[G.R. No. L-27811. November 17, 1967] LACSON-MAGALLANES CO., INC. vs. JOSE PAÑO

[G.R. No. L-27811. November 17, 1967] LACSON-MAGALLANES CO., INC., plaintiff-appellant,  vs.JOSE PAÑO, HON. JUAN PAJO, in his capacity as Executive Secretary, and HON. JUAN DE G. RODRIGUEZ, in his capacity as Secretary of Agriculture and Natural Resources, defendants-appellees.

Leopoldo M. Abellera for plaintiff-appellant.
Victorio Advincula for defendant Jose Paño.
Office of the Solicitor General for defendant Secretary of Agriculture and Natural Resources and Executive Secretary.

SANCHEZ, J.:

The question — May the Executive Secretary, acting by authority of the President, reverse a decision of the Director of Lands that had been affirmed by the Executive Secretary of Agriculture and Natural Resources — yielded an affirmative answer from the lower court.¹

Hence, this appeal certified to this Court by the Court of Appeals upon the provisions of Sections 17 and 31 of the Judiciary Act of 1948, as amended.

The undisputed controlling facts are:

In 1932, Jose Magallanes was a permittee and actual occupant of a 1,103-hectare pasture land situated in Tamlangon, Municipality of Bansalan, Province of Davao.

On January 9, 1953, Magallanes ceded his rights and interests to a portion (392,7569 hectares) of the above public land to plaintiff.

On April 13, 1954, the portion Magallanes ceded to plaintiff was officially released from the forest zone as pasture land and declared agricultural land.

On January 26, 1955, Jose Paño and nineteen other claimants² applied for the purchase of ninety hectares of the released area.

On March 29, 1955, plaintiff corporation in turn filed its own sales application covering the entire released area. This was protested by Jose Paño and his nineteen companions upon the averment that they are actual occupants of the part thereof covered by their own sales application.

The Director of Lands, following an investigation of the conflict, rendered a decision on July 31, 1956 giving due course to the application of plaintiff corporation, and dismissing the claim of Jose Paño and his companions. A move to reconsider failed.

On July 5, 1957, the Secretary of Agriculture and Natural Resources — on appeal by Jose Paño for himself and his companions — held that the appeal was without merit and dismissed the same.

The case was elevated to the President of the Philippines.

On June 25, 1958, Executive Secretary Juan Pajo, "[b]y authority of the President" decided the controversy, modified the decision of the Director of Lands as affirmed by the Secretary of Agriculture and Natural Resources, and (1) declared that "it would be for the public interest that appellants, who are mostly landless farmers who depend on the land for their existence, be allocated that portion on which they have made improvements;" and (2) directed that the controverted land (northern portion of Block I, LC Map 1749, Project No. 27, of Bansalan, Davao, with Latian River as the dividing line) "should be subdivided into lots of convenient sizes and allocated to actual occupants, without prejudice to the corporation's right to reimbursement for the cost of surveying this portion." It may be well to state, at this point, that the decision just mentioned, signed by the Executive Secretary, was planted upon the facts as found in said decision.

Plaintiff corporation took the foregoing decision to the Court of First Instance praying that judgment be rendered declaring: (1) that the decision of the Secretary of Agriculture and Natural Resources has full force and effect; and (2) that the decision of the Executive Secretary is contrary to law and of no legal force and effect.

And now subject of this appeal is the judgment of the court a quo dismissing plaintiff's case.

1. Plaintiff's mainstay is Section 4 of Commonwealth Act 141. The precept there is that decisions of the Director of Lands "as to questions of facts shall be conclusive when approved" by the Secretary of Agriculture and Natural Resources. Plaintiff's trenchment claim is that this statute is controlling not only upon courts but also upon the President.

Plaintiff's position is incorrect. The President's duty to execute the law is of constitutional origin.³ So, too, is his control of all executive departments.⁴ Thus it is, that department heads are men of his confidence. His is the power to appoint them; his, too, is the privilege to dismiss them at pleasure. Naturally, he controls and directs their acts. Implicit then is his authority to go over, confirm, modify or reverse the action taken by his department secretaries. In this context, it may not be said that the President cannot rule on the correctness of a decision of a department secretary.

Particularly in reference to the decisions of the Director of Lands, as affirmed by the Secretary of Agriculture and Natural Resources, the standard practice is to allow appeals from such decisions to the Office of the President.⁵ This Court has recognized this practice in several cases. In one, the decision of the Lands Director as approved by the Secretary was considered superseded by that of the President's appeal.⁶ In other cases, failure to pursue or resort to this last remedy of appeal was considered a fatal defect, warranting dismissal of the case, for non-exhaustion of all administrative remedies.⁷

Parenthetically, it may be stated that the right to appeal to the President reposes upon the President's power of control over the executive departments.⁸ And control simply means "the power of an officer to alter or modify or nullify or set aside what a subordinate officer had done in the performance of his duties and to substitute the judgment of the former for that of the latter."⁹

This unquestionably negates the assertion that the President cannot undo an act of his department secretary.

2. Plaintiff next submits that the decision of the Executive Secretary herein is an undue delegation of power. The Constitution, petitioner asserts, does not contain any provision whereby the presidential power of control may be delegated to the Executive Secretary. It is argued that it is the constitutional duty of the President to act personally upon the matter.

It is correct to say that constitutional powers there are which the President must exercise in person.¹⁰ Not as correct, however, is it so say that the Chief Executive may not delegate to his Executive Secretary acts which the Constitution does not command that he perform in person.¹¹ Reason is not wanting for this view. The President is not expected to perform in person all the multifarious executive and administrative functions. The Office of the Executive Secretary is an auxiliary unit which assists the President. The rule which has thus gained recognition is that "under our constitutional setup the Executive Secretary who acts for and in behalf and by authority of the President has an undisputed jurisdiction to affirm, modify, or even reverse any order" that the Secretary of Agriculture and Natural Resources, including the Director of Lands, may issue.¹²

3. But plaintiff underscores the fact that the Executive Secretary is equal in rank to the other department heads, no higher than anyone of them. From this, plaintiff carves the argument that one department head, on the pretext that he is an alter ego of the President, cannot intrude into the zone of action allocated to another department secretary. This argument betrays lack of appreciation of the fact that where, as in this case, the Executive Secretary acts "[b]y authority of the President," his decision is that of the President's. Such decision is to be given full faith and credit by our courts. The assumed authority of the Executive Secretary is to be accepted. For, only the President may rightfully say that the Executive Secretary is not authorized to do so. Therefore, unless the action taken is "disapproved or reprobated by the Chief Executive,"¹³ that remains the act of the Chief Executive, and cannot be successfully assailed.¹⁴ No such disapproval or reprobation is even intimated in the record of this case.

For the reasons given, the judgment under review is hereby affirmed. Costs against plaintiff.

So ordered.

Source: lawphil,net

[G.R. No. 168274, August 20, 2008] FAR EAST BANK & TRUST COMPANY VS. GOLD PALACE JEWELLERY CO.

[G.R. No. 168274, August 20, 2008] FAR EAST BANK & TRUST COMPANY, PETITIONER, VS. GOLD PALACE JEWELLERY CO., AS REPRESENTED BY JUDY L. YANG, JULIE YANG-GO AND KHO SOON HUAT, RESPONDENT.

DECISION

NACHURA, J.:

For the review of the Court through a Rule 45 petition are the following issuances of the Court of Appeals (CA) in CA-G.R. CV No. 71858: (1) the March 15, 2005 Decision^[1] which reversed the trial court's ruling, and (2) the May 26, 2005 Resolution^[2] which denied the motion for reconsideration of the said CA decision.

The instant controversy traces its roots to a transaction consummated sometime in June 1998, when a foreigner, identified as Samuel Tagoe, purchased from the respondent Gold Palace Jewellery Co.'s (Gold Palace's) store at SM-North EDSA several pieces of jewelry valued at P258,000.00.^[3] In payment of the same, he offered Foreign Draft No. M-069670 issued by the United Overseas Bank (Malaysia) BHD Medan Pasar, Kuala Lumpur Branch (UOB), addressed to the Land Bank of the Philippines, Manila (LBP), and payable to the respondent company for P380,000.00.^[4]

Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold Palace, inquired from petitioner Far East Bank & Trust Company's (Far East's) SM North EDSA Branch, its neighbor mall tenant, the nature of the draft. The teller informed her that the same was similar to a manager's check, but advised her not to release the pieces of jewelry until the draft had been cleared.^[5] Following the bank's advice, Yang issued Cash Invoice No. 1609^[6] to the foreigner, asked him to come back, and informed him that the pieces of jewelry would be released when the draft had already been cleared.^[7] Respondent Julie Yang-Go, the manager of Gold Palace, consequently deposited the draft in the company's account with the aforementioned Far East branch on June 2, 1998.^[8]

When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, the latter cleared the same^[9]--UOB's account with LBP was debited,^[10] and Gold Palace's account with Far East was credited with the amount stated in the draft.^[11]

The foreigner eventually returned to respondent's store on June 6, 1998 to claim the purchased goods. After ascertaining that the draft had been cleared, respondent Yang released the pieces of jewelry to Samuel Tagoe; and because the amount in the draft was more than the value of the goods purchased, she issued, as his change, Far East Check No. 1730881^[12] for P122,000.00.^[13] This check was later presented for encashment and was, in fact, paid by the said bank.^[14]

On June 26, 1998, or after around three weeks, LBP informed Far East that the amount in Foreign Draft No. M-069670 had been materially altered from P300.00 to P380,000.00 and that it was returning the same. Attached to its official correspondence were Special Clearing Receipt No. 002593 and the duly notarized and consul-authenticated affidavit of a corporate officer of the drawer, UOB.^[15] It is noted at this point that the material alteration was discovered by UOB after LBP had informed it that its funds were being depleted following the encashment of the subject draft.^[16] Intending to debit the amount from respondent's account, Far East subsequently refunded the P380,000.00 earlier paid by LBP.

Gold Palace, in the meantime, had already utilized portions of the amount. Thus, on July 20, 1998, as the outstanding balance of its account was already inadequate, Far East was able to debit only P168,053.36,^[17] but this was done without a prior written notice to the account holder.^[18] Far East only notified by phone the representatives of the respondent company.^[19]

On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or the difference between the amount in the materially altered draft and the amount debited from the respondent company's account.^[20] Because Gold Palace did not heed the demand, Far East consequently instituted Civil Case No. 99-296 for sum of money and damages before the Regional Trial Court (RTC), Branch 64 of Makati City.^[21]

In their Answer, respondents specifically denied the material allegations in the complaint and interposed as a defense that the complaint states no cause of action--the subject foreign draft having been cleared and the respondent not being the party who made the material alteration. Respondents further counterclaimed for actual damages, moral and exemplary damages, and attorney's fees considering, among others, that the petitioner had confiscated without basis Gold Palace's balance in its account resulting in operational loss, and had maliciously imputed to the latter the act of alteration.^[22]

After trial on the merits, the RTC rendered its July 30, 2001 Decision^[23] in favor of Far East, ordering Gold Palace to pay the former P211,946.64 as actual damages and P50,000.00 as attorney's fees.^[24] The trial court ruled that, on the basis of its warranties as a general indorser, Gold Palace was liable to Far East.^[25]

On appeal, the CA, in the assailed March 15, 2005 Decision,^[26] reversed the ruling of the trial court and awarded respondents' counterclaim. It ruled in the main that Far East failed to undergo the proceedings on the protest of the foreign draft or to notify Gold Palace of the draft's dishonor; thus, Far East could not charge Gold Palace on its secondary liability as an indorser.^[27] The appellate court further ruled that the drawee bank had cleared the check, and its remedy should be against the party responsible for the alteration. Considering that, in this case, Gold Palace neither altered the draft nor knew of the alteration, it could not be held liable.^[28] The dispositive portion of the CA decision reads:

WHEREFORE, premises considered, the appeal is GRANTED; the assailed Decision dated 30 July 2001 of the Regional Trial Court of Makati City, Branch 64 is hereby REVERSED and SET ASIDE; the Complaint dated January 1999 is DISMISSED; and appellee Far East Bank and Trust Company is hereby ordered to pay appellant Gold Palace Jewellery Company the amount of Php168,053.36 for actual damages plus legal interest of 12% per annum from 20 July 1998, Php50,000.00 for exemplary damages, and Php50,000.00 for attorney's fees. Costs against appellee Far East Bank and Trust Company.^[29]

The appellate court, in the further challenged May 26, 2005 Resolution,^[30] denied petitioner's Motion for Reconsideration,^[31] which prompted the petitioner to institute before the Court the instant Petition for Review on Certiorari.^[32]

We deny the petition.

Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance.^[33] This provision applies with equal force in case the drawee pays a bill without having previously accepted it. His actual payment of the amount in the check implies not only his assent to the order of the drawer and a recognition of his corresponding obligation to pay the aforementioned sum, but also, his clear compliance with that obligation.^[34] Actual payment by the drawee is greater than his acceptance, which is merely a promise in writing to pay. The payment of a check includes its acceptance.^[35]
Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft and forwarded the amount thereof to the collecting bank. The latter then credited to Gold Palace's account the payment it received. Following the plain language of the law, the drawee, by the said payment, recognized and complied with its obligation to pay in accordance with the tenor of his acceptance. The tenor of the acceptance is determined by the terms of the bill as it is when the drawee accepts.^[36] Stated simply, LBP was liable on its payment of the check according to the tenor of the check at the time of payment, which was the raised amount.

Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a due course holder. We note at this point that Gold Palace was not a participant in the alteration of the draft, was not negligent, and was a holder in due course--it received the draft complete and regular on its face, before it became overdue and without notice of any dishonor, in good faith and for value, and absent any knowledge of any infirmity in the instrument or defect in the title of the person negotiating it.^[37] Having relied on the drawee bank's clearance and payment of the draft and not being negligent (it delivered the purchased jewelry only when the draft was cleared and paid), respondent is amply protected by the said Section 62. Commercial policy favors the protection of any one who, in due course, changes his position on the faith of the drawee bank's clearance and payment of a check or draft.^[38]

This construction and application of the law gives effect to the plain language of the NIL^[39] and is in line with the sound principle that where one of two innocent parties must suffer a loss, the law will leave the loss where it finds it.^[40] It further reasserts the usefulness, stability and currency of negotiable paper without seriously endangering accepted banking practices. Indeed, banking institutions can readily protect themselves against liability on altered instruments either by qualifying their acceptance or certification, or by relying on forgery insurance and special paper which will make alterations obvious.^[41] This is not to mention, but we state nevertheless for emphasis, that the drawee bank, in most cases, is in a better position, compared to the holder, to verify with the drawer the matters stated in the instrument. As we have observed in this case, were it not for LBP's communication with the drawer that its account in the Philippines was being depleted after the subject foreign draft had been encashed, then, the alteration would not have been discovered. What we cannot understand is why LBP, having the most convenient means to correspond with UOB, did not first verify the amount of the draft before it cleared and paid the same. Gold Palace, on the other hand, had no facility to ascertain with the drawer, UOB Malaysia, the true amount in the draft. It was left with no option but to rely on the representations of LBP that the draft was good.

In arriving at this conclusion, the Court is not closing its eyes to the other view espoused in common law jurisdictions that a drawee bank, having paid to an innocent holder the amount of an uncertified, altered check in good faith and without negligence which contributed to the loss, could recover from the person to whom payment was made as for money paid by mistake.^[42] However, given the foregoing discussion, we find no compelling reason to apply the principle to the instant case.

The Court is also aware that under the Uniform Commercial Code in the United States of America, if an unaccepted draft is presented to a drawee for payment or acceptance and the drawee pays or accepts the draft, the person obtaining payment or acceptance, at the time of presentment, and a previous transferor of the draft, at the time of transfer, warrant to the drawee making payment or accepting the draft in good faith that the draft has not been altered.^[43] Nonetheless, absent any similar provision in our law, we cannot extend the same preferential treatment to the paying bank.

Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting agent, Far East, should not have debited the money paid by the drawee bank from respondent company's account. When Gold Palace deposited the check with Far East, the latter, under the terms of the deposit and the provisions of the NIL, became an agent of the former for the collection of the amount in the draft.^[44] The subsequent payment by the drawee bank and the collection of the amount by the collecting bank closed the transaction insofar as the drawee and the holder of the check or his agent are concerned, converted the check into a mere voucher,^[45] and, as already discussed, foreclosed the recovery by the drawee of the amount paid. This closure of the transaction is a matter of course; otherwise, uncertainty in commercial transactions, delay and annoyance will arise if a bank at some future time will call on the payee for the return of the money paid to him on the check.^[46]

As the transaction in this case had been closed and the principal-agent relationship between the payee and the collecting bank had already ceased, the latter in returning the amount to the drawee bank was already acting on its own and should now be responsible for its own actions. Neither can petitioner be considered to have acted as the representative of the drawee bank when it debited respondent's account, because, as already explained, the drawee bank had no right to recover what it paid. Likewise, Far East cannot invoke the warranty of the payee/depositor who indorsed the instrument for collection to shift the burden it brought upon itself. This is precisely because the said indorsement is only for purposes of collection which, under Section 36 of the NIL, is a restrictive indorsement.^[47] It did not in any way transfer the title of the instrument to the collecting bank. Far East did not own the draft, it merely presented it for payment. Considering that the warranties of a general indorser as provided in Section 66 of the NIL are based upon a transfer of title and are available only to holders in due course,^[48] these warranties did not attach to the indorsement for deposit and collection made by Gold Palace to Far East. Without any legal right to do so, the collecting bank, therefore, could not debit respondent's account for the amount it refunded to the drawee bank.

The foregoing considered, we affirm the ruling of the appellate court to the extent that Far East could not debit the account of Gold Palace, and for doing so, it must return what it had erroneously taken. Far East's remedy under the law is not against Gold Palace but against the drawee-bank or the person responsible for the alteration. That, however, is another issue which we do not find necessary to discuss in this case.

However, we delete the exemplary damages awarded by the appellate court. Respondents have not shown that they are entitled to moral, temperate or compensatory damages.^[49] Neither was petitioner impelled by malice or bad faith in debiting the account of the respondent company and in pursuing its cause.^[50] On the contrary, petitioner was honestly convinced of the propriety of the debit. We also delete the award of attorney's fees for, in a plethora of cases, we have ruled that it is not a sound public policy to place a premium on the right to litigate. No damages can be charged to those who exercise such precious right in good faith, even if done erroneously.^[51]

WHEREFORE, premises considered, the March 15, 2005 Decision and the May 26, 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 71858 are AFFIRMED WITH THE MODIFICATION that the award of exemplary damages and attorney's fees is DELETED.

SO ORDERED.

[G.R. No. 143672. April 24, 2003] COMMISSIONER OF INTERNAL REVENUE vs. GENERAL FOODS (PHILS.), INC.

[G.R. No. 143672.  April 24, 2003] COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. GENERAL FOODS (PHILS.), INC., respondent.

D E C I S I O N

CORONA, J.:

Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution^[1][1] of the Court of Appeals reversing the decision^[1][2] 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.”^[1][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.^[1][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;^[1][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.^[1][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 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.^[1][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 protest^[1][8] 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.^[1][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.^[1][10]

True, it is the taxpayer’s prerogative to determine the amount of advertising expenses it will incur and where to apply them.^[1][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.^[1][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.^[1][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.^[1][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.

[G.R. Nos. 147706-07. February 16, 2005] PEOPLE OF THE PHILIPPINES vs. THE HONORABLE SANDIGANBAYAN (Fifth Division) and EFREN L. ALAS

[G.R. Nos. 147706-07.  February 16, 2005] PEOPLE OF THE PHILIPPINES, petitioner, vs. THE HONORABLE SANDIGANBAYAN (Fifth Division) and EFREN L. ALAS, respondents.

CORONA, J.:

Does the Sandiganbayan have jurisdiction over presidents, directors or trustees, or managers of government-owned or controlled corporations organized and incorporated under the Corporation Code for purposes of the provisions of RA 3019, otherwise known as the Anti-Graft and Corrupt Practices Act?  The petitioner, represented by the Office of the Special Prosecutor (OSP), takes the affirmative position in this petition for certiorari under Rule 65 of the Rules of Court.  Respondent Efren L. Alas contends otherwise, together with the respondent court.

Pursuant to a resolution dated September 30, 1999 of the Office of the Ombudsman, two separate informations^[1] for violation of Section 3(e) of RA 3019, otherwise known as the Anti-Graft and Corrupt Practices Act, were filed with the Sandiganbayan on November 17, 1999 against Efren L. Alas.  The charges emanated from the alleged anomalous advertising contracts entered into by Alas, in his capacity as President and Chief Operating Officer of the Philippine Postal Savings Bank (PPSB), with Bagong Buhay Publishing Company which purportedly caused damage and prejudice to the government.

On October 30, 2002, Alas filed a motion to quash the informations for lack of jurisdiction, which motion was vehemently opposed by the prosecution. After considering the arguments of both parties, the respondent court ruled that PPSB was a private corporation and that its officers, particularly herein respondent Alas, did not fall under Sandiganbayan jurisdiction.  According to the Sandiganbayan:

After a careful consideration of the arguments of the accused-movant as well as of that of the prosecution, we are of the considered opinion that the instant motion of the accused is well taken.  Indeed, it is the basic thrust of Republic Act as well as (sic) Presidential Decree No. 1606 as amended by President Decree No. 1486 and Republic Act No. 7975 and Republic Act No. 8249 that the Sandiganbayan has jurisdiction only over public officers unless private persons are charged with them in the commission of the offenses.

The records disclosed that while Philippine Postal Savings Bank is a subsidiary of the Philippine Postal Corporation which is a government owned corporation, the same is not created by a special law.  It was organized and incorporated under the Corporation Code which is Batas Pambansa Blg. 68. It was registered with the Securities and Exchange Commission under SEC No. AS094-005593 on June 22, 1994 with a lifetime of fifty (50) years.  Under its Articles of Incorporation the purpose for which said entity is formed was primarily for business, xxx

Likewise, a scrutiny of the seven (7) secondary purposes of the corporation points to the conclusion that it exists for business.  Obviously, it is not involved in the performance of a particular function in the exercise of government power.  Thus, its officers and employees are not covered by the GSIS and are under the SSS law, and actions for reinstatement and backwages are not within the jurisdiction of the Civil Service Commission but by the National Labor Relations Commission (NLRC).

The Supreme Court, in the case of Trade Unions of the Philippines and Allied Services vs. National Housing Corp., 173 SCRA 33, held that the Civil Service now covers only government owned or controlled corporations with original or legislative charters, those created by an act of Congress or by special law, and not those incorporated under and pursuant to a general legislation.  The Highest Court categorically ruled that the Civil Service does not include government-owned or controlled corporation which are organized as subsidiaries of government-owned or controlled corporation under the general corporation law.

In Philippine National Oil Company – Energy Development Corporation vs. Leogardo, 175 SCRA 26, the Supreme Court emphasized that:

The test in determining whether a government-owned or controlled corporation is subject to the Civil Service Law is the manner of its creation such that government corporation created by special charter are subject to its provision while those incorporated under the general corporation law are not within its coverage.

Likewise in Davao City Water District vs. Civil Service Commission, 201 SCRA 601 it was held that “by government-owned or controlled corporation with original charter we mean government-owned or controlled corporation created by a special law and not under the Corporation Code of the Philippines” while in Llenes vs. Dicdican, et al., 260 SCRA 207, a public officer has been  ruled, as a person whose duties involve the exercise of discretion in the performance of the function of government.

Clearly, on the basis of the foregoing pronouncements of the Supreme Court, the accused herein cannot be considered a public officer.  Thus, this Court may not exercise jurisdiction over his act.^[2]

Dissatisfied, the People, through the Office of the Special Prosecutor (OSP), filed this petition^[3] arguing, in essence, that the PPSB was a government-owned or controlled corporation as the term was defined under Section 2(13) of the Administrative Code of 1987.^[4] Likewise, in further defining the jurisdiction of the Sandiganbayan, RA 8249 did not make a distinction as to the manner of creation of the government-owned or controlled corporations for their officers to fall under its jurisdiction. Hence, being President and Chief Operating Officer of the PPSB at the time of commission of the crimes charged, respondent Alas came under the jurisdiction of the Sandiganbayan.

Quoting at length from the assailed resolution dated February 15, 2001, respondent Alas, on the other hand, practically reiterated the pronouncements made by the respondent court in support of his conclusion that the PPSB was not created by special law, hence, its officers did not fall within the jurisdiction of the Sandiganbayan.^[5]

We find merit in the petition.

Section 2(13) of EO 292^[6] defines government-owned or controlled corporations as follows:

Sec. 2. General Terms Defined – Unless the specific words of the text or the context as a whole or a particular statute, shall require a different meaning:

xxx                xxx                   xxx

(13) government owned or controlled corporations refer to any agency organized as a stock or non-stock corporation vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the government directly or indirectly or through its instrumentalities either wholly, or where applicable as in the case of stock corporations to the extent of at least 51% of its capital stock: provided, that government owned or controlled corporations maybe further categorized by the department of the budget, the civil service commission and the commission on audit for the purpose of the exercise and discharge of their respective powers, functions and responsibilities with respect to such corporations.

From the foregoing, PPSB fits the bill as a government-owned or controlled corporation, and organized and incorporated under the Corporation Code as a subsidiary of the Philippine Postal Corporation (PHILPOST). More than 99% of the authorized capital stock of PPSB belongs to the government while the rest is nominally held by its incorporators who are/were themselves officers of PHILPOST.  The creation of PPSB was expressly sanctioned by Section 32 of RA 7354, otherwise known as the Postal Service Act of 1992, for purposes of, among others, “to encourage and promote the virtue of thrift and the habit of savings among the general public, especially the youth and the marginalized sector in the countryside xxx” and to facilitate postal service by “receiving collections and making payments, including postal money orders.”^[7]

It is not disputed that the Sandiganbayan has jurisdiction over presidents, directors or trustees, or managers of government-owned or controlled corporations with original charters whenever charges of graft and corruption are involved. However, a question arises whether the Sandiganbayan has jurisdiction over the same officers in government-owned or controlled corporations organized and incorporated under the Corporation Code in view of the delimitation provided for in Article IX-B Section 2(1) of the 1987 Constitution which states that:

SEC. 2.  (1) The Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the government, including government-owned or controlled corporations with original charters.

It should be pointed out however, that the jurisdiction of the Sandiganbayan is separate and distinct from the Civil Service Commission. The same is governed by Article XI, Section 4 of the 1987 Constitution which provides that “the present anti-graft court known as the Sandiganbayan shall continue to function and exercise its jurisdiction as now or hereafter may be provided by law.”  This provision, in effect, retained the jurisdiction of the anti-graft court as defined under Article XIII, Section 5 of the 1973 Constitution which mandated its creation, thus:

Sec. 5. The Batasang Pambansa shall create a special court, to be known as Sandiganbayan, which shall have jurisdiction over criminal and civil cases involving graft and corrupt practices and such other offense committed by public officers and employees, including those in government-owned or controlled corporations, in relation to their office as may be determined by law. (Italics ours)

On March 30, 1995, Congress, pursuant to its authority vested under the 1987 Constitution, enacted RA 7975^[8] maintaining the jurisdiction of the Sandiganbayan over presidents, directors or trustees, or managers of government-owned or controlled corporations without any distinction whatsoever. Thereafter, on February 5, 1997, Congress enacted RA 8249^[9] which preserved the subject provision:

Section 4, Jurisdiction.  The Sandiganbayan shall exercise exclusive original jurisdiction in all cases involving:

a.       Violations of Republic Act No. 3019, as amended, otherwise known as the Anti-Graft and Corrupt Practices Act, Republic Act No. 1379, and Chapter II, Section, Title VII, Book II of the Revised Penal Code, where one or more of the accused are officials occupying the following positions in the government, whether in a permanent, acting or interim capacity, at the time of the commission of the offense,

(1) Officials of the executive branch occupying the positions of regional director, and higher, otherwise classified as grade “27” and higher, of the Compensation and Position Classification Act of 1989 (Republic Act No. 6758) specifically including:

xxx                     xxx                   xxx

(g) Presidents, directors or trustees, or managers of government-owned or controlled corporations, state universities or educational institutions or foundations. (Italics ours)

The legislature, in mandating the inclusion of “presidents, directors or trustees, or managers of government-owned or controlled corporations” within the jurisdiction of the Sandiganbayan, has consistently refrained from making any distinction with respect to the manner of their creation.

The deliberate omission, in our view, clearly reveals the intention of the legislature to include the presidents, directors or trustees, or managers of both types of corporations within the jurisdiction of the Sandiganbayan whenever they are involved in graft and corruption.  Had it been otherwise, it could have simply made the necessary distinction.  But it did not.

It is a basic principle of statutory construction that when the law does not distinguish, we should not distinguish.  Ubi lex non distinguit nec nos distinguere debemos.  Corollarily, Article XI Section 12 of the 1987 Constitution, on the jurisdiction of the Ombudsman (the government’s prosecutory arm against persons charged with graft and corruption), includes officers and employees of government-owned or controlled corporations, likewise without any distinction.

In Quimpo v. Tanodbayan,^[10] this Court, already mindful of the pertinent provisions of the 1987 Constitution, ruled that the concerned officers of government-owned or controlled corporations, whether created by special law or formed under the Corporation Code, come under the jurisdiction of the Sandiganbayan for purposes of the provisions of the Anti-Graft and Corrupt Practices Act. Otherwise, as we emphasized therein, a major policy of Government, which is to eradicate, or at the very least minimize, the graft and corruption that has permeated the fabric of the public service like a malignant social cancer, would be seriously undermined. In fact, Section 1 of the Anti-Graft and Corrupt Practices Act embodies this policy of the government, that is, to repress certain acts not only of public officers but also of private persons constituting graft or corrupt practices or which may lead thereto.

The foregoing pronouncement has not outlived its usefulness. On the contrary, it has become even more relevant today due to the rampant cases of graft and corruption that erode the people’s faith in government. For indeed, a government-owned or controlled corporation can conceivably create as many subsidiary corporations under the Corporation Code as it might wish, use public funds, disclaim public accountability and escape the liabilities and responsibilities provided by law.  By including the concerned officers of government-owned or controlled corporations organized and incorporated under the Corporation Code within the jurisdiction of the Sandiganbayan, the legislature evidently seeks to avoid just that.

WHEREFORE, in view of the foregoing, the petition is hereby GRANTED and the assailed resolution dated February 15, 2001 of the respondent court is hereby REVERSED and SET ASIDE.

SO ORDERED.

Source: lawphil.net