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G.R. No. L-29790
February 25, 1982
### Facts:
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 the manufacture of furniture. The business of manufacturing fishing nets is
handled by its Fish Nets Division, while the manufacture of Furniture is operat
ed by its Furniture Division. For accounting purposes, each division is provided
with separate books of accounts.
Previously, Aguinaldo Industries 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 Aguinaldo I
ndustries, it sold the Muntinglupa property, Aguinaldo Industries derived profit
from this sale which was entered in the books of the Fish Nets Division as misc
ellaneous income to distinguish it from its tax-exempt income.
For the year 1957, Aguinaldo Industries filed two separate income tax returns â one
for its Fish Nets Division and another for its Furniture Division. After investi
gation of these returns, the examiners of the BIR found that the Fish Nets Divis
ion deducted from its gross income for that year the amount of â ±61k as additional re
muneration paid to the officers of Aguinaldo Industries.
The examiner recommended the disallowance of the â ±61k deduction because he found tha
t 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 Aguinaldo Industries
's trade or business. It appears from the books that such deduction was claimed
as part of the selling expenses of the land in Muntinglupa, Riza.
Aguinaldo Industries insists that said amount should be allowed as deduction bec
ause 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 allowa
nce of the President â 3%, for the first Vice President â 1 %, for the second Vice Pres
dent for the members of the Board of Directors â 10% to he divided equally among the
mselves, for the Secretary of the Board for the General Manager for two Assistan
t General Managersâ ¦.
### Issue:
WON the bonus given to the officers of Aguinaldo upon the sale of its Muntinglup
a land is an ordinary and necessary business expense deductible for income tax p
### Held:
No. In general, only those ordinary and necessary expenses paid or incurred duri
ng the taxable year in carrying on any trade or business, including a reasonable
allowance for personal services actually rendered can be claimed as a deductibl
The bonus given to the officers of the Aguinaldo Industries as their share of th
e profit realized from the sale of the land cannot be deemed a deductible expens
e for tax purposes, even if the aforesaid sale could be considered as a transact
ion for Carrying on the trade or business of the Aguinaldo Industries and the gr
ant of the bonus to the corporate officers pursuant to Aguinaldo Industries's by
-laws could, as an intra-corporate matter, be sustained.
Evidence show that the sale was effected through a broker who was paid by Aguina
ldo Industries a commission for his services. On the other hand, there is absolu
tely no evidence of any service actually rendered by Aguinaldo Industries's offi
cers which could be the basis of a grant to them of a bonus out of the profit de
rived from the sale. This being so, the payment of a bonus to them out of the ga
in 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.
Thus, the extraordinary and unusual amounts paid by Aguinaldo to these directors
in the guise and form of compensation for their supposed services as such, with
out any relation to the measure of their actual services, cannot be regarded as
ordinary and necessary expenses within the meaning of the law.
### Other doctrines:
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) q
uestions become material, namely: (a) Have personal services been actually rende
red by said officers? (b) In the affirmative case, what is the reasonable allowa
nce therefor.

### Dispositive Portion:

WHEREFORE, the judgment under review is affirmed in toto. Costs against the peti