G.R. No. L-28896 February 17, 1988 the tax authorities.

the tax authorities. During the intervening period, the warrant was premature and
COMMISSIONER OF INTERNAL REVENUE, petitioner, could therefore not be served.
vs. As the Court of Tax Appeals correctly noted," 11 the protest filed by private
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents. respondent was not pro forma and was based on strong legal considerations. It thus
CRUZ, J.: had the effect of suspending on January 18, 1965, when it was filed, the
Taxes are the lifeblood of the government and so should be collected without reglementary period which started on the date the assessment was received, viz.,
unnecessary hindrance On the other hand, such collection should be made in January 14, 1965. The period started running again only on April 7, 1965, when
accordance with law as any arbitrariness will negate the very reason for government the private respondent was definitely informed of the implied rejection of the said
itself. It is therefore necessary to reconcile the apparently conflicting interests of the protest and the warrant was finally served on it. Hence, when the appeal was filed
authorities and the taxpayers so that the real purpose of taxation, which is the on April 23, 1965, only 20 days of the reglementary period had been consumed.
promotion of the common good, may be achieved. Now for the substantive question.
The main issue in this case is whether or not the Collector of Internal Revenue The petitioner contends that the claimed deduction of P75,000.00 was properly
correctly disallowed the P75,000.00 deduction claimed by private respondent Algue disallowed because it was not an ordinary reasonable or necessary business
as legitimate business expenses in its income tax returns. The corollary issue is expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it
whether or not the appeal of the private respondent from the decision of the held that the said amount had been legitimately paid by the private respondent for
Collector of Internal Revenue was made on time and in accordance with law. actual services rendered. The payment was in the form of promotional fees. These
We deal first with the procedural question. were collected by the Payees for their work in the creation of the Vegetable Oil
The record shows that on January 14, 1965, the private respondent, a domestic Investment Corporation of the Philippines and its subsequent purchase of the
corporation engaged in engineering, construction and other allied activities, properties of the Philippine Sugar Estate Development Company.
received a letter from the petitioner assessing it in the total amount of P83,183.85 Parenthetically, it may be observed that the petitioner had Originally claimed these
as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, promotional fees to be personal holding company income 12 but later conformed to
Algue flied a letter of protest or request for reconsideration, which letter was stamp the decision of the respondent court rejecting this assertion. 13 In fact, as the said
received on the same day in the office of the petitioner. 2 On March 12, 1965, a court found, the amount was earned through the joint efforts of the persons among
warrant of distraint and levy was presented to the private respondent, through its whom it was distributed It has been established that the Philippine Sugar Estate
counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the Development Company had earlier appointed Algue as its agent, authorizing it to
pending protest. 3 A search of the protest in the dockets of the case proved fruitless. sell its land, factories and oil manufacturing process. Pursuant to such authority,
Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo
Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was Sanchez, worked for the formation of the Vegetable Oil Investment Corporation,
finally informed that the BIR was not taking any action on the protest and it was inducing other persons to invest in it.14 Ultimately, after its incorporation largely
only then that he accepted the warrant of distraint and levy earlier sought to be through the promotion of the said persons, this new corporation purchased the
served.5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the PSEDC properties.15 For this sale, Algue received as agent a commission of
decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6 P126,000.00, and it was from this commission that the P75,000.00 promotional
The above chronology shows that the petition was filed seasonably. According to fees were paid to the aforenamed individuals.16
Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the There is no dispute that the payees duly reported their respective shares of the fees
decision or ruling challenged.7 It is true that as a rule the warrant of distraint and in their income tax returns and paid the corresponding taxes thereon. 17 The Court
levy is "proof of the finality of the assessment" 8 and renders hopeless a request for of Tax Appeals also found, after examining the evidence, that no distribution of
reconsideration," 9 being "tantamount to an outright denial thereof and makes the dividends was involved.18
said request deemed rejected." 10 But there is a special circumstance in the case at The petitioner claims that these payments are fictitious because most of the payees
bar that prevents application of this accepted doctrine. are members of the same family in control of Algue. It is argued that no indication
The proven fact is that four days after the private respondent received the was made as to how such payments were made, whether by check or in cash, and
petitioner's notice of assessment, it filed its letter of protest. This was apparently there is not enough substantiation of such payments. In short, the petitioner
not taken into account before the warrant of distraint and levy was issued; indeed, suggests a tax dodge, an attempt to evade a legitimate assessment by involving an
such protest could not be located in the office of the petitioner. It was only after imaginary deduction.
Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by
We find that these suspicions were adequately met by the private respondent when excessive payments are a distribution of earnings upon the stock. . . .
its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
that the payments were not made in one lump sum but periodically and in different It is worth noting at this point that most of the payees were not in the regular
amounts as each payee's need arose. 19 It should be remembered that this was a employ of Algue nor were they its controlling stockholders. 23
family corporation where strict business procedures were not applied and The Solicitor General is correct when he says that the burden is on the taxpayer to
immediate issuance of receipts was not required. Even so, at the end of the year, prove the validity of the claimed deduction. In the present case, however, we find
when the books were to be closed, each payee made an accounting of all of the fees that the onus has been discharged satisfactorily. The private respondent has
received by him or her, to make up the total of P75,000.00. 20 Admittedly, proved that the payment of the fees was necessary and reasonable in the light of
everything seemed to be informal. This arrangement was understandable, however, the efforts exerted by the payees in inducing investors and prominent businessmen
in view of the close relationship among the persons in the family corporation. to venture in an experimental enterprise and involve themselves in a new business
We agree with the respondent court that the amount of the promotional fees was requiring millions of pesos. This was no mean feat and should be, as it was,
not excessive. The total commission paid by the Philippine Sugar Estate sufficiently recompensed.
Development Co. to the private respondent was P125,000.00. 21After deducting the It is said that taxes are what we pay for civilization society. Without taxes, the
said fees, Algue still had a balance of P50,000.00 as clear profit from the government would be paralyzed for lack of the motive power to activate and operate
transaction. The amount of P75,000.00 was 60% of the total commission. This was it. Hence, despite the natural reluctance to surrender part of one's hard earned
a reasonable proportion, considering that it was the payees who did practically income to the taxing authorities, every person who is able to must contribute his
everything, from the formation of the Vegetable Oil Investment Corporation to the share in the running of the government. The government for its part, is expected to
actual purchase by it of the Sugar Estate properties. This finding of the respondent respond in the form of tangible and intangible benefits intended to improve the lives
court is in accord with the following provision of the Tax Code: of the people and enhance their moral and material values. This symbiotic
SEC. 30. Deductions from gross income.--In computing net income there shall be relationship is the rationale of taxation and should dispel the erroneous notion that
allowed as deductions — it is an arbitrary method of exaction by those in the seat of power.
(a) Expenses: But even as we concede the inevitability and indispensability of taxation, it is a
(1) In general.--All the ordinary and necessary expenses paid or incurred during requirement in all democratic regimes that it be exercised reasonably and in
the taxable year in carrying on any trade or business, including a reasonable accordance with the prescribed procedure. If it is not, then the taxpayer has a right
allowance for salaries or other compensation for personal services actually to complain and the courts will then come to his succor. For all the awesome power
rendered; ... 22 of the tax collector, he may still be stopped in his tracks if the taxpayer can
and Revenue Regulations No. 2, Section 70 (1), reading as follows: demonstrate, as it has here, that the law has not been observed.
SEC. 70. Compensation for personal services.--Among the ordinary and We hold that the appeal of the private respondent from the decision of the petitioner
necessary expenses paid or incurred in carrying on any trade or business may was filed on time with the respondent court in accordance with Rep. Act No. 1125.
be included a reasonable allowance for salaries or other compensation for And we also find that the claimed deduction by the private respondent was
personal services actually rendered. The test of deductibility in the case of permitted under the Internal Revenue Code and should therefore not have been
compensation payments is whether they are reasonable and are, in fact, disallowed by the petitioner.
payments purely for service. This test and deductibility in the case of ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in
compensation payments is whether they are reasonable and are, in fact, toto, without costs.
payments purely for service. This test and its practical application may be SO ORDERED.
further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase
price of services, is not deductible. (a) An ostensible salary paid by a
corporation may be a distribution of a dividend on stock. This is likely to occur
in the case of a corporation having few stockholders, Practically all of whom
draw salaries. If in such a case the salaries are in excess of those ordinarily
paid for similar services, and the excessive payment correspond or bear a close
relationship to the stockholdings of the officers of employees, it would seem
likely that the salaries are not paid wholly for services rendered, but the