Deduction of the Ordinary and Necessary Expenses

August 28, 1958 BIR RULING NO. 478-58 6th Indorsement Returned to the Regional Director, Regional District No. 3, Manila, the docket of the income tax case of Mr. Jose A. Gonzalez, sole proprietor of Gonzalez Laboratories, covering the period from 1952 to 1955. prcd Section 30(a)(1) of the National Internal Revenue Code provides, among others, that all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business shall be allowed as deductions in computing net income. In the recent case of "Santiago Gancayco vs. Collector of Internal Revenue" (C.T.A. Case No. 287, Nov. 14, 1957), the Court of Tax Appeals, quoting from American decisions, said: "Expenses which are described as being ordinary and necessary generally contemplate expense which are directly connected with the proximately resulting from carrying on the and must be shown to be appropriate and helpful in the development of the taxpayer's business for the acquisition or pursuit of income or profit. . ." Again, in the case of "Visayan Cebu Terminal Co., Inc. vs. Collector of Internal Revenue" (C.T.A Case No. 128, June 29, 1957), it was held that "an expense is generally considered necessary where the expenditure is appropriate or helpful in the development of the taxpayer's business or that the same is proper for the purpose of realizing a profit or minimizing a loss" and "an expense is ordinary when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances". "Now, what is ordinary, though there must always be a strain of constancy within it, is nonetheless a variable affected by time and place and circumstance. Ordinary in this context does not mean that the payments must be habitual or normal in the sense that the same taxpayer will have to make then often. A law suit affecting the safety of a business may happen once in a lifetime. The counsel fees may be so heavy that repetition is unlikely. Nonetheless, the expense is an ordinary one because we know from experience that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack. . ." (Welch vs. Helvering, 290 U.S. 111., cited in Visayan Cebu Terminal Co., Inc., vs. Collector, supra ) cdpr In the light of the foregoing, it follows that the expenses defrayed by Mr. Gonzalez for his son, Gamaliel, a pharmacist and production manager of Gonzalez Laboratories, who went to the United States for the purpose of making arrangements for the purchase of modern pharmaceutical machineries, studying their processes of installation and operation, and taking up courses in the various phases of pharmaceutical manufacturing in order to modernize the equipments of said establishment and make available to it up-to-date knowledge and skill on pharmaceutical manufacturing, are "ordinary and necessary expenses incurred in carrying on the trade or business" of Mr. Gonzalez within the meaning of Section 30(a)(1) of the Tax Code and, therefore, deductible from his gross income for the years 1951 and 1952, the taxable years during which said expenses were incurred. The amount of such expenses should, however, be verified to determine whether or not the same have been augmented by the taxpayer. Be guided accordingly. cdt (SGD.) MELECIO R. DOMINGO Acting Commissioner of Internal Revenue