G.R. No. 15014 - Ledesma vs. Collector of Internal Revenue

A corporation or individual engaged in business in the Philippines has the authority to determine employee compensation.
Employee compensation is classified as a business expense and is essential for calculating income tax.
Properly accounting for these expenses allows for an accurate determination of net income for tax purposes.

The plaintiff initiated legal action in the Court of First Instance of Occidental Negros on March 11, 1918, seeking to recover P10,065.44 paid under protest to the defendants.
The dispute arose from the plaintiff's income tax declaration for the year 1916, where he claimed various deductions, including:
- P135,229.10 for employee compensation.
- P6,281.55 for depreciation of stock.
- P8,000 for personal exemption.
The defendants rejected these deductions, insisting on the full income amount for tax assessment.

The plaintiff asserted that the P135,229.10 paid to employees was a fixed percentage of annual gains based on their roles and responsibilities.
The Attorney-General countered that these payments were bonuses or profit distributions, not legitimate business expenses.
Regarding the P6,281.55 deduction for stock depreciation, the Attorney-General argued that it should not be allowed until the stock was sold.

The trial court determined that the payments to employees were not bonuses but rather fixed and reasonable compensation for their services.
The court found insufficient evidence to support the plaintiff's claim for the P6,281.55 deduction for stock depreciation.
Ultimately, the court ruled that the defendants had unlawfully collected P9,199.55 from the plaintiff and ordered its return without interest or costs.

Both parties appealed the lower court's decision.
The plaintiff's appeal focused on the denial of interest on the recovered amount, which was not permitted under Section 1579 of Act No. 2711, applicable at the time.
The Attorney-General argued that the lower court erred in recognizi...continue reading