MADRIGAL V.

RAFFERTY

Internal Revenue, action was begun by

Vicente Madrigal and his wife Susana
STATEMENT OF THE CASE.
Paterno in the Court of First Instance of
the city of Manila against Collector of
Vicente Madrigal and Susana PaternoInternal Revenue and the Deputy
were legally married prior to January 1, Collector of Internal Revenue for the
1914. The marriage was contractedrecovery of the sum of P3,786.08,
under the provisions of law concerning alleged to have been wrongfully and
conjugal partnerships (sociedad deillegally collected by the defendants
gananciales). On February 25, 1915,from the plaintiff, Vicente Madrigal,
Vicente Madrigal filed sworn declarationunder the provisions of the Act of
on the prescribed form with the Congress known as the Income Tax Law.
Collector of Internal Revenue, showing, The burden of the complaint was that if
as his total net income for the year the income tax for the year 1914 had
1914,
the
sum
of
P296,302.73.been correctly and lawfully computed
Subsequently Madrigal submitted thethere would have been due payable by
claim that the said P296,302.73 did not each of the plaintiffs the sum of
which
taken
together
represent his income for the year 1914, P2,921.09,
but was in fact the income of the amounts of a total of P5,842.18 instead
conjugal partnership existing between of P9,668.21, erroneously and unlawfully
himself and his wife Susana Paterno, and collected from the plaintiff Vicente
that in computing and assessing the Madrigal, with the result that plaintiff
additional income tax provided by theMadrigal has paid as income tax for the
Act of Congress of October 3, 1913, theyear 1914, P3,786.08, in excess of the
income declared by Vicente Madrigalsum lawfully due and payable.
should be divided into two equal parts,
one-half to be considered the income ofThe answer of the defendants, together
Vicente Madrigal and the other half ofwith an analysis of the tax declaration,
Susana Paterno. The general questionthe pleadings, and the stipulation, sets
had in the meantime been submitted toforth the basis of defendants' stand in
the Attorney-General of the Philippinethe following way: The income of Vicente
Islands who in an opinion dated March Madrigal and his wife Susana Paterno of
17, 1915, held with the petitioner the year 1914 was made up of three
Madrigal. The revenue officers being still items: (1) P362,407.67, the profits made
unsatisfied,
the
correspondenceby Vicente Madrigal in his coal and
together with this opinion was forwarded shipping business; (2) P4,086.50, the
to Washington for a decision by the profits made by Susana Paterno in her
United States Treasury Department. Theembroidery business; (3) P16,687.80,
United States Commissioner of Internalthe profits made by Vicente Madrigal in
Revenue reversed the opinion of the a pawnshop company. The sum of these
Attorney-General, and thus decidedthree items is P383,181.97, the gross
against the claim of Madrigal.
income of Vicente Madrigal and Susana
Paterno for the year 1914. General
After payment under protest, and after deductions were claimed and allowed in
the protest of Madrigal had beenthe sum of P86,879.24. The resulting net
decided adversely by the Collector of income was P296,302.73. For the
purpose of assessing the normal tax of

one per cent on the net income there

were allowed as specific deductions theDECISION.
following: (1) P16,687.80, the tax upon
which was to be paid at source, and (2)
P8,000, the specific exemption grantedFrom the point of view of test of faculty
to Vicente Madrigal and Susana Paterno, in taxation, no less than five answers
husband and wife. The remainder,have been given the course of history.
P271,614.93 was the sum upon whichThe final stage has been the selection of
the normal tax of one per cent wasincome as the norm of taxation.
"The
Income
Tax,"
assessed. The normal tax thus arrived at (SeeSeligman,
Introduction.)
The
Income
Tax
Law
of
the
was P2,716.15.
United States, extended to the Philippine
Islands, is the result of an effect on the
The dispute between the plaintiffs andpart of the legislators to put into
the defendants concerned the additional statutory form this canon of taxation
tax provided for in the Income Tax Law. and of social reform. The aim has been
The trial court in an exhausted decisionto mitigate the evils arising from
found in favor of defendants, withoutinequalities of wealth by a progressive
costs.
scheme of taxation, which places the
burden on those best able to pay. To
carry out this idea, public considerations
ISSUES.
have demanded an exemption roughly
equivalent
to
the
minimum
of
The contentions of plaintiffs and subsistence. With these exceptions, the
appellants having to do solely with the income tax is supposed to reach the
additional income tax, is that is should earnings of the entire non-governmental
be divided into two equal parts, because property of the country. Such is the
of the conjugal partnership existingbackground of the Income Tax Law.
between them. The learned argument of
counsel is mostly based upon theIncome as contrasted with capital or
provisions of the Civil Code establishing property is to be the test. The essential
the sociedad de gananciales. Thedifference between capital and income
counter contentions of appellees areis that capital is a fund; income is a flow.
that the taxes imposed by the Income A fund of property existing at an instant
Tax Law are as the name implies taxes of time is called capital. A flow of
upon income tax and not upon capital services rendered by that capital by the
and property; that the fact that Madrigal payment of money from it or any other
was a married man, and his marriagebenefit rendered by a fund of capital in
contracted
under
the
provisionsrelation to such fund through a period of
governing the conjugal partnership, has time is called an income. Capital is
no bearing on income considered aswealth, while income is the service of
income, and that the distinction must be wealth. (See Fisher, "The Nature of
drawn between the ordinary form of Capital and Income.") The Supreme
commercial
partnership
and
theCourt of Georgia expresses the thought
conjugal
partnership
of
spouses in the following figurative language:
resulting from the relation of marriage. "The fact is that property is a tree,
income is the fruit; labor is a tree,

income the fruit; capital is a tree,

income the fruit." (Waring vs. City of
Savannah [1878], 60 Ga., 93.) A tax on
income is not a tax on property.
"Income," as here used, can be defined
as "profits or gains."

G.R. No. L-66416 March 21, 1990

interest; and arranging their cultural

entertainment,
shopping
and
COMMISSIONER OF INTERNAL REVENUE,recreational activities.
petitioner,
In order to ably supply these services to
vs.
the foreign tourists, petitioner and its
counterpart
tourist
TOURS SPECIALISTS, INC., and THEcorrespondent
agencies
abroad
have
agreed
to
offer
a
COURT OF TAX APPEALS, respondents.
package fee for the tourists. Although
Gadioma Law Offices for privatethe fee to be paid by said tourists is
quoted by the petitioner, the payments
respondent.
of the hotel room accommodations, food
and other personal expenses of said
tourists, as a rule, are paid directly
GUTIERREZ, JR., J.:
either by tourists themselves, or by their
This is a petition to review on certiorari foreign travel agencies to the local
the decision of the Court of Tax Appeals hotels (pp. 77, t.s.n., February 2, 1981;
which ruled that the money entrusted to Exhs. O & O-1, p. 29, CTA rec.; pp. 2425,
private respondent Tours Specialists,t.s.n., ibid) and restaurants or shops, as
Inc., earmarked and paid for hotel room the case may be.
charges of tourists, travelers and/or
It is also the case that some tour
foreign travel agencies does not form
agencies abroad request the local tour
part of its gross receipts subject to the
agencies, such as the petitioner in the
3% independent contractor's tax under
case, that the hotel room charges, in
the National Internal Revenue Code of
some specific cases, be paid through
1977.
them. By this arrangement, the foreign
We adopt the findings of facts of thetour agency entrusts to the petitioner
Tours Specialists, Inc., the fund for hotel
Court of Tax Appeals as follows:
room accommodation, which in turn is
For the years 1974 to 1976, petitioner paid by petitioner tour agency to the
(Tours Specialists, Inc.) had derivedlocal hotel when billed. The procedure
income from its activities as a travelobserved is that the billing hotel sends
agency by servicing the needs of foreign the bill to the petitioner. The local hotel
tourists and travelers and Filipinoidentifies the individual tourist, or the
"Balikbayans" during their stay in this particular groups of tourists by code
country. Some of the services extended name or group designation and also the
to the tourists consist of booking saidduration of their stay for purposes of
tourists and travelers in local hotels for payment. Upon receipt of the bill, the
their
lodging
and
board
needs;petitioner then pays the local hotel with
transporting these foreign tourists from the funds entrusted to it by the foreign
the airport to their respective hotels, tour correspondent agency.
and from the latter to the airport upon
their departure from the Philippines,Despite this arrangement, respondent
transporting them from their hotels toCommissioner of Internal Revenue
various embarkation points for local assessed petitioner for deficiency 3%
tax
as
independent
tours, visits and excursions; securing contractor's
permits for them to visit places of contractor by including the entrusted

hotel room charges in its gross receipts 21-25) and that the reason why tourists
from services for the years 1974 to pay their room charge, or through their
1976. Consequently, on December 6, foreign tourists agencies, is the fact that
1979,
petitioner
received
fromthe room charge is exempt from hotel
respondent
the
3%
deficiencyroom tax under P.D. 31. (t.s.n., Ibid., pp.
independent
contractor's
tax25-29.) Witness Isada stated, on crossassessment
in
the
amount
ofexamination, that if their payment is
P122,946.93 for the years 1974 to 1976, made, thru petitioner's tour agency, the
inclusive, computed as follows:
hotel cost or charges "is only an act of
accomodation on our (its) part" or that
In addition to the deficiency contractor's the "agent abroad instead of sending
tax of P122,946.93, petitioner was several telexes and saving on bank
assessed to pay a compromise penaltycharges they take the option to send
of P500.00.
money to us to be held in trust to be
Subsequently on December 11, 1979,endorsed to the hotel." (pp. 3-4, t.s.n.
petitioner
formally
protested
the Aug. 10, 1982.)
assessment made by respondent on the Nevertheless,
on
June
2,
1980,
ground that the money received and respondent,
without
deciding
the
entrusted to it by the tourists, petitioner's written protest, caused the
earmarked to pay hotel room charges, issuance of a warrant of distraint and
were not considered and have never levy. (p. 51, BIR Rec.) And later,
been considered by it as part of its respondent
had
petitioner's
bank
taxable gross receipts for purposes of deposits garnished. (pp. 49-50, BIR Rec.)
computing and paying its constractor's
tax.
Taking this action of respondent as the
adverse and final decision on the
During one of the hearings in this case, disputed
assessment,
petitioner
a witness, Serafina Sazon, Certifiedappealed to this Court. (Rollo, pp. 40-45)
Public Accountant and in charge of the
Accounting Department of petitioner,The petitioner raises the lone issue in
had testified, her credibility not having this petition as follows:
been destroyed on cross examination,
categorically stated that the amountsWHETHER AMOUNTS RECEIVED BY A
entrusted to it by the foreign touristLOCAL TOURIST AND TRAVEL AGENCY
agencies intended for payment of hotel INCLUDED IN A PACKAGE FEE FROM
room charges, were paid entirely to the TOURISTS OR FOREIGN TOUR AGENCIES,
hotel concerned, without any portion INTENDED OR EARMARKED FOR HOTEL
thereof being diverted to its own funds. ACCOMMODATIONS FORM PART OF
(t.s.n., Feb. 2, 1981, pp. 7, 25; t.s.n., GROSS RECEIPTS SUBJECT TO 3%
Aug. 20, 1981, pp. 5-9, 17-18). TheCONTRACTOR'S TAX. (Rollo, p. 23)
testimony of Serafina Sazon was The petitioner premises the issue raised
corroborated by Gerardo Isada, General on the following assumptions:
Manager of petitioner, declaring to the
effect
that
payments
of
hotelFirstly, the ruling overlooks the fact that
accommodation are made throughthe amounts received, intended for hotel
petitioner without any increase in theroom accommodations, were received as
room charged (t.s.n., Oct. 9, 1981, pp. part of the package fee and, therefore,

form part of "gross receipts" as definedwherein the hotel room charges in some
by law.
specific cases, would be paid to the local
hotels through them. In the latter case,
Secondly, there is no showing and is not the correspondent court found as a fact
established by the evidence. that the ". . . that the foreign tour agency
amounts received and "earmarked" are entrusts
to
the
petitioner
Tours
actually what had been paid out as hotel Specialists, Inc. the fund for hotel room
room charges. The mere possibility thataccommodation, which in turn is paid by
the amounts actually paid could be less petitioner tour agency to the local hotel
than the amounts received is sufficient when billed." (Rollo, p. 42) The following
to destroy the validity of the ruling. procedure is followed: The billing hotel
(Rollo, pp. 26-27)
sends the bill to the respondent; the
In effect, the petitioner's lone issue is local hotel then identifies the individual
based on alleged error in the findings of tourist, or the particular group of tourist
by code name or group designation plus
facts of the respondent court.
the duration of their stay for purposes of
The well-settled doctrine is that thepayment; upon receipt of the bill the
findings of facts of the Court of Tax private respondent pays the local hotel
Appeals are binding on this Court and with the funds entrusted to it by the
absent strong reasons for this Court to foreign tour correspondent agency.
delve into facts, only questions of law
are open for determination. (Nilsen v. Moreover, evidence presented by the
Commissioner of Customs, 89 SCRA 43private respondent shows that the
[1979]; Balbas v. Domingo, 21 SCRA 444 amounts entrusted to it by the foreign
[1967]; Raymundo v. De Joya, 101 SCRA tourist agencies to pay the room
495 [1980]). In the recent case of Sy Po charges of foreign tourists in local hotels
v. Court of Appeals, (164 SCRA 524 were not diverted to its funds; this
[1988]), we ruled that the factualarrangement was only an act of
findings of the Court of Tax Appeals are accommodation on the part of the
binding upon this court and can only be private respondent. This evidence was
disturbed on appeal if not supported bynot refuted.
substantial evidence.
In essence, the petitioner's assertion
In the instant case, we find no reason to that the hotel room charges entrusted to
disregard and deviate from the findings the private respondent were part of the
package fee paid by foreign tourists to
of facts of the Court of Tax Appeals.
the respondent is not correct. The
As quoted earlier, the Court of Tax evidence is clear to the effect that the
Appeals
sufficiently
explained
the amounts entrusted to the private
were
exclusively
for
services of a local travel agency, like the respondent
payment
of
hotel
room
charges
of
herein private respondent, rendered to
foreign customers. The respondentforeign tourists entrusted to it by foreign
differentiated between the package fee travel agencies.
offered by both the local travel
agency
and
its
correspondentAs regards the petitioner's second
the
respondent
court
counterpart tourist agencies abroad andassumption,
stated:
the requests made by some tour
agencies abroad to local tour agencies

. . . [C]ontrary to the contention of 191 of the Tax Code) which states that
respondent, the records show, firstly, in the 3% contractor's tax prescribed by
the Examiners' Worksheet (Exh. T, p. 22, Section 191 of the Tax Code is imposed
BIR Rec.), that from July to December of the gross receipts of the contractor,
1976 alone, the following sums made up "no deduction whatever being allowed
the hotel room accommodations:
by said law." The petitioner contends
that the only exception to this rule is
It is not true therefore, as stated by when there is a law or regulation which
respondent, that there is no evidencewould exempt such gross receipts from
proving the amounts earmarked forbeing subjected to the 3% contractor's
hotel room charges. Since the BIR tax.
examiners could not have manufactured
the
above
figures
representingThe Collector of the Internal Revenue,
"advances
for
hotel
roomhowever had a different opinion on the
accommodations," these payments mustmatter and demanded payment of
have certainly been taken from the amusement taxes. The Court of Tax
records of petitioner, such as the Appeals reversed the Collector.
invoices, hotel bills, official receipts and
other pertinent documents. (Rollo, pp. We affirmed the decision of the Court of
Tax Appeals and stated:
48-49)
The factual findings of the respondentThe Secretary's opinion was correct. The
court are supported by substantial Government could not have meant to
evidence, hence binding upon this tax as gross receipt of the Manila Jockey
Club the 1/2% which it directs same Club
Court.
to turn over to the Board on Races. The
With these clarifications, the issue to belatter being a Government institution,
threshed out is as stated by thethere would be double taxation, which
respondent court, to wit:
should be avoided unless the statute
admits of no other interpretation. In the
. . . [W]hether or not the hotel room same manner, the Government could
charges held in trust for foreign tourists not have intended to consider as gross
and travelers and/or correspondentreceipt the portion of the funds which it
foreign travel agencies and paid to local directed the Club to give, or knew the
host hotels form part of the taxable Club would give, to winning horses and
gross receipts for purposes of the 3%jockeys admittedly 5%. It is true that
contractor's tax. (Rollo, p. 45)
the law says that out of the total wager
The petitioner opines that the grossfunds 12-1/2% shall be set aside as the
receipts which are subject to the 3% "commission" of the race track owner,
contractor's tax pursuant to Section 191 but the law itself takes official notice,
(Section 205 of the National Internaland actually approves or directs
Revenue Code of 1977) of the Tax Codepayment of the portion that goes to
include the entire gross receipts of a owners of horses as prizes and bonuses
taxpayer undiminished by any amount.of jockeys, which portion is admittedly
According to the
petitioner,
this 5% out of that 12-1/2% commission. As
interpretation is in consonance with it did not at that time contemplate the
B.I.R. Ruling No. 68-027, dated 23application of "gross receipts" revenue
October, 1968 (implementing Section principle, the law in making a

distribution of the total wager funds, which exempts foreign tourists from
took no trouble of separating one itempayment of hotel room tax. Section 1
from the other; and for convenience, thereof provides:
grouped three items under one common
Sec. 1. Foreign tourists and travelers
denomination.
shall be exempt from payment of any
Needless to say, gross receipts of the and all hotel room tax for the entire
proprietor of the amusement place period of their stay in the country.
should not include any money which
although delivered to the amusement The petitioner now alleges that P.D. 31
place has been especially earmarked byhas no relevance to the case. He
law or regulation for some person othercontends that the tax under Section 191
than the proprietor. (The situation thusof the Tax Code is in the nature of an
differs from one in which the owner of excise tax; that it is a tax on the
the amusement place, by a private exercise of the privilege to engage in
contract, with its employees or partners, business as a contractor and that it is
agrees to reserve for them a portion of imposed on, and collectible from the
the proceeds of the establishment. (See person exercising the privilege. He sums
Wong & Lee v. Coll. 104 Phil. 469; 55 Off. his arguments by stating that "while the
Gaz. [51] 10539; Sy Chuico v. Coll., 107 burden may be shifted to the person for
whom the services are rendered by the
Phil., 428; 59 Off. Gaz., [6] 896).
contractor, the latter is not relieved from
As
demonstrated
in
the
above-payment of the tax." (Rollo, p. 28)
mentioned case, gross receipts subject
to tax under the Tax Code do not include The same arguments were submitted by
monies or receipts entrusted to the the Commissioner of Internal Revenue in
taxpayer which do not belong to themthe case of Commissioner of Internal
and do not redound to the taxpayer's Revenue v. John Gotamco & Son., Inc.
benefit; and it is not necessary that (148 SCRA 36 [1987]), to justify his
there must be a law or regulation whichimposition of the 3% contractor's tax
would exempt such monies and receipts under Section 191 of the National
within the meaning of gross receipts Internal Revenue Code on the gross
receipts John Gotamco & Sons, Inc.,
under the Tax Code.
realized from the construction of the
Parenthetically,
the
room
chargesWorld Health Organization (WHO) office
entrusted by the foreign travel agenciesbuilding in Manila. We rejected the
to the private respondent do not form petitioner's arguments and ruled:
part of its gross receipts within the
definition of the Tax Code. The said We agree with the Court of Tax Appeals
receipts never belonged to the private in rejecting this contention of the
respondent. The private respondent petitioner. Said the respondent court:
never benefited from their payment to"In context, direct taxes are those that
the local hotels. As stated earlier, this are demanded from the very person
arrangement was only to accommodate who, it is intended or desired, should
the foreign travel agencies.
pay them; while indirect taxes are those
Another
objection
raised
by
thethat are demanded in the first instance
petitioner is to the respondent court's from one person in the expectation and
application of Presidential Decree 31intention that he can shift the burden to

someone else. (Pollock v. Farmers, L & Ttaxes," contemplates taxes which,

Co., 1957 US 429, 15 S. Ct. 673, 39 Law. although not imposed upon or paid by
ed. 759). The contractor's tax is ofthe Organization directly, form part of
course payable by the contractor but inthe price paid or to be paid by it.
the last analysis it is the owner of the
building that shoulders the burden of the Accordingly, the significance of P.D. 31 is
established
in
determining
tax because the same is shifted by the clearly
whether
or
not
hotel
room
charges of
contractor to the owner as a matter of
self-preservation. Thus, it is an indirect foreign tourists in local hotels are
tax. And it is an indirect tax on the WHO subject to the 3% contractor's tax. As
because, although it is payable by the the respondent court aptly stated:
petitioner, the latter can shift its burden. . . If the hotel room charges entrusted
on the WHO. In the last analysis it is the to petitioner will be subjected to 3%
WHO that will pay the tax indirectlycontractor's tax as what respondent
through the contractor and it certainlywould want to do in this case, that would
cannot be said that 'this tax has no in effect do indirectly what P.D. 31 would
bearing
upon
the
World
Healthnot like hotel room charges of foreign
Organization.'"
tourists to be subjected to hotel room
Petitioner claims
that under
the tax. Although, respondent may claim
authority of the Philippine Acetylene that the 3% contractor's tax is imposed
Company versus Commissioner ofupon a different incidence i.e. the gross
Internal Revenue, et al., (127 Phil. 461) receipts of petitioner tourist agency
the 3% contractor's tax falls directly on which he asserts includes the hotel room
Gotamco and cannot be shifted to thecharges entrusted to it, the effect would
WHO. The Court of Tax Appeals,be to impose a tax, and though
however, held that the said case is not different, it nonetheless imposes a tax
controlling in this case, since the Host actually on room charges. One way or
Agreement specifically exempts thethe other, it would not have the effect of
WHO from "indirect taxes." We agree.promoting tourism in the Philippines as
The Philippine Acetylene case involved a that would increase the costs or
tax on sales of goods which under the expenses by the addition of a hotel room
law had to be paid by the manufacturer tax in the overall expenses of said
or
producer;
the
fact
that
the tourists. (Rollo, pp. 51-52)
manufacturer or producer might have WHEREFORE, the instant petition is
added the amount of the tax to the price DENIED. The decision of the Court of Tax
of the goods did not make the sales tax Appeals
is
AFFIRMED.
No
"a tax on the purchaser." The Court held pronouncement as to costs.
that the sales tax must be paid by the
manufacturer or producer even if the SO ORDERED.
sale is made to tax-exempt entities like
the National Power Corporation, an
agency of the Philippine Government,
and to the Voice of America, an agency
of the United States Government.
The Host Agreement, in specifically
exempting the WHO from "indirect

CIR
vs.
ISABELA
CORPORATION (ICC)

CULTURALwere rendered to ICC in 1984 or 1985, it

could not declare the same because
amounts cannot be determined at that
G.R. No. 172231 February 12, 2007
time. The CTA also held that ICC did not
understate its interest income on the
FACTS:
subject promissory notes. It found that it
the
BIR
which
made
an
ICC, a domestic corporation, receivedwas
from BIR two (2) notices for deficiency of overstatement of said income when it
the
interest
income
(1) income tax amounting to P333,compounded
196.86 and (2) expanded withholdingreceivable by ICC from the promissory
tax amounting to P4, 897.79, both for notes of Realty Investment, Inc., despite
1986. Income tax deficiency arose fromthe absence of a stipulation in the
contract providing for a compounded
the BIR disallowance of IC
interest; nor of a circumstance, like
Cs claimed expense deductions for delay in payment or breach of contract,
professional and security services billed that would justify the application of
to and paid by ICC in 1986 and alleged compounded interest. Petition for review
understatement of ICCs
was filed with the CA, which sustained
CTA decision. Hence, the petition before
interest income on the 3 promissory
the SC.
notes due to Realty Investment, Inc.
Expanded
withholding
tax
(EWT)ISSUE/S
deficiency (with interest and surcharge)
was allegedly due to failure of ICC to: (1) WON the expenses for professional
security
services
should
be
withhold 1% EWT on its claimedand
P244,890.00 deduction for security deducted from ICCs gross income.
services. ICC sought reconsideration of
the assessments on March 1990 but (2) WON held that ICC did not
received final notice before seizure understate its interest income from the
(demanding payment of amounts) on promissory notes of Realty Investment,
February 1995. Thus, brought to CTA Inc. and that ICC withheld the required
which held that petition is premature 1% withholding tax from the deductions
because
final
notice
cannot
be for security services.
considered final decision appealable to HELD:
tax court. CA reversed holding that
demand letter of BIR amounts to finalThe requisites for the deductibility of
decision on the protested assessmentsordinary and necessary trade, business,
and may be questioned before CTA. SCor professional expenses, like expenses
sustained CA and remanded case to CTA paid for legal and auditing services, are:
on July 2001. On 2003, CTA decided to (a) the expense must be ordinary and
cancel and set aside the assessment necessary;
notices against ICC
(b) it must have been paid or incurred

during the taxable year

claimed deductions were properly; (c) it must have been paid or incurred
claimed in 1986 because it was only that in carrying on the trade or business of
year that the bills were sent to ICC. the taxpayer; and (d) it must be
Hence, even if some of the services supported by receipts, records or other

pertinent papers. The requisite that itaccuracy implies something less than
must have been paid or incurred during an exact or completely accurate
the taxable year is further qualified by amount.
Section 45 of the NIRC which states that:
[t]he deduction provided for in this Title
shall be taken for the taxable year in The propriety of an accrual must be
which paid or accrued or paid or judged by the facts that a taxpayer
incurred, dependent upon the method knew, or could reasonably be expected
of accounting upon the basis of whichto have known, at the closing of its
the net income is computed x x x. In books for the taxable year. Accrual
the instant case, the accounting
method of accounting presents largely a
method used by ICC is the accrualquestion of fact; such that the taxpayer
method. Revenue Audit Memorandumbears the burden of proof of establishing
Order No. 1-2000, provides that underthe accrual of an item of income or
the accrual method of accounting,deduction.
expenses
not
being
claimed
as Corollarily, it is a governing principle in
deductions by a taxpayer in the current taxation that tax exemptions must be
year when they are incurred cannot be construed in against the taxpayer and
claimed as deduction from income forliberally in favor of the taxing authority;
the succeeding year. For a taxpayer and one who claims an exemption must
using
the
accrual
method,
thebe able to justify the same by the
determinative question is, when do the clearest grant of organic or statute law.
facts present themselves in such a In the instant case, the expenses for
manner
that
the
taxpayer
mustprofessional fees consist of expenses for
recognize income or expense? The legal and auditing services. The
accrual of income and expense isexpenses for legal services pertain to
permitted when the all-events test has the 1984 and 1985 legal and retainer
been met. This test requires: (1) fixing of fees of the law firm Bengzon Zarraga
a right to income or liability to pay; and Narciso Cudala Pecson Azcuna &
(2) the availability of the reasonable Bengson, and for reimbursement of the
accurate determination of such income expenses
or liability. The all-events test requires
the right to income or liability be fixed,of said firm in connection with ICCs tax
and the amount of such income or problems for the year 1984.
liability be determined with reasonable
As testified by the Treasurer of ICC,
accuracy. However,
the amount of liability does not have tothe firm has been its counsel since the
1960s. ICC can be expected to have
be
reasonably known the retainer
determined
exactly;
it
must
be
determined with reasonable accuracy. fees charged by the firm as well as the
compensation for its legal services. As
Accordingly, the term
previously stated, the accrual method
presents largely a question of fact and
reasonable
that the taxpayer bears the burden of
establishing the accrual of an expense
or income. However, ICC failed to

discharge this burden. It simply relied on

the defense of delayed billing by the
firm and the company, which under the
circumstances, is not sufficient to
exempt it from being charged with
knowledge of the reasonable amount of
the expenses for legal and auditing
services. As to the expenses for security
services, the records show that these
expenses were incurred by ICC in 1986
and could therefore be properly claimed
as deductions for the said year. Anent
the
purported
understatement
of
interest income from the promissory
notes of Realty Investment, Inc., we
sustain the findings of the CTA and the
Court of Appeals that no such
understatement exists and that only
simple interest computation and not a
compounded one should have been
applied by the BIR. Likewise, the findings
of the CTA and the Court of Appeals that
ICC
truly
withheld
the
required
withholding tax from its claimed
deductions for security services and
remitted the same to the BIR is
supported by payment order and
confirmation
receipts.
Hence,
the
Assessment
Notice
for
deficiency
expanded withholding tax was properly
cancelled and set aside. In sum,
Assessment Notice for deficiency income
tax should be cancelled and set aside
but only insofar as the claimed
deductions of ICC for security services. s
aid Assessment is valid as to the BIRs
disallowance of ICCs expenses for
professional services.

The Court of Appeals cancellation of

Assessment
Notice in the amount of P4,897.79 for
deficiency expanded withholding tax, is
sustained.