Aguinaldo Industries Corp. is engaged in the manufacture of fishing nets, a tax-exempt industry, and the manufacture of furniture. For accounting purposes, each division is provided with separate books of accounts. Previously, Aguinaldo Industries acquired a parcel of land in Muntinglupa,Rizal, as site of the fishing net factory. This transaction was entered in the books of the Fish Nets Division of the Company.
Later, Aguinaldo Industries, it sold the said property, the profit from this sale which was entered in the books of the Fish Nets Division as miscellaneous income to distinguish it from its tax-exempt income. Petitioner filed two separate income tax returns and after investigation of these returns, the examiners of the BIR found that the Fish Nets Division deducted from its gross income P61,187.48 as additional remuneration paid to the officers of Aguinaldo Industries. The examiner recommended the disallowance of the deduction. It appears from the books that such deduction was claimed as part of the selling expenses of the land in Muntinglupa. Aguinaldo Industries insists that said amount should be allowed as deduction because it was paid to its officers as allowance or bonus pursuant to Section 3 of its by-laws.
Whether the bonus given to the officers of Aguinaldo upon the sale of its Muntinglupa land is an ordinary and necessary business expense deductible for income tax purposes?
No. In general, only those ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for personal services actually rendered can be claimed as a deductible. The bonus given to the officers of the Aguinaldo Industries as their share of the profit realized from the sale of the land cannot be deemed a deductible expense for tax purposes, even if the aforesaid sale could be considered as a transact ion for Carrying on the trade or business of the Aguinaldo Industries and the grant of the bonus to the corporate officers pursuant to Aguinaldo Industries’ by -laws could, as an intra-corporate matter, be sustained.
Evidence show that the sale was effected through a broker who was paid by Aguinaldo Industries a commission for his services. On the other hand, there is absolutely no evidence of any service actually rendered by Aguinaldo Industries’ officers which could be the basis of a grant to them of a bonus out of the profit derived from the sale. This being so, the payment of a bonus to them out of the gain realized from the sale cannot be considered as a selling expense; nor can it be deemed reasonable and necessary so as to make it deductible for tax purposes. Thus, the extraordinary and unusual amounts paid by Aguinaldo to these directors in the guise and form of compensation for their supposed services as such, without any relation to the measure of their actual services, cannot be regarded as ordinary and necessary expenses within the meaning of the law.
Whenever a controversy arises on the deductibility, for purposes of income tax, of certain items for alleged compensation of officers of the taxpayer, two (2) questions become material, namely: (a)Have personal services been actually rendered by said officers? (b) In the affirmative case, what is the reasonable allowance therefor