CTA Case No. 1706

ASPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

PHILIPPINE PAPER PRODUCTS

COMPANY,

Petitioner, tyh :

Ww o Te Ae

ww - Vergug « CASE NO, 1706 ¥, YFRA, ‘n his ca~ ye

NISABL P. YFRA, tn his ca-

pacity as Acting Conmmis-

sioner of Internal ‘evenue,

X=eweeweenaeeweneawewe we X

DECISIONS

This is an appeal from the decision of respondert

holding petitioner liable for deficiency income tax for

the year 1959 in the asount of P7,7%7.00, plus interest

of P1,39%.46, or a total of 79,142.46, and the sum of

P100,00, as compromise penalty for nen-cowpliance with

the requirements of Section 77 of the National Inter-

nal Revenue Code. |

The facts of this case appear in a written stip-

wlation of the parties ané, in affition thereto, in

the evidence introéuced during the trial, The stipu-

lated Cacts are as follows:

1. That petitioner ic a corporation

duly peptone in 193% under the lows of

the Frhilip

ané as of 1959, its sub-

scribed ao g ro 1 om capital was P4O0,000,00,

2. That as shown by the purpose clause

of its Articles of Incorporation, potitioner

was organized:

namdtgsineinns camaptenpe svamete

ac rs rs Ts

and distributors of, emf dealers in) -

pepers and pauper producte of every

DRCISION «

CTA CASE WO. 1706

= @

kind ané for all purposes, including

writing eamphe envelopes, blotting

papers, book papers, tissue papers,

cards, cardboards pager bangs, cor

rugated boxes, solid ibre packing

containers, and other converted

articles of paper; to construct,

build and operate pulp and’ paper

mills, and to engage in the manu-

feaeture, and sale of pulp and paper

or any products in whieh pulp or

paper, or any 322 te used in the

namfacture of SS papers may be

used, to A ys er o deal in and

@ispose of such real “ personal

property as say be necessary or con-

venient in connection with the ap

saié msiness or the corporation

aet as general agent of any non- fe

insurance company; to make contracts,

promissory notes, mortgages, ant any

other documents or papers deemed

advisable or necessary ané, in general,

to carry on any other Lawful business

whatsoever in connestion with the

foregoing or whieh is ealeulated

‘ @4Pectly or indirectiy, to promote

the interest of the > gee rm er to

enhance the value of the properties."

» Theat shortly efter its incorporation

in 193%, petitioner acquired machinery and

— ané since thet time up te the pre-

gent. has been actually engaged in the mane

facture or conversion of raw material paper

inte various finished consumer paper p ts

such as ns, toilet papers, wrapping papers,

counter rolis and sheets, ete,

ie Tat on deptenbor 16, 1958,

integral "aunt hereof as ANMEX AM,

5. That on “cteber 29, 1959 pots tsonee

herein ané ANSA! entered into a ftuneten

ané settlement Agreement" y Mot ‘which .

hereto attached ané made an integral part

hereof as ANNEX "3B", .

6. Theat since reteking possession of

the leasec machineries, tools and equipment

from ANSAN, petitioner resumed ita operations

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ISIOW «

CTA CASE NO. 1706

-=3-

of converting raw paper materiel into

finished paper products and continued

to do so up to the present.

Ve That on Mareh 29 196es ve ot

tioner herein filed its 1959 tax

returns, showing therein a <4. taxable

8. That upon examination and audit

of the said income tax ape. Ro

respondent, the following

disallowed on the cround the ay sare

are not considered ordinary and Sotayea)

business expenses under Section yon 2)

of the National Internal "evenue Cod

a. Vondonation by

tioner of a

receivables of .. +« FL, 000.00

bo. Assumption of ané ==

tlaxt ee a

re power

account of ANSAN .. 763.82

¢. Payment by petitioner

te Andres J. Sanches

Of. se ses 2 « « 16,000,00

ad. Value of motor car of

petitioner transferred

to Andres J. Sanchez 3, 7975,i0

Total. . Eabsiiisie

S. That accordingly, on the basis of the

said disallowances, respondent assessed the

petitioner the sum "of Hi 747,00 as deficiency

income tax — ie Be ¢ interest of Pl, son ke

= by total of i, under Sgeceteess tice

5C~ 30061 "and Letter of Demand Wo, 90-

1+59 ena y a penalty of *100,00 for

semmarneeoares with the requirenents of Section

77 of the National Internal Reverme Code, which

assessment and demand were received by

petitioner on September > i, 1963,

‘10. That the petitioner wrote to the

respomient under Sate of September ia 1983+

a letter et yp the SS

the assessment and 4 cuek aes

ll. That on Cetober 5, 1965, the respond-

ent, in reply te the petitioner's request for

50

Cee RAE BD. 2706

a * «

reinvestigation, reiterated the assess-

ment and demand in pe raph 9 hereof,

which reply was recei by petitioner

. ris, 1965. (See ptifaste, PP.

Bese, Cth red.s underlining supplicd.)

During the hearing, ty was established by

adéittional evitence tiet the lease was for two

years beginnt~ . 1999 ending December 1960, after

andres 1. \ehes, who Way an employee of petitioner

before th mae took effect, had taken possession

of petitic ws machinery and equipment pursuant to

the lease tontract, he pai¢ the stipulated rentals

and the Light. and pover consumption fer the first

four :wonths. Sanches, it appears, overused the

nechinery até equipmext and neglected to give them

proper care aM¢ maintenmpnce. Four months after the

default in the payment? Gf rentals, petitioner entered

in negotiations with Gencher to terminate the lease

before the ené of the stipulated period. Sanchez vas

agreeable to the ‘ermination, but demanded to be com-

pensated for the alleged losses anf damages he would

incur in the form of unrealized profits, ete. In

Getober, 1959 a comprom4 se agreement wes reached be -

‘

>

tween petitioner and Sancheg whereby in consideration

for the termination of the lease in question, petitionr

condoned in favor of ‘Sanches the asount of P14, 000 00

and £763.82 representing unpaid rentals and light bills

respectively; paid to him the sum of 716,000.00, as

separetion pay as former manager of petitioner; ané

(3) transferred to him an gatenvbile Valued at

73,575.00,

The principal issue raised by the parties in

this appeal is whether or not the expenses in question

in the total amount of 34,338.82 are deductible as

ordinary and necessary expenses from petitioner's

gross income for 1959 pursuant to Section 30(a)(1)

ef the National Internal Revenue Code which —

as fellows:

“SEC, 30. —suckions “hei reas

~- In computing net income there

” allowed as Ceductions -

(a) Expensess

(1) Zn general. -

peneatéen for personal aise oF ether oxe-

rendereds x x x." (Underlining supplied.)

Respondent rgaintains that the foregoing erpenses

are not ordinary and necessary expenses becavee, to

terminate the lease, petitioner cowld have merely

availed itself of the conditions set forth in the

contract which state thats “In the event the Con-

tractor fails to pay the rent for two (2) sonsecutive

months, the Company hes the right te eancel this con-

tract and take posscesion of the equipmente and

machineries immediately without notice.” (See par.

12, Mah, "A", p. 4L, CTA reo.)s or that petitioner

sould have interposed a counterclaim for actual

52

DECISION «

CTa Case nO, 2706

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damages for losses sustained (ue to the unsatisfactory

operation of its machines and equipment by Andres J.

Sancher since the contract alee provides that the les-

eee chell be liable for saintenance and repair due to

ordinary wear and tear of the eachinery and ecuipment

(par. 16, Sxh, "A", gupea.) In other words, respondent's

theory is that petitioner should have elected to en-

foree its right uncer the centract of lease instesd

of entering inte a compromise agreement.

On the other hand, petitioner asser’s thet the |

coupromise agresnent was a ordinary ané necessary

expense sade as it was to aveid a protracted litiga-

tion te cancel the Lease afd protect ite expensive

machinery and equipment from being impeiree whieh

could result te a loss of « sizeable investeent in

capital asaset.

An expense ig ordinary when it connotes a par-

seon® whieh is nofmal in relation te the tusiness of

the taxpayer under the circumstances (Visayan “obu

Terminal Co, va. Comm. of Int. Wwy., CTA Cause lo,

128, June 29, 1957), And the ters oréinary as vsed

in Seetion 30 of the leverme Code does cot moan that

payrents surt be hebitual or normal in that the sane

taxpayer will heve to maske ther often, “he situation

may de wnique in ‘he life of am individwal but it may

etill be ordinary within the content of the lew if it

is net unique in the life of the group, the couwunity

of which he is « part. }oeien va. lelvering, 290 U.5.

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