CIR Vs General Foods
CIR Vs General Foods
CIR Vs General Foods
SUPREME COURT
Manila
THIRD DIVISION
[G.R. No. 143672. April 24, 2003]
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. GENERAL FOODS (PHILS.), INC., respondent.
Rhodora J. Corcuera-Menzon for petitioner.
Ortega Del Castillo Bacorro Odulio Calma & Carbonell for respondent.
SYNOPSIS
Respondent corporation filed its income tax return for the fiscal year
ending February 28, 1985. In said tax return, respondent claimed as
deduction, among other business expenses, the amount of P9,461,246
for media advertising for "Tang" one of its products. The Commissioner
disallowed 50% or P4,730,623 of the deduction claimed by respondent.
The latter filed a motion for reconsideration, but the same was denied.
Respondent appealed to the Court of Tax Appeals, but the appeal was
dismissed. Aggrieved, respondent filed a petition for review at the Court
of Appeals which rendered a decision reversing and setting aside the
decision of the Court of Tax Appeals. Hence, the present petition for
review. The Commissioner of Internal Revenue presented to the Court the
lone issue of whether or not the subject media advertising expense for
"Tang" incurred by respondent was an ordinary and necessary expense
fully deductible under the National Internal Revenue Code (NIRC).
The Supreme Court reversed and set aside the decision of the Court of
Appeals and ordered private respondent General Foods (Phils); Inc., to
pay its deficiency income tax in the amount of P2,635,141.42, plus 25%
surcharge for late payment and 20% annual interest computed from
August 25, 1989, the date of the denial of its protest, until the same is
fully paid. The Court found the subject expense for the advertisement of
a single product to be inordinately large, and even if indeed it is
necessary, it cannot be considered an ordinary expense deductible under
Section 29 (a) (1) (A) of the NIRC. According to the Court, the subject
advertisement is one designed to stimulate the future sale of
merchandise or use of services. Said venture of respondent to protect its
brand franchise was tantamount to efforts to establish a reputation and
is akin to the acquisition of capital assets, and should not, therefore, be
considered as business expenses but as capital expenditures which
normally should be spread out over a reasonable period of time.
SYLLABUS
1. TAXATION; INCOME TAXATION; DEDUCTIONS FROM GROSS
INCOME; DEDUCTIONS FOR INCOME TAX PURPOSES PARTAKE OF
THE NATURE OF TAX EXEMPTIONS AND ARE THEREFORE STRICTLY
CONSTRUED AGAINST THE TAXPAYER AND LIBERALLY IN FAVOR OF
THE TAXING AUTHORITY. It is a governing principle in taxation that
tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority; and he who claims
an exemption must be able to justify his claim by the clearest grant of
organic or statute law. An exemption from the common burden cannot be
permitted to exist upon vague implications. Deductions for income tax
purposes partake of the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then deductions must also be strictly
construed.
2. ID.; ID.; ID.; EXPENSES; ORDINARY AND NECESSARY TRADE
BUSINESS OR PROFESSIONAL EXPENSES; WHEN DEDUCTIBLE. To
be deductible from gross income, the subject advertising expense must
comply with the following requisites: (a) the expense must be ordinary
and necessary; (b) it must have been paid or incurred during the taxable
year; (c) it must have been paid or incurred in carrying on the trade or
business of the taxpayer; and (d) it must be supported by receipts,
records or other pertinent papers.
3. ID.;
ID.;
ID.;
ID.;
FACTORS
IN
DETERMINING
THE
REASONABLENESS OF AN ADVERTISING EXPENSE. There is yet to
Thus, the instant petition, wherein the Commissioner presents for the
Court's consideration a lone issue: whether or not the subject media
advertising expense for "Tang" incurred by respondent corporation was
an ordinary and necessary expense fully deductible under the National
Internal Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of
the taxing authority; 5 and he who claims an exemption must be able to
justify his claim by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon
vague implications. 6
Deductions for income tax purposes partake of the nature of tax
exemptions; hence, if tax exemptions are strictly construed, then
deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was the
media advertising expense for "Tang" paid or incurred by respondent
corporation for the fiscal year ending February 28, 1985 "necessary and
ordinary," hence, fully deductible under the NIRC? Or was it a capital
expenditure, paid in order to create "goodwill and reputation" for
respondent corporation and/or its products, which should have been
amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A) Expenses.
(1) Ordinary and necessary trade, business or professional
expenses.
(a) In general. There shall be allowed as deduction
from gross income all ordinary and necessary
expenses paid or incurred during the taxable
year in carrying on, or which are directly
attributable to, the development, management,
operation and/or conduct of the trade,
business or exercise of a profession.
SET ASIDE. Pursuant to Sections 248 and 249 of the Tax Code,
respondent General Foods (Phils.), Inc. is hereby ordered to pay its
deficiency income tax in the amount of P2,635,141.42, plus 25%
surcharge for late payment and 20% annual interest computed from
August 25, 1989, the date of the denial of its protest, until the same is
fully paid.
SO ORDERED.
Puno, Panganiban, Sandoval-Gutierrez and Carpio-Morales, JJ., concur.
FOOTNOTES
1.Penned by Associate Justice Andres B. Reyes and concurred in by
Associate Justices Quirino D. Abad Santos, Jr. and Romeo A.
Brawner of the Third Division.
2.Penned by Associate Judge Manuel K. Gruba and concurred in by
Associate Judge Ramon O. de Veyra.
3.Rollo, pp. 22-23.
4.Id., p. 24.
5.Commissioner of Internal Revenue vs. Visayan Electric Co., 23 SCRA
715 [1968].
6.Asiatic Petrolium Co. vs. Llanas, 49 Phil 466 [1926] cited in Davao
Light & Power Co. vs. Commissioner of Customs, 44 SCRA 122
[1972].
7.Zamora vs. Collector, 8 SCRA 163 [1963].
8.Dated June 14, 1988; Petition for Review, p. 8 citing BIR Records, pp.
198-199; Rollo, p. 15.
9.Mertens, Vol. 4A 25.38 p. 190 citing Colonial Ice Cream Co., 7 BTA
154.
10.Welch vs. Helvering, 290 US 111 [1933].