General Foods (Phils.), Inc. v. Commissioner of Internal Revenue

THIRD DIVISION [CA-G.R. SP No. 33553. June 13, 2000.] GENERAL FOODS (PHILS.), INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE & THE COURT OF TAX APPEALS , respondents . D E C I S I O N REYES, JR ., A ., J p : This is a Petition for Review from the Decision dated 8 February 1994 of respondent Court of Tax Appeals which dismissed the appeal of petitioner General Foods (Philippines), Inc. (GFPI) from the letter, dated 25 August 1989 of respondent Commissioner of Internal Revenue denying the protest filed by the taxpayer regarding the assessment against it for deficiency taxes. The facts are as follows: Petitioner GFPI is a corporation organized and existing under the laws of the Republic of the Philippines and engaged in the manufacture of beverages such as "Tang", "Calumet", and "Kool-Aid." On 14 June 1985, it filed its income tax return for the fiscal year which ended 28 February 1985. In the said income tax return, it claimed as a deduction its expenses during the said period for media advertising in the amount of P9,461,246.00. In a letter, dated 31 May 1988, respondent Commissioner of Internal Revenue disallowed 50% of the said item claimed by petitioner GFPI as a deduction, which is equivalent to P4,730,623.00. Consequently, it was assessed deficiency income taxes in the amount of P2,635,141.42. It filed a motion for reconsideration, which was denied. On 29 September 1989, petitioner GFPI filed an appeal with respondent Court of Tax Appeals from the ruling of respondent Commissioner of Internal Revenue disallowing the item it claimed as a deduction and assessing it deficiency income taxes. In a decision, dated 8 February 1994, respondent Court of Appeals dismissed the said appeal as follows: CDISAc "Within 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 flight, 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 Ill. 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." Petitioner GFPI again filed a motion for reconsideration, which was likewise denied. Petitioner GFPI now raises the following assignments of error: "1. THE RESPONDENT COURT ERRED IN HOLDING THAT PETITIONER'S MEDIA ADVERTISING EXPENSES IN THE AMOUNT OF P9,461,246.00 ARE DEDUCTIBLE ONLY TO THE EXTENT OF ONE-HALF THEREOF OR P4,730,623.00 FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1985. 2. THE RESPONDENT COURT ERRED IN HOLDING THAT PETITIONER'S MEDIA ADVERTISING EXPENSES ARE CONSIDERED AS CAPITAL EXPENDITURE. 3. THE RESPONDENT COURT ERRED IN HOLDING THAT IT CAN SUBSTITUTE ITS OWN JUDGMENT TO THE BUSINESS JUDGMENT OF THE TAXPAYER IN DETERMINING THE KIND AND SIZE OF ADVERTISING AND/OR PROMOTIONAL EXPENSES THAT HAVE TO BE SPENT TO PROMOTE ITS BEST SELLING PRODUCT WHICH IS "TANG"." The instant petition is meritorious. Under Section 30 (a)(1)(a) of the National Internal Revenue Code, the requisites for the deductibility of a particular business expense are: a) the expense must be ordinary and necessary; b) it must have been paid or incurred during the taxable year; and c) it must have been paid or incurred in carrying on the trade or business of the taxpayer. The parties agree that in this proceeding, the only question is whether the item claimed by petitioner GFPI as a deduction is considered as ordinary. As pointed out by Presiding Judge Ernesto D. Acosta in his dissenting opinion, the taxpayer has the discretion of setting the amounts of business expenses it will incur, and absent a clear showing of unreasonableness, respondent Commissioner of Internal Revenue should not substitute his judgment for that of the former as to the ordinary character of the same. In the present case, it should be noted that petitioner GFPI made gross sales in the amount of P124,711,969.00 during the fiscal year involved. Compared to this figure, the amount of P9,461,246.00 it incurred as expenses for media advertising during the same period does not appear to be disproportionate. Hence, the same should be deducted as a business expense. The reliance of respondent Commissioner of Internal Revenue in its comment on the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue (102 SCRA 246) is misplaced. In the said case, the Supreme Court held that cost incurred for enhancing the reputation of a firm are for the purpose of building up its good will and hence, is not considered as business expense but rather as capital expense. On the other hand, in the instant case, petitioner GFPI incurred costs not for promoting its name, but rather for stimulating the sales of its products. 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. Abad Santos, Jr . and Brawner, JJ., concur.