ISHWAR JETHMAL RAMNANI v.

THE COMMISSIONER
OF INTERNAL REVENUE NS TRANSPORT SERVICES
C.T.A. CASE NO. 5l08 l3 September
l996
Doctrine:
The law on lncome Taxation provides a more liberal
interpretation of who may be considered a resident alien.
Money judgement, which forms part of income, is subject
to income tax except for damages and return of capital.
Fact:
lshwar Ramnani and his spouse are American citizens
who invested in real estate in the Philippines. Choithram
Ramnani, as attorney-in-fact, bought two parcels of land
and erected buildings and improvements. Through the
years, the properties earned income for leasing the same
to various companies such as the Ortigas and Co., Ltd.
Partnership.
The Supreme Court decided in two cases in favor of
lshwar, ordering Choithram and Ortigas to pay spouses
lshwar Ramnani their share in the rental income, fair
market value of the property, moral and exemplary
damages, and attorney's fee. The Supreme Court further
ordered the trial court to determine the fair market value of
the property and to execute the judgement.
At the Trial Court, parties entered into a tripartite
agreement which provides that the total money judgment
payable to lshwar be Php 65,000,000.00.
Choithram, through counsel, as payers of the said money
judgment, requested the Commissioner of lnternal
Revenue (ClR) for a clarificatory ruling with regard to the
tax implications of such an agreement. The ClR held that
lshwar was a non-resident alien not engage trade or
business in the Philippines. As such, the total tax to be
withheld is P20,l50,000.00, for 30% final income tax on
P65M and l% documentary stamp tax on P65M.
lshwar opposed ClR's ruling and insisted that he is a
resident alien. lshwar filed a Petition for Review with the
Supreme Court.
I!e:
l. Whether or not petitioners are resident aliens YES
2. Whether or not the money judgment are subject to
income tax YES, except the return of capital,
damages and attorney's fees.
Ratio:
l. The law on lncome Taxation provides a more liberal
interpretation of who may be considered a resident
alien.
The Supreme Court was convinced that lshwar's stay
in the Philippines can no longer be considered as
transient. Through the years, lshwar had been
frequently coming to the Philippines and had paying
his Community Residence Certificate therein. The
Commissioner of lmmigration had also changed his
status from temporary visitor to immigrant/resident
alien.
On the other hand, ClR was not able to adduce
evidence that lshwar was a non-resident alien not
engage trade or business in the Philippines. With the
foregoing therefore, lshwar, was held as a resident
alien for purposes of taxation.
2. What is subject to taxation in this money judgement is
the rental income of P24,879,265.00 by 5%
withholding tax. The mount of Pl,243,963.25
therefore should be withheld by the payors.
The Court stated that the essential difference
between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an
instant of time is called capital. A flow of services
rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of
time is called income. Capital is wealth, while lncome
is the service of wealth.
The Court also held that moral and exemplary
damages as well as the attorney's fees are not
subject to income tax.
Hence, the entire Php65M cannot be subject to tax
because part therein is return on capital (fair market
value of the property and its improvements), moral
and exemplary damages and attorney's fees which
are not taxable.
The Court also held that as a resident alien, lshwar is
also entitled to deductions and personal and
additional exemptions.
As such, the Court computed the tax payable as
follows:
Total Money
Judgment
P65,000,000.00
Less:
Capital investment 600,000.00
Moral damages 500,000.00
Exemplary
damages
200,000.00
Attorney's fees 6,500,000.0
0
7,800,000.0
0
Gross
lncome P57,200,000.00
Less
:
40% Optional
Standard Deductions 22,880,000.00
Net lncome P34,320,000.0
0
Less
:
Personal Exemptions l8,000.00
Net Taxable lncome
P34,302,000.0
0
lncome Tax Due
Pl0,247,200.0
0
Less: lncome Tax paid on
4/l5/94
3,823,02l.22
5% Withholding tax on
rentals
l,243,963.25
lncome Tax Payable P5,l80,2l5.53
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