[G.R. No. 143672.

April 24, 2003]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. GENERAL FOODS (PHILS.), INC., respondent.
DECISION
CORONA, J.:
Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution[1] of the Court of Appeals reversing
the decision[2] of the Court of Tax Appeals which in turn denied the protest filed by respondent General Foods (Phils.),
Inc., regarding the assessment made against the latter for deficiency taxes.
The records reveal that, on June 14, 1985, respondent corporation, which is engaged in the manufacture of beverages
such as Tang, Calumet and Kool-Aid, filed its income tax return for the fiscal year ending February 28, 1985. In
said tax return, respondent corporation claimed as deduction, among other business expenses, the amount of
P9,461,246 for media advertising for Tang.
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed by respondent
corporation. Consequently, respondent corporation was assessed deficiency income taxes in the amount of P2,635,
141.42. The latter filed a motion for reconsideration but the same was denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but the appeal was dismissed:
With such a gargantuan expense for the advertisement of a singular product, which even excludes other advertising
and promotions expenses, we are not prepared to accept that such amount is reasonable to stimulate the current
sale of merchandise regardless of Petitioners explanation that such expense does not connote unreasonableness
considering the grave economic situation taking place after the Aquino assassination characterized by capital fight,
strong deterioration of the purchasing power of the Philippine peso and the slacking demand for consumer products
(Petitioners Memorandum, CTA Records, p. 273). We are not convinced with such an explanation. The staggering
expense led us to believe that such expenditure was incurred to create or maintain some form of good will for the
taxpayers trade or business or for the industry or profession of which the taxpayer is a member. The term good
will can hardly be said to have any precise signification; it is generally used to denote the benefit arising from
connection and reputation (Words and Phrases, Vol. 18, p. 556 citing Douhart vs. Loagan, 86 III. App. 294). As held in
the case of Welch vs. Helvering, efforts to establish reputation are akin to acquisition of capital assets and, therefore,
expenses related thereto are not business expenses but capital expenditures. (Atlas Mining and Development Corp.

vs. Commissioner of Internal Revenue, supra). For sure such expenditure was meant not only to generate present
sales but more for future and prospective benefits. Hence, abnormally large expenditures for advertising are usually
to be spread over the period of years during which the benefits of the expenditures are received (Mertens, supra,
citing Colonial Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the case appealed from, we hereby RESOLVE to DISMISS the
instant petition for lack of merit and ORDER the Petitioner to pay the respondent Commissioner the assessed amount
of P2,635,141.42 representing its deficiency income tax liability for the fiscal year ended February 28, 1985.[3]
Aggrieved, respondent corporation 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:
Since it has not been sufficiently established that the item it claimed as a deduction is excessive, the same should be
allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is hereby GRANTED. Accordingly, the Decision,
dated 8 February 1994 of respondent Court of Tax Appeals is REVERSED and SET ASIDE and the letter, dated 31 May
1988 of respondent Commissioner of Internal Revenue is CANCELLED.
SO ORDERED.[4]
Thus, the instant petition, wherein the Commissioner presents for the Courts 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.
Simply put, 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.[7]
The parties are in agreement that the subject advertising expense was paid or incurred within the corresponding
taxable year and was incurred in carrying on a trade or business. Hence, it was necessary. However, their views
conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary
but also ordinary. These two requirements must be met.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it failed the two
conditions set by U.S. jurisprudence: first, reasonableness of the amount incurred and second, the amount incurred
must not be a capital outlay to create goodwill for the product and/or private respondents business. Otherwise, the
expense must be considered a capital expenditure to be spread out over a reasonable time.
We agree.

There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising expense. There
being no hard and fast rule on the matter, the right to a deduction depends on a number of factors such as but not
limited to: the type and size of business in which the taxpayer is engaged; the volume and amount of its net earnings;
the nature of the expenditure itself; the intention of the taxpayer and the general economic conditions. It is the
interplay of these, among other factors and properly weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense for Tang alone was almost one-half of its
total claim for marketing expenses. Aside from that, respondent-corporation also claimed P2,678,328 as other
advertising and promotions expense and another P1,548,614, for consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for Tang was almost double the amount of
respondent corporations P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product to be inordinately large. Therefore, even if it is
necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services
and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves
expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayers trade or
business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second
kind, then normally they should be spread out over a reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising expense was of the second kind. Not only was the
amount staggering; the respondent corporation itself also admitted, in its letter protest[8] to the Commissioner of
Internal Revenues assessment, that the subject media expense was incurred in order to protect respondent
corporations brand franchise, a critical point during the period under review.
The protection of brand franchise is analogous to the maintenance of goodwill or title to ones property. This is a
capital expenditure which should be spread out over a reasonable period of time.[9]

Respondent corporations venture to protect its brand franchise was tantamount to efforts to establish a reputation.
This was akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as
business expenses but as capital expenditures.[10]
True, it is the taxpayers prerogative to determine the amount of advertising expenses it will incur and where to apply
them.[11] Said prerogative, however, is subject to certain considerations. The first relates to the extent to which the
expenditures are actually capital outlays; this necessitates an inquiry into the nature or purpose of such expenditures.
[12] The second, which must be applied in harmony with the first, relates to whether the expenditures are ordinary
and necessary. Concomitantly, for an expense to be considered ordinary, it must be reasonable in amount. The Court
of Tax Appeals ruled that respondent corporation failed to meet the two foregoing limitations.
We find said ruling to be well founded. Respondent corporation incurred the subject advertising expense in order to
protect its brand franchise. We consider this as a capital outlay since it created goodwill for its business and/or
product. The P9,461,246 media advertising expense for the promotion of a single product, almost one-half of
petitioner corporations entire claim for marketing expenses for that year under review, inclusive of other advertising
and promotion expenses of P2,678,328 and P1,548,614 for consumer promotion, is doubtlessly unreasonable.
It has been a long standing policy and practice of the Court to respect the conclusions of quasi-judicial agencies such
as the Court of Tax Appeals, a highly specialized body specifically created for the purpose of reviewing tax cases. The
CTA, by the nature of its functions, is dedicated exclusively to the study and consideration of tax problems. It has
necessarily developed an expertise on the subject. We extend due consideration to its opinion unless there is an
abuse or improvident exercise of authority.[13] Since there is none in the case at bar, the Court adheres to the findings
of the CTA.
Accordingly, we find that the Court of Appeals committed reversible error when it declared the subject media
advertising expense to be deductible as an ordinary and necessary expense on the ground that it has not been
established that the item being claimed as deduction is excessive. It is not incumbent upon the taxing authority to
prove that the amount of items being claimed is unreasonable. The burden of proof to establish the validity of claimed
deductions is on the taxpayer.[14] In the present case, that burden was not discharged satisfactorily.
WHEREFORE, premises considered, the instant petition is GRANTED. The assailed decision of the Court of Appeals is
hereby REVERSED and 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.

G.R. No. 172231

February 12, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1 of the Court of Appeals in
CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No.
5211, which cancelled and set aside the Assessment Notices for deficiency income tax and expanded withholding tax
issued by the Bureau of Internal Revenue (BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR Assessment Notice No.
FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both
for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions for professional and security services billed to and paid
by ICC in 1986Z to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December 31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon Zarraga Narciso Cudala Pecson
Azcuna & Bengson for the years 1984 and 1985.5
(c) Expense for security services of El Tigre Security & Investigation Agency for the months of April and May 1986.6
(2) The alleged understatement of ICCs interest income on the three promissory notes due from Realty Investment,
Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was allegedly due to the
failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00 deduction for security services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995, however, it
received a final notice before seizure demanding payment of the amounts stated in the said notices. Hence, it brought
the case to the CTA which held that the petition is premature because the final notice of assessment cannot be
considered as a final decision appealable to the tax court. This was reversed by the Court of Appeals holding that a
demand letter of the BIR reiterating the payment of deficiency tax, amounts to a final decision on the protested

assessment and may therefore be questioned before the CTA. This conclusion was sustained by this Court on July 1,
2001, in G.R. No. 135210.8 The case was thus remanded to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment notices issued against
ICC. It held that the claimed deductions for professional and security services were properly claimed by ICC in 1986
because it was only in the said year when the bills demanding payment were sent to ICC. Hence, even if some of these
professional services were rendered to ICC in 1984 or 1985, it could not declare the same as deduction for the said
years as the amount thereof could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject promissory notes. It found that it was
the BIR which made an overstatement of said income when it compounded the interest income receivable by ICC from
the promissory notes of Realty Investment, Inc., despite the absence of a stipulation in the contract providing for a
compounded interest; nor of a circumstance, like delay in payment or breach of contract, that would justify the
application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed deduction for security
services as shown by the various payment orders and confirmation receipts it presented as evidence. The dispositive
portion of the CTAs Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the
amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in
the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986, are hereby CANCELLED
and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA decision,10 holding that
although the professional services (legal and auditing services) were rendered to ICC in 1984 and 1985, the cost of the
services was not yet determinable at that time, hence, it could be considered as deductible expenses only in 1986
when ICC received the billing statements for said services. It further ruled that ICC did not understate its interest
income from the promissory notes of Realty Investment, Inc., and that ICC properly withheld and remitted taxes on the
payments for security services for the taxable year 1986.

Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that since ICC is
using the accrual method of accounting, the expenses for the professional services that accrued in 1984 and 1985,
should have been declared as deductions from income during the said years and the failure of ICC to do so bars it from
claiming said expenses as deduction for the taxable year 1986. As to the alleged deficiency interest income and failure
to withhold expanded withholding tax assessment, petitioner invoked the presumption that the assessment notices
issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the expenses for
professional and security services from ICCs gross income; and (2) held that ICC did not understate its interest income
from the promissory notes of Realty Investment, Inc; and that ICC withheld the required 1% withholding tax from the
deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses
paid for legal and auditing services, are: (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.11
The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the
National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided for in this Title shall be taken for
the taxable year in which paid or accrued or paid or incurred, dependent upon the method of accounting upon the
basis of which the net income is computed x x
Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and
deductions.12 In the instant case, the accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not
being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction
from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other
allowable deductions for the current year but failed to do so cannot deduct the same for the next year.13
The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them, in opposition to
actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the
right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued
when fixed and determinable in amount, without regard to indeterminacy merely of time of payment.14

For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such
a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when
the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the
availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be
determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable;
the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year.
The amount of liability does not have to be determined exactly; it must be determined with "reasonable accuracy."
Accordingly, the term "reasonable accuracy" implies something less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to
have known, at the closing of its books for the taxable year.[16] Accrual method of accounting presents largely a
question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or
deduction.17
Corollarily, 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 one who claims an exemption must be able to justify the
same by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to
exist upon vague implications. And since a deduction for income tax purposes partakes of the nature of a tax
exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The
expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in connection with ICCs
tax problems for the year 1984. As testified by the Treasurer of ICC, the firm has been its counsel since the 1960s.19
From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the taxable year when they could have
been claimed as deductions cannot thus be attributed solely to the delayed billing of these liabilities by the firm. For

one, ICC, in the exercise of due diligence could have inquired into the amount of their obligation to the firm, especially
so that it is using the accrual method of accounting. For another, it could have reasonably determined the amount of
legal and retainer fees owing to its familiarity with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the burden of
establishing the accrual of an expense or income. However, ICC failed to discharge this burden. As to when the firms
performance of its services in connection with the 1984 tax problems were completed, or whether ICC exercised
reasonable diligence to inquire about the amount of its liability, or whether it does or does not possess the information
necessary to compute the amount of said liability with reasonable accuracy, are questions of fact which ICC never
established. 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.
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the year 1985
cannot be validly claimed as expense deductions in 1986. This is so because ICC failed to present evidence showing
that even with only "reasonable accuracy," as the standard to ascertain its liability to SGV & Co. in the year 1985, it
cannot determine the professional fees which said company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional services
were allowable deductions for the taxable year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they
cannot be validly deducted from its gross income for the said year and were therefore properly disallowed by the BIR.
s to the expenses for security services, the records show that these expenses were incurred by ICC in 198620 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. There is indeed no stipulation
between the latter and ICC on the application of compounded interest.21 Under Article 1959 of the Civil Code, unless
there is a stipulation to the contrary, interest due should not further earn interest.
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.22 Hence, the Assessment Notice for deficiency expanded withholding tax was properly
cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency income tax should be
cancelled and set aside but only insofar as the claimed deductions of ICC for security services. Said Assessment is
valid as to the BIRs disallowance of ICCs expenses for professional services. The Court of Appeals cancellation of
Assessment Notice No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency expanded withholding tax, is
sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the Court of Appeals in CA-G.R.
SP No. 78426, is AFFIRMED with the MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which disallowed
the expense deduction of Isabela Cultural Corporation for professional and security services, is declared valid only
insofar as the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala
Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability under Assessment
Notice No. FAS-1-86-90-000680.
SO ORDERED.

PHILEX MINING VS CIR

DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the June 30, 2000 Decision[1] of the Court of Appeals in CA-G.R. SP
No. 49385, which affirmed the Decision[2] of the Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April
3, 2001 Resolution[3] denying the motion for reconsideration.
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an agreement[4] with Baguio Gold
Mining Company (Baguio Gold) for the former to manage and operate the latters mining claim, known as the Sto.
Nino mine, located in Atok and Tublay, Benguet Province. The parties agreement was denominated as Power of
Attorney and provided for the following terms:
4.
Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available to the MANAGERS
(Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as from time to time may be required
by the MANAGERS within the said 3-year period, for use in the MANAGEMENT of the STO. NINO MINE. The said ELEVEN
MILLION PESOS (P11,000,000.00) shall be deemed, for internal audit purposes, as the owners account in the Sto. Nino
PROJECT. Any part of any income of the PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino PROJECT,
shall be added to such owners account.
5.
Whenever the MANAGERS shall deem it necessary and convenient in connection with the MANAGEMENT of the
STO. NINO MINE, they may transfer their own funds or property to the Sto. Nino PROJECT, in accordance with the
following arrangements:
(a)
The properties shall be appraised and, together with the cash, shall be carried by the Sto. Nino
PROJECT as a special fund to be known as the MANAGERS account.
(b)
The total of the MANAGERS account shall not exceed P11,000,000.00, except with prior approval of the
PRINCIPAL; provided, however, that if the compensation of the MANAGERS as herein provided cannot be paid in cash
from the Sto. Nino PROJECT, the amount not so paid in cash shall be added to the MANAGERS account.

(c)
of this Agency.

The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT until termination

(d)
The MANAGERS account shall not accrue interest. Since it is the desire of the PRINCIPAL to extend to
the MANAGERS the benefit of subsequent appreciation of property, upon a projected termination of this Agency, the
ratio which the MANAGERS account has to the owners account will be determined, and the corresponding proportion
of the entire assets of the STO. NINO MINE, excluding the claims, shall be transferred to the MANAGERS, except that
such transferred assets shall not include mine development, roads, buildings, and similar property which will be
valueless, or of slight value, to the MANAGERS. The MANAGERS can, on the other hand, require at their option that
property originally transferred by them to the Sto. Nino PROJECT be re-transferred to them. Until such assets are
transferred to the MANAGERS, this Agency shall remain subsisting.
12.
The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the Sto. Nino PROJECT
before income tax. It is understood that the MANAGERS shall pay income tax on their compensation, while the
PRINCIPAL shall pay income tax on the net profit of the Sto. Nino PROJECT after deduction therefrom of the MANAGERS
compensation.
16.
The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the future, may incur other
obligations in favor of the MANAGERS. This Power of Attorney has been executed as security for the payment and
satisfaction of all such obligations of the PRINCIPAL in favor of the MANAGERS and as a means to fulfill the same.
Therefore, this Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is
outstanding, inclusive of the MANAGERS account. After all obligations of the PRINCIPAL in favor of the MANAGERS
have been paid and satisfied in full, this Agency shall be revocable by the PRINCIPAL upon 36-month notice to the
MANAGERS.
17.
Notwithstanding any agreement or understanding between the PRINCIPAL and the MANAGERS to the contrary,
the MANAGERS may withdraw from this Agency by giving 6-month notice to the PRINCIPAL. The MANAGERS shall not in
any manner be held liable to the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d) hereof shall be
operative in case of the MANAGERS withdrawal.
In the course of managing and operating the project, Philex Mining made advances of cash and property in
accordance with paragraph 5 of the agreement. However, the mine suffered continuing losses over the years which
resulted to petitioners withdrawal as manager of the mine on January 28, 1982 and in the eventual cessation of mine
operations on February 20, 1982.[6]

Thereafter, on September 27, 1982, the parties executed a Compromise with Dation in Payment[7] wherein
Baguio Gold admitted an indebtedness to petitioner in the amount of P179,394,000.00 and agreed to pay the same in
three segments by first assigning Baguio Golds tangible assets to petitioner, transferring to the latter Baguio Golds
equitable title in its Philodrill assets and finally settling the remaining liability through properties that Baguio Gold may
acquire in the future.
On December 31, 1982, the parties executed an Amendment to Compromise with Dation in Payment[8] where
the parties determined that Baguio Golds indebtedness to petitioner actually amounted to P259,137,245.00, which
sum included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor. These liabilities
pertained to long-term loans amounting to US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT
& SA and Citibank N.A. This time, Baguio Gold undertook to pay petitioner in two segments by first assigning its
tangible assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets for P16,302,426.00.
The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to petitioner in the amount
of P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding indebtedness of
Baguio Gold by charging P112,136,000.00 to allowances and reserves that were set up in 1981 and P2,860,768.00 to
the 1982 operations.
In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112,136,000.00
as loss on settlement of receivables from Baguio Gold against reserves and allowances.[9] However, the Bureau of
Internal Revenue (BIR) disallowed the amount as deduction for bad debt and assessed petitioner a deficiency income
tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt
deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt was ascertained to be worthless;
and (c) it was charged off within the taxable year when it was determined to be worthless.
Petitioner emphasized that the debt arose out of a valid management contract it entered into with Baguio Gold.
The bad debt deduction represented advances made by petitioner which, pursuant to the management contract,
formed part of Baguio Golds pecuniary obligations to petitioner. It also included payments made by petitioner as
guarantor of Baguio Golds long-term loans which legally entitled petitioner to be subrogated to the rights of the
original creditor.

Petitioner also asserted that due to Baguio Golds irreversible losses, it became evident that it would not be able to
recover the advances and payments it had made in behalf of Baguio Gold. For a debt to be considered worthless,
petitioner claimed that it was neither required to institute a judicial action for collection against the debtor nor to sell
or dispose of collateral assets in satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts to
enforce collection and exhausted all reasonable means to collect.
On October 28, 1994, the BIR denied petitioners protest for lack of legal and factual basis. It held that the alleged
debt was not ascertained to be worthless since Baguio Gold remained existing and had not filed a petition for
bankruptcy; and that the deduction did not consist of a valid and subsisting debt considering that, under the
management contract, petitioner was to be paid fifty percent (50%) of the projects net profit.[10]
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as follows:
WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DENIED for lack of merit. The
assessment in question, viz: FAS-1-82-88-003067 for deficiency income tax in the amount of P62,811,161.39 is hereby
AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY respondent Commissioner of Internal
Revenue the amount of P62,811,161.39, plus, 20% delinquency interest due computed from February 10, 1995, which
is the date after the 20-day grace period given by the respondent within which petitioner has to pay the deficiency
amount x x x up to actual date of payment.
SO ORDERED.[11]
The CTA rejected petitioners assertion that the advances it made for the Sto. Nino mine were in the nature of a loan.
It instead characterized the advances as petitioners investment in a partnership with Baguio Gold for the development
and exploitation of the Sto. Nino mine. The CTA held that the Power of Attorney executed by petitioner and Baguio
Gold was actually a partnership agreement. Since the advanced amount partook of the nature of an investment, it
could not be deducted as a bad debt from petitioners gross income.
The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio Gold could not be
allowed as a bad debt deduction. At the time the payments were made, Baguio Gold was not in default since its loans
were not yet due and demandable. What petitioner did was to pre-pay the loans as evidenced by the notice sent by

Bank of America showing that it was merely demanding payment of the installment and interests due. Moreover,
Citibank imposed and collected a pre-termination penalty for the pre-payment.
The Court of Appeals affirmed the decision of the CTA.[12] Hence, upon denial of its motion for reconsideration,[13]
petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:

I. The Court of Appeals erred in construing that the advances made by Philex in the management of the Sto. Nino Mine
pursuant to the Power of Attorney partook of the nature of an investment rather than a loan.
II. The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto. Nino Mine indicates that
Philex is a partner of Baguio Gold in the development of the Sto. Nino Mine notwithstanding the clear absence of any
intent on the part of Philex and Baguio Gold to form a partnership.
III. The Court of Appeals erred in relying only on the Power of Attorney and in completely disregarding the Compromise
Agreement and the Amended Compromise Agreement when it construed the nature of the advances made by Philex.
IV. The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad debts write-off.[14]
Petitioner insists that in determining the nature of its business relationship with Baguio Gold, we should not only rely
on the Power of Attorney, but also on the subsequent Compromise with Dation in Payment and Amended
Compromise with Dation in Payment that the parties executed in 1982. These documents, allegedly evinced the
parties intent to treat the advances and payments as a loan and establish a creditor-debtor relationship between
them.
The petition lacks merit.
The lower courts correctly held that the Power of Attorney is the instrument that is material in determining the true
nature of the business relationship between petitioner and Baguio Gold. Before resort may be had to the two
compromise agreements, the parties contractual intent must first be discovered from the expressed language of the
primary contract under which the parties business relations were founded. It should be noted that the compromise
agreements were mere collateral documents executed by the parties pursuant to the termination of their business
relationship created under the Power of Attorney. On the other hand, it is the latter which established the juridical
relation of the parties and defined the parameters of their dealings with one another.

The execution of the two compromise agreements can hardly be considered as a subsequent or contemporaneous act
that is reflective of the parties true intent. The compromise agreements were executed eleven years after the Power
of Attorney and merely laid out a plan or procedure by which petitioner could recover the advances and payments it
made under the Power of Attorney. The parties entered into the compromise agreements as a consequence of the
dissolution of their business relationship. It did not define that relationship or indicate its real character.
An examination of the Power of Attorney reveals that a partnership or joint venture was indeed intended by the
parties. Under a contract of partnership, two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.[15] While a corporation, like
petitioner, cannot generally enter into a contract of partnership unless authorized by law or its charter, it has been
held that it may enter into a joint venture which is akin to a particular partnership:
The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been
generally understood to mean an organization formed for some temporary purpose. x x x It is in fact hardly
distinguishable from the partnership, since their elements are similar community of interest in the business, sharing
of profits and losses, and a mutual right of control. x x x The main distinction cited by most opinions in common law
jurisdictions is that the partnership contemplates a general business with some degree of continuity, while the joint
venture is formed for the execution of a single transaction, and is thus of a temporary nature. x x x This observation is
not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific undertaking. x x x It would seem therefore that under
Philippine law, a joint venture is a form of partnership and should be governed by the law of partnerships. The
Supreme Court has however recognized a distinction between these two business forms, and has held that although a
corporation cannot enter into a partnership contract, it may however engage in a joint venture with others. x x x
(Citations omitted) [16]
Perusal of the agreement denominated as the Power of Attorney indicates that the parties had intended to create a
partnership and establish a common fund for the purpose. They also had a joint interest in the profits of the business
as shown by a 50-50 sharing in the income of the mine.
Under the Power of Attorney, petitioner and Baguio Gold undertook to contribute money, property and industry to
the common fund known as the Sto. Nio mine.[17] In this regard, we note that there is a substantive equivalence in
the respective contributions of the parties to the development and operation of the mine. Pursuant to paragraphs 4
and 5 of the agreement, petitioner and Baguio Gold were to contribute equally to the joint venture assets under their

respective accounts. Baguio Gold would contribute P11M under its owners account plus any of its income that is left
in the project, in addition to its actual mining claim. Meanwhile, petitioners contribution would consist of its expertise
in the management and operation of mines, as well as the managers account which is comprised of P11M in funds
and property and petitioners compensation as manager that cannot be paid in cash.
However, petitioner asserts that it could not have entered into a partnership agreement with Baguio Gold because it
did not bind itself to contribute money or property to the project; that under paragraph 5 of the agreement, it was
only optional for petitioner to transfer funds or property to the Sto. Nio project (w)henever the MANAGERS shall
deem it necessary and convenient in connection with the MANAGEMENT of the STO. NIO MINE.[18]
The wording of the parties agreement as to petitioners contribution to the common fund does not detract from the
fact that petitioner transferred its funds and property to the project as specified in paragraph 5, thus rendering
effective the other stipulations of the contract, particularly paragraph 5(c) which prohibits petitioner from withdrawing
the advances until termination of the parties business relations. As can be seen, petitioner became bound by its
contributions once the transfers were made. The contributions acquired an obligatory nature as soon as petitioner had
chosen to exercise its option under paragraph 5.
There is no merit to petitioners claim that the prohibition in paragraph 5(c) against withdrawal of advances should not
be taken as an indication that it had entered into a partnership with Baguio Gold; that the stipulation only showed that
what the parties entered into was actually a contract of agency coupled with an interest which is not revocable at will
and not a partnership.
In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the principal due to an
interest of a third party that depends upon it, or the mutual interest of both principal and agent.[19] In this case, the
non-revocation or non-withdrawal under paragraph 5(c) applies to the advances made by petitioner who is supposedly
the agent and not the principal under the contract. Thus, it cannot be inferred from the stipulation that the parties
relation under the agreement is one of agency coupled with an interest and not a partnership.
Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the parties was one of
agency and not a partnership. Although the said provision states that this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS account, it does not
necessarily follow that the parties entered into an agency contract coupled with an interest that cannot be withdrawn
by Baguio Gold.

It should be stressed that the main object of the Power of Attorney was not to confer a power in favor of petitioner to
contract with third persons on behalf of Baguio Gold but to create a business relationship between petitioner and
Baguio Gold, in which the former was to manage and operate the latters mine through the parties mutual
contribution of material resources and industry. The essence of an agency, even one that is coupled with interest, is
the agents ability to represent his principal and bring about business relations between the latter and third
persons.[20] Where representation for and in behalf of the principal is merely incidental or necessary for the proper
discharge of ones paramount undertaking under a contract, the latter may not necessarily be a contract of agency,
but some other agreement depending on the ultimate undertaking of the parties.[21]
In this case, the totality of the circumstances and the stipulations in the parties agreement indubitably lead to the
conclusion that a partnership was formed between petitioner and Baguio Gold.
First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by petitioner
under the agreement. Paragraph 5 (d) thereof provides that upon termination of the parties business relations, the
ratio which the MANAGERS account has to the owners account will be determined, and the corresponding proportion
of the entire assets of the STO. NINO MINE, excluding the claims shall be transferred to petitioner.[22] As pointed out
by the Court of Tax Appeals, petitioner was merely entitled to a proportionate return of the mines assets upon
dissolution of the parties business relations. There was nothing in the agreement that would require Baguio Gold to
make payments of the advances to petitioner as would be recognized as an item of obligation or accounts payable
for Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the Sto. Nio mine
upon termination, a provision that is more consistent with a partnership than a creditor-debtor relationship. It should
be pointed out that in a contract of loan, a person who receives a loan or money or any fungible thing acquires
ownership thereof and is bound to pay the creditor an equal amount of the same kind and quality.[23] In this case,
however, there was no stipulation for Baguio Gold to actually repay petitioner the cash and property that it had
advanced, but only the return of an amount pegged at a ratio which the managers account had to the owners
account.
In this connection, we find no contractual basis for the execution of the two compromise agreements in which Baguio
Gold recognized a debt in favor of petitioner, which supposedly arose from the termination of their business relations
over the Sto. Nino mine. The Power of Attorney clearly provides that petitioner would only be entitled to the return
of a proportionate share of the mine assets to be computed at a ratio that the managers account had to the owners
account. Except to provide a basis for claiming the advances as a bad debt deduction, there is no reason for Baguio

Gold to hold itself liable to petitioner under the compromise agreements, for any amount over and above the
proportion agreed upon in the Power of Attorney.
Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds of millions of
pesos to another corporation with neither security, or collateral, nor a specific deed evidencing the terms and
conditions of such loans. The parties also did not provide a specific maturity date for the advances to become due and
demandable, and the manner of payment was unclear. All these point to the inevitable conclusion that the advances
were not loans but capital contributions to a partnership.
The strongest indication that petitioner was a partner in the Sto Nio mine is the fact that it would receive 50% of the
net profits as compensation under paragraph 12 of the agreement. The entirety of the parties contractual
stipulations simply leads to no other conclusion than that petitioners compensation is actually its share in the
income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the receipt by a person of a share in the profits of a business
is prima facie evidence that he is a partner in the business. Petitioner asserts, however, that no such inference can
be drawn against it since its share in the profits of the Sto Nio project was in the nature of compensation or wages of
an employee, under the exception provided in Article 1769 (4) (b).[24]
On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who will be paid
wages pursuant to an employer-employee relationship. To begin with, petitioner was the manager of the project and
had put substantial sums into the venture in order to ensure its viability and profitability. By pegging its compensation
to profits, petitioner also stood not to be remunerated in case the mine had no income. It is hard to believe that
petitioner would take the risk of not being paid at all for its services, if it were truly just an ordinary employee.
Consequently, we find that petitioners compensation under paragraph 12 of the agreement actually constitutes its
share in the net profits of the partnership. Indeed, petitioner would not be entitled to an equal share in the income of
the mine if it were just an employee of Baguio Gold.[25] It is not surprising that petitioner was to receive a 50% share
in the net profits, considering that the Power of Attorney also provided for an almost equal contribution of the parties
to the St. Nino mine. The compensation agreed upon only serves to reinforce the notion that the parties relations
were indeed of partners and not employer-employee.
All told, the lower courts did not err in treating petitioners advances as investments in a partnership known as the Sto.
Nino mine. The advances were not debts of Baguio Gold to petitioner inasmuch as the latter was under no

unconditional obligation to return the same to the former under the Power of Attorney. As for the amounts that
petitioner paid as guarantor to Baguio Golds creditors, we find no reason to depart from the tax courts factual finding
that Baguio Golds debts were not yet due and demandable at the time that petitioner paid the same. Verily,
petitioner pre-paid Baguio Golds outstanding loans to its bank creditors and this conclusion is supported by the
evidence on record.[26]
In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions for income
tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must prove
by convincing evidence that he is entitled to the deduction claimed.[27] In this case, petitioner failed to substantiate
its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income.
Consequently, it could not claim the advances as a valid bad debt deduction.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No. 49385 dated June
30, 2000, which affirmed the decision of the Court of Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner
Philex Mining Corporation is ORDERED to PAY the deficiency tax on its 1982 income in the amount of P62,811,161.31,
with 20% delinquency interest computed from February 10, 1995, which is the due date given for the payment of the
deficiency income tax, up to the actual date of payment.
SO ORDERED.