same as deduction for the said years as the amount thereof
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
versus ISABELA CULTURAL CORPORATION,
Respondent.
G.R. No. 172231 | 2007-02-12
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the
September 30, 2005 Decision[1] of the Court of Appeals in CA-
G.R. SP No. 78426 affirming the February 26, 2003 Decision[2] of
the Court of Tax Appeals (CTA) in CTA Case No. 5211, which
cancelled and set aside the Assessment Notices for deficiency
income tax and expanded withholding tax issued by the Bureau
of Internal Revenue (BIR) against respondent Isabela Cultural
Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic
corporation, received from the BIR Assessment Notice No. FAS-1-
86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of
P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR's disallowance of ICC's claimed expense
deductions for professional and security services billed to
and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,[3] for
the year ending December 31, 1985;[4]
(b) Expenses for the legal services [inclusive of retainer
fees] of the law firm Bengzon Zarraga Narciso Cudala
Pecson Azcuna & Bengson for the years 1984 and 1985.[5]
(c) Expense for security services of El Tigre Security &
Investigation Agency for the months of April and May
1986.[6]
(2) The alleged understatement of ICC's interest income
on the three promissory notes due from Realty
Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive
of interest and surcharge) was allegedly due to the failure of ICC
to withhold 1% expanded withholding tax on its claimed
P244,890.00 deduction for security services.[7]
On March 23, 1990, ICC sought a reconsideration of the subject
assessments. On February 9, 1995, however, it received a final
notice before seizure demanding payment of the amounts
stated in the said notices. Hence, it brought the case to the CTA
which held that the petition is premature because the final
notice of assessment cannot be considered as a final decision
appealable to the tax court. This was reversed by the Court of
Appeals holding that a demand letter of the BIR reiterating the
payment of deficiency tax, amounts to a final decision on the
protested assessment and may therefore be questioned before
the CTA. This conclusion was sustained by this Court on July 1,
2001, in G.R. No. 135210.[8] The case was thus remanded to the
CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling
and setting aside the assessment notices issued against ICC. It
held that the claimed deductions for professional and security
services were properly claimed by ICC in 1986 because it was
only in the said year when the bills demanding payment were
sent to ICC. Hence, even if some of these professional services
were rendered to ICC in 1984 or 1985, it could not declare the
could not be determined at that time.
The CTA also held that ICC did not understate its interest income
on the subject promissory notes. It found that it was the BIR which
made an overstatement of said income when it compounded
the interest income receivable by ICC from the promissory notes
of Realty Investment, Inc., despite the absence of a stipulation
in the contract providing for a compounded interest; nor of a
circumstance, like delay in payment or breach of contract, that
would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded
withholding tax on its claimed deduction for security services as
shown by the various payment orders and confirmation receipts
it presented as evidence. The dispositive portion of the CTA's
Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment
Notice No. FAS-1-86-90-000680 for deficiency income tax
in the amount of P333,196.86, and Assessment Notice No.
FAS-1-86-90-000681 for deficiency expanded withholding
tax in the amount of P4,897.79, inclusive of surcharges
and interest, both for the taxable year 1986, are hereby
CANCELLED and SET ASIDE.
SO ORDERED.[9]
Petitioner filed a petition for review with the Court of Appeals,
which affirmed the CTA decision,[10] holding that although the
professional services (legal and auditing services) were
rendered to ICC in 1984 and 1985, the cost of the services was
not yet determinable at that time, hence, it could be considered
as deductible expenses only in 1986 when ICC received the
billing statements for said services. It further ruled that ICC did
not understate its interest income from the promissory notes of
Realty Investment, Inc., and that ICC properly withheld and
remitted taxes on the payments for security services for the
taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General,
filed the instant petition contending that since ICC is using the
accrual method of accounting, the expenses for the
professional services that accrued in 1984 and 1985, should have
been declared as deductions from income during the said years
and the failure of ICC to do so bars it from claiming said
expenses as deduction for the taxable year 1986. As to the
alleged deficiency interest income and failure to withhold
expanded withholding tax assessment, petitioner invoked the
presumption that the assessment notices issued by the BIR are
valid.
The issue for resolution is whether the Court of Appeals correctly:
(1) sustained the deduction of the expenses for professional and
security services from ICC's gross income; and (2) held that ICC
did not understate its interest income from the promissory notes
of Realty Investment, Inc; and that ICC withheld the required 1%
withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary
trade, business, or professional expenses, like expenses paid for
legal and auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been paid or incurred
during the taxable year; (c) it must have been paid or incurred
in carrying on the trade or business of the taxpayer; and (d) it
must be supported by receipts, records or other pertinent
papers.[11]
The requisite that it must have been paid or incurred during the
taxable year is further qualified by Section 45 of the National
Internal Revenue Code (NIRC) which states that: "[t]he
deduction provided for in this Title shall be taken for the taxable
year in which 'paid or accrued' or 'paid or incurred', dependent
upon the method of accounting upon the basis of which the net
income is computed x x x".
Accounting methods for tax purposes comprise a set of rules for
determining when and how to report income and
deductions.[12] In the instant case, the accounting method
used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that
under the accrual method of accounting, expenses not being
claimed as deductions by a taxpayer in the current year when
they are incurred cannot be claimed as deduction from income
for the succeeding year. Thus, a taxpayer who is authorized to
deduct certain expenses and other allowable deductions for
the current year but failed to do so cannot deduct the same for
the next year.[13]
The accrual method relies upon the taxpayer's right to receive
amounts or its obligation to pay them, in opposition to actual
receipt or payment, which characterizes the cash method of
accounting. Amounts of income accrue where the right to
receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed
and determinable in amount, without regard to indeterminacy
merely of time of payment.[14]
For a taxpayer using the accrual method, the determinative
question is, when do the facts present themselves in such a
manner that the taxpayer must recognize income or expense?
The accrual of income and expense is permitted when the all-
events test has been met. This test requires: (1) fixing of a right to
income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed,
and the amount of such income or liability be determined with
reasonable accuracy. However, the test does not demand that
the amount of income or liability be known absolutely, only that
a taxpayer has at his disposal the information necessary to
compute the amount with reasonable accuracy. The all-events
test is satisfied where computation remains uncertain, if its basis
is unchangeable; the test is satisfied where a computation may
be unknown, but is not as much as unknowable, within the
taxable year. The amount of liability does not have to be
determined exactly; it must be determined with "reasonable
accuracy." Accordingly, the term "reasonable accuracy"
implies something less than an exact or completely accurate
amount.[15]
The propriety of an accrual must be judged by the facts that a
taxpayer knew, or could reasonably be expected to have
known, at the closing of its books for the taxable year.[16]
Accrual method of accounting presents largely a question of
fact; such that the taxpayer bears the burden of proof of
establishing the accrual of an item of income or deduction.[17]
Corollarily, it is a governing principle in taxation that tax
exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority; and one
who claims an exemption must be able to justify the same by the
clearest grant of organic or statute law. An exemption from the
common burden cannot be permitted to exist upon vague
implications. And since a deduction for income tax purposes
partakes of the nature of a tax exemption, then it must also be
strictly construed.[18]
In the instant case, the expenses for professional fees consist of
expenses for legal and auditing services. The expenses for legal
services pertain to the 1984 and 1985 legal and retainer fees of
the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, and for reimbursement of the expenses of said firm in
connection with ICC's tax problems for the year 1984. As testified
by the Treasurer of ICC, the firm has been its counsel since the
1960's.[19] From the nature of the claimed deductions and the
span of time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees charged
by the firm as well as the compensation for its legal services. The
failure to determine the exact amount of the expense during the
taxable year when they could have been claimed as
deductions cannot thus be attributed solely to the delayed
billing of these liabilities by the firm. For one, ICC, in the exercise
of due diligence could have inquired into the amount of their
obligation to the firm, especially so that it is using the accrual
method of accounting. For another, it could have reasonably
determined the amount of legal and retainer fees owing to its
familiarity with the rates charged by their long time legal
consultant.
As previously stated, the accrual method presents largely a
question of fact and that the taxpayer bears the burden of
establishing the accrual of an expense or income. However, ICC
failed to discharge this burden. As to when the firm's
performance of its services in connection with the 1984 tax
problems were completed, or whether ICC exercised
reasonable diligence to inquire about the amount of its liability,
or whether it does or does not possess the information necessary
to compute the amount of said liability
with reasonable accuracy, are questions of fact which ICC
never established. It simply relied on the defense of delayed
billing by the firm and the company, which under the
circumstances, is not sufficient to exempt it from being charged
with knowledge of the reasonable amount of the expenses for
legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing
the financial statements of ICC for the year 1985 cannot be
validly claimed as expense deductions in 1986. This is so because
ICC failed to present evidence showing that even with only
"reasonable accuracy," as the standard to ascertain its liability
to SGV & Co. in the year 1985, it cannot determine the
professional fees which said company would charge for its
services.
ICC thus failed to discharge the burden of proving that the
claimed expense deductions for the professional services were
allowable deductions for the taxable year 1986. Hence, per
Revenue Audit Memorandum Order No. 1-2000, they cannot be
validly deducted from its gross income for the said year and
were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that
these expenses were incurred by ICC in 1986[20] and could
therefore be properly claimed as deductions for the said year.
Anent the purported understatement of interest income from
the promissory notes of Realty Investment, Inc., we sustain the
findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation
and not a compounded one should have been applied by the
BIR. There is indeed no stipulation between the latter and ICC on
the application of compounded interest.[21] Under Article 1959
of the Civil Code, unless there is a stipulation to the contrary,
interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that
ICC truly withheld the required withholding tax from its claimed
deductions for security services and remitted the same to the BIR
is supported by payment order and confirmation receipts.[22]
Hence, the Assessment Notice for deficiency expanded
withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount
of P333,196.86 for deficiency income tax should be cancelled
and set aside but only insofar as the claimed deductions of ICC
for security services. Said Assessment is valid as to the BIR's
disallowance of ICC's expenses for professional services. The
Court of Appeal's cancellation of Assessment Notice No. FAS-1-
86-90-000681 in the amount of P4,897.79 for deficiency
expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September
30, 2005 Decision of the Court of Appeals in CA-G.R. SP No.
78426, is AFFIRMED with the MODIFICATION that Assessment
Notice No. FAS-1-86-90-000680, which disallowed the expense
deduction of Isabela Cultural Corporation for professional and
security services, is declared valid only insofar as the expenses
for the professional fees of SGV & Co. and of the law firm,
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson,
are concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela
Cultural Corporation's liability under Assessment Notice No. FAS-
1-86-90-000680. SO ORDERED.

FIRST DIVISION
[G.R. Nos. L-28508-9. July 7, 1989.]
ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil
Company), petitioner, vs. THE COMMISSIONER OF INTERNAL
REVENUE, respondent.
SYLLABUS
1. STATUTORY CONSTRUCTION; LEGISLATIVE HISTORY OF AN
ACT RESORTED TO ONLY WHERE THE LANGUAGE OF THE STATUTE IS
AMBIGUOUS. — Only in extremely doubtful matters of interpretation
does the legislative history of an act of Congress become
important. As a matter of fact, there may be no resort to the
legislative history of the enactment of a statute, the language of
which is plain and unambiguous, since such legislative history may
only be resorted to for the purpose of solving doubt, not for the
purpose of creating it. [50 Am. Jur. 328.]
2. TAXATION; REPUBLIC ACT NO. 2009, MARGIN FEE; NOT A
TAX BUT AN EXACTION. — A margin fee is not a tax but an exaction
designed to curb the excessive demands upon our international
reserve. (Caltex [Phil.] Inc. v. Acting Commissioner of Customs, 22
SCRA 779; Chamber of Agriculture and Natural Resources of the
Philippines v. Central Bank, 14 SCRA 630).
3. ID.; ID.; AN EXERCISE OF POLICE POWER. — The margin
fee under Republic Act No. 2009 was imposed by the State in the
exercise of its police power and not the power of taxation.
4. ID.; ID.; NOT A DEDUCTIBLE EXPENSE; REASON. — The fees
were paid for the remittance by ESSO as part of the profits to the
head office in the United States. Such remittance was an
expenditure necessary and proper for the conduct of its corporate
affairs. As stated in the Lopez case, the margin fees are not
expenses in connection with the production or earning of
petitioner's incomes in the Philippines. They were expenses incurred
in the disposition of said incomes; expenses for the remittance of
funds after they have already been earned by petitioner's branch
in the Philippines for the disposal of its Head Office in New York
which is already another distinct and separate income taxpayer.
5. ID.; NATIONAL INTERNAL REVENUE CODE; INCOME TAX
ON BUSINESS; CONDITIONS FOR DEDUCTIBILITY OF EXPENSE. — We
come, then, to the statutory test of deductibility where it is axiomatic
that to be deductible as a business expense, three conditions are
imposed, namely: (1) the expense must be ordinary and necessary,
(2) it must be paid or incurred within the taxable year, and (3) it must
be paid or incurred in carrying on a trade or business. In addition,
not only must the taxpayer meet the business test, he must
substantially prove by evidence or records the deductions claimed
under the law, otherwise, the same will be disallowed. The mere
allegation of the taxpayer that an item of expense is ordinary and
necessary does not justify its deduction. (Atlas Consolidated Mining
and Development Corporation v. Commissioner of Internal
Revenue, 102 SCRA 246)
6. ID.; ID.; CLAIMS FOR DEDUCTIONS, A MATTER OF
LEGISLATIVE GRACE AND CONSTRUED STRICTLY AGAINST THE
TAXPAYER. — The paramount rule is that claims for deductions are
a matter of legislative grace and do not turn on mere equitable
considerations. . . . The taxpayer in every instance has the burden
of justifying the allowance of any deduction claimed.
DECISION
CRUZ, J p:
On appeal before us is the decision of the Court of Tax
Appeals 1 denying petitioner's claims for refund of overpaid income
taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases
No. 1251 and 1558 respectively.
I
In CTA Case No. 1251, petitioner ESSO deducted from its
gross income for 1959, as part of its ordinary and necessary business
expenses, the amount it had spent for drilling and exploration of its
petroleum concessions. This claim was disallowed by the
respondent Commissioner of Internal Revenue on the ground that
the expenses should be capitalized and might be written off as a
loss only when a "dry hole" should result. ESSO then filed an
amended return where it asked for the refund of P323,279.00 by
reason of its abandonment as dry holes of several of its oil wells. Also
claimed as ordinary and necessary expenses in the same return was
the amount of P340,822.04, representing margin fees it had paid to
the Central Bank on its profit remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of
P221,033.00 only, disallowing the claimed deduction for the margin
fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency
income tax for the year 1960, in the amount of P367,994.00, plus 18%
interest thereon of P66,238.92 for the period from April 18, 1961 to
April 18, 1964, for a total of P434,232.92. The deficiency arose from
the disallowance of the margin fees of P1,226,647.72 paid by ESSO
to the Central Bank on its profit remittances to its New York head
office. LibLex
ESSO settled this deficiency assessment on August 10,
1964, by applying the tax credit of P221,033.00 representing its
overpayment on its income tax for 1959 and paying under protest
the additional amount of P213,201.92. On August 13, 1964, it
claimed the refund of P39,787.94 as overpayment on the interest on
its deficiency income tax. It argued that the 18% interest should
have been imposed not on the total deficiency of P367,944.00 but
only on the amount of P146,961.00, the difference between the
total deficiency and its tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging
the 18% interest on the entire amount of the deficiency tax. On May
4, 1965, the CIR also denied the claims of ESSO for refund of the
overpayment of its 1959 and 1960 income taxes, holding that the
margin fees paid to the Central Bank could not be considered taxes
or allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of
P102,246.00 for 1959, contending that the margin fees were
deductible from gross income either as a tax or as an ordinary and
necessary business expense. It also claimed an overpayment of its
tax by P434,232.92 in 1960, for the same reason. Additionally, ESSO
argued that even if the amount paid as margin fees were not legally
deductible, there was still an overpayment by P39,787.94 for 1960,
representing excess interest.
After trial, the CTA denied petitioner's claim for refund of
P102,246.00 for 1959 and P434,234.92 for 1960 but sustained its claim
for P39,787.94 as excess interest. This portion of the decision was
appealed by the CIR but was affirmed by this Court in Commissioner
of Internal Revenue v. ESSO, G.R. No. L-28502-03, promulgated on
April 18, 1989. ESSO for its part appealed the CTA decision denying
its claims for the refund of the margin fees P102,246.00 for 1959 and
P434,234.92 for 1960. That is the issue now before us.
II
The first question we must settle is whether R.A. 2009,
entitled An Act to Authorize the Central Bank of the Philippines to
Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is
a police measure or a revenue measure. If it is a revenue measure,
the margin fees paid by the petitioner to the Central Bank on its
profit remittances to its New York head office should be deductible
from ESSO's gross income under Sec. 30(c) of the National Internal
Revenue Code. This provides that all taxes paid or accrued during
or within the taxable year and which are related to the taxpayer's
trade, business or profession are deductible from gross income.
The petitioner maintains that margin fees are taxes and
cites the background and legislative history of the Margin Fee Law
showing that R.A. 2609 was nothing less than a revival of the 17%
excise tax on foreign exchange imposed by R.A. 601. This was a
revenue measure formally proposed by President Carlos P. Garcia
to Congress as part of, and in order to balance, the budget for 1959-
1960. It was enacted by Congress as such and, significantly,
properly originated in the House of Representatives. During its two
and a half years of existence, the measure was one of the major
sources of revenue used to finance the ordinary operating
expenditures of the government. It was, moreover, payable out of
the General Fund.
On the claimed legislative intent, the Court of Tax Appeals,
quoting established principles, pointed out that —
We are not unmindful of the rule that
opinions expressed in debates, actual proceedings
of the legislature, steps taken in the enactment of
a law, or the history of the passage of the law
through the legislature, may be resorted to as an
aid in the interpretation of a statute which is
ambiguous or of doubtful meaning. The courts may
take into consideration the facts leading up to,
confident with, and in any way connected with,
the passage of the act, in order that they may
properly interpret the legislative intent. But it is also
well-settled jurisprudence that only in extremely
doubtful matters of interpretation does the
legislative history of an act of Congress become
important. As a matter of fact, there may be no
resort to the legislative history of the enactment of
a statute, the language of which is plain and
unambiguous, since such legislative history may
only be resorted to for the purpose of solving doubt,
not for the purpose of creating it. [50 Am. Jur. 328.]
 Apart from the above consideration, there are at least two
cases where we have held that a margin fee is not a tax but an
exaction designed to curb the excessive demands upon our
international reserve.
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2
the Court stated through Justice Jose P. Bengzon:
A margin levy on foreign exchange is a
form of exchange control or restriction designed to
discourage imports and encourage exports, and
ultimately, `curtail any excessive demand upon the
international reserve' in order to stabilize the
currency. Originally adopted to cope with balance
of payment pressures, exchange restrictions have
come to serve various purposes, such as limiting
non-essential imports, protecting domestic industry
— and when combined with the use of multiple
currency rates — providing a source of revenue to
the government, and are in many developing
countries regarded as a more or less inevitable
concomitant of their economic development
programs. The different measures of exchange
control or restriction cover different phases of
foreign exchange transactions, i.e., in quantitative
restriction, the control is on the amount of foreign
exchange allowable. In the case of the margin
levy, the immediate impact is on the rate of foreign
exchange; in fact, its main function is to control the
exchange rate without changing the par value of
the peso as fixed in the Bretton Woods Agreement
Act. For a member nation is not supposed to alter
its exchange rate (at par value) to correct a merely
temporary disequilibrium in its balance of
payments. By its nature, the margin levy is part of
the rate of exchange as fixed by the government.
As to the contention that the margin levy
is a tax on the purchase of foreign exchange and
hence should not form part of the exchange rate,
suffice it to state that We have already held the
contrary for the reason that a tax is levied to
provide revenue for government operations, while
the proceeds of the margin fee are applied to
strengthen our country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources
of the Philippines v. Central Bank, 3 the same idea was expressed,
though in connection with a different levy, through Justice J.B.L.
Reyes:
Neither do we find merit in the argument
that the 20% retention of exporter's foreign
exchange constitutes an export tax. A tax is a levy
for the purpose of providing revenue for
government operations, while the proceeds of the
20% retention, as we have seen, are applied to
strengthen the Central Bank's international reserve.
We conclude then that the margin fee was imposed by
the State in the exercise of its police power and not the power of
taxation.
Alternatively, ESSO prays that if margin fees are not taxes,
they should nevertheless be considered necessary and ordinary
business expenses and therefore still deductible from its gross
income. The fees were paid for the remittance by ESSO as part of
the profits to the head office in the United States. Such remittance
was an expenditure necessary and proper for the conduct of its
corporate affairs.
The applicable provision is Section 30(a) of the National
Internal Revenue Code reading as follows:
SEC. 30. Deductions from gross income.—
In computing net income there shall be allowed as
deductions —
(a) Expenses:
(1) In general. — All the ordinary and
necessary expenses paid or incurred during the
taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or
other compensation for personal services actually
rendered; traveling expenses while away from
home in the pursuit of a trade or business; and
rentals or other payments required to be made as
a condition to the continued use or possession, for
the purpose of the trade or business, of property to
which the taxpayer has not taken or is not taking
title or in which he has no equity.
(2) Expenses allowable to non-resident
alien individuals and foreign corporations. — In the
case of a non-resident alien individual or a foreign
corporation, the expenses deductible are the
necessary expenses paid or incurred in carrying on
any business or trade conducted within the
Philippines exclusively.
In the case of Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue, 4
the Court laid down the rules on the deductibility of business
expenses, thus:
The principle is recognized that when a
taxpayer claims a deduction, he must point to
some specific provision of the statute in which that
deduction is authorized and must be able to prove
that he is entitled to the deduction which the law
allows. As previously adverted to, the law allowing
expenses as deduction from gross income for
purposes of the income tax is Section 30(a) (1) of
the National Internal Revenue which allows a
deduction of 'all the ordinary and necessary
expenses paid or incurred during the taxable year
in carrying on any trade or business.' An item of
expenditure, in order to be deductible under this
section of the statute, must fall squarely within its
language.
We come, then, to the statutory test of
deductibility where it is axiomatic that to be
deductible as a business expense, three conditions
are imposed, namely: (1) the expense must be
ordinary and necessary, (2) it must be paid or
incurred within the taxable year, and (3) it must be
paid or incurred in carrying on a trade or business.
In addition, not only must the taxpayer meet the
business test, he must substantially prove by
evidence or records the deductions claimed under
the law, otherwise, the same will be disallowed. The
mere allegation of the taxpayer that an item of
expense is ordinary and necessary does not justify
its deduction.
While it is true that there is a number of
decisions in the United States delving on the
interpretation of the terms 'ordinary and necessary,
as used in the federal tax laws, no adequate or
satisfactory definition of those terms is possible.
Similarly, this Court has never attempted to define
with precision the terms 'ordinary and necessary.'
There are however, certain guiding principles
worthy of serious consideration in the proper
adjudication of conflicting claims. Ordinarily, an
expense will be considered `necessary, where the
expenditure is appropriate and helpful in the
development of the taxpayer's business. It is
'ordinary' when it connotes a payment which is
normal in relation to the business of the taxpayer
and the surrounding circumstances. The term
'ordinary' does not require that the payments be
habitual or normal in the sense that the same
taxpayer will have to make them often; the
payment may be unique or non-recurring to the
particular taxpayer affected.
There is thus no hard and fast rule on the
matter. The right to a deduction depends in each
case on the particular facts and the relation of the
payment to the type of business in which the
taxpayer is engaged. The intention of the taxpayer
often may be the controlling fact in making the
determination. Assuming that the expenditure is
ordinary and necessary in the operation of the
taxpayer's business, the answer to the question as
to whether the expenditure is an allowable
deduction as a business expense must be
determined from the nature of the expenditure
itself, which in turn depends on the extent and
permanency of the work accomplished by the
expenditure.
In the light of the above explanation, we hold that the
Court of Tax Appeals did not err when it held on this issue as follows:
Considering the foregoing test of what
constitutes an ordinary and necessary deductible
expense, it may be asked: Were the margin fees
paid by petitioner on its profit remittances to its
Head Office in New York appropriate and helpful in
the taxpayer's business in the Philippines? Were the
 margin fees incurred for purposes proper to the
conduct of the affairs of petitioner's branch in the
Philippines? Or were the margin fees incurred for
the purpose of realizing a profit or of minimizing a
loss in the Philippines? Obviously not. As stated in
the Lopez case, the margin fees are not expenses
in connection with the production or earning of
petitioner's incomes in the Philippines. They were
expenses incurred in the disposition of said
incomes; expenses for the remittance of funds after
they have already been earned by petitioner's
branch in the Philippines for the disposal of its Head
Office in New York which is already another distinct
and separate income taxpayer.

xxx xxx xxx

Since the margin fees in question were

incurred for the remittance of finds to petitioner's
Head Office in New York, which is a separate and
distinct income taxpayer from the branch in the
Philippines, for its disposal abroad, it can never be
said therefore that the margin fees were
appropriate and helpful in the development of
petitioner's business in the Philippines exclusively or
were incurred for purposes proper to the conduct
of the affairs of petitioner's branch in the Philippines
exclusively or for the purpose of realizing a profit or
of minimizing a loss in the Philippines exclusively. If
at all, the margin fees were incurred for purposes
proper to the conduct of the corporate affairs of
Standard Vacuum Oil Company in New York, but
certainly not in the Philippines.

ESSO has not shown that the remittance to the head office
of part of its profits was made in furtherance of its own trade or
business. The petitioner merely presumed that all corporate
expenses are necessary and appropriate in the absence of a
showing that they are illegal or ultra vires. This is error. The public
respondent is correct when it asserts that "the paramount rule is that
claims for deductions are a matter of legislative grace and do not
turn on mere equitable considerations . . . The taxpayer in every
instance has the burden of justifying the allowance of any
deduction claimed." 5
It is clear that ESSO, having assumed an expense properly
attributable to its head office, cannot now claim this as an ordinary
and necessary expense paid or incurred in carrying on its own trade
or business. cdrep
WHEREFORE, the decision of the Court of Tax Appeals
denying the petitioner's claims for refund of P102,246.00 for 1959 and
P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner.
SO ORDERED.
||| (Esso Standard Eastern, Inc. v. Commissioner of Internal Revenue,
G.R. Nos. L-28508-9, [July 7, 1989], 256 PHIL 601-610)

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
GENERAL FOODS (PHILS.), INC., respondent.
G.R. No. 143672 | 2003-04-24
DECISION
CORONA, J.:
Petitioner Commissioner of Internal Revenue (Commissioner) assails the
resolution[1] of the Court of Appeals reversing the decision[2] of the
Court of Tax Appeals which in turn denied the protest filed by
respondent General Foods (Phils.), Inc., regarding the assessment
made against the latter for deficiency taxes.
The records reveal that, on June 14, 1985, respondent corporation,
which is engaged in the manufacture of beverages such as "Tang,"
"Calumet" and "Kool-Aid," filed its income tax return for the fiscal year
ending February 28, 1985. In said tax return, respondent corporation
claimed as deduction, among other business expenses, the amount of
P9,461,246 for media advertising for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the
deduction claimed by respondent corporation. Consequently,
respondent corporation was assessed deficiency income taxes in the
amount of P2,635, 141.42. The latter filed a motion for reconsideration
but the same was denied.
On September 29, 1989, respondent corporation appealed to the
Court of Tax Appeals but the appeal was dismissed:
With such a gargantuan expense for the advertisement of a singular
product, which even excludes "other advertising and promotions"
expenses, we are not prepared to accept that such amount is
reasonable "to stimulate the current sale of merchandise" regardless of
Petitioner's explanation that such expense "does not connote
unreasonableness considering the grave economic situation taking
place after the Aquino assassination characterized by capital fight,
strong deterioration of the purchasing power of the Philippine peso and
the slacking demand for consumer products" (Petitioner's
Memorandum, CTA Records, p. 273). We are not convinced with such
an explanation. The staggering expense led us to believe that such
expenditure was incurred "to create or maintain some form of good will
for the taxpayer's trade or business or for the industry or profession of
which the taxpayer is a member." The term "good will" can hardly be
said to have any precise signification; it is generally used to denote the
benefit arising from connection and reputation (Words and Phrases,
Vol. 18, p. 556 citing Douhart vs. Loagan, 86 III. App. 294). As held in the
case of Welch vs. Helvering, efforts to establish reputation are akin to
acquisition of capital assets and, therefore, expenses related thereto
are not business expenses but capital expenditures. (Atlas Mining and
Development Corp. vs. Commissioner of Internal Revenue, supra). For
sure such expenditure was meant not only to generate present sales
but more for future and prospective benefits. Hence, "abnormally large
expenditures for advertising are usually to be spread over the period of
years during which the benefits of the expenditures are received"
(Mertens, supra, citing Colonial Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the case
appealed from, we hereby RESOLVE to DISMISS the instant petition for
lack of merit and ORDER the Petitioner to pay the respondent
Commissioner the assessed amount of P2,635,141.42 representing its
deficiency income tax liability for the fiscal year ended February 28,
1985."[3]
Aggrieved, respondent corporation filed a petition for review at the
Court of Appeals which rendered a decision reversing and setting
aside the decision of the Court of Tax Appeals:
Since it has not been sufficiently established that the item it claimed as
a deduction is excessive, the same should be allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc.
is hereby GRANTED. Accordingly, the Decision, dated 8 February 1994
of respondent Court of Tax Appeals is REVERSED and SET ASIDE and the
letter, dated 31 May 1988 of respondent Commissioner of Internal
Revenue is CANCELLED.
SO ORDERED.[4]
Thus, the instant petition, wherein the Commissioner presents for the
Court's consideration a lone issue: whether or not the subject media
advertising expense for "Tang" incurred by respondent corporation was
an ordinary and necessary expense fully deductible under the National
Internal Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of
the taxing authority;[5] and he who claims an exemption must be able
to justify his claim by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist
upon vague implications.[6]
Deductions for income tax purposes partake of the nature of tax
exemptions; hence, if tax exemptions are strictly construed, then
deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was
the media advertising expense for "Tang" paid or incurred by
respondent corporation for the fiscal year ending February 28, 1985
"necessary and ordinary," hence, fully deductible under the NIRC? Or
was it a capital expenditure, paid in order to create "goodwill and
reputation" for respondent corporation and/or its products, which
should have been amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional expenses.-
(a) In general.- There shall be allowed as deduction from gross income
all ordinary and necessary expenses paid or incurred during the
taxable year in carrying on, or which are directly attributable to, the
development, management, operation and/or conduct of the trade,
business or exercise of a profession.
Simply put, to be deductible from gross income, the subject advertising
expense must comply with the following requisites: (a) the expense
must be ordinary and necessary; (b) it must have been paid or incurred
during the taxable year; (c) it must have been paid or incurred in
carrying on the trade or business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent papers.[7]
The parties are in agreement that the subject advertising expense was
paid or incurred within the corresponding taxable year and was
incurred in carrying on a trade or business. Hence, it was necessary.
However, their views conflict as to whether or not it was ordinary. To be
deductible, an advertising expense should not only be necessary but
also ordinary. These two requirements must be met.
The Commissioner maintains that the subject advertising expense was
not ordinary on the ground that it failed the two conditions set by U.S.
jurisprudence: first, "reasonableness" of the amount incurred and
second, the amount incurred must not be a capital outlay to create
"goodwill" for the product and/or private respondent's business.
Otherwise, the expense must be considered a capital expenditure to
be spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the
reasonableness of an advertising expense. There being no hard and
fast rule on the matter, the right to a deduction depends on a number
of factors such as but not limited to: the type and size of business in
which the taxpayer is engaged; the volume and amount of its net
earnings; the nature of the expenditure itself; the intention of the
taxpayer and the general economic conditions. It is the interplay of
these, among other factors and properly weighed, that will yield a
proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising
expense for "Tang" alone was almost one-half of its total claim for
"marketing expenses." Aside from that, respondent-corporation also
claimed P2,678,328 as "other advertising and promotions expense" and
another P1,548,614, for consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for
"Tang" was almost double the amount of respondent corporation's
P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product
to be inordinately large. Therefore, even if it is necessary, it cannot be
considered an ordinary expense deductible under then Section 29 (a)
(1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the
current sale of merchandise or use of services and (2) advertising
designed to stimulate the future sale of merchandise or use of services.
The second type involves expenditures incurred, in whole or in part, to
create or maintain some form of goodwill for the taxpayer's trade or
business or for the industry or profession of which the taxpayer is a
member. If the expenditures are for the advertising of the first kind,
then, except as to the question of the reasonableness of amount, there
is no doubt such expenditures are deductible as business expenses. If,
however, the expenditures are for advertising of the second kind, then
normally they should be spread out over a reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising
expense was of the second kind. Not only was the amount staggering;
the respondent corporation itself also admitted, in its letter protest[8] to
the Commissioner of Internal Revenue's assessment, that the subject
media expense was incurred in order to protect respondent
corporation's brand franchise, a critical point during the period under
review.

The protection of brand franchise is analogous to the maintenance of

goodwill or title to one's property. This is a capital expenditure which
should be spread out over a reasonable period of time.[9]

Respondent corporation's venture to protect its brand franchise was

tantamount to efforts to establish a reputation. This was akin to the
acquisition of capital assets and therefore expenses related thereto
were not to be considered as business expenses but as capital
expenditures.[10]

True, it is the taxpayer's prerogative to determine the amount of

advertising expenses it will incur and where to apply them.[11] Said
prerogative, however, is subject to certain considerations. The first
relates to the extent to which the expenditures are actually capital
outlays; this necessitates an inquiry into the nature or purpose of such
expenditures.[12] The second, which must be applied in harmony with
the first, relates to whether the expenditures are ordinary and
necessary. Concomitantly, for an expense to be considered ordinary, it
must be reasonable in amount. The Court of Tax Appeals ruled that
respondent corporation failed to meet the two foregoing limitations.

We find said ruling to be well founded. Respondent corporation

incurred the subject advertising expense in order to protect its brand
franchise. We consider this as a capital outlay since it created goodwill
for its business and/or product. The P9,461,246 media advertising
expense for the promotion of a single product, almost one-half of
petitioner corporation's entire claim for marketing expenses for that
year under review, inclusive of other advertising and promotion
expenses of P2,678,328 and P1,548,614 for consumer promotion, is
doubtlessly unreasonable.

It has been a long standing policy and practice of the Court to respect
the conclusions of quasi-judicial agencies such as the Court of Tax
Appeals, a highly specialized body specifically created for 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.
H. TAMBUNTING PAWNSHOP, INC., PETITIONER, VS. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT.
G.R. No. 173373 | 2013-07-29
FIRST DIVISION
DECISION
BERSAMIN, J.:
To be entitled to claim a tax deduction, the taxpayer must competently
establish the factual and documentary bases of its claim.
Antecedents
H. Tambunting Pawnshop, Inc. (petitioner), a domestic corporation duly
licensed and authorized to engage in the pawnshop business, appeals
the adverse decision promulgated on April 24, 2006,[1] whereby the
Court of Tax Appeals En Banc (CTA En Banc) affirmed the decision of the
CTA First Division ordering it to pay deficiency income taxes in the
amount of P4,536,687.15 for taxable year 1997, plus 20% delinquency
interest computed from August 29, 2000 until full payment, but
cancelling the compromise penalties for lack of basis.
On June 26, 2000, the Bureau of Internal Revenue (BIR), through then
Acting Regional Director Lucien E. Sayuno of Revenue Region No. 6 in
Manila, issued assessment notices and demand letters, all numbered 32-
1-97, assessing Tambunting for deficiency percentage tax, income tax
and compromise penalties for taxable year 1997,[2] as follows:
On July 26, 2000, Tambunting instituted an administrative protest against
the assessment notices and demand letters with the Commissioner of
Internal Revenue.[3]
On February 21, 2001, Tambunting brought a petition for review in the
CTA, pursuant to Section 228 of theNational Internal Revenue Code of
1997,[4] citing the inaction of the Commissioner of Internal Revenue on its
protest within the 180-day period prescribed by law.
On October 8, 2004, the CTA First Division rendered a decision, the
pertinent portion of which is hereunder quoted, to wit:
In view of all the foregoing verification, petitioner’s allowable deductions
are summarized below:
Apparently, petitioner is still liable for deficiency income tax in the
reduced amount of P4,536,687.15, computed as follows:
WHEREFORE, petitioner is ORDERED to PAY the respondent the amount
of P4,536,687.15 representing deficiency income tax for the year 1997,
plus 20% delinquency interest computed from August 29, 2000 until full
payment thereof pursuant to Section 249 (C) of the National Internal
Revenue Code. However, the compromise penalties in the sum of
P49,000.00 is hereby CANCELLED for lack of legal basis.
SO ORDERED.[5]
After its motion for reconsideration was denied for lack of merit on
February 18, 2005,[6] Tambunting filed a petition for review in the CTA En
Banc, arguing that the First Division erred in disallowing its deductions on
the ground that it had not substantiated them by sufficient evidence.
On April 24, 2006, the CTA En Banc denied Tambunting’s petition for
review,[7] disposing:
WHEREFORE, the Court en banc finds no reversible error to warrant the
reversal of the assailed Decision and Resolution promulgated on
October 8, 2004 and February 11, 2005, respectively, the instant Petition
for Review is hereby DISMISSED. Accordingly, the aforesaid Decision and
Resolution are hereby AFFIRMED in toto.
SO ORDERED.
On June 29, 2006, the CTA En Banc also denied Tambunting’s motion for
reconsideration for its lack of merit.[8]
Issues
Hence, this appeal by petition for review on certiorari.
Tambunting argues that the CTA should have allowed its deductions
because it had been able to point out the provisions of law authorizing
the deductions; that it proved its entitlement to the deductions through
all the documentary and testimonial evidence presented in court;[9] that
the provisions of Section 34 (A)(1)(b) of the 1997National Internal
Revenue Code, governing the types of evidence to prove a claim for
deduction of expenses, were applicable because the law took effect
during the pendency of the case in the CTA;[10] that the CTA had
allowed deductions for ordinary and necessary expenses on the basis of
cash vouchers issued by the taxpayer or certifications issued by the
payees evidencing receipt of interest on loans as well as agreements
relating to the imposition of interest;[11] that it had thus shown beyond
doubt that it had incurred the losses in its auction sales;[12] and that it
substantially complied with the requirements of Revenue Regulations
No. 12-77 on the deductibility of its losses.[13]
On December 5, 2006, the Commissioner of Internal Revenue filed a
comment,[14] stating that the conclusions of the CTA were entitled to
respect,[15] due to its being a highly specialized body specifically
created for the purpose of reviewing tax cases;[16] and that the petition
involved factual and evidentiary matters not reviewable by the Court in
an appeal by certiorari.[17]
On March 22, 2007, Tambunting reiterated its arguments in its reply.[18]
Ruling
The petition has no merit.
At the outset, the Court agrees with the CTA En Banc that because this
case involved assessments relating to transactions incurred by
Tambunting prior to the effectivity of Republic Act No. 8424 (National
Internal Revenue Code of 1997, or NIRC of 1997), the provisions
governing the propriety of the deductions was Presidential Decree 1158
(NIRC of 1977). In that regard, the pertinent provisions of Section 29 (d)
(2) & (3)of the NIRC of 1977 state:
xxxx
(2) By corporation. — In the case of a corporation, all losses actually
sustained and charged off within the taxable year and not
compensated for by insurance or otherwise.
(3) Proof of loss. — In the case of a non-resident alien individual or foreign
corporation, the losses deductible are those actually sustained during
the year incurred in business or trade conducted within the Philippines,
and losses actually sustained during the year in transactions entered into
for profit in the Philippines although not connected with their business or
trade, when such losses are not compensated for by insurance or
otherwise. The Secretary of Finance, upon recommendation of the
Commissioner of Internal Revenue, is hereby authorized to promulgate
rules and regulations prescribing, among other things, the time and
manner by which the taxpayer shall submit a declaration of loss
sustained from casualty or from robbery, theft, or embezzlement during
the taxable year: Provided, That the time to be so prescribed in the
regulations shall not be less than 30 days nor more than 90 days from the
date of the occurrence of the casualty or robbery, theft, or
embezzlement giving rise to the loss.
The CTA En Banc ruled thusly:
To prove the loss on auction sale, petitioner submitted in evidence its
“Rematado” and “Subasta” books and the “Schedule of Losses on
Auction Sale”. The “Rematado” book contained a record of items
foreclosed by the pawnshop while the “Subasta” book contained a
record of the auction sale of pawned items foreclosed.
However, as elucidated by the petitioner, the gain or loss on auction sale
represents the difference between the capital (the amount loaned to
the pawnee, the unpaid interest and other expenses incurred in
connection with such loan) and the price for which the pawned articles
were sold, as reflected in the “Subasta” Book. Furthermore, it explained
that the amounts appearing in the “Rematado” book do not reflect the
total capital of petitioner as it merely reflected the amounts loaned to
the pawnee. Likewise, the amounts appearing in the “Subasta” book,
are not representative of the amount of sale made during the “subastas”
since not all articles are eventually sold and disposed of by petitioner.
Petitioner submits that based on the evidence presented, it was able to
show beyond doubt that it incurred the amount of losses on auction sale
claimed as deduction from its gross income for the taxable year 1997.
And that the documents/records submitted in evidence as well as the
facts contained therein were neither contested nor controverted by the
respondent, hence, admitted.
xxxx
In this case, petitioner's reliance on the entries made in the “Subasta”
book were not sufficient to substantiate the claimed deduction of loss
on auction sale. As admitted by the petitioner, the contents in the
“Rematado” and “Subasta” books do not reflect the true amounts of
the total capital and the auction sale, respectively. Be that as it may,
petitioner still failed to adduce evidence to substantiate the other
expenses alleged to have been incurred in connection with the sale of
pawned items.
As correctly held by the Court's Division in the assailed decision, and We
quote:
x x x The remaining evidence is neither conclusive to sustain its claim of
loss on auction sale in the aggregate amount of P4,915,967.50. While it
appears that the basis of respondent is not strong, petitioner,
nevertheless, should not rely on the weakness of such evidence but on
the strength of its own documents. The facts essential for the proper
disposition of the said controversy were available to the petitioner.
Petitioner should have endeavored to make the facts clear to this court.
Sad to say, it failed to dispute the same with clear and convincing proof.
x x x[19]
We affirm the aforequoted ruling of the CTA En Banc.
The rule that tax deductions, being in the nature of tax exemptions, are
to be construed in strictissimi juris against the taxpayer is well
settled.[20] Corollary to this rule is the principle that when a taxpayer
claims a deduction, he must point to some specific provision of the
statute in which that deduction is authorized and must be able to prove
that he is entitled to the deduction which the law allows.[21] An item of
expenditure, therefore, must fall squarely within the language of the law
in order to be deductible.[22] A mere averment that the taxpayer has
incurred a loss does not automatically warrant a deduction from its gross
income.
As the CTA En Banc held, Tambunting did not properly prove that it had
incurred losses. The subasta books it presented were not the proper
evidence of such losses from the auctions because they did not reflect
the true amounts of the proceeds of the auctions due to certain items
having been left unsold after the auctions. The rematado books did not
also prove the amounts of capital because the figures reflected therein
were only the amounts given to the pawnees. It is interesting to note,
too, that the amounts received by the pawnees were not the actual
values of the pawned articles but were only fractions of the real values.
As to business expenses, Section 29 (a) (1) (A) of the NIRC of 1977
provides:
(a) Expenses. — (1) Business expenses.— (A) In general. — All ordinary
and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually rendered;
traveling expenses while away from home in the pursuit of a trade,
profession or business, rentals or other payments required to be made as
a condition to the continued use or possession, for the purpose of the
trade, profession or business, of property to which the taxpayer has not
taken or is not taking title or in which he has no equity.
The requisites for the deductibility of ordinary and necessary trade or
business expenses, like those paid for security and janitorial services,
management and professional fees, and rental expenses, are that: (a)
the expenses must be ordinary and necessary; (b) they must have been
paid or incurred during the taxable year; (c) they must have been paid
or incurred in carrying on the trade or business of the taxpayer; and (d)
they must be supported by receipts, records or other pertinent papers.[23]
In denying Tambunting’s claim for deduction of its security and janitorial
expenses, management and professional fees, and its rental expenses,
the CTA En Banc explained:
Contrary to petitioner’s contention, the security/janitorial expenses paid
to Pathfinder Investigation were not duly substantiated. The certification
issued by Mr. Balisado was not the proper document required by law to
substantiate its expenses. Petitioner should have presented the official
receipts or invoices to prove its claim as provided for under Section 238
of the National Internal Revenue Code of 1977, as amended, to wit:
“SEC. 238. Issuance of receipts or sales or commercial invoices. — All
persons subject to an internal revenue tax shall for each sale or transfer
of merchandise or for services rendered valued at P25.00 or more, issue
receipts or sales or commercial invoices, prepared at least in duplicate,
showing the date of transaction, quantity, unit cost and description of
merchandise or nature of service; Provided, That in the case of sales,
receipts or transfers in the amount of P100.00 or more, or, regardless of
amount, where the sale or transfer is made by persons subject to value-
added tax to other persons also subject to value-added tax; or, where
the receipts is issued to cover payment made as rentals, commissions,
compensation or fees, receipts or invoices shall be issued which shall
show the name, business style, if any, and address of the purchaser,
customer, or client. The original of each receipt or invoice shall be issued
to the purchases, customer or client at the time the transaction is
effected, who, if engaged in business or in the exercise of profession,
shall keep and preserve the same in his place of business for a period of
3 years from the close of the taxable year in which such invoice or
receipt was issued, while the duplicate shall be kept and preserved by
the issuer, also in his place of business, for a like period.
With regard to the misclassified items of expenses, petitioner's statements
were self-serving, likewise it failed to substantiate its allegations by clear
and convincing evidence as provided under the foregoing provision of
law.
Bearing in mind the principle in taxation that deductions from gross
income partake the nature of tax exemptions which are construed in
strictissimi juris against the taxpayer, the Court en banc is not inclined to
believe the self-serving statements of petitioner regarding the
misclassified items of office supplies, advertising and rent expenses.
Among the expenses allegedly incurred, courts may consider only those
supported by credible evidence and which appear to have been
genuinely incurred in connection with the trade or business of the
taxpayer.[24]
xxxx
As previously discussed, the proper substantiation requirement for an
expense to be allowed is the official receipt or invoice. While the rental
payments were subjected to the applicable expanded withholding
taxes, such returns are not the documents required by law to
substantiate the rental expense. Petitioner should have submitted official
receipts to support its claim.
Moreover, the issue on the submission of cash vouchers as evidence to
prove expenses incurred has been addressed by this Court in the
assailed Resolution, to wit:
“The trend then was to allow deductions based on cash vouchers which
are signed by the payees. It bears to note that the cases cited by
petitioner are pronouncements by this Court in 1980, 1982 and 1989.
However, latest jurisprudence has deviated from such interpretation of
the law. Thus, this Court held in the case of Pilmico-Mauri Foods
Corporation vs. Commissioner of Internal Revenue C.T.A. Case No. 6151,
December 15, 2004;
[P]etitioner’s contention that the NIRC of 1977 did not impose
substantiation requirements on deductions from gross income is bereft of
merit. Section 238 of the 1977 Tax Code [now Section 237] provides:
xxxx
From the foregoing provision of law, a person who is subject to an
internal revenue tax shall issue receipts, sales or commercial invoices,
prepared at least in duplicate. The provision likewise imposed a
responsibility upon the purchaser to keep and preserve the original copy
of the invoice or receipt for a period of three years from the close of the
taxable year in which the invoice or receipt was issued. The rationale
behind the latter requirement is the duty of the taxpayer to keep
adequate records of each and every transaction entered into in the
conduct of its business. So that when their books of accounts are
subjected to a tax audit examination, all entries therein could be shown
as adequately supported and proven as legitimate business
transactions. Hence, petitioner’s claim that the NIRC of 1977 did not
require substantiation requirements is erroneous.”
In order that the cash vouchers may be given probative value, these
must be validated with official receipts.[25]
xxxx
Petitioner’s management and professional fees were disallowed as
these were supported merely by cash vouchers, which the Court’s
Division correctly found to have little probative value.[26]
Again, we affirm the foregoing holding of the CTA En Banc for the
reasons therein stated. To reiterate, deductions for income tax purposes
partake of the nature of tax exemptions and are strictly construed
against the taxpayer, who must prove by convincing evidence that he
is entitled to the deduction claimed.[27] Tambunting did not discharge its
burden of substantiating its claim for deductions due to the inadequacy
of its documentary support of its claim. Its reliance on withholding tax
returns, cash vouchers, lessor’s certifications, and the contracts of lease
was futile because such documents had scant probative value. As the
CTA En Banc succinctly put it, the law required Tambunting to support its
claim for deductions with the corresponding official receipts issued by
the service providers concerned.
Regarding proof of loss due to fire, the text of Section 29(d) (2) & (3) of
P.D. 1158 (NIRC of 1977) then in effect, is clear enough, to wit:
(2) By corporation. — In the case of a corporation, all losses actually
sustained and charged off within the taxable year and not
compensated for by insurance or otherwise.
(3) Proof of loss. — In the case of a non-resident alien individual or foreign
corporation, the losses deductible are those actually sustained during
the year incurred in business or trade conducted within the Philippines,
and losses actually sustained during the year in transactions entered into
for profit in the Philippines although not connected with their business or
trade, when such losses are not compensated for by insurance or
otherwise. The Secretary of Finance, upon recommendation of the
Commissioner of Internal Revenue, is hereby authorized to promulgate
rules and regulations prescribing, among other things, the time and
manner by which the taxpayer shall submit a declaration of loss
sustained from casualty or from robbery, theft, or embezzlement during
the taxable year: Provided, That the time to be so prescribed in the
regulations shall not be less than 30 days nor more than 90 days from the
date of the occurrence of the casualty or robbery, theft, or
embezzlement giving rise to the loss.
The implementing rules for deductible losses are found in Revenue
Regulations No. 12-77, as follows:
SECTION 1. Nature of deductible losses.— Any loss arising from fires,
storms or other casualty, and from robbery, theft or embezzlement, is
allowable as a deduction under Section 30 (d) for the taxable year in
which the loss is sustained. The term “casualty” is the complete or partial
destruction of property resulting from an identifiable event of a sudden,
unexpected, or unusual nature. It denotes accident, some sudden
invasion by hostile agency, and excludes progressive deterioration
through steadily operating cause. Generally, theft is the criminal
appropriation of another’s property for the use of the taker.
Embezzlement is the fraudulent appropriation of another's property by a
person to whom it has been entrusted or into whose hands it has lawfully
come.
SECTION 2. Requirements of substantiation. — The taxpayer bears the
burden of proving and substantiating his claim for deduction for losses
allowed under Section 30 (d) and should comply with the following
substantiation requirements:
(a) A declaration of loss which must be filed with the Commissioner of
Internal Revenue or his deputies within a certain period prescribed in
these regulations after the occurrence of the casualty, robbery, theft or
embezzlement.
(b) Proof of the elements of the loss claimed, such as the actual nature
and occurrence of the event and amount of the loss.
SECTION 3. Declaration of loss. — Within forty-five days after the date of
the occurrence of casualty or robbery, theft or embezzlement, a
taxpayer who sustained loss therefrom and who intends to claim the loss
as a deduction for the taxable year in which the loss was sustained shall
file a sworn declaration of loss with the nearest Revenue District Officer.
The sworn declaration of loss shall contain, among other things, the
following information:
(a)The nature of the event giving rise to the loss and the time of its
occurrence;
(b) A description of the damaged property and its location;
(c)The items needed to compute the loss such as cost or other basis of
the property; depreciation allowed or allowable if any; value of property
before and after the event; cost of repair;
(d) Amount of insurance or other compensation received or receivable.
Evidence to support these items should be furnished, if available.
Examples are purchase contracts and deeds, receipted bills for
improvements, and pictures and competent appraisals of the property
before and after the casualty.
SECTION 4. Proof of loss.— (a) In general. — The declaration of loss, being
one of the essential requirements of substantiation of a claim for a loss
deduction, is subject to verification and does not constitute sufficient
proof of the loss that will justify its deductibility for income tax purposes.
Therefore, the mere filing of a declaration of loss does not automatically
entitle the taxpayer to deduct the alleged loss from gross income. The
failure, however, to submit the said declaration of loss within the period
prescribed in these regulations will result in the disallowance of the
casualty loss claimed in the taxpayer's income tax return. The taxpayer
should therefore file a declaration of loss and should be prepared to
support and substantiate the information reported in the said
declaration with evidence which he should gather immediately or as
soon as possible after the occurrence of the casualty or event causing
the loss.
xxxx
(b) Casualty loss. — Photographs of the property as it existed before it
was damaged will be helpful in showing the condition and value of the
property prior to the casualty. Photographs taken after the casualty
which show the extent of damage will be helpful in establishing the
condition and value of the property after it was damaged. Photographs
showing the condition and value of the property after it was repaired,
restored or replaced may also be helpful.
Furthermore, since the valuation of the property is of extreme
importance in determining the amount of loss sustained, the taxpayer
should be prepared to come forward with documentary proofs, such as
cancelled checks, vouchers, receipts and other evidence of cost.

The foregoing evidence should be kept by the taxpayer as part of his tax
records and be made available to a revenue examiner, upon audit of
his income tax return and the declaration of loss.

(c) Robbery, theft or embezzlement losses. — To support the deduction

for losses arising from robbery, theft or embezzlement, the taxpayer must
prove by credible evidence all the elements of the loss, the amount of
the loss, and the proper year of the deduction. The taxpayer bears the
burden of proof, and no deduction will be allowed unless he shows the
property was stolen, rather than misplaced or lost. A mere
disappearance of property is not enough, nor is a mere error or shortage
in accounts.

Failure to report theft or robbery to the police may be a factor against

the taxpayer. On the other hand, a mere report of alleged theft or
robbery to the police authorities is not a conclusive proof of the loss
arising therefrom. (Bold underscoring supplied for emphasis)

In the context of the foregoing rules, the CTA En Banc aptly rejected
Tambunting’s claim for deductions due to losses from fire and theft. The
documents it had submitted to support the claim, namely: (a) the
certification from the Bureau of Fire Protection in Malolos; (b) the
certification from the Police Station in Malolos; (c) the accounting entry
for the losses; and (d) the list of properties lost, were not enough. What
were required were for Tambunting to submit the sworn declaration of
loss mandated by Revenue Regulations 12-77. Its failure to do so was
prejudicial to the claim because the sworn declaration of loss was
necessary to forewarn the BIR that it had suffered a loss whose extent it
would be claiming as a deduction of its tax liability, and thus enable the
BIR to conduct its own investigation of the incident leading to the loss.
Indeed, the documents Tambunting submitted to the BIR could not serve
the purpose of their submission without the sworn declaration of loss.

WHEREFORE, the Court AFFIRMS the decision promulgated on April 24,

2006; and ORDERS petitioner to pay the costs of suit.

SO ORDERED.
 EN BANC
[G.R. No. 125508. July 19, 2000.]
CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS,
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
SYNOPSIS
Petitioner China Banking Corporation made a 53% equity
investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary
engaged in financing and investment with "deposit-taking" function. First
CBC Capital (Asia), Ltd. became insolvent. With the approval of Bangko
Sentral, petitioner wrote-off as being worthless its investment in First CBC
Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a bad
debt or as an ordinary loss deductible from its gross income. Respondent
Commissioner of Internal Revenue disallowed the deduction. The
Commissioner held the view that the shares should be classified as
"capital loss," and not as a bad debt expense there being no
indebtedness to speak of between petitioner and its subsidiary.
Petitioner contested the ruling of respondent Commissioner before the
Court of Tax Appeals (CTA). The tax court sustained the Commissioner.
When the decision was appealed to the Court of Appeals, the latter
upheld the CTA. Hence, the present petition. Petitioner bank assailed the
appellate court in affirming the CTA's decision.
The Supreme Court affirmed the decision of the Court of
Appeals. The Court ruled that shares of stock held by way of an
investment are considered as capital assets under the law and when
said shares held by such investor become worthless, the loss is deemed
to be a loss from the sale or exchange of capital assets under Section
29(d)(4)(B) of the National Internal Revenue Code. In the case at bar,
First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary
corporation of petitioner bank whose shares in said investee corporation
are not intended for purchase or sale but as an investment.
Unquestionably then, any loss therefrom would be a capital loss, not an
ordinary loss to the investor. The Court also ruled that equity holdings
cannot come close to being, within the purview of "evidence of
indebtedness" under Section 33 of the NIRC. The loss of petitioner bank
in its equity investment in the Hongkong subsidiary cannot also be
deductible as a bad debt. The shares of stock in question did not
constitute a loan extended by it to its subsidiary (First CBC Capital) or a
debt subject to obligatory repayment by the latter, essential elements to
constitute a bad debt, but a long term investment made by CBC.
SYLLABUS
1. TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME
TAXATION; GROSS INCOME; DEDUCTIONS FROM GROSS INCOME; SHARES
OF STOCK HELD BY INVESTOR BECOMING WORTHLESS; NOT DEDUCTIBLE,
LOSS SUSTAINED DEEMED TO BE A LOSS FROM THE SALE OR EXCHANGE
OF CAPITAL ASSETS. — An equity investment is a capital, not ordinary,
asset of the investor the sale or exchange of which results in either a
capital gain or a capital loss. The gain or the loss is ordinary when the
property sold or exchanged is not a capital asset. Shares of stock, like
the other securities defined in Section 20(t) of the NIRC, would be
ordinary assets only to a dealer in securities or a person engaged in the
purchase and sale of, or an active trader (for his own account) in,
securities. In the hands, however, of another who holds the shares of
stock by way of an investment, the shares to him would be capital assets.
When the shares held by such investor become worthless, the loss is
deemed to be a loss from the sale or exchange of capital assets. Section
29(d)(4)(B) of the NIRC. - Provides that the loss sustained by the holder of
the securities, which are capital assets (to him), is to be treated as a
capital loss as if incurred from a sale or exchange transaction. A capital
gain or a capital loss normally requires the concurrence of two
conditions for it to result: (1) There is a sale or exchange; and (2) the thing
sold or exchanged is a capital asset. When securities become worthless,
there is strictly no sale or exchange but the law deems the loss anyway
to be "a loss from the sale or exchange of capital assets." A similar kind
of treatment is given by the NIRC on the retirement of certificates of
indebtedness with interest coupons or in registered form, short sales and
options to buy or sell property where no sale or exchange strictly exists.
In these cases, the NIRC dispenses, in effect, with the standard
requirement of a sale or exchange for the application of the capital gain
and loss provisions of the code. Capital losses are allowed to be
deducted only to the extent of capital gains, i.e., gains derived from the
sale or exchange of capital assets, and not from any other income of
the taxpayer. In the case at bar, First CBC Capital (Asia), Ltd., the
investee corporation, is a subsidiary corporation of petitioner bank
whose shares in said investee corporation are not intended for purchase
or sale but as an investment. Unquestionably then, any loss therefrom
would be a capital loss, not an ordinary loss, to the investor. cTCaEA
2. ID.; ID.; ID.; LOSSES IN EQUITY INVESTMENT LIKE SHARES OF
STOCK NOT DEDUCTIBLE AS BAD DEBT; EQUITY HOLDINGS SUCH AS
SHARES OF STOCK NOT WITHIN THE PURVIEW OF "EVIDENCE OF
INDEBTEDNESS" UNDER OF SECTION 33 (c) OF THE NATIONAL INTERNAL
REVENUE CODE. — The exclusionary clause found in Section 33(c) of the
National Internal Revenue Code does not include all forms of securities
but specifically covers only bonds, debentures, notes, certificates or
other evidence of indebtedness, with interest coupons or in registered
form, which are the instruments of credit normally dealt with in the usual
lending operations of a financial institution. Equity holdings cannot come
close to being within the purview of "evidence of indebtedness" under
the second sentence of the aforequoted paragraph. Verily, it is for a like
thesis that the loss of petitioner bank in its equity investment in the
Hongkong subsidiary cannot also be deductible as a bad debt. The
shares of stock in question do not constitute a loan extended by it to its
subsidiary (First CBC Capital) or a debt subject to obligatory repayment
by the latter, essential elements to constitute a bad debt, but a long
term investment made by CBC.
DECISION
VITUG, J p:
The Commissioner of Internal Revenue denied the deduction
from gross income of "securities becoming worthless" claimed by China
Banking Corporation ("CBC"). The Commissioner's disallowance was
sustained by the Court of Tax Appeals ("CTA"). When the ruling was
appealed to the Court of Appeals ("CA"), the appellate court upheld
the CTA. The case is now before us on a Petition for Review on Certiorari.
Sometime in 1980, petitioner China Banking Corporation made
a 53% equity investment in the First CBC Capital (Asia) Ltd., a Hongkong
subsidiary engaged in financing and investment with "deposit-taking"
function. The investment amounted to P16,227,851.80, consisting of
106,000 shares with a par value of P100 per share.
In the course of the regular examination of the financial books
and investment portfolios of petitioner conducted by Bangko Sentral in
1986, it was shown that First CBC Capital (Asia), Ltd., has become
insolvent. With the approval of Bangko Sentral, petitioner wrote-off as
being worthless its investment in First CBC Capital (Asia), Ltd., in its 1987
Income Tax Return and treated it as a bad debt or as an ordinary loss
deductible from its gross income.
Respondent Commissioner of Internal Revenue disallowed the
deduction and assessed petitioner for income tax deficiency in the
amount of P8,533,328.04, inclusive of surcharge, interest and
compromise penalty. The disallowance of the deduction was made on
the ground that the investment should not be classified as being
"worthless" and that, although the Hongkong Banking Commissioner had
revoked the license of First CBC Capital as a "deposit-taking" company,
the latter could still exercise, however, its financing and investment
activities. Assuming that the securities had indeed become worthless,
respondent Commissioner of Internal Revenue held the view that they
should then be classified as "capital loss," and not as a bad debt expense
there being no indebtedness to speak of between petitioner and its
subsidiary. ScEaAD
Petitioner contested the ruling of respondent Commissioner
before the CTA. The tax court sustained the Commissioner, holding that
the securities had not indeed become worthless and ordered petitioner
to pay its deficiency income tax for 1987 of P8,533,328.04 plus 20%
interest per annum until fully paid. When the decision was appealed to
the Court of Appeals, the latter upheld the CTA. In its instant petition for
review on certiorari, petitioner bank assails the CA decision.
The petition must fail.
The claim of petitioner that the shares of stock in question have
become worthless is based on a Profit and Loss Account for the Year-
End 31 December 1987, and the recommendation of Bangko
Sentral that the equity investment be written-off due to the insolvency of
the subsidiary. While the matter may not be indubitable (considering
that certain classes of intangibles, like franchises and goodwill, are not
always given corresponding values in financial statements 1 ), there may
really be no need, however, to go at length into this issue since, even to
assume the worthlessness of the shares, the deductibility thereof would
still be nil in this particular case. At all events, the Court is not prepared
to hold that both the tax court and the appellate court are utterly
devoid of substantial basis for their own factual findings.
Subject to certain exceptions, such as the compensation
income of individuals and passive income subject to final tax, as well as
income of non-resident aliens and foreign corporations not engaged in
trade or business in the Philippines, the tax on income is imposed on the
net income allowing certain specified deductions from gross income to
be claimed by the taxpayer. Among the deductible items allowed by
the National Internal Revenue Code ("NIRC") are bad
debts and losses. 2
An equity investment is a capital, not ordinary, asset of the
investor the sale or exchange of which results in either a capital gain or
a capital loss. The gain or the loss is ordinary when the property sold or
exchanged is not a capital asset. 3 A capital asset is defined negatively
in Section 33(1) of the NIRC; viz:
"(1) Capital assets. — The term 'capital
assets' means property held by the taxpayer
(whether or not connected with his trade or
business), but does not include stock in trade of the
taxpayer or other property of a kind which would
properly be included in the inventory of the
 taxpayer if on hand at the close of the taxable
year, or property held by the taxpayer primarily for
sale to customers in the ordinary course of his trade
or business, or property used in the trade or
business, of a character which is subject to the
allowance for depreciation provided in subsection
(f) of section twenty-nine; or real property used in
the trade or business of the taxpayer."
Thus, shares of stock, like the other securities defined in Section
20(t) 4 of the NIRC, would be ordinary assets only to a dealer in
securities or a person engaged in the purchase and sale of, or an
active trader (for his own account) in, securities. Section 20(u) of
the NIRC defines a dealer in securities thus:
"(u) The term 'dealer in securities' means a
merchant of stocks or securities, whether an
individual, partnership or corporation, with an
established place of business, regularly engaged in
the purchase of securities and their resale to
customers; that is, one who as a merchant buys
securities and sells them to customers with a view
to the gains and profits that may be derived
therefrom."
In the hands, however, of another who holds the shares of stock by
way of an investment, the shares to him would be capital
assets. When the shares held by such investor become worthless,
the loss is deemed to be a loss from the sale or exchange of
capital assets. Section 29(d)(4)(B) of the NIRC states:
"(B) Securities becoming worthless. — If
securities as defined in Section 20 become
worthless during the taxable" year and are capital
assets, the loss resulting therefrom shall, for the
purposes of this Title, be considered as a loss from
the sale or exchange, on the last day of such
taxable year, of capital assets."
The above provision conveys that the loss sustained by the holder
of the securities, which are capital assets (to him), is to be treated
as a capital loss as if incurred from a sale or exchange transaction.
A capital gain or a capital loss normally requires the concurrence
of two conditions for it to result: (1) There is a sale or exchange;
and (2) the thing sold or exchanged is a capital asset. When
securities become worthless, there is strictly no sale or exchange
but the law deems the loss anyway to be "a loss from the sale or
exchange of capital assets. " 5 A similar kind of treatment is given,
by the NIRC on the retirement of certificates of indebtedness with
interest coupons or in registered form, short sales and options to
buy or sell property where no sale or exchange strictly exists. 6 In
these cases, the NIRC dispenses, in effect, with the standard
requirement of a sale or exchange for the application of the
capital gain and loss provisions of the code.
Capital losses are allowed to be deducted only to the extent
of capital gains, i.e., gains derived from the sale or exchange of capital
assets, and not from any other income of the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee
corporation, is a subsidiary corporation of petitioner bank whose shares
in said investee corporation are not intended for purchase or sale but as
an investment. Unquestionably then, any loss therefrom would be a
capital loss, not an ordinary loss, to the investor.
Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. — Losses from sales or
exchanges of capital assets shall be allowed only
to the extent provided in Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in the
aforesaid Section 29(d)(4)(A), read:
"SECTION 33. Capital gains and losses. —
"xxx xxx xxx
"(c) Limitation on capital losses. — Losses
from sales or exchange of capital assets shall be
allowed only to the extent of the gains from such
sales or exchanges. If a bank or trust company
incorporated under the laws of the Philippines, a
substantial part of whose business is the receipt of
deposits, sells any bond, debenture, note, or
certificate or other evidence of
indebtedness issued by any corporation (including
one issued by a government or political subdivision
thereof), with interest coupons or in registered form,
any loss resulting from such sale shall not be subject
to the foregoing limitation and shall not be
included in determining the applicability of such
limitation to other losses." ITADaE
The exclusionary clause found in the foregoing text of the law
does not include all forms of securities but specifically covers
only bonds, debentures, notes, certificates or other evidence of
indebtedness, with interest coupons or in registered form, which are the
instruments of credit normally dealt with in the usual lending operations
of a financial institution. Equity holdings cannot come close to being,
within the purview of "evidence of indebtedness" under the second
sentence of the aforequoted paragraph. Verily, it is for a like thesis that
the loss of petitioner bank in its equity investment in the Hongkong
subsidiary cannot also be deductible as a bad debt. The shares of stock
in question do not constitute a loan extended by it to its subsidiary (First
CBC Capital) or a debt subject to obligatory repayment by the latter,
essential elements to constitute a bad debt, but a long term investment
made by CBC.
One other item. Section 34(c)(1) of the NIRC states that the
entire amount of the gain or loss upon the sale or exchange of property,
as the case may be, shall be recognized. The complete text reads:
"SECTION 34. Determination of amount of
and recognition of gain or loss. —
"(a) Computation of gain or loss. — The
gain from the sale or other disposition of property
shall be the excess of the amount realized
therefrom over the basis or adjusted basis for
determining gain and the loss shall be the excess of
the basis or adjusted basis for determining loss over
the amount realized. The amount realized from the
sale or other disposition of property shall be to sum
of money received plus the fair market value of the
property (other than money) received. (As
amended by E.O. No. 37)
"(b) Basis for determining gain or loss from
sale or disposition of property. — The basis of
property shall be — (1) The cost thereof in the cases
of property acquired on or before March 1, 1913, if
such property was acquired by purchase; or
"(2) The fair market price or value as of the
date of acquisition if the same was acquired by
inheritance; or
"(3) If the property was acquired by gift
the basis shall be the same as if it would be in the
hands of the donor or the last preceding owner by
whom it was not acquired by gift, except that if
such basis is greater than the fair market value of
the property at the time of the gift, then for the
purpose of determining loss the basis shall be such
fair market value; or
"(4) If the property, other than capital
asset referred to in Section 21 (e), was acquired for
less than an adequate consideration in money or
money's worth, the basis of such property is (i) the
amount paid by the transferee for the property or
(ii) the transferor's adjusted basis at the time of the
transfer whichever is greater.
"(5) The basis as defined in paragraph (c)
(5) of this section if the property was acquired in a
transaction where gain or loss is not recognized
under paragraph (c) (2) of this section. (As
amended by E.O. No. 37)
"(c) Exchange of property.
"(1) General rule. — Except as herein
provided, upon the sale or exchange of property,
the entire amount of the gain or loss, as the case
may be, shall be recognized.
"(2) Exception. — No gain or loss shall be
recognized if in pursuance of a plan of merger or
consolidation (a) a corporation which is a party to
a merger or consolidation exchanges property
solely for stock in a corporation which is, a party to
the merger or consolidation, (b) a shareholder
exchanges stock in a corporation which is a party
to the merger or consolidation solely for the stock
in another corporation also a party to the merger
or consolidation, or (c) a security holder of a
corporation which is a party to the merger or
consolidation exchanges his securities in such
corporation solely for stock or securities in another
corporation, a party to the merger or
consolidation.
"No gain or loss shall also be recognized if
property is transferred to a corporation by a person
 in exchange for stock in such corporation of which
as a result of such exchange said person, alone or
together with others, not exceeding four persons,
gains control of said corporation: Provided, That
stocks issued for services shall not be considered as
issued in return of property."

The above law should be taken within context on the general

subject of the determination and recognition of gain or loss; it is not
preclusive of, let alone renders completely inconsequential, the more
specific provisions of the code. Thus, pursuant, to the same section of the
law, no such recognition shall be made if the sale or exchange is made
in pursuance of a plan of corporate merger or consolidation or, if as a
result of an exchange of property for stocks, the exchanger, alone or
together with others not exceeding four, gains control of the
corporation. 7 Then, too, how the resulting gain might be taxed, or
whether or not the loss would be deductible and how, are matters
properly dealt with elsewhere in various other sections of the NIRC. 8 At
all events, it may not be amiss to once again stress that the basic rule is
still that any capital loss can be deducted only from capital gains under
Section 33(c) of the NIRC.

In sum —

(a) The equity investment in shares of stock held by CBC of

approximately 53% in its Hongkong subsidiary, the First CBC Capital
(Asia), Ltd., is not an indebtedness, and it is a capital, not an
ordinary, asset. 9

(b) Assuming that the equity investment of CBC has indeed

become "worthless," the loss sustained is a capital, not an
ordinary, loss. 10

(c) The capital loss sustained by CBC can only be deducted

from capital gains if any derived by it during the same taxable year that
the securities have become "worthless." 11

WHEREFORE, the Petition is DENIED. The decision of the Court of

Appeals disallowing the claimed deduction of P16,227,851.80 is
AFFIRMED.

SO ORDERED.

||| (China Banking Corp. v. Court of Appeals, G.R. No. 125508, [July
19, 2000], 391 PHIL 59-69)
 THIRD DIVISION WHEREFORE, in view of the foregoing, the
[G.R. No. 168331. October 11, 2012.] instant Petition for Review is hereby PARTIALLY
UNITED INTERNATIONAL PICTURES AB, petitioner, vs. COMMISSIONER OF GRANTED. Accordingly, respondent
INTERNAL REVENUE, respondent. is ORDERED to REFUND, or in the alternative, ISSUE A
TAX CREDIT CERTIFICATE to petitioner in the amount
DECISION of P7,269,078.40 representing unutilized creditable
PERALTA, J p: withholding tax for the year 1999. 4
This Petition for Review on Certiorari under Rule 45 of the Rules
of Court assails the Decision 1 dated August 31, 2004 and Dissatisfied, both parties filed their respective motions for
Resolution 2 dated May 17, 2005 of the Court of Appeals in CA-G.R. SP reconsideration, but the same were denied by the CTA per Resolution
No. 76173. dated March 11, 2003. IcTCHD

The facts follow. Consequently, respondent elevated the case to the Court of
Appeals (CA).
On April 15, 1999, petitioner filed with the Bureau of Internal
Revenue (BIR) its Corporation Annual Income Tax Return for the calendar In its petition, respondent argued that petitioner is not entitled
year ended December 31, 1998 reflecting, among others, a net taxable to the refund awarded by the CTA, because it failed to present sufficient
income from operations in the sum of P24,961,200.00, an income tax proof that the subject taxes were erroneously or illegally collected.
liability of P8,486,808.00, but with an excess income tax payment in the
On August 31, 2004, the CA annulled and set aside the decision
amount of P4,325,152.00 arising from quarterly income tax payments and
of the CTA. The CA ruled in this wise:
creditable taxes withheld at source, computed as follows:
All told, the CTA erred in granting
Gross Income P42,905,466.00 respondent's claim for tax refund, albeit in a
reduced amount. As earlier discussed, the law
Less: Deductions 17,944,266.00 specifically outlines the evidentiary requirements
for the grant of tax credit or refund and failure on
––––––––––––– the part of the taxpayer to justify its claim in
accordance with said standard is fatal to its cause.
Taxable Income P24,961,200.00 Considering the doubts cast on the documentary
evidence presented by respondent in support of its
Tax Due P8,468,808.00 claim, said evidence cannot be the basis for the
grant of a refund. Indeed, it is the height of
Less: Tax Credits/Payments 12,811,960.00 absurdity to allow a taxpayer to claim a refund
when there is doubt as to whether it had, in fact,
––––––––––––– paid the correct amount of taxes due to the
government.
Tax Overpayment P4,325,152.00
WHEREFORE, the instant petition
is GRANTED. The assailed decision of the Court of
============
Tax Appeals is ANNULLED and SET ASIDE and
Petitioner opted to carry-over as tax credit to the succeeding another rendered DISMISSING the claim for tax
taxable year the said overpayment by putting an "x" mark on the refund of respondent.
corresponding box.
SO ORDERED. 5
On April 17, 2000, petitioner filed its Corporation Annual Income
Tax Return for the calendar year ended December 31, 1999 wherein it Thereafter, petitioner filed a motion for reconsideration against
reported, among others, a taxable income in the amount of the aforementioned decision, but the same was denied in a Resolution
P7,071,651.00, an income tax due of P2,333,645.00, but with an excess dated May 17, 2005.
income tax payment in the amount of P9,309,292.00, detailed as follows:
Accordingly, petitioner filed a petition for review
on certiorari before this Court praying that the decision of the CA be set
Gross Income P25,240,148.00 aside and that an income tax refund or tax credit certificate in the full
amount of P9,260,585.40 be issued in its favor.
Less: Deductions 18,168,497.00
In its petition, petitioner submitted the following issues for this
–––––––––––– Court's disposition:

Taxable Income P7,071,651.00

A. THE COURT OF APPEALS COMMITTED REVERSIBLE
ERROR IN ANNULLING THE DECISION OF
Tax Due P2,333,645.00
THE COURT OF TAX APPEALS THEREBY
DENYING THE CLAIM FOR REFUND OF
[PETITIONER] UIP.
Less: Tax Credits/Payments
B. WHETHER UIP IS PERPETUALLY PRECLUDED FROM
a. Prior Years Excess Credits P4,325,152.00 [SUBMITTING] AN APPLICATION FOR
INCOME TAX REFUND ON ITS EXCESS AND
b. Creditable Tax Withheld 7,317,785.00 11,642,937.00 UNUTILIZED CREDITABLE WITHHOLDING
TAXES FOR THE YEAR 1998 AFTER IT HAS
–––––––––––– –––––––––––– INDICATED ITS OPTION TO CARRY-OVER
THIS EXCESS CREDITABLE INCOME TAX TO
Tax Overpayment P9,309,292.00 THE FOLLOWING TAXABLE YEAR 1999. 6

=========== The foregoing issues can be simplified as follows: first, whether

On the face of the 1999 return, petitioner indicated its option
by putting an "x" mark on the box "To be refunded."
On April 28, 2000, petitioner filed with the BIR an administrative
claim for refund in the amount of P9,309,292.00.
As respondent did not act on petitioner's claim, the latter filed
a petition for review before the Court of Tax Appeals (CTA) to toll the
running of the two-year prescriptive period.
On September 12, 2001, the CTA rendered a
Decision 3 denying petitioner's claim for refund for taxable year 1998. It
reasoned that since petitioner opted to carry over the 1998 tax
overpayment as tax credit to the succeeding taxable year, the same
cannot be refunded pursuant to Section 76 of the National Internal
Revenue Code (NIRC) of 1997. The decretal portion of the decision
reads:
petitioner is perpetually barred to refund its tax overpayment for taxable
year 1998 since it opted to carry-over its excess tax;
and second, whether petitioner has proven its entitlement to the
refund. caADSE
Let us discuss the issues in seriatim.
Anent the first issue, petitioner asserts that there is nothing in the
law which perpetually prohibits the refund of carried over excess tax. It
maintains that the option to carry-over is irrevocable only for the next
"taxable period" where the excess tax payment was carried over.
We are not convinced.
Section 76 of the NIRC of 1997 states —
Section 76. Final Adjustment Return. —
Every corporation liable to tax under Section 27
shall file a final adjustment return covering the total
 taxable income for the preceding calendar or
fiscal year. If the sum of the quarterly tax payments
made during the said taxable year is not equal to
the total tax due on the entire taxable income of
that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the
excess amount paid, as the
case may be.
In case the corporation is entitled to a tax
credit or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on its
final adjustment return may be carried over and
credited against the estimated quarterly income
tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to
carry-over and apply the excess quarterly income
tax against income due for the taxable quarters of
the succeeding taxable years has been made,
such option shall be considered irrevocable for that
taxable period and no application for cash refund
or issuance of a tax credit certificate shall be
allowed therefore. (Emphasis supplied)
From the aforequoted provision, it is clear that once a
corporation exercises the option to carry-over, such option is
irrevocable "for that taxable period." Having chosen to carry-over the
excess quarterly income tax, the corporation cannot thereafter choose
to apply for a cash refund or for the issuance of a tax credit certificate
for the amount representing such overpayment. 7
To avoid confusion, this Court has properly explained the
phrase "for that taxable period" in Commissioner of Internal Revenue v.
Bank of the Philippine Islands. 8 In said case, the Court held that the
phrase merely identifies the excess income tax, subject of the option, by
referring to the "taxable period when it was acquired by the taxpayer."
Thus: CTDacA
. . . Section 76 remains clear and
unequivocal. Once the carry-over option is
taken, actually or constructively, it becomes
irrevocable. It mentioned no exception or
qualification to the irrevocability rule.
Hence, the controlling factor for the
operation of the irrevocability rule is that the
taxpayer chose an option; and once it had already
done so, it could no longer make another one.
Consequently, after the taxpayer opts to carry-over
its excess tax credit to the following taxable period,
the question of whether or not it actually gets to
apply said tax credit is irrelevant. Section 76 of
the NIRC of 1997 is explicit in stating that once the
option to carry over has been made, "no
application for tax refund or issuance of a tax credit
certificate shall be allowed therefor."
The last sentence of Section 76 of
the NIRC of 1997 reads: "Once the option to carry-
over and apply the excess quarterly income tax
against income tax due for the taxable quarters of
the succeeding taxable years has been made,
such option shall be considered irrevocable for
that taxable period and no application for tax
refund or issuance of a tax credit certificate shall
be allowed therefore." The phrase "for that taxable
period" merely identifies the excess income tax,
subject of the option, by referring to the taxable
period when it was acquired by the taxpayer. In the
present case, the excess income tax credit, which
BPI opted to carry over, was acquired by the said
bank during the taxable year 1998. The option of
BPI to carry over its 1998 excess income tax credit is
irrevocable; it cannot later on opt to apply for a
refund of the very same 1998 excess income tax
credit.
The Court of Appeals mistakenly
understood the phrase "for that taxable period" as
a prescriptive period for the irrevocability rule . . . .
The evident intent of the legislature, in adding the
last sentence to Section 76 of the NIRC of 1997, is to
keep the taxpayer from flip-flopping on its options,
and avoid confusion and complication as regards
said taxpayer's excess tax credit. The interpretation
of the Court of Appeals only delays the flip-flopping
to the end of each succeeding taxable period. 9
Plainly, petitioner's claim for refund for 1998 should be denied
as its option to carry over has precluded it from claiming the refund of
the excess 1998 income tax payment.
Apropos, we now resolve the issue of whether petitioner had
sufficiently proven entitlement to refund its tax overpayments for taxable
year 1999.
As to this issue, petitioner contends that the CA erred when it
annulled the decision of the CTA and insists that it had substantially
established its claim for refund through documentary and testimonial
evidence.
For its part, respondent maintains that petitioner is not entitled
to the refund awarded by the CTA, because it failed to present sufficient
proof that the subject taxes were erroneously or illegally collected. It
asserts that the 1999 certificate of withholding tax is defective, since
petitioner failed to file the same together with the 1999 corporate return
and include in its return income payments from which the taxes were
withheld.
We find for respondent. IESTcD
In claiming for the refund of excess creditable withholding tax,
petitioner must show compliance with the following basic requirements:
(1) The claim for refund was filed within two years
as prescribed under Section 229 10 of
the NIRC of 1997;
(2) The income upon which the taxes were
withheld were included in the return of
the recipient (Section 10, Revenue
Regulations No. 6-85);
(3) The fact of withholding is established by a copy
of a statement (BIR Form 1743.1) duly
issued by the payor (withholding agent)
to the payee showing the amount paid
and the amount of tax withheld therefrom
(Section 10, Revenue Regulations No. 6-
85).
Here, it is undisputed that the claim for refund was filed within
the two-year prescriptive period prescribed under Section 229 of
the NIRC of 1997 and that the taxpayer was able to present its certificate
of creditable tax withheld from its payor. However, records show that
petitioner failed to reconcile the discrepancy between income
payments per its income tax return and the certificate of creditable tax
withheld.
A perusal of the certificate of tax withheld would reveal that
petitioner earned P146,355,699.80. On the contrary, its annual income
tax return reflects a gross income from film rentals in the amount of
P145,381,568.00. However, despite the P974,131.80 difference, both the
certificate of taxes withheld and income tax return filed by petitioner for
taxable year 1999 indicate the same amount of P7,317,785.00 as
creditable tax withheld. What's more, petitioner failed to present
sufficient proof to allow the Court to trace the discrepancy between the
certificate of taxes withheld and the income tax return.
Parenthetically, the Office of the Solicitor General correctly
pointed out that the amount of income payments in the income tax
return must correspond and tally to the amount indicated in the
certificate of withholding, since there is no possible and efficacious way
by which the BIR can verify the precise identity of the income payments
as reflected in the income tax return.
Therefore, petitioner's claim for tax refund for taxable year 1999
must be denied, since it failed to prove that the income payments
subjected to withholding tax were declared as part of the gross income
of the taxpayer. SCEDAI
WHEREFORE, in view of the foregoing, the instant petition is
hereby DENIED. The Decision dated August 31, 2004 and Resolution
dated May 17, 2005 of the Court of Appeals are hereby AFFIRMED.
SO ORDERED.
||| (United International Picture AB, v. Commissioner of Internal
Revenue, G.R. No. 168331, [October 11, 2012], 697 PHIL 312-321)
 SECOND DIVISION Less: Tax Credits/Payments
[G.R. No. 179260. April 2, 2014.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TEAM [PHILIPPINES]
OPERATIONS CORPORATION [formerly MIRANT (PHILS.) OPERATIONS
CORPORATION], respondent.
DECISION Total Tax Credits/Payments
PEREZ, J p:
Before the Court is a Petition for Review on Certiorari seeking to Tax Payable/(Overpayment)
reverse and set aside the 19 June 2007 Decision 1 and the 13 August
2007 Resolution 2 of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB
No. 224 which affirmed in toto the Decision and Resolution dated 4
August 2006 and 8 November 2006, respectively, of the First Division of
the CTA (CTA in Division) 3 in C.T.A. Case No. 6623, granting Team
(Philippines) Operations Corporation's (respondent) claim for refund in
the amount of P69,562,412.00 representing unutilized tax credits for
taxable period ending 31 December 2001. IHCSTE
The Facts
The factual antecedents of the case are undisputed:
Petitioner is the duly appointed Commissioner of Internal
Revenue, charged with the duty of enforcing the provisions of
the National Internal Revenue Code (NIRC), including the power to
decide and approve administrative claims for refund.
Respondent, on the other hand, is a corporation duly
organized and existing under and virtue of the laws of the Republic of
the Philippines, with its principal office at Bo. Ibabang Pulo, Pagbilao
Grande Island, Pagbilao, Quezon Province. It is primarily engaged in the
business of designing, constructing, erecting, assembling,
commissioning, operating, maintaining, rehabilitating and managing
gas turbine and other power generating plants and related facilities for
the conversion into electricity of coal, distillate and other fuels provided
by and under contract with the Government of the Republic of the
Philippines, or any subdivision, instrumentality or agency thereof, or any
government owned or controlled corporations or other entity engaged
in the development, supply or distribution of energy.
On 30 April 2001, respondent secured from the Securities and
Exchange Commission (SEC) its Certificate of Filing of Amended Articles
of Incorporation, reflecting its change of name from Southern Energy
Asia-Pacific Operations (Phils.), Inc. to Mirant (Philippines) Operations
Corporation. Prior to its use of the name Southern Energy Asia-Pacific
Operations (Phils.), Inc., respondent operated under the corporate
names CEPA Operations (Philippines) Corporation, CEPA Tileman Project
Management Corporation and Hopewell Tileman Project Management
Corporation. The changes in respondent's corporate name from CEPA
Operations (Philippines) Corp. to Southern Energy Asia-Pacific
Operations (Phils.) Inc., from CEPA Tileman Project Management
Corporation to CEPA Operations (Philippines) Corp. and from Hopewell
Tileman Project Management Corporation to CEPA Tileman Project
Management Corp., were approved by the SEC on 24 November 2000,
21 November 1997 and 29 July 1994, respectively. HcDATC
Under its original corporate name, Hopewell Tileman Project
Management Corp., respondent was registered with the Bureau of
Internal Revenue (BIR) with Tax Identification No. 003-057-796 as shown
by its original BIR Certificate of Registration issued on 29 March 1994.
In line with its primary purpose, respondent entered into
Operating and Management Agreements with Mirant Pagbilao
Corporation (MPC) [formerly Southern Energy Quezon, Inc.] and Mirant
Sual Corporation (MSC) [formerly Southern Energy Pangasinan, Inc.] to
provide MPC and MSC with operation and maintenance services in
connection with the operation, construction and commissioning of the
coal-fired thermal power stations situated in Pagbilao, Quezon and Sual,
Pangasinan, respectively. Payments received by respondent from MPC
and MSC relative to the said agreements were allegedly subjected to
creditable withholding taxes.
On 15 April 2002, respondent filed its 2001 income tax return
with the BIR, reporting an income tax overpayment in the amount of
P69,562,412.00 arising from unutilized creditable taxes withheld during
the year, detailed as follows: 4
Sales/Revenues P922,569,303.00
Less: Cost of Sales/Services 938,543,252.00
–––––––––––––––
Gross Income from Operation (P15,973,949.00)
Add: Non-Operating & Other Income 74,995,982.00
–––––––––––––––
Total Gross Income P59,022,033.00
Less: Deductions 59,022,033.00
–––––––––––––––
Taxable Income - This is not novel.
Tax Rate 32%
–––––––––––––––
Income
NIL
Tax
Creditable Tax Withheld for the
First Three Quarters
Creditable Tax Withheld for the P27,784,217.00
Fourth Quarter 41,778,195.00
–––––––––––––––
P69,652,412.00
–––––––––––––––
(P69,562,412.00)
==============
Respondent marked the appropriate box manifesting its intent to
have the above overpayment refunded.
On 19 March 2003, pursuant to Section 76 in relation to Section
204 of the NIRC of 1997, as amended, respondent filed with the BIR, a
letter requesting for the refund or issuance of a tax credit certificate
corresponding to its reported unutilized creditable withholding taxes for
taxable year 2001 in the amount of P69,562,412.00.
Thereafter, on 27 March 2003, respondent filed a Petition for
Review before the CTA, in order to toll the running of the two-year
prescriptive period provided under Section 229 of the NIRC of 1997, as
amended, which was docketed as C.T.A. Case No. 6623.
The Ruling of the CTA in Division
In a Decision dated 4 August 2006, 5 the CTA in Division granted
respondent's Petition and ordered petitioner to refund or issue a tax
credit certificate in favor of the former the entire amount of
P69,562,412.00, representing its unutilized tax credits for the taxable year
ended 31 December 2001.
The CTA in Division based its ruling on the numerous
documentary evidence presented by respondent during the
proceedings, such as its Income Tax Returns (ITRs) for taxable years 2001
and 2002, various Certificates of Creditable Tax Withheld at Source for
taxable year 2001 duly issued to it by its withholding agents, and Report
of the Commissioned Independent Certified Public Accountant dated
15 March 2004, among others. The court a quo reasoned that
respondent has indeed established its entitlement to a refund/tax credit
of its excess creditable withholding taxes in compliance with the
following basic requirements: (1) that the claim for refund (or issuance of
a tax credit certificate) was filed within the two-year prescriptive period
prescribed under Section 204 (C), in relation to Section 229 of the NIRC
of 1997, as amended; (2) that the fact of withholding is established by a
copy of a statement duly issued by the payor (withholding agent) to the
payee, showing the amount paid and the amount of tax withheld
therefrom; and (3) that the income upon which the taxes were withheld
was included in the return of the recipient. 6
Subsequently, on 8 November 2006, the CTA in Division denied
petitioner's Motion for Reconsideration for lack of merit. 7
Aggrieved, petitioner appealed to the CTA En Banc by filing a
Petition for Review pursuant to Section 18 of Republic Act (RA) No. 1125,
as amended by RA No. 9282 8 on 6 December 2006, docketed as CTA
EB No. 224.
The Ruling of the CTA En Banc
The CTA En Banc affirmed in toto both the aforesaid Decision
and Resolution rendered by the CTA in Division in CTA Case No. 6623,
pronouncing that there was no cogent reason to disturb the findings and
conclusion spelled out therein. It revealed that what the petition seeks
to accomplish was for the CTA En Banc to view and appreciate the
evidence in another perspective, which unfortunately had already been
considered and passed upon correctly by the CTA in Division. CHTcSE
Upon denial of petitioner's Motion for Reconsideration of the 19
June 2007 Decision 9 of the CTA En Banc, it filed this Petition for Review
on Certiorari before this Court seeking the reversal of the
aforementioned Decision and the 13 August 2007
Resolution 10 rendered in CTA EB No. 224. Petitioner 11 relies on the sole
ground that the CTA En Banc gravely erred on a question of law in
affirming the CTA in Division's ruling which ordered a refund or issuance
of tax credit certificate in favor of respondent despite the fact that it is
not supported by the evidence on record. 12
The Issue and Our Ruling
The core issue for the Court's resolution is whether or not
respondent has established its entitlement for the refund or issuance of
a tax credit certificate in its favor the entire amount of P69,562,412.00
representing its unutilized tax credits for taxable year ended 31
December 2001, pursuant to the applicable provisions of the NIRC of
1997, as amended.
In order to be entitled to a refund claim or issuance of a tax
credit certificate representing any excess or unutilized creditable
withholding tax, it must be shown that the claimant has complied with
the essential basic conditions set forth under pertinent provisions of law
and existing jurisprudential declarations.
In Banco Filipino Savings and Mortgage Bank v. Court of
Appeals, 13 this Court had previously articulated that there are three
essential conditions for the grant of a claim for refund of creditable
withholding income tax, to wit: (1) the claim is filed with the
Commissioner of Internal Revenue within the two-year period from the
date of payment of the tax; 14 (2) it is shown on the return of the
recipient that the income payment received was declared as part of
the gross income; 15 and (3) the fact of withholding is established by a
copy of a statement duly issued by the payor to the payee showing the
amount paid and the amount of the tax withheld therefrom.
The first condition is pursuant to Sections 204 (C) and 229 of
the NIRC of 1997, as amended, viz.:
SEC. 204. Authority of the Commissioner
to Compromise, Abate and Refund or Credit
Taxes. — The Commissioner may —
xxx xxx xxx
(C)Credit or refund taxes erroneously or
illegally received or penalties imposed without
authority, refund the value of internal revenue
stamps when they are returned in good condition
by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered
unfit for use and refund their value upon proof of
destruction.
No credit or refund of taxes or penalties
shall be allowed unless the taxpayer files in writing
with the Commissioner a claim for credit or refund
within two (2) years after the payment of the tax
or penalty: Provided, however, That a return filed
showing an overpayment shall be considered as a
written claim for credit or refund. (Emphasis
supplied)
xxx xxx xxx
SEC. 229. Recovery of Tax Erroneously or
Illegally Collected. — No suit or proceeding shall be
maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged
to have been excessively or in any manner
wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner;
but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been
paid under protest or duress.
In any case, no such suit or proceeding
shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty
regardless of any supervening cause that may arise
after payment: Provided, however, That the
Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the
face of the return upon which payment was made,
such payment appears clearly to have been
erroneously paid. (Emphasis supplied)
The second and third conditions are anchored on Section
2.58.3 (B) of Revenue Regulations No. 2-98, 16 which states:
Sec. 2.58.3.Claim for Tax Credit or
Refund. —
xxx xxx xxx
(B) Claims for tax credit or refund of any
creditable income tax which was deducted and
withheld on income payments shall be given due
course only when it is shown that the income
payment has been declared as part of the gross
income and the fact of withholding is established
by a copy of the withholding tax statement duly
issued by the payor to the payee showing the
amount paid and the amount of tax withheld
therefrom. (Emphasis supplied)
In addition to the abovementioned requisites, the NIRC of 1997,
as amended, likewise provides for the strict observance of the concept
of the irrevocability rule, 17 the focal provision of which is Section 76
thereof, quoted hereunder for easy reference:
SEC. 76. Final Adjustment Return. —
Every corporation liable to tax under Section 27
shall file a final adjustment return covering the total
taxable income for the preceding calendar or
fiscal year. If the sum of the quarterly tax payments
made during the said taxable year is not equal to
the total tax due on the entire taxable income of
that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the
excess amount paid, as the
case may be.
In case the corporation is entitled to a tax
credit or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on its
final adjustment return may be carried over and
credited against the estimated quarterly income
tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to
carry-over and apply the excess quarterly income
tax against income tax due for the taxable quarters
of the succeeding taxable years has been made,
such option shall be considered irrevocable for that
taxable period and no application for cash refund
or issuance of a tax credit certificate shall be
allowed therefor. (Emphasis supplied)
Applying the foregoing discussion to the present case, we find
that respondent had indeed complied with the abovementioned
requirements.
Here, it is undisputed that the claim for refund was filed within
the two-year prescriptive period prescribed under Section 229 18 of
the NIRC of 1997, as amended. Respondent filed 19 its income tax return
for taxable year 2001 on 15 April 2002. Counting from said date, it indeed
had until 14 April 2004 20 within which to file its claim for refund or
issuance of tax credit certificate in its favor both administratively and
judicially. Thus, petitioner's administrative claim and petition for review
filed on 19 March 2003 and 27 March 2003, respectively, fell within the
abovementioned prescriptive period.
Likewise, respondent was able to present various certificates of
creditable tax withheld at source from its payors, MPC and MSC, for
taxable year 2001, showing creditable withholding taxes in the
aggregate amount of P70,805,771.42 (although the refund claim was
only P69,562,412.00). 21 Moreover, as determined by the CTA in Division,
respondent declared the income related to the claimed creditable
withholding taxes of P69,562,412.00 on its return. 22 EcATDH
Lastly, in compliance with Section 76 of the NIRC of 1997, as
amended, respondent opted to be refunded of its unutilized tax credit
(as evidenced by the "x" mark in the appropriate box of its 2001 income
tax return), and the same was not carried over in its 2002 income tax
return; therefore, the entire amount of P69,562,412.00 may be a proper
subject of a claim for refund/tax credit certificate. 23
It is apt to restate here the hornbook doctrine that the findings
and conclusions of the CTA are accorded the highest respect and will
not be lightly set aside. The CTA, by the very nature of its functions, is
dedicated exclusively to the resolution of tax problems and has
accordingly developed an expertise on the subject unless there has
been an abusive or improvident exercise of authority. 24
Consequently, its conclusions will not be overturned unless
there has been an abuse or improvident exercise of authority. Its findings
can only be disturbed on appeal if they are not supported by substantial
evidence or there is a showing of gross error or abuse on the part of the
Tax Court. In the absence of any clear and convincing proof to the
contrary, this Court must presume that the CTA rendered a decision
which is valid in every respect. 25
The Court in this case agrees with the conclusion of the CTA in
Division and subsequent affirmation of the CTA En Banc that respondent
complied with all the requirements for the refund of its unutilized
creditable withholding taxes for taxable period ending 31 December
2001. We adopt the factual and legal findings as follows:
On the first ground, [petitioner] argues
that [respondent] failed to present the various
withholding agents/payors to testify on the validity
of the contents of the Certificates of Creditable Tax
Withheld at Source ("certificates"). Thus, the
certificates presented by [respondent] are not
valid. And even assuming that the certificates are
valid, this Court cannot entertain the claim for
refund/tax credit certificates because the
certificates were not submitted to [petitioner].
 [Petitioner's] arguments are
untenable since the certificates presented (Exhibits
"R", "S", "T", "U", "V", "W", and "X") were duly signed
and prepared under penalties of perjury, the figures
appearing therein are presumed to be true and
correct. Thus, the testimony of the various
agents/payors need not be presented to validate
the authenticity of the certificates.

In addition, that [respondent] did not

submit the certificates to the [petitioner] is of no
moment. The administrative and judicial claim for
refund and/or tax credit certificates must be filed
within the two-year prescriptive period starting from
the date of payment of the tax (Section 229, NIRC).
In the instant case, [respondent] filed its judicial
claim (after filing its administrative claim) precisely
to preserve its right to claim. Otherwise,
[respondent's] right to the claim would have been
barred. Considering that this [c]ourt had jurisdiction
over the claim, [respondent] rightfully presented
the certificates before this [c]ourt. Besides, any
records that [petitioner] may have on the
administrative claim would eventually be
transmitted to this [c]ourt under Section 5(b), Rule 6
of the Revised Rules of the Court of (Tax) Appeals.

As for the second ground, this [c]ourt finds

[petitioner's] contention unmeritorious. The
requirements for claiming a tax refund/tax credit
certificates had been laid down in Citibank N.A. vs.
Court of Appeals, G.R. No. 107434, October 10,
1997. Nowhere in the case cited is proof of actual
remittance of the withheld taxes to the [petitioner]
required before the taxpayer may claim for a tax
refund/tax credit certificates. 26 (Emphasis
supplied)

In the same vein, this Court finds no abusive or improvident

exercise of authority on the part of the CTA in Division. Since there is no
showing of gross error or abuse on the part of the CTA in Division, and its
findings are supported by substantial evidence which were thoroughly
considered during the trial, there is no cogent reason to disturb its
findings and conclusions.

All told, respondent complied with all the legal requirements

and it is entitled, as it opted, to a refund of its excess creditable
withholding tax for the taxable year 2001 in the amount of
P69,562,412.00.

WHEREFORE, the petition is hereby DENIED for lack of merit.

Accordingly, the Decision dated 19 June 2007 and Resolution dated 13
August 2007 of the CTA En Banc are hereby AFFIRMED. No costs.

SO ORDERED.

||| (Commissioner of Internal Revenue v. Team [Philippines]

Operations Corp., G.R. No. 179260, [April 2, 2014])

WINEBRENNER & IÑIGO INSURANCE BROKERS, INC., PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
G.R. No. 206526 | 2015-01-28
SECOND DIVISION
DECISION
MENDOZA, J.:
In this petition for review under Rule 45 of the Rules of Court and Rule 16
of the Revised Rules of the Court of Tax Appeals, Winebrenner & Iñigo
Insurance Brokers, Inc. (petitioner) seeks the review of the March 22, 2013
Decision[1] of the Court of Tax Appeals En Banc (CTA-En Banc). In the said
decision, the CTA-En Banc affirmed the denial of petitioner’s judicial
claim for refund or issuance of tax credit certificate for excess and
unutilized creditable withholding tax (CWT) for the 1st to 4th quarter of
calendar year (CY) 2003 amounting to P4,073,954.00. In denying the
refund, the CTA-En Banc held that petitioner failed to prove that the
excess CWT for CY 2003 was not carried over to the succeeding quarters
of the subject taxable year. Under the 1997 National Internal Revenue
Code (NIRC), a taxpayer must not have exercised the option to carry
over the excess CWT for a particular taxable year in order to qualify for
refund.
The Factual Antecedents
On April 15, 2004, petitioner filed its Annual Income Tax Return for CY
2003.
About two years thereafter or on April 7, 2006, petitioner applied for the
administrative tax credit/refund claiming entitlement to the refund of its
excess or unutilized CWT for CY 2003, by filing BIR Form No. 1914 with the
Revenue District Office No. 50 of the Bureau of Internal Revenue (BIR).
There being no action taken on the said claim, a petition for review was
filed by petitioner before the CTA on April 11, 2006. The case was
docketed as CTA Case No. 7440 and was raffled to the Special First
Division (CTA Division).
On April 13, 2010, CTA Division partially granted petitioner’s claim for
refund of excess and unutilized CWT for CY 2003 in the reduced amount
of P2,737,903.34 in its April 13, 2010 Decision[2] (original decision). The
dispositive portion of the decision reads:
In view of the foregoing, the Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, respondent is
hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor
of the petitioner in the reduced amount of P2,737,903.34 representing its
excess/unutilized creditable withholding taxes for the year 2003.
SO ORDERED.[3]
Petitioner filed a Motion for Partial Reconsideration with Leave to Submit
Supplemental Evidence. It prayed that an amended decision be issued
granting the entirety of its claim for refund, or in the alternative, that it be
allowed to submit and offer relevant documents as supplemental
evidence.
Respondent Commissioner of Internal Revenue (CIR) also moved for
reconsideration, praying for the denial of the entire amount of refund
because petitioner failed to present the quarterly Income Tax Returns
(ITRs) for CY 2004. To the CIR, the presentation of the 2004 quarterly ITRs
was indispensable in proving petitioner’s entitlement to the claimed
amount because it would prove that no carry-over of unutilized and
excess CWT for the four (4) quarters of CY 2003 to the succeeding four
(4) quarters of CY 2004 was made. In the absence of said ITRs, no refund
could be granted. In the CIR’s view, this was in accordance with the
irrevocability rule under Section 76 of the NIRC which reads:
SEC. 76. Final Adjustment Return. – Every corporation liable to tax under
Section 27 shall file an adjustment return covering the total taxable
income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal
to the total tax due on the entire taxable income of that year, the
corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credits; or
(C) Be credited or refunded with the excess amount paid, as the case
may be.
In case the corporation is entitled to a tax credit or refund of the excess
estimated quarterly income taxes paid, the excess amount shown on its
final adjustment return may be carried over and credited against the
estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry-over and apply the
excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit certificate shall be
allowed therefor.
On July 27, 2011, the CTA-Division reversed itself. In an Amended
Decision,[4] it denied the entire claim of petitioner. It reasoned out that
petitioner should have presented as evidence its first, second and third
quarterly ITRs for the year 2004 to prove that the unutilized CWT being
claimed had not been carried over to the succeeding quarters. Thus:
WHEREFORE, in view of the foregoing, petitioner’s Motion for Partial
Reconsideration is hereby DENIED while respondent’s Motion for
Reconsideration is hereby GRANTED. Accordingly, the Decision dated
April 13, 2010 granting petitioner’s claim in the reduced amount of
P2,737,903.34 is hereby REVERSED AND SET ASIDE. Consequently, the
instant Petition for Review is hereby DENIED due to insufficiency of
evidence.
SO ORDERED.[5]
Aggrieved, petitioner elevated the case to the CTA En Banc praying for
the reversal of the Amended Decision of the CTA Division.
In its March 22, 2013 Decision,[6] the CTA-En Banc affirmed the Amended
Decision of the CTA-Division. It stated that before a cash refund or an
issuance of tax credit certificate for unutilized excess tax credits could
be granted, it was essential for petitioner to establish and prove, by
presenting the quarterly ITRs of the succeeding years, that the excess
CWT was not carried over to the succeeding taxable quarters
considering that the option to carry over in the succeeding taxable
quarters could not be modified in the final adjustment returns (FAR).
Because petitioner did not present the first, second and third quarterly
ITRs for CY 2004, despite having offered and submitted the Annual
ITR/FAR for the same year, the CTA-En Banc stated that the petitioner
failed to discharge its burden, hence, no refund could be granted. In
justifying its conclusions, the CTA-En Banc cited its own case of
Millennium Business Services, Inc. v. Commissioner of Internal Revenue
(Millennium)[7] wherein it held as follows:
Since the burden of proof is upon the claimant to show that the amount
claimed was not utilized or carried over to the succeeding taxable
quarters, the presentation of the succeeding quarterly income tax return
and final adjustment return is indispensable to prove that it did not carry
over or utilized the claimed excess creditable withholding taxes. Absent
thereof, there will be no basis for a taxpayer’s claim for refund since
there will be no evidence that the taxpayer did not carry over or utilize
the claimed excess creditable withholding taxes to the succeeding
taxable quarters.
Significantly, a taxpayer may amend its quarterly income tax return or
annual income tax return or Final Adjustment Return, which in any case
may modify the previous intention to carry-over, apply as tax credit
certificate or refund, as the case may be. But the option to carry over in
the succeeding taxable quarters under the irrevocability rule cannot be
modified in its final adjustment return.
The presentation of the final adjustment return does not shift the burden
of proof that the excess creditable withholding tax was not utilized or
carried over to the first three (3) taxable quarters. It remains with the
taxpayer claimant. It goes without saying that final adjustment returns of
the preceding and the succeeding taxable years are not sufficient to
prove that the amount claimed was utilized or carried over to the first
three (3) taxable quarters.
The importance of the presentation of the succeeding quarterly income
tax return and the annual income tax return of the subsequent taxable
year need not be overly emphasized. All corporations subject to income
tax, are required to file quarterly income tax returns, on a cumulative
basis for the preceding quarters, upon which payment of their income
tax has been made. In addition to the quarterly income tax returns,
corporations are required to file a final or adjustment return on or before
the fifteenth day of April. The quarterly income tax return, like the final
adjustment return, is the most reliable firsthand evidence of corporate
acts pertaining to income taxes, as it includes the itemization and
summary of additions to and deductions from the income tax due. These
entries are not without rhyme or reason. They are required, because they
facilitate the tax administration process, and guide this Court to the
veracity of a petitioner’s claim for refund without which petitioner could
not prove with certainty that the claimed amount was not utilized or
carried over to the succeeding quarters or the option to carry over and
apply the excess was effectively chosen despite the intent to claim a
refund.
In the same vein, if the government wants to disprove that the excess
creditable withholding tax was not utilized or carried over to the
succeeding taxable quarters, the presentation of the succeeding
quarterly income tax return and the annual income tax return of the
subsequent taxable year indicating utilization or carrying over are [sic]
indispensible. However, the claimant must first establish its claim for
refund, such that it did not utilize or carry over or that it opted to utilize
and carry over to the 1st, 2nd, 3rd quarters and final adjustment return
of the succeeding taxable year.
Concomitantly, the presentation of the quarterly income tax return and
the annual income tax return to prove the fact that excess creditable
withholding tax was not utilized or carried over or opted to be utilized
and carried over to the 1st, 2nd, 3rd quarters and final adjustment return
of the succeeding taxable quarter is not only for convenience to
facilitate the tax administration process but it is part of the requisites to
establish the claim for refund. Section 76 of the NIRC of 1997 provides
that if the taxpayer claimant carries over and applies the excess
quarterly income tax against the income tax due for the taxable quarters
of the succeeding taxable years, the same is irrevocable and no
application for cash refund or issuance of a tax credit certificate shall be
allowed.[8]
Hence, this petition.
Noteworthy is the fact that the CTA-En Banc ruling was met with two
dissents from Associate Justices Juanito C. Castañeda (Justice
Castañeda) and Esperanza R. Fabon-Victorino (Justice Fabon-
Victorino).
In his Dissenting Opinion[9] which was concurred in by Justice Fabon-
Victorino, Justice Castañeda expressed the view that the CTA-En Banc
should have reinstated the CTA-Division’s original decision because in
the cases of Philam Asset Management Inc. v. Commissioner of Internal
Revenue (Philam);[10] State Land Investment Corporation v.
Commissioner of Internal Revenue (State Land);[11] Commissioner of
Internal Revenue v. PERF Realty Corporation (PERF Realty);[12] and
Commissioner of Internal Revenue v. Mirant (Philippines) Operations,
Corporation (Mirant),[13] this Court already ruled that requiring the ITR or
the FAR for the succeeding year in a claim for refund had no basis in law
and jurisprudence. According to him, the submission of the FAR of the
succeeding taxable year was not required under the law to prove the
claimant’s entitlement to excess or unutilized CWT, and by following
logic, the submission of quarterly income tax returns for the subsequent
taxable period was likewise unnecessary. He found no justifiable reason
not to follow the existing rulings of this Court.
Petitioner’s reasoning in this petition echoes the dissenting opinion of
Justice Castaneda. It further submits that despite the non-presentation
of the quarterly ITRs, it has sufficiently shown that the excess CWT for CY
2003 was not carried over or applied to its income tax liabilities for CY
2004, as shown in the Annual ITR for 2004 it submitted. Thus, petitioner
insists that its refund should have been granted. Petitioner further avers,
in its Reply,[14] that even if Millennium Business case was applicable, such
must be given prospective effect considering that this case was litigated
on the basis of the doctrines laid down in Philam, State Land and PERF
Realty cases wherein the submission of quarterly ITRs in a case for tax
refund was held by this Court as not mandatory.
In its Comment,[15] the CIR counters that even if the taxpayer signifies the
option for either tax refund or carry-over as tax credit, this does not ipso
facto confer the right to avail of the option immediately. There is a need,
according to the CIR, for an investigation to ascertain the correctness of
the corporate returns and the amount sought to be credited; and part
of which is to look into the quarterly returns so that it may be determined
whether or not excess and unutilized CWT was carried over into the
succeeding quarters of the next taxable year. Because the pertinent
quarterly ITRs were not presented, the CIR submits that the petitioner
failed to prove its right to a tax refund.
Issue
The sole issue here is whether the submission and presentation of the
quarterly ITRs of the succeeding quarters of a taxable year is
indispensable in a claim for refund.
The Court’s Ruling
The Court recognizes, as it always has, that the burden of proof to
establish entitlement to refund is on the claimant taxpayer.[16] Being in
the nature of a claim for exemption,[17] refund is construed in strictissimi
juris against the entity claiming the refund and in favor of the taxing
power.[18] This is the reason why a claimant must positively show
compliance with the statutory requirements provided for under the NIRC
in order to successfully pursue one’s claim. As implemented by the
applicable rules and regulations and as interpreted in a vast array of
decisions, a taxpayer who seeks a refund of excess and unutilized CWT
must:
1) File the claim with the CIR within the two year period from the date of
payment of the tax;
2) Show on the return that the income received was declared as part of
the gross income; and
3) Establish the fact of withholding by a copy of a statement duly issued
by the payor to the payee showing the amount paid and the amount
of tax withheld.[19]
The original decision of the CTA-Division made plain that the petitioner
complied with the above requisites in so far as the reduced amount of
P2,737,903.34 was concerned. In the amended decision, however, it
was pointed out that because petitioner failed to present the quarterly
ITRs of the subsequent year, there was an impossibility of determining
compliance with the irrevocability rule under Section 76 of the NIRC as
in those documents could be found evidence of whether the excess
CWT was applied to its income tax liabilities in the quarters of 2004. The
irrevocability rule under Section 76 of the NIRC means that once an
option, either for refund or issuance of tax credit certificate or carry-over
of CWT has been exercised, the same can no longer be modified for the
succeeding taxable years.[20] For said reason, the CTA-En Banc affirmed
the conclusion in the amended decision that because of the said
impossibility, the claim for refund was not substantiated.
The CIR agrees with the disposition of the CTA-En Banc, stressing that the
petitioner failed to carry out the burden of showing that no carry-over
was made when it did not present the quarterly ITRs for CY 2004.
Petitioner disagrees, as the dissents did, that the non-submission of
quarterly ITRs is fatal to its claim.
Hence, the issue on the indispensability of quarterly ITRs of the
succeeding taxable year in a claim for refund.
The Court finds for the petitioner.
There is no question that those who claim must not only prove its
entitlement to the excess credits, but likewise must prove that no carry-
over has been made in cases where refund is sought.
In this case, the fact of having carried over petitioner’s 2003 excess
credits to succeeding taxable year is in issue. According to the CTA-En
Banc and the CIR, the only evidence that can sufficiently show that
carrying over has been made is to present the quarterly ITRs. Some
members of this Court adhere to the same view.
The Court however cannot.
Proving that no carry-over has been made does not absolutely require
the presentation of the quarterly ITRs.
In Philam, the petitioner therein sought for recognition of its right to the
claimed refund of unutilized CWT. The CIR opposed the claim, on the
grounds similar to the case at hand, that no proof was provided showing
the non-carry over of excess CWT to the subsequent quarters of the
subject year. In a categorical manner, the Court ruled that the
presentation of the quarterly ITRs was not necessary. Therein, it was
written:
Requiring that the ITR or the FAR of the succeeding year be presented
to the BIR in requesting a tax refund has no basis in law and
jurisprudence.
First, Section 76 of the Tax Code does not mandate it. The law merely
requires the filing of the FAR for the preceding – not the succeeding –
taxable year. Indeed, any refundable amount indicated in the FAR of
the preceding taxable year may be credited against the estimated
income tax liabilities for the taxable quarters of the succeeding taxable
year. However, nowhere is there even a tinge of a hint in any provisions
of the [NIRC] that the FAR of the taxable year following the period to
which the tax credits are originally being applied should also be
presented to the BIR.
Second, Section 5 of RR 12-94, amending Section 10(a) of RR 6-85, merely
provides that claims for refund of income taxes deducted and withheld
from income payments shall be given due course only (1) when it is
shown on the ITR that the income payment received is being declared
part of the taxpayer’s gross income; and (2) when the fact of
withholding is established by a copy of the withholding tax statement,
duly issued by the payor to the payee, showing the amount paid and
the income tax withheld from that amount.
It has been submitted that Philam cannot be cited as a precedent to
hold that the presentation of the quarterly income tax return is not
indispensable as it appears that the quarterly returns for the succeeding
year were presented when the petitioner therein filed an administrative
claim for the refund of its excess taxes withheld in 1997.
It appears however that there is misunderstanding in the ruling of the
Court in Philam. That factual distinction does not negate the proposition
that subsequent quarterly ITRs are not indispensable. The logic in not
requiring quarterly ITRs of the succeeding taxable years to be presented
remains true to this day. What Section 76 requires, just like in all civil cases,
is to prove the prima facie entitlement to a claim, including the fact of
not having carried over the excess credits to the subsequent quarters or
taxable year. It does not say that to prove such a fact, succeeding
quarterly ITRs are absolutely needed.
This simply underscores the rule that any document, other than quarterly
ITRs may be used to establish that indeed the non-carry over clause has
been complied with, provided that such is competent, relevant and part
of the records. The Court is thus not prepared to make a pronouncement
as to the indispensability of the quarterly ITRs in a claim for refund for no
court can limit a party to the means of proving a fact for as long as they
are consistent with the rules of evidence and fair play. The means of
ascertainment of a fact is best left to the party that alleges the same.
The Court’s power is limited only to the appreciation of that means
pursuant to the prevailing rules of evidence. To stress, what the NIRC
merely requires is to sufficiently prove the existence of the non-carry over
of excess CWT in a claim for refund.
The implementing rules similarly support this conclusion, particularly
Section 2.58.3 of Revenue Regulation No. 2-98 thereof. There, it provides
as follows:
SECTION 2.58.3. Claim for Tax Credit or Refund.
(A) The amount of creditable tax withheld shall be allowed as a tax
credit against the income tax liability of the payee in the quarter of the
taxable year in which income was earned or received.
(B) Claims for tax credit or refund of any creditable income tax which
was deducted and withheld on income payments shall be given due
course only when it is shown that the income payment has been
declared as part of the gross income and the fact of withholding is
established by a copy of the withholding tax statement duly issued by
the payer to the payee showing the amount paid and the amount of
tax withheld therefrom.
xxx xxx xxx
Evident from the above is the absence of any categorical
pronouncement of requiring the presentation of the succeeding
quarterly ITRs in order to prove the fact of non-carrying over. To say the
least, the Court rules that as to the means of proving it, It has no power
to unduly restrict it.
In this case, it confounds the Court why the CTA did not recognize and
discuss in detail the sufficiency of the annual ITR for 2004,[21] which was
submitted by the petitioner. The CTA in fact said:
In the present case, while petitioner did offer its Annual ITR/Final
Adjustment Return for taxable year 2004, it appears that petitioner
miserably failed to submit and offer as part of its evidence the first,
second, and third Quarterly ITRs for the year 2004. Consequently,
petitioner was not able to prove that it did not exercise its option to carry-
over its excess CWT.[22]
Petitioner claims that the requirement of proof showing the non-carry
over has been established in said document.
Indeed, an annual ITR contains the total taxable income earned for the
four (4) quarters of a taxable year, as well as deductions and tax credits
previously reported or carried over in the quarterly income tax returns for
the subject period. A quick look at the Annual ITR reveals this fact:
Aggregate Income Tax Due
Less Tax Credits/Payments
Prior Year’s excess Credits – Taxes withheld
Tax Payment (s) for the Previous Quarter (s) of the same taxable year
other than MCIT
xxx xxx xxx
Creditable Tax Withheld for the Previous Quarter (s)
Creditable Tax Withheld Per BIR Form No. 2307 for this Quarter
xxx xxx xxx[23]
It goes without saying that the annual ITR (including any other proof that
may be sufficient to the Court) can sufficiently reveal whether carry over
has been made in subsequent quarters even if the petitioner has chosen
the option of tax credit or refund in the immediately 2003 annual ITR.
Section 76 of the NIRC requires a corporation to file a Final Adjustment
Return (or Annual ITR) covering the total taxable income for the
preceding calendar or fiscal year. The total taxable income contains the
combined income for the four quarters of the taxable year, as well as
the deductions and excess tax credits carried over in the quarterly
income tax returns for the same period.
If the excess tax credits of the preceding year were deducted, whether
in whole or in part, from the estimated income tax liabilities of any of the
taxable quarters of the succeeding taxable year, the total amount of
the tax credits deducted for the entire taxable year should appear in
the Annual ITR under the item “Prior Year’s Excess Credits.” Otherwise, or
if the tax credits were carried over to the succeeding quarters and the
corporation did not report it in the annual ITR, there would be a
discrepancy in the amounts of combined income and tax credits carried
over for all quarters and the corporation would end up shouldering a
bigger tax payable. It must be remembered that taxes computed in the
quarterly returns are mere estimates. It is the annual ITR which shows the
aggregate amounts of income, deductions, and credits for all quarters
of the taxable year. It is the final adjustment return which shows whether
a corporation incurred a loss or gained a profit during the taxable
quarter.[24] Thus, the presentation of the annual ITR would suffice in
proving that prior year’s excess credits were not utilized for the taxable
year in order to make a final determination of the total tax due.
In this case, petitioner reported an overpayment in the amount of
P7,194,213.00 in its annual ITR for the year ended December 2003:
For the overpayment, petitioner chose the option “To be issued a Tax
Credit Certificate.” In its Annual ITR for the year ended December 2004,
petitioner did not report the Creditable Tax Withheld for the 4th quarter
of 2003 in the amount of P4,073,954.00 as prior year’s excess credits. As
shown in the 2004 ITR:
Verily, the absence of any amount written in the Prior Year excess Credit
– Tax Withheld portion of petitioner’s 2004 annual ITR clearly shows that
no prior excess credits were carried over in the first four quarters of 2004.
And since petitioner was able to sufficiently prove that excess tax credits
in 2003 were not carried over to taxable year 2004 by leaving the item
“Prior Year’s Excess Credits” as blank in its 2004 annual ITR, then petitioner
is entitled to a refund. Unfortunately, the CTA, in denying entirely the
claim, merely relied on the absence of the quarterly ITRs despite being
able to verify the truthfulness of the declaration that no carry over was
indeed effected by simply looking at the 2004 annual ITR.
At this point, worth mentioning is the fact that subsequent cases affirm
the proposition as correctly pointed out by petitioner. State Land, PERF
and Mirant reiterated the rule that the presentation of the quarterly ITRs
of the subsequent year is not mandatory on the part of the claimant to
prove its claims.
There are some who challenges the applicability of PERF in the case at
bar. It is said that PERF is not in point because the Annual ITR for the
succeeding year had actually been attached to PERF’s motion for
reconsideration with the CTA and had formed part of the records of the
case.
Clearly, if the Annual ITR has been recognized by this Court in PERF, why
then would the submitted 2004 Annual ITR in this case be insufficient
despite the absence of the quarterly ITRs? Why then would this Court
require more than what is enough and deny a claim even if the minimum
burden has been overcome? At best, the existence of quarterly ITRs
would have the effect of strengthening a proven fact. And as such, may
only be considered corroborative evidence, obviously not indispensable
in character. PERF simply affirms that quarterly ITRs are not indispensable,
provided that there is sufficient proof that carrying over excess CWT was
not effected.
Stateland and Mirant are equally challenged. In all these cases
however, the factual distinctions only serve to bolster the proposition that
succeeding quarterly ITRs are not indispensable. Implicit from all these
cases is the Court’s recognition that proving carry-over is an evidentiary
matter and that the submission of quarterly ITRs is but a means to prove
the fact of one’s entitlement to a refund and not a condition sine qua
non for the success of refund. True, it would have been better, easier and
more efficient for the CTA and the CIR to have as basis the quarterly ITRs,
but it is not the only way considering further that in this case, the Annual
ITR for 2004 is sufficient. Courts are here to painstakingly weigh evidence
so that justice and equity in the end will prevail.
 is REINSTATED. Respondent Commissioner of Internal Revenue is ordered
It must be emphasized that once the requirements laid down by the to REFUND to petitioner the amount of P2,737,903.34 as excess creditable
NIRC have been met, a claimant should be considered successful in withholding tax paid for taxable year 2003.
discharging its burden of proving its right to refund. Thereafter, the
burden of going forward with the evidence, as distinct from the general SO ORDERED.
burden of proof, shifts to the opposing party,[25] that is, the CIR. It is then
the turn of the CIR to disprove the claim by presenting contrary evidence
which could include the pertinent ITRs easily obtainable from its own files.

All along, the CIR espouses the view that it must be given ample
opportunity to investigate the veracity of the claims. Thus, the Court asks:
In the process of investigation at the administrative level to determine
the right of the petitioner to the claimed amount, did the CIR, with all its
resources even attempt to verify the quarterly ITRs it had in its files?
Certainly, it did not as the application was met by the inaction of the
CIR. And if desirous in its effort to clearly verify petitioner’s claim, it should
have had the time, resources and the liberty to do so. Yet, nothing was
produced during trial to destroy the prima facie right of the petitioner by
counterchecking the claims with the quarterly ITRs the CIR has on its file.
To the Court, it seems that the CIR languished on its duties to ascertain
the veracity of the claims and just hoped that the burden would fall on
the petitioner’s head once the issue reaches the courts.

This mindset ignores the rule that the CIR has the equally important
responsibility of contradicting petitioner’s claim by presenting proof
readily on hand once the burden of evidence shifts to its side. Claims for
refund are civil in nature and as such, petitioner, as claimant, though
having a heavy burden of showing entitlement, need only prove
preponderance of evidence in order to recover excess credit in cold
cash. To review, “[P]reponderance of evidence is [defined as] the
weight, credit, and value of the aggregate evidence on either side and
is usually considered to be synonymous with the term ‘greater weight of
the evidence’ or ‘greater weight of the credible evidence.’ It is
evidence which is more convincing to the court as worthy of belief than
that which is offered in opposition thereto.[26]

The CIR must then be reminded that in Philam, the CIR’s “failure to
present [the quarterly ITRs and AFR] to support its contention against the
grant of a tax refund to [a claimant] is certainly fatal.” PERF reinforces
this with a sweeping statement holding that the verification process is
not incumbent on PERF [or any claimant for that matter]; [but] is the duty
of the CIR to verify whether xxx excess income taxes [have been carried
over].

And should there be a possibility that a claimant may have violated the
irrevocability rule and thereafter claim twice from its credits, no one is to
be blamed but the CIR for not discharging its burden of evidence to
destroy a claimant’s right to a refund. At any rate, a claimant who
defrauds the government cannot escape liability be it criminal or civil in
nature.

Verily, with the petitioner having complied with the requirements for
refund, and without the CIR showing contrary evidence other than its
bare assertion of the absence of the quarterly ITRs, copies of which are
easily verifiable by its very own records, the burden of proof of
establishing the propriety of the claim for refund has been sufficiently
discharged. Hence, the grant of refund is proper.

The Court does not, and cannot, however, grant the entire claimed
amount as it finds no error in the original decision of the CTA Division
granting refund to the reduced amount of P2,737,903.34. This finding of
fact is given respect, if not finality, as the CTA,[27] which by the very nature
of its functions of dedicating itself exclusively to the consideration of the
tax problems has necessarily developed an expertise on the subject.[28] It
being the case, the Court partly grants this petition to the extent of
reinstating the April 23, 2010 original decision of the CTA Division.

The Court reminds the CIR that substantial justice, equity and fair play
take precedence over technicalities and legalisms. The government
must keep in mind that it has no right to keep the money not belonging
to it, thereby enriching itself at the expense of the law-abiding
citizen[29] or entities who have complied with the requirements of the law
in order to forward the claim for refund. Under the principle of solution
indebiti provided in Article 2154 of the Civil Code, the CIR must return
anything it has received.[30]

Finally, even assuming that the Court reverses itself and pronounces the
indispensability of presenting the quarterly ITRs to prove entitlement to
the claimed refund, petitioner should not be prejudiced for relying on
Philam. The CTA En Banc merely based its pronouncement on a case
that does not enjoy the benefit of stare decis et non quieta movere
which means "to adhere to precedents, and not to unsettle things which
are established."[31] As between a CTA En Banc Decision (Millennium)
and this Court’s Decision (Philam), it is elementary that the latter should
prevail.

WHEREFORE, the Court partly grants the petition. The March 22, 2013
Decision of the Court of Tax Appeals En Banc is REVERSED. The April 13,
2010 Decision of the Court of Tax Appeals Special First Division
UNIVERSITY PHYSICIANS SERVICES INC. - MANAGEMENT, INC.
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent
G.R. No. 205955 | 2018-03-07
Republic of the Philippines
Supreme Court
Manila
THIRD DIVISION
DECISION
MARTIRES, J.:
When a corporation overpays its income tax liability as adjusted at the
close of the taxable year, it has two options: (1) to be refunded or issued
a tax credit certificate, or (2) to carry over such overpayment to the
succeeding taxable quarters to be applied as tax credit against income
tax due.1 Once the carry-over option is taken, it becomes irrevocable
such that the taxpayer cannot later on change its mind in order to claim
a cash refund or the issuance of a tax credit certificate of the very same
amount of overpayment or excess m. come tax credit.2
Does the irrevocability rule apply exclusively to the carry-over option?
Such is the novel issue presented in this case.
THE FACTS
Before the Court is a petition for review under Rule 45 of the Rules of
Court filed by petitioner University Physicians Services Inc.-Management,
Inc. (UPSI-MI) which seeks the reversal and setting aside of the 8 February
2013 Decision3 of the Court of Tax Appeals (CTA) En Banc in CTA-EB Case
No. 828. ·Said decision of the CTA En Banc affirmed the 5 July 2011
Decision and 8 September 2011 Resolution of the CTA Second Division
(CTA Division) in CTA Case No. 7908. The CTA Division denied the
application of UPSI-MI for tax refund or issuance of Tax Credit Certificate
(TCC) of its excess unutilized creditable income tax for the taxable year
2006.
The Antecedents
As narrated by the CTA, the facts are uncomplicated, viz:
UPSI-MI is a corporation incorporated and existing under and by virtue of
laws of the Republic of the Philippines, with business address at 1122
General Luna Street, Paco. Manila. Respondent on the other hand, is the
duly appointed Commissioner of Internal Revenue, with power, among
others, 10 act upon claims for refund or tax credit of overpaid internal
revenue taxes, with office address at the Fifth Floor, BIR National Office
Building, BIR Road, Diliman , Quezon City.
On April 16, 2007. petitioner filed its Annual Income Tax Return (ITR) for
the year ended December 31, 2006 with the Revenue District No. 34 of
the Revenue Region No. 6 of the Bureau of Internal Revenue (BIR),
reflecting an income tax overpayment of 5,159,341.00. computed as
follows:4
Subsequently, on November 14, 2007, petitioner filed an Annual ITR for
the short period fiscal year ended March 31, 2007, reflecting the income
tax overpayment of 5. 159.341 from the previous period as "Prior Year’s
Excess Credit", as follows:5
On the same date, petitioner filed an amended Annual ITR for the short
period fiscal year ended March 31, 2007, reflecting the removal of the
amount of the instant claim in the ''Prior Year's Excess Credit".Thus, the
amount thereof was changed from P5, 159,341 to P2,231,507.
On October 10, 2008, petitioner filed with the respondent's office, a claim
for refund and/or issuance of a Tax Credit Certificate (TCC) in the
amount of P2,927.834.00, representing the alleged excess and unutilized
creditable withholding taxes for 2006.
In view of the fact that respondent has not acted upon the foregoing
claim for refund/tax credit, petitioner filed with a Petition for Review on
April l4, 2009 before the Court in Division.
The Ruling of the CTA Division
After trial, the CT A Division denied the petition for review for lack of merit.
It reasoned that UPSI-MI effectively exercised the carry-over option
under Section 76 of the National Internal Revenue Code (NIRC) of 1997.
On motion for reconsideration, UPSI-MI argued that the irrevocability rule
under Section 76 of the NIRC is not applicable for the reason that it did
not carry over to the succeeding taxable period the 2006 excess income
tax credit. UPSI-MI added that the subject excess tax credits were
inadvertently included in its original 2007 ITR, and such mistake was
rectified in the amended 2007 ITR. Thus, UPSI-MI insisted that what should
control is its election of the option "To be issued a Tax Credit
Certificate" in its 2006 ITR.
The CTA Division ruled that UPSI-MI's alleged inadvertent inclusion of the
2006 excess tax credit in the 2007 original ITR belies its own allegation that
it did not carry over the said amount to the succeeding taxable period.
The amendment of the 2007 ITR cannot undo UPSI-MI's actual exercise
of the carry-over option in the original 2007 ITR, for to do so would be
against the irrevocability rule. The dispositive portion of the CTA Division's
decision reads:
WHEREFORE, the instant Petition for Review is hereby DENIED for lack of
merit.6
Aggrieved, UPSI-MI appealed before the CTA En Banc.
The Ruling of the CTA En Banc
The CTA En Banc ruled that UPSI-MI is barred by Section 76 of the NIRC
from claiming a refund of its excess tax credits for the taxable year 2006.
The barring effect applies after UPSI-MI carried over its excess tax credits
to the succeeding quarters of 2007, even if such carry-over was allegedly
done inadvertently. The court emphasized that the prevailing law and
jurisprudence admit of no exception or qualification to the irrevocability
rule. Thus, the CTA En Banc affirmed the assailed decision and resolution
of the CTA Division, disposing as follows:
WHEREFORE, all the foregoing considered, the instant Petition for Review
is hereby DENIED. The assailed Decision dated July 5. 2011and Resolution
dated September 8, 2011 both rendered by the Court in Division in CTA
Case No. 7908 are hereby AFFIRMED.
SO ORDERED.7
Notably, the said decision was met by a dissent from Justice Esperanza
R. Pabon-Victorino. Invoking Phi/am Asset Management,
Inc. v. Commissioner (Philam), 8 Justice Pabon-Victorino took the view
that the irrevocability rule applies as much to the option of refund or tax
credit certificate. She wrote:
A contextual appreciation of the ruling [Philam] would tell us that any of
the two alternatives once chosen is irrevocable - be it for refund or carry
over. The controlling factor for the operation of the irrevocability rule is
that the taxpayer chose an option; and once it had already done so, it
could no longer make another one.
Unsatisfied with the decision of the CTA En Banc, UPSI-MI appealed
before this Court.
The Present Petition for Review
UPSI-MI interposed the following reasons for its petition:
THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED AND
DECIDED IN A MANNER NOT IN ACCORDANCE WITH THE LAW, PREVAILING
JURISPRUDENCE, AND FACTUAL MILIEU SURROUNDING THE CASE, WHEN IT
ADOPTED THE DECISION OF THE COURT OF TAX APPEALS IN DIVISION AND
RULED THAT:
a. Petitioner is not entitled to the refund or issuance of a Tax Credit
Certificate in the amount of P2,927,834.00 representing its 2006 excess
tax credits because of the application of the "irrevocability rule" under
Section 76 of the NIRC of 1997.
b. The amendment of the original ITR for fiscal year ended 31 March 2007
does not take back, cancel or rescind the original option to refund
through tax credit certificate based on the argument that the Petitioner
allegedly made an option to carry-over the excess credits.
THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED
WHEN IT IGNORED THAT ON JOINT STIPULATIONS, THE RESPONDENT
ADMITTED THE FACT THAT PETITIONER INDICATED IN THE CORRESPONDING
BOX ITS
INTENTION TO BE ISSUED A TAX CREDIT CERTIFICATE REPRESENTING ITS
UNUTILIZED CREDITABLE WITHHOLDING TAX WITHHELD FOR THE TAXABLE
YEAR 2006 BY MARKING THE APPROPRIATE BOX.
THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED
WHEN IT DECIDED ON THE ISSUE OF WHETHER OR NOT PEITIONER CARRIED
OVER ITS 2006 EXCESS TAX CREDITS TO THE SUCCEEDING SHORT TAXABLE
PERIOD OF 2007 WHEN THE SAME WAS NEVER RAISED IN THE JOINT
STIPULATION OF FACTS.
UPSI-MI faults the CTA En Banc for banking too much on the irrevocability
of the option to carry over. It contends that even the option to be
refunded through the issuance of a TCC is likewise irrevocable. Taking
cue from the dissent of Justice Pabon-Victorino, UPSI-MI cites Philam in
restating this Court's pronouncement that "the options of a corporate
taxpayer, whose total quarterly income tax payments exceed its tax
liability, are alternative in nature and the choice of one precludes the
other." It also cites Commissioner v. PL Management International
Philippines, Inc. (PL Management)9 that reiterated the rule that the
choice of one precludes the other. Thus, when it indicated in its 2006
Annual ITR the option "To be issued a Tax Credit Certificate," such choice
precluded the other option to carry over.10
In other words, UPSI-MI proposes that the options of refund on one hand
and carry-over on the other hand are both irrevocable by nature.
Relying again on the dissent of Justice Pabon-Victorino, UPSI-MI also
points to BIR Form 1702 (Annual Income Tax Return) itself which expressly
states under line 31 thereof:
"If overpayment, mark one box only:
(once the choice is made, the same is irrevocable)"
Resume of relevant facts
To recapitulate, UPSI-MI had, as of 31 December 2005, an outstanding
amount of P2,331, 102.00 in excess and unutilized creditable withholding
taxes.
For the subsequent taxable year ending 31 December 2006, the total
sum of creditable taxes withheld on the management fees of UPSI-MI
was P2,927,834.00. Per its 2006 Annual Income Tax Return (ITR), UPSI-MI's
income tax due amounted to P99,105.00. UPSI-MI applied its "Prior Year's
Excess Credits" of P2,331, 102.00 as tax credit against such 2006 Income
Tax due, leaving a balance of P2,231,507.00 of still unutilized excess
creditable tax. Meanwhile, the creditable taxes withheld for the year
2006 (P2,927,834.00) remained intact and unutilized. In said 2006 Annual
ITR, UPSI-MI chose the option "To be issued a tax credit certificate" with
respect to the amount P2,927,834.00, representing unutilized excess
creditable taxes for the taxable year ending 31 December 2006. The
figures are summarized in the table below:
In the following year, UPSI-MI changed its taxable period from calendar
year to fiscal year ending on the last day of March. Thus, it filed on 14
November 2007 an Annual ITR covering the short period from January 1
to March 31 of 2007. In the original 2007 Annual ITR, UPSI-MI opted to
carry over as "Prior Year's Excess Credits" the total amount of
P5,159,341.00 which included the 2006 unutilized creditable withholding
tax of P2,927,834.00. UPSI-MI amended the return by excluding the sum
of P2,927,834.00 under the line "Prior Year's Excess Credits" which amount
is the subject of the refund claim.
In sum, the question to be resolved is whether UPSI-MI may still be entitled
to the refund of its 2006 excess tax credits in the amount of P2,927,834.00
when it thereafter filed its income tax return (for the short period ending
31 March 2007) indicating the option of carry-over.
OUR RULING
We affirm the CTA.
We cannot subscribe to the suggestion that the irrevocability rule
enshrined in Section 76 of the National Internal Revenue Code (NIRC)
applies to either of the options of refund or carry-over. Our reading of
the law assumes the interpretation that the irrevocability is limited only to
the option of carry-over such that a taxpayer is still free to change its
choice after electing a refund of its excess tax credit. But once it opts to
carry over such excess creditable tax, after electing refund or issuance
of tax credit certificate, the carry-over option becomes irrevocable.
Accordingly, the previous choice of a claim for refund, even if
subsequently pursued, may no longer be granted.
The aforementioned Section 76 of the NIRC provides:
SECTION 76. Final Adjustment Return. - Every corporation liable to tax
under Section 27 shall file a final adjustment return covering the total
taxable income for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said taxable year is not
equal to the total tax due on the entire taxable income of that year, the
corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case
may be.
In case the corporation is entitled to a tax credit or refund of the excess
estimated quarterly income taxes paid, the excess amount shown on its
final adjustment return may be carried over and credited against the
estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry-over and apply the
excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit certificate shall be
allowed therefor. (emphasis supplied)
Under the cited law, there are two options available to the corporation
whenever it overpays its income tax for the taxable year: (1) to carry
over and apply the overpayment as tax credit against the estimated
quarterly income tax liabilities of the succeeding taxable years (also
known as automatic tax credit) until fully utilized (meaning, there is no
prescriptive period); and (2) to apply for a cash refund or issuance of
a tax credit certificate within the prescribed period.11 Such
overpayment of income tax is usually occasioned by the over-
withholding of taxes on the income payments to the corporate
taxpayer.
The irrevocability rule is provided in the last sentence of Section 76. A
perfunctory reading of the law unmistakably discloses that the
irrevocable option referred to is the carry-over option only. There
appears nothing therein from which to infer that the other choice, i.e.,
cash refund or tax credit certificate, is also irrevocable. If the intention of
the lawmakers was to make such option of cash refund or tax credit
certificate also irrevocable, then they would have clearly provided so.
In other words, the law does not prevent a taxpayer who originally opted
for a refund or tax credit certificate from shifting to the carry-over of the
excess creditable taxes to the taxable quarters of the succeeding
taxable years. However, in case the taxpayer decides to shift its option
to carryover, it may no longer revert to its original choice due to the
irrevocability rule. As Section 76 unequivocally provides, once the option
to carry over has been made, it shall be irrevocable. Furthermore, the
provision seems to suggest that there are no qualifications or conditions
attached to the rule on irrevocability.
Law and jurisprudence unequivocally support the view that only the
option of carry-over is irrevocable.
Aside from the uncompromising last sentence of Section 76, Section 228
of the NIRC recognizes such freedom of a taxpayer to change its option
from refund to carry-over. This law affords the government a remedy in
case a taxpayer, who had previously claimed a refund or tax credit
certificate (TCC) of excess creditable withholding tax, subsequently
applies such amount as automatic tax credit. The pertinent text of
Section 228 reads:
SEC. 228. Protesting of Assessment. - When the Commissioner or his duly
authorized representative finds that proper taxes should be assessed, he
shall first notify the taxpayer of his findings: Provided, however, That a
pre-assessment notice shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical
error in the computation of the tax as appearing on the face of the
return; or
(b) When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to
have carried over and automatically applied the same amount
claimed against the estimated tax liabilities for the taxable quarter or
quarters of the succeeding taxable year; or
(d) When the excise tax due on exciseable articles has not been paid;
or
(e) When the article locally purchased or imported by an exempt
person, such as, but not limited to, vehicles, capital equipment,
machineries and spare parts, has been sold, traded or transferred to
non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on
which the assessment is made; otherwise, the assessment shall be void.
x x x (emphasis supplied)
The provision contemplates three scenarios:
(1) Deficiency in the payment or remittance of tax to the government
(paragraphs [a], [b] and [d]);
(2) Overclaim of refund or tax credit (paragraph [ c ]); and
(3) Unwarranted claim of tax exemption (paragraph [e]).
In each case, the government is deprived of the rightful amount of tax
due it. The law assures recovery of the amount through the issuance of
an assessment against the erring taxpayer. However, the usual two-
stage process in making an assessment is not strictly followed.
Accordingly, the government may immediately proceed to the issuance
of a final assessment notice (FAN), thus dispensing with the preliminary
assessment (PAN), for the reason that the discrepancy or deficiency is so
glaring or reasonably within the taxpayer's knowledge such that a
preliminary notice to the taxpayer, through the issuance of a PAN, would
be a superfluity.
Pertinently, paragraph (c) contemplates a double recovery by the
taxpayer of an overpaid income tax that arose from an over-withholding
of creditable taxes. The refundable amount is the excess and unutilized
creditable withholding tax.
This paragraph envisages that the taxpayer had previously asked
for and successfully recovered from the BIR its excess creditable
withholding tax through refund or tax credit certificate; it could not be
viewed any other way. If the government had already granted the
refund, but the taxpayer is determined to have automatically applied
the excess creditable withholding tax against its estimated quarterly tax
liabilities in the succeeding taxable year(s), the taxpayer would
undeservedly recover twice the same amount of excess creditable
withholding tax. There appears, therefore, no other viable remedial
recourse on the part of the government except to assess the taxpayer
for the double recovery. In this instance, and in accordance with the
above rule, the government can right away issue a FAN.
If, on the other hand, an administrative claim for refund or issuance of
TCC is still pending but the taxpayer had in the meantime automatically
carried over the excess creditable tax, it would appear not only wholly
unjustified but also tantamount to adopting an unsound policy if the
government should resort to the remedy of assessment.
First, on the premise that the carry-over is to be sustained, there should
be no more reason for the government to make an assessment for the
sum (equivalent to the excess creditable withholding tax) that has been
justifiably returned already to the taxpayer (through automatic tax
credit) and for which the government has no right to retain in the first
place. In this instance, all that the government needs to do is to deny
the refund claim.
Second, on the premise that the carry-over is to be disallowed due to
the pending application for refund, it would be more complicated and
circuitous if the government were to grant first the refund claim and then
later assess the taxpayer for the claim of automatic tax credit that was
previously disallowed. Such procedure is highly inefficient and expensive
on the part of the government due to the costs entailed by an
assessment. It unduly hampers, instead of eases, tax administration and
unnecessarily exhausts the government's time and resources. It defeats,
rather than promotes, administrative feasibility.12 Such could not have
been intended by our lawmakers. Congress is deemed to have enacted
a valid, sensible, and just law.13
Thus, in order to place a sensible meaning to paragraph (c) of Section
228, it should be interpreted as contemplating only that situation when
an application for refund or tax credit certificate had already been
previously granted. Issuing an assessment against the taxpayer who
benefited twice because of the application of automatic tax credit is a
wholly acceptable remedy for the government.
Going back to the case wherein the application for refund or tax credit
is still pending before the BIR, but the taxpayer had in the meantime
automatically carried over its excess creditable tax in the taxable
quarters of the succeeding taxable year(s), the only judicious course of
action that the BIR may take is to deny the pending claim for refund. To
insist on giving due course to the refund claim only because it was the
first option taken, and consequently disallowing the automatic tax
credit, is to encourage inefficiency or to suppress administrative
feasibility, as previously explained. Otherwise put, imbuing upon the
choice of refund or tax credit certificate the character of irrevocability
would bring about an irrational situation that Congress did not intend to
remedy by means of an assessment through the issuance of a FAN
without a prior PAN, as provided in paragraph (c) of Section 228. It should
be remembered that Congress' declared national policy in passing the
NIRC of 1997 is to rationalize the internal revenue tax system of the
Philippines, including tax administration.14
The foregoing simply shows that the lawmakers never intended to make
the choice of refund or tax credit certificate irrevocable. Sections 76 and
228, paragraph (c), unmistakably evince such intention.
Philam and PL Management cases
did not categorically declare the
option of refund or TCC irrevocable.
The petitioner hinges its claim of irrevocability of the option of refund on
the statement of this Court in Philam and PL Management that "the
options xxx are alternative and the choice of one precludes the other."
This also appears as the basis of Justice Fabon-Victorino’s stance in her
dissent to the majority opinion in the assailed decision.
We do not agree.
The cases cited in the petition did not make an express declaration that
the option of cash refund or TCC, once made, is irrevocable. Neither
should this be inferred from the statement of the Court that the options
are alternative and that the choice of one precludes the other. Such
statement must be understood in the light of the factual milieu obtaining
in the cases.
Philam involved two cases wherein the taxpayer failed to signify its
option in the Final Adjustment Return (FAR).
In the first case (G.R. No. 156637), the Court ruled that such failure did
not mean the outright barring of the request for a refund should one still
choose this option later on. Thy taxpayer did in fact file on 11 September
1998 an administrative claim for refund of its 1997 excess creditable
taxes. We sustained the refund claim in1 this case.
It was different in the second case (G.R. No. 162004) because the
taxpayer filled out the portion "Prior Year's Excess Credits" in its
subsequent FAR. The court considered the taxpayer to have
constructively chosen the carry-over option. It was in this context that
the court determined the taxpayer to be bound by its initial choice (of
automatic tax credit), so that it is precluded from asking for a refund of
the excess CWT. It must be so because the carry-over option is
irrevocable, and it cannot be allowed to recover twice for its
overpayment of tax.
Unlike the second case, there was no flip-flopping of choices in the first
one. The taxpayer did not indicate in its 1997 FAR the choice of
carryover. Neither did it apply automatic tax credit in subsequent
income tax returns so as to be considered as having constructively
chosen the carry-over option. When it later on asked for a refund of its
1997 excess CWT, the taxpayer was expressing its option for the first time.
It must be emphasized that the Court sustained the application for
refund but without expressly declaring that such choice was irrevocable.
In either case, it is clear that the taxpayer cannot avail of both refund
and automatic tax credit at the same time. Thus, as Philam declared:
"One cannot get a tax refund and a tax credit at the same time for the
same excess income taxes paid." This is the import of the Court's
pronouncement that the options under Section 76 are alternative in
nature.
In declaring that "the choice of one (option) precludes the other," the
Court in Philam cited Philippine Bank of Communications v.
Commissioner of Internal Revenue (PBCom), 15 a case decided under
the aegis of the old NIRC of 1977 under which the irrevocability rule had
not yet been established. It was in PBCom that the Court stated for the
first time that "the choice of one precludes the other." 16 However, a
closer perusal of PBCom reveals that the taxpayer had opted for an
automatic tax credit. Thus, it was precluded from availing of the other
remedy of refund; otherwise, it would recover twice the same excess
creditable tax. Again, nowhere is it even suggested that the choice of
refund is irrevocable. For one thing, it was not the choice taken by the
taxpayer. For another, the irrevocability rule had not yet been provided.
As in PBCom, the Court also said in PL Management that the choice of
one (option) precludes the other. Similarly, the taxpayer in PL
Management initially signified in the FAR its choice of automatic tax
credit. But unlike in PBCom, PL Management was decided under the
NIRC of 1997 when the irrevocability rule was already applicable. Thus,
although PL Management was unable to actually apply its excess
creditable tax in the next succeeding taxable quarters due to lack of
income tax liability, its subsequent application for TCC was rightfully
denied by the Court. The reason is the irrevocability of its choice of carry-
over.
Applying the foregoing precepts to the given case, UPSI-MI is barred
from recovering its excess creditable tax through refund or TCC. It is
undisputed that despite its initial option to refund its 2006 excess
creditable tax, UPSI-MI subsequently indicated in its 2007 short-period
FAR that it carried over the 2006 excess creditable tax and applied the
same against its 2007 income tax due. The CTA was correct in
considering UPSI-MI to have constructively chosen the option of carry-
over, for which reason, the irrevocability rule forbade it to revert to its
initial choice. It does not matter that UPSI-Ml had not actually benefited
from the carry-over on the ground that it did not have a tax due in its
2007 short period. Neither may it insist that the insertion of the carry-over
in the 2007 FAR was by mere mistake or inadvertence. As we previously
laid down, the irrevocability rule admits of no qualifications or conditions.
In sum, the petitioner is clearly mistaken in its view that the irrevocability
rule also applies to the option of refund or tax credit certificate. In view
of the court's finding that it constructively chose the option of can-y-
over, it is already barred from recovering its 2006 excess creditable tax
through refund or TCC even if it was its initial choice.
However, the petitioner remains entitled to the benefit of carry-over and
thus may apply the 2006 overpaid income tax as tax credit in
succeeding taxable years until fully exhausted. This is because, unlike the
remedy of refund or tax credit certificate, the option of carry-over under
Section 76 is not subject to any prescriptive period.
WHEREFORE, the petition is DENIED for lack of merit. The 8 February 2013
Decision of the Court of Tax Appeals in CTA-EB Case No. 828 is
hereby AFFIRMED.
SO ORDERED.

In other words, previous incarnations of the words "the options are

alternative... the choice of one precludes the other" did not lay down a
doctrinal rule that the option of refund or tax credit certificate is
irrevocable.

Again, we need not belabor the point that insisting upon the
irrevocability of the option for refund, even though the taxpayer
subsequently changed its mind by resorting to automatic tax credit, is
not only contrary to the apparent intention of the lawmakers but is also
clearly violative of the principle of administrative feasibility.

Prior to the NIRC of 1997, the alternative options of refund and carryover
of excess creditable tax had already been firmly established. However,
the irrevocability rule was not yet in place.17 As we explained in PL
Management,Congress added the last sentence of Section 76 in order
to lay down the irrevocability rule. More recently, in Republic v. Team
(Phils.) Energy Corp., 18 we said that the rationale of the rule is to avoid
confusion and complication that could be brought about by the flip-
flopping on the options, viz:

The evident intent of the legislature, in adding the last sentence to

Section 76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping
on its options, and avoid confusion and complication as regards said
taxpayer's excess tax credit.19

The current rule specifically addresses the problematic situation when a

taxpayer, after claiming cash refund or applying for the issuance of tax
credit, and during the pendency of such claim or application,
automatically carries over the same excess creditable tax and applies it
against the estimated quarterly income tax liabilities of the succeeding
year. Thus, the rule not only eases tax administration but also obviates
double recovery of the excess creditable tax.

Further, nothing in the contents of BIR 1702 expressly declares that the
option of refund or TCC is irrevocable. Even on the assumption that the
irrevocability also applies to the option of refund, such would be an
interpretation of the BIR that, as already demonstrated in the foregoing
discussion, is contrary to the intent of the law. It must be stressed that
such erroneous interpretation is not binding on the court. Philippine Bank
of Communications v. CIR20is apropos:

It is widely accepted that the interpretation placed upon a statute by

the executive officers, whose duty is to enforce it, is entitled to great
respect by the courts. Nevertheless, such interpretation is not conclusive
and will be ignored if judicially found to be erroneous. Thus, courts will
not countenance administrative issuances that override, instead of
remaining consistent and in harmony with, the law they seek to apply
and implement.21
RHOMBUS ENERGY, INC., Petitioner, vs. COMMISSIONER OF INTERNAL On April 2, 2007, respondent filed its Annual Income Tax Return for
taxable year 2006 showing prior year's excess credits of P0.00.
REVENUE, Respondent.
On December 7, 2007, pending petitioner's action on respondent's claim
Present: VELASCO, JR., J., Chairperson, BERSAMIN, LEONEN, * MARTIRES, for refund or issuance of a .tax credit certificate of its excess/unutilized
CWT for the year 2005 and before the lapse of the period for filing an
and GESMUNDO, JJ. appeal, respondent filed the instant Petition for Review.
G.R. No. 206362 | 2018-08-01

Republic of the Philippines In her Answer, by way of special and affirmative defenses, the CIR
alleged: assuming without admitting that respondent filed a claim for
Supreme Court
refund, the same is subject to investigation by the BIR; respondent failed
Manila
to demonstrate that the tax was erroneously or illegally collected; taxes
THIRD DIVISION paid and collected are presumed to have been made in accordance
with laws and regulations, hence, not refundable; it is incumbent upon
respondent to show that it has complied with the provisions
DECISION
of Section 204(C), in relation to Section 229 of the Tax Code, as
BERSAMIN, J.: amended, upon which its claim for refund was premised; in an action for
tax refund the burden is upon the taxpayer to prove that he is entitled
thereto, and failure to discharge said burden is fatal to the claim; and
At issue is whether or not the taxpayer is barred by the irrevocability rule
in claiming for the refund of its excess and/or unutilized creditable claims for refund are construed strictly against the claimant, as the same
withholding tax. partake of the nature of exemption from taxation.

After trial on the merits, on March 23, 2011, the First Division rendered the
The Case
assailed Decision granting the Petition for Review.
This appeal assails the decision promulgated on October 11, 2012 in CTA
On April 14, 2011, petitioner CIR filed a "Motion for Reconsideration",
EB Case No. 803,1 whereby the Court of Tax Appeals En Banc (CTA En
which was denied for lack of merit by the First Division in a Resolution
Banc) reversed and set aside the decision dated March 23, 2011 of the
CTA First Division granting the claim for refund of excess and/or unutilized dated June 30, 2011.
creditable withholding tax in the total amount of P500,653.00 filed by
Not satisfied, petitioner CIR filed the instant Petition for Review x x x.3
Rhombus Energy, Inc. (Rhombus).2
Decision of the CTA En Banc
Antecedents
Citing Commissioner of Internal Revenue v. Mirant (Philippines)
The factual and procedural antecedents are synthesized by the CTA En
Banc in its assailed decision as follows: Operations, Corporation, 4 the CTA En Banc reversed and set aside the
decision dated March 23, 2011 of the CTA First Division, explaining and
holding thusly:
Records show that from October 1998 to July 2007, respondent was
registered with and was under the jurisdiction of Revenue Region No. 8,
Revenue District Office ("RDO") No. 50 (South Makati) of the BIR with x x x Section 76 is clear and unequivocal. Once the carry-over option is
Taxpayer Identification No. 005-650-790-000. However, due to taken, actually or constructively, it becomes irrevocable. It mentioned
no exception or qualification to the irrevocability rule (Commissioner of
respondent's change of address from Suite 1402, BDO Plaza, 8737 Paseo
Internal Revenue vs. Bank of the Philippine Islands 592 SCRA 231). Hence,
de Roxas, Salcedo Village, Makati City to Suite 208, 2nd Floor, the Manila
Bank Corporation Condominium Building, 6772 Ayala Avenue, Makati the controlling factor for the operation of the irrevocability rule is that the
taxpayer chose an option; and once it had already done so, it could no
City, respondent filed an application for change of home RDO.
longer make another one. Consequently, after the taxpayer opts to
carry-over its excess tax credit to the following taxable period, the
Thus, on July 18, 2007, respondent was transferred to the jurisdiction of
RDO No. 47, with Certificate of Registration No. OCN9RC0000211342. question of whether or not it actually gets to apply said tax credit is
irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once
the option to carry over has been made[,] no application for tax refund
In the meantime, on April 17, 2006, respondent filed its Annual Income
or issuance of a tax credit certificate shall be allowed therefor' (supra).
Tax Return ("ITR") for taxable year 2005, detailed, as follows:
Applying the foregoing rulings to the instant case, considering that
Sales/Revenues/Receipts/Fees P59,551,116.00
petitioner opted to carry-over its unutilized creditable withholding tax of
Less: Cost of Sales 22,351,923.00
P1,500,653.00 for taxable year 2005 to the first, second and third quarters
Gross Income from Operations 37,199,193.00 of taxable year 2006 when it had actually carried-over said excess
Add: Non-Operating and Other Income 209,320,181.00 creditable withholding tax to the first, second and third quarters in its
Gross Income P246,519,374.00 Quarterly Income Tax Returns for taxable year 2006, said option to
Less: Deductions 144,421,350.00 carryover becomes irrevocable. Petitioner's act of reporting in its Annual
Taxable Income P 102,098,024.00 Income Tax Return for taxable year 2006 of prior year's excess credits
Income Tax 33,181,858.00 other than MCIT as 0.00, will not change the fact that petitioner had
Less: Prior year's Excess Credits P0.00 already opted the carry-over option in its first, second and third quarters
Tax Payments for the First 3 Quarterly Income Tax Returns for taxable year 2006, and said choice is
6,159,215.00 irrevocable. As previously mentioned, whether or not petitioner actually
Quarters
Creditable Tax Withheld for the 1st 3 gets to apply said excess tax credit is irrelevant and would not change
28,523,296.00 the carry-over option already made.
Quarters
Total Tax Credit/Payments P 34,682,511 .00
Thus, the present petition praying for refund or issuance of a TCC of its
Tax payable/(Overpayment) 1,500,653.00
unutilized creditable withholding tax for taxable year 2005 in the amount
of P1,500,653.00 must perforce be denied in view of the irrevocability rule
In said Annual ITR for taxable year 2005, respondent indicated that its
on carry-over option of unutilized creditable withholding tax.
excess creditable withholding tax ("CWT') for the year 2005 was "To be
refunded".
WHEREFORE, premises considered, the instant Petition for Review is
hereby GRANTED. Accordingly, the Decision of the First Division dated
On May 29, 2006, respondent filed its Quarterly Income Tax Return for the
March 23, 2011 and Resolution dated June 30, 2011 are
first quarter of taxable year 2006 showing prior year's excess credits of
hereby REVERSED and SET ASIDE, and another one is hereby
P1,500,653.00.
entered DISMISSING the Petition for Review filed in C.T.A. Case No. 7711.

SO ORDERED.5
On August 25, 2006, respondent filed its Quarterly Income Tax Return for
the second quarter of taxable year 2006 showing prior year's excess
On March 13, 2013, the CTA En Banc denied Rhombus' motion for
credits of P1,500,653.00.
reconsideration. 6
On November 27, 2006, respondent filed its Quarterly Income Tax Return
Hence, Rhombus appeals to resolve whether or not it has proved its
for the third quarter of taxable year 2006 showing prior year's excess
entitlement to the refund.
credits of P1,500,653.00.
Ruling of the Court
On December 29, 2006, respondent filed with the Revenue Region No. 8
an administrative claim for refund of its alleged excess/unutilized CWT
The appeal is meritorious.
for the year 2005 in the amount of P1,500,653.00.

The irrevocability rule is enunciated in Section 76 of the National Internal
Revenue Code (NIRC), viz.:
Section 76. Final Adjusted Return. - Every corporation liable to tax under
Section 27 shall file a final adjustment return covering the total taxable
income for the preceding calendar of fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal
to the total tax due on the entire taxable income of that year, the
corporation shall either:
(A) Pay the balance of the tax still due; or
(B) Carry over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case
may be.
In case the corporation is entitled to a tax credit or refund of the excess
estimated quarterly income taxes paid, the excess amount shown on its
final adjustment return may be carried over and credited against the
estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry over and apply
the excess quarterly income tax against income tax due for the
taxable years of the succeeding taxable years has been made, such
option shall be considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit certificate shall be
allowed therefor. (Bold underscoring supplied to highlight the relevant
portion)
The application of the irrevocability rule is explained in Republic v. Team
(Phils.) Energy Corporation (formerly Mirant [Phils.] Energy
Corporation, 7 where the Court stated:
In Commissioner of Internal Revenue v. Bank of the Philippine Islands, the
Court, citing the pronouncement in Philam Asset Management,
Inc., points out that Section 76 of the NIRC of 1997 is clear and
unequivocal in providing that the carry-over option, once actually or
constructively chosen by a corporate taxpayer,
becomes irrevocable. The Court explains:
Hence, the controlling factor for the operation of the irrevocability rule is
that the taxpayer chose an option; and once it had already done so, it
could no longer make another one. Consequently, after the taxpayer
opts to carry-over its excess tax credit to the following taxable period,
the question of whether or not it actually gets to apply said tax credit is
irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once
the option to carry over has been made, "no application for tax refund
or issuance of a tax credit certificate shall be allowed therefor."
The last sentence of Section 76 of the NIRC of 1997 reads: "Once the
option to carry-over and apply the excess quarterly income tax against
income tax due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable for that
taxable period and no application for tax refund or issuance of a tax
credit certificate shall be allowed therefor." The phrase "for that taxable
period" merely identifies the excess income tax, subject of the option, by
referring to the taxable period when it was acquired by the taxpayer. In
the present case, the excess income tax credit, which BPI opted to carry
over, was acquired by the said bank during the taxable year 1998. The
option of BPI to carry over its 1998 excess income tax credit is irrevocable;
it cannot later on opt to apply for a refund of the very same 1998 excess
income tax credit.
The Court of Appeals mistakenly understood the phrase "for that taxable
period" as a prescriptive period for the irrevocability rule. This would
mean that since the tax credit in this case was acquired in 1998, and BPI
opted to carry it over to 1999, then the irrevocability of the option to
carry over expired by the end of 1999, leaving BPI free to again take
another option as regards its 1998 excess income tax credit. This
construal effectively renders nugatory the irrevocability rule. The evident
intent of the legislature, in adding the last sentence to Section 76 of the
NIRC of 1997, is to keep the taxpayer from flip-flopping on its options, and
avoid confusion and complication as regards said taxpayer's excess tax
credit. The interpretation of the Court of Appeals only delays the flip-
flopping to the end of each succeeding taxable period.
The Court similarly disagrees in the declaration of the Court of Appeals
that to deny the claim for refund of BPI, because of the irrevocability
rule, would be tantamount to unjust enrichment on the part of the
government. The Court addressed the very same argument
in Philam, where it elucidated that there would be no unjust enrichment
in the event of denial of the claim for refund under such circumstances,
because there would be no forfeiture of any amount in favor of the
government. The amount being claimed as a refund would remain in
the account of the taxpayer until utilized in succeeding taxable years,
as provided in Section 76 of the NIRC of 1997. It is worthy to note that
unlike the option for refund of excess income tax, which prescribes after
two years from the filing of the FAR, there is no prescriptive period for the
carrying over of the same. Therefore, the excess income tax credit of BPI,
which it acquired in 1998 and opted to carry over, may be repeatedly
carried over to succeeding taxable years, i.e., to 1999, 2000, 2001, and
so on and so forth, until actually applied or credited to a tax liability of
BPI. 8
The CTA First Division duly noted the exercise of the option by Rhombus
in the following manner:
The evidence on record shows that petitioner clearly signified its
intention to be refunded of its excess creditable tax withheld for calendar
year 2005 in its Annual ITR for the said year. Petitioner under Line 31 of the
said ITR marked "x" on the box "To be refunded". Moreover, petitioner's
2006 and 2007 Annual ITRs do not have any entries in Line 28A "Prior Year's
Excess Credits" which only prove that petitioner did not carry-over its
2005 excess/unutilized creditable withholding tax to the succeeding
taxable years or quarters.9 (Bold underscoring is supplied for emphasis)
Although the CTA En Banc recognized that Rhombus had actually
exercised the option to be refunded, it nonetheless maintained that
Rhombus was not entitled to the refund for having reported the prior
year's excess credits in its quarterly ITRs for the year 2006, viz.:
Based on the records, it is clear that respondent marked the box "To be
refunded" in its Annual Income Tax Return. It is also clear that the 2005
excess CWT were included in the prior year's excess credits reported in
the 2006 Quarter ITRs. The 2006 Annual ITR did not reflect the 2005 excess
CWT in the prior year's excess credits. 10 (Emphasis supplied)
The CTA En Banc thereby misappreciated the fact that Rhombus had
already exercised the option for its unutilized creditable withholding tax
for the year 2005 to be refunded when it filed its annual ITR for the
taxable year ending December 31, 2005. Based on the disquisition
in Republic v. Team (Phils.) Energy Corporation, supra, the irrevocability
rule took effect when the option was exercised. In the case of Rhombus,
therefore, its marking of the box "To be refunded" in its 2005 annual ITR
constituted its exercise of the option, and from then onwards Rhombus
became precluded from carrying-over the excess creditable
withholding tax. The fact that the prior year's excess credits were
reported in its 2006 quarterly ITRs did not reverse the option to be
refunded exercised in its 2005 annual ITR. As such, the CTA En Banc erred
in applying the irrevocability rule against Rhombus. It is relevant to
mention the requisites for entitlement to the refund as listed in
Republic v. Team (Phils.) Energy Corporation, supra,11 to wit:
1. That the claim for refund was filed within the two-year reglementary
period pursuant to Section 229 of the NIRC;
2. When it is shown on the ITR that the income payment received is being
declared part of the taxpayer's gross income; and
3. When the fact of withholding is established by a copy of the
withholding tax statement, duly issued by the payor to the payee,
showing the amount paid and income tax withheld from that amount.
Finding that Rhombus met the foregoing requisites based on its
examination of the documents submitted, the CTA First Division rendered
the following findings:
x x x [P]etitioner filed its Annual ITR for the year 2005 on April 17, 2006.
Counting from the said date, petitioner had until April 17, 2008, within
which to file both its administrative and judicial claim for refund or
issuance of a tax credit certificate. Clearly, petitioner's administrative
claim filed on December 29, 2006 and judicial claim via the instant
Petition for Review filed on December 07, 2007, were within the two-year
prescriptive limit.
To comply with the second requisite, petitioner presented Certificates of
Creditable Tax Withheld at Source issued by its sole customer Distileria
Bago, Inc., a wholly owned subsidiary of La Tondeña, Inc. (now Ginebra
San Miguel, Inc.). The details of the said certificates are summarized as
follows:
xxxx
To show compliance with the third requisite that petitioner declared in
its return the income related to the creditable withholding taxes of
Php28,523,295.45, it presented the following documents:
1. Annual Income tax Return for the year ended December 31, 2005 with
attached audited financial statements and Account Information Form
marked as Exhibit "B";
2. Certificates of Creditable Tax Withheld at Source issued to petitioner
for the first three quarters of taxable year 2005 marked as Exhibits "J", "Y",
"L" and "K";
3. Summary of invoices issued for taxable year 2005 marked as Exhibit
"M"; and
4. The sales invoices issued for taxable year 2005 marked as Exhibits "O-
1" to "O-14''.

The withholding tax certificates reveal that the creditable income taxes
of Php28,523,295.45 were withheld from petitioner's energy service fees
of Php9,313,272.54 and from the sale of its generation facility amounting
to Php472,283,838.00. The energy fees paid by Distileria Bago, Inc. in the
amount of Php9,313,272.54 from which creditable withholding tax in the
aggregate amount of Php186,265.45 was withheld was reported by
petitioner as part of its "Sales/Revenues/Receipts/Fees" amounting to
Php59,551,116.00 in Item No. 15A of its 2005 Annual ITR.

As regards the income from the sale of power generation facility in the
amount of Php472,283,838.00 from which the amount of
Php28,337,030.00 creditable withholding tax was withheld, petitioner
reported a gain of only Php209,320,181.00 as appearing under Item 18B
(Non-Operating and Other Income) of petitioner's Annual ITR marked as
Exhibit B. There was nothing fallacious in doing so for petitioner could
deduct valid cost (i.e. Book Value of the asset) from the selling price to
arrive at the amount of "Non-operating and Other Income" to be
reported in its 2005 Annual ITR. 12

The members of the CTA First Division were in the best position as trial
judges to examine the documents submitted in relation thereto, 13 and
to make the proper findings thereon. Given their expertise on the matter,
we accord weight and respect to their finding that Rhombus had
satisfied the requirements for its claim for refund of its excess creditable
withholding taxes for the year 2005.

WHEREFORE, the Court REVERSES and SETS ASIDE the decision

promulgated on October 11, 2012 and the resolution issued on March
13, 2013 by the Court of Tax Appeals En Banc in CTA EB Case No.
803; REINSTATES the decision rendered on March 23, 2011 and the
resolution issued on June 30, 2011 by the Court of Tax Appeals, First
Division, in CTA Case No. 7711; and DIRECTS the Commissioner of the
Bureau of Internal Revenue to refund to or to issue a tax credit certificate
in favor of petitioner Rhombus Energy, Inc. in the amount of P1,500,653.00
representing excess creditable withholding tax for the year 2005.

No pronouncement on costs of suit.

SO ORDERED.
 EN BANC
[G.R. No. 160756. March 9, 2010.]
CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS,
INC., petitioner, vs. THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO,
THE HON. ACTING SECRETARY OF FINANCE JUANITA D. AMATONG, and
THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO,
JR., respondents.
DECISION
CORONA, J p:
In this original petition
for certiorari and mandamus, 1 petitioner Chamber of Real Estate
and Builders' Associations, Inc. is questioning the constitutionality of
Section 27 (E) of Republic Act (RA) 8424 2 and the revenue
regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to
implement said provision and those involving creditable withholding
taxes. 3
Petitioner is an association of real estate developers and
builders in the Philippines. It impleaded former Executive Secretary
Alberto Romulo, then acting Secretary of Finance Juanita D.
Amatong and then Commissioner of Internal Revenue Guillermo
Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum
corporate income tax (MCIT) on corporations and creditable
withholding tax (CWT) on sales of real properties classified as
ordinary assets.
Section 27 (E) of RA 8424 provides for MCIT on domestic
corporations and is implemented by RR 9-98. Petitioner argues that
the MCIT violates the due process clause because it levies income
tax even if there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2 (J) (as
amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4 (a) (ii)
and (c) (ii) of RR 7-2003, all of which prescribe the rules and
procedures for the collection of CWT on the sale of real properties
categorized as ordinary assets. Petitioner contends that these
revenue regulations are contrary to law for two reasons: first, they
ignore the different treatment by RA 8424 of ordinary assets and
capital assets and second, respondent Secretary of Finance has no
authority to collect CWT, much less, to base the CWT on the gross
selling price or fair market value of the real properties classified as
ordinary assets. TCIEcH
Petitioner also asserts that the enumerated provisions of
the subject revenue regulations violate the due process clause
because, like the MCIT, the government collects income tax even
when the net income has not yet been determined. They
contravene the equal protection clause as well because the CWT
is being levied upon real estate enterprises but not on other business
enterprises, more particularly those in the manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take
cognizance of the present case;
(2) whether or not the imposition of the MCIT on
domestic corporations is unconstitutional
and
(3) whether or not the imposition of CWT on income
from sales of real properties classified as
ordinary assets under RRs 2-98, 6-
2001 and 7-2003, is unconstitutional.
OVERVIEW OF THE ASSAILED PROVISIONS
Under the MCIT scheme, a corporation, beginning on its
fourth year of operation, is assessed an MCIT of 2% of its gross
income when such MCIT is greater than the normal corporate
income tax imposed under Section 27 (A). 4 If the regular income
tax is higher than the MCIT, the corporation does not pay the MCIT.
Any excess of the MCIT over the normal tax shall be carried forward
and credited against the normal income tax for the three
immediately succeeding taxable years. Section 27 (E) of RA
8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. —
(1) Imposition of Tax. — A [MCIT] of two percent (2%)
of the gross income as of the end of the
taxable year, as defined herein, is hereby
imposed on a corporation taxable under
this Title, beginning on the fourth taxable
year immediately following the year in
which such corporation commenced its
business operations, when the minimum
income tax is greater than the tax
computed under Subsection (A) of this
Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. — Any
excess of the [MCIT] over the normal
income tax as computed under Subsection
(A) of this Section shall be carried forward
and credited against the normal income tax
for the three (3) immediately succeeding
taxable years.
(3) Relief from the [MCIT] under certain conditions. —
The Secretary of Finance is hereby
authorized to suspend the imposition of the
[MCIT] on any corporation which suffers
losses on account of prolonged labor
dispute, or because of force majeure, or
because of legitimate business reverses.
The Secretary of Finance is hereby
authorized to promulgate, upon
recommendation of the Commissioner, the
necessary rules and regulations that shall
define the terms and conditions under
which he may suspend the imposition of the
[MCIT] in a meritorious case.
(4) Gross Income Defined. — For purposes of applying
the [MCIT] provided under Subsection (E)
hereof, the term 'gross income' shall mean
gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of
goods sold" shall include all business
expenses directly incurred to produce the
merchandise to bring them to their present
location and use.
For trading or merchandising concern, "cost
of goods sold" shall include the invoice cost
of the goods sold, plus import duties, freight
in transporting the goods to the place
where the goods are actually sold including
insurance while the goods are in
transit. cSTHaE
For a manufacturing concern, "cost of
goods manufactured and sold" shall include
all costs of production of finished goods,
such as raw materials used, direct labor and
manufacturing overhead, freight cost,
insurance premiums and other costs
incurred to bring the raw materials to the
factory or warehouse.
In the case of taxpayers engaged in the sale
of service, "gross income" means gross
receipts less sales returns, allowances,
discounts and cost of services. "Cost of
services" shall mean all direct costs and
expenses necessarily incurred to provide the
services required by the customers and
clients including (A) salaries and employee
benefits of personnel, consultants and
specialists directly rendering the service and
(B) cost of facilities directly utilized in
providing the service such as depreciation
or rental of equipment used and cost of
supplies: Provided, however, that in the
case of banks, "cost of services" shall include
interest expense.
On August 25, 1998, respondent Secretary of Finance
(Secretary), on the recommendation of the Commissioner of
Internal Revenue (CIR), promulgated RR 9-98 implementing Section
27 (E). 5 The pertinent portions thereof read:
Sec. 2.27(E). [MCIT] on Domestic Corporations. —
(1) Imposition of the Tax. — A [MCIT] of two percent
(2%) of the gross income as of the end of the
taxable year (whether calendar or fiscal
year, depending on the accounting period
employed) is hereby imposed upon any
domestic corporation beginning the fourth
(4th) taxable year immediately following the
taxable year in which such corporation
commenced its business operations. The
MCIT shall be imposed whenever such
corporation has zero or negative taxable
income or whenever the amount of
minimum corporate income tax is greater
 than the normal income tax due from such
withheld on the last installment
corporation.

For purposes of these Regulations, the term, or installments to be paid to the

"normal income tax" means the income tax
rates prescribed under Sec. 27 (A) and Sec. seller.
28 (A) (1) of the Code xxx at 32% effective
January 1, 2000 and thereafter. However, if the buyer is engaged

xxx xxx xxx in trade or business, whether a

(2) Carry forward of excess [MCIT]. — Any excess of corporation or otherwise, the tax
the [MCIT] over the normal income tax as
computed under Sec. 27(A) of the Code
shall be deducted and withheld
shall be carried forward on an annual basis
and credited against the normal income tax
by the buyer on every installment.
for the three (3) immediately succeeding
taxable years.

xxx xxx xxx This provision was amended by RR 6-2001 on July 31, 2001:

Meanwhile, on April 17, 1998, respondent Secretary, upon
recommendation of respondent CIR, promulgated RR 2-
98 implementing certain provisions of RA 8424 involving the
withholding of taxes. 6 Under Section 2.57.2 (J) of RR No. 2-98,
income payments from the sale, exchange or transfer of real
property, other than capital assets, by persons residing in the
Philippines and habitually engaged in the real estate business were
subjected to CWT:
Sec. 2.57.2. Income payment subject to
[CWT] and rates prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of
consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of. —
Real property, other than capital assets, sold by an
individual, corporation, estate, trust, trust fund or
pension fund and the seller/transferor is habitually
engaged in the real estate business in accordance
with the following schedule —
Those which are exempt from a Exempt xxx xxx xxx
Sec. 2.57.2. Income payment subject to
[CWT] and rates prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of
consideration or its equivalent paid to the
seller/owner for the sale, exchange or
transfer of real property classified as
ordinary asset. — A [CWT] based on the
gross selling price/total amount of
consideration or the fair market value
determined in accordance with Section
6(E) of the Code, whichever is higher,
paid to the seller/owner for the sale,
transfer or exchange of real property,
other than capital asset, shall be imposed
upon the withholding agent,/buyer, in
accordance with the following
schedule: CIcEHS
Where the seller/transferor is exempt from
[CWT] in accordance with Sec. 2.57.5 of
these regulations. — Exempt

Upon the following values of real

withholding tax at source as
prescribed in Sec. 2.57.5 of
these regulations.
Gross selling price shall mean
the consideration stated in the
sales document or the fair
property, where the seller/transferor is
habitually engaged in the real estate
business.
With a selling price of Five Hundred
Thousand Pesos (P500,000.00) or less. —
1.5%

With a selling price of five
hundred thousand pesos
(P500,000.00) or less.
With a selling price of more
than five hundred thousand
pesos (P500,000.00) but not
more than two million pesos
(P2,000,000.00).
With selling price of more
than two million pesos
1.5% market value determined in
accordance with Section 6 (E)
of the Code, as amended,
whichever is higher. In an
3.0% exchange, the fair market
value of the property received
in exchange, as determined
in the Income Tax
Regulations shall be used.
5.0% Where the consideration or part
thereof is payable on installment,
With a selling price of more than Five
Hundred Thousand Pesos (P500,000.00)
but not more than Two Million Pesos
(P2,000,000.00). — 3.0%
With a selling price of more than two
Million Pesos (P2,000,000.00). — 5.0%
xxx xxx xxx
Gross selling price shall remain the
consideration stated in the sales document or the
fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever
is higher. In an exchange, the fair market value of
the property received in exchange shall be
considered as the consideration.
xxx xxx xxx
However, if the buyer is engaged in trade
or business, whether a corporation or otherwise,
these rules shall apply:

(P2,000,000.00) no withholding tax is required to
be made on the periodic
installment
payments where the buyer is an
individual not engaged in trade or
business. In such a case, the
applicable rate of tax based on
the entire consideration shall be
(i) If the sale is a sale of property on the
installment plan (that is, payments in the
year of sale do not exceed 25% of the
selling price), the tax shall be deducted
and withheld by the buyer on every
installment.
(ii) If, on the other hand, the sale is on a
"cash basis" or is a "deferred-payment sale
not on the installment plan" (that is,
payments in the year of sale exceed 25%
of the selling price), the buyer shall
withhold the tax based on the gross selling
price or fair market value of the property,
 whichever is higher, on the first
installment.
In any case, no Certificate Authorizing
Registration (CAR) shall be issued to the buyer
unless the [CWT] due on the sale, transfer or
exchange of real property other than capital asset
has been fully paid. (Underlined amendments in
the original)
Section 2.58.2 of RR 2-98 implementing Section 58 (E) of RA
8424 provides that any sale, barter or exchange subject to the CWT
will not be recorded by the Registry of Deeds until the CIR has
certified that such transfers and conveyances have been reported
and the taxes thereof have been duly paid: 7
Sec. 2.58.2. Registration with the Register
of Deeds. — Deeds of conveyances of land or land
and building/improvement thereon arising from
sales, barters, or exchanges subject to the
creditable expanded withholding tax shall not be
recorded by the Register of Deeds unless the [CIR]
or his duly authorized representative has certified
that such transfers and conveyances have been
reported and the expanded withholding tax,
inclusive of the documentary stamp tax, due
thereon have been fully paid . . . .
On February 11, 2003, RR No. 7-2003 8 was promulgated,
providing for the guidelines in determining whether a particular real
property is a capital or an ordinary asset for purposes of imposing
the MCIT, among others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale,
exchange or other disposition of real property. —
Gains/Income derived from sale, exchange, or
other disposition of real properties shall, unless
otherwise exempt, be subject to applicable taxes
imposed under the Code, depending on whether
the subject properties are classified as capital
assets or ordinary assets;
a. In the case of individual citizen (including estates
and trusts), resident aliens, and non-
resident aliens engaged in trade or
business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the
Philippines, classified as ordinary
assets, shall be subject to the
[CWT] (expanded) under Sec.
2.57.2(J) of [RR 2-98], as
amended, based on the gross
selling price or current fair
market value as determined in
accordance with Section 6(E) of
the Code, whichever is higher,
and consequently, to the
ordinary income tax imposed
under Sec. 24(A)(1)(c) or
25(A)(1) of the Code, as the
case may be, based on net
taxable income.
xxx xxx xxx
c. In the case of domestic corporations. —
xxx xxx xxx
(ii) The sale of land and/or building
classified as ordinary asset and
other real property (other than
land and/or building treated as
capital asset), regardless of the
classification thereof, all of
which are located in the
Philippines, shall be subject to
the [CWT] (expanded) under
Sec. 2.57.2(J) of [RR 2-98], as
amended, and consequently,
to the ordinary income tax
under Sec. 27(A) of the Code. In
lieu of the ordinary income tax,
however, domestic
corporations may become
subject to the [MCIT] under Sec.
27(E) of the Code, whichever is
applicable.
xxx xxx xxx
We shall now tackle the issues raised.
EXISTENCE OF A JUSTICIABLE CONTROVERSY
Courts will not assume jurisdiction over a constitutional
question unless the following requisites are satisfied: (1) there must
be an actual case calling for the exercise of judicial review; (2) the
question before the court must be ripe for adjudication; (3) the
person challenging the validity of the act must have standing to do
so; (4) the question of constitutionality must have been raised at the
earliest opportunity and (5) the issue of constitutionality must be the
very lis mota of the case. 9 SCETHa
Respondents aver that the first three requisites are absent
in this case. According to them, there is no actual case calling for
the exercise of judicial power and it is not yet ripe for adjudication
because
[petitioner] did not allege that CREBA, as
a corporate entity, or any of its members, has been
assessed by the BIR for the payment of [MCIT] or
[CWT] on sales of real property. Neither did
petitioner allege that its members have shut down
their businesses as a result of the payment of the
MCIT or CWT. Petitioner has raised concerns in mere
abstract and hypothetical form without any actual,
specific and concrete instances cited that the
assailed law and revenue regulations have
actually and adversely affected it. Lacking
empirical data on which to base any conclusion,
any discussion on the constitutionality of the MCIT
or CWT on sales of real property is essentially an
academic exercise.
Perceived or alleged hardship to
taxpayers alone is not an adequate justification for
adjudicating abstract issues. Otherwise,
adjudication would be no different from the giving
of advisory opinion that does not really settle legal
issues. 10
An actual case or controversy involves a conflict of legal
rights or an assertion of opposite legal claims which is susceptible of
judicial resolution as distinguished from a hypothetical or abstract
difference or dispute. 11 On the other hand, a question is
considered ripe for adjudication when the act being challenged
has a direct adverse effect on the individual challenging it. 12
Contrary to respondents' assertion, we do not have to wait
until petitioner's members have shut down their operations as a
result of the MCIT or CWT. The assailed provisions are already being
implemented. As we stated in Didipio Earth-Savers' Multi-Purpose
Association, Incorporated (DESAMA) v. Gozun: 13
By the mere enactment of the questioned
law or the approval of the challenged act, the
dispute is said to have ripened into a judicial
controversy even without any other overt act.
Indeed, even a singular violation of the Constitution
and/or the law is enough to awaken judicial
duty. 14
If the assailed provisions are indeed unconstitutional, there is no
better time than the present to settle such question once and for
all.
Respondents next argue that petitioner has no legal
standing to sue:
Petitioner is an association of some of the
real estate developers and builders in the
Philippines. Petitioners did not allege that [it] itself is
in the real estate business. It did not allege any
material interest or any wrong that it may suffer
from the enforcement of [the assailed
provisions]. 15
Legal standing or locus standi is a party's personal and
substantial interest in a case such that it has sustained or will sustain
direct injury as a result of the governmental act being
challenged. 16 In Holy Spirit Homeowners Association, Inc. v.
Defensor, 17 we held that the association had legal standing
because its members stood to be injured by the enforcement of the
assailed provisions:
Petitioner association has the legal
standing to institute the instant petition . . . . There is
no dispute that the individual members of
petitioner association are residents of the NGC. As
such they are covered and stand to be either
benefited or injured by the enforcement of the IRR,
particularly as regards the selection process of
 beneficiaries and lot allocation to qualified
beneficiaries. Thus, petitioner association may
assail those provisions in the IRR which it believes to
be unfavorable to the rights of its members. . . .
Certainly, petitioner and its members have
sustained direct injury arising from the enforcement
of the IRR in that they have been disqualified and
eliminated from the selection process. 18
In any event, this Court has the discretion to take
cognizance of a suit which does not satisfy the requirements of an
actual case, ripeness or legal standing when paramount public
interest is involved. 19 The questioned MCIT and CWT affect not only
petitioners but practically all domestic corporate taxpayers in our
country. The transcendental importance of the issues raised and
their overreaching significance to society make it proper for us to
take cognizance of this petition. 20
CONCEPT AND RATIONALE OF THE MCIT
The MCIT on domestic corporations is a new concept
introduced by RA 8424 to the Philippine taxation system. It came
about as a result of the perceived inadequacy of the self-
assessment system in capturing the true income of
corporations. 21 It was devised as a relatively simple and effective
revenue-raising instrument compared to the normal income tax
which is more difficult to control and enforce. It is a means to ensure
that everyone will make some minimum contribution to the support
of the public sector. The congressional deliberations on this are
illuminating:
Senator Enrile.
Mr. President, we are not unmindful of the
practice of certain corporations of
reporting constantly a loss in their
operations to avoid the payment of taxes,
and thus avoid sharing in the cost of
government. In this regard, the Tax
Reform Act introduces for the first time a
new concept called the [MCIT] so as to
minimize tax evasion, tax avoidance, tax
manipulation in the country and for
administrative convenience. . . . This will
go a long way in ensuring that
corporations will pay their just share in
supporting our public life and our
economic advancement. 22
Domestic corporations owe their corporate existence and
their privilege to do business to the government. They also benefit
from the efforts of the government to improve the financial market
and to ensure a favorable business climate. It is therefore fair for the
government to require them to make a reasonable contribution to
the public expenses.
Congress intended to put a stop to the practice of
corporations which, while having large turn-overs, report minimal or
negative net income resulting in minimal or zero income taxes year
in and year out, through under-declaration of income or over-
deduction of expenses otherwise called tax shelters. 23
Mr. Javier (E.)
. . . [This] is what the Finance Dept. is trying
to remedy, that is why they have
proposed the [MCIT]. Because from
experience too, you have corporations
which have been losing year in and year
out and paid no tax. So, if the corporation
has been losing for the past five years to
ten years, then that corporation has no
business to be in business. It is dead. Why
continue if you are losing year in and year
out? So, we have this provision to avoid
this type of tax shelters, Your Honor. 24
The primary purpose of any legitimate business is to earn a
profit. Continued and repeated losses after operations of a
corporation or consistent reports of minimal net income render its
financial statements and its tax payments suspect. For sure, certain
tax avoidance schemes resorted to by corporations are allowed in
our jurisdiction. The MCIT serves to put a cap on such tax shelters. As
a tax on gross income, it prevents tax evasion and minimizes tax
avoidance schemes achieved through sophisticated and artful
manipulations of deductions and other stratagems. Since the tax
base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the
following safeguards were incorporated into the law: TAECSD
First, recognizing the birth pangs of businesses and the
reality of the need to recoup initial major capital expenditures, the
imposition of the MCIT commences only on the fourth taxable year
immediately following the year in which the corporation
commenced its operations. 25 This grace period allows a new
business to stabilize first and make its ventures viable before it is
subjected to the MCIT. 26
Second, the law allows the carrying forward of any excess
of the MCIT paid over the normal income tax which shall be
credited against the normal income tax for the three immediately
succeeding years. 27
Third, since certain businesses may be incurring genuine
repeated losses, the law authorizes the Secretary of Finance to
suspend the imposition of MCIT if a corporation suffers losses due to
prolonged labor dispute, force majeure and legitimate business
reverses. 28
Even before the legislature introduced the MCIT to the
Philippine taxation system, several other countries already had their
own system of minimum corporate income taxation. Our lawmakers
noted that most developing countries, particularly Latin American
and Asian countries, have the same form of safeguards as we do.
As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing
countries where you have of course quite a bit of
room for underdeclaration of gross receipts have
this same form of safeguards.
In the case of Thailand, half a percent
(0.5%), there's a minimum of income tax of half a
percent (0.5%) of gross assessable income. In Korea
a 25% of taxable income before deductions and
exemptions. Of course the different countries have
different basis for that minimum income tax.
The other thing you'll notice is the
preponderance of Latin American countries that
employed this method. Okay, those are additional
Latin American countries. 29
At present, the United States of America, Mexico, Argentina, Tunisia,
Panama and Hungary have their own versions of the MCIT. 30
MCIT IS NOT VIOLATIVE OF DUE PROCESS
Petitioner claims that the MCIT under Section 27 (E) of RA
8424 is unconstitutional because it is highly oppressive, arbitrary and
confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross
income, were not taken into account. 31 Thus, pegging the tax
base of the MCIT to a corporation's gross income is tantamount to
a confiscation of capital because gross income, unlike net income,
is not "realized gain." 32
We disagree.
Taxes are the lifeblood of the government. Without taxes,
the government can neither exist nor endure. The exercise of taxing
power derives its source from the very existence of the State whose
social contract with its citizens obliges it to promote public interest
and the common good. 33
Taxation is an inherent attribute of sovereignty. 34 It is a
power that is purely legislative. 35 Essentially, this means that in the
legislature primarily lies the discretion to determine the nature (kind),
object (purpose), extent (rate), coverage (subjects) and situs
(place) of taxation. 36 It has the authority to prescribe a certain tax
at a specific rate for a particular public purpose on persons or things
within its jurisdiction. In other words, the legislature wields the power
to define what tax shall be imposed, why it should be imposed, how
much tax shall be imposed, against whom (or what) it shall be
imposed and where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited
in its range, acknowledging in its very nature no limits, so that the
principal check against its abuse is to be found only in the
responsibility of the legislature (which imposes the tax) to its
constituency who are to pay it. 37 Nevertheless, it is circumscribed
by constitutional limitations. At the same time, like any other statute,
tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied
in the fiat "[no] person shall be deprived of life, liberty or property
without due process of law." In Sison, Jr. v. Ancheta, et al., 38 we
held that the due process clause may properly be invoked to
invalidate, in appropriate cases, a revenue measure 39 when it
amounts to a confiscation of property. 40 But in the same case, we
also explained that we will not strike down a revenue measure as
unconstitutional (for being violative of the due process clause) on
the mere allegation of arbitrariness by the taxpayer. 41 There must
be a factual foundation to such an unconstitutional taint. 42 This
merely adheres to the authoritative doctrine that, where the due
process clause is invoked, considering that it is not a fixed rule but
rather a broad standard, there is a need for proof of such persuasive
character. 43
Petitioner is correct in saying that income is distinct from
capital. 44 Income means all the wealth which flows into the
taxpayer other than a mere return on capital. Capital is a fund or
property existing at one distinct point in time while income denotes
a flow of wealth during a definite period of time. 45 Income is gain
derived and severed from capital. 46 For income to be taxable, the
following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty
from taxation. 47
Certainly, an income tax is arbitrary and confiscatory if it taxes
capital because capital is not income. In other words, it is income,
not capital, which is subject to income tax. However, the MCIT is not
a tax on capital.
The MCIT is imposed on gross income which is arrived at by
deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods 48 and other direct expenses from
gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition.
It is imposed in lieu of the normal net income tax, and only if the
normal income tax is suspiciously low. The MCIT merely
approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and uses
as the base the corporation's gross income.
Besides, there is no legal objection to a broader tax base
or taxable income by eliminating all deductible items and at the
same time reducing the applicable tax rate. 49
Statutes taxing the gross "receipts,"
"earnings," or "income" of particular
corporations are found in many jurisdictions. Tax
thereon is generally held to be within the power of
a state to impose; or constitutional, unless it
interferes with interstate commerce or violates the
requirement as to uniformity of
taxation. 50 cSDHEC
The United States has a similar alternative minimum tax
(AMT) system which is generally characterized by a lower tax rate
but a broader tax base. 51 Since our income tax laws are of
American origin, interpretations by American courts of our parallel
tax laws have persuasive effect on the interpretation of these
laws. 52 Although our MCIT is not exactly the same as the AMT, the
policy behind them and the procedure of their implementation are
comparable. On the question of the AMT's constitutionality, the
United States Court of Appeals for the Ninth Circuit stated in Okin v.
Commissioner: 53
In enacting the minimum tax, Congress
attempted to remedy general taxpayer distrust of
the system growing from large numbers of
taxpayers with large incomes who were yet paying
no taxes.
xxx xxx xxx
We thus join a number of other courts in
upholding the constitutionality of the [AMT]. . . . [It]
is a rational means of obtaining a broad-based tax,
and therefore is constitutional. 54
The U.S. Court declared that the congressional intent to ensure that
corporate taxpayers would contribute a minimum amount of taxes
was a legitimate governmental end to which the AMT bore a
reasonable relation. 55
American courts have also emphasized that Congress has
the power to condition, limit or deny deductions from gross income
in order to arrive at the net that it chooses to tax. 56 This is because
deductions are a matter of legislative grace. 57
Absent any other valid objection, the assignment of gross
income, instead of net income, as the tax base of the MCIT, taken
with the reduction of the tax rate from 32% to 2%, is not
constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific
and concrete negative experiences of its members nor does it
present empirical data to show that the implementation of the MCIT
resulted in the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal
basis, its allegation that the MCIT is arbitrary and confiscatory. The
Court cannot strike down a law as unconstitutional simply because
of its yokes. 58 Taxation is necessarily burdensome because, by its
nature, it adversely affects property rights. 59 The party alleging the
law's unconstitutionality has the burden to demonstrate the
supposed violations in understandable terms. 60
RR 9-98 MERELY CLARIFIES SECTION 27 (E) OF RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property
without due process of law because the MCIT is being imposed and
collected even when there is actually a loss, or a zero or negative
taxable income:
Sec. 2.27(E). [MCIT] on Domestic
Corporations. —
(1) Imposition of the Tax. — . . . The MCIT
shall be imposed whenever such corporation has
zero or negative taxable income or whenever the
amount of [MCIT] is greater than the normal
income tax due from such corporation. (Emphasis
supplied)
RR 9-98, in declaring that MCIT should be imposed
whenever such corporation has zero or negative taxable income,
merely defines the coverage of Section 27 (E). This means that even
if a corporation incurs a net loss in its business operations or reports
zero income after deducting its expenses, it is still subject to an MCIT
of 2% of its gross income. This is consistent with the law which
imposes the MCIT on gross income notwithstanding the amount of
the net income. But the law also states that the MCIT is to be paid
only if it is greater than the normal net income. Obviously, it may
well be the case that the MCIT would be less than the net income
of the corporation which posts a zero or negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which
taxes (including income taxes) are collected. 61 Under Section 57
of RA 8424, the types of income subject to withholding tax are
divided into three categories: (a) withholding of final tax on certain
incomes; (b) withholding of creditable tax at source and (c) tax-
free covenant bonds. Petitioner is concerned with the second
category (CWT) and maintains that the revenue regulations on the
collection of CWT on sale of real estate categorized as ordinary
assets are unconstitutional.
Petitioner, after enumerating the distinctions between
capital and ordinary assets under RA 8424, contends that Sections
2.57.2 (J) and 2.58.2 of RR 2-98 and Sections 4 (a) (ii) and (c) (ii) of RR
7-2003 were promulgated "with grave abuse of discretion
amounting to lack of jurisdiction" and "patently in contravention of
law" 62 because they ignore such distinctions. Petitioner's
conclusion is based on the following premises: (a) the revenue
regulations use gross selling price (GSP) or fair market value (FMV)
of the real estate as basis for determining the income tax for the
sale of real estate classified as ordinary assets and (b) they
mandate the collection of income tax on a per transaction
basis, i.e., upon consummation of the sale via the CWT, contrary
to RA 8424 which calls for the payment of the net income at the
end of the taxable period. 63
Petitioner theorizes that since RA 8424 treats capital assets
and ordinary assets differently, respondents cannot disregard the
distinctions set by the legislators as regards the tax base, modes of
collection and payment of taxes on income from the sale of capital
and ordinary assets.
Petitioner's arguments have no merit.
AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER THE COLLECTION
OF CWT ON SALES OF REAL PROPERTY CONSIDERED AS ORDINARY ASSETS
The Secretary of Finance is granted, under Section 244
of RA 8424, the authority to promulgate the necessary rules and
regulations for the effective enforcement of the provisions of the
law. Such authority is subject to the limitation that the rules and
regulations must not override, but must remain consistent and in
harmony with, the law they seek to apply and implement. 64 It is
well-settled that an administrative agency cannot amend an act of
Congress. 65
We have long recognized that the method of withholding
tax at source is a procedure of collecting income tax which is
sanctioned by our tax laws. 66 The withholding tax system was
devised for three primary reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax liability;
second, to ensure the collection of income tax which can otherwise
be lost or substantially reduced through failure to file the
corresponding returns and third, to improve the government's cash
flow. 67 This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of
governmental effort to collect taxes through more complicated
means and remedies. 68
Respondent Secretary has the authority to require the
withholding of a tax on items of income payable to any person,
national or juridical, residing in the Philippines. Such authority is
derived from Section 57 (B) of RA 8424 which provides: ICTDEa
SEC. 57. Withholding of Tax at Source. —
xxx xxx xxx
(B) Withholding of Creditable Tax at Source. The
[Secretary] may, upon the
recommendation of the [CIR], require the
withholding of a tax on the items of income
payable to natural or juridical persons,
residing in the Philippines, by payor-
corporation/persons as provided for by law,
at the rate of not less than one percent (1%)
but not more than thirty-two percent (32%)
thereof, which shall be credited against the
income tax liability of the taxpayer for the
taxable year.
The questioned provisions of RR 2-98, as amended, are
well within the authority given by Section 57(B) to the
Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-
32% range; the withholding tax is imposed on the income payable
and the tax is creditable against the income tax liability of the
taxpayer for the taxable year.
EFFECT OF RRS ON THE TAX BASE FOR THE INCOME TAX OF
INDIVIDUALS OR CORPORATIONS ENGAGED IN THE REAL ESTATE
BUSINESS
Petitioner maintains that RR 2-98, as amended, arbitrarily
shifted the tax base of a real estate business' income tax from net
income to GSP or FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax
payments by a taxpayer in order to extinguish its possible tax
obligation. 69 They are installments on the annual tax which may be
due at the end of the taxable year. 70
Under RR 2-98, the tax base of the income tax from the
sale of real property classified as ordinary assets remains to be the
entity's net income imposed under Section 24 (resident individuals)
or Section 27 (domestic corporations) in relation to Section 31 of RA
8424, i.e. gross income less allowable deductions. The CWT is to be
deducted from the net income tax payable by the taxpayer at the
end of the taxable year. 71 Precisely, Section 4 (a) (ii) and (c) (ii)
of RR 7-2003 reiterate that the tax base for the sale of real property
classified as ordinary assets remains to be the net taxable income:
Section 4. Applicable taxes on sale,
exchange or other disposition of real property. —
Gains/Income derived from sale, exchange, or
other disposition of real properties shall unless
otherwise exempt, be subject to applicable taxes
imposed under the Code, depending on whether
the subject properties are classified as capital
assets or ordinary assets;
xxx xxx xxx
a. In the case of individual citizens
(including estates and trusts), resident aliens, and
non-resident aliens engaged in trade or business in
the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the
Philippines, classified as ordinary assets, shall
be subject to the [CWT] (expanded) under Sec.
2.57.2(j) of [RR 2-98], as amended, based on the
[GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the
ordinary income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the Code, as the case
may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
The sale of land and/or building classified
as ordinary asset and other real property (other
than land and/or building treated as capital asset),
regardless of the classification thereof, all of which
are located in the Philippines, shall be subject
to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR
2-98], as amended, and consequently, to the
ordinary income tax under Sec. 27(A) of the Code.
In lieu of the ordinary income tax, however,
domestic corporations may become subject to the
[MCIT] under Sec. 27(E) of the same Code,
whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller
shall file its income tax return and credit the taxes withheld (by the
withholding agent/buyer) against its tax due. If the tax due is
greater than the tax withheld, then the taxpayer shall pay the
difference. If, on the other hand, the tax due is less than the tax
withheld, the taxpayer will be entitled to a refund or tax credit.
Undoubtedly, the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the
withholding taxes is evidently for purposes of practicality and
convenience. Obviously, the withholding agent/buyer who is
obligated to withhold the tax does not know, nor is he privy to, how
much the taxpayer/seller will have as its net income at the end of
the taxable year. Instead, said withholding agent's knowledge and
privity are limited only to the particular transaction in which he is a
party. In such a case, his basis can only be the GSP or FMV as these
are the only factors reasonably known or knowable by him in
connection with the performance of his duties as a withholding
agent.
NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY ASSETS AND
CAPITAL ASSETS
RR 2-98 imposes a graduated CWT on income based on
the GSP or FMV of the real property categorized as ordinary assets.
On the other hand, Section 27 (D) (5) of RA 8424 imposes a final tax
and flat rate of 6% on the gain presumed to be realized from the
sale of a capital asset based on its GSP or FMV. This final tax is also
withheld at source. 72
The differences between the two forms of withholding
tax, i.e., creditable and final, show that ordinary assets are not
treated in the same manner as capital assets. Final withholding tax
(FWT) and CWT are distinguished as follows: caHASI
FWT CWT
a) The amount of income tax a) Taxes withheld on certain
withheld by the withholding income payments are intended
agent is constituted as a full to equal or at least approximate
and final payment of the the tax due of the payee on
income tax due from the said income.
payee on the said income.
b) The liability for payment of b) Payee of income is required to
the tax rests primarily on the report the income and/or pay
payor as a withholding agent. the difference between the tax
withheld and the tax due on the
income. The payee also has the
right to ask for a refund if the tax
withheld is more than the tax due.
c) The payee is not required to c) The income recipient is still required
file an income tax return for to file an income tax return, as
the particular income. 73 prescribed in Sec. 51 and Sec. 52
of the NIRC, as amended. 74
 As previously stated, FWT is imposed on the sale of capital
assets. On the other hand, CWT is imposed on the sale of ordinary
assets. The inherent and substantial differences between FWT and
CWT disprove petitioner's contention that ordinary assets are being
lumped together with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of
CWT at the time of transaction are contrary to the provisions of RA
8424 on the manner and time of filing of the return, payment and
assessment of income tax involving ordinary assets. 75
The fact that the tax is withheld at source does not
automatically mean that it is treated exactly the same way as
capital gains. As aforementioned, the mechanics of the FWT are
distinct from those of the CWT. The withholding agent/buyer's act of
collecting the tax at the time of the transaction by withholding the
tax due from the income payable is the essence of the withholding
tax method of tax collection.
NO RULE THAT ONLY PASSIVE INCOMES CAN BE SUBJECT TO CWT
Petitioner submits that only passive income can be
subjected to withholding tax, whether final or creditable. According
to petitioner, the whole of Section 57 governs the withholding of
income tax on passive income. The enumeration in Section 57 (A)
refers to passive income being subjected to FWT. It follows that
Section 57 (B) on CWT should also be limited to passive income:
SEC. 57. Withholding of Tax at Source. —
(A) Withholding of Final Tax on Certain
Incomes. — Subject to rules and regulations, the
[Secretary] may promulgate, upon the
recommendation of the [CIR], requiring the filing of
income tax return by certain income payees,
the tax imposed or prescribed by Sections 24(B)(1),
24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B),
25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3),
27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3),
28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33;
and 282 of this Code on specified items of
income shall be withheld by payor-corporation
and/or person and paid in the same manner and
subject to the same conditions as provided in
Section 58 of this Code.
(B) Withholding of Creditable Tax at
Source. — The [Secretary] may, upon the
recommendation of the [CIR], require the
withholding of a tax on the items of income
payable to natural or juridical persons, residing in
the Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than one
percent (1%) but not more than thirty-two percent
(32%) thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable
year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57 (A) expressly states that final tax can be
imposed on certain kinds of income and enumerates these as
passive income. The BIR defines passive income by stating what it is
not:
. . . if the income is generated in the
active pursuit and performance of the
corporation's primary purposes, the same is not
passive income. . . 76
It is income generated by the taxpayer's assets. These assets can be
in the form of real properties that return rental income, shares of
stock in a corporation that earn dividends or interest income
received from savings.
On the other hand, Section 57 (B) provides that the
Secretary can require a CWT on "income payable to natural or
juridical persons, residing in the Philippines." There is no requirement
that this income be passive income. If that were the intent of
Congress, it could have easily said so.
Indeed, Section 57 (A) and (B) are distinct. Section 57 (A)
refers to FWT while Section 57 (B) pertains to CWT. The former covers
the kinds of passive income enumerated therein and the latter
encompasses any income other than those listed in 57 (A). Since
the law itself makes distinctions, it is wrong to regard 57 (A) and 57
(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended,
do not modify or deviate from the text of Section 57 (B). RR 2-
98 merely implements the law by specifying what income is subject
to CWT. It has been held that, where a statute does not require any
particular procedure to be followed by an administrative agency,
the agency may adopt any reasonable method to carry out its
functions. 77 Similarly, considering that the law uses the general
term "income," the Secretary and CIR may specify the kinds of
income the rules will apply to based on what is feasible. In addition,
administrative rules and regulations ordinarily deserve to be given
weight and respect by the courts 78 in view of the rule-making
authority given to those who formulate them and their specific
expertise in their respective fields.
NO DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS
Petitioner avers that the imposition of CWT on GSP/FMV of
real estate classified as ordinary assets deprives its members of their
property without due process of law because, in their line of
business, gain is never assured by mere receipt of the selling price.
As a result, the government is collecting tax from net income not yet
gained or earned.
Again, it is stressed that the CWT is creditable against the
tax due from the seller of the property at the end of the taxable
year. The seller will be able to claim a tax refund if its net income is
less than the taxes withheld. Nothing is taken that is not due so there
is no confiscation of property repugnant to the constitutional
guarantee of due process. More importantly, the due process
requirement applies to the power to tax. 79 The CWT does not
impose new taxes nor does it increase taxes. 80 It relates entirely to
the method and time of payment. cDCHaS
Petitioner protests that the refund remedy does not make
the CWT less burdensome because taxpayers have to wait years
and may even resort to litigation before they are granted a
refund. 81 This argument is misleading. The practical problems
encountered in claiming a tax refund do not affect the
constitutionality and validity of the CWT as a method of collecting
the tax.
Petitioner complains that the amount withheld would
have otherwise been used by the enterprise to pay labor wages,
materials, cost of money and other expenses which can then save
the entity from having to obtain loans entailing considerable interest
expense. Petitioner also lists the expenses and pitfalls of the trade
which add to the burden of the realty industry: huge investments
and borrowings; long gestation period; sudden and unpredictable
interest rate surges; continually spiraling development/construction
costs; heavy taxes and prohibitive "up-front" regulatory fees from at
least 20 government agencies. 82
Petitioner's lamentations will not support its attack on the
constitutionality of the CWT. Petitioner's complaints are essentially
matters of policy best addressed to the executive and legislative
branches of the government. Besides, the CWT is applied only on
the amounts actually received or receivable by the real estate
entity. Sales on installment are taxed on a per-installment
basis. 83 Petitioner's desire to utilize for its operational and capital
expenses money earmarked for the payment of taxes may be a
practical business option but it is not a fundamental right which can
be demanded from the court or from the government.
NO VIOLATION OF EQUAL PROTECTION
Petitioner claims that the revenue regulations are violative
of the equal protection clause because the CWT is being levied only
on real estate enterprises. Specifically, petitioner points out that
manufacturing enterprises are not similarly imposed a CWT on their
sales, even if their manner of doing business is not much different
from that of a real estate enterprise. Like a manufacturing concern,
a real estate business is involved in a continuous process of
production and it incurs costs and expenditures on a regular basis.
The only difference is that "goods" produced by the real estate
business are house and lot units. 84
Again, we disagree.
The equal protection clause under the Constitution means
that "no person or class of persons shall be deprived of the same
protection of laws which is enjoyed by other persons or other classes
in the same place and in like circumstances." 85 Stated differently,
all persons belonging to the same class shall be taxed alike. It follows
that the guaranty of the equal protection of the laws is not violated
by legislation based on a reasonable classification. Classification, to
be valid, must (1) rest on substantial distinctions; (2) be germane to
the purpose of the law; (3) not be limited to existing conditions only
and (4) apply equally to all members of the same class. 86
The taxing power has the authority to make reasonable
classifications for purposes of taxation. 87 Inequalities which result
from a singling out of one particular class for taxation, or exemption,
infringe no constitutional limitation. 88 The real estate industry is, by
itself, a class and can be validly treated differently from other
business enterprises.
Petitioner, in insisting that its industry should be treated
similarly as manufacturing enterprises, fails to realize that what
 distinguishes the real estate business from other manufacturing
enterprises, for purposes of the imposition of the CWT, is not their
production processes but the prices of their goods sold and the
number of transactions involved. The income from the sale of a real
property is bigger and its frequency of transaction limited, making it
less cumbersome for the parties to comply with the withholding tax
scheme.
On the other hand, each manufacturing enterprise may
have tens of thousands of transactions with several thousand
customers every month involving both minimal and substantial
amounts. To require the customers of manufacturing enterprises, at
present, to withhold the taxes on each of their transactions with their
tens or hundreds of suppliers may result in an inefficient and
unmanageable system of taxation and may well defeat the
purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein
expensive items are also sold infrequently, e.g., heavy equipment,
jewelry, furniture, appliance and other capital goods yet these are
not similarly subjected to the CWT. 89 As already discussed, the
Secretary may adopt any reasonable method to carry out its
functions. 90 Under Section 57 (B), it may choose what to subject to
CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show
that petitioner's argument is not accurate. The sales of
manufacturers who have clients within the top 5,000 corporations,
as specified by the BIR, are also subject to CWT for their transactions
with said 5,000 corporations. 91
SECTION 2.58.2 OF RR NO. 2-98 MERELY IMPLEMENTS SECTION 58
OF RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which
provides that the Registry of Deeds should not effect the regisration
of any document transferring real property unless a certification is
issued by the CIR that the withholding tax has been paid. Petitioner
proffers hardly any reason to strike down this rule except to rely on
its contention that the CWT is unconstitutional. We have ruled that it
is not. Furthermore, this provision uses almost exactly the same
wording as Section 58 (E) of RA 8424 and is unquestionably in
accordance with it:
Sec. 58. Returns and Payment of Taxes
Withheld at Source. —

(E) Registration with Register of

Deeds. — No registration of any document
transferring real property shall be effected by the
Register of Deeds unless the [CIR] or his duly
authorized representative has certified that such
transfer has been reported, and the capital gains or
[CWT], if any, has been paid: . . . any violation of this
provision by the Register of Deeds shall be subject
to the penalties imposed under Section 269 of this
Code. (Emphasis supplied)

CONCLUSION
The renowned genius Albert Einstein was once quoted as
saying "[the] hardest thing in the world to understand is the income
tax." 92 When a party questions the constitutionality of an income
tax measure, it has to contend not only with Einstein's observation
but also with the vast and well-established jurisprudence in support
of the plenary powers of Congress to impose taxes. Petitioner has
miserably failed to discharge its burden of convincing the Court that
the imposition of MCIT and CWT is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
SO ORDERED.
||| (Chamber of Real Estate and Builders' Association, Inc. v. Romulo,
G.R. No. 160756, [March 9, 2010], 628 PHIL 508-547)
 THIRD DIVISION Deficiency
[G.R. No. 170257. September 7, 2011.] Expanded
RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. Withholding
COMMISSIONER OF INTERNAL REVENUE, respondent. Ta
x
DECISION 1995 (ST-
MENDOZA, J p: EWT-95-
5,051,415.22 4,583,640.33 113,000.00 9,748,055.55
0207-
This is a petition for review on certiorari under Rule 45 2000)
seeking to set aside the July 27, 2005 Decision 1 and October 26, 1994 (ST-
2005 Resolution 2 of the Court of Tax Appeals En Banc (CTA-En EWT-94-
Banc) in C.T.A. E.B. No. 83 entitled "Rizal Commercial Banking 4,482,740.35 4,067,626.31 78,200.00 8,628,566.66
0208-
Corporation v. Commissioner of Internal Revenue." ESTAIH 2000)
THE FACTS Deficiency
Documenta
Petitioner Rizal Commercial Banking ry Stamp
Corporation (RCBC) is a corporation engaged in general banking Ta
operations. It seasonably filed its Corporation Annual Income Tax x
Returns for Foreign Currency Deposit Unit for the calendar years 1995 (ST-
1994 and 1995. 3 DST1-95-
351,900,539.39 315,804,946.26 250,000.00 667,955,485.65
0209-
On August 15, 1996, RCBC received Letter of Authority No.
2000)
133959 issued by then Commissioner of Internal
1995 (ST-
Revenue (CIR) Liwayway Vinzons-Chato, authorizing a special audit
DST2-95-
team to examine the books of accounts and other accounting 367,207,105.29 331,535,844.68 300,000.00 699,042,949.97
0210-
records for all internal revenue taxes from January 1, 1994 to
2000)
December 31, 1995. 4
1994 (ST-
On January 23, 1997, RCBC executed two Waivers of the DST3-94-
460,370,640.05 512,193,460.02 300,000.00 972,864,100.07
Defense of Prescription Under the Statute of Limitations of 0211-
the National Internal Revenue Code covering the internal revenue 2000)
taxes due for the years 1994 and 1995, effectively extending the 1994 (ST-
period of the Bureau of Internal Revenue (BIR) to assess up to DST4-94-
223,037,675.89 240,050,706.09 300,000.00 463,388,381.98
December 31, 2000. 5 0212-
2000)
Subsequently, on January 27, 2000, RCBC received a –––––––––––
Formal Letter of Demand together with Assessment Notices from the ––––––––––––––– ––––––––––––––– –––––––––––––––
–
BIR for the following deficiency tax assessments: 6 P2,130,226,954. P2,035,495,733. P4,335,945. P4,170,058,634.
TOTALS
Compromis 83 89 52 49
e
Particular
Basic Tax Interest Penalties Total Disagreeing with the said deficiency tax assessment,
s
RCBC filed a protest on February 24, 2000 and later submitted the
relevant documentary evidence to support it. Much later on
Deficiency
November 20, 2000, it filed a petition for review before the CTA,
Income Tax
pursuant to Section 228 of the 1997 Tax Code. 7
1995 (ST-
INC-95- On December 6, 2000, RCBC received another Formal
P252,150,988.01 P191,496,585.96 P25,000.00 P443,672,573.97
0199- Letter of Demand with Assessment Notices dated October 20, 2000,
2000) following the reinvestigation it requested, which drastically reduced
1994 (ST- the original amount of deficiency taxes to the following: 8
INC-94-
216,478,397.90 207,819,261.99 25,000.00 424,322,659.89 Surcharge
0200-
2000) &/
Deficiency Particulars Basic Tax Interest Compromise Total
Gross
Receipts Tax
1995 (ST-
GRT-95- Deficiency
13,697,083.68 12,428,696.21 2,819,745.52 28,945,525.41
0201- Income Tax
2000) 1995 (INC-
P374,348.45 P346,656.92 P721,005.37
1994 (ST- 95-000003)
GRT-94- 1994 (INC-
2,488,462.38 2,755,716.42 25,000.00 5,269,178.80 1,392,366.28 1,568,605.52 2,960,971.80
0202- 94-000002)
2000) Deficiency
Deficiency Gross
Final Receipts Tax
Withholding 1995 (GRT-
2,000,926.96 3,322,589.63 P1,367,222.04 6,690,738.63
Tax 95-000004)
1995 (ST- 1994 (GRT-
138,368.61 161,872.32 300,240.93
EWT-95- 94-000003)
64,365,610.12 58,757,866.78 25,000.00 123,148,477.15
0203- Deficiency
2000) Final
1994 (ST- Withholding
EWT-94- Tax
53,058,075.25 59,047,096.34 25,000.00 112,130,171.59
0204- 1995 (FT-95-
2000) 362,203.47 351,287.75 713,491.22
000005)
Deficiency 1994 (FT-94-
Final Tax on 188,746.43 220,807.47 409,553.90
000004)
FCDU Deficiency
Onshore Final Tax on
Income FCDU
1995 (ST- Onshore
OT-95- Income
81,508,718.20 61,901,963.52 25,000.00 143,435,681.72
0205- 1995 (OT-
2000) 81,508,718.20 79,052,291.08 160,561,009.28
95-000006)
1994 (ST- 1994 (OT-
OT-94- 34,429,503.10 40,277,802.26 74,707,305.36
34,429,503.10 33,052,322.98 25,000.00 67,506,826.08 94-000005)
0206- Deficiency
2000) Expanded
 Withholding
––––––––––––– –––––––––––––– ––––––––––––––
Tax
1995 (EWT-
520,869.72 505,171.80 25,000.00 1,051,041.03TOTALS P96,007,436.41 P191,753,312.36 P287,760,748.77
95-000004)
1994 (EWT-
297,949.95 348,560.63 25,000.00 671,510.58 ============ ============= =============
94-000003)
Deficiency
Documentar
y Stamp Tax RCBC argued that the waivers of the Statute of Limitations
1995 (DST- which it executed on January 23, 1997 were not valid because the
599,890.72 149,972.68 749,863.40 same were not signed or conformed to by the respondent CIR as
95-000006)
1995 (DST2- required under Section 222 (b) of the Tax Code. 11 As regards the
24,953,842.46 6,238,460.62 31,192,303.08 deficiency FCDU onshore tax, RCBC contended that because the
95-000002)
1994 (DST- onshore tax was collected in the form of a final withholding tax, it
905,064.74 226,266.18 1,131,330.92 was the borrower, constituted by law as the withholding agent, that
94-000005)
1994 (DST2- was primarily liable for the remittance of the said tax. 12
17,040,104.84 4,260,026.21 21,300,131.05
94-000001) On December 15, 2004, the First Division of the Court of Tax
–––––––––––––– –––––––––––––– ––––––––––––– –––––––––––––– Appeals (CTA-First Division) promulgated its Decision 13 which
partially granted the petition for review. It considered as closed and
P164,712,903.4 P126,155,645.3 P12,291,947.7 P303,160,496.5 terminated the assessments for deficiency income tax, deficiency
TOTALS
4 8 3 5 gross receipts tax, deficiency final withholding tax, deficiency
=========== =========== =========== =========== expanded withholding tax, and deficiency documentary stamp tax
== == = == (not an industry issue) for 1994 and 1995. 14 It, however, upheld the
assessment for deficiency final tax on FCDU onshore income and
deficiency documentary stamp tax for 1994 and 1995 and ordered
On the same day, RCBC paid the following deficiency RCBC to pay the following amounts plus 20% delinquency tax: 15
taxes as assessed by the BIR: 9
Particulars 1994 1995 Total
Particulars 1994 1995 Total

Deficiency Final
iciency Income Tax P2,965,549.44 P722,236.11 Tax on
P3,687,785.55
FCDU Onshore
iciency Gross Receipts Tax 300,695.84 6,701,893.17 Income
7,002,589.01
Basic P22,356,324.43 P16,067,952.86 P115,938,221.30
iciency Final Withholding Tax 410,174.44 714,682.02 1,124,856.46
Interest 26,153,837.08 15,583,713.19 119,330,093.34
Deficiency Expanded 672,490.14 1,052,753.48 1,725,243.62
––––––––––––– ––––––––––––– ––––––––––––––
hholding Tax
Sub Total 48,510,161.51 31,651,666.05 119,330,093.34
iciency Documentary 1,131,330.92 749,863.40 1,881,194.32
––––––––––––– ––––––––––––– ––––––––––––––
mp Tax
Deficiency
–––––––––––– –––––––––––– Documentary
–––––––––––––
Stamp Tax
TALS P5,480,240.78 P9,941,428.18 (Industry
P15,421,668.96
Issue)
=========== =========== ============
Basic P17,040,104.84 P24,953,842.46 P41,993,947.30

RCBC, however, refused to pay the following assessments Surcharge 4,260,026.21 6,238,460.62 10,498,486.83
for deficiency onshore tax and documentary stamp tax which
remained to be the subjects of its petition for review: 10 DACTSH ––––––––––––– ––––––––––––– ––––––––––––––

Particulars 1994 1995 Total Sub Total 21,300,131.05 31,192,303.08 52,492,434.13

––––––––––––– ––––––––––––– ––––––––––––––

Deficiency Final Tax on TOTALS P69,810,292.56 P62,843,969.13 P171,822,527.47

FCDU Onshore Income ============ ============ =============

Basic P34,429,503.10 P81,508,718.20 P115,938,221.30

Unsatisfied, RCBC filed its Motion for Reconsideration on
Interest 40,277,802.26 79,052,291.08 119,330,093.34 January 21, 2005, arguing that: (1) the CTA erred in its addition of
the total amount of deficiency taxes and the correct amount
––––––––––––– –––––––––––––– –––––––––––––– should only be P132,654,261.69 and not P171,822,527.47; (2) the CTA
erred in holding that RCBC was estopped from questioning the
Sub Total P74,707,305.36 P160,561,009.28 P235,268,314.64 validity of the waivers; (3) it was the payor-borrower as withholding
tax agent, and not RCBC, who was liable to pay the final tax on
––––––––––––– –––––––––––––– –––––––––––––– FCDU, and (4) RCBC's special savings account was not subject to
documentary stamp tax. 16
Deficiency Documentary
In its Resolution 17 dated April 11, 2005, the CTA-First
Stamp Tax Division substantially upheld its earlier ruling, except for its
inadvertence in the addition of the total amount of deficiency
Basic P17,040,104.84 P24,953,842.46 P41,993,947.30 taxes. As such, it modified its earlier decision and ordered RCBC to
pay the amount of P132,654,261.69 plus 20% delinquency tax. 18
Surcharge 4,260,026.21 6,238,460.62 10,498,486.83 RCBC elevated the case to the CTA-En Banc where it
raised the following issues:
––––––––––––– –––––––––––––– ––––––––––––––
I.
Sub Total P21,300,131.05 P31,192,303.08 P52,492,434.13
Whether or not the right of the respondent to assess
deficiency onshore tax and documentary stamp
 tax for taxable year 1994 and 1995 had already
prescribed when it issued the formal letter of
demand and assessment notices for the said
taxable years.
II.
Whether or not petitioner is liable for deficiency
onshore tax for taxable year 1994 and 1995.
III.
Whether or not petitioner's special savings account
is subject to documentary stamp tax under then
Section 180 of the 1993 Tax Code. 19
The CTA-En Banc, in its assailed Decision, denied the
petition for lack of merit. It ruled that by receiving, accepting and
paying portions of the reduced assessment, RCBC bound itself to
the new assessment, implying that it recognized the validity of the
waivers. 20 RCBC could not assail the validity of the waivers after it
had received and accepted certain benefits as a result of the
execution of the said waivers. 21 As to the deficiency onshore tax,
it held that because the payor-borrower was merely designated by
law to withhold and remit the said tax, it would then follow that the
tax should be imposed on RCBC as the payee-bank. 22 Finally, in
relation to the assessment of the deficiency documentary stamp
tax on petitioner's special savings account, it held that petitioner's
special savings account was a certificate of deposit and, as such,
was subject to documentary stamp tax. 23
Hence, this petition.
While awaiting the decision of this Court, RCBC filed its
Manifestation dated July 22, 2009, informing the Court that this
petition, relative to the DST deficiency assessment, had been
rendered moot and academic by its payment of the tax
deficiencies on Documentary Stamp Tax (DST) on Special Savings
Account (SSA) for taxable years 1994 and 1995 after the BIR
approved its applications for tax abatement. 24
In its November 17, 2009 Comment to the Manifestation,
the CIR pointed out that the only remaining issues raised in the
present petition were those pertaining to RCBC's deficiency tax on
FCDU Onshore Income for taxable years 1994 and 1995 in the
aggregate amount of P80,161,827.56 plus 20% delinquency interest
per annum. The CIR prayed that RCBC be considered to have
withdrawn its appeal with respect to the CTA-En Banc ruling on its
DST on SSA deficiency for taxable years 1994 and 1995 and that the
questioned CTA decision regarding RCBC's deficiency tax on FCDU
Onshore Income for the same period be affirmed. 25 TSAHIa
THE ISSUES
Thus, only the following issues remain to be resolved by this
Court:
Whether petitioner, by paying the other tax
assessment covered by the waivers of the statute of
limitations, is rendered estopped from questioning
the validity of the said waivers with respect to the
assessment of deficiency onshore tax. 26
and
Whether petitioner, as payee-bank, can be held
liable for deficiency onshore tax, which is
mandated by law to be collected at source in the
form of a final withholding tax. 27
THE COURT'S RULING
Petitioner is estopped from questioning the validity of the waivers
RCBC assails the validity of the waivers of the statute of
limitations on the ground that the said waivers were merely attested
to by Sixto Esquivias, then Coordinator for the CIR, and that he failed
to indicate acceptance or agreement of the CIR, as required under
Section 223 (b) of the 1977 Tax Code. 28 RCBC further argues that
the principle of estoppel cannot be applied against it because its
payment of the other tax assessments does not signify a clear
intention on its part to give up its right to question the validity of the
waivers. 29
The Court disagrees.
Under Article 1431 of the Civil Code, the doctrine of
estoppel is anchored on the rule that "an admission or
representation is rendered conclusive upon the person making it,
and cannot be denied or disproved as against the person relying
thereon." A party is precluded from denying his own acts, admissions
or representations to the prejudice of the other party in order to
prevent fraud and falsehood. 30
Estoppel is clearly applicable to the case at bench. RCBC,
through its partial payment of the revised assessments issued within
the extended period as provided for in the questioned waivers,
impliedly admitted the validity of those waivers. Had petitioner truly
believed that the waivers were invalid and that the assessments
were issued beyond the prescriptive period, then it should not have
paid the reduced amount of taxes in the revised assessment.
RCBC's subsequent action effectively belies its insistence that the
waivers are invalid. The records show that on December 6, 2000,
upon receipt of the revised assessment, RCBC immediately made
payment on the uncontested taxes. Thus, RCBC is estopped from
questioning the validity of the waivers. To hold otherwise and allow
a party to gainsay its own act or deny rights which it had previously
recognized would run counter to the principle of equity which this
institution holds dear. 31
Liability for Deficiency Onshore Withholding Tax
RCBC is convinced that it is the payor-borrower, as
withholding agent, who is directly liable for the payment of onshore
tax, citing Section 2.57 (A) of Revenue Regulations No. 2-98 which
states:
(A) Final Withholding Tax. — Under the final
withholding tax system the amount of income tax
withheld by the withholding agent is constituted as
a full and final payment of the income tax due from
the payee on the said income. The liability for
payment of the tax rests primarily on the payor as
a withholding agent. Thus, in case of his failure to
withhold the tax or in case of under withholding, the
deficiency tax shall be collected from the
payor/withholding agent. The payee is not required
to file an income tax return for the particular
income. (Emphasis supplied)
The petitioner is mistaken.
Before any further discussion, it should be pointed out that
RCBC erred in citing the abovementioned Revenue Regulations No.
2-98 because the same governs collection at source on income
paid only on or after January 1, 1998. The deficiency withholding tax
subject of this petition was supposed to have been withheld on
income paid during the taxable years of 1994 and 1995.
Hence, Revenue Regulations No. 2-98 obviously does not apply in
this case.
In Chamber of Real Estate and Builders' Associations, Inc.
v. The Executive Secretary, 32 the Court has explained that the
purpose of the withholding tax system is three-fold: (1) to provide
the taxpayer with a convenient way of paying his tax liability; (2) to
ensure the collection of tax, and (3) to improve the government's
cashflow. Under the withholding tax system, the payor is the
taxpayer upon whom the tax is imposed, while the withholding
agent simply acts as an agent or a collector of the government to
ensure the collection of taxes. 33
It is, therefore, indisputable that the withholding agent is
merely a tax collector and not a taxpayer, as elucidated by this
Court in the case of Commissioner of Internal Revenue v. Court of
Appeals, 34 to wit:
In the operation of the withholding tax system, the
withholding agent is the payor, a separate entity
acting no more than an agent of the government
for the collection of the tax in order to ensure its
payments; the payer is the taxpayer — he is the
person subject to tax imposed by law; and the
payee is the taxing authority. In other words, the
withholding agent is merely a tax collector, not a
taxpayer. Under the withholding system, however,
the agent-payor becomes a payee by fiction of
law. His (agent) liability is direct and independent
from the taxpayer, because the income tax is still
imposed on and due from the latter. The agent is
not liable for the tax as no wealth flowed into him
— he earned no income. The Tax Code only makes
the agent personally liable for the tax arising from
the breach of its legal duty to withhold as
distinguished from its duty to pay tax since:
"the government's cause of action against
the withholding agent is not for the
collection of income tax, but for the
enforcement of the withholding provision
of Section 53 of the Tax Code,
compliance with which is imposed on the
withholding agent and not upon the
taxpayer." 35 (Emphases supplied)
Based on the foregoing, the liability of the withholding
agent is independent from that of the taxpayer. The former cannot
 be made liable for the tax due because it is the latter who earned
the income subject to withholding tax. The withholding agent is
liable only insofar as he failed to perform his duty to withhold the tax
and remit the same to the government. The liability for the tax,
however, remains with the taxpayer because the gain was realized
and received by him.
While the payor-borrower can be held accountable for its
negligence in performing its duty to withhold the amount of tax due
on the transaction, RCBC, as the taxpayer and the one which
earned income on the transaction, remains liable for the payment
of tax as the taxpayer shares the responsibility of making certain
that the tax is properly withheld by the withholding agent, so as to
avoid any penalty that may arise from the non-payment of the
withholding tax due. STECDc
RCBC cannot evade its liability for FCDU Onshore Tax by
shifting the blame on the payor-borrower as the withholding agent.
As such, it is liable for payment of deficiency onshore tax on interest
income derived from foreign currency loans, pursuant to Section 24
(e) (3) of the National Internal Revenue Code of 1993:
Sec. 24. Rates of tax on domestic corporations. —

xxx xxx xxx

(e) Tax on certain incomes derived by domestic

corporations

xxx xxx xxx

(3) Tax on income derived under the Expanded

Foreign Currency Deposit System. — Income
derived by a depository bank under the expanded
foreign currency deposit system from foreign
currency transactions with nonresidents, offshore
banking units in the Philippines, local commercial
banks including branches of foreign banks that
may be authorized by the Central Bank to transact
business with foreign currency depository system
units and other depository banks under the
expanded foreign currency deposit system shall be
exempt from all taxes, except taxable income from
such transactions as may be specified by the
Secretary of Finance, upon recommendation of
the Monetary Board to be subject to the usual
income tax payable by banks: Provided, That
interest income from foreign currency loans
granted by such depository banks under said
expanded system to residents (other than offshore
banking units in the Philippines or other depository
banks under the expanded system) shall be
subject to a 10% tax. (Emphasis supplied)

As a final note, this Court has consistently held that findings

and conclusions of the CTA shall be accorded the highest respect
and shall be presumed valid, in the absence of any clear and
convincing proof to the contrary. 36 The CTA, as a specialized court
dedicated exclusively to the study and resolution of tax problems,
has developed an expertise on the subject of taxation. 37 As such,
its decisions shall not be lightly set aside on appeal, unless this Court
finds that the questioned decision is not supported by substantial
evidence or there is a showing of abuse or improvident exercise of
authority on the part of the Tax Court. 38
WHEREFORE, the petition is DENIED.
SO ORDERED.
||| (Rizal Commercial Banking Corp. v. Commissioner of Internal
Revenue, G.R. No. 170257, [September 7, 2011], 672 PHIL 514-530)
 SECOND DIVISION
[G.R. No. 180290. September 29, 2014.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE
NATIONAL BANK, respondent.
DECISION
LEONEN, J p:
Before this court is a petition for review 1 under Rule 45 of
the Rules of Court, seeking to annul the October 1, 2007 decision 2 and
October 30, 2007 resolution 3 of the Court of Tax Appeals En Banc
in C.T.A. E.B. No. 285.
The assailed decision denied petitioner's appeal and affirmed
the January 30, 2007 decision 4 and May 30, 2007 resolution 5 of the First
Division of the Court of Tax Appeals, granting respondent a tax refund or
credit in the amount of PhP23,762,347.83, representing unutilized excess
creditable withholding taxes for taxable year 2000. The assailed
resolution denied petitioner's motion for reconsideration.
The pertinent facts are summarized in the assailed decision as
follows:
In several transactions including but not
limited to the sale of real properties, lease and
commissions, [respondent] allegedly earned
income and paid the corresponding income taxes
due which were collected and remitted by various
payors as withholding agents to the Bureau of
Internal Revenue ("BIR") during the taxable year
2000.
On April 18, 2001, [respondent] filed its
tentative income tax return for taxable year 2000
which [it] subsequently amended on July 25, 2001.
. . . [Respondent] filed again an amended
income tax return for taxable year 2000 on June 20,
2002, declaring no income tax liability . . . as it
incurred a net loss in the amount of
P11,318,957,602.00 and a gross loss of
P745,713,454.00 from its Regular Banking Unit ("RBU")
transactions. However, [respondent] had a 10%
final income tax liability of P210,364,280.00 on
taxable income of P1,959,931,182.00 earned from
its Foreign Currency Deposit Unit ("FCDU")
transactions for the same year. Likewise, in the
[same] return, [respondent] reported a total
amount of P245,888,507.00 final and creditable
withholding taxes which was applied against the
final income tax due of P210,364,280.00 leaving an
overpayment of P35,524,227.00. . . .
xxx xxx xxx
In its second amended return,
[respondent's] income tax overpayment of
P35,524,227.00 consisted of the balance of the prior
year's (1999) excess credits of P9,057,492.00 to be
carried-over as tax credit to the succeeding
quarter/year and excess creditable withholding
taxes for taxable year 2000 in the amount of
P26,466,735.00 which [respondent] opted to be
refunded.
On November 11, 2002, [respondent] . . .
filed a claim for refund or the issuance of a tax
credit certificate in the amount of P26,466,735.40
for the taxable year 2000 with the [BIR].
Due to [BIR's] inaction on its administrative
claim, [respondent] appealed before [the Court of
Tax Appeals] by way of a Petition for Review on
April 11, 2003. 6 (Citation omitted)
On January 30, 2007, the Court of Tax Appeals First Division
rendered a decision in favor of respondent as follows:
WHEREFORE, premises considered, the
petition is hereby GRANTED. Accordingly,
respondent is hereby ORDERED TO REFUND or ISSUE
A TAX CREDIT CERTIFICATE to petitioner in the
reduced amount of Twenty Three Million Seven
Hundred Sixty Two Thousand Three Hundred Forty
Seven Pesos and 83/100
(P23,762,347.83) representing unutilized excess
creditable withholding taxes for taxable year
2000. 7 (Emphasis in the original)
Petitioner's motion for reconsideration was subsequently
denied for lack of merit in the First Division's resolution dated May 30,
2007.
On appeal, the Court of Tax Appeals En Banc sustained the First
Division's ruling. It held that the fact of withholding and the amount of
taxes withheld from the income payments received by respondent were
sufficiently established by the creditable withholding tax certificates,
and there was no need to present the testimonies of the various payors
or withholding agents who issued the certificates and made the entries
therein. It also held that respondent need not prove actual remittance
of the withheld taxes to the Bureau of Internal Revenue because the
functions of withholding and remittance of income taxes are vested in
the payors who are considered the agents of petitioner. 8 IcCATD
The Court of Tax Appeals En Banc also denied petitioner's
motion for reconsideration 9 in its October 30, 2007 resolution.
Hence, this instant petition was filed.
Petitioner claims that the Court of Tax Appeals "erred on a
question of law in ordering the refund to respondent of alleged excess
creditable withholding taxes because(:)
A. Respondent failed to prove that the
creditable withholding taxes amounting to
P23,762,347.83 are duly supported by valid
certificates of creditable tax withheld at source;
B. Respondent failed to prove actual
remittance of the alleged withheld taxes to the
Bureau of Internal Revenue (BIR); and
C. Respondent failed to discharge its
burden of proving its entitlement to a refund." 10
Petitioner questions the validity of respondent's certificates of
creditable tax withheld at source (withholding tax certificates) and
contends that even if the original certificates were offered in evidence,
respondent failed to present the various withholding agents to: (1)
identify and testify on their contents; and (2) prove the subsequent
remittance of the withheld taxes to the Bureau of Internal Revenue.
Moreover, petitioner faults respondent for presenting the withholding tax
certificates only before the Court of Tax Appeals, and not at the first
instance when it filed its claim for refund administratively before the
Bureau of Internal Revenue. 11
In its comment, 12 respondent counters that:
1) The petition should be dismissed for being pro
forma because it does not specify the
reversible errors of either fact or law that
the lower courts committed, and the
arguments raised are all rehash and
purely factual;
2) It complied with all the requirements for judicial
claim for refund of unutilized creditable
withholding taxes;
3) The fact of withholding was sufficiently
established by the 622 creditable
withholding tax certificates, primarily
attesting the amount of taxes withheld
from the income payments received by
respondent. Furthermore, to present to
the court all the withholding agents or
payors to identify and authenticate each
and every one of the 622 withholding tax
certificates would be too burdensome
and would unnecessarily prolong the trial
of the case; and
4) Respondent need not prove the actual
remittance of withheld taxes to the
Bureau of Internal Revenue because the
remittance is the responsibility of the
payor or withholding agent and not the
payee.
In its reply, 13 petitioner maintains that claims for refund are
strictly construed against the claimant, and "it is incumbent upon
respondent to discharge the burden of proving . . . the fact of
withholding of taxes and their subsequent remittance to the Bureau of
Internal Revenue." 14
In the resolution dated February 2, 2009, 15 the court resolved
to give due course to the petition and decide the case according to the
pleadings already filed.
The petition, however, should be denied.
The petition is but a reiteration of reasons and arguments
previously set forth in petitioner's pleadings before the Court of Tax
Appeals En Banc, and which the latter had already considered,
weighed, and resolved before it rendered its decision and resolution
now sought to be set aside.
 Furthermore, the questions on whether respondent's claim for
refund of unutilized excess creditable withholding taxes amounting to
PhP23,762,347.83 were duly supported by valid certificates of creditable
tax withheld at source and whether it had sufficiently proven its claim
are questions of fact. These issues require a review, examination,
evaluation, or weighing of the probative value of evidence presented,
especially the withholding tax certificates, which this court does not
have the jurisdiction to do, barring the presence of any exceptional
circumstance, as it is not a trier of facts. 16
Besides, as pointed out by respondent, petitioner did not
object to the admissibility of the 622 withholding tax certificates when
these were formally offered by respondent before the tax
court. 17 Hence, petitioner is deemed to have admitted the validity of
these documents. 18 Petitioner's "failure to object to the offered
evidence renders it admissible, and the court cannot, on its own,
disregard such evidence." 19
At any rate, the Court of Tax Appeals First Division and En Banc
uniformly found that respondent has established its claim for refund or
issuance of a tax credit certificate for unutilized excess creditable
withholding taxes for the taxable year 2000 in the amount of
PhP23,762,347.83. The Court of Tax Appeals First Division thoroughly
passed upon the evidence presented by respondent and the report of
the court-commissioned auditing firm, SGV & Co., and found: HTScEI
[O]ut of the total claimed creditable
withholding taxes of P26,466,735.40, [respondent]
was able to substantiate only the amount of
P25,666,064.80 [sic], computed as follows:
Amount of Claimed Creditable Taxes
P26,466,735.40
Withheld
Less: 1.) Certificates which do not bear any
date or period when the indicated
creditable taxes were withheld 48,600.00
Certificates dated outside the
2.)
period
of claim 730,151.10
Certificate without indicated
3.)
amount
of tax withheld 8,794.50
4.) Certificates taken-up twice 9,000.00
––––––––––––––
Substantiated Creditable Taxes Withheld P25,670,189.80
============
xxx xxx xxx
[O]ut of the claimed amount of
P25,670,189.80 supported by valid certificates, only
the creditable withholding taxes of P23,762,347.83,
the related income of which were verified to have
been recorded in [respondent's] general ledger
and reported in [respondent's] income tax return
either in the year 1999, 2000 or 2001, satisfied the
third requisite, computed as follows:
Creditable Taxes Withheld With Valid
P25,670,189.80
Certificates
Less: Creditable Taxes Withheld, the related
income of which was not verified
against
the general ledger 1,907,841.97
––––––––––––––––
Refundable Excess Creditable Taxes Withheld P23,762,347.83 20
==============
(Emphasis supplied)
This court accords respect to the conclusion reached by the
Court of Tax Appeals and will not presumptuously set it aside absent any
showing of gross error or abuse on its part. 21
The certificate of creditable tax withheld at source 22 is the
competent proof to establish the fact that taxes are withheld. 23 It is not
necessary for the person who executed and prepared the certificate of
creditable tax withheld at source to be presented and to testify
personally to prove the authenticity of the certificates. 24
In Banco Filipino Savings and Mortgage Bank v. Court of
Appeals, 25 this court declared that a certificate is complete in the
relevant details that would aid the courts in the evaluation of any claim
for refund of excess creditable withholding taxes:
In fine, the document which may be
accepted as evidence of the third condition, that
is, the fact of withholding, must emanate from the
payor itself, and not merely from the payee, and
must indicate the name of the payor, the income
payment basis of the tax withheld, the amount of
the tax withheld and the nature of the tax paid.
At the time material to this case, the
requisite information regarding withholding taxes
from the sale of acquired assets can be found in BIR
Form No. 1743.1. As described in Section 6 of
Revenue Regulations No. 6-85, BIR Form No. 1743.1
is a written statement issued by the payor as
withholding agent showing the income or other
payments made by the said withholding agent
during a quarter or year and the amount of the tax
deducted and withheld therefrom. It readily
identifies the payor, the income payment and the
tax withheld. It is complete in the relevant details
which would aid the courts in the evaluation of any
claim for refund of creditable withholding
taxes. 26 (Emphasis supplied, citations omitted)
Moreover, as correctly held by the Court of Tax Appeals En
Banc, the figures appearing in the withholding tax certificates can be
taken at face value since these documents were executed under the
penalties of perjury, pursuant to Section 267 of the 1997 National Internal
Revenue Code, as amended, which reads:
SEC. 267. Declaration under Penalties of
Perjury. — Any declaration, return and other
statements required under this Code, shall, in lieu of
an oath, contain a written statement that they are
made under the penalties of perjury. Any person
who willfully files a declaration, return or statement
containing information which is not true and
correct as to every material matter shall, upon
conviction, be subject to the penalties prescribed
for perjury under the Revised Penal Code.
Thus, upon presentation of a withholding tax certificate
complete in its relevant details and with a written statement that it was
made under the penalties of perjury, the burden of evidence then shifts
to the Commissioner of Internal Revenue to prove that (1) the certificate
is not complete; (2) it is false; or (3) it was not issued regularly. IaHDcT
Petitioner's posture that respondent is required to establish
actual remittance to the Bureau of Internal Revenue deserves scant
consideration. Proof of actual remittance is not a condition to claim for
a refund of unutilized tax credits. Under Sections 57 and 58 of the 1997
National Internal Revenue Code, as amended, it is the payor-
withholding agent, and not the payee-refund claimant such as
respondent, who is vested with the responsibility of withholding and
remitting income taxes.
This court's ruling in Commissioner of Internal Revenue v. Asian
Transmission Corporation, 27 citing the Court of Tax Appeals'
explanation, is instructive:
. . . proof of actual remittance by the
respondent is not needed in order to prove
withholding and remittance of taxes to petitioner.
Section 2.58.3 (B) of Revenue Regulation No. 2-98
clearly provides that proof of remittance is the
responsibility of the withholding agent and not of
the taxpayer-refund claimant. It should be borne in
mind by the petitioner that payors of withholding
taxes are by themselves constituted as withholding
agents of the BIR. The taxes they withhold are held
in trust for the government. In the event that the
withholding agents commit fraud against the
government by not remitting the taxes so withheld,
such act should not prejudice herein respondent
who has been duly withheld taxes by the
withholding agents acting under government
authority. Moreover, pursuant to Sections 57 and 58
of the NIRC of 1997, as amended, the withholding
of income tax and the remittance thereof to the BIR
is the responsibility of the payor and not the payee.
Therefore, respondent . . . has no control over the
remittance of the taxes withheld from its income by
the withholding agent or payor who is the agent of
the petitioner. The Certificates of Creditable Tax
Withheld at Source issued by the withholding
agents of the government are prima facie proof of
actual payment by herein respondent-payee to
the government itself through said agents. 28
Finally, petitioner's allegation that the submission of the
certificates of withholding taxes before the Court of Tax Appeals was
late is untenable. The samples of the withholding tax certificates
attached to respondent's comment bore the receiving stamp of the
Bureau of Internal Revenue's Large Taxpayers Document Processing and
Quality Assurance Division. 29 As observed by the Court of Tax Appeals
En Banc, "[t]he Commissioner is in no position to assail the authenticity of
the CWT certificates due to PNB's alleged failure to submit the same
before the administrative level since he could have easily directed the
claimant to furnish copies of these documents, if the refund applied for
casts him any doubt." 30 Indeed, petitioner's inaction prompted
respondent to elevate its claim for refund to the tax court.

More importantly, the Court of Tax Appeals is not precluded

from accepting respondent's evidence assuming these were not
presented at the administrative level. Cases filed in the Court of Tax
Appeals are litigated de novo. 31 Thus, respondent "should prove every
minute aspect of its case by presenting, formally offering and submitting
. . . to the Court of Tax Appeals [all evidence] . . . required for the
successful prosecution of [its] administrative claim." 32

WHEREFORE, the petition is DENIED.

||| (Commissioner of Internal Revenue. v. Philippine National Bank,

G.R. No. 180290, [September 29, 2014], 744 PHIL 299-312)