Visayan Cebu Terminal Co. Inc. vs. Coll. of Internal Rev., 108 Phil.

320(1960) Doctrine: To be deductible, (said) business expenses must "ordinary and necessary expenses paid or incurred in carrying on any trade or business"; that (those) expenses "must also, meet the further test of reasonableness in amount Facts: Visayan Cebu Terminal Co. Inc., is a corporation organized for the purpose of handling arrastre operations in the port of Cebu. It was awarded the contract for the said arrastre operations by the Bureau of Customs, pursuant to Act No. 3002, as amended.

Visayan filed its income tax return for 1951reporting a gross income of P420,633.40 and claimed deductions amounting to P379,036.95, leaving a net income of P41,596.45 on which it paid income tax in the sum of P8,319.20. The sum of P379,036.95 claimed as deductions consisted of various items, among which were the following: 1. Salaries (a) Salary and bonus of Juan Eugenio Lo (b) Salary of Felix Go Chan (c) Salary of Teomino Tiu Tiam P1,875.00 250.00 250.00 (P 2,375.00) (75,855.88)

2. Representation expenses 3. Miscellaneous expenses (a) Christmas bonus given to various persons P1,500.00 (b) Tips to ships' officers 4,800.00 (6,300.00) TOTAL (P84,530.88) The claimed deductions were disallowed by the CIR giving rise to a deficiency assessment of P 18 991.00. Upon reconsideration, the CIR allowed P 1875.00 as deduction for salaries and P 532.00 for miscellaneous expenses but maintained the disallowance of P75 855.90 as representation expenses. On appeal to the CTA, the Tax Court allowed a deduction of P10 000.00 as reasonable representation expenses based on a comparison of the gross income and the representation expenses for the years 1950 to 1952 and disallowed the rest of the amount. Visayan raises the issue of this disallowance in this present appeal. The Tax Court based its allowance of ONLY P10 000.00 on a comparison of the gross income of Visayan versus its representation expenses as summarized below:
Year 1949 1950 1951 1952 Gross Income P722,135.42 451,303.21 420,479.39 425,326.86 Net Profit P61,257.53 33,023.78 41,596.45 34,207.31 Representation Expense P83,703.54 10,424.39 75,855.88 63,618.64

The Tax Court held that the gross income for 1950 was greater than in 1951 and 1952 and yet the expenses for that year was only a little over P10 000.00. Hence, this figure is a reasonable amount considering that that some of the representation expenses claimed had been evidenced by vouchers or chits, but others were reimbursed "without presentation of supporting papers. The aforementioned vouchers or chits were allegedly "destroyed when the house of Buenaventura M. Veloso, treasurer of appellant, where the records were kept was burned"; Accordingly, "it is not possible to determine the actual amount covered by supporting papers and the amount without supporting papers". Thus the Court is left with no choice but to deduce a reasonable amount of representation expenses based on the available data. The Court explained that "representation expenses fall under the category of business expenses which" are allowable deductions from gross income if they meet the conditions prescribed by law", particularly section 30(a) (1) of the National Internal Revenue Code.

To be deductible, said business expenses must "ordinary and necessary expenses paid or incurred in carrying on any trade or business". Further, those expenses "must also, meet the test of reasonableness in amount", this test being "inherent in the phase `ordinary and necessary'". The evidence bears out the fact that the expenses were not liquidated. The receipts or vouchers were allegedly lost and no proof other than oral testimony served to substantiate the claims or deductions. Thus the CTA was fully justified in extrapolating the allowable deductions from the data available to it. Further, the amount of P10 000.00 appears reasonable in light of the expenses and gross income for the other years. The Court noted that far from being arbitrary, the CTA was rather liberal in allowing P10 000.00 as representation expenses, there being absolutely no concrete evidence to substantiate the actual amount spent. Thus the decision of the CTA allowing ONLY P10 000.00 as representation expenses must be upheld.