Sunday, February 19, 2012

Aguinaldo Industries Co. vs. CIR

Facts: Aguinaldo Industries is engaged in the manufacture of fishing nets (a tax exempt industry), which is handled by its Fish Nets Division. It is also engaged in the manufacture of furniture which is operated by its Furniture Division. Each division is provided with separate books of accounts. The income from the Fish Nets Division, miscellaneous income of the Fish Nets Division, and and the income from the Furniture Division are computed individually. 

Petitioner acquired a parcel of land in Muntinlupa Rizal as site for its fishing net factory. The transaction was entered in the books of the Fish Nets Division. The company then found another parcel of land in Marikina Heights, which was more suitable. They then sold the Muntinlupa property and the profit derived from the sale was entered in the books of the Fish Nets Division as miscellaneous income to separate it from its tax exempt income. 

For 1957, petitioner filed 2 separate ITRs (one for Fish Nets and one for Furniture). After investigation, BIR examiners found that the Fish Nets Div deducted from its gross income PhP 61k as additional remuneration paid to the company’s officers. Such amount was taken from the sale of the land and was reported as part of the selling expenses. The examiners recommended that such deduction be disallowed. Petitioner then asserted in its letter that it should be allowed because it was paid as bonus to its officers pursuant to Sec.3 of its by-laws: “From the net profits shall be deducted for allowance of the Pres. - 3%, VP - 1%, members of the Board - 10%.” 

CTA imposed a 5% surcharge and 1% monthly interest for the deficiency assessment. Petitioner then stressed that the profit derived from the sale of the land is not taxable because the Fish Nets Div enjoys tax exemption under RA 901. 

(1) Whether the bonus given to the officers of the petitioner upon the sale of its Muntinlupa land is an ordinary and necessary business expense deductible for income tax purposes; and 
(2) Whether petitioner is liable for surcharge and interest for late payment. 

(1) YES. 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. 

Moreover, petitioner cannot now claim that the profit from the sale is tax exempt. At the administrative level, the petitioner implicitly admitted that the profit it derived from the sale of its Muntinlupa 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. The requirement of prior exhaustion of administrative remedies gives 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. 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 CTA. 

(2) YES. 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 15th day of the 5th month following the close of the fiscal year in the case of taxpayers whose tax returns were made on the basis of fiscal years. 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 and the imposition thereof is mandatory even in the absence of fraud or willful failure to pay the tax is full. 

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