Commissioner of Internal Revenue v. Court of Tax Appeals

[CA-G.R. SP No. 20263. May 31, 1991.] (C.T.A. Case No. 3938) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . HON. COURT OF TAX APPEALS and PBM CONSTRUCTION SERVICE, INC. , respondent . D E C I S I O N MENDOZA , J p : This is a petition for review of the decision of the Court of Tax Appeals dated December 23, 1989 holding private respondent not liable for the deficiency income tax assessment issued against it by petitioner for the year 1980 in the amount of P76,664.37, inclusive of interest and 10% surcharge. PBM Construction Service, Inc., the herein private respondent, is a domestic corporation engaged in the construction business. It filed its Corporate Annual Income Tax Return (Exh. A) for the year 1980 in which it claimed certain deductions which after investigation, the Revenue Examiner of the Bureau of Internal Revenue disallowed. The private respondent was thereafter ordered to pay a deficiency income tax of P76,664.37 computed as follows: Net income per return P1,106.61 Add : Items disallowed (1) Miscellaneous P275.00 (2) Expenses not subjected to Expanded With- holding Tax (a) Lease of jeep 12,000.00 (b) Professional fee 148,814.12 161,089.12 ________ ________ Net income per investigation 162,195.73 Less : Exemptions 0 Net Income subject to tax 162,195.73 Tax Due thereon P54,879.00 Less : Tax paid per return 118.74 Deficiency Income Tax 54,760.26 Plus : 10% surcharge (Sec. 51 P.D. 1705) 5,476.03 20% interest P/A from 4-16-81 to 10-16-82 (.30) 16,428.08 TOTAL AMOUNT DUE and COLLECTIBLE P76,664.37 ======== On January 7, 1983, private respondent protested the said deficiency income tax assessment (Exh. C) but the BIR issued instead warrants of distraint and levy against the company. The private respondent therefore, appealed to the Court of Tax Appeals, assailing the disallowance by the BIR of the following items as deductible expenses from its gross income for 1980: (1) Miscellaneous P275.00 (a) payment for assistance of non-employees of the LTC P15.00 (b) lechon, donated to Bagoyado family 160.00 (c) contribution to Bagoyado family 100.00 (2) Lease of jeep P12,000.00 (3) Professional fee 148,814.12 TOTAL P161,089.12 ========= On December 23, 1989, the Court of Tax Appeals rendered a decision sustaining the private respondent's contention and holding it not liable for deficiency income tax. In turn the Commissioner of Internal Revenue has filed this petition for review. The CTA held that the amount of P275.00 was properly deducted as ordinary and necessary business expenses of the private respondent. The petitioner Commissioner of Internal Revenue contends that these cannot be considered ordinary and necessary expenses they have no close link to the business in which the private respondent is engaged. This amount according to the company, was incurred for paying P15.00 for taking the stencil impression of the engine number of its vehicle in connection with its registration and for contributions (P260.00) allegedly paid to a family for roasted pig for business information given by it to the company. We do not think these items can be considered "ordinary and necessary expenses" within the meaning of sec. 29 (a) (1) of the Tax Code. As held by the Supreme Court: Ordinarily, an expense will be considered "necessary" where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is "ordinary" when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term "ordinary" does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often: the payment may be unique or non-recurring to the particular taxpayer affected. (Atlas Consolidated Mining & Development Corp. vs. Commissioner of Internal Revenue, 102 SCRA 246 (1981)) In no sense can these items in question be considered as "appropriate for the development" of the business of the private respondent as a contractor. With respect to the P160.00 for lechon and P100.00 for contribution to the Bagoyado family, private respondent claims that the expenses were for good will and in recognition of the family's help in giving information to the company regarding the Maria Cristina Chemical Industries project which was held for public bidding. (TSN, pp. 4-5, March 25m 1987). However, the records show that the private respondent did not participate in the bidding (TSN, p. 12, Jan. 22, 1986) and that it was its Engr. Rodolfo Tolosa who recommended the private respondent as the contractor for the MCCI project. (Exh. I) Indeed, in its letter dated June 28, 1984 to the petitioner (Exh. N-1), private respondent stated that it was accepting the disallowance of these "miscellaneous expenses" and expressed willingness to pay the corresponding deficiency tax. On the other hand, the CTA held that the amount for professional services should be P107,000.00 and not P148,814.12 as claimed by the BIR and that, with respect to the payment of these fees, the private respondent had no obligation to withhold the tax because the individuals (Rodolfo Tolosa and P.B. Mejia) to whom the amount was paid were not general contractors within the meaning of the Expanded Withholding Tax Regulations. The Expanded Withholding Tax Regulations (EWT) provides in pertinent parts: Revenue Regulations No. 1378 Expanded Withholding Tax Regulations (Sept. 7, 1978) Sec. 1. Income payments subject to withholding tax and rates prescribed herein . Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines. xxx xxx xxx a) Amounts paid to certain contractors . On fifteen per centum (15%) of gross payments to the following contractors, whether individual or corporation three per centum (3%). (1) General engineering, general building and specialty contractors (a) General Engineering Contractors . . . . (b) General Building Contractors Those whose principal contracting business is in connection with any structure built, being built, or to be built, for the support, shelter and enclosure or persons, animals, chattels or movable property of any kind, requiring in its construction the use of more than two unrelated building trades or crafts, or to do or superintend the whole or any part thereof. Such structure includes sewers and sewerage disposal plants and systems, parks, playground and other plants and similar industrial plants requiring specialized engineering knowledge and skill, powerhouse, power plants and other utility plants and installations, mines and metallurgical plants, cement and concrete works in connection with the abovementioned fixed works. (As amended by Revenue Regulations No. 6-79, June 4, 1979) The CTA held that Tolosa and Mejia were not contractors but only officers and employees and that it was their company which was the contractor. This view is erroneous. Sec. 1(e)(b) above quoted includes in the term "general building contractors" those who "superintend the whole or part" of the construction of any building. Private respondent contends that at any rate the amounts paid to the two engineers were advances and not "professional fees" as the petitioner called them. But the minutes (Exh. I) of the private respondent itself referred to them as "professional fees" to be given to them as advances. (Exh. I-2) For the same reason the amount of P12,000.00 paid to Mejia for the use of his jeep should likewise be considered income payment to such parties since the jeep was used by Mejia in superintending the project. In accordance with the EWT regulation, as the tax on these were admittedly not withheld by private respondent, they cannot be deducted from its gross income. The purpose for requiring the withholding tax is to insure its payment to the government. In the case at bar, Engr. Rodolfo Tolosa admits having been paid P71,000.00 for his fees as project director of the MCCI project, but, while he claims he reported the amount in his individual income tax return for the year 1980 and paid the corresponding tax, he did not show his income tax return. On the other hand, Engr. P.B. Mejia, who according to the private respondent was paid P36,000.00, said in his testimony that he only received P25,000.00. although he claims he reported this in his ITR (TSN, pp. 18 and 29, March 25, 1987) he, like Tolosa, did not present his ITR to show that he had paid the income tax. The private respondent claims that the amounts paid is only P107,000.00 (P71,000.00 for Tolosa and P36,000.00 for Mejia) but even its own witness, P.B. Mejia, contradicted this by claiming that he only reported P25,000.00 in his ITR. Moreover, that private respondent paid more than P107,000.00 in professional fees is suggested by the vouchers marked in evidence as Exhibits F-2, F-4, F-5, G, G-1, G-6 and G-7, which contain annotations that the amounts paid therein to Tolosa and Mejia were "only part of" other amounts paid to them by way of checks, the numbers of which are written on these vouchers. These vouchers support the BIR claim that P148,814.12 had been paid by private respondent for professional fees to Tolosa and Mejia, but since the tax on this amount was not withheld, the amount cannot be allowed by way of deductions. WHEREFORE, the decision appealed from is REVERSED and the private respondent is hereby ordered to pay the amount of P76,664.37 as deficiency income tax for the year 1980, plus ten percent (10%) surcharge and twenty percent (20%) annual interest from November 15, 1982 up to the date of full payment in accordance with sec. 51(e) of the Tax Code of 1977. SO ORDERED. Herrera and Sempio Diy, JJ., concur.