G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

FACTS

Algue, Inc., a domestic corporation, received an assessment for delinquency income taxes for 1958 and 1959 from the Commissioner of Internal Revenue (CIR) on January 14, 1965. Four days later, on January 18, Algue filed a letter of protest. Despite this pending protest, the Bureau of Internal Revenue (BIR) attempted to serve a warrant of distraint and levy on March 12, 1965. Algue’s counsel refused service, presented a copy of the protest (which the BIR could not locate in its files), and the warrant’s service was deferred. The BIR finally informed Algue on April 7 that it was not acting on the protest, and the warrant was then served. Algue filed a petition for review with the Court of Tax Appeals (CTA) on April 23, 1965.
The substantive dispute centered on Algue’s claimed deduction of P75,000.00 as legitimate business expenses for the taxable year 1959. This amount represented promotional fees paid to a group of individuals for their successful efforts in organizing the Vegetable Oil Investment Corporation of the Philippines, which subsequently purchased properties from the Philippine Sugar Estate Development Company. Algue had acted as an agent for the sale and earned a commission of P126,000.00, from which the promotional fees were paid. The CIR disallowed the deduction, contending the fees were not ordinary, necessary, and reasonable business expenses, and suggested the payment was a fictitious distribution to family members controlling Algue to evade taxes.

ISSUE

1. Whether Algue’s appeal to the CTA was filed on time.
2. Whether the P75,000.00 promotional fees paid by Algue constituted deductible ordinary and necessary business expenses.

RULING

The Supreme Court affirmed the CTA’s decision, ruling in favor of Algue on both procedural and substantive grounds. On the procedural issue, the Court held the appeal was timely. While a warrant of distraint and levy typically signifies finality of an assessment, the reglementary 30-day period to appeal was suspended when Algue filed a substantive protest on January 18, 1965. The period only recommenced on April 7, 1965, when the BIR impliedly rejected the protest by finally serving the warrant. Thus, the petition filed on April 23 was within the 30-day period, as only 20 days had lapsed.
On the substantive issue, the Court upheld the deduction. The P75,000.00 was paid for actual services rendered in promoting and securing investors for a new corporate venture, a task requiring considerable effort and expertise. The Court found the expense to be ordinary, necessary, and reasonable under the National Internal Revenue Code. It rejected the CIR’s claim of fictitious payment, noting the payees reported their shares as income and paid corresponding taxes, and testimony established periodic payments were made as needed. The Court emphasized that while tax collection is vital, it must be exercised in accordance with law and not arbitrarily. Algue successfully proved the legitimacy of the business expense, and the disallowance was unjustified.