CTA Case No. 3367 (Decision)

REPUBLIC OF THE PHILIPPIMIS COURT OF TAX APPEALS QUEZON CITY CASAS AGENCIAS DE EMPENOS DE ANTONIO L. TAMBUNTING E HIJOS INC., Petitioner~ - vers us - C.T.A. CASE NO. 3367 COMMISSIONER OF INTERNAL REVENUE, Respondent. >: - - - - -----H DEC I S I 0 N This case in volves a defi c iency income taH as s essment for 1969 in the ~mount of F'57~359. 3 9 inclu s ive of interest~ computed as follows: Ne t income pe r return --------- P 7~046.00 Addt Unallowable deductions: 1. 1/2 of the operating I e xpenses from January I to June~ 1969--- -------- 8 3 ~118.79 2 . Car maintenance--------- 2 ~ 22 7.24 3 . Repr ese nta tion e xpenses- 9~457.41 4. Inte rest e xpens e -------- 17~689.02 5. Ins urance--------------- 7~ 52 4.18 6 . Professional fee-------- 10~ 5 46.00 7. Advert is ing------------- 150.00 B. Donat~ons --------------- 300.00 9. Rent-------------------- 3 ~ 6 00.00 10. Off i cers compensation- -- 20, 000.00 !!. Mi sc ellaneous e x penses-- 574.60 1 2. Cafeteria service - - - - --- ______z_,_~'!.J, !.OQ. Ne t i ncome per invest i gation - - - P169~ 52 4. 2 4 Ta x due thereon - ------- - ------- p 54~ 333 .00 Less: Amount already assessed - -�---~-'.'1.~2..!..9.9. a a 1 a n c e ----- -- - - - - - - ---- p 52~ 3 8 3 .00 Adds 1/2X mo . int. fr. 4 - 16- 70 to 11- 15- 71 ------------ - - TOTAL AMOUNT DUE ~ COLLECTIBLE 4~9

DECISION - C.T.A. CASE NO. 3367 - 2- The relev ant material facts are simple. Petitioner is a domestic corporation engaged in the pawns hop business. For the calendar year ending December 31~ 1969~ petitioner filed its corporate annual income ta x return on April 15~ 1970 showing a net income o f P7~046.00 with the corresponding income tax of P1,950.00. On No v ember 29, 197 1, petitioner received from respondent an assessment dated November 15, 1971 for deficiency income tax for the year 1969. Petitioner protested the assessment on December 2~ 1971. Meanwhile, respondent requested petitioner to s ubmit evidence on the claimed deductions. In compliance with the request, petitioner submitted its Cash Disbursements Journal, Cash Receipts Journal, Journal and Ledger Book for the year covered by the assessment. On October 10,1979, respondent informed petitioner that with the exception of the 1/2 operating expenses of P83~118.79 fro~ January to June, 1969 petitioner s t i l l has to submit the necessary documents to support the rest of the di s allowed items. (Exh. I~ p. 22, CTA rec.) This notwithstanding, respondent denied the protest for failure of petitioner to submit the necessary documents to rebut the findings of the examiner. At the same time he demanded the payment of P57,359.39 as deficiency 450

DECISION -� C.T.A. CASE NO. 3 367 3- i ncome t ax f o r 1969 inclus i v e of interes t. Hespondent's �f ina 1 d ec i s ion i s sue d on ,Jun(~ ,.... ..,. 1981 ~>Jas n?ceived by .L. �...:� !' p e t i tion e r o n Jul y 18~ 1 9 81. On Augu s t 1 7 ~ 1981 the instant petition for re v iew was filed see king th e re v iew of r e s p o ndent ' s de c ision a nd d is puting the va lidity there of. For hi s part~ re s p o ndent a v er s a s a s pecial and a ffirmati ve defen s e tha t the expens es cl a imed are not l e gitimate e xpenses under Section 30 (now Section 2 9) of the Nation a l Intern a l Rev enue Code. He added that an expense in orde r to be deductible must be: (1) ordinary a nd n ecessary in nature; ( 2 ) directly incurred in c a rr y ing on a tr a d e or business ; (3) paid within the ta :-:a b 1 e �y'ear; and ( 4) dul y s upported by receipts. (Ba s ilan Es t a t e v . Co mmi s sioner of Internal Re v enue~ 2 1 SCRA 17; Vis a y an Cebu Terminal Co. v . Coil. of Internal .1.08 Phi 1 � :323 ) � The burden i s on the part of to pro v e entitlement to the~ claimed d e duction s . The i ssue squarely presented is whethe r or not � r es pondent properly disallowed the deductions claimed by pet.i tiorH:.> I~ . All deduction s claimed were allowable items of deductions pursua nt to Section 30 (a) ( 1) ~ (b) ( 1) ~ (c) ( 1) ~ (f)(.t)~ a nd (h) [n o w Section ::~ 9(a)(1)~ (b)(l.)~ ( c )(1)~ (f)(1)~ and (h) respecti v el y ] of th e Nation a l Internal 4fll

\ DECISION - C.T.A. CASE NO. 3367 - 4- Revenue Code. But the disallowances made were by rea$On of their being unsupported or purely personal expenditure prescribed by Section 31(a)(1) and (4) [now Section 30(a)(1) and (4)] of the same Code. We will discuss the items disallowed by respondent in seriatim. 1. 1/2 of the operating expenses from January to June~ 1969 in the amount of P83~118.79. The first item disallowed by the respondent refers to 1/2 of the operating expenses incurred by petitioner from January to June~ 1969 amounting to P83,118.79~ itemized as follows: Operating e >:penses Amount 1 / 2 disallowed J BIJ....!._to_J U.!J..~_.:!_.]l~_'r. ~J.Lbl_b i t C !_a i m_ed_ _Q_'L...t he B_lB__ a. Interest e)�:pense 0 - 41 p 95~284.16 b. Professional and p 48,717.08 0- 43 9~614.75 Technical fees 0-45 8~680.00 4~8(15.:37 c. Rent e >:pense 0 - 46 14~2 33 .17 4~340.00 d. Representation 0-48 2~562.93 7~1.16.58 e. Office Supply f. Employees 0-49 17,368.66 1,281.46 0-52 883.72 Welfare and 0 - 53 367.90 8 ~ 684. 3:.) Subsistence 0 - 54 441.86 g. Light and Water 0-55 8~235.14 183 .95 0-57 h. Advertising � 0 - 58 2,398.20 4~117.57 0-59 347.00 i. Insur-ance 1,199.10 j . Car maintenance 1,248.85 173.50 k. Donation ----~-.1-~27 .14 624.42 1 � Communication m. Miscellaneous 1,433~_ 57 T0 t a 1 P164,051.62 p 83,118.79 =========== == == ~======= In conducting his investigation, the examiner was unable to examine the vouchers pertaining to the 45 2

DECISION C.T.A. CASE NO. 3367 - 5- operating e x penses of petitioner from January to June~ 1969. It was alleged that the vouchers were lost. Upon consultation with his supervisor the examiner applied the so called "jeopardy assessment" pursuant to Section 15 (now Section 16) of the National Internal Revenue Code. Section 15 authorizes the respondent to assess the proper ta x on the best evidence obtainable. For failure on the part of petitioner to file the required document the respondent shall amend the return based on such information as he can obtain through testimony or otherwise. After careful e>:amina tion of the vouchers~ receipts~ returned checks, cash disbursement journals~ cash receipts journals and the ledger of petitioner from January to June 1969~ the Court arrived at the following findings with respect to 1/2 of the operating expenses disallowed by respondent. This is better illustrated in tabular form~ as follows: � Amount Disallowed Proven Amount Per Operating exp. Amount Court ' s J an -~-.::...J. Ll!) e _!_9 6 9_ _!;;;.!.a i f11.�?_Q_ E >: hi b ij:. s F i n_QJ...!l9..~- a. Interest P95~284.16 Q~Q - 1 to P95 ~ 278.16 p 6.00 Q - 67~ M~ M- 2 to M- 7 b. Prof. 8( 9~614.75 S~S-1 t o 3~649.55 5~965.20 Tech. Fees S- 6

DECISION - C.T.A. CASE NO. 3367 - 6- c . Rent 8~680.00 U ~ U- �1 to 8~680.00 U- 11 d . Repr-ese n - 14~ 23 3.17 P~P-1 t o 8~850.17 5 ~ 38 ~.::. . (l(l tat ion P-41 e. Office 2~562.93 y~ Y-1 8( 1~120.00 1~44 2 .93 Supply Y-2 "f. Employees 17~ 3 68.66 cc~ CC-1 \J.Jelfar-e 8( to CC - 22 Subs is - tance 1.4,857.19 2~51.1.47 g. Light 8( 883.72 None 1/2 pr-oper-ly 441.86 \J.Jat.er- disallol-'led by r-espondent h. Adver-tising 367.90 None 1/2 pr-oper-ly 183.9~ disallowed by r-espondent i. Insur-ance 8~235.14 R~R-1 t o The benefi- 8!1"235.14 R-11 ciar-y of the life � insur-ance of Antonio and Ramon Tambunting was estab- 1 ished to be the company. [see Tsn~ p.12~ Nov. 8~ 1988 Hear-ing] Ther-efor-e~ all the P8~235 . .1.4 s hould be disallowed pur-suant to Bec.31(a)(4) .1939 NIRC. [see discus- sion of di~ allowed 4~4

DECISION - C.T.A. CASE NO. 3367 - 7- insurance e:-:pense ~ in �fra.] j. Car main. 2~398.20 None 1/2 properly 1~199.10 disallowed by respondent k. Donation 347.00 T 8( T-1 140.00 207.00 1. Communica- 1,248.85 AA~ AA- 1 1,115.95 132.90 tion to AA-12 m. Misc. e>:p. 2~827.1 4 W~W-1 to 1,538.91 1,288.23 W-12~ M~ M-2 to M-7 TOTAL AMOUNT DISALLOWED BY THE COURT PERTAINING TO ITEM (1) ...���.�..�.... P 26,996.78 :r::==========: 2. Car maintenance of P2,227.24. Of the total P2~282.54 car maintenance expense from July to December, 1969 (Exh. 0- 55), the BIR examiner disallowed P2,227.24. The examiner considered the use and maintenance of a Camaru and a Mercede$ Benz one for personal use. He stressed that on the average petitioner consumes 50 liters of gasoline in two to � three days time sometimes even less. (T.s.n., p. 14, Dec. 2, 1988 Hearing.) The consumption of 50 liters of gasoline for a pawnshop business was deemed to be unreasonable. Petitioner averred that the cars were used to: service its clients in its various offices in Metro

DECISION - C.T.A. CASE NO. 3367 - 8- Manila; transport its employees~ supplies and valuable jewelry from one branch to another; allow its officers to supervise and inspect the operations of its branches a nd transfer cash and deposit money in the bank. An examination of the car maintenance vouchers from July to December 3 1~ 1969 and the receipts attached thereto showed that petitioner consumed on the average at least 50 liters of gasoline in a period of one to two days time. The examiner believes that there is no necessity of consuming on a daily basis at least 50 liters of gasoline in a pawnshop business even though petitioner operates 5 branches~ namely: Azcarraga, San Juan~ F'asay~ Sampaloc or Bustillos~ and Blumentritt. Ra mon Tambunting~ manager of one of petitioner ' s branches~ admitted during trial that the car was not u s ed solely for business. We quote the cross examination c onducted by Atty. Dabu, respondent's counsel~ to wit: (T. s .n.~ pp. 1 3- 14~ Nov. 8~ 1988 Hearing.) "ATTY . DABU� You stated that in the case of car maintenance expense most of these expenses were used by you for the busines s. Could you tell us the perc entage of the use in the busine s s and percentage for the personal use o �f this c ar? A. � Eas ily 90-95 percent for the business. ATTY. DABU Where do you live? �

DECISION - C.T.A. CASE NO. 3367 - 9- A. San Juan. ATTY. DABU You stated you have five branches. Tell us where these were loeated in 1969? A. One is in Azcarraga. The other one in San Juan. One in Pasay. One in Sampaloc or Bustillos. One in Blumentritt. ATTY. DABU You said 90-95% in the average the car was used in connection with your business and 5-10% for personal? ~ A. Yes." Although the car maintenance expense was properly documented by vouchers and receipts (Exhs. DO, DD - 1 to DD-376) still by the admission of petitioner 's witness, Mr. Ramon Tambunting, the Court finds that the ~xpenses incurred far car maintenance was not solely for the business. In the case of GUTIERREZ v. COLLECTOR OF INTERNA~ REVENUE, No. L- 19537, May 20, 1965, 14 SCRA the Supreme Court held that "where there is no clear showing that the ta:�: p~yer � s car was devoted more far t,tte ta:-:payer � s business than for hi s personal needs, but accordin g to the evidence, the ta>:payer � s car was utilized both for personal and business needs, it is held that it is reasonable to allow as deduction one- half of the driver's salary, car e:-:penses and depreciation."

DECISION - C.T.A. CASE NO. 3367 - 10 - In the case at bar~ petitioner admitted that at least 90- 95% of the time the car was used for business purpose and 10-15% for personal use. The 50 liter consumption in a day or two would be unreasonable even if petitioner maintains and operate 5 branches in Metro Manila considering the proximity of these branches with one another. No other proof was presented by petitioner to show that the car was used more in the business other than the testimony of Mr. Ramon Tambunting. In line with the Gutierrez case~ supra.~ only 50% of P2~282.54 or P1~141.27 shou ld be disallowed. The other half should be allowed as a va lid and legitimate business expense. 3. Representation expense of P9~457.41. Petitioner ' s representation expense from Jul y to December~ 1969 amounted to P13~211.90 (Ex h. 0-46). P9~457.41 was disallowed by the examiner for the simple reason that the chits covering this expenditure were mostly spent b y Ramon Tambunting in places like the Sheraton~ El Bod~gon~ Selecta and the like. An example of disallowed representation expenses paid by Ramon Tambunting include those paid to the Manila Polo Club~ Tre s Herman as~ and Diners Club. The examiner considered them purely personal expenditures of Ramon Tambunting. Petitioner clai ms that representation expenses were incurred for the promotion of goodwill~ 4~8

DECISION C.T.A. CASE NO. 3367 - 11 - entertainment of valued clients~ creditors and potential investors~ and for business conferences with the managers of its various branches as well as other pawnshop operators. Aside from being reasonable~ all these were allegedly spent in relation to the active conduct of petitioner's business. Miss Rosario Chua~ petitioner's accountant~ testified during the hearing that the representation expenses were spent by its owners and manager, Antonio and Ramon Tambunting~ respectively. It covers expenses incurred during their meetings with valued clients and other pawnshop brokers. (T.s.n., pp. 5-6, Nov. 15, 1985 Hearing.) Again from the testimony of Mr. Ramon Tambunting We gather that in 1969 he openly campaigned and invited non-members to join the Chamber of Pawnbrokers of the Philippines an association of which he was a director and officer. He added that the expenses incurred for representation were necessary since it contributed to the goodwill of the business. (T.s.n., p. 16, Nov. 8, 1988 Hearing.) Representation expenses in order to be deductible as a business expense must be ordinary and necessary; paid or incurred in carrying on a trade or business; and they must be reasonable. It must be shown that the expenditures were made to promote the business of the

DECISION - C.T.A. CASE NO. 3367 - 12 - taxpayer. A close scrutiny of the vouchers and receipts showing representation from July to December~ 1969 revealed that the examiner only allowed expenses paid to the Chamber of Commerce of the Philippines, the Chamber of Pawnshop Brokers of the Philippines and some minimal amounts spent in a few restaurants. All the rest were disallowed for the second half of 1969. Petitioner ' s income statemeht for 1969 showed that of i ts gross income of P402, 376.00 it deducted P 2 7~445. 0 0 representation expense (p.23, SIR rec.). This amount is not ev e n more than 7% of its gross income. Therefore~ the requirement of its being reasonable has been complied with. Likewise~ petitioner presented documentary e vidence to prove that the amounts spent for r epresentation for July to December, 1969 were duly supported by receipts issued by the entities to which the payments have been made. The documents consisted of vouchers~ invoi~es, some returned checks, and cash disbursement journals (Exhs. EE~ EE- 1 to EE-487, K a nd L) . Furthe r more~ petitioner's accountant and Mr. Ramon Tambunting both tes t i fied that the amounts disallowed wer e indeed s pent during meetings with clients~ officers a nd other pawns hop bro kers . Hence, this is an ordinary 4Sn

DECISION C.T.A. CASE NO. 3367 - 13 - business expense. However-, this does not mean that We ar-e allowing all the r-epr-esentation expenses claimed fr-om July to December- of 1969 which wer-e fully substantiated by r-eceipts. /r t is fundamental that r-epr-esentation e:-:penses in or-der- to be deductible must be r-elated to the conduct or- fur-ther-ance of the taxpayer-'s business. Expenses incur-r-ed for- the pur-chase of pajamas, r-ollete, mop, spam, br-ead, r-ed eggs and flower-s cannot be consider-ed a valid and legitimate business expense. Thus, for- being per-sonal expenditur-es the following r-epr-esentation expenses fr-om July to December-, 1969 wer-e pr-oper-ly disallowed by the e>:aminer-: Date Voucher- E>:hs. Disallowed Par-ticular-s No. O.R. No. Amount Per- Cour-t's Findings 7- 07- 69 Rustan's - 17997A 9247 EE-12 p 51.21 2141 to 3.80 1 set pajama 32517 EE-14 1 set pajama 11803 EE-38 I!< 29975 EE-40 7 - 12-69 Dr-ug Stor-e 8< 18039A 1512A 151861 Cosmetics - 1 Bottle Min. Rollete EE-52 & 12.00 EE-53 7.50 7 - 17-69 J. BechaV1?s - 18064A EE-59 4.50 1 Doz. Roses to 24.00 EE-61 7-21-69 Br-inton Shoe 18085A EE-62 1!1. 1 Pair- Saw EE-63 Patch EE-86 to 2 CB Hash EE- 89 7-22- 69 Rosana Stor-e - 18088A 1 can spam 1 pc. pan 7- 30-69 J. Bechaves 18141A 1 vase - r-oses 1 vase - r-oses 46 .1

.� DECISION - C.T.A. CASE NO. 3367 - 14 - 9-06- 69 Pepe's Store 18406A 87463C EE-237 I!< 1.80 4.20 1 pc. mop EE-238 4.20 30.00 10-6-69 Rosana Grocery 18594A 1720 EE-308 8< 3.35 1 Spam EE-309 4.20 1 Tasty 0.50 108.00 10- 18-69Rosana Grocery 18664A 1745A EE-353 1!1. 50.00 1 can spam EE-354 1 S. bread 10-20-69 Bechaves - 18667A State- EE-355 2 Vases of ment of to Roses Account EE-358 11-05-69 Ambos Mundos 18760A 81490 EE-386 & Restaurant - EE-387 Short Order Various 2 Itlog- Maalat 1!1. Calamansi 11- 15- 69 Rosana Grocery 18802A 1805 EE-400 & 1 can spam EE-401 1 loaf bread 11-24-69 Pepe's Store 18847A 87663C EE-416 1!1. 1 rope EE-417 James Estrel- 18850A 10212 EE-419 1!1. ler - 1 Suit EE-420 11- 25-69 Phil. Motor 18860A 9412F EE-425 & Asso. Mem. EE- 426 Dues TOTAL REPRESENTATION EXPENSE 309.26 FROM JULY- DECEMBER, 1969 DISALLOWED PER COURT'S =========== FINDINGS ...................... . 4. Interest expense disallowed P17,689.02 of P17,689.02 . � Respondent's out of P82,716.99 (E xh. 0-41) interest expense from July to December 1969 even though supported by vouchers it appearing that no recipients were stated therein (Exhs. 3-a-1, 3-c-1, 3-f-1, 3-h-1, 3-i-1, 3-k-1, 3-1-1, and 3- p-1) . 46?.

DECISION C.T.A. CASE NO. 3367 - 15 - Petitioner claims that interests were paid to various banks. The cash disbursements journal and the cash receipts journal showed the banks to whom these interest payments were remitted. Likewise~ payments of these interests also appear in the books of the recipients. We agree with petitioner. The payees of interests were definitely named in the book� of petitioner and in some returned checks as well as in the bank statements. This Court have examined carefully the books of accounts (c ash disbursement journals, cash receipts journal and journal book) and ledger of petitioner. The vouchers~ returned checks, statement of accounts and debit memos issued by the bank were also scrutinized. In the end the Court arrived at the following findings: INTEREST EXPENSE PROVEN BY PETITIONER FROM JULY TO DECEMBER, 1969 Date E:�:hibi ts Amount Proven in Interest 1969 July {Proof~ CDJ + CRJ = Proven Aug. FF, .. FF-1 to p 14,319.91 p 4 '087 '. 50 p 18,407.41 3,451.43 4,747.92 Sept. FF - 19~ �.�. ~ 8~199.35 14,050.23 10,055.55 Oct. K- 39 to ~ - 43, 1,715.42 24,105.78 4~232.67 5,948.09 M~ M- 8, and 0- 41 , FF- 21 to FF- 3 0, v.. 1<-46, L, L-.-...,. , M, M-9 and 0-41 FF-32 to FF- 43, L, L-4 to L- 6, L- 9, M, M- 10 and 0-41 FF- 45 to FF- 54~ L~ L-11~

DECISION C.T.A. CASE NO. 3367 - 16 - Nov. L-12~ L-14, M~ 3~520.34 7 ~ 104. 58 10~624.92 Dec. M-11 and 0-41 4~149.76 FF-57 to FF- 4~712.50 8,862.26 67~ L~ L-16 to L -2 0~ M~ M-12 and 0 - 41 FF-71 to FF- 87~ L~ L -22 ~ L-24~ and L- 27 ~ M~ M-13~ N~ N-8 and 0 - 41 TOTAL INTEREST EXPENSE PROVEN FROM JULY TO DECEMBER~ 1969 . . . . � . . . . P 76~147.81 ===========:::: Petitioner have overcome the burden of proof with r espect to � P76~147.81 interest expense out of the P82~716.99 claimed for July to December, 1969. Logically~ only P6~569.18 should be disallowed as interest expense for failure on the part of petitioner to substantiate this expense with receipts showing payments therefor. 5. Insurance expense of P7,524.18. Premiums paid by petitioner on the insurance policy covering the life of its key officers Mr. Antonio � Tambunting and Ramon Tambunting were treated by the examiner as a personal expense. Petitioner failed to explain in its protest why the insurance expense should be allowed as a deductible expense. Furthermore~ i t failed to present the life insurance policy when asked for by the examiner. 4hd

DECISION - C .T.A. CASE NO. 3367 - 17 - The whole amount of P7~5 2 4.18~ appearing in the ledger (E xh. 0 - 54) as insurance expense from July to D e cember~ 1969~ disallowed by respondent are hereunder itemi z ed as follows: ( E:�:hs. GG- 1 to GG-21) Date Voucher No. Check No. Payee Amount 7- 19- 69 18080 A FEBTC 661712 Phi lam Life P1~127.06 7-24- 69 18106 A FEBTC 661717 Phil am Life 7-24- 69 18107 A FEBTC 661718 Phil am Life 864.15 7-28 - 69 18126 A FEBTC 661721 BIA Inc. 737. 36 7 - 2 8 --69 18127 A FEBTC 661722 BIA Inc. 3 86.28 9 - 01- 69 18375 A BOA 3 15417 A Phil am Life 277.76 10-16- 69 18656 A BOA 319689 A Phil am Life 812.50 10- 2 4- 69 18686 A BOA 3 19692 A Phil am Life 905.06 10-24- 69 18687 A BOA 3 19693 A Phil a m Life 73 7. 36 12-01 - 69 18916 A TMBC 31925 Phil am Life 864.15 812.50 T0 t a 1 P--7-,5--2-4-.1--8 There is no dispute that the insurance expense incurred were premiums paid on the life of Antonio Ta mbunting (as Chairman of the Board) and Ramon Ta mbunting (a s Stockholder- Manager). [T.s.n.~ pp. 6 - 7~ No v. 15~ 1985 Hearing.] However~ whether or not the s a me shall be deductible is determined by the beneficiary named in the life insurance policy. Section 3l(a)(4) of the 193 9 National Internal Revenue Code is cle~r on this matter. It states: "SEC. 3 1. Items not deductible. (a) General rule. - In computing net income no deduction shall in any case be allowed in res pec t of - (4) Pre miums paid on any life insurance po licy covering the life of any officer or

DECISION - C.T.A. CASE NO. 3367 - 18 - employee~ or of any person financially interested in any trade or business carried on by the ta x payer~ individual or corporate~ when the taxpayer is directly or indirectly a beneficiary under such policy. Petitioner ' s witnesses gave contradictory s tatements during the trial. When called during the hearing, petitioner ' s accountant testified that although the insurance expense was personal the same should be allowed as a deduction from gross income since the b e neficiary was the family of the insured. (T.s.n.~ p. 11 - 12~ Nov. 15~ 1985 Hearing.) However, when Mr. Ramon Tambunting was presented in the witness stand he contradicted the previous testimony of the accountant saying that the company was the beneficiary. Fai1ure on his part to present the policy was due its surrender to the insurance company when his father (Antonio) died. (T.s.n., p. 12, Nov. 8, 1988 Hearing.) We give more credence and weight to the testimony of Mr. Ramon Tambunting stating that the beneficiary was the company. Taking into consideration the proximity by blood relation of the former to the deceased Antonio Ta mbunting being the son of the latter. We quote Ramon Tambunting's relevant testimony as follows: (T.s.n., p. 12, Nov. 8~ 1988 Hearing.) "ATTY. MACASAET 4hR

DECISION C.T.A. CASE NO. 3367 - 19 - The witness for the Commissioner likewise disallowed payment of premiums for a policy taken upon the life of Mr. Antonio Tambunting on the ground that it was never shown who the beneficiary was. A. The beneficiary was the company. We were paying the premium and the beneficiary is the company. ATTY. MACASAET Do you have any evidence to show that? A. When my father passed away~ we surrendered the policy so they ~auld give us the insurance." In fact petitioner completely ignored this item of disallowance in his protest filed with respondent. No mention was made in the protest letter regarding the disallowed insurance expense. Another factor was its failure to present the life insurance policy at the time of the investigation. The policy could not have been surrendered as yet since at that time the insured was still alive there being no claim to speak of. Pursuant to Section 31(a)(4) of the 1939 National Internal Revenue Code and Sections 65 and 121 of Revenue Regulations No. 2~ the insurance expense of P7~524.18 was properly disallowed. In the same manner and for the same reasons~ this Court disallowed in full the amount of P8~235.14 claimed as insurance expense from January to June~ 1969. 4R7

DECISION C.T.A. CASE NO. 3367 - 20 - 6. Professional fee of P10~546.00. This refers to doctor ' s fees paid by Antonio Tambunting to Dr. Busuego and Dr. Tanco. The e:-:aminer maintains that doctors fees �do not form part of petitioner's operating expenses. Instead it ~hould be treated as a return of capital investment chargeable against the surplus account as the share of Mr. Antonio Tambunting. Petitioner claims that this expense represents amounts paid for professional services rendered by the accountants~ lawyers~ and doctors of the firm. The doctors fees cover medical services rendered by Dr. Busuego and Dr. Tanco to one of the managers seriously injured in an accident while in the performance of his duties. A total of P18~269.00 professional fees for July to December~ 1969 was claimed by petitioner (Exh. 0-43). An examination of the worksheet prepared by the examiner s hows that the sum of P10~546.00 was disallowed for the � period July to December~ 1969~ to wit: Date F'articu 1ars Voucher No. Amount E>:hibits 7 - 17-69 No particulars- 1B066A p 724.00 HH-15 ~I. HH-16 Payees name not HH -- 19 ~1. indicated. HH-20 7-22-69 No particulars- 18090A 20.00 Payees name not indicated.

DECISION - C.T.A. CASE NO. 3367 - 21 - 7 - 22- 69 C.N.Enterprises 18091A 150.00 HH-21 ~( FEBTC Check No. 18103A HH-22 661713 18203A 600.00 HH-23 /!( 7-24-69 No particulars- 1~088.00 HH-24 Payees name not indicated 794.00 HH-28 I!( 420.00 HH- 29 8 - 08-69 Payee - CI IA HH- 30 /!( HH-31 8 - 08-69 Payee - CI IA 18205A HH-43 & HH- 44 8 - 18- 69 Payee- Or. Ernesto 18275A Que �for services rendered from 6 - 6-69 to 7-22-69 9 - 16-- 69 Payee-Male Nurse 18463A 250.00 HH-60 for services ren - de red from 9-4-69 to 9-19-69 9 - 24-69 Payee- Or. Busuego 18512A 3~000.00 HH-61 /!( HH-62 for services ren- de red from April to Sept. J,t_.,._~, ~ 1969 9 - 24- 69 Payee-Or. Andres 18513A 2~000.00 HH-63 /!( HH - 64 Reyes~ Jr. for services rendered from April to July~ 1969 18536A 1,500.00 HH-65 to HH-67 9 - 29-69 Payee-Jose vJ. Diokno (O.R.#3042) For Attorney's Fees Total Disallowed P10,546.00 ========== The attorney's fees of P1~500.00 (Exhs. HH-65 to HH-67) should be� allowed as a deductible professional expense as it was paid to Atty. Jose W. Diokno for legal services rendered properly supported by official receipt. All other professional fees mentioned-above were properly disallowed by respondent. The payments made to Mr. Antonio Tambunting's doctors (Ernesto Que~ Busuego and Andres Reyes, Jr.) and 4h9

DECISION - C.T.A. CASE NO. 3367 - 22 - male nurse were properly disallowed. Petitioner failed to present the medical report or diagnostic finding to describe the illness if job related or not. Petitioner only presented the protest letter marked as Exhibit H stating that the "professional fee of P10~546.00 represent professional services rendered by the accountants~ lawyers and for medical services of Dr. Busuego and Dr. Tanco on account of injuries sustained by one of the managers who was seriously injured in an accident while in the performance of his duties." Ms. Rosario Chua and Mr. Ramon Tambunting pointed that the disallowed professional fees of P10~546.00 are doctor ' s fees paid for the medical expenses of Mr. Antonio Tambunting. (T.s.n.~ pp. 7-8~ Nov. 15~ 1<;185; p. 25!' May 26~ 1988 Hearings.) Their testimony standing alone is not sufficient to prove that the illness of Mr. Antonio Tambunting was indeed job related. The rest of the professional fees were likewise properly disallowed. Petitioner fail~d to present the official recei~ts to support payment of professional fees. No description of the transaction whatsoever was indicated in the vouchers. Neither was there any named payee . Therefore~ only P1~500.00 for attorneys fees should be allowed. The remaining amount of P9,046.00' was properly disallowed by respondent as professional fees from July to December, 1969. 47n

DECISION - C.T.A. CASE NO. 3367 - 23 - 7. Advertising of P150.00. For not being properly documented the examiner disallowed the advertising expense of P150.00 from July to December~ 1969. For that period~ the ledger shows an advertising expense of P1~342.40 (Exh. 0-53). Petitioner protested the disallowance claiming that the same was properly supported by vouchers and receipts. In its offer of evidence petitioner merely presented Voucher No. 18861 A (E:�:h. II -2 1) \1-Ji th an attached encashed check (TMBC Check No. 182029) dated November 25~ 1969. The check was issued to Maryknoll College amounting to P150.00 (Exh. II-22). No receipt was presented to prove that the payment in favor of Maryknoll College was for advertisement unlike the other advertising expenses allowed by the examiner. Moreso~ no explanation was stated in the voucher except that it was for advertisement. Advertising expenses allowed by the e:-:aminer covered those p�aid to The Manila Times Publishing Co.~ Herald Publications~ Inc.~ The Manila Chronicle~ and Arnoldus Press~ Inc. and Sacred Heart Nursery and Pre- School all of which were properly supported by official ~eceipts attached to the vouchers. As a rule~ Maryknoll College is not engaged in the advertising business. Hence~ any payments made thereto without any explanation 4 71

DECISION - C.T.A. CASE NO. 3367 - 24 - whatsoever or failure on its part to present the receipt describing the transaction would be fatal to petitioner's claim for deduction. There is no doubt cast on the disallowance of advertisement of P150.00. 8. Donations of P300.00. Petitioner claimed a total of P650.00 for donation from July to December~ 1969 (Exh. 0 - 57). Again~ for failure to substantiate P300.00 the same was disallowed by the examiner~ broken down as follows: (Exhs. 3-0 and 3-0- 1) Date Voucher # Official Amount Exhibit Receipts 12-11-69 19019 A P100.00 JJ- 20 none 12- 11- 69 19018 A 100.00 12-11-69 19017 A 100.00 JJ-21 none P----3--0--0--.0-- 0-- JJ-27 none but with TMBC check # 213970 payee-White Cross (E:-:h. JJ - 28) To t a 1 Donation of P200.00 was properly disallowed since this was not properly substantiated by receipts. The checks issued fCH""" their payment were not attached to the vouchers although there was a note attached to these vouchers saying that those checks are still outstanding and can be seen from its records of January~ 1970. Even then these checks were not presented as evidence by petitioner. With respect to the White Cross donation of 41?

DECISION - C.T.A. CASE NO. 3367 - 25 - P100.00 (Exh. JJ-27) this should have been allowed by respondent as a deductible expense. The check was encashed and attached to the voucher (Exh. JJ - 28). The Court takes judicial notice of the fact that White Cross Inc. with office address at #276 Santolan Road~ San Juan~ Metro Manila is non - profit charitable institution catering to children of indigent families~ abandoned and neglected children from 0 to 8 years old in 1969 but at present caters to children from 0 to 6 years old. 9. Rent of P3~600.00. Petitioner claimed P8~880.00 as rental expense from July to December~ 1969 (Exh. 0-45). It paid Mr. Dee C. Chuan P600.00 per month as rental for a property located at #932 Soler Street~ Manila used as a bodega. It also rented an office space located at #710-712 C. M. Recto~ Manila for PBBO.OO per month. The rentals paid to Dee C. Chuan for a space in Soler Street, Manila were disallowed by the examiner . � He opined that this was not incurred in connection with the business of the taxpayer. Petitioner ' s busine$S establishment is located at #710- 712 C.M. Recto, Manila and not in Soler. According to the examiner, keeping a bodega in Soler Street has no relation whatsoever with the pawnshop business. Instead of a bodega the proper

�' DECISION - C.T.A. CASE NO. 3367 - 26 - depository of jewelry and important documents $hould be a safe. Petitioner claims that the property rented in Solet- St.~ Manila was used as a "bodega". Document~> such as old pawn tickets and appliances pledged like refrigerators, radios~ airconditioners, etc. were kept and stored in this bodega. Petitioner maintains this space not for the purpose of operating a pawnshop office but for the purpose of storing and keeping obsolete and bulky items pawned. The rent of P3~600.00 for a bodega should be~ as alleged by petitioner, consider~d an ordinary and necessary business expense. Generally~ rental expense is deductible only if the payment was made for the use of property ~y the lessee for his trade or business. However, where it was established that the "bodega", as in this case, was necessary in the operation of petitioner's business the rentals paid for its use should be deductible. Nothing was said about jewelry being kept in the "bodega" for ttle logical conclusion is that the same should be kept in a safe. As clearly established by testimonial evidence the "bodega" was used as warehouse for appliances pawned and old pawn tickets. Rental expense was properly documented by vouchers with attached official receipts (Exhs. KK-2 to KK-4; KK- 7 and KK - 8; KK- 11 and KK- 12; KK-15 and KK-16; and KK-19

DECISION - C.T.A. CASE NO. 3367 - 27 - and KK - 20). After satisfying proof of payments~ We can fairly conclude that the lease of a bodega is necessarily connected with the pawnshop business of petitioner. The rent of P3,600.00 for a bodega in Soler Street, Manila from July to December, 1969 should be allowed. 10. Officers compensation of P20,000.00. For the year 1969 (January- December), petitioner deducted from its gross income officers compensation in the amount of P32,000.00 (Exh. 0-44 and p. 23, BIR rec.). But only P12,000.00 representing compensation paid to Mr. � Ramon Tambunting was allowed as a deduction by the respondent. The examiner alleged that there is only one stockholder (Mr. Ramon Tambunting) who works for the corporation. Compensation received by stockholders other than Ramon Tambunting was disallowed. Payments made to officers who do not work for the corporation should be treate'tl as a return to capital investment. Petitioner maintains that this was spent for the payment of personal services actually rendered by its officers. It stressed the reasonableness of the amount claimed adding that the amount paid to officers does not exceed those ordinarily paid for services rendered. It has no relation whatsoever with the stockholdings of the

DECISION - C.T.A. CASE NO. 3367 - 28 - officers to warrant the conclusion that it should be treated as a corporate distribution of surplus profits. The test of deductibility of compensation payments is whether they are reasonable and are, in fact, payments for services rendered. (Exh. B-1, p. 37, BIR rec.) In this case, the records show that petitioner pays compensation to four of its stockholders, namely: Ramon Tambunting, Ediliza Ongsiako, Edna Verzosa, and Bernadette Mendoza. Petitioner regularly pays their compensation net of withholding tax except for Ediliza Ongsiako who was never withheld income tax (Exhs. V, V- 1 to V- 7, LL, and LL-1 to LL-7). The fact that compensation paid to Edna Verzosa and Bernadette Mendoza for 1969 was established by oral testimony plus proof of withholding of income tax are enough evidence to allow its deductibility. And, if respondent allowed compensation of Pi,OOO.OO per month for Ramon Tambunting then with more reason should it allow compensation of P500.00 per month from January to August, 1969 a�nd P349. 99 per month from September to December, 1969 in favor of Edna Verzosa and Bernadette Mendoza who have actually rendered personal service to the corporation. At that time these amounts were c onsidered reasonable. This was properly recorded in the books of petitioner (Exhs. K, K-7, K-12, K-19, K-25, K- 32, K-38, K-44, L-3, L, L- 9, L-14, L-20, and L-27).

DECISION - C.T.A. CASE NO. 3367 - 29 - Thus, compensations paid to Edna Verzosa and Bernadette Mendoza in the amount of P5,399.96 each or a total of P10.800.00 should be allowed. On the other hand, payments made to Ediliza Ongsiako in the amount of P9,200.00 was properly disallowed c onsidering petitioner ' s failure to withhold the corresponding income tax due for such payment. The renumerations paid by an employer to an employee (including officers) for services performed shall not be allowed as a deduction if the employer fails to d e duct and withhold the tax required. 11. Miscellaneous expenses of P574.60. According to the revenue examiner, no document$ were presented to warrant the deductibility of P574.60 as miscellaneous e xpense under Section 30 of the Ta x Code. The disallowed miscellaneous expenses totalling to P574.60 are itemized below, as follows: Date . Particulars Voucher # Amouot Exhibits 8 - 23-69 18305 A F' 7.90 9 - 01 - 69 Filipinas Bazar 183 72 A MM-24 8t. pomada (OR# 958976) 40.00 MM-25 9- 0 2-69 18382 A MM-36 8t. Veluzar - I. D. of 6.50 MM-3 7 9 - 2 4- 69 18511 A Ramon Tambunting 245.00 MM-39 & (OR# 6713) MM- 4 0 Be a tt- iz Gen. Mer - chandise-shampoo MM- 62 8t. (OR# 8182) MM-6 3 Esquire- various items sold to Maj. A.A.Quinto c/o UP (OR# 15847) 4?7

DECISION - C.T.A. CASE NO. 3367 - 30 7" 10- 1- 69 Pings Cosmetics- 18569 A 4.00 MH- 71 & mum rolette (OR# 18596 A MH-72 10479) 18959 A 119.70 MM- 77 8~ 10-6-69 Fortune Magazine- MM-78 Ramon Tambunting 2 yr. subscription 151.50 MM-126 & MM-127 12- 5-69 The . Kodak Store - Ramon Tambunting various items (OR# 85804) To t a 1 P574.60 ======= The above-mentioned disallowed miscellaneous expenses were all supported by vouchers with attached official receipts. But a close examination of the official receipts would reveal that most of these e xpenses were for personal use such as pomada, shampoo and mum rolette. One receipt shows that the goods itemized were sold to one Maj. A. A. Quinto c/o of U.P., certainly not the petitioner in this case therefore non- deductible business expense. However, We take exception to the following items which should be allowed as a deductible miscellaneous e:�:pense, to wit: Date F'artoicu 1ars Voucher # Amount Exhibits 9- 01-69 Veluzar - I. D. of 18372 A p 40.00 MM- 36 I!< Ramon Tambunting MM-37 (O.R.# 6713) 18596 A 18959 A 119.7(1 MM - 77 I!~ 10- 6 - 69 Fortune Magazine- 151.50 MM-78 MM-126 /!( Ramon Tambunting MM-127 12- 5-69 The �<adak Store - Ramon Tambunting (O.R.# 85804) T0 t a 1 P311.20 ========

DECISION - C.T.A. CASE NO. 3367 - 31 - Ther-efor-e, the sum of P311.20 should be allowed a s miscellaneous expense and only P263.40 was pr-oper-ly disallowed by r-espondent. 12. Cafeter-ia ser-vice of P7,291.00. The examiner- disallowed P7 ' 291 � (H) cafeteria ser-vices ( E :-: h. 0-50) for- the whole year- of 1969 believing this was spent not in connection with the business. Petitioner- pr-esented its July to December-, 1969 voucher-s showing a P25.00 daily cafeter-ia expense. No r-eceipts wer-e attached to these voucher-s. Respondent ' s examiner- also opined that the comida expens e would not be toler-ated if this was not a close c or-por-ation. (T.s.n., p. 25, May 2 6, 1988 Hear-ing.) Meanwhile, petitioner-'s witness, Ms. Rosar-io Chua, explains that the company gives fr-ee lunch for all employees. (T.s.n., p. 7, Nov. 15, 1985 Hear-ing.) The comida r-epr-esents expenditur-es for- snacks and bever-ages given to its employees who r-ender-ed over-time ser-vices in � var-ious shops of petitioner- (Exh. H). After- e:-:amining the voucher-s pr-esented by petitioner- fr-om July to December-, 1969 totalling to P3,749.70 (Exhs. NN, NN- 1 to NN-151), We have found that on the aver-age petitioner- has been claiming ~ P25.00 daily comida. The voucher-s wer-e all signed by var-ious

DECISION - C.T.A. CASE NO. 3367 - 32 - persons. As testified by petitioner's accountant~ the company accommodates its employees by giving them free lunch as an incentive for them to stay in the office during lunch and break time. This practice is common to many companies. It is not unusual for a firm to give snacks in case of overtime work rendered by its employees nor is it excessive to give free lunch for the purpose of keeping them inside the off~ce premises even during lunch break. By the very nature of a pawnshop business clients transact business at any time of the day. The amount of P3~749.70 cafeteria services from July to December, 1969 should be allowed. With respect to the January to July, 1969 cafeteria services of P3,541.20, petitioner failed to present the vouchers pertaining to thi~ period. Following respondent's policy of allowing 1/2 of the expenses claimed in a jeopardy assessment, the Court heretofore allows 1/2 of P3,541.20 or P1,770.60 cafeteria e}:pense from January to June, 1969. Therefore, � (F'1,770.60 + the total sum of P5,520.30 P3,749.70) should be allowed for the whole year and only P1,770.70 was properly disallowed. In summary, the Court finds petitioner liable for deficiency income tax for the year 1969, recomputed as follows: 4Bn

- DECISION - C.T.A. CASE NO. 336 7 - 33 - Net income per return ------------ P 7~046.00 Add: Unallowable deductions: 1. 1/2 of the operating expenses from January to June~ 1969 -- 26~996.78 2 . Car maintenance ------------- 1~141.27 3. Representation expenses ----- 309.26 4. Interest expense ------------ 6~569.18 5. Insurance ------------------- 7~524.18 6. Professional fee ------------ 9~046.00 7. Advertising ----------------- 150.00 8. Donations ------------------- 200.00 9. Rent ------------------------ -0- 10. Officers compensation ------- 9~200.00 11. Miscellaneous e x penses ------ 263.40 12. Cafeteria service ----------- 1,770.70 Net income per Decision ---------- P 70,216.77 Ta x Due Thereon ------------------ P 17~554.00 Less: Amount already assessed ---- 1,950.00 B a 1 a n c e - - - - - - - - - - - - - - - - - - - - P 15~604.00 Add: 1/2% mo. int. fr. 4-16- 70 to 11 - 15- 71 -------------------- ___!~482.38 TOTAL AMOUNT DUE & COLLECTIBLE PER DECISION --------------------- P 17~086~38 =========== WHEREFORE~ in view of the foregoing findings of this Court~ respondent's decision dated June 23~ 1981 is hereby MODIFIED. Petitioner Casas Agencias De Empenos De Antonio L. Tambunting E Hijos Inc. is ordered to pay respondent Commissioner of Internal Revenue the amount � o �f P 17 ~ 086.38 as deficiency income tax for the year 1969~ plus surcharges and interest incident to delinquency until fully paid. 48.1.

DECISION CTA CASE NO. 3 367 ... 34 - With cost against petitioner. SO ORDERED. Quezon City~ Metro M a n i l a ~ Octo b er 20~ 1991. Q~ Q .. G:'vrA-.. ERNESTO D. ACOSTA Associate Judge WE CONCUR: ~-~ Pr�esid i~y~Judge CONS~~AOUIN A(c;;oc: .i ate Ju d ge CERT I F I C AT I 0 N I hereb y certJ fy that t h.is dec is ion 11-Jas reac hed after due consu l tation a mo n g the me mbers of the Court � of Tax Appeals in accordance wit h S e ctJon 1 3 ~ Article VII I of the Constitu tion. � ~~ Presi d ing Judge 4 R?.