WON the subject media advertising expense for to accept that such amount is reasonable "to

‘Tang’ incurred by respondent was an ordinary and stimulate the current sale of merchandise"
necessary expense fully deductible under the NIRC regardless of Petitioner’s explanation that
such expense "does not connote
– NO. To be deductible from gross income, the
unreasonableness considering the grave
subject advertising expense must be ordinary and economic situation taking place after the
necessary. Aquino assassination characterized by
capital fight, strong deterioration of the
THIRD DIVISION purchasing power of the Philippine peso and
the slacking demand for consumer products"
G.R. No. 143672 April 24, 2003 (Petitioner’s Memorandum, CTA Records,
p. 273). We are not convinced with such an
COMMISSIONER OF INTERNAL REVENUE, explanation. The staggering expense led us
petitioner, to believe that such expenditure was
vs. incurred "to create or maintain some form of
GENERAL FOODS (PHILS.), INC., respondent. good will for the taxpayer’s trade or
business or for the industry or profession of
CORONA, J.: which the taxpayer is a member." The term
"good will" can hardly be said to have any
Petitioner Commissioner of Internal Revenue precise signification; it is generally used to
(Commissioner) assails the resolution1 of the Court denote the benefit arising from connection
of Appeals reversing the decision2 of the Court of and reputation (Words and Phrases, Vol. 18,
Tax Appeals which in turn denied the protest filed p. 556 citing Douhart vs. Loagan, 86 III.
by respondent General Foods (Phils.), Inc., App. 294). As held in the case of Welch vs.
regarding the assessment made against the latter for Helvering, efforts to establish reputation are
deficiency taxes. akin to acquisition of capital assets and,
therefore, expenses related thereto are not
The records reveal that, on June 14, 1985, business expenses but capital expenditures.
respondent corporation, which is engaged in the (Atlas Mining and Development Corp. vs.
manufacture of beverages such as "Tang," Commissioner of Internal Revenue, supra).
"Calumet" and "Kool-Aid," filed its income tax For sure such expenditure was meant not
return for the fiscal year ending February 28, 1985. only to generate present sales but more for
In said tax return, respondent corporation claimed future and prospective benefits. Hence,
as deduction, among other business expenses, the "abnormally large expenditures for
amount of P9,461,246 for media advertising for advertising are usually to be spread over the
"Tang." period of years during which the benefits of
the expenditures are received" (Mertens,
On May 31, 1988, the Commissioner disallowed supra, citing Colonial Ice Cream Co., 7
50% or P4,730,623 of the deduction claimed by BTA 154).
respondent corporation. Consequently, respondent
corporation was assessed deficiency income taxes in WHEREFORE, in all the foregoing, and
the amount of P2,635, 141.42. The latter filed a finding no error in the case appealed from,
motion for reconsideration but the same was denied. we hereby RESOLVE to DISMISS the
instant petition for lack of merit and
On September 29, 1989, respondent corporation ORDER the Petitioner to pay the respondent
appealed to the Court of Tax Appeals but the appeal Commissioner the assessed amount of
was dismissed: P2,635,141.42 representing its deficiency
income tax liability for the fiscal year ended
With such a gargantuan expense for the February 28, 1985."3
advertisement of a singular product, which
even excludes "other advertising and Aggrieved, respondent corporation filed a petition
promotions" expenses, we are not prepared for review at the Court of Appeals which rendered a
decision reversing and setting aside the decision of Section 34 (A) (1), formerly Section 29 (a) (1) (A),
the Court of Tax Appeals: of the NIRC provides:

Since it has not been sufficiently established (A) Expenses.-

that the item it claimed as a deduction is
excessive, the same should be allowed. (1) Ordinary and necessary trade, business
or professional expenses.-
WHEREFORE, the petition of petitioner
General Foods (Philippines), Inc. is hereby (a) In general.- There shall be
GRANTED. Accordingly, the Decision, allowed as deduction from gross
dated 8 February 1994 of respondent Court income all ordinary and necessary
of Tax Appeals is REVERSED and SET expenses paid or incurred during the
ASIDE and the letter, dated 31 May 1988 of taxable year in carrying on, or which
respondent Commissioner of Internal are directly attributable to, the
Revenue is CANCELLED. development, management,
operation and/or conduct of the
SO ORDERED.4 trade, business or exercise of a
profession.
Thus, the instant petition, wherein the
Commissioner presents for the Court’s Simply put, to be deductible from gross income, the
consideration a lone issue: whether or not the subject advertising expense must comply with the
subject media advertising expense for "Tang" following requisites: (a) the expense must be
incurred by respondent corporation was an ordinary ordinary and necessary; (b) it must have been paid
and necessary expense fully deductible under the or incurred during the taxable year; (c) it must have
National Internal Revenue Code (NIRC). been paid or incurred in carrying on the trade or
business of the taxpayer; and (d) it must be
It is a governing principle in taxation that tax supported by receipts, records or other pertinent
exemptions must be construed in strictissimi juris papers.7
against the taxpayer and liberally in favor of the
taxing authority;5 and he who claims an exemption The parties are in agreement that the subject
must be able to justify his claim by the clearest advertising expense was paid or incurred within the
grant of organic or statute law. An exemption from corresponding taxable year and was incurred in
the common burden cannot be permitted to exist carrying on a trade or business. Hence, it was
upon vague implications.6 necessary. However, their views conflict as to
whether or not it was ordinary. To be deductible, an
Deductions for income tax purposes partake of the advertising expense should not only be necessary
nature of tax exemptions; hence, if tax exemptions but also ordinary. These two requirements must be
are strictly construed, then deductions must also be met.
strictly construed.
The Commissioner maintains that the subject
We then proceed to resolve the singular issue in the advertising expense was not ordinary on the ground
case at bar. Was the media advertising expense for that it failed the two conditions set by U.S.
"Tang" paid or incurred by respondent corporation jurisprudence: first, "reasonableness" of the amount
for the fiscal year ending February 28, 1985 incurred and second, the amount incurred must not
"necessary and ordinary," hence, fully deductible be a capital outlay to create "goodwill" for the
under the NIRC? Or was it a capital expenditure, product and/or private respondent’s business.
paid in order to create "goodwill and reputation" for Otherwise, the expense must be considered a capital
respondent corporation and/or its products, which expenditure to be spread out over a reasonable time.
should have been amortized over a reasonable
period? We agree.
There is yet to be a clear-cut criteria or fixed test for corporation itself also admitted, in its letter protest8
determining the reasonableness of an advertising to the Commissioner of Internal Revenue’s
expense. There being no hard and fast rule on the assessment, that the subject media expense was
matter, the right to a deduction depends on a incurred in order to protect respondent corporation’s
number of factors such as but not limited to: the brand franchise, a critical point during the period
type and size of business in which the taxpayer is under review.
engaged; the volume and amount of its net earnings;
the nature of the expenditure itself; the intention of The protection of brand franchise is analogous to
the taxpayer and the general economic conditions. It the maintenance of goodwill or title to one’s
is the interplay of these, among other factors and property. This is a capital expenditure which should
properly weighed, that will yield a proper be spread out over a reasonable period of time.9
evaluation.
Respondent corporation’s venture to protect its
In the case at bar, the P9,461,246 claimed as media brand franchise was tantamount to efforts to
advertising expense for "Tang" alone was almost establish a reputation. This was akin to the
one-half of its total claim for "marketing expenses." acquisition of capital assets and therefore expenses
Aside from that, respondent-corporation also related thereto were not to be considered as business
claimed P2,678,328 as "other advertising and expenses but as capital expenditures.10
promotions expense" and another P1,548,614, for
consumer promotion. True, it is the taxpayer’s prerogative to determine
the amount of advertising expenses it will incur and
Furthermore, the subject P9,461,246 media where to apply them.11 Said prerogative, however,
advertising expense for "Tang" was almost double is subject to certain considerations. The first relates
the amount of respondent corporation’s P4,640,636 to the extent to which the expenditures are actually
general and administrative expenses. capital outlays; this necessitates an inquiry into the
nature or purpose of such expenditures.12 The
We find the subject expense for the advertisement second, which must be applied in harmony with the
of a single product to be inordinately large. first, relates to whether the expenditures are
Therefore, even if it is necessary, it cannot be ordinary and necessary. Concomitantly, for an
considered an ordinary expense deductible under expense to be considered ordinary, it must be
then Section 29 (a) (1) (A) of the NIRC. reasonable in amount. The Court of Tax Appeals
ruled that respondent corporation failed to meet the
Advertising is generally of two kinds: (1) two foregoing limitations.
advertising to stimulate the current sale of
merchandise or use of services and (2) advertising We find said ruling to be well founded. Respondent
designed to stimulate the future sale of merchandise corporation incurred the subject advertising expense
or use of services. The second type involves in order to protect its brand franchise. We consider
expenditures incurred, in whole or in part, to create this as a capital outlay since it created goodwill for
or maintain some form of goodwill for the its business and/or product. The P9,461,246 media
taxpayer’s trade or business or for the industry or advertising expense for the promotion of a single
profession of which the taxpayer is a member. If the product, almost one-half of petitioner corporation’s
expenditures are for the advertising of the first kind, entire claim for marketing expenses for that year
then, except as to the question of the reasonableness under review, inclusive of other advertising and
of amount, there is no doubt such expenditures are promotion expenses of P2,678,328 and P1,548,614
deductible as business expenses. If, however, the for consumer promotion, is doubtlessly
expenditures are for advertising of the second kind, unreasonable.
then normally they should be spread out over a
reasonable period of time. It has been a long standing policy and practice of
the Court to respect the conclusions of quasi-
We agree with the Court of Tax Appeals that the judicial agencies such as the Court of Tax Appeals,
subject advertising expense was of the second kind. a highly specialized body specifically created for
Not only was the amount staggering; the respondent 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.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.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.