Court of Tax Appeals
0' re Othe Philipp!, Am Applals a + 4n Cry Corporation LL vs. Commissioner of Intrrmal Revenue
' re oThe PHILIPP!
( , AM APPLALS
a + 4N cry
CORPORATION (FISHING
NETS DIVISION) ll
Petitioner, "4
versus CTA CASE NO. 1636
COMMISSIONER OF
INTRRMAL REVENUE,
Respondent,
AGUINALDO INDUSTRIEBS | iA
DECTITSIOR
This is en appeel trom a decision of re-
spondent Commissioner of Internal Sevenue re~
quiring petitioner Aguinalde Industries Corpora-
tion to pay the sum of °17,133.00 as deficiency
income tax for the year 1957, exclusive of the
statutory penalties ineident toe delinquency.
At the outset, it should be stated that
this case was submitted by petitioner for judg-
ment on the pleadings and records. |
The first issue that confronts us is one of
jarisdiction. Respondent contends that the pres-
ent petition was filed beyond the 30-day period
‘prescribed in Section 11 of Republic Act No,
9125. In this respect, it appears that the
Court re-set this ease for hearing on this point
144
ne ae
DECISION ~
CTA CASE WO. 1636
on May &, 1968, Petitioner then presented
evidence, whieh was not contradicted or impugned
by respondent, that it received the letter con-
taining the decision of respondent dated “ereh
15, 1965 om. April 26, 1965. Sinee the petition
for review was filed on May 20, 1965, which is
well within the thirty-dey period provided in
ection 11 of Republic Act No. 1125, this Court
has, therefore, jurisdiction te entertaio the
present appeal.
The second issue thet confronts us refers
to the merit of this case. It appears that peti-
tioner Aguinaldo Industries Corporation is a
domestic corporation organized in accordance with
law with prinefipel place of business in Perang,
Marikina, Rizal. I€ is engaged in two lines of
business, namely: (a) the manufecture of fishing
nets, a tax-exempt industry, and (b) the menn-
facture of furniture. Its business of manufacturing
fishing nets is handled by its fish Nets Division,
while the manufecture of furniture is operated by
its Furniture Division. For sccounting purposes,
each division is provided with separate books of
secounts as required by the Department of Finance.
Under the company's accounting method the net
income from its Fish tiets Division, miscellaneous
income of the Fish Nets Division, and the inecne
_ pEcTSToON -
CTA CASE NO. 1636
3
of the Furniture Division are computed individually.
Previously, petitioner acquired a parcel of
land in vYontinglave, Risal, as site of its fish- —
ing net factory. This transaction vas entered in
the books of the Mish Jets Division ef the Con-
pany. Later, when another parse] of land in
Marikina Heights was found supposedly more suit-
able for the needs of petitioner, it sold the
Muntinglupe property. ‘etitiener derived profit
from this sale which vas entered in the books of
the Fish Jets Division as miseellanecus income to
Gistinguish it from its tax-exempt income.
Yor the year 1957, petitionsr filed two
separate income tax returas - one for its Fish
Nets Division and ancther for ite Furniture Div-
ision. After investigation of these returns, the
examiners of the Bureau of Internal Revenue found
thet the Fish “Nets Division deducted from its gross
ineeme for that year the amount of (61,187.46 as
additional remuneration paid te the officers of
petitioner. The examiner further found that this
amount was taken from the net profit ef an isolated
transaction mot in the course of or carrying on
of petitioner's trade or business.. He reports it
a8 part of the selling expenses of the land in
Muntinglupa, Bisel, the details of seid transac-
tion being as follows:
146
DECISION -
CTA CASE 80, 1636 " Selling of land « «6 © 2 & 8% 32,991,00 pot alee | — Purghase price of , a 3 ‘ . 971,120,900 Registration, doc- wmentary stempe and other ex- nakeenbion survey 5 " - a) »
ADD: SELLING EXPENSES
Commission . « « oyerapeee stemps 2, “V9 Tepographic survey 450,00 Offieers’ remunere- thom «eo ee Ole IG7Z 88 wA260436030 WOT PROFIT ee ee eens oo | =6CO eee (Pages 48-49, BIR rec.)
Upon recommendation of aforesaid examiner that the said sum of "61,187.48 be disallowed as deduction from gross income, petitioner asserted in ite letter of February 19, 1958, that said amount showld be allowed as deduction because it was paid to its officers as allowanee or bonus pursuant to section 3 of its by-lews which provides ss follows: i “From the net profits of the .
tusiness of the Company shail be deducted for allowance of the Pres- ident - 34, for the Mirst Vice- - President - 1%, for the Second Viece- President - 15, for the members of the Beard of Directors ~ 10% to be divided equally among themselves, for the Secretary of the Board ~ 1%, for the General aaonane - 2», for two Assistent General Maenarers - 2%."
(Page 2, “etitioner's menorendun.)
in this connection, petitioner expleins that to arrive at the aforesaid 20% it gets 20% _ i be an M98. £2. BR Meee # Bw eee Be- ne - oe .
DECISION ~
CTA CASE WO. 1636 35 _ the sane to 208 of the profit of the fish net wenture. The ®61,1°7.4° which is the basis of the assessment of °17,133.0° does not even represent the entire 208 allocated as sllowance in section 3 of its by-laws but only 20% of the net profit of the non-exempt operation of the | Fish Nets Division, that is, 20¢ of %305,°69.89, which is the sua tots] of *305,%02.1% represent- ing profit from the sele of the Muntinglupa lend, 45.21 representing interest on savings acccunts, and 799.00 representing @ividends from invest- sents of the Fish Yet Division.
Parenthetieslly, on the bases of the records, the sum actually in question ig not 61,157.48 but only 61,160.54, which is 20% of the profit from the Muntingliupa land sale. The defieieney assessuent should be £17,12%.93 instead of *17,- 133.0 (p. 82, BIR ree.). This is so because it is only the deductibility of the additional compensation from the profit of 264,160. of the Muntinglups lend sate that is questioned. And it 49 well to remember at this juncture that aside from this °61,169.44% which petitioner al-~ loeated as additional compensation to its officers, petitioner also gave a comission of #51,732.72 to te broker who effected the sale. | — = ——— —
DECISION «
CTA CASE NO. 1636 6 ( sax @eductions for compensation are governed by Section 30 of the sx Code, The Ceductibility from gross income of additicnal remuneration or benuses granted to officers and employees of a commercial enterprise is, under Seotion 30 aforesaid as interpreted by our Supreme Court, subject to three condition precedents, to wits -€4) thie payment of the bonuses is in fact compen- sation; (2) it must be for personal services actually rendered; and (3) the bonuses, when acced to the salaries are reasonable when weasured by the amount and quality of the services per- formed with relation to the business of the par- ticular taxsayen/(suenale & Streiff v. Colleetor of Internal Kevenue, 4. A. los. 112010 & L-12113, October 20, 1999 laws of corporation cannot render nugatory these principles )(Sotany worsted Wills v. United States, 73 U. 5. le ed 262).
(at is not controverted that the sum of 61,160.44 in question comes from the net profit of the sale of the “Muntingliupa lot for the pur- pose of acquiring a better site for petitioner's fish net factory. ‘The record shows that said sale was effected, not by petitioner's officers, but through a broker who reeeived a commission of #51,723.72 for the transaction. On the other » 4149
DECISION «
CTa CrsB HO. 1636 ¥ hand, there is no evidence ef the service reni- ered by said officers on which to justify their additional reauneration for the profits of said Sale, And the sale was sesreely related te the operation of the bueiness for which petitioner was organized, to wit: furnltufe and fish net bosinoss, Needless to ay, uncer the facts of this case, it cannot be said that the ad@- @itional compensations of petitioner's off Leers are for actual persone! serviess, and when added te their salaries ere reasoneble when nessured by the awount and quality of the services per~ formed with relstion to the vetitioner's busi- nese (‘to restate a familiar rule, the tan- payer cust show that its claimed deductions elearly come within the language of the law, since allew- } anees, like exemptions, ere utters of legisla- tive grace) Martens, Me- @it., Yol. %, 1998 B4,, Gece. 25.03, Chap. 25, po. 7, 39, Nertens, Thid., Voi. 1, 1956 Od., Sec. 3.09, Chap. 3, PP. 15-163 Cepitel indemity insurance Co. Vs Comm., 25 STA 147, 150) and moreover the pre- priety of the deduction ts a contested issue da the pleadings. 7 | There are goed reasons for limiting the aiditLeaal compensation in the form ef perceat- ages of the profits from the operation of the business of petitioner. The policy of agreeing » 150
PFCTSION «
OTe Cash BO, 1636 - 8 to pay adGitional compensation on the percentage Dasis before it is cerned is based on sound - Dusiners principles primartly, Its object is to stimulate the getivity, diligence, an? ambition of the officers or expleyess oni to enable the eaployer to justly compensate its deserving ef- fleers and employees (Willie 5, Gray 4 Co. v, United States, 35 F Z2a/ 968), On this premise section 3 ef petitioner's by-laws should be interpreted as referring to profits frea the operation of its furniture and fish met busi- ness. Iniieed, petitioner's pretension cas result te incongraous situations, Petitioner's offteers will still receive additional compensation al- though Lt saffered leases from eperation through tneir inefficiency or negligence, as long os the profits from the sale ef ite eapital iuvestments are sore thin ite losses from operation - a sifuation which is a travesty of tue prlwary pur- powe of bonuses and additional remanere tien.
WiEROPURS, reducing the assessment to £17,12%.93, the Court aeredy affiras the deci- sion appealed froa in every other respect.
30 GADERM®.
qezon City, June 2), 1968.
Le AVARCEAA
OT at
nome Rh, GALE OTF e.
Cotas dudge sosoclate Jnage 151