person because taxes are the lifeblood of our nation so its collection should be actively
pursued without unnecessary impediment.
As to the deficiency final withholding tax assessments for payments of dividends and computerization
expenses incurred by petitioner to foreign entities, particularly Matsui Marine & Fire Insurance Co. Ltd.
(Matsui),17 the Court agrees with CIR that petitioner failed to present evidence to show the supposed
remittance to Matsui.
The Court likewise holds the imposition of delinquency interest under Section 249 (c) (3) of the 1997 NIRC
to be proper, because failure to pay the deficiency tax assessed within the time prescribed for its payment
justifies the imposition of interest at the rate of twenty percent (20%) per annum, which interest shall be
assessed and collected from the date prescribed for its payment until full payment is made.
It is worthy to note that tax revenue statutes are not generally intended to be liberally construed. 18
Moreover, the CTA being a highly specialized court particularly created for the purpose of reviewing tax and
customs cases, it is settled that its findings and conclusions are accorded great respect and are generally
upheld by this Court, unless there is a clear showing of a reversible error or an improvident exercise of
authority.19 Absent such errors, the challenged decision should be maintained.
WHEREFORE, the petition is DENIED. The March 1, 2011 Decision and the May 27, 2011 Resolution of the
Court of Tax Appeals En Banc, in CTA E.B. No. 563, are AFFIRMED.