In an appeal, where Atlas Consolidated Mining and Development Corporation assailed the disallowance of the transfer agent’s fee; stockholder’s relation fee; U.S. listing expenses; suit expenses and provision for contingencies, as deductible expenses from its gross income which resulted in the deficiency income tax assessments made by the Commissioner of Internal Revenue against Atlas, the Court of Tax Appeals allowed said disallowed items except the stockholders relation service fee and suit expenses. Both parties appealed by filing two separate petitions for review, one filed by Atlas in L-26911 as to the portion disallowed and the other by the Commissioner in L-26924, not only raising for the first time lack of proof of payment of the expense deducted but questioning as well the allowance of said deductible expenses.

The Supreme Court ruled: in L-26911, that the stockholder’s relation service fee was in effect spent as a capital expenditure and should be disallowed and in L-26924, that: (a) the Commissioner of Internal Revenue cannot raise for the first time on appeal the fact of payment of expense deducted; (b) the listing fee which was paid annually is deductible as an ordinary and necessary business expense; (c) the findings of the Court of Tax Appeal on the "provision for contingencies" are factual in nature and in the absence of grave abuse of discretion should not be disturbed on appeal; and (d) litigation expenses in defense of title of property are capital in nature and not deductible.

Judgments modified as to taxable amount.

1. ADMINISTRATIVE LAW; NATIONAL INTERNAL REVENUE CODE; INCOME TAX; ALLOWABLE DEDUCTIONS FROM GROSS INCOME. — The law allowing expenses as deduction from gross income for purposes of the income tax is Section 30(a) (1) of the National Internal Revenue Code which allows a deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business."cralaw virtua1aw library

2. ID.; ID.; ID.; ID.; STATUTORY TEST OF DEDUCTIBILITY. — The statutory test of deductibility imposes three conditions namely: (1) the expense must be ordinary and necessary; (2) it must be paid or incurred within the taxable year; and (3) it must be paid or incurred in carrying on a trade or business.

3. ID.; ID.; ID.; ID.; ORDINARY AND NECESSARY EXPENSES GUIDING PRINCIPLES FOR CONSIDERATION. — This Court has never attempted to define with precision the terms "ordinary and necessary." There are however, certain guiding principles worthy of serious consideration in the proper adjudication of conflicting claims. Ordinarily, an expense will be considered "necessary" where the expenditure is appropriate and helpful in the development of the taxpayers business. (Martens, Law of Federal, Income Taxation, Volume IV, p. 315) It is "ordinary" when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. (p. 316, Ibid) The term "ordinary" does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected. (Ibid.)

4. ID.; ID.; ID.; ID.; NOT HARD AND FAST RULE IN THE DETERMINATION OF. — There is no hard and fast rule on the right to a deduction which depends in each case on the particular facts and the relation of the payment to the type of business in which the taxpayer is engaged. The intention of the tax-payer often may be the controlling fact in making the determination. (Eaton v. Comm., 81 F. (2d) 332 [CCA 9th, 1936]) Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer’s business, the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure. (Duesenberg, Inc. of Del., 31 BTA 922, aff’d 84 F. (2d) 921 [CCA 7th, 1936] cited in Mertens, Law of Federal Income Taxation, Vol. IV, p. 339; Illinois Central Railroad Co. v. Interstate Commerce Commission, 206 S. Court, 700 [1907], cited in Simons & Hammond, 1 BTA 803. Accordingly, as found by the Court of Tax Appeals, the stockholders relation service fee, which was in effect spent for the acquisition of additional capital, ergo, a capital expenditure, is not deductible from Atlas gross income in 1958 because expenses relating to recapitalization and reorganization of the corporation (Missouri Kansas Pipe Line v. Commissioner of Internal Revenue, 122, F. [2d] 268, Cert. denied 314 U.S. 6961), the cost of obtaining stock subscription (Simons Co., 8 BTA 631, promotions expenses (Beneficial Industrial Loan Corp. v. Handy, 92 F. [2d] 74), and commission of fees paid for the sale of stock reorganization (Protective Finance Corp., 23 BTA 308) are capital expenditures.

5. ID.; ID.; ID.; ID.; EXPENSE INCURRED TO CREATE FAVORABLE PUBLIC IMAGE; NOT DEDUCTIBLE AS BUSINESS EXPENSE. — An expense incurred to create a favorable image of the corporation in order to gain or maintain the public’s and its stockholder’s patronage, does not make it deductible as business expense. As held in the case of Welch v. Helvering, (290 U.S. 111, 78 L Ed. 212, 54S Ct. 8 [1993]) efforts to establish reputation are a kin to acquisition of capital assets and, therefore, expenses related thereto are not business expense but capital expenditures.

6. ID.; ID.; ID.; ID.; STOCK LISTING FEE; WHEN DEDUCTIBLE. — A listing fee is an ordinary and necessary business expense for the privilege of having its stock listed. In Dome Mines, Ltd. v. Commissioner of Internal Revenue (20 BTA 377) the stock listing fee was disallowed as a deduction not only because the same was paid only once, and the benefit acquired thereby continued indefinitely, whereas, in the case of Chesapeake Corporation of Virginia v. Commissioner of Internal Revenue (17 T.C. 68), fee paid to the stock exchange was annual and recurring.

7. ID.; ID, ID.; ID.; LITIGATION EXPENSES IN DEFENSE OF TITLE, NOT DEDUCTIBLE; CASE AT BAR. — In line with the decision of the U.S. Tax Court in the case of Safety Tube Corporation v. Commissioner of Internal Revenue (8 T.C. 762-763, April 2, 1947 [citing Bowers v. Lumpkin, 104 Fed. (2d) 927; Certiorari denied, 322 U.S. 88; Jones estate v. Commissioner, 127 Fed. (2d) 231; Brauner v. Burnet, 63 Fed. (2d) 129; Murphy Oil Co. v. Burnet, 55 Fed. (2d) 17, affirmed in another point, 287 U.S. 299], it is well settled that litigation expenses incurred in defense or protection of title are capital in nature and not deductible, likewise, it was ruled by the U.S. Tax Court that expenditures in defense of title property constitute a part of the cost of the property, are not deductible as expense. (Coughlin v. Commissioner of Internal Revenue, 2 T.C. 422) Hence, there is no question that, as held by the Court of Tax Appeals, the litigation expenses under consideration were incurred in defense of Atlas title to its mining properties.

8. REMEDIAL LAW; APPEAL; COURT OF TAX APPEALS; FACT OF PAYMENT OF DEDUCTIBLE EXPENSES CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL; CASE AT BAR. — The Commissioner of Internal Revenue on appeal cannot be allowed to adopt a theory distinct and different from that he has previously pursued, as shown by the BIR records and the answer to the amended petition for review. (Agoncillo v. Javier, 38 Phil. 424; American Express v. Natividad, 46 Phil. 207; Balceta, Et. Al. v. Espe, Et Al., Ca-G.R. No. 16115-R, April 5, 1957; Commissioner of Customs v. Valencia, 100 Phil. 172-173, October 31, 1956) As this Court said in the case of Commissioner of Customs v. Valencia (100 Phil. 172), such change in nature of the case may not be made on appeal, especially when the purpose of the later is to seek a review of the action taken by an administrative body, forming part of a coordinate branch of all Government, such as the Executive Department. Under all the attendant circumstances in the case at bar, substantial justice would be served if the Commissioner be held precluded from now attempting to raise an issue to disallow deduction of the item in question at this stage. Failure to assert a question within a reasonable time warrants a presumption that the party entitled to assert it either has abandoned or declines to assert it.

9. ID.; ID.; ID.; FINDINGS OF FACT, NOT SUBJECT TO REVIEW IN THE ABSENCE OF GROSS ERROR OR ABUSE; CASE AT BAR. — The findings of facts by the Court of Tax Appeals will not be reviewed by the Supreme Court in the absence of showing of gross error or abuse on the part of the Tax Court. (Coca-Cola Export v. Commissioner of Internal Revenue, 55 SCRA 5; Nasiad v. Court of Tax Appeals, 61 SCRA 238) It is not within the province of this Court to resolve whether or not the P60,000.00 representing "provision for contingencies" was in fact added to or deducted from the taxable income. As ruled by the Court of Tax Appeals, the said amount was in effect added to Atlas’ taxable income. The same being factual in nature and supported by substantial evidence, such findings should not be disturbed in this appeal.

10. ID.; EVIDENCE; DISPUTABLE PRESUMPTION; ORDINARY CARE OF PERSON OF HIS CONCERN; NOT APPLICABLE TO GOVERNMENT OFFICIALS’ NEGLECT OR OMISSION IN THE COLLECTION OF TAXES. — Taxes are the lifeblood of the Government and their prompt and certain availability are imperious need. Upon taxation depends the Government’s ability to serve the people for whose benefit taxes are collected. To safeguard such interest, neglect omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people, in the manner as private persons may be made to suffer individually on account of his own negligence, the presumption being that they take good care of their personal affair. This should not hold true to government officials with respect to matters not of their own personal concern. This is the philosophy behind the government’s exception, as a general rule from the operation of the principle of estoppel. (G.R. No. L-31364, Vera v. Fernandez, March 20, 1979, 89 SCRA 199)

These are two (2) petitions for review from the decision of the Court of Tax Appeals of October 25, 1966 in CTA Case No. 1312 entitled "Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue." One (L-26911) was filed by the Atlas Consolidated Mining & Development Corporation, and in the other (L-26924), the Commissioner of Internal Revenue is the petitioner.chanroblesvirtuallawlibrary

This tax case (CTA No. 1312) arose from the 1957 and 1958 deficiency income tax assessments made by the Commissioner of Internal Revenue, hereinafter referred to as Commissioner, where the Atlas Consolidated Mining and Development Corporation, hereinafter referred to as Atlas, was assessed P546,295.16 for 1957 and P215,493.96 for 1958 deficiency income taxes.

Atlas is a corporation engaged in the mining industry registered under the laws of the Philippines. On August 20, 1962, the Commissioner assessed against Atlas the sum of P546,295.16 and P215,493.96 or a total of P761,789.12 as deficiency income taxes for the years 1957 and 1958. For the year 1957, it was the opinion of the Commissioner that Atlas is not entitled to exemption from the income tax under Section 4 of Republic Act 909 1 because same covers only gold mines, the provision of which reads:jgc:chanrobles.com.ph

"New mines, and old mines which resume operation, when certified to as such by the Secretary of Agriculture and Natural Resources upon the recommendation of the Director of Mines, shall be exempt from the payment of income tax during the first three (3) years of actual commercial production. Provided that, any such mine and/or mines making a complete return of its capital investment at any time within the said period, shall pay income tax from that year."cralaw virtua1aw library

For the year 1958, the assessment of deficiency income tax of P761,789.12 covers the disallowance of items claimed by Atlas as deductible from gross income.chanrobles lawlibrary : rednad

On October 9, 1962, Atlas protested the assessment asking for its reconsideration and cancellation. 2 Acting on the protest, the Commissioner conducted a reinvestigation of the case.

On October 25, 1962, the Secretary of Finance ruled that the exemption provided in Republic Act 909 embraces all new mines and old mines whether gold or other minerals. 3 Accordingly, the Commissioner recomputed Atlas deficiency income tax liabilities’ in the light of the ruling of the Secretary of Finance. On June 9, 1964, the Commissioner issued a revised assessment entirely eliminating the assessment of P546,295.16 for the year 1957. The assessment for 1958 was reduced from P215,493.96 to P39,646.82 from which Atlas appealed to the Court of Tax Appeals, assailing the disallowance of the following items claimed as deductible from its gross income for 1958:chanrob1es virtual 1aw library

Transfer agent’s fee P59,477.42

Stockholders relation service fee 25,523.14

U.S. stock listing expenses 8,326.70

Suit expenses 6,666.65

Provision for contingencies 60,000.00

—————

Total P159,993.91

After hearing, the Court of Tax Appeals rendered a decision on October 25, 1966 allowing the abovementioned disallowed items, except the items denominated by Atlas as stockholders relation service fee and suit expenses. 4 Pertinent portions of the decision of the Court of Tax Appeals read as follows:jgc:chanrobles.com.ph

"Under the facts, circumstances and applicable law in this case, the unallowable deduction from petitioner’s gross income in 1958 amounted to P32,189.79.

Stockholders relation

service fee P25,523.14

Suit and litigation

expenses 6,666.65

—————

Total P32,189.79

"As the exemption of petitioner from the payment of corporate income tax under Section 4, Republic Act 909, was good only up to the 1st quarter of 1958 ending on March 31 of the same year, only three-fourth (3/4) of the net taxable income of petitioner is subject to income tax, computed as follows:chanrob1es virtual 1aw library

1958

Total net income for 1958 P1,968.898.27

Net income corresponding to

taxable period April 1 to

Dec. 31, 1958, 3/4 of P1,968.898.27 P1,476.673.70

Add: 3/4 of promotion fees

of P25,523.14 P 19,142.35

Litigation expenses: 6,666.65

——————

Net income per decision P1,502.482.70

Tax due thereon 412,695.00

Less: Amount already assessed 405,468.00

——————

DEFICIENCY INCOME TAX DUE P 7,227.00

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