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THIRD DIVISION
G.R. No. 143672 April 24, 2003
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
GENERAL FOODS (PHILS.), INC., respondent.
CORONA, J.:
Petitioner Commissioner of Internal Revenue (Commissioner) assails
the resolution1 of the Court of Appeals reversing the decision2 of the
Court of Tax Appeals which in turn denied the protest filed by
respondent General Foods (Phils.), Inc., regarding the assessment
made against the latter for deficiency taxes.
The records reveal that, on June 14, 1985, respondent corporation,
which is engaged in the manufacture of beverages such as "Tang,"
"Calumet" and "Kool-Aid," filed its income tax return for the fiscal year
ending February 28, 1985. In said tax return, respondent corporation
claimed as deduction, among other business expenses, the amount of
P9,461,246 for media advertising for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of
the deduction claimed by respondent corporation. Consequently,
respondent corporation was assessed deficiency income taxes in the
amount of P2,635, 141.42. The latter filed a motion for reconsideration
but the same was denied.
On September 29, 1989, respondent corporation appealed to the
Court of Tax Appeals but the appeal was dismissed:
With such a gargantuan expense for the advertisement of a
singular product, which even excludes "other advertising and
promotions" expenses, we are not prepared to accept that such
amount is reasonable "to stimulate the current sale of
merchandise" regardless of Petitioner’s explanation that such
expense "does not connote unreasonableness considering the
grave economic situation taking place after the Aquino
assassination characterized by capital fight, strong deterioration of
the purchasing power of the Philippine peso and the slacking
demand for consumer products" (Petitioner’s Memorandum, CTA
Records, p. 273). We are not convinced with such an explanation.
The staggering expense led us to believe that such expenditure
was incurred "to create or maintain some form of good will for the
taxpayer’s trade or business or for the industry or profession of
which the taxpayer is a member." The term "good will" can hardly
be said to have any precise signification; it is generally used to
denote the benefit arising from connection and reputation (Words
and Phrases, Vol. 18, p. 556 citing Douhart vs. Loagan, 86 III.
App. 294). As held in the case of Welch vs. Helvering, efforts to
establish reputation are akin to acquisition of capital assets and,
therefore, expenses related thereto are not business expenses but
capital expenditures. (Atlas Mining and Development Corp. vs.
Commissioner of Internal Revenue, supra). For sure such
expenditure was meant not only to generate present sales but
more for future and prospective benefits. Hence, "abnormally large
expenditures for advertising are usually to be spread over the
period of years during which the benefits of the expenditures are
received" (Mertens, supra, citing Colonial Ice Cream Co., 7 BTA
154).
WHEREFORE, in all the foregoing, and finding no error in the
case appealed from, we hereby RESOLVE to DISMISS the instant
petition for lack of merit and ORDER the Petitioner to pay the
respondent Commissioner the assessed amount of P2,635,141.42
representing its deficiency income tax liability for the fiscal year
ended February 28, 1985."3
Aggrieved, respondent corporation filed a petition for review at the
Court of Appeals which rendered a decision reversing and setting
aside the decision of the Court of Tax Appeals:
Since it has not been sufficiently established that the item it
claimed as a deduction is excessive, the same should be allowed.
WHEREFORE, the petition of petitioner General Foods
(Philippines), Inc. is hereby GRANTED. Accordingly, the Decision,
dated 8 February 1994 of respondent Court of Tax Appeals is
REVERSED and SET ASIDE and the letter, dated 31 May 1988 of
respondent Commissioner of Internal Revenue is CANCELLED.

SO ORDERED.4
Thus, the instant petition, wherein the Commissioner presents for the
Court’s consideration a lone issue: whether or not the subject media
advertising expense for "Tang" incurred by respondent corporation
was an ordinary and necessary expense fully deductible under the
National Internal Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor
of the taxing authority;5 and he who claims an exemption must be able
to justify his claim by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon
vague implications.6
Deductions for income tax purposes partake of the nature of tax
exemptions; hence, if tax exemptions are strictly construed, then
deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was
the media advertising expense for "Tang" paid or incurred by
respondent corporation for the fiscal year ending February 28, 1985
"necessary and ordinary," hence, fully deductible under the NIRC? Or
was it a capital expenditure, paid in order to create "goodwill and
reputation" for respondent corporation and/or its products, which
should have been amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC
provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional
expenses.-
(a) In general.- There shall be allowed as deduction from gross
income all ordinary and necessary expenses paid or incurred
during the taxable year in carrying on, or which are directly
attributable to, the development, management, operation
and/or conduct of the trade, business or exercise of a
profession.
Simply put, to be deductible from gross income, the subject advertising
expense must comply with the following requisites: (a) the expense
must be ordinary and necessary; (b) it must have been paid or
incurred during the taxable year; (c) it must have been paid or incurred
in carrying on the trade or business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent papers.7
The parties are in agreement that the subject advertising expense was
paid or incurred within the corresponding taxable year and was
incurred in carrying on a trade or business. Hence, it was necessary.
However, their views conflict as to whether or not it was ordinary. To
be deductible, an advertising expense should not only be necessary
but also ordinary. These two requirements must be met.
The Commissioner maintains that the subject advertising expense was
not ordinary on the ground that it failed the two conditions set by U.S.
jurisprudence: first, "reasonableness" of the amount incurred and
second, the amount incurred must not be a capital outlay to create
"goodwill" for the product and/or private respondent’s business.
Otherwise, the expense must be considered a capital expenditure to
be spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the
reasonableness of an advertising expense. There being no hard and
fast rule on the matter, the right to a deduction depends on a number
of factors such as but not limited to: the type and size of business in
which the taxpayer is engaged; the volume and amount of its net
earnings; the nature of the expenditure itself; the intention of the
taxpayer and the general economic conditions. It is the interplay of
these, among other factors and properly weighed, that will yield a
proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising
expense for "Tang" alone was almost one-half of its total claim for
"marketing expenses." Aside from that, respondent-corporation also
claimed P2,678,328 as "other advertising and promotions expense"
and another P1,548,614, for consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for
"Tang" was almost double the amount of respondent corporation’s
P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product
to be inordinately large. Therefore, even if it is necessary, it cannot be
considered an ordinary expense deductible under then Section 29 (a)
(1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the
current sale of merchandise or use of services and (2) advertising
designed to stimulate the future sale of merchandise or use of
services. The second type involves expenditures incurred, in whole or
in part, to create or maintain some form of goodwill for the taxpayer’s
trade or business or for the industry or profession of which the
taxpayer is a member. If the expenditures are for the advertising of the
first kind, then, except as to the question of the reasonableness of
amount, there is no doubt such expenditures are deductible as
business expenses. If, however, the expenditures are for advertising of
the second kind, then normally they should be spread out over a
reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising
expense was of the second kind. Not only was the amount staggering;
the respondent corporation itself also admitted, in its letter protest8 to
the Commissioner of Internal Revenue’s assessment, that the subject
media expense was incurred in order to protect respondent
corporation’s brand franchise, a critical point during the period under
review.
The protection of brand franchise is analogous to the maintenance of
goodwill or title to one’s property. This is a capital expenditure which
should be spread out over a reasonable period of time.9
Respondent corporation’s venture to protect its brand franchise was
tantamount to efforts to establish a reputation. This was akin to the
acquisition of capital assets and therefore expenses related thereto
were not to be considered as business expenses but as capital
expenditures.10
True, it is the taxpayer’s prerogative to determine the amount of
advertising expenses it will incur and where to apply them.11 Said
prerogative, however, is subject to certain considerations. The first
relates to the extent to which the expenditures are actually capital
outlays; this necessitates an inquiry into the nature or purpose of such
expenditures.12 The second, which must be applied in harmony with
the first, relates to whether the expenditures are ordinary and
necessary. Concomitantly, for an expense to be considered ordinary, it
must be reasonable in amount. The Court of Tax Appeals ruled that
respondent corporation failed to meet the two foregoing limitations.
We find said ruling to be well founded. Respondent corporation
incurred the subject advertising expense in order to protect its brand
franchise. We consider this as a capital outlay since it created goodwill
for its business and/or product. The P9,461,246 media advertising
expense for the promotion of a single product, almost one-half of
petitioner corporation’s entire claim for marketing expenses for that
year under review, inclusive of other advertising and promotion
expenses of P2,678,328 and P1,548,614 for consumer promotion, is
doubtlessly unreasonable.
It has been a long standing policy and practice of the Court to respect
the conclusions of quasi-judicial agencies such as the Court of Tax
Appeals, a highly specialized body specifically created for the purpose
of reviewing tax cases. The CTA, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax problems. It
has necessarily developed an expertise on the subject. We extend due
consideration to its opinion unless there is an abuse or improvident
exercise of authority.13 Since there is none in the case at bar, the
Court adheres to the findings of the CTA.
Accordingly, we find that the Court of Appeals committed reversible
error when it declared the subject media advertising expense to be
deductible as an ordinary and necessary expense on the ground that
"it has not been established that the item being claimed as deduction
is excessive." It is not incumbent upon the taxing authority to prove
that the amount of items being claimed is unreasonable. The burden of
proof to establish the validity of claimed deductions is on the
taxpayer.14 In the present case, that burden was not discharged
satisfactorily.
WHEREFORE, premises considered, the instant petition is
GRANTED. The assailed decision of the Court of Appeals is hereby
REVERSED and SET ASIDE. Pursuant to Sections 248 and 249 of
the Tax Code, respondent General Foods (Phils.), Inc. is hereby
ordered to pay its deficiency income tax in the amount of
P2,635,141.42, plus 25% surcharge for late payment and 20% annual
interest computed from August 25, 1989, the date of the denial of its
protest, until the same is fully paid.
SO ORDERED.
Puno, (Chairman), Panganiban, Sandoval-Gutierrez, and Carpio-
Morales, JJ., concur.

Footnotes
1 Penned by Associate Justice Andres B. Reyes and concurred in
by Associate Justices Quirino D. Abad Santos, Jr. and Romeo A.
Brawner of the Third Division.
2 Penned by Associate Judge Manuel K. Gruba and concurred in
by Associate Judge Ramon O. de Veyra.
3 Rollo, pp. 22-23.

4 Id., p. 24.

5 Commissioner of Internal Revenue vs. Visayan Electric Co., 23

SCRA 715 [1968].
6 Asiatic Petrolium Co. vs. Llanas, 49 Phil 466 [1926] cited in
Davao Light & Power Co. vs. Commissioner of Customs, 44 SCRA
122 [1972].
7 Zamora vs. Collector, 8 SCRA 163 [1963].

8 Dated June 14, 1988; Petition for Review, p. 8 citing BIR

Records, pp. 198-199; Rollo, p. 15.
9 Mertens, Vol. 4A 25.38 p. 190 citing Colonial Ice Cream Co., 7
BTA 154.
10 Welch vs. Helvering, 290 US 111 [1933].

11 Revenue Audit Memorandum Order No. 1-87.

12 Mertens, Vol. 4A 25.38 p.190, citing E.H. Sheldon & Co., 19 TC

481 [1952].
13 Commissioner vs. Court of Tax Appeals & Atlas Consolidated
Mining and Development Co., 204 SCRA 182 [1991].
14 Commissioner vs. Algue, Inc., 158 SCRA 9 [1988].

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