HENDERSON v COLLECTOR OF INTERNAL REVENUE
1 SCRA 649, G.R. Nos. L-12954 and L-13049, February 28, 1961
Section 29, Commonwealth Act No. 466, National Internal Revenue Code, provides:
"Gross income" includes gains, profits, and income derived from salaries, wages, or
compensation for personal service of whatever kind and in whatever form paid, or
from professions, vocations, trades, businesses, commerce, sales, or dealings in
property, whether real or personal, growing out of the ownership or use of or interest,
in such property; also from interest, rents, dividend, securities, or the transactions of
any business carried on for gain or profit, or gains, profits, an income derived; from
any source whatever.
Facts:
The Bureau of Internal Revenue (BIR) issued assessment notices to spouses Arthur and
Marie Henderson (taxpayers) in relation to their annual net income for the years 1948 to
1952. Taxpayers paid the amounts assessed. Later, BIR reassessed the taxpayers' income
for the aforesaid years, and demanded payment of the deficiency taxes.
In the reassessment, BIR considered as part of their taxable income, among others: (1) the
husband-taxpayer's allowances for rental, residential expenses, subsistence, water,
electricity, and telephone, and (2) the travelling allowance of his wife in 1952.
The taxpayers asked for reconsideration, claiming that:
1. the husband-taxpayer's allowances for rental and utilities such as water, electricity,
and telephone, were not received as money but that they lived in the apartment
furnished and paid for by his employer for its convenience; and
2. the wife-taxpayer's travelling allowance in 1952 should not be considered as part of
their income because she merely accompanied him in his business trip to New York
as his secretary and, at the behest of her husband's employer, to study and look into
the details of the plans and decorations of the building intended to be constructed
by his employer in its property.
The Collector of Internal Revenue (CIR) denied the taxpayer's request for reconsideration,
except as regards the P200 entrance fee to the Marikina Gun and Country Club paid for the
husband-taxpayer's account by his employer. The taxpayers again sought a reconsideration
and requested the CIR to refund the allegedly excess amounts paid. The CIR did not take
any action on taxpayer's request for refund.
The taxpayers appealed to the CTA. CTA held that only the amount of P4,800 annually, the
ratable value to husband-taxpayer of the quarters furnished constitutes a part of taxable
income; that since the taxpayers did not receive any benefit out of the P3,247.40 travelling
expense allowance granted in 1952 to the wife-taxpayers and that she merely undertook
the trip abroad at the behest of her husband's employer, the same could not be considered
as income; and that even if it were considered as such, still it could not be subject to tax
because it was deductible as travel expense. CTA ordered the CIR to refund to the taxpayers
the amount of P5,109.33.
The taxpayers filed a motion for reconsideration (MR) claiming that the amounts of P1,400
and P1,849.32 as manager's residential expenses in 1948 should not be included in their
taxable net income for the reason that they are of the same nature as the rentals for the
apartment, they being mainly expenses for utilities as light, water and telephone in the
apartment furnished by the husband-taxpayer's employer. CIR filed an opposition to their
MR and also filed a separate MR of the decision claiming that his assessment under review
was correct and should have been affirmed, to which the taxpayers opposed. CTA denied
both MRs.
Issue:
Whether the following items form part of the taxpayers’ taxable income:
1. Allowances for rental of the apartment furnished by Arthur’s employer corporation,
including utilities such as light, water, telephone, etc.
2. Allowance for travel expenses given by Arthur’s employer-corporation to his wife,
Marie, in 1952.
3. The amount of P1,400 and P1,849.32 (total of P3,249.32) for "manager's residential
expense" in 1948.
Held:
Section 29, Commonwealth Act No. 466, National Internal Revenue Code, provides:
"Gross income" includes gains, profits, and income derived from salaries, wages, or
compensation for personal service of whatever kind and in whatever form paid, or from
professions, vocations, trades, businesses, commerce, sales, or dealings in property,
whether real or personal, growing out of the ownership or use of or interest, in such
property; also from interest, rents, dividend, securities, or the transactions of any business
carried on for gain or profit, or gains, profits, an income derived; from any source
whatever. (Italics supplied.)
1. Part of the taxpayers’ taxable income but only the amount of P4,800 annually.
The fact that the taxpayers had to live or did not have to live in the apartments
chosen by the husband taxpayer's employer-corporation is of no moment, for no
part of the allowances in question redounded to their personal benefit or was
retained by them. Their bills for rental and utilities were paid directly by the
employer-corporation to the creditors. Nevertheless, as correctly held by the CTA,
the taxpayers are entitled only to a ratable value of the allowances in question, and
only the amount of P4,800 annually, the reasonable amount they would have spent
for house rental and utilities such as light, water, telephone, etc. should be the
amount subject to tax, and the excess considered as expenses of the corporation.
2. Not part of the taxpayers’ taxable income. The findings of the CTA that the wife-
taxpayer had to make a trip to New York at the behest of her husband's employer-
corporation to help in drawing up the plans and specifications of a proposed
building, is also supported by the evidence. The parts of the letters written by the
wife-taxpayer to her husband while in New York and the letter written by the
husband-taxpayer to Mr. C. V. Starr support the said findings. No part of the
allowance for travelling expenses redounded to the benefit of the taxpayers. Neither
was a part thereof retained by them. The fact that she had herself operated on for
tumors while in New York was, but incidental to her stay there and she must have
merely taken advantage of her presence in that city to undergo the operation.
3. Not part of the taxpayers’ taxable income. The taxpayers claim that the CTA erred
in considering the amount of P1,400 and P1,849.32, or a total of P3,249.32, for
"manager's residential expense" in 1948 as taxable income despite the fact "that
they were of the same nature as the rentals for the apartment, they being expenses
for utilities, such as light, water and telephone necessarily incidental to the
apartment furnished to him by his employer."
Mrs. Cresencia Perez Ramos, an examiner of the BIR who examined the books of
account of the American International Underwriters for the Philippines, Inc.,
testified that the total amount of P3,249.32 was reflected in its books as "living
expenses of Mr. and Mrs. Arthur Henderson in the quarters they occupied in 1948;"
and that "the amount of P1,400 was included as manager's residential expense
while the amount of P1,849.32 was entered as profit and loss account."
Buenaventura Loberiza, acting head of the accounting department of the American
International Underwriters for the Philippines, Inc., testified that rentals utilities,
water, telephone and electric bills of executive of the corporation were entered in
the books of account as "subsistence allowances and expenses;" that there was a
separate account for salaries and wages of employees and officers; and that
expenses for rentals and other utilities were not charged to salary accounts.
The taxpayers' claim is supported by the evidence. The total amount of P3,249.32
"for manager's residential expense" in 1948 should be treated as rentals for
apartments and utilities and should not form part of the ratable value subject to tax.
The CTA judgment is modified; CIR is ordered to refund to the taxpayers the sum of
P5,986.61.
