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G.R. No.

L-28896 February 17, 1988




Algue, Inc. is a domestic corporation engaged in engineering,

construction and other allied activities. It had been appointed by
the Philippine Sugar Estate Development Company as its agent,
authorizing it to sell its land, factories and oil manufacturing
process. Hence payees worked for the formation of the Vegetable
Oil Investment Corporation, inducing other persons to invest in it.
After its incorporation, this new corporation purchased the PSEDC
properties and Algue received, as agent, a commission of
P126,000.00, and from this P75,000.00 promotional fees were paid
to the aforenamed individuals.

Algue, Inc. then received an assessment letter from the CIR for the
total amount of P83,183.85 as delinquency income taxes for the
years 1958 and 1959 wherein the former filed a letter of protest or
request for reconsideration, duly received by the office of the
petitioner. However, a warrant of distraint and levy was presented
to the private respondent, through its counsel, Atty. Alberto
Guevara, Jr., who refused to receive it on the ground of the
pending protest. The BIR agent deferred service of the warrant.
Finally, Atty. Guevara was informed that the BIR was not taking any
action on the protest and only then that the former received the
warrant of distraint and levy. However, they filed a petition for
review of the decision of the Commissioner of Internal Revenue
with the Court of Tax Appeals.


The main issue in this case is whether or not the Collector of

Internal Revenue correctly disallowed the P75,000.00 deduction
claimed by private respondent Algue as legitimate business
expenses in its income tax returns.


The Court ruled that the petition was filed seasonably as an appeal
may be made within thirty days after receipt of the decision or
ruling challenged. This case has a special circumstance since the
warrant of distraint and levy was issued notwithstanding the private
respondents protest over the petitioner’s assessment. Hence, the
warrant was premature and could therefore not be served as there
was no finality yet on the assessment.

As to the substantive question:

CIR contends that the claimed deduction of P75,000.00 was

properly disallowed because it was not an ordinary reasonable or
necessary business expense. However, the Court of Tax Appeals
agreed with Algue that the said amount had been legitimately paid
for actual services rendered. The payment was in the form of
promotional fees for the payee’s work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar
Estate Development Company. It was earned through the joint
efforts of the persons among whom it was distributed. The payees
duly reported their respective shares of the fees in their income tax
returns and paid the corresponding taxes thereon and no
distribution of dividends was involved.

The CIR suggests a tax dodge or an attempt to evade a legitimate

assessment by involving an imaginary deduction, claiming that
these payments are fictitious as most of the payees are members
of the same family in control of Algue.

However, the Court found that the suspicion was baseless as the
payments were not made in lump sum but periodically and in
different amounts as each payee's need arose. Being a family
corporation, strict business procedures were not applied and
immediate issuance of receipts was not required. Even so, at the
end of the year, each payee made an accounting of all of the fees
received by him or her, totalling P75,000.00.

The court ruled that the promotional fees was not excessive as
Algue still had a balance of P50,000.00 as clear profit from the

The Court ruled that the private respondent has proved that the
payment of the fees was necessary and reasonable in light of the
efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve
themselves in a new business requiring millions of pesos. This was
no mean feat and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society.

Without taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of one's hard earned income to
the taxing authorities, every person who is able to must contribute
his share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance
their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat of power.

However, the Court ruled that taxation must be exercised

reasonably and in accordance with the prescribed procedure. If it is
not, then the taxpayer has a right to complain and the courts will
then come to his succor. For all the awesome power of the tax
collector, he may still be stopped in his tracks if the taxpayer can
demonstrate, as it has here, that the law has not been observed.


The appeal of the private respondent was filed on time with the
CTA in accordance with Rep. Act No. 1125.
That the claimed deduction by Algue, Inc. was permitted under the
Internal Revenue Code and should therefore not have been
disallowed by the CIR.