Tax Cases April 28

All events test Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 172231 February 12, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
1
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision of the Court of Appeals in CA-G.R. SP No. 78426 affirming the
2
February 26, 2003 Decision 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:
3 4
(a) Expenses for the auditing services of SGV & Co., for the year ending December 31, 1985;
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for
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the years 1984 and 1985.
6
(c) Expense for security services of El Tigre Security & Investigation Agency for the months of April and May 1986.
(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
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withholding tax on its claimed P244,890.00 deduction for security services.
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
8
before the CTA. This conclusion was sustained by this Court on July 1, 2001, in G.R. No. 135210. 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
CTA DECISION
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 same as
deduction for the said years as the amount thereof 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.
9
SO ORDERED.
10
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA decision, 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
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carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.
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".
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Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. 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
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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.
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
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enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment.
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
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establishing the accrual of an item of income or deduction.
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
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exemption, then it must also be strictly construed.
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
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1960’s. 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.
20
As to the expenses for security services, the records show that these expenses were incurred by ICC in 1986 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.
21
There is indeed no stipulation between the latter and ICC on the application of compounded interest. 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
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services and remitted the same to the BIR is supported by payment order and confirmation receipts. 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.
Republic of the Philippines

SUPREME COURT
SUPREME COURT
Baguio City
THIRD DIVISION
G.R. No. 197117 April 10, 2013
FIRST LEPANTO TAISHO INSURANCE CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
MENDOZA, J.:
1
Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure filed by First Lepanto Taisho Corporation, now FLT
2 3
Prime Insurance Corporation (petitioner), assailing the March l, 2011 Decision and the May 27, 2011 Resolution of the Court of Tax Appeals (CTA) En Bane,
in CTA E.B. No. 563, which affirmed the May 21, 2009 Decision of the CTA-Second Division.
The Facts:
Petitioner is a non-lire insurance corporation and considered as a "Large Taxpayer under Revenue Regulations No. 6-85, as amended by Revenue
4
Regulations No. 12-94 effective 1994." After submitting its corporate income tax return for taxable year ending December 31, 1997, petitioner received a
Letter of Authority, dated October 30, 1998, from respondent Commissioner of Internal Revenue (CIR) to allow it to examine their books of account and other
accounting records for 1997 and other unverified prior years.
On December 29, 1999, CIR issued internal revenue tax assessments for deficiency income, withholding, expanded withholding, final withholding, value-
added, and documentary stamp taxes for taxable year 1997.
On February 24, 2000, petitioner protested the said tax assessments.
During the pendency of the case, particularly on February 15, 2008, petitioner filed its Motion for Partial Withdrawal of Petition for Review of Assessment
Notice Nos. ST-INC-97-0220-99; ST-VAT-97-0222-99 and ST-DST-97-0217-00, in view of the tax amnesty program it had availed. The CTA Second Division
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granted the said motion in a Resolution, dated March 31, 2008.
6
Consequently, on May 21, 2009, the CTA Second Division partially granted the petition. It directed petitioner to pay CIR a reduced tax liability of
₱1,994,390.86. The dispositive portion reads:
WHEREFORE, in view of the foregoing considerations, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, petitioner is hereby
ORDERED TO PAY deficiency withholding tax on compensation, expanded withholding tax and final tax in the reduced amount of ₱1,994,390.86, computed
as follows:
Basic Surcharges Interest Total

Tax
Deficiency ₱774,200.55 ₱193,550.14 ₱312.227.34 ₱1,279,978.03

Withholding
Tax on
Compensation
ST-WC-97-0221-99
Deficiency 132,724.02 33,181.01 53,526.27 219,431.30

Expanded
Withholding
Tax ST-EWT-97-0218-
99
Deficiency 299,391.84 74,847.96 120,741.73 494,981.53

Final
Withholding
Tax ST-FT-97-0219-99
TOTALS ₱1,206,316.41 ₱301,579.11 ₱486,495.34 ₱1,994,390.86
7 8
Petitioner’s Motion for Partial Reconsideration was likewise denied by the CTA Second Division in its October 29, 2009 Resolution.
9
Unsatisfied, petitioner filed a Petition for Review before the CTA En Banc.
10
On March 1, 2011, the CTA En Banc affirmed the decision of the CTA Second Division.
Petitioner contended that it was not liable to pay Withholding Tax on Compensation on the ₱500,000.00 Director’s Bonus to their directors, specifically,
Rodolfo Bausa, Voltaire Gonzales, Felipe Yap, and Catalino Macaraig, Jr., because they were not employees and the amount was already subjected to
Expanded Withholding Tax. The CTA En Banc, however, ruled that Section 5 of Revenue Regulation No. 12-86 expressly identified a director to be an
employee.
As to transportation, subsistence and lodging, and representation expenses, the expenses would not be subject to withholding tax only if the same were
reimbursement for actual expenses of the company. In the present case, the CTA En Banc declared that petitioner failed to prove that they were so.
As to deficiency expanded withholding taxes on compensation, petitioner failed to substantiate that the commissions earned totaling ₱905,428.36, came from
reinsurance activities and should not be subject to withholding tax. Petitioner likewise failed to prove its direct loss expense, occupancy cost and
service/contractors and purchases.
As to deficiency final withholding taxes, "petitioner failed to present proof of remittance to establish that it had remitted the final tax on dividends paid as well
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as the payments for services rendered by the Malaysian entity."
As to the imposition of delinquency interest under Section 249 (c) (3) of the 1997 National Internal Revenue Code (NIRC), records reveal that petitioner failed
to pay the deficiency taxes within thirty (30) days from receipt of the demand letter, thus, delinquency interest accrued from such non-payment.
12
Petitioner moved for partial reconsideration, but the CTA En Banc denied the same in its May 27, 2011 Resolution.
13
Hence, this petition.
The principal issue in this case is whether the CTA En Banc erred in holding petitioner liable for:
a. deficiency withholding taxes on compensation on directors’ bonuses under Assessment No. ST-WC-97-0021-99;
b. deficiency expanded withholding taxes on transportation, subsistence and lodging, and representation expense; commission expense; direct loss expense;
occupancy cost; and service/contractor and purchases under Assessment No. ST-EWT-97-0218-99;
c. deficiency final withholding taxes on payment of dividends and computerization expenses to foreign entities under Assessment No. ST-FT-97-0219-99; and
d. delinquency interest under Section 249 (c) (3) of the NIRC.
The Court finds no merit in the petition.
14
For taxation purposes, a director is considered an employee under Section 5 of Revenue Regulation No. 12-86, to wit:
An individual, performing services for a corporation, whether as an officer and director or merely as a director whose duties are confined to attendance at and
participation in the meetings of the Board of Directors, is an employee.
The non-inclusion of the names of some of petitioner’s directors in the company’s Alpha List does not ipso facto create a presumption that they are not
employees of the corporation, because the imposition of withholding tax on compensation hinges upon the nature of work performed by such individuals in
15 16
the company. Moreover, contrary to petitioner’s attestations, Revenue Regulation No. 2-98, specifically, Section 2.57.2. A (9) thereof, cannot be applied to
this case as the latter is a later regulation while the accounting books examined were for taxable year 1997.
As to the deficiency withholding tax assessment on transportation, subsistence and lodging, and representation expense, commission expense, direct loss
expense, occupancy cost, service/contractor and purchases, the Court finds no cogent reason to deviate from the findings of the CTA En Banc. As correctly
observed by the CTA Second Division and the CTA En Banc, petitioner was not able to sufficiently establish that the transportation expenses reflected in their
books were reimbursement from actual transportation expenses incurred by its employees in connection with their duties as the only document presented
was a Schedule of Transportation
Expenses without pertinent supporting documents. Without said documents, such as but not limited to, receipts, transportation-related vouchers and/or
invoices, there is no way of ascertaining whether the amounts reflected in the schedule of expenses were disbursed for transportation.
With regard to commission expense, no additional documentary evidence, like the reinsurance agreements contracts, was presented to support petitioner’s
allegation that the expenditure originated from reinsurance activities that gave rise to reinsurance commissions, not subject to withholding tax. As to
occupancy costs, records reveal that petitioner failed to compute the correct total occupancy cost that should be subjected to withholding tax, hence,
petitioner is liable for the deficiency.
As to service/contractors and purchases, petitioner contends that both parties already stipulated that it correctly withheld the taxes due. Thus, petitioner is of
the belief that it is no longer required to present evidence to prove the correct payment of taxes withheld. As correctly ruled by the CTA Second Division and
En Bane, however, stipulations cannot defeat the right of the State to collect the correct taxes due on an individual or juridical person because taxes are the
lifeblood of our nation so its collection should be actively pursued without unnecessary impediment.
As to the deficiency final withholding tax assessments for payments of dividends and computerization expenses incurred by petitioner to foreign entities,
17
particularly Matsui Marine & Fire Insurance Co. Ltd. (Matsui), the Court agrees with CIR that petitioner failed to present evidence to show the supposed
remittance to Matsui.
The Court likewise holds the imposition of delinquency interest under Section 249 (c) (3) of the 1997 NIRC to be proper, because failure to pay the deficiency
tax assessed within the time prescribed for its payment justifies the imposition of interest at the rate of twenty percent (20%) per annum, which interest shall
be assessed and collected from the date prescribed for its payment until full payment is made.
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It is worthy to note that tax revenue statutes are not generally intended to be liberally construed. Moreover, the CTA being a highly specialized court
particularly created for the purpose of reviewing tax and customs cases, it is settled that its findings and conclusions are accorded great respect and are
19
generally upheld by this Court, unless there is a clear showing of a reversible error or an improvident exercise of authority. Absent such errors, the
challenged decision should be maintained.
WHEREFORE, the petition is DENIED. The March 1, 2011 Decision and the May 27, 2011 Resolution of the Court of Tax Appeals En Bane, in CTA E.B. No.
563, are AFFIRMED.
G.R. No. 153793 August 29, 2006
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-in-fact) Respondent.
DECISION
YNARES-SANTIAGO, J.:
1
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002 Decision of the Court of Appeals in CA-G.R. SP No. 59794, which
2
granted the tax refund of respondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision of the Court of Tax Appeals (CTA) in C.T.A. Case No.
3
5633. Petitioner also assails the May 8, 2002 Resolution of the Court of Appeals denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged in
"[m]anufacturing, marketing on wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling and disposing embroidered textile
4
products." Through JUBANITEX’s General Manager, Marina Q. Guzman, the corporation appointed and engaged the services of respondent as commission
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agent. It was agreed that respondent will receive 10% sales commission on all sales actually concluded and collected through her efforts.
In 1995, respondent received the amount of P1,707,772.64, representing her sales commission income from which JUBANITEX withheld the corresponding
10% withholding tax amounting to P170,777.26, and remitted the same to the Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed her
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1995 income tax return reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26.
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have been mistakenly withheld and remitted by JUBANITEX to
the BIR. Respondent contended that her sales commission income is not taxable in the Philippines because the same was a compensation for her services
rendered in Germany and therefore considered as income from sources outside the Philippines.
7
The next day, April 15, 1998, she filed a petition for review with the CTA contending that no action was taken by the BIR on her claim for refund. On June 28,
2000, the CTA rendered a decision denying her claim. It held that the commissions received by respondent were actually her remuneration in the
performance of her duties as President of JUBANITEX and not as a mere sales agent thereof. The income derived by respondent is therefore an income
taxable in the Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding that respondent received the commissions as sales agent of
JUBANITEX and not as President thereof. And since the "source" of income means the activity or service that produce the income, the sales commission
received by respondent is not taxable in the Philippines because it arose from the marketing activities performed by respondent in Germany. The dispositive
portion of the appellate court’s Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated June 28, 2000 is hereby REVERSED and SET ASIDE and the
respondent court is hereby directed to grant petitioner a tax refund in the amount of Php 170,777.26.
8
SO ORDERED.
9
Petitioner filed a motion for reconsideration but was denied. Hence, the instant recourse.
Petitioner maintains that the income earned by respondent is taxable in the Philippines because the source thereof is JUBANITEX, a domestic corporation
located in the City of Makati. It thus implied that source of income means the physical source where the income came from. It further argued that since
respondent is the President of JUBANITEX, any remuneration she received from said corporation should be construed as payment of her overall managerial
services to the company and should not be interpreted as a compensation for a distinct and separate service as a sales commission agent.
Respondent, on the other hand, claims that the income she received was payment for her marketing services. She contended that income of nonresident
aliens like her is subject to tax only if the source of the income is within the Philippines. Source, according to respondent is the situs of the activity which
produced the income. And since the source of her income were her marketing activities in Germany, the income she derived from said activities is not subject
to Philippine income taxation.
The issue here is whether respondent’s sales commission income is taxable in the Philippines. Issue
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual. –
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines. –
(1) In General. – A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an
individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall
come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a
‘nonresident alien doing business in the Philippines,’ Section 22(G) of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. – There shall be levied, collected and paid for each taxable year
upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the
Philippines x x x a tax equal to twenty-five percent (25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to Philippine income taxation
on their income received from all sources within the Philippines. Thus, the keyword in determining the taxability of non-resident aliens is the income’s
"source." In construing the meaning of "source" in Section 25 of the NIRC, resort must be had on the origin of the provision.
10 11
The first Philippine income tax law enacted by the Philippine Legislature was Act No. 2833, which took effect on January 1, 1920. Under Section 1 thereof,
nonresident aliens are likewise subject to tax on income "from all sources within the Philippine Islands," thus –
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all
sources by every individual, a citizen or resident of the Philippine Islands, a tax of two per centum upon such income; and a like tax shall be levied, assessed,
collected, and paid annually upon the entire net income received in the preceding calendar year from all sources within the Philippine Islands by every
individual, a nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.
12
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as amended by U.S. Revenue Law of 1917. Being a law of American
12
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as amended by U.S. Revenue Law of 1917. Being a law of American
13
origin, the authoritative decisions of the official charged with enforcing it in the U.S. have peculiar persuasive force in the Philippines.
The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as from sources within the U.S. and specifies when similar types of
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income are to be treated as from sources outside the U.S. Under the said Code, compensation for labor and personal services performed in the U.S., is
generally treated as income from U.S. sources; while compensation for said services performed outside the U.S., is treated as income from sources outside
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the U.S. A similar provision is found in Section 42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. – Compensation for labor or personal services performed in the Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without the Philippines;
The following discussions on sourcing of income under the Internal Revenue Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from three possible sources only: (1) capital and/or
(2) labor; and/or (3) the sale of capital assets. While the three elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful
guides in any inquiry into whether a particular item is from "sources within the United States" and suggest an investigation into the nature and location of the
activities or property which produce the income.
If the income is from labor the place where the labor is done should be decisive; if it is done in this country, the income should be from "sources within the
United States." If the income is from capital, the place where the capital is employed should be decisive; if it is employed in this country, the income should be
from "sources within the United States." If the income is from the sale of capital assets, the place where the sale is made should be likewise decisive.
Much confusion will be avoided by regarding the term "source" in this fundamental light. It is not a place, it is an activity or property. As such, it has a situs or
location, and if that situs or location is within the United States the resulting income is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign corporations
and to make the test of taxability the "source," or situs of the activities or property which produce the income. The result is that, on the one hand, nonresident
aliens and nonresident foreign corporations are prevented from deriving income from the United States free from tax, and, on the other hand, there is no
undue imposition of a tax when the activities do not take place in, and the property producing income is not employed in, this country. Thus, if income is to be
taxed, the recipient thereof must be resident within the jurisdiction, or the property or activities out of which the income issues or is derived must be situated
within the jurisdiction so that the source of the income may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is protection of life and property and that the income rightly to be levied upon to defray the burdens
of the United States Government is that income which is created by activities and property protected by this Government or obtained by persons enjoying that
16
protection.
The important factor therefore which determines the source of income of personal services is not the residence of the payor, or the place where the contract
17
for service is entered into, or the place of payment, but the place where the services were actually rendered.
18
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, the Court addressed the issue on the applicable source rule relating to reinsurance
premiums paid by a local insurance company to a foreign insurance company in respect of risks located in the Philippines. It was held therein that the
undertaking of the foreign insurance company to indemnify the local insurance company is the activity that produced the income. Since the activity took place
in the Philippines, the income derived therefrom is taxable in our jurisdiction. Citing Mertens, The Law of Federal Income Taxation, the Court emphasized that
the technical meaning of source of income is the property, activity or service that produced the same. Thus:
The source of an income is the property, activity or service that produced the income. The reinsurance premiums remitted to appellants by virtue of the
reinsurance contracts, accordingly, had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the
activity that produced the reinsurance premiums, and the same took place in the Philippines. x x x the reinsured, the liabilities insured and the risk originally
19
underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines. x x x
20
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC), the issue was whether BOAC, a foreign airline company which does
not maintain any flight to and from the Philippines is liable for Philippine income taxation in respect of sales of air tickets in the Philippines, through a general
sales agent relating to the carriage of passengers and cargo between two points both outside the Philippines. Ruling in the affirmative, the Court applied the
case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and reiterated the rule that the source of income is that "activity" which produced the
income. It was held that the "sale of tickets" in the Philippines is the "activity" that produced the income and therefore BOAC should pay income tax in the
Philippines because it undertook an income producing activity in the country.
Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British Overseas Airways Corporation in support of their
arguments, but the correct interpretation of the said case favors the theory of respondent that it is the situs of the activity that determines whether such
income is taxable in the Philippines. The conflict between the majority and the dissenting opinion in the said case has nothing to do with the underlying
principle of the law on sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue. The divergence in
opinion centered on whether the sale of tickets in the Philippines is to be construed as the "activity" that produced the income, as viewed by the majority, or
merely the physical source of the income, as ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority, through Justice Ameurfina Melencio-
Herrera, as ponente, interpreted the sale of tickets as a business activity that gave rise to the income of BOAC. Petitioner cannot therefore invoke said case
to support its view that source of income is the physical source of the money earned. If such was the interpretation of the majority, the Court would have
simply stated that source of income is not the business activity of BOAC but the place where the person or entity disbursing the income is located or where
BOAC physically received the same. But such was not the import of the ruling of the Court. It even explained in detail the business activity undertaken by
BOAC in the Philippines to pinpoint the taxable activity and to justify its conclusion that BOAC is subject to Philippine income taxation. Thus –
BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the Philippines. That general sales agent, from 1959 to
1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips — each trip in the series corresponding to a different
airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their participation
in the services rendered through the mode of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Those
activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an
international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the
paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered
21
by the assessments. x x x
xxxx
The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that
produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of
payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticket-holder and the carrier. It
gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the
terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in general embraces within its terms all the elements to
22
constitute it a valid contract, binding upon the parties entering into the relationship.
The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the income. With respect to rendition of labor or
personal service, as in the instant case, it is the place where the labor or service was performed that determines the source of the income. There is therefore
no merit in petitioner’s interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of
the income.
Having disposed of the doctrine applicable in this case, we will now determine whether respondent was able to establish the factual circumstances showing
that her income is exempt from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent received the income, but the sufficiency of evidence to prove that the services
she rendered were performed in Germany. Though not raised as an issue, the Court is clothed with authority to address the same because the resolution
23
thereof will settle the vital question posed in this controversy.
24
The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi jurisagainst the taxpayer. To those therefore, who
claim a refund rest the burden of proving that the transaction subjected to tax is actually exempt from taxation.
In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that the activity or the service which would entitle her to 10%
25
commission income, are "sales actually concluded and collected through [her] efforts." What she presented as evidence to prove that she performed income
producing activities abroad, were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics
to be used in the finished products as well as samples of sales orders purportedly relayed to her by clients. However, these documents do not show whether
the instructions or orders faxed ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence show that while respondent
was in Germany, she sent instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to consummated sales and whether these
sales were truly concluded in Germany, respondent presented no such evidence. Neither did she establish reasonable connection between the
orders/instructions faxed and the reported monthly sales purported to have transpired in Germany.
The paucity of respondent’s evidence was even noted by Atty. Minerva Pacheco, petitioner’s counsel at the hearing before the Court of Tax Appeals. She
26
pointed out that respondent presented no contracts or orders signed by the customers in Germany to prove the sale transactions therein. Likewise, in her
Comment to the Formal Offer of respondent’s evidence, she objected to the admission of the faxed documents bearing instruction/orders marked as Exhibits
27 28 29
"R," "V," "W", and "X," for being self serving. The concern raised by petitioner’s counsel as to the absence of substantial evidence that would constitute
proof that the sale transactions for which respondent was paid commission actually transpired outside the Philippines, is relevant because respondent stayed
in the Philippines for 89 days in 1995. Except for the months of July and September 1995, respondent was in the Philippines in the months of March, May,
30
June, and August 1995, the same months when she earned commission income for services allegedly performed abroad. Furthermore, respondent
presented no evidence to prove that JUBANITEX does not sell embroidered products in the Philippines and that her appointment as commission agent
is exclusivelyfor Germany and other European markets.
In sum, we find that the faxed documents presented by respondent did not constitute substantial evidence, or that relevant evidence that a reasonable mind
31
might accept as adequate to support the conclusion that it was in Germany where she performed the income producing service which gave rise to the
reported monthly sales in the months of March and May to September of 1995. She thus failed to discharge the burden of proving that her income was from
sources outside the Philippines and exempt from the application of our income tax law. Hence, the claim for tax refund should be denied.
32
The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel, a previous case for refund of income withheld from respondent’s remunerations
33
for services rendered abroad, the Court in a Minute Resolution dated February 17, 2003, sustained the ruling of the Court of Appeals that respondent is
entitled to refund the sum withheld from her sales commission income for the year 1994. This ruling has no bearing in the instant controversy because the
subject matter thereof is the income of respondent for the year 1994 while, the instant case deals with her income in 1995. Otherwise, stated, res judicata has
no application here. Its elements are: (1) there must be a final judgment or order; (2) the court that rendered the judgment must have jurisdiction over the
subject matter and the parties; (3) it must be a judgment on the merits; (4) there must be between the two cases identity of parties, of subject matter, and of
34
causes of action. The instant case, however, did not satisfy the fourth requisite because there is no identity as to the subject matter of the previous and
present case of respondent which deals with income earned and activities performed for different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002 Resolution of the Court of Appeals in CA-G.R. SP No. 59794,
are REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633, which denied respondent’s claim for
refund of income tax paid for the year 1995 is REINSTATED.

SUPREME COURT
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 72780 February 13, 1992

SOTERO COLLADO, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT, THE SOLICITOR GENERAL, and HELEN TUBAY, respondents.
Eliseo M. Cruz for petitioner.
PARAS, J.:
This is an appeal from the decision * of the then Intermediate Appellate Court in AC-G.R. No. 000834 which affirmed with modification the decision ** of the
Regional Trial Court of Tarlac, Tarlac (Branch LXIV) in Criminal Case No. 3235 convicting herein petitioner Sotero Collado of the crime of Attempted Rape.
Petitioner Collado was charged with the aforementioned crime in a criminal complaint dated December 29, 1981filed by private respondent Helen Tubay
which reads as follows:
That on or about September 21, 1981 at Barangay Bantog, in the Municipality of Victoria, Philippines, and within jurisdiction of this Honorable Court,
the said accused did then and there willfully, unlawfully and feloniously and by means of force and intimidation, commence the commission of the
crime of rape directly by overt acts, to wit: while Helen Tubay, a married woman was sleeping in their house with her five (5) year old child the said
accused without permission of anyone entered her house; lay on top of the said undersigned, embraced, kissed and touched her breast and lifted her
skirt with the intent of having carnal knowledge of her by means of force and threats to kill her with a gun and if said accused did not a accomplish his
purpose, that is, to have carnal knowledge of the said undersigned, it was not because of his voluntarily (sic) desistance but because the offended
party succeeded in resisting the criminal attempt of the said accused and because of the timely arrival of her parents who responded to the loud cries
of her five (5) year old child for help.
Contrary to law. (Exhibit "B", Original Records, p. 1)
A preliminary investigation was conducted by Assistant Provincial Fiscal Rizal B. Perez and based on his finding that a reasonable ground to believe that the
accused committed the crime exists, a warrant of arrest (Original Records, p. 4) was issued and the bailbond was fixed at P10,000.00 (Ibid., p. 3). Petitioner
Collado posted the bond (Ibid., p. 7) and upon arraignment, on March 25, 1982, entered a plea of not guilty (Ibid., p. 18). Thereafter, trial ensued.
The prosecution presented as witnesses the complainant, Mrs. Helen Tubay, Pat. Leon Apolonio, Dr. Ricardo Ramos, Pat. Alfonso Gagarin and Bernabe
Tubay, Jr. while the defense presented petitioner Sotero Collado and his nephew Feliciano Collado as witnesses.
Helen Domingo Tubay, married to Bernabe Tubay and a public school teacher at the Bantog Elementary School in Bantog, Victoria, Tarlac, testified that on
the night of September 21, 1981, while she was sleeping in their house with her five (5) year old son, Bernabe Tubay, Jr., she felt someone on top of her,
smelling of liquor and embracing her.When she opened her eyes, she saw petitioner Sotero Collado on top of her pointing a short gun at the left side of her
neck. She was able to clearly see petitioner Collado and the gun as the room was lighted by a gas lamp (kingke). Petitioner Collado then threatened her not
to shout or else she would be killed. Thereafter, he raised her silk nightdress to her waist and started to remove his pants. She then pinched her son Bernabe
Tubay, Jr. who gave out a loud cry. At the same time, she also fought off the petitioner by pushing him. The latter stood up and left passing through their living
room. The following day, she reported the matter to their Barangay Captain, Policarpio Cuaresma. Her parents advised her to see her husband who was then
working as a security guard at the U.P. College in Baguio City. Upon the advise of a lawyer, they filed a complaint (Exhibit "B", Original Records, p. 1)against
petitioner for Attempted Rape. Witness further testified that petitioner Collado must have entered their house by destroying the screen of their window
in the kitchen and bending the two bars to allow passage (Exhibit "A", Original Records, p. 50) (TSN, Hearing of May 19, 1982, pp. 4-17).
Pat. Leon Apolonio, a policeman assigned at Victoria, Tarlac, testified that on page 330 of their police blotter, Pat.Gagarin made Entry No. 81365 dated
September 23, 1981 which reads:
That on or about 17 hundred hours, 23 September 1981, Mrs. Helen Tubay y Domingo, 39 years old, married, teacher in profession, and a resident of
Brgy. Bantog, this municipality, appeared and reported personally to this station that on or about 12:00 o'clock midnight of September 21, 1981, one
Sotero Collado, resident of the same place, forcibly entered their house and pointed his gun to her and saying "I'll kill you if you shout!".
A certification was prepared regarding said entry in the blotter and marked Exhibit "D" (Original Records, p. 52) (TSN, Hearing of October 19, 1992, pp. 3-8).
Dr. Ricardo Ramos, of the Tarlac Provincial Hospital, testified that on September 23, 1981, Mrs. Helen Tubay came to the Tarlac Provincial Hospital for
physical examination. As shown in the medical certificate (Exhibit "C", Original Records, p. 51) which he issued to Mrs. Tubay, the latter sustained an
abrasion at the neck about two and a half inches in length. He further testified that such an abrasion could have been caused by a piece of wood, a metal
with a rough surface or a piece of stone (TSN, Hearing of October 19, 1982, pp. 19-26).
Pat. Alfonso Gagarin, a member of the INP, Victoria, testified that on September 23, 1981, Mrs. Helen Tubay came to the municipal building to report that on
September 21, 1981, at about 12:00 midnight, Sotero Collado forcibly entered their house, pointed a gun at her and said "If you shout, I'll kill you". He
recorded the report in his personal booklet. He was not able to complete the report as Mrs. Tubay was then in a hurry to leave. She promised to return the
following day but failed to do so. He nevertheless submitted the report to be finalized (TSN, Hearing of March 16, 1983 pp. 3-6).
Bernabe Tubay, Jr., son of Mrs. Helen Tubay, testified that on the night of September 21, 1981, he saw his mother fighting off petitioner Collado while in a
lying position. He further declared that their room was lighted by a gas lamp enabling him to clearly see petitioner. It was the first time that he saw petitioner
Collado in their house (TSN, Hearing of April 6, 1983, pp. 2-5).
Petitioner Sotero Collado, a resident of Victoria, Tarlac, denied the accusation made by Helen Tubay and declared that on the night of September 21, 1981,
he was at Amacalan, Gerona, Tarlac with Eduvigis Valdez, Miller Valdez, Florentino Valdez, and Bening Yangco to visit Mr. Orbel Mauricio. From there, they
proceeded to the house of his late Aunt Sabel Valdez in Abagon, Gerona, Tarlac where they stayed for some thirty (30) minutes. They next went to the house
of Bening Yangco in Pura. The latter's house is about six (6) kilometers from the house of his Aunt Sabel and they negotiated the distance in about ten (10)
minutes by a tricycle owned by Florentino Valdez. They left Bening Yangco's place at about 10:30 in the evening and proceeded to Bantog. They parted ways
at the Barangay Proper Crossing. He reached his house at about 11:00 in the evening (TSN, Hearing of April 19, 1983, pp. 8-12).
At home, he was informed by his wife, Susana, that their eldest daughter Victa had a stomach ailment. They brought the child to Dr. Crisostomo Carlos' Clinic
for treatment. They stayed in said clinic for about two (2) hours since there were other patients who came ahead of them. Among the people he saw at the
clinic were Isabelo Marquez and his nephew, Feliciano Collado. They went home at about 2:00 in the morning after his daughter was given an injection and a
prescription (Ibid., pp. 13-15).
When asked about the possible motive of Mrs. Helen Tubay for accusing him of such a serious crime, he said that Mrs. Tubay is probably angry at him
because he confronted her about the complaints of some parents regarding her frequent tardiness. He received said complaints when he was the Auditor of
the Parents-Teachers Association of the Bantog Elementary School and the Barangay Captain of the place sometime in 1964-66. The last time he confronted
her about these complaints was in 1981 before the date of the alleged crime (Ibid., pp. 3-8).
Feliciano Collado, nephew of petitioner Sotero Collado, corroborated the latter's testimony that he was at the clinic of Dr. Carlos on September 21, 1981. He
testified that petitioner Collado came with his wife and their two (2) year old daughter (TSN, Hearing of September 19, 1983, p. 3). He, however, did not have
a chance to talk with his uncle as they were at a distance from where he was seated. They merely acknowledged each other's presence by winking an
eye. He left ahead of petitioner Collado as he was the third patient in the line when his uncle came (Ibid., pp. 2-9).
On February 6, 1984, the Regional Trial Court of Tarlac (Branch LXIV) rendered Judgment, the decretal portion of which reads:
WHEREFORE, the Court finds accused Sotero Collado guilty beyond reasonable doubt of the crime of Attempted Rape, as defined and penalized
under Article 335, in relation to Article 51, both of the Revised Penal Code, and in the absence of any modifying circumstances, hereby sentences
him to an indeterminate penalty ranging from Two (2) Years, Four (4) Months and One (1) Day of Prision Correccional, as minimum to Six (6) Years
and One (1) Day of Prision Mayor, as maximum, with the accessories provided by law, and with credit for preventive imprisonment undergone in
accordance with Article 29 of the Revised Penal Code, as amended by Republic Act 6127, and to pay the costs.
Tarlac, Tarlac, February 6, 1984.
(Original Records, pp. 136-137)
Petitioner Collado appealed the decision to the Intermediate Appellate Court which affirmed the judgment but modified the penalty imposed by increasing the
maximum penalty to eight (8) years and one (1) day of prision mayor(IAC Decision, Rollo, p. 23).
Hence, this petition.
On January 13, 1986, the Second Division resolved to deny the petition for lack of merit (Rollo, p. 43). Petitioner Collado filed a Motion for Reconsideration
(Ibid., pp. 50-51), hence, on January 16, 1989, the same division gave due course to the petition and required the parties to submit their respective
memoranda (Ibid., p. 55). Public respondent complied with the Court's order on February 27, 1989 (Ibid., p. 57) while the petitioner complied on March
8, 1989 (Ibid., p. 72).
The issue to be resolved in this petition is whether or not the guilt of petitioner Collado has been established beyond reasonable doubt.
Petitioner Collado contends that the delay of the complainant in lodging the complaint renders doubtful the veracity of the charge considering that there was
no threat exerted on her as an adult public school teacher. The incident took place on September 21, 1981 but the complaint was lodged about three (3)
months after. Furthermore, the discrepancy in the police report and the complaint militates against the conviction of petitioner Collado. When complainant
reported the incident to the police, no mention of the crime of attempted rape was mentioned. However, the complaint filed was for the crime of attempted
rape. Her unexplained failure to account for such accusation of attempted rape at the earliest opportunity lends transparency to her charge since this is an
admission against interest (Memorandum for the Petitioner, Rollo, pp. 75-76).
The petition is devoid of merit.
Firmly entrenched is the rule that conclusions and findings of fact of the trial court are entitled to great weight on appeal and should not be disturbed unless
for strong and valid reasons because the trial court is in a better position to examine the demeanor of the witnesses while testifying on the case (People
vs. Lutanez, 192 SCRA 588 [1990]; People v. Tasarra, 192 SCRA 266 [1990]).
Collado's contention that complainant's delay in lodging the complaint renders the veracity of the charge doubtful is without merit. This has been debunked by
the positive declaration of the prosecution witnesses regarding his identity and participation in the crime (People v. Beringuel, 192 SCRA 561
[1990]). Complainant Helen Tubay positively identified petitioner Collado since the room was illuminated by a gas lamp. Her son, Bernabe Tubay, Jr., likewise
testified that he clearly saw petitioner Collado since the room was lighted by a gas lamp. The lighting produced by agasera enables one to identify positively
persons in the dark of the night (People v. Paringit, 189 SCRA 478 [1990]).Moreover, it has been held that the testimony of children of sound mind is likely to
be more correct and truthful than that of older persons so that once established that they have fully understood the character and nature of an oath, their
testimony should be given full faith and credence (People v. Pedrosa, 169 SCRA 546 [1989]).
Petitioner Collado's main defense is alibi. He alleged that he was at the clinic of Dr. Carlos on the night of September 21, 1981 which is about seven (7)
kilometers from the house of the complainant Helen Tubay. He did not have the chance to pass by her house as he went to the house of his nephew who had
a tricycle which he himself drove (TSN, Hearing of April 19, 1983, p. 16). Defense of alibi is inherently weak and cannot prevail over the positive identification
of the accused. For such a defense to succeed, the accused must establish physical impossibility and improper motive of the prosecution witnesses which
matters the accused failed to prove (People v. Calixto, 193 SCRA 303 [1991]). The testimony of Feliciano Collado does not carry much weight as he is the
nephew of the petitioner. Alibi is weak if it is established by the accused himself and his immediate relatives and not by credible persons (People v.
Beringuel, supra). As aptly observed by the Court of Appeals, the accused could easily have presented Dr. Crisostomo Carlos to corroborate his version but
he did not. Besides, unless more proof is given, it is difficult to conceive of a provincial doctor's clinic filled with several patients at MIDNIGHT.
IN VIEW OF THE FOREGOING, the decision appealed from is hereby AFFIRMED.

SUPREME COURT
SUPREME COURT
Manila
EN BANC
G.R. No. L-12954 February 28, 1961
COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
ARTHUR HENDERSON, respondent.
x---------------------------------------------------------x Taxable and non taxable fringe benefits
G.R. No. L-13049 February 28, 1961
ARTHUR HENDERSON, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
Office of the Solicitor General for petitioner.
Formilleza & Latorre for respondent.
PADILLA, J.:
These are petitioner filed by the Collector of Internal Revenue (G.R. No. L-12954) and by Arthur Henderson (G.R. No. L-13049) under the provisions of
section 18, Republic Act No. 1125, for review of a judgment dated 26 June 1957 and a resolution dated 28 September 1957 rendered and adopted by the
Court of Tax Appeals in Case No. 237.
The spouses Artuhur Henderson and Marie B. Henderson (later referred to as the taxpayers) filed with the Bureau of Internal Revenue returns of annual net
income for the years 1948 to 1952, inclusive, where the following net incomes, personal exemptions and amounts subject to tax appear:
1948:
Net Income P29,573.79

.......................................................
Less:Personal Exemption 2,500.00

..............................
Amount subject to tax P27,073.79

.......................................
1949:

.......................................................

..............................

.......................................
1950:

.......................................................

..............................

.......................................
1951:

........................................................

..............................

.......................................
1952:

.......................................................

..............................

.......................................
(Exhibits 1, 3, 5, 7, 9, A, F, J, N, R). In due time the taxpayers received from the Bureau of Internal Revenue assessment notices Nos. 15804-48, 25450-49,
15255-50, 25705-51 and 22527-52 and paid the amounts assessed as follows:
1948:
14 May 1949, O.R. No. 52991, Exhibit B ....……….. P2,068.12
12 September 1950, O.R. No. 160473, Exhibit B-1 . 2,068.11
Total Paid ......................................................... P4,136.23

1949:
13 May 1950, O.R. No. 232366, Exhibit G ...........… P2,314.95
15 September 1950, O.R. No. 247918, Exhibit G-1 . 2,314.94
Total Paid ......................................................... P4,629.89
1950:
27 April 1951, O.R. No. 323173, Exhibit K ...………. P7,273.00
1951:
Amount withheld from salary and paid by employer . P5,780.40
15 May 1952, O.R. No. 33250, Exhibit O ................. 360.50
15 August 1952, O.R. No. 383318, Exhibit O-1 ..….. 361.20
Total Paid ......................................................... P6,502.10
1952:
Amount withheld from salary and paid by employer . P5,660.40
18 May 1953, O.R. No. 438026, Exhibit T ..………… 1,160.30
13 August 1953, O.R. No. 443483, Exhibit T-1 ...….. 1,160.30
Total Paid ......................................................... P7,981.00
On 28 November 1953, after investigation and verification, the Bureay of Internal Revenue reassessed the taxpayers'income for the years 1948 to 1952,
inclusive, as follows:
1948:
Net income per return ..................................……………………… P29,573.79
Add:
Rent expense .........................................................…….. 7,200.00
Additional bonus for 1947 received May 13, 1948 .……… 6,500.00
Other income:
Manager's residential expense (2/29/48 a/c/#4.51) 1,400.00
Manager's residential expense (refer to 1948 P & L) .. 1,849.32
Entrance fee — Marikina Gun & Country Club ..…….. 200.00
Net income per investigation .........................................………... P46,723.11
Less: Personal exemption ...............................................………. 2,500.00
Net taxable income ..........................................................……… P44,223.11
Tax due thereon ...............................................................……… P8,562.47
Less: Amount of tax already paid per OR #52991 &

160473 ..……………………………………………………… 4,136.23
Deficiency tax still due & assessable ............................ P4,426.24
1949:
Add: disallowances —
Capital loss (no capital gain) ................... P3,248.84
Undeclared bonus ...................………….. 3,857.75
Rental allowance from A.I.U. ................... 1,800.00
Subsistence allowance from A.I.U. .…….. 6,051.30 14,958.09
Less: Personal exemption ...............................................……….. 2,500.00
Amount of income subject to tax ..................................…………. 43,275.75
Tax due thereon ...............................................................………. P8,292.21
Less: tax already assessed & paid per OR Nos. 232366 & 4,629.89
Less: tax already assessed & paid per OR Nos. 232366 & 4,629.89
247918
Deficiency tax due ............................................................………. P3,662.23
(Should be) ...................................................................... 3,662.32
1950:
Add:
Rent, electricity, water allowances .......................……….. 8,373.73
Net taxable income ..........................................................……….. P40,189.47
Tax due thereon ...............................................................………. P10,296.00
Less: tax already paid per OR No. #323173 7,273.00
Deficiency tax due & assessable .................…………………….. P3,023.00
1951:
Add: house rental allowance from AIU 5,782.91
Amount of income subject to tax ..................................………….. P35,388.74
Tax due thereon ...............................................................………. P 8,560.00
Less: tax already assessed and paid per O.R. Nos. A33250
& 383318 .......................……………………………………… 6,502.00
Deficiency tax due .................………………………………………. P2,058.00
1952:
Add:
Withholding tax paid by company ..................................... 600.00
Travelling allowances ....................................................... 3,247.40
Allowances for rent, telephone, water, electricity, etc. ..... 7,044.67
Net taxable income ..................................………………………… P44,672.18
Tax due thereon ...............................................................………. P12,089.00
Less: Tax already withheld P5,660.40
Tax already paid per O.R. Nos. #438026, 443484 2,320.60 7,981.00
Deficiency tax still due & collectible ...............................………… P4,108.00
(Exhibits 2, 4, 6, 8, 10) and demanded payment of thedeficiency taxes on or before 28 February 1954 with respectto those due for the years 1948, 1949,
1950 and 1952and on or before 15 February 1954 with respect to thatdue for the year 1951 (Exhibits B-2, H, L, P, S).
In the foregoing assessments, the Bureau of InternalRevenue considered as part of their taxable income thetaxpayer-husband's allowances for rental,
residential expenses,subsistence, water, electricity and telephone; bonuspaid to him; withholding tax and entrance fee to the Marikinagun and Country Bluc
paid by his employer for hisaccount; and travelling allowance of his wife. On 26 and27 January 1954 the taxpayers asked for reconsiderationof the foregoing
assessment (pp. 29, 31, BIR rec.) andon 11 Februayr 1954 and 28 February 1955 stated thegrounds and reasons in support of their request for
reconsideration (pp. 36-38, 62-66, BIR rec.). The claimthat as regards the husband-taxpayer's allowances forrental and utilities such as water, electricity and
telephone,he did not receive the money for said allowances, but thatthey lieved in the apartment furnished and paid for byhis employer for its convenience;
that they had no choicebut live in the said apartment furnished by his employer,otherwise they would have lived in a less expensive one;that as regards his
allowances for rental of P7,200 andresidential expenses of P1,400 and P1,849.32 in 1948, rentalof P1,800 and subsistence of P6,051.50 (the latter
merelyconsisting of allowances for rent and utilities such as light,water, telephone, etc.) in 1949 rental, electricity and waterof P8,373.73 in 1950, rental of
P5,782.91 in 1951 and rental,telephone, water, electricity, etc. of P7,044.67 in 1952, onlythe amount of P3,900 for each year, which is the amountthey would
have spent for rental of an apartment includingutilities, should be taxed; that as regards the amount ofP200 representing entrance fee to the Marikina Gun
andCountry Club paid for him by his employer in 1948, thesame should not be considered as part of their income forit was an expense of his employer and
his membershiptherein was merely incidental to his duties of increasingand sustaining the business of his employer; and that asregards the wife-taxpayer's
his membershiptherein was merely incidental to his duties of increasingand sustaining the business of his employer; and that asregards the wife-taxpayer's
travelling allowance of P3,247.40 in 1952, it should not be considered as part of theirincome because she merely accompanied him in his businesstrip to New
York as his secretary and, at the behestof her husband's employer, to study and look into the detailsof the plans and decorations of the building intendedto be
constructed byn his employer in its property at DeweyBoulevard. On 15 and 27 February 1954, the taxpayerspaid the deficiency taxes assessed under
Official ReceiptsNos. 451841, 451842, 451843, 451748 and 451844 (ExhibitsC, I, M, Q, and Y). After hearing conducted by theConference Staff of the
Bureau of Internal Revenue on5 October 1954 (pp. 74-85, BIR rec.), on 27 May 1955the Staff recommended to the Collector of Internal Revenuethat the
assessments made on 28 November 1953 (Exhibits2, 4, 6, 8, 10) be sustained except that the amountof P200 as entrance fee to the Marikina Gun and
CountryClub paid for the husband-taxpayer's account by his employerin 1948 should not be considered as part of thetaxpayers' taxable income for that year
(pp. 95-107, BIRrec.). On 14 July 1955, in line with the recommendationof the Conference Staff, the Collector of Internal Revenuedenied the taxpayers'
request for reconsideration, exceptas regards the assessment of their income tax due for theyear 1948, which was modified as follows:
Net income per return P29,573.79
Add: Rent expense 7,200.00
Additional bonus for 1947 received

on May 13, 1948 6,500.00
Manager's residential expense

(2/29/48 a/c #4.41) 1,400.00
Manager's residential expense (1948

profit and loss) 1,849.32
Net income per investigation P46,523.11
Less: Personal exemption 2,500.00
Net taxable income P44,023.11
Tax due thereon P 8,506.47
Less; Amount already paid 4,136.23
Deficiency tax still due P 4,370.24
and demanded payment of the deficiency taxes of P4,370.24for 1948, P3,662.23 for 1949, P3,023 for 1950, P2,058 for1951 and P4,108 for 1952, 5%
surcharge and 1% monthlyinterest thereon from 1 March 1954 to the date of paymentand P80 as administrative penalty for late payment,to the City Treasurer
of Manila not later than 31 July1955 (Exhibit 14). On 30 January 1956 the taxpayersagain sought a reconsideration of the denial of their requestfor
reconsideration and offered to settle the case ona more equitable basis by increasing the amount of thetaxable portion of the husband-taxpayer's allowances
forrental, etc. from P3,000 yearly to P4,800 yearly, which "isthe value to the employee of the benefits he derived therefrommeasured by what he had saved
on account thereof'in the ordinary course of his life ... for which hewould have spent in any case'". The taxpayers also reiteratedtheir previous stand regarding
the transportationallowance of the wife-taxpayer of P3,247.40 in 1952 andrequested the refund of the amounts of P3,477.18, P569.33,P1,294, P354 and
P2,164, or a total of P7,858.51, (Exhibit Z). On 10 February 1956 the taxpayers again requestedthe Collector of Internal Revenue to refund to them
theamounts allegedly paid in excess as income taxes for theyears 1948 to 1952, inclusive (Exhibit Z-1). The Collectorof Internal Revenue did not take any
action on the taxpayers'request for refund.
On 15 February 1956 the taxpayers filed in the Courtof Tax Appeals a petition to review the decision of theCollector of Internal Revenue (C.T.A. Case No.
237). Afterhearing, on 26 June 1957 the Court rendered judgmentholding "that the inherent nature of petitioner's(the husband-taxpayer) employment as
president of theAmerican International Underwriters as president of theAmerican International Underwriters of the Philippines,Inc. does not require him to
occupy the apartments suppliedby his employer-corporation;" that, however, onlythe amount of P4,800 annually, the ratable value to him ofthe quarters
furnished constitutes a part of taxable income;that since the taxpayers did not receive any benefitout of the P3,247.40 traveling expense allowance grantedin
1952 to the wife-taxpayer and that she merely undertookthe trip abroad at the behest of her husband's employer,the same could not be considered as
income; andthat even if it were considered as such, still it could not besubject to tax because it was deductible as travel expense;and ordering the Collector of
Internal Revenue to refundto the taxpayers the amount of P5,109.33 with interestfrom 27 February 1954, without pronouncement as tocosts. The taxpayers
filed a motion for reconsiderationclaiming that the amount of P5,986.61 is the amount refundableto them because the amounts of P1,400 and P1,849.32 as
manager's residential expenses in 1948 shouldnot be included in their taxable net income for the reasonthat they are of the same nature as the rentals for
theapartment, they being mainly expenses for utilities aslight, water and telephone in the apartment furnished bythe husbant-taxpayer's employer. The
Collector of InternalRevenue filed an opposition to their motion for reconsideration.He also filed a separate motion for reconsiderationof the decision claiming
that his assessmentunder review was correct and should have been affirmed.The taxpayers filed an opposition to this motion for reconsiderationof the
Collector of Internal Revenue; thelatter, a reply thereto. On 28 September 1957 the Courtdenied both motions for reconsideration. On 7 October1957 the
Collector of Internal Revenue filed a notice ofappeal in the Court of Tax Appeals and on 21 October1957, within the extension of time previously granted
bythis Court, a petition for review (G.R. No. L-12954). On29 October 1957 the taxpayers filed a notice of appealin the Court of Tax Appeals and a petition for
review inthis Court (G.R. No. L-13049).
The Collector of Internal Revenue had assigned the followingerrors allegedly committed by the Court of TaxAppeals:
I. The Court of Tax Appeals erred in finding that theherein respondent did not have any choice in the selection ofthe living quarters occupied by him.
II. The Court of Tax Appeals erred in not consideringthe fact that respondent is not a minor company official butthe President of his employer-
corporation, in the appreciationof respondent's alleged lack of choice in the matter of the selectionof the quarters occupied by him.
III. The Court of Tax Appeals erred in giving full weightand credence to respondent's allegation, a self-serving and unsupported declaration that the
ratable value to him of the living quarters and subsistence allowance was only P400.00 a month.
IV. The Court of Tax Appeals erred in holding that only the ratable value of P4,800.00 per annum, or P400.00 a month constitutes income to
respondent.
V. The Court of Tax Appeals erred in arbitrarily fixing the amount of P4,800.00 per annum, or P400.00 a month as the only amount taxable aganst
respondent during the five tax years in question.
VI. The Court of Tax Appeals erred in not finding that travelling allowance in the amount of P3,247.40 constituted income to respondent and,
therefore, subject to the income tax.
VII. The Court of Tax Appeals erred in ordering the refund of the sum of P5,109.33 with interest from February 17, 1954. (G.R. No. L-12954.)
The taxpayers have assigned the following errors allegedly committed by the Court of Tax Appeals:
I. The Court of Tax Appeals erred in its computation of the 1948 income tax and consequently in the amount that should be refunded for that year.
II. The Court of Tax Appeals erred in denying our motion for reconsideration as contained in its resolution dated September 28, 1957. (G.R. No. L-
13049.)
The Government's appeal:
The Collector of Internal Revenue raises questions of fact. He claims that the evidence is not sufficient to support the findings and conclusion of the Court of
Tax Appeals that the quarters occupied by the taxpayers were not of their choice but that of the husband-taxpayer's employer; that it did not take into
consideration the fact that the husband-taxpayer is not a mere minor company official, but the highest executive of his employer-corporation; and that the
wife-taxpayer's trip abroad in 1952 was not, as found by the Court, a business but a vacation trip. In Collector of Internal Revenue vs. Aznar, 56, Off. Gaz.
2386, this Court held that in petitions for review under section 18, Republic Act No. 1125, it may review the findings of fact of the Court of Tax Appeals.
The determination of the main issue in the case requires a review of the evidence. Are the allowances for rental of the apartment furnished by the husband-
taxpayer's employer-corporation, including utilities such as light, water, telephone, etc. and the allowance for travel expenses given by his employer-
corporation to his wife in 1952 part of taxable income? Section 29, Commonwealth Act No. 466, National Internal Revenue Code, provides: Issue
"Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in
whatever form paid, or from professions, vocations, trades, businesses, commerce, sales, or dealings in property, whether real or personal, growing
out of the ownership or use of or interest in such property; also from interest, rents dividend, securities, or the transaction of any business carried on
for gain or profit, or gains, profits, and income derived from any source whatever. (Emphasis ours.)
The Court of Tax Appeals found that the husband-taxpayer "is the president of the American International Underwriters for the Philippines, Inc., a domestic
corporation engaged in insurance business;" that the taxpayers "entertained officials, guests and customers of his employer-corporation, in apartments
furnished by the latter and successively occupied by him as president thereof; that "In 1952, petitioner's wife, Mrs. Marie Henderson, upon request o Mr. C. V.
Starr, chairman of the parent corporation of the American International Underwriters for the Philippines, Inc., undertook a trip to New York in connection with
the purchase of a lot in Dewey Boulevardby petitioner's employer-corporatio, the construction of a building thereon, the drawing of prospectus and plans for
said building, and other related matters."
Arthur H. Henderson testified that he is the President of American International Underwriters for the Philippines, Inc., which representa a group of American
insurance companies engagad in the business of general insurance except life insurance; that he receives a basic annual salary of P30,000 and allowance
for house rental and utilities like light, water, telephone, etc.; that he and his wife are childless and are the only two in the family; that during the years 1948 to
1952, they lived in apartments chosen by his employer; that from 1948 to the early part of 1950, they lived at the Embassy Apartments on Dakota Street,
Manila, where they had a large sala, three bedrooms, dining room, two bathrooms, kitchen and a large porch, and from the early part of 1950 to 1952, they
lived at the Rosaria Apartments on the same street where they had a kitchen, sala, dining room two bedrooms and bathroom; that despite the fact that they
were the only two in the family, they had to live in apartments of the size beyond their personal needs because as president of the corporation, he and his
wife had to entertain and put up houseguests; that during all those years of 1948 to 1952, inclusive, they entertained and put up houseguests of his
company's officials, guests and customers such as the president of C, V. Starr & Company, Inc., who spent four weeks in his apartment, Thomas Cocklin, a
lawyer from Washington, D.C., and Manuel Elizalde, a stockholder of AIUPI; that were he not required by his employer to live in those apartments furnished
to him, he and his wife would have chosen an apartment only large enough for them and spend from P300 to P400 monthly for rental; that of the allowances
granted to him, only the amount of P4,800 annually, the maximum they would have spent for rental, should be considered as taxable income and the excess
treated as expense of the company; and that the trip to New York undertaken by his wife in 1952, for which she was granted by his employer-corporation
travelling expense allowance of P3,247.40, was made at the behest of his employer to assist its architect in the preparation of the plans for a proposed
building in Manila and procurement of supplies and materials for its use, hence the said amount should not be considered as part of taxable income. In
support of his claim, letters written by his wife while in New York concerning the proposed building, inquiring about the progress made in the acquisition of the
lot, and informing him of the wishes of Mr. C. V. Starr, chairman of the board of directors of the parent-corporation (Exhibits U-1, U-1-A, V, V-1 and W) and a
letter written by the witness to Mr. C. V. Starr concerning the proposed building (Exhibits X, X-1) were presented in evidence.
Mrs. Marie Henderson testified that for almost three years, she and her husband gave parties every Friday night at their apartment for about 18 to 20 people;
that their guests were officials of her husband's employer-corporation and other corporations; that during those parties movies for the entertainment of the
guests were shown after dinner; that they also entertained during luncheons and breakfasts; that these involved and necessitated the services of additional
servants; and that in 1952 she was asked by Mr. C. V. Starr to come to New York to take up problems concerning the proposed building and entertainment
because her husband could not make the trip himself, and because "the woman of the family is closer to those problems."
The evidence presented at the hearing of the case substantially supports the findings of the Court of Tax Appeals. The taxpayers are childless and are the
only two in the family. The quarters, therefore, that they occupied at the Embassy Apartments consisting of a large sala, three bedrooms, dining room, two
bathrooms, kitchen and a large porch, and at the Rosaria Apartments consisting of a kitchen, sala dining room, two bedrooms and a bathroom, exceeded
their personal needs. But the exigencies of the husband-taxpayer's high executive position, not to mention social standing, demanded and compelled them to
live in amore spacious and pretentious quarters like the ones they had occupied. Although entertaining and putting up houseguests and guests of the
husbnad-taxpayer's employer-corporation were not his predominand occupation as president, yet he and his wife had to entertain and put up houseguests in
their apartments. That is why his employer-corporation had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of
those extra expenses for rental and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the
apartments chosen by the husband-taxpayer's employer-corporation is of no moment, for no part of the allowances in question redounded to their personal
benefit or was retained by them. Their bills for rental and utilities were paid directly by the employer-corporation to the creditors (Exhibit AA to DDD, inclusive;
pp. 104, 170-193, t.s.n.). Neverthelss, as correctly held by the Court of Tax Appeals, the taxpayers are entitled only to a ratable value of the allowances in
question, and only the amount of P4,800 annually, the reasonable amount they would have spent for house rental and utilities such as light, water, telephone,
etc., should be the amount subject to tax, and the excess considered as expenses of the corporation.
Likewise, the findings of the Court of Tax Appeals that the wife-taxpayer had to make the trip to New York at the behest of her husband's employer-
corporation to help in drawing up the plans and specificatins of a proposed building, is also supported by the evidence. The parts of the letters written by the
wife-taxpayer to her husband while in New York and the letter written by the husband-taxpayer to Mr. C. V. Starr support the said findings (Exhibits U-2, V-1,
W-1, X). No part of the allowance for travellking expenses redounded to the benefit of the taxpayers. Neither was a part thereof retained by them. The fact
that she had herself operated on for tumors while in New York wsa but incidental to her stay there and she must have merely taken advantage of her
presence in that city to undergo the operation.
The taxpayers' appeal:
The taxpayers claim that the Court of Tax Appeals erred in considering the amounts of P1,400 and P1,849.32, or a total of P3,249.32, for "manager's
residential expense" in 1948 as taxable income despite the fact "that they were of the same nature as the rentals for the apartment, they being expenses for
utilities, such as light, water and telephone necessarily incidental to the apartment furnished to him by his employer."
Mrs. Crescencia Perez Ramos, an examiner of the Bureau of Internal Revenue who examined the books of accound of the American International
Underwriters for the Philippines, Inc., testified that he total amount of P3,249.32 was reflected in its books as "living expenses of Mr. and Mrs. Arthur
Henderson in the quarters they occupied in 1948;" and that "the amount of P1,400 was included as manager's residential expense while the amount of
P1,849.32 was entered as profit and loss account."
Buenaventura Loberiza, acting head of the accouting department of the American International Underwriters for the Philippines, Inc., testified that rentals,
utilities, water, telephone and electric bills of executives of the corporation were entered in the books of account as "subsistence allowances and expenses;"
that there was a separate account for salaries and wages of employees and officers; and that expenses for rentals and other utilities were not charged to
salary accounts.
The taxpayers' claim is supported by the evidence. The total amount of P3,249.32 "for manager's residential expense" in 1948 should be treated as rentals
for apartments and utilities and should not form part of the ratable value subject to tax.
The computation made by the taxpayers is correct. Adding to the amount of P29,573.79, their net income per return, the amount of P6,500, the bonus
received in 1948, and P4,800, the taxable ratable value of the allowances, brings up their gross income to P40,873.79. Deducting therefrom the amount of
P2,500 for personal exemption, the amount of P38,373.79 is the amount subject to income tax. The income tax due on this amount is P6,957.19 only.
Deducting the amount of income tax due, P6,957.19, from the amount already paid, P8,562.47 (Exhibits B, B-1, C), the amount of P1,605.28 is the amount
refundable to the taxpayers. Add this amount to P563.33, P1,294.00, P354.00 and P2,154.00, refundable to the taxpayers for 1949, 1950, 1951 and 1952
and the total is P5,986.61.
The judgment under review is modified as above indicated. The Collector of Internal Revenue is ordered to refund to the taxpayers the sum of P5,986.61,
without pronouncement as to costs.
G.R. No. 133834 August 28, 2006
COMPAGNIE FINANCIERE SUCRES ET DENREES, Petitioner,
vs.
DECISION
SANDOVAL-GUTIERREZ, J.:
1
For our resolution is the instant Petition for Review on Certiorari assailing the Decision of the Court of Appeals dated October 27, 1997 in CA-G.R. SP No.
39501.
Compagnie Financiere Sucres et Denrees, petitioner, is a non-resident private corporation duly organized and existing under the laws of the Republic of
France.
On October 21, 1991, petitioner transferred its eight percent (8%) equity interest in the Makati Shangri-La Hotel and Resort, Incorporated to Kerry Holdings
Ltd. (formerly Sligo Holdings Ltd), as shown by a Deed of Sale and Assignment of Subscription and Right of Subscription of the same date. Transferred were
(a) 107,929 issued shares of stock valued at P100.00 per share with a total par value of P10,792,900.00; (b) 152,031 with a par value of P100.00 per share
with a total par value of P15,203,100.00; (c) deposits on stock subscriptions amounting to P43,147,630.28; and (d) petitioner’s right of subscription.
On November 29, 1991, petitioner paid the documentary stamps tax and capital gains tax on the transfer under protest.
On October 21, 1993, petitioner filed with the Commissioner of Internal Revenue, herein respondent, a claim for refund of overpaid capital gains tax in the
amount of P107,869.00 and overpaid documentary stamps taxes in the sum of P951,830.00 or a total of P1,059,699.00. Petitioner alleged that the transfer of
deposits on stock subscriptions is not a sale/assignment of shares of stock subject to documentary stamps tax and capital gains tax.
However, respondent did not act on petitioner’s claim for refund. Thus, on November 19, 1993, petitioner filed with the Court of Tax Appeals (CTA) a petition
for review, docketed as CTA Case No. 5042.
2
In its Decision dated October 6, 1995, the CTA denied petitioner’s claim for refund. The CTA held that it is clear from Section 176 of the Tax Code that sales
"to secure the future payment of money or for the future transfer of any bond, due-bill, certificates of obligation or stock" are taxable. Furthermore, petitioner
admitted that it profited from the sale of shares of stocks. Such profit is subject to capital gains tax.
Petitioner filed a motion for reconsideration, but in a Resolution dated December 26, 1995, the CTA denied the same. This prompted petitioner to file with the
Court of Appeals a petition for review, docketed as CA-G.R. SP No. 39501.
On October 27, 1997, the Court of Appeals denied the petition and affirmed the Decision of the CTA. The appellate court ruled that a taxpayer has the onus
probandi of proving entitlement to a refund or deduction, following the rule that tax exemptions are strictly construed against the taxpayer and liberally in favor
of the State. Petitioner failed to meet the requisite burden of proof to support its claim.
Hence, petitioner’s recourse to this Court by way of a Petition for Review on Certiorari.
The sole issue for our resolution is whether the Court of Appeals erred in holding that the assignment of deposits on stock subscriptions is subject to
documentary stamps tax and capital gains tax.
Along with police power and eminent domain, taxation is one of the three basic and necessary attributes of sovereignty. Thus, the State cannot be deprived of
this most essential power and attribute of sovereignty by vague implications of law. Rather, being derogatory of sovereignty, the governing principle is that tax
exemptions are to be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and he who claims an exemption must
3
be able to justify his claim by the clearest grant of statute.
In the instant case, petitioner seeks a refund. Tax refunds are a derogation of the State’s taxing power. Hence, like tax exemptions, they are construed strictly
4
against the taxpayer and liberally in favor of the State. Consequently, he who claims a refund or exemption from taxes has the burden of justifying the
5
exemption by words too plain to be mistaken and too categorical to be misinterpreted. Significantly, petitioner cannot point to any specific provision of
the National Internal Revenue Code authorizing its claim for an exemption or refund. Rather, Section 176 of the National Internal Revenue Code
applicable to the issue provides that the future transfer of shares of stocks is subject to documentary stamp tax, thus:
SEC. 176. Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfer of due-bills, certificates of obligation, or shares or certificates of
stock. – On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or certificates of
stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or
memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such due bills, certificates of
obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificates of obligation or stock, there shall be
collected a documentary stamp tax of fifty centavos (P1.50) on each two hundred pesos(P200.00), or fractional part thereof, of the par value of such due-bill,
certificates of obligation or stock: Provided, That only one tax shall be collected on each sale or transfer of stock or securities from one person to
certificates of obligation or stock: Provided, That only one tax shall be collected on each sale or transfer of stock or securities from one person to
another, regardless of whether or not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer;
and Provided, further, That in case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-
five percentum (25%) of the documentary stamp tax paid upon the original issue of the said stock. (Emphasis supplied).
Clearly, under the above provision, sales to secure "the future transfer of due-bills, certificates of obligation or certificates of stock" are liable for documentary
stamp tax. No exemption from such payment of documentary stamp tax is specified therein.
Petitioner contends that the assignment of its "deposits on stock subscription" is not subject to capital gains tax because there is no gain to speak of. In the
Capital Gains Tax Return on Stock Transaction, which petitioner filed with the Bureau of Internal Revenue, the acquisition cost of the shares it sold, including
the stock subscription is P69,143,630.28. The transfer price to Kerry Holdings, Ltd. is P70,332,869.92. Obviously, petitioner has a net gain in the amount
of P1,189,239.64. As the CTA aptly ruled, " a tax on the profit of sale on net capital gain is the very essence of the net capital gains tax law. To hold otherwise
will ineluctably deprive the government of its due and unduly set free from tax liability persons who profited from said transactions."
Verily, the Court of Appeals committed no error in affirming the CTA Decision.
We reiterate the well-established doctrine that as a matter of practice and principle, this Court will not set aside the conclusion reached by an agency, like the
CTA, especially if affirmed by the Court of Appeals. By the very nature of its function, it has dedicated itself to the study and consideration of tax problems and
has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part, which is not present
here.
WHEREFORE, we DENY the petition. The Decision of the Court of Appeals in CA-G.R. SP No. 39501 is AFFIRMED IN TOTO. Costs against petitioner.

SUPREME COURT
Manila
EN BANC
G.R. No. 95022 March 23, 1992

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE HON. COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL RETIREMENT PLAN, represented by its Trustee-Director, respondents.
MELENCIO-HERRERA, J.:
This case is said to be precedent setting. While the amount involved is insignificant, the Solicitor General avers that there are about 85 claims of the same
nature pending in the Court of Tax Appeals and Bureau of Internal Revenue totalling approximately P120M.
Petitioner, the Commissioner of Internal Revenue, seeks a reversal of the Decision of respondent Court of Appeals, dated August 27, 1990, in CA-G.R. SP
No. 20426, entitled "Commissioner of Internal Revenue vs. GCL Retirement Plan, represented by its Trustee-Director and the Court of Tax Appeals," which
affirmed the Decision of the latter Court, dated 15 December 1986, in Case No. 3888, ordering a refund, in the sum of P11,302.19, to the GCL Retirement
Plan representing the withholding tax on income from money market placements and purchase of treasury bills, imposed pursuant to Presidential Decree No.
1959.
There is no dispute with respect to the facts. Private Respondent, GCL Retirement Plan (GCL, for brevity) is an employees' trust maintained by the employer,
GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan as submitted was approved and qualified as exempt from
1
income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917.
In 1984, Respondent GCL made investsments and earned therefrom interest income from which was witheld the fifteen per centum (15%) final witholding tax
2
imposed by Pres. Decree No. 1959, which took effect on 15 October 1984, to wit:
Date Kind of Investment Principal Income Earned 15% Tax
ACIC
12/05/84 Market Placement P236,515.32 P8,751.96 P1,312.66
10/22/84 — 234,632.75 9,815.89 1,472.38
11/19/84 — 225,886.51 10,629.22 1,594.38
11/23/84 — 344,448.64 17,313.33 2,597.00
12/05/84 — 324,633.81 15,077.44 2,261.52
COMBANK Treasury Bills 2,064.15
——————
P11,302.19
On 15 January 1985, Respondent GCL filed with Petitioner a claim for refund in the amounts of P1,312.66 withheld by Anscor Capital and Investment Corp.,
and P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed a second claim for refund of the amount of P7,925.00 withheld by Anscor, stating
in both letters that it disagreed with the collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from income tax
3
as provided under Rep. Act No. 4917 in relation to Section 56 (b) of the Tax Code.
The refund requested having been denied, Respondent GCL elevated the matter to respondent Court of Tax Appeals (CTA). The latter ruled in favor of GCL,
holding that employees' trusts are exempt from the 15% final withholding tax on interest income and ordering a refund of the tax withheld. Upon appeal,
originally to this Court, but referred to respondent Court of Appeals, the latter upheld the CTA Decision. Before us now, Petitioner assails that disposition.
It appears that under Rep. Act No. 1983, which took effect on 22 June 1957, amending Sec. 56 (b) of the National Internal Revenue Code (Tax Code, for
brevity), employees' trusts were exempt from income tax. That law provided:
Sec. 56 Imposition of tax. —(a) Application of tax. — The taxes imposed by this Title upon individuals shall apply to the income of estates or
of any kind of property held in trust, including —
xxx xxx xxx
(b) Exception. — The tax imposed by this Title shall not apply to employees' trust which forms a part of a pension, stock bonus or profit-
sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to trust by such employer, or
employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in
accordance with such
plan, . . .
On 3 June 1977, Pres. Decree No. 1156 provided, for the first time, for the withholding from the interest on bank deposits at the source of a tax of fifteen per
cent (15%) of said interest. However, it also allowed a specific exemption in its Section 53, as follows:
Sec. 53. Withholding of tax at source. —
xxx xxx xxx
(c) Withholding tax on interest on bank deposits. — (1) Rate of withholding tax. — Every bank or banking institution shall deduct and withhold
from the interest on bank deposits (except interest paid or credited to non-resident alien individuals and foreign corporations), a tax equal to
fifteen per cent of the said interest: Provided, however, That no withholding of tax shall be made if the aggregate amount of the interest on all
deposit accounts maintained by a depositor alone or together with another in any one bank at any time during the taxable period does not
exceed three hundred fifty pesos a year or eighty-seven pesos and fifty centavos per quarter. For this purpose, interest on a deposit account
maintained by two persons shall be deemed to be equally owned by them.
(2) Treatment of bank deposit interest. — The interest income shall be included in the gross income in computing the depositor's income tax
liability in according with existing law.
(3) Depositors enjoying tax exemption privileges or preferential tax treatment. — In all cases where the depositor is tax-exempt or is enjoying
preferential income tax treatment under existing laws, the withholding tax imposed in this paragraph shall be refunded or credited as the case
may be upon submission to the Commissioner of Internal Revenue of proof that the said depositor is a tax-exempt entity or enjoys a
preferential income tax treatment.
xxx xxx xxx
This exemption and preferential tax treatment were carried over in Pres. Decree No. 1739, effective on 17 September 1980, which law also subjected interest
from bank deposits and yield from deposit substitutes to a final tax of twenty per cent (20%). The pertinent provisions read:
Sec. 2. Section 21 of the same Code is hereby amended by adding a new paragraph to read as follows:
Sec. 21. Rates of tax on citizens or residents. —
xxx xxx xxx
Interest from Philippine Currency bank deposits and yield from deposit substitutes whether received by citizens of the
Philippines or by resident alien individuals, shall be subject to the final tax as follows: (a) 15% of the interest on savings
deposits, and (b) 20% of the interest on time deposits and yield from deposit substitutes, which shall be collected and paid as
provided in Sections 53 and 54 of this Code. Provided, That no tax shall be imposed if the aggregate amount of the interest
on all Philippine Currency deposit accounts maintained by a depositor alone or together with another in any one bank at any
time during the taxable period does not exceed Eight Hundred Pesos (P800.00) a year or Two Hundred Pesos (P200.00) per
quarter. Provided, further, That if the recipient of such interest is exempt from income taxation, no tax shall be imposed and
that, if the recipient is enjoying preferential income tax treatment, then the preferential tax rates so provided shall be
imposed (Emphasis supplied).
Sec. 3. Section 24 of the same Code is hereby amended by adding a new subsection (cc) between subsections (c) and (d) to read as follows:
(cc) Rates of tax on interest from deposits and yield from deposit substitutes. — Interest on Philippine Currency bank
deposits and yield from deposit substitutes received by domestic or resident foreign corporations shall be subject to a final
tax on the total amount thereof as follows: (a) 15% of the interest on savings deposits; and (b) 20% of the interest on time
deposits and yield from deposit substitutes which shall be collected and paid as provided in Sections 53 and 54 of this
Code. Provided, That if the recipient of such interest is exempt from income taxation, no tax shall be imposed and that, if the
recipient is enjoying preferential income tax treatment, then the preferential tax rates so provided shall be
imposed (Emphasis supplied).
Sec. 9. Section 53(e) of the same Code is hereby amended to read as follows:
Se. 53(e) Withholding of final tax on interest on bank deposits and yield from deposit substitutes. —
(1) Withholding of final tax. — Every bank or non-bank financial intermediary shall deduct and withhold from the interest on
bank deposits or yield from deposit substitutes a final tax equal to fifteen (15%) per cent of the interest on savings deposits
and twenty (20%) per cent of the interest on time deposits or yield from deposit substitutes: Provided, however, That no
withholding tax shall be made if the aggregate amount of the interest on all deposit accounts maintained by a depositor alone
or together with another in any one bank at any time during the taxable period does not exceed Eight Hundred Pesos a year
or Two Hundred Pesos per quarter. For this purpose, interest on a deposit account maintained by two persons shall be
deemed to be equally owned by them.
(2) Depositors or placers/investors enjoying tax exemption privileges or preferential tax treatment. — In all cases where the
depositor or placer/investor is tax exempt or is enjoying preferential income tax treatment under existing laws, the
withholding tax imposed in this paragraph shall be refunded or credited as the case may be upon submission to the
Commissioner of Internal Revenue of proof that the said depositor, or placer/investor is a tax exempt entity or enjoys a
preferential income tax treatment.
Subsequently, however, on 15 October 1984, Pres. Decree No. 1959 was issued, amending the aforestated provisions to read:
Sec. 2. Section 21(d) of this Code, as amended, is hereby further amended to read as follows:
(d) On interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and
similar arrangements. — Interest from Philippine Currency Bank deposits and yield or any other monetary benefit from
deposit substitutes and from trust fund and similar arrangements whether received by citizens of the Philippines, or by
resident alien individuals, shall be subject to a 15% final tax to be collected and paid as provided in Sections 53 and 54 of
this Code.
Sec. 3. Section 24(cc) of this Code, as amended, is hereby further amended to read as follows:
(cc) Rates of tax on interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust
fund and similar arrangements. — Interest on Philippine Currency Bank deposits and yield or any other monetary benefit
from deposit substitutes and from trust fund and similar arrangements received by domestic or resident foreign corporations
shall be subject to a 15% final tax to be collected and paid as provided in Section 53 and 54 of this Code.
Sec. 4. Section 53 (d) (1) of this code is hereby amended to read as follows:
Sec. 53 (d) (1). Withholding of Final Tax. — Every bank or non-bank financial intermediary or commercial. industrial, finance
companies, and other non-financial companies authorized by the Securities and Exchange Commission to issue deposit
substitutes shall deduct and withhold from the interest on bank deposits or yield or any other monetary benefit from deposit
substitutes a final tax equal to fifteen per centum (15%) of the interest on deposits or yield or any other monetary benefit from
deposit substitutes and from trust fund and similar arrangements.
It is to be noted that the exemption from withholding tax on interest on bank deposits previously extended by Pres. Decree No. 1739 if the recipient (individual
or corporation) of the interest income is exempt from income taxation, and the imposition of the preferential tax rates if the recipient of the income is enjoying
preferential income tax treatment, were both abolished by Pres. Decree No. 1959. Petitioner thus submits that the deletion of the exempting and preferential
preferential income tax treatment, were both abolished by Pres. Decree No. 1959. Petitioner thus submits that the deletion of the exempting and preferential
tax treatment provisions under the old law is a clear manifestation that the single 15% (now 20%) rate is impossible on all interest incomes from deposits,
deposit substitutes, trust funds and similar arrangements, regardless of the tax status or character of the recipients thereof. In short, petitioner's position is
that from 15 October 1984 when Pres. Decree No. 1959 was promulgated, employees' trusts ceased to be exempt and thereafter became subject to the final
withholding tax.
Upon the other hand, GCL contends that the tax exempt status of the employees' trusts applies to all kinds of taxes, including the final withholding tax on
interest income. That exemption, according to GCL, is derived from Section 56(b) and not from Section 21 (d) or 24 (cc) of the Tax Code, as argued by
Petitioner.
The sole issue for determination is whether or not the GCL Plan is exempt from the final withholding tax on interest income from money placements and
purchase of treasury bills required by Pres. Decree No. 1959.
We uphold the exemption.
To begin with, it is significant to note that the GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance
with Rep. Act No. 4917 approved on 17 June 1967. This law specifically provided:
Sec. 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and employees of private firms,
whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all
taxes and shall not be liable to attachment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the
official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action; . . . (emphasis ours).
In so far as employees' trusts are concerned, the foregoing provision should be taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, as
amended by Rep. Act No. 1983, supra, which took effect on 22 June 1957. This provision specifically exempted employee's trusts from income tax and is
repeated hereunder for emphasis:
Sec. 56. Imposition of Tax. — (a) Application of tax. — The taxes imposed by this Title upon individuals shall apply to the income of estates
or of any kind of property held in trust.
xxx xxx xxx
(b) Exception. — The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing
plan of an employer for the benefit of some or all of his
employees . . .
The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust, springs from the foregoing provision. It is
unambiguous. Manifest therefrom is that the tax law has singled out employees' trusts for tax exemption.
And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts. Employees' trusts or benefit plans normally provide economic
assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security
against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What
is more, it is established for their exclusive benefit and for no other purpose.
The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in order to encourage the formation and establishment of such private Plans for the
benefit of laborers and employees outside of the Social Security Act. Enlightening is a portion of the explanatory note to H.B. No. 6503, now R.A. 1983,
reading:
Considering that under Section 17 of the social Security Act, all contributions collected and payments of sickness, unemployment, retirement,
disability and death benefits made thereunder together with the income of the pension trust are exempt from any tax, assessment, fee, or
charge, it is proposed that a similar system providing for retirement, etc. benefits for employees outside the Social Security Act be exempted
from income taxes. (Congressional Record, House of Representatives, Vol. IV, Part. 2, No. 57, p. 1859, May 3, 1957; cited in Commissioner
of Internal Revenue v. Visayan Electric Co., et al., G.R. No. L-22611, 27 May 1968, 23 SCRA 715); emphasis supplied.
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution
accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law.
The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential tax rates under the old law, therefore, can not be deemed to
extent to employees' trusts. Said Decree, being a general law, can not repeal by implication a specific provision, Section 56(b) now 53 [b]) in relation to Rep.
Act No. 4917 granting exemption from income tax to employees' trusts. Rep. Act 1983, which excepted employees' trusts in its Section 56 (b) was effective
on 22 June 1957 while Rep. Act No. 4917 was enacted on 17 June 1967, long before the issuance of Pres. Decree No. 1959 on 15 October 1984. A
subsequent statute, general in character as to its terms and application, is not to be construed as repealing a special or specific enactment, unless the
legislative purpose to do so is manifested. This is so even if the provisions of the latter are sufficiently comprehensive to include what was set forth in the
special act (Villegas v. Subido, G.R. No. L-31711, 30 September 1971, 41 SCRA 190).
Notably, too, all the tax provisions herein treated of come under Title II of the Tax Code on "Income Tax." Section 21 (d), as amended by Rep. Act No. 1959,
refers to the final tax on individuals and falls under Chapter II; Section 24 (cc) to the final tax on corporations under Chapter III; Section 53 on withholding of
final tax to Returns and Payment of Tax under Chapter VI; and Section 56 (b) to tax on Estates and Trusts covered by Chapter VII, Section 56 (b), taken in
conjunction with Section 56 (a), supra, explicitly excepts employees' trusts from "the taxes imposed by this Title." Since the final tax and the withholding
thereof are embraced within the title on "Income Tax," it follows that said trust must be deemed exempt therefrom. Otherwise, the exception becomes
meaningless.
There can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt (Sec. 56 [b],
now 53 [b], Tax Code). The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and
expedite the collection of income taxes by requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status from income, we
see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place.
Petitioner also relies on Revenue Memorandum Circular 31-84, dated 30 October 1984, and Bureau of Internal Revenue Ruling No. 027-e-000-00-005-85,
dated 14 January 1985, as authorities for the argument that Pres. Decree No. 1959 withdrew the exemption of employees' trusts from the withholding of the
final tax on interest income. Said Circular and Ruling pronounced that the deletion of the exempting and preferential tax treatment provisions by Pres. Decree
No. 1959 is a clear manifestation that the single 15% tax rate is imposable on all interest income regardless of the tax status or character of the recipient
thereof. But since we herein rule that Pres. Decree No. 1959 did not have the effect of revoking the tax exemption enjoyed by employees' trusts, reliance on
those authorities is now misplaced.
WHEREFORE, the Writ of Certiorari prayed for is DENIED. The judgment of respondent Court of Appeals, affirming that of the Court of Tax Appeals is
UPHELD. No costs.
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-68375 April 15, 1988
vs.
WANDER PHILIPPINES, INC. AND THE COURT OF TAX APPEALS, respondents.
The Solicitor General for petitioner.
Felicisimo R. Quiogue and Cirilo P. Noel for respondents.
BIDIN, J.:
This is a petition for review on certiorari of the January 19, 1984 Decision of the Court of Tax Appeals * in C.T.A. Case No.2884, entitled Wander Philippines,
Inc. vs. Commissioner of Internal Revenue, holding that Wander Philippines, Inc. is entitled to the preferential rate of 15% withholding tax on the dividends
remitted to its foreign parent company, the Glaro S.A. Ltd. of Switzerland, a non-resident foreign corporation.
Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic corporation organized under Philippine laws. It is wholly-owned
subsidiary of the Glaro S.A. Ltd. (Glaro for short), a Swiss corporation not engaged in trade or business in the Philippines.
On July 18, 1975, Wander filed its withholding tax return for the second quarter ending June 30, 1975 and remitted to its parent company, Glaro dividends in
the amount of P222,000.00, on which 35% withholding tax thereof in the amount of P77,700.00 was withheld and paid to the Bureau of Internal Revenue.
Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending June 30, 1976 on the dividends it remitted to Glaro amounting to
P355,200.00, on wich 35% tax in the amount of P124,320.00 was withheld and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund and/or tax credit in the amount of P115,400.00,
contending that it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos. 369
and 778, and not on the basis of 35% which was withheld and paid to and collected by the government.
Petitioner herein, having failed to act on the above-said claim for refund, on July 15, 1977, Wander filed a petition with respondent Court of Tax Appeals.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal portion of which reads:
WHEREFORE, respondent is hereby ordered to grant a refund and/or tax credit to petitioner in the amount of P115,440.00 representing
overpaid withholding tax on dividends remitted by it to the Glaro S.A. Ltd. of Switzerland during the second quarter of the years 1975 and
1976.
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied in a Resolution dated August 13, 1984. Hence, the instant petition.
Petitioner raised two (2) assignment of errors, to wit:
I
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL, THE COURT OF TAX APPEALS ERRED INHOLDING THAT THE
HEREIN RESPONDENT WANDER PHILIPPINES, INC. IS ENTITLED TO THE SAID REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME COUNTRY OF GLARO S.A. LTD. (THE PARENT COMPANY OF
THE HEREIN RESPONDENT WANDER PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS SWISS INCOME TAX LIABILITY A TAX
CREDIT EQUIVALENT TO THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT PHILIPPINE DIVIDEND TAX) SPARED OR WAIVED OR
OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE PHILIPPINE TAX CODE.
The sole issue in this case is whether or not private respondent Wander is entitled to the preferential rate of 15% withholding tax on dividends declared and
remitted to its parent corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not Wander is the proper party to claim the refund; and (2) Whether or not
Switzerland allows as tax credit the "deemed paid" 20% Philippine Tax on such dividends.
Petitioner maintains and argues that it is Glaro the tax payer, and not Wander, the remitter or payor of the dividend income and a mere withholding agent for
and in behalf of the Philippine Government, which should be legally entitled to receive the refund if any.
It will be noted, however, that Petitioner's above-entitled argument is being raised for the first time in this Court. It was never raised at the administrative level,
or at the Court of Tax Appeals. To allow a litigant to assume a different posture when he comes before the court and challenge the position he had accepted
at the administrative level, would be to sanction a procedure whereby the Court—which is supposed to review administrative determinations—would not
review, but determine and decide for the first time, a question not raised at the administrative forum. Thus, it is well settled that under the same underlying
principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court cannot be raised for the first time on appeal
(Aguinaldo Industries Corporation vs. Commissioner of Internal Revenue, 112 SCRA 136; Pampanga Sugar Dev. Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs.
Court of Appeals, 102 SCRA 597; Matialonzo vs. Servidad, 107 SCRA 726,
In any event, the submission of petitioner that Wander is but a withholding agent of the government and therefore cannot claim reimbursement of the alleged
overpaid taxes, is untenable. It will be recalled, that said corporation is first and foremost a wholly owned subsidiary of Glaro. The fact that it became a
withholding agent of the government which was not by choice but by compulsion under Section 53 (b) of the Tax Code, cannot by any stretch of the
imagination be considered as an abdication of its responsibility to its mother company. Thus, this Court construing Section 53 (b) of the Internal Revenue
Code held that "the obligation imposed thereunder upon the withholding agent is compulsory." It is a device to insure the collection by the Philippine
Government of taxes on incomes, derived from sources in the Philippines, by aliens who are outside the taxing jurisdiction of this Court (Commissioner of
Internal Revenue vs. Malayan Insurance Co., Inc., 21 SCRA 944). In fact, Wander may be assessed for deficiency withholding tax at source, plus penalties
consisting of surcharge and interest (Section 54, NLRC). Therefore, as the Philippine counterpart, Wander is the proper entity who should for the refund or
credit of overpaid withholding tax on dividends paid or remitted by Glaro.
Closely intertwined with the first assignment of error is the issue of whether or not Switzerland, the foreign country where Glaro is domiciled, grants to Glaro a
tax credit against the tax due it, equivalent to 20%, or the difference between the regular 35% rate of the preferential 15% rate. The dispute in this issue lies
on the fact that Switzerland does not impose any income tax on dividends received by Swiss corporation from corporations domiciled in foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this case, reads:
Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal Revenue Code, as amended, is hereby further amended to
read as follows:
(b) Tax on foreign corporations. — 1) Non-resident corporation. A foreign corporation not engaged in trade or business in the
Philippines, including a foreign life insurance company not engaged in the life insurance business in the Philippines, shall
pay a tax equal to 35% of the gross income received during its taxable year from all sources within the Philippines, as
interest (except interest on foreign loans which shall be subject to 15% tax), dividends, premiums, annuities, compensations,
remuneration for technical services or otherwise, emoluments or other fixed or determinable, annual, periodical or casual
gains, profits, and income, and capital gains: ... Provided, still further That on dividends received from a domestic corporation
liable to tax under this Chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided
in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign corporation is
domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid
in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the
tax (15%) dividends as provided in this section: ...
From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the tax shall be 15% of the dividends received, subject to
the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign
corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) dividends.
In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. Accordingly, Wander claims that full credit is granted and not
merely credit equivalent to 20%. Petitioner, on the other hand, avers the tax sparing credit is applicable only if the country of the parent corporation allows a
foreign tax credit not only for the 15 percentage-point portion actually paid but also for the equivalent twenty percentage point portion spared, waived or
otherwise deemed as if paid in the Philippines; that private respondent does not cite anywhere a Swiss law to the effect that in case where a foreign tax, such
as the Philippine 35% dividend tax, is spared waived or otherwise considered as if paid in whole or in part by the foreign country, a Swiss foreign-tax credit
would be allowed for the whole or for the part, as the case may be, of the foreign tax so spared or waived or considered as if paid by the foreign country.
While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose any tax or the
dividends received by Glaro from the Philippines should be considered as a full satisfaction of the given condition. For, as aptly stated by respondent Court, to
deny private respondent the privilege to withhold only 15% tax provided for under Presidential Decree No. 369, amending Section 24 (b) (1) of the Tax Code,
would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations" interest here and discourage them from
investing capital in our country.
Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation of the May 19, 1977 ruling of petitioner that "since the
Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition imposed under
the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed."
Moreover, as a matter of principle, this Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals which is, by the very
nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless
there has been an abuse or improvident exercise of authority (Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, which is not present in the instant
case.
WHEREFORE, the petition filed is DISMISSED for lack of merit.
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 108576 January 20, 1999

vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP., respondents.
MARTINEZ, J.:
1
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of Appeals (CA) which affirmed the ruling of the Court of
2
Tax Appeals (CTA) that private respondent A. Soriano Corporation's (hereinafter ANSCOR) redemption and exchange of the stocks of its foreign
3
stockholders cannot be considered as "essentially equivalent to a distribution of taxable dividends" under, Section 83(b) of the 1939 Internal Revenue Act.
The undisputed facts are as follows:
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the corporation "A. Soriano Y Cia", predecessor of
ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by
4 5
the family of Don Andres, who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued.
On September 12, 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00 divided into 25,000 common shares with the same par value of
the additional 15,000 shares, only 10,000 was issued which were all subscribed by Don Andres, after the other stockholders waived in favor of the former
6 7 8
their pre-emptive rights to subscribe to the new issues. This increased his subscription to 14,963 common shares. A month later, Don Andres transferred
9 10
1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in ANSCOR. Both sons are foreigners.
11
By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949 and December 20, 1963. On December 30,
12
1964 Don Andres died. As of that date, the records revealed that he has a total shareholdings of 185,154 shares — 50,495 of which are original issues and
13 14
the balance of 134.659 shares as stock dividend declarations. Correspondingly, one-half of that shareholdings or 92,577 shares were transferred to his
15
wife, Doña Carmen Soriano, as her conjugal share. The other half formed part of his estate.
16 17
A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to P30M. In the same year (December 1966),
18
stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres estate and Doña Carmen from ANSCOR. Hence,
19 20
increasing their accumulated shareholdings to 138,867 and 138,864 common shares each.
On December 28, 1967, Doña Carmen requested a ruling from the United States Internal Revenue Service (IRS), inquiring if an exchange of common with
21 22
preferred shares may be considered as a tax avoidance scheme under Section 367 of the 1954 U.S. Revenue Act. By January 2, 1968, ANSCOR
23
reclassified its existing 300,000 common shares into 150,000 common and 150,000 preferred shares.
24 25
In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme and not tax avoidance. Consequently, on March
31, 1968 Doña Carmen exchanged her whole 138,864 common shares for 138,860 of the newly reclassified preferred shares. The estate of Don Andres in
26
turn, exchanged 11,140 of its common shares, for the remaining 11,140 preferred shares, thus reducing its (the estate) common shares to 127,727.
On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the Don Andres' estate. By November 1968, the Board
27
further increased ANSCOR's capital stock to P75M divided into 150,000 preferred shares and 600,000 common shares. About a year later, ANSCOR again
28
redeemed 80,000 common shares from the Don Andres' estate, further reducing the latter's common shareholdings to 19,727. As stated in the Board
Resolutions, ANSCOR's business purpose for both redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the company's
29
foreign exchange remittances in case cash dividends are declared.
In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency
30
withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue Code, for the year 1968 and the second quarter of 1969 based on the
31
transactions of exchange 31 and redemption of stocks. The Bureau of Internal Revenue (BIR) made the corresponding assessments despite the claim of
ANSCOR that it availed of the tax amnesty under Presidential Decree
32 33
(P.D.) 23 which were amended by P.D.'s 67 and 157. However, petitioner ruled that the invoked decrees do not cover Sections 53 and 54 in relation to
34
Article 83(b) of the 1939 Revenue Act under which ANSCOR was assessed. ANSCOR's subsequent protest on the assessments was denied in 1983 by
35
petitioner.
Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks. In its decision, the
36
Tax Court reversed petitioner's ruling, after finding sufficient evidence to overcome the prima facie correctness of the questioned assessments. In a petition
37
for review the CA as mentioned, affirmed the ruling of the CTA. Hence, this petition.
38
The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act which provides:
Sec. 83. Distribution of dividends or assets by corporations. —
(b) Stock dividends — A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated
after March first, nineteen hundred and thirteen. (Emphasis supplied)
Specifically, the issue is whether ANSCOR's redemption of stocks from its stockholder as well as the exchange of common with preferred shares can
be considered as "essentially equivalent to the distribution of taxable dividend" making the proceeds thereof taxable under the provisions of the
above-quoted law.
Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section 83(b) making the proceeds thereof taxable. It also argues that
the Section applies to stock dividends which is the bulk of stocks that ANSCOR redeemed. Further, petitioner claims that under the "net effect test," the estate
of Don Andres gained from the redemption. Accordingly, it was the duty of ANSCOR to withhold the tax-at-source arising from the two transactions, pursuant
39
to Section 53 and 54 of the 1939 Revenue Act.
ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres estate or from Doña Carmen based on the two transactions,
because the same were done for legitimate business purposes which are (a) to reduce its foreign exchange remittances in the event the company would
40 41
declare cash dividends, and to (b) subsequently "filipinized" ownership of ANSCOR, as allegedly, envisioned by Don Andres. It likewise invoked the
amnesty provisions of P.D. 67.
42
We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances of each case. The findings of facts of a special court
43
(CTA) exercising particular expertise on the subject of tax, generally binds this Court, considering that it is substantially similar to the findings of the CA
44
which is the final arbiter of questions of facts. The issue in this case does not only deal with facts but whether the law applies to a particular set of facts.
45
Moreover, this Court is not necessarily bound by the lower courts' conclusions of law drawn from such facts.
AMNESTY:
46
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 provides:
1. In all cases of voluntary disclosures of previously untaxed income and/or wealth such as earnings, receipts, gifts, bequests or any other
acquisitions from any source whatsoever which are taxable under the National Internal Revenue Code, as amended, realized here or abroad
by any taxpayer, natural or judicial; the collection of all internal revenue taxes including the increments or penalties or account of non-
payment as well as all civil, criminal or administrative liabilities arising from or incident to such disclosures under the National Internal
Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the Revised Administrative Code, the Civil Service laws
and regulations, laws and regulations on Immigration and Deportation, or any other applicable law or proclamation, are hereby condoned
and, in lieu thereof, a tax of ten (10%) per centum on such previously untaxed income or wealth, is hereby imposed, subject to the following
conditions: (conditions omitted) [Emphasis supplied].
The decree condones "the collection of all internal revenue taxes including the increments or penalties or account of non-payment as well as all civil,
criminal or administrative liable arising from or incident to" (voluntary) disclosures under the NIRC of previously untaxed income and/or wealth
"realized here or abroad by any taxpayer, natural or juridical."
May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? An income taxpayer covers all persons who derive taxable
47
income. ANSCOR was assessed by petitioner for deficiency withholding tax under Section 53 and 54 of the 1939 Code. As such, it is being held liable in its
capacity as a withholding agent and not its personality as a taxpayer.
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
48 49 50
collection of the tax in order to ensure its payments; the payer is the taxpayer — he is the person subject to tax impose by law; and the payee is the
51
taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor
52
becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still impose 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
53
the tax arising from the breach of its legal duty to withhold as distinguish from its duty to pay tax since:
the government's cause of action against the withholding is not for the collection of income tax, but for the enforcement of the withholding
54
provision of Section 53 of the Tax Code, compliance with which is imposed on the withholding agent and not upon the taxpayer.
Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not protected by the amnesty under the decree.
55
Codal provisions on withholding tax are mandatory and must be complied with by the withholding agent. The taxpayer should not answer for the non-
performance by the withholding agent of its legal duty to withhold unless there is collusion or bad faith. The former could not be deemed to have evaded the
tax had the withholding agent performed its duty. This could be the situation for which the amnesty decree was intended. Thus, to curtail tax evasion and give
56
tax evaders a chance to reform, it was deemed administratively feasible to grant tax amnesty in certain instances. In addition, a "tax amnesty, much like a
tax exemption, is never favored nor presumed in law and if granted by a statute, the term of the amnesty like that of a tax exemption must be construed
57 58
strictly against the taxpayer and liberally in favor of the taxing authority. The rule on strictissimi juris equally applies. So that, any doubt in the application
of an amnesty law/decree should be resolved in favor of the taxing authority.
Furthermore, ANSCOR's claim of amnesty cannot prosper. The implementing rules of P.D. 370 which expanded amnesty on previously
untaxed income under P.D. 23 is very explicit, to wit:
Sec. 4. Cases not covered by amnesty. — The following cases are not covered by the amnesty subject of these regulations:
xxx xxx xxx
(2) Tax liabilities with or without assessments, on withholding tax at source provided under Section 53 and 54 of the National Internal
59
Revenue Code, as amended;
ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision of law, it is not covered by the amnesty.
TAX ON STOCK DIVIDENDS
General Rule
60
Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code of 1928. It laid down the general rule known as the
61 62
proportionate test wherein stock dividends once issued form part of the capital and, thus, subject to income tax. Specifically, the general rule states that:
A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.
Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US Revenue Code, this provision originally referred
to "stock dividends" only, without any exception. Stock dividends, strictly speaking, represent capital and do not constitute income to its
63 64
recipient. So that the mere issuance thereof is not yet subject to income tax as they are nothing but an "enrichment through increase in value of capital
65
investment." As capital, the stock dividends postpone the realization of profits because the "fund represented by the new stock has been transferred from
66
surplus to capital and no longer available for actual distribution." Income in tax law is "an amount of money coming to a person within a specified time,
67 68 69
whether as payment for services, interest, or profit from investment." It means cash or its equivalent. It is gain derived and severed from capital, from
70 71
labor or from both combined — so that to tax a stock dividend would be to tax a capital increase rather than the income. In a loose sense, stock
dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before the
72
realization, stock dividends are nothing but a representation of an interest in the corporate properties. As capital, it is not yet subject to income tax. It should
73
be noted that capital and income are different. Capital is wealth or fund; whereas income is profit or gain or the flow of wealth. The determining factor for the
74
imposition of income tax is whether any gain or profit was derived from a transaction.
The Exception
However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits
accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied).
75
In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber (that pro rata stock dividends are not taxable income), the
exempting clause above quoted was added because provision corporation found a loophole in the original provision. They resorted to devious means to
circumvent the law and evade the tax. Corporate earnings would be distributed under the guise of its initial capitalization by declaring the stock dividends
previously issued and later redeem said dividends by paying cash to the stockholder. This process of issuance-redemption amounts to a distribution of
taxable cash dividends which was lust delayed so as to escape the tax. It becomes a convenient technical strategy to avoid the effects of taxation.
Thus, to plug the loophole — the exempting clause was added. It provides that the redemption or cancellation of stock dividends, depending on the "time"
and "manner" it was made, is essentially equivalent to a distribution of taxable dividends," making the proceeds thereof "taxable income" "to the extent it
represents profits". The exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not
76
taxable, from being made use of as a device for the actual distribution of cash dividends, which is taxable. Thus,
the provision had the obvious purpose of preventing a corporation from avoiding dividend tax treatment by distributing earnings to its
shareholders in two transactions — a pro rata stock dividend followed by a pro rata redemption — that would have the same economic
77
consequences as a simple dividend.
Although redemption and cancellation are generally considered capital transactions, as such. they are not subject to tax. However, it does not
78
necessarily mean that a shareholder may not realize a taxable gain from such transactions. Simply put, depending on the circumstances, the
proceeds of redemption of stock dividends are essentially distribution of cash dividends, which when paid becomes the absolute property of the
79
stockholder. Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of choice. Having realized gain from that
80
redemption, the income earner cannot escape income tax.
As qualified by the phrase "such time and in such manner," the exception was not intended to characterize as taxable dividend every distribution of earnings
81
arising from the redemption of stock dividend. So that, whether the amount distributed in the redemption should be treated as the equivalent of a "taxable
82 83
dividend" is a question of fact, which is determinable on "the basis of the particular facts of the transaction in question. No decisive test can be used to
determine the application of the exemption under Section 83(b). The use of the words "such manner" and "essentially equivalent" negative any idea that a
84
weighted formula can resolve a crucial issue — Should the distribution be treated as taxable dividend. On this aspect, American courts developed certain
85
recognized criteria, which includes the following:
1) the presence or absence of real business purpose,
2) the amount of earnings and profits available for the declaration of a regular dividends and the corporation's past record
with respect to the declaration of dividends,
3) the effect of the distribution, as compared with the declaration of regular dividend,
86
4) the lapse of time between issuance and redemption,
87
5) the presence of a substantial surplus and a generous supply of cash which invites suspicion as does a meager policy in
88
relation both to current earnings and accumulated surplus,
REDEMPTION AND CANCELLATION
For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation; (b) the transaction involves stock
dividends and (c) the "time and manner" of the transaction makes it "essentially equivalent to a distribution of taxable dividends." Of these, the most
important is the third.
89
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not the acquired stock is
90
cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment
for the stock, and continues in business as before. The redemption of stock dividends previously issued is used as a veil for the constructive distribution of
cash dividends. In the instant case, there is no dispute that ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000 and 80,000
common shares). But where did the shares redeemed come from? If its source is the original capital subscriptions upon establishment of the corporation or
from initial capital investment in an existing enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b) under
the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed shares are from stock dividend declarations other than
as initial capital investment, the proceeds of the redemption is additional wealth, for it is not merely a return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is undisputed that at the time of the last
91
redemption, the original common shares owned by the estate were only 25,247.5 This means that from the total of 108,000 shares redeemed from the
estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock dividends. Besides, in the absence of evidence to the contrary, the Tax
92
Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate profits such as stock dividends. The capital cannot
be distributed in the form of redemption of stock dividends without violating the trust fund doctrine — wherein the capital stock, property and other assets of
be distributed in the form of redemption of stock dividends without violating the trust fund doctrine — wherein the capital stock, property and other assets of
93 94
the corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That doctrine was intended for
95
the protection of corporate creditors.
With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The time alone that lapsed from the issuance to the
redemption is not a sufficient indicator to determine taxability. It is a must to consider the factual circumstances as to the manner of both the issuance and the
redemption. The "time" element is a factor to show a device to evade tax and the scheme of cancelling or redeeming the same shares is a method usually
96
adopted to accomplish the end sought. Was this transaction used as a "continuing plan," "device" or "artifice" to evade payment of tax? It is necessary to
97
determine the "net effect" of the transaction between the shareholder-income taxpayer and the acquiring (redeeming) corporation. The "net effect" test is
98
not evidence or testimony to be considered; it is rather an inference to be drawn or a conclusion to be reached. It is also important to know whether the
99
issuance of stock dividends was dictated by legitimate business reasons, the presence of which might negate a tax evasion plan.
The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the redemption to be considered a legitimate
100 101
tax scheme. Redemption cannot be used as a cloak to distribute corporate earnings. Otherwise, the apparent intention to avoid tax becomes doubtful as
the intention to evade becomes manifest. It has been ruled that:
[A]n operation with no business or corporate purpose — is a mere devise which put on the form of a corporate reorganization as a disguise
for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to
102
reorganize a business or any part of a business, but to transfer a parcel of corporate shares to a stockholder.
Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if the redeemed shares were issued with bona
103
fide business purpose, which is judged after each and every step of the transaction have been considered and the whole transaction does not amount to a
tax evasion scheme.
ANSCOR invoked two reasons to justify the redemptions — (1) the alleged "filipinization" program and (2) the reduction of foreign exchange remittances in
case cash dividends are declared. The Court is not concerned with the wisdom of these purposes but on their relevance to the whole transaction which can
104
be inferred from the outcome thereof. Again, it is the "net effect rather than the motives and plans of the taxpayer or his corporation" that is the
105
fundamental guide in administering Sec. 83(b). This tax provision is aimed at the result. It also applies even if at the time of the issuance of the stock
106
dividend, there was no intention to redeem it as a means of distributing profit or avoiding tax on dividends. The existence of legitimate business purposes in
107
support of the redemption of stock dividends is immaterial in income taxation. It has no relevance in determining "dividend equivalence". Such purposes
may be material only upon the issuance of the stock dividends. The test of taxability under the exempting clause, when it provides "such time and manner" as
would make the redemption "essentially equivalent to the distribution of a taxable dividend", is whether the redemption resulted into a flow of wealth. If no
wealth is realized from the redemption, there may not be a dividend equivalence treatment. In the metaphor of Eisner v. Macomber, income is not deemed
"realize" until the fruit has fallen or been plucked from the tree.
The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit is realized or received, actually or
108
constructively, and (3) it is not exempted by law or treaty from income tax. Any business purpose as to why or how the income was earned by the taxpayer
is not a requirement. Income tax is assessed on income received from any property, activity or service that produces the income because the Tax Code
stands as an indifferent neutral party on the matter of where income comes
109
from.
As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was realized through the redemption of stock
dividends. The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholder's separate
110
property. Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the existence of any business purpose for the redemption. Otherwise, to rule that the said proceeds are exempt
from income tax when the redemption is supported by legitimate business reasons would defeat the very purpose of imposing tax on income. Such argument
would open the door for income earners not to pay tax so long as the person from whom the income was derived has legitimate business reasons. In other
words, the payment of tax under the exempting clause of Section 83(b) would be made to depend not on the income of the taxpayer, but on the business
purposes of a third party (the corporation herein) from whom the income was earned. This is absurd, illogical and impractical considering that the Bureau of
Internal Revenue (BIR) would be pestered with instances in determining the legitimacy of business reasons that every income earner may interposed. It is not
administratively feasible and cannot therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed shares are the equivalent of dividend only if the shares were
111 112
not issued for genuine business purposes", or the "redeemed shares have been issued by a corporation bona fide" bears no relevance in determining
the non-taxability of the proceeds of redemption ANSCOR, relying heavily and applying said cases, argued that so long as the redemption is supported by
113 114
valid corporate purposes the proceeds are not subject to tax. The adoption by the courts below of such argument is misleading if not misplaced. A
review of the cited American cases shows that the presence or absence of "genuine business purposes" may be material with respect to the issuance or
declaration of stock dividends but not on its subsequent redemption. The issuance and the redemption of stocks are two different transactions. Although the
115
existence of legitimate corporate purposes may justify a corporation's acquisition of its own shares under Section 41 of the Corporation Code, such
purposes cannot excuse the stockholder from the effects of taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion
plan and thus, without legitimate business reasons, the redemption becomes suspicious which exempting clause. The substance of the whole transaction, not
116
its form, usually controls the tax consequences.
The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax liability. First, the alleged "filipinization" plan cannot be
considered legitimate as it was not implemented until the BIR started making assessments on the proceeds of the redemption. Such corporate plan was not
stated in nor supported by any Board Resolution but a mere afterthought interposed by the counsel of ANSCOR. Being a separate entity, the corporation can
117
act only through its Board of Directors. The Board Resolutions authorizing the redemptions state only one purpose — reduction of foreign exchange
remittances in case cash dividends are declared. Not even this purpose can be given credence. Records show that despite the existence of enormous
corporate profits no cash dividend was ever declared by ANSCOR from 1945 until the BIR started making assessments in the early 1970's. Although a
corporation under certain exceptions, has the prerogative when to issue dividends, yet when no cash dividends was issued for about three decades, this
circumstance negates the legitimacy of ANSCOR's alleged purposes. Moreover, to issue stock dividends is to increase the shareholdings of ANSCOR's
foreign stockholders contrary to its "filipinization" plan. This would also increase rather than reduce their need for foreign exchange remittances in case of
cash dividend declaration, considering that ANSCOR is a family corporation where the majority shares at the time of redemptions were held by Don Andres'
foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid excuse for the imposition of tax. Otherwise, the
taxpayer's liability to pay income tax would be made to depend upon a third person who did not earn the income being taxed. Furthermore, even if the said
purposes support the redemption and justify the issuance of stock dividends, the same has no bearing whatsoever on the imposition of the tax herein
assessed because the proceeds of the redemption are deemed taxable dividends since it was shown that income was generated therefrom.
Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of the redeemed stock dividends would be to impose on such stock an undisclosed
118
lien and would be extremely unfair to intervening purchase, i.e. those who buys the stock dividends after their issuance. Such argument, however, bears
no relevance in this case as no intervening buyer is involved. And even if there is an intervening buyer, it is necessary to look into the factual milieu of the
case if income was realized from the transaction. Again, we reiterate that the dividend equivalence test depends on such "time and manner" of the transaction
119
and its net effect. The undisclosed lien may be unfair to a subsequent stock buyer who has no capital interest in the company. But the unfairness may not
be true to an original subscriber like Don Andres, who holds stock dividends as gains from his investments. The subsequent buyer who buys stock dividends
is investing capital. It just so happen that what he bought is stock dividends. The effect of its (stock dividends) redemption from that subsequent buyer is
merely to return his capital subscription, which is income if redeemed from the original subscriber.
After considering the manner and the circumstances by which the issuance and redemption of stock dividends were made, there is no other conclusion but
that the proceeds thereof are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is part of
120
the "entire income" subject to tax under Section 22 in relation to Section 21 of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are
120
the "entire income" subject to tax under Section 22 in relation to Section 21 of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are
included in "gross income". As income, it is subject to income tax which is required to be withheld at source. The 1997 Tax Code may have altered the
situation but it does not change this disposition.
121
EXCHANGE OF COMMON WITH PREFERRED SHARES
122 123
Exchange is an act of taking or giving one thing for another involving reciprocal transfer and is generally considered as a taxable transaction. The
exchange of common stocks with preferred stocks, or preferred for common or a combination of either for both, may not produce a recognized gain or loss,
so long as the provisions of Section 83(b) is not applicable. This is true in a trade between two (2) persons as well as a trade between a stockholder and a
corporation. In general, this trade must be parts of merger, transfer to controlled corporation, corporate acquisitions or corporate reorganizations. No taxable
124
gain or loss may be recognized on exchange of property, stock or securities related to reorganizations.
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and preferred, and that parts of the common shares of
the Don Andres estate and all of Doña Carmen's shares were exchanged for the whole 150.000 preferred shares. Thereafter, both the Don Andres estate and
Doña Carmen remained as corporate subscribers except that their subscriptions now include preferred shares. There was no change in their proportional
interest after the exchange. There was no cash flow. Both stocks had the same par value. Under the facts herein, any difference in their market value would
be immaterial at the time of exchange because no income is yet realized — it was a mere corporate paper transaction. It would have been different, if the
125
exchange transaction resulted into a flow of wealth, in which case income tax may be imposed.
Reclassification of shares does not always bring any substantial alteration in the subscriber's proportional interest. But the exchange is different — there
would be a shifting of the balance of stock features, like priority in dividend declarations or absence of voting rights. Yet neither the reclassification nor
exchange per se, yields realize income for tax purposes. A common stock represents the residual ownership interest in the corporation. It is a basic class of
126
stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. Preferred stocks
127
are those which entitle the shareholder to some priority on dividends and asset distribution.
Both shares are part of the corporation's capital stock. Both stockholders are no different from ordinary investors who take on the same investment risks.
128
Preferred and common shareholders participate in the same venture, willing to share in the profits and losses of the enterprise. Moreover, under the
doctrine of equality of shares — all stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of
129
Incorporation is silent on such differences.
In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a modification of the subscriber's rights and
privileges — which is not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire interest and
130
not when there is still maintenance of proprietary interest.
WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that ANSCOR's redemption of 82,752.5 stock dividends is herein
considered as essentially equivalent to a distribution of taxable dividends for which it is LIABLE for the withholding tax-at-source. The decision is AFFIRMED
in all other respects.
SO ORDERED.

SUPREME COURT
Manila
EN BANC
G.R. No. L-21551 September 30, 1969
FERNANDEZ HERMANOS, INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
-----------------------------
vs.
FERNANDEZ HERMANOS, INC., and COURT OF TAX APPEALS, respondents.
-----------------------------
vs.
FERNANDEZ HERMANOS INC., and the COURT OF TAX APPEALS, respondents.
-----------------------------
FERNANDEZ HERMANOS, INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, and HON. ROMAN A. UMALI, COURT OF TAX APPEALS,respondents.
L-21551:
Rafael Dinglasan for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney Virgilio G. Saldajeno for respondent.
L-21557:
Office of the Solicitor General for petitioner.
Rafael Dinglasan for respondent Fernandez Hermanos, Inc.
L-24972:
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special Attorney Virgilio G. Saldajeno for petitioner.
Rafael Dinglasan for respondent Fernandez Hermanos, Inc.
L-24978:
Rafael Dinglasan for petitioner.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Antonio G. Ibarra and Special Attorney Virgilio G. Saldajeno for respondent.
TEEHANKEE, J.:
These four appears involve two decisions of the Court of Tax Appeals determining the taxpayer's income tax liability for the years 1950 to 1954 and for the
year 1957. Both the taxpayer and the Commissioner of Internal Revenue, as petitioner and respondent in the cases a quo respectively, appealed from the Tax
Court's decisions, insofar as their respective contentions on particular tax items were therein resolved against them. Since the issues raised are interrelated,
the Court resolves the four appeals in this joint decision.
Cases L-21551 and L-21557
The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized for the principal purpose of engaging in business as an "investment company"
with main office at Manila. Upon verification of the taxpayer's income tax returns for the period in question, the Commissioner of Internal Revenue assessed
against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged deficiency income taxes for the years 1950,
1951, 1952, 1953 and 1954, respectively. Said assessments were the result of alleged discrepancies found upon the examination and verification of the
taxpayer's income tax returns for the said years, summarized by the Tax Court in its decision of June 10, 1963 in CTA Case No. 787, as follows:
1. Losses —
a. Losses in Mati Lumber Co. (1950) P 8,050.00
b. Losses in or bad debts of Palawan Manganese Mines, Inc. (1951) 353,134.25
c. Losses in Balamban Coal Mines —
1950 8,989.76
1951 27,732.66
d. Losses in Hacienda Dalupiri —
1950 17,418.95
1951 29,125.82
1952 26,744.81
1953 21,932.62
1954 42,938.56
e. Losses in Hacienda Samal —
1951 8,380.25
1952 7,621.73
2. Excessive depreciation of Houses —
1950 P 8,180.40
1951 8,768.11
1952 18,002.16
1953 13,655.25
1954 29,314.98
3. Taxable increase in net worth —
1950 P 30,050.00
1951 1,382.85
1
4. Gain realized from sale of real property in 1950 P 11,147.261
The Tax Court sustained the Commissioner's disallowances of Item 1, sub-items (b) and (e) and Item 2 of the above summary, but overruled the
Commissioner's disallowances of all the remaining items. It therefore modified the deficiency assessments accordingly, found the total deficiency
income taxes due from the taxpayer for the years under review to amount to P123,436.00 instead of P166,063.00 as originally assessed by the
Commissioner, and rendered the following judgment:
RESUME
1950 P2,748.00
1951 108,724.00
1952 3,600.00
1953 2,501.00
1954 5,863.00
Total P123,436.00
WHEREFORE, the decision appealed from is hereby modified, and petitioner is ordered to pay the sum of P123,436.00 within 30 days from the date
this decision becomes final. If the said amount, or any part thereof, is not paid within said period, there shall be added to the unpaid amount as
surcharge of 5%, plus interest as provided in Section 51 of the National Internal Revenue Code, as amended. With costs against petitioner. (Pp. 75,
76, Taxpayer's Brief as appellant)
Both parties have appealed from the respective adverse rulings against them in the Tax Court's decision. Two main issues are raised by the parties: first, the
correctness of the Tax Court's rulings with respect to the disputed items of disallowances enumerated in the Tax Court's summary reproduced above, and
second, whether or not the government's right to collect the deficiency income taxes in question has already prescribed.
On the first issue, we will discuss the disputed items of disallowances seriatim.
1. Re allowances/disallowances of losses.
(a) Allowance of losses in Mati Lumber Co. (1950). — The Commissioner of Internal Revenue questions the Tax Court's allowance of the taxpayer's writing
off as worthless securities in its 1950 return the sum of P8,050.00 representing the cost of shares of stock of Mati Lumber Co. acquired by the taxpayer on
January 1, 1948, on the ground that the worthlessness of said stock in the year 1950 had not been clearly established. The Commissioner contends that
although the said Company was no longer in operation in 1950, it still had its sawmill and equipment which must be of considerable value. The Court,
however, found that "the company ceased operations in 1949 when its Manager and owner, a certain Mr. Rocamora, left for Spain ,where he subsequently
died. When the company eased to operate, it had no assets, in other words, completely insolvent. This information as to the insolvency of the Company —
reached (the taxpayer) in 1950," when it properly claimed the loss as a deduction in its 1950 tax return, pursuant to Section 30(d) (4) (b) or Section 30 (e) (3)
2
of the National Internal Revenue Code.
We find no reason to disturb this finding of the Tax Court. There was adequate basis for the writing off of the stock as worthless securities. Assuming that the
Company would later somehow realize some proceeds from its sawmill and equipment, which were still existing as claimed by the Commissioner, and that
such proceeds would later be distributed to its stockholders such as the taxpayer, the amount so received by the taxpayer would then properly be reportable
as income of the taxpayer in the year it is received.
(b) Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951). — The taxpayer appeals from the Tax Court's disallowance of its
(b) Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951). — The taxpayer appeals from the Tax Court's disallowance of its
writing off in 1951 as a loss or bad debt the sum of P353,134.25, which it had advanced or loaned to Palawan Manganese Mines, Inc. The Tax Court's
findings on this item follow:
Sometime in 1945, Palawan Manganese Mines, Inc., the controlling stockholders of which are also the controlling stockholders of petitioner
corporation, requested financial help from petitioner to enable it to resume it mining operations in Coron, Palawan. The request for financial
assistance was readily and unanimously approved by the Board of Directors of petitioner, and thereafter a memorandum agreement was executed on
August 12, 1945, embodying the terms and conditions under which the financial assistance was to be extended, the pertinent provisions of which are
as follows:
"WHEREAS, the FIRST PARTY, by virtue of its resolution adopted on August 10, 1945, has agreed to extend to the SECOND PARTY the
requested financial help by way of accommodation advances and for this purpose has authorized its President, Mr. Ramon J. Fernandez to
cause the release of funds to the SECOND PARTY.
"WHEREAS, to compensate the FIRST PARTY for the advances that it has agreed to extend to the SECOND PARTY, the latter has agreed to
pay to the former fifteen per centum (15%) of its net profits.
"NOW THEREFORE, for and in consideration of the above premises, the parties hereto have agreed and covenanted that in consideration of
the financial help to be extended by the FIRST PARTY to the SECOND PARTY to enable the latter to resume its mining operations in Coron,
Palawan, the SECOND PARTY has agreed and undertaken as it hereby agrees and undertakes to pay to the FIRST PARTY fifteen per
centum (15%) of its net profits." (Exh. H-2)
Pursuant to the agreement mentioned above, petitioner gave to Palawan Manganese Mines, Inc. yearly advances starting from 1945, which advances
amounted to P587,308.07 by the end of 1951. Despite these advances and the resumption of operations by Palawan Manganese Mines, Inc., it continued to
suffer losses. By 1951, petitioner became convinced that those advances could no longer be recovered. While it continued to give advances, it decided to
write off as worthless the sum of P353,134.25. This amount "was arrived at on the basis of the total of advances made from 1945 to 1949 in the sum of
P438,981.39, from which amount the sum of P85,647.14 had to be deducted, the latter sum representing its pre-war assets. (t.s.n., pp. 136-139, Id)." (Page
4, Memorandum for Petitioner.) Petitioner decided to maintain the advances given in 1950 and 1951 in the hope that it might be able to recover the same, as
in fact it continued to give advances up to 1952. From these facts, and as admitted by petitioner itself, Palawan Manganese Mines, Inc., was still in operation
when the advances corresponding to the years 1945 to 1949 were written off the books of petitioner. Under the circumstances, was the sum of P353,134.25
properly claimed by petitioner as deduction in its income tax return for 1951, either as losses or bad debts?
It will be noted that in giving advances to Palawan Manganese Mine Inc., petitioner did not expect to be repaid. It is true that some testimonial evidence was
presented to show that there was some agreement that the advances would be repaid, but no documentary evidence was presented to this effect. The
memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 15% of the net profits
of Palawan Manganese Mines, Inc. In other words, if there were no earnings or profits, there was no obligation to repay those advances. It has been held that
the voluntary advances made without expectation of repayment do not result in deductible losses. 1955 PH Fed. Taxes, Par. 13, 329, citing W. F. Young, Inc.
v. Comm., 120 F 2d. 159, 27 AFTR 395; George B. Markle, 17 TC. 1593.
Is the said amount deductible as a bad debt? As already stated, petitioner gave advances to Palawan Manganese Mines, Inc., without expectation of
repayment. Petitioner could not sue for recovery under the memorandum agreement because the obligation of Palawan Manganese Mines, Inc. was to pay
petitioner 15% of its net profits, not the advances. No bad debt could arise where there is no valid and subsisting debt.
Again, assuming that in this case there was a valid and subsisting debt and that the debtor was incapable of paying the debt in 1951, when petitioner wrote
off the advances and deducted the amount in its return for said year, yet the debt is not deductible in 1951 as a worthless debt. It appears that the debtor was
still in operation in 1951 and 1952, as petitioner continued to give advances in those years. It has been held that if the debtor corporation, although losing
3
money or insolvent, was still operating at the end of the taxable year, the debt is not considered worthless and therefore not deductible.
The Tax Court's disallowance of the write-off was proper. The Solicitor General has rightly pointed out that the taxpayer has taken an "ambiguous position "
and "has not definitely taken a stand on whether the amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad
4
debt." We sustain the government's position that the advances made by the taxpayer to its 100% subsidiary, Palawan Manganese Mines, Inc. amounting to
5
P587,308,07 as of 1951 were investments and not loans. The evidence on record shows that the board of directors of the two companies since August,
1945, were identical and that the only capital of Palawan Manganese Mines, Inc. is the amount of P100,000.00 entered in the taxpayer's balance sheet as its
6
investment in its subsidiary company. This fact explains the liberality with which the taxpayer made such large advances to the subsidiary, despite the latter's
admittedly poor financial condition.
The taxpayer's contention that its advances were loans to its subsidiary as against the Tax Court's finding that under their memorandum agreement, the
taxpayer did not expect to be repaid, since if the subsidiary had no earnings, there was no obligation to repay those advances, becomes immaterial, in the
light of our resolution of the question. The Tax Court correctly held that the subsidiary company was still in operation in 1951 and 1952 and the taxpayer
continued to give it advances in those years, and, therefore, the alleged debt or investment could not properly be considered worthless and deductible in
1951, as claimed by the taxpayer. Furthermore, neither under Section 30 (d) (2) of our Tax Code providing for deduction by corporations of losses actually
sustained and charged off during the taxable year nor under Section 30 (e) (1) thereof providing for deduction of bad debts actually ascertained to be
worthless and charged off within the taxable year, can there be a partial writing off of a loss or bad debt, as was sought to be done here by the taxpayer. For
such losses or bad debts must be ascertained to be so and written off during the taxable year, are therefore deductible in full or not at all, in the absence of
any express provision in the Tax Code authorizing partial deductions.
The Tax Court held that the taxpayer's loss of its investment in its subsidiary could not be deducted for the year 1951, as the subsidiary was still in operation
in 1951 and 1952. The taxpayer, on the other hand, claims that its advances were irretrievably lost because of the staggering losses suffered by its subsidiary
in 1951 and that its advances after 1949 were "only limited to the purpose of salvaging whatever ore was already available, and for the purpose of paying the
7
wages of the laborers who needed help." The correctness of the Tax Court's ruling in sustaining the disallowance of the write-off in 1951 of the taxpayer's
claimed losses is borne out by subsequent events shown in Cases L-24972 and L-24978 involving the taxpayer's 1957 income tax liability. (Infra, paragraph
6.) It will there be seen that by 1956, the obligation of the taxpayer's subsidiary to it had been reduced from P587,398.97 in 1951 to P442,885.23 in 1956, and
8
that it was only on January 1, 1956 that the subsidiary decided to cease operations.
(c) Disallowance of losses in Balamban Coal Mines (1950 and 1951). — The Court sustains the Tax Court's disallowance of the sums of P8,989.76 and
P27,732.66 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951, respectively, and claimed as losses in the
taxpayer's returns for said years. The Tax Court correctly held that the losses "are deductible in 1952, when the mines were abandoned, and not in 1950 and
9
1951, when they were still in operation." The taxpayer's claim that these expeditions should be allowed as losses for the corresponding years that they were
incurred, because it made no sales of coal during said years, since the promised road or outlet through which the coal could be transported from the mines to
the provincial road was not constructed, cannot be sustained. Some definite event must fix the time when the loss is sustained, and here it was the event of
actual abandonment of the mines in 1952. The Tax Court held that the losses, totalling P36,722.42 were properly deductible in 1952, but the appealed
judgment does not show that the taxpayer was credited therefor in the determination of its tax liability for said year. This additional deduction of P36,722.42
from the taxpayer's taxable income in 1952 would result in the elimination of the deficiency tax liability for said year in the sum of P3,600.00 as determined by
the Tax Court in the appealed judgment.
(d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952). — The Tax Court overruled the Commissioner's
disallowance of these items of losses thus:
Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P17,418.95 in 1950, P29,125.82 in 1951, P26,744.81 in 1952,
P21,932.62 in 1953, and P42,938.56 in 1954. These deductions were disallowed by respondent on the ground that the farm was operated solely for
pleasure or as a hobby and not for profit. This conclusion is based on the fact that the farm was operated continuously at a loss.1awphîl.nèt
From the evidence, we are convinced that the Hacienda Dalupiri was operated by petitioner for business and not pleasure. It was mainly a cattle
farm, although a few race horses were also raised. It does not appear that the farm was used by petitioner for entertainment, social activities, or other
non-business purposes. Therefore, it is entitled to deduct expenses and losses in connection with the operation of said farm. (See 1955 PH Fed.
Taxes, Par. 13, 63, citing G.C.M. 21103, CB 1939-1, p.164)
Section 100 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations, authorizes farmers to determine their gross income on
the basis of inventories. Said regulations provide:
"If gross income is ascertained by inventories, no deduction can be made for livestock or products lost during the year, whether purchased for
resale, produced on the farm, as such losses will be reflected in the inventory by reducing the amount of livestock or products on hand at the
close of the year."
Evidently, petitioner determined its income or losses in the operation of said farm on the basis of inventories. We quote from the memorandum of
counsel for petitioner:
"The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive, the corresponding yearly losses sustained in
the operation of Hacienda Dalupiri, which losses represent the excess of its yearly expenditures over the receipts; that is, the losses
represent the difference between the sales of livestock and the actual cash disbursements or expenses." (Pages 21-22, Memorandum for
Petitioner.)
As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation, which losses were determined by
means of inventories authorized under Section 100 of Revenue Regulations No. 2, it was error for respondent to have disallowed the deduction of
10
said losses. The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952.
The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting. He concedes, however,
"that the regulations referred to does not specify how the inventories are to be made. The Tax Court, however, felt satisfied with the evidence presented by
11
the taxpayer ... which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved." The Tax
Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock, reporting on the basis of receipts and disbursements. We find no
Compelling reason to disturb its findings.
2. Disallowance of excessive depreciation of buildings (1950-1954). — During the years 1950 to 1954, the taxpayer claimed a depreciation allowance for its
buildings at the annual rate of 10%. The Commissioner claimed that the reasonable depreciation rate is only 3% per annum, and, hence, disallowed as
excessive the amount claimed as depreciation allowance in excess of 3% annually. We sustain the Tax Court's finding that the taxpayer did not submit
adequate proof of the correctness of the taxpayer's claim that the depreciable assets or buildings in question had a useful life only of 10 years so as to justify
its 10% depreciation per annum claim, such finding being supported by the record. The taxpayer's contention that it has many zero or one-peso
12
assets, representing very old and fully depreciated assets serves but to support the Commissioner's position that a 10% annual depreciation rate was
excessive.
3. Taxable increase in net worth (1950-1951). — The Tax Court set aside the Commissioner's treatment as taxable income of certain increases in the
taxpayer's net worth. It found that:
For the year 1950, respondent determined that petitioner had an increase in net worth in the sum of P30,050.00, and for the year 1951, the sum of
P1,382.85. These amounts were treated by respondent as taxable income of petitioner for said years.
It appears that petitioner had an account with the Manila Insurance Company, the records bearing on which were lost. When its records were
reconstituted the amount of P349,800.00 was set up as its liability to the Manila Insurance Company. It was discovered later that the correct liability
was only 319,750.00, or a difference of P30,050.00, so that the records were adjusted so as to show the correct liability. The correction or adjustment
was made in 1950. Respondent contends that the reduction of petitioner's liability to Manila Insurance Company resulted in the increase of
petitioner's net worth to the extent of P30,050.00 which is taxable. This is erroneous. The principle underlying the taxability of an increase in the net
worth of a taxpayer rests on the theory that such an increase in net worth, if unreported and not explained by the taxpayer, comes from income
derived from a taxable source. (See Perez v. Araneta, G.R. No. L-9193, May 29, 1957; Coll. vs. Reyes, G.R. Nos. L- 11534 & L-11558, Nov. 25,
1958.) In this case, the increase in the net worth of petitioner for 1950 to the extent of P30,050.00 was not the result of the receipt by it of taxable
income. It was merely the outcome of the correction of an error in the entry in its books relating to its indebtedness to the Manila Insurance Company.
The Income Tax Law imposes a tax on income; it does not tax any or every increase in net worth whether or not derived from income. Surely, the said
sum of P30,050.00 was not income to petitioner, and it was error for respondent to assess a deficiency income tax on said amount.
The same holds true in the case of the alleged increase in net worth of petitioner for the year 1951 in the sum of P1,382.85. It appears that certain items (all
amounting to P1,382.85) remained in petitioner's books as outstanding liabilities of trade creditors. These accounts were discovered in 1951 as having been
paid in prior years, so that the necessary adjustments were made to correct the errors. If there was an increase in net worth of the petitioner, the increase in
13
net worth was not the result of receipt by petitioner of taxable income." The Commissioner advances no valid grounds in his brief for contesting the Tax
Court's findings. Certainly, these increases in the taxpayer's net worth were not taxable increases in net worth, as they were not the result of the receipt by it
of unreported or unexplained taxable income, but were shown to be merely the result of the correction of errors in its entries in its books relating to its
indebtednesses to certain creditors, which had been erroneously overstated or listed as outstanding when they had in fact been duly paid. The Tax Court's
action must be affirmed.
4. Gain realized from sale of real property (1950). — We likewise sustain as being in accordance with the evidence the Tax Court's reversal of the
Commissioner's assessment on all alleged unreported gain in the sum of P11,147.26 in the sale of a certain real property of the taxpayer in 1950. As found
by the Tax Court, the evidence shows that this property was acquired in 1926 for P11,852.74, and was sold in 1950 for P60,000.00, apparently, resulting in a
14 15
gain of P48,147.26. The taxpayer reported in its return a gain of P37,000.00, or a discrepancy of P11,147.26. It was sufficiently proved from the
16
taxpayer's books that after acquiring the property, the taxpayer had made improvements totalling P11,147.26, accounting for the apparent discrepancy in
the reported gain. In other words, this figure added to the original acquisition cost of P11,852.74 results in a total cost of P23,000.00, and the gain derived
from the sale of the property for P60,000.00 was correctly reported by the taxpayer at P37,000.00.
On the second issue of prescription, the taxpayer's contention that the Commissioner's action to recover its tax liability should be deemed to have prescribed
for failure on the part of the Commissioner to file a complaint for collection against it in an appropriate civil action, as contradistinguished from the answer filed
by the Commissioner to its petition for review of the questioned assessments in the case a quo has long been rejected by this Court. This Court has
consistently held that "a judicial action for the collection of a tax is begun by the filing of a complaint with the proper court of first instance, or where the
17
assessment is appealed to the Court of Tax Appeals, by filing an answer to the taxpayer's petition for review wherein payment of the tax is prayed for." This
is but logical for where the taxpayer avails of the right to appeal the tax assessment to the Court of Tax Appeals, the said Court is vested with the authority to
pronounce judgment as to the taxpayer's liability to the exclusion of any other court. In the present case, regardless of whether the assessments were made
on February 24 and 27, 1956, as claimed by the Commissioner, or on December 27, 1955 as claimed by the taxpayer, the government's right to collect the
taxes due has clearly not prescribed, as the taxpayer's appeal or petition for review was filed with the Tax Court on May 4, 1960, with the Commissioner filing
on May 20, 1960 his Answer with a prayer for payment of the taxes due, long before the expiration of the five-year period to effect collection by judicial action
counted from the date of assessment.
Cases L-24972 and L-24978
These cases refer to the taxpayer's income tax liability for the year 1957. Upon examination of its corresponding income tax return, the Commissioner
assessed it for deficiency income tax in the amount of P38,918.76, computed as follows:
Net income per return P29,178.70
Add: Unallowable deductions:
(1) Net loss claimed on Ha. Dalupiri 89,547.33
(2) Amortization of Contractual right claimed as
an expense under Mines Operations 48,481.62
Net income per investigation P167,297.65

Tax due thereon 38,818.00
Less: Amount already assessed 5,836.00

Balance P32,982.00
Add: 1/2% monthly interest from 6-20-59 to
6-20-62 5,936.76
TOTAL AMOUNT DUE AND COLLECTIBLE P38,918.76

18
The Tax Court overruled the Commissioner's disallowance of the taxpayer's losses in the operation of its Hacienda Dalupiri in the sum of P89,547.33 but
sustained the disallowance of the sum of P48,481.62, which allegedly represented 1/5 of the cost of the "contractual right" over the mines of its subsidiary,
Palawan Manganese Mines, Inc. which the taxpayer had acquired. It found the taxpayer liable for deficiency income tax for the year 1957 in the amount of
P9,696.00, instead of P32,982.00 as originally assessed, and rendered the following judgment:
WHEREFORE, the assessment appealed from is hereby modified. Petitioner is hereby ordered to pay to respondent the amount of P9,696.00 as
deficiency income tax for the year 1957, plus the corresponding interest provided in Section 51 of the Revenue Code. If the deficiency tax is not paid
in full within thirty (30) days from the date this decision becomes final and executory, petitioner shall pay a surcharge of five per cent (5%) of the
unpaid amount, plus interest at the rate of one per cent (1%) a month, computed from the date this decision becomes final until paid, provided that
the maximum amount that may be collected as interest shall not exceed the amount corresponding to a period of three (3) years. Without
19
pronouncement as to costs.
Both parties again appealed from the respective adverse rulings against them in the Tax Court's decision.
5. Allowance of losses in Hacienda Dalupiri (1957). — The Tax Court cited its previous decision overruling the Commissioner's disallowance of losses
suffered by the taxpayer in the operation of its Hacienda Dalupiri, since it was convinced that the hacienda was operated for business and not for pleasure.
And in this appeal, the Commissioner cites his arguments in his appellant's brief in Case No. L-21557. The Tax Court, in setting aside the Commissioner's
principal objections, which were directed to the accounting method used by the taxpayer found that:
It is true that petitioner followed the cash basis method of reporting income and expenses in the operation of the Hacienda Dalupiri and used the
accrual method with respect to its mine operations. This method of accounting, otherwise known as the hybrid method, followed by petitioner is not
without justification.
... A taxpayer may not, ordinarily, combine the cash and accrual bases. The 1954 Code provisions permit, however, the use of a hybrid
method of accounting, combining a cash and accrual method, under circumstances and requirements to be set out in Regulations to be
issued. Also, if a taxpayer is engaged in more than one trade or business he may use a different method of accounting for each trade or
business. And a taxpayer may report income from a business on accrual basis and his personal income on the cash basis.' (See Mertens,
20
Law of Federal Income Taxation, Zimet & Stanley Revision, Vol. 2, Sec. 12.08, p. 26.)
The Tax Court, having satisfied itself with the adequacy of the taxpayer's accounting method and procedure as properly reflecting the taxpayer's
income or losses, and the Commissioner having failed to show the contrary, we reiterate our ruling [supra, paragraph 1 (d) and (e)] that we find no
compelling reason to disturb its findings.
6. Disallowance of amortization of alleged "contractual rights." — The reasons for sustaining this disallowance are thus given by the Tax Court:
It appears that the Palawan Manganese Mines, Inc., during a special meeting of its Board of Directors on January 19, 1956, approved a resolution,
the pertinent portions of which read as follows:
"RESOLVED, as it is hereby resolved, that the corporation's current assets composed of ores, fuel, and oil, materials and supplies, spare
parts and canteen supplies appearing in the inventory and balance sheet of the Corporation as of December 31, 1955, with an aggregate
value of P97,636.98, contractual rights for the operation of various mining claims in Palawan with a value of P100,000.00, its title on various
mining claims in Palawan with a value of P142,408.10 or a total value of P340,045.02 be, as they are hereby ceded and transferred to
Fernandez Hermanos, Inc., as partial settlement of the indebtedness of the corporation to said Fernandez Hermanos Inc. in the amount of
P442,895.23." (Exh. E, p. 17, CTA rec.)
On March 29, 1956, petitioner's corporation accepted the above offer of transfer, thus:
"WHEREAS, the Palawan Manganese Mines, Inc., due to its yearly substantial losses has decided to cease operation on January 1, 1956
and in order to satisfy at least a part of its indebtedness to the Corporation, it has proposed to transfer its current assets in the amount of
NINETY SEVEN THOUSAND SIX HUNDRED THIRTY SIX PESOS & 98/100 (P97,636.98) as per its balance sheet as of December 31,
1955, its contractual rights valued at ONE HUNDRED THOUSAND PESOS (P100,000.00) and its title over various mining claims valued at
ONE HUNDRED FORTY TWO THOUSAND FOUR HUNDRED EIGHT PESOS & 10/100 (P142,408.10) or a total evaluation of THREE
HUNDRED FORTY THOUSAND FORTY FIVE PESOS & 08/100 (P340,045.08) which shall be applied in partial settlement of its obligation to
the Corporation in the amount of FOUR HUNDRED FORTY TWO THOUSAND EIGHT HUNDRED EIGHTY FIVE PESOS & 23/100
(P442,885.23)," (Exh. E-1, p. 18, CTA rec.)
Petitioner determined the cost of the mines at P242,408.10 by adding the value of the contractual rights (P100,000.00) and the value of its mining
claims (P142,408.10). Respondent disallowed the deduction on the following grounds: (1) that the Palawan Manganese Mines, Inc. could not transfer
P242,408.10 worth of assets to petitioner because the balance sheet of the said corporation for 1955 shows that it had only current as worth
P97,636.96; and (2) that the alleged amortization of "contractual rights" is not allowed by the Revenue Code.
The law in point is Section 30(g) (1) (B) of the Revenue Code, before its amendment by Republic Act No. 2698, which provided in part:
"(g) Depletion of oil and gas wells and mines.:
"(1) In general. — ... (B) in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the mine of the
product thereof, which has been mined and sold during the year for which the return and computation are made. The allowances shall be
made under rules and regulations to be prescribed by the Secretary of Finance: Provided, That when the allowances shall equal the capital
invested, ... no further allowance shall be made."
Assuming, arguendo, that the Palawan Manganese Mines, Inc. had assets worth P242,408.10 which it actually transferred to the petitioner in 1956,
the latter cannot just deduct one-fifth (1/5) of said amount from its gross income for the year 1957 because such deduction in the form of depletion
charge was not sanctioned by Section 30(g) (1) (B) of the Revenue Code, as above-quoted.
xxx xxx xxx
The sole basis of petitioner in claiming the amount of P48,481.62 as a deduction was the memorandum of its mining engineer (Exh. 1, pp. 31-32,
CTA rec.), who stated that the ore reserves of the Busuange Mines (Mines transferred by the Palawan Manganese Mines, Inc. to the petitioner) would
be exhausted in five (5) years, hence, the claim for P48,481.62 or one-fifth (1/5) of the alleged cost of the mines corresponding to the year 1957 and
every year thereafter for a period of 5 years. The said memorandum merely showed the estimated ore reserves of the mines and it probable selling
price. No evidence whatsoever was presented to show the produced mine and for how much they were sold during the year for which the return and
computation were made. This is necessary in order to determine the amount of depletion that can be legally deducted from petitioner's gross income.
The method employed by petitioner in making an outright deduction of 1/5 of the cost of the mines is not authorized under Section 30(g) (1) (B) of the
21
Revenue Code. Respondent's disallowance of the alleged "contractual rights" amounting to P48,481.62 must therefore be sustained.
The taxpayer insists in this appeal that it could use as a method for depletion under the pertinent provision of the Tax Code its "capital investment,"
representing the alleged value of its contractual rights and titles to mining claims in the sum of P242,408.10 and thus deduct outright one-fifth (1/5) of this
"capital investment" every year. regardless of whether it had actually mined the product and sold the products. The very authorities cited in its brief give the
correct concept of depletion charges that they "allow for the exhaustion of the capital value of the deposits by production"; thus, "as the cost of the raw
22
materials must be deducted from the gross income before the net income can be determined, so the estimated cost of the reserve used up is allowed." The
alleged "capital investment" method invoked by the taxpayer is not a method of depletion, but the Tax Code provision, prior to its amendment by Section 1, of
Republic Act No. 2698, which took effect on June 18, 1960, expressly provided that "when the allowances shall equal the capital invested ... no further
allowances shall be made;" in other words, the "capital investment" was but the limitation of the amount of depletion that could be claimed. The outright
deduction by the taxpayer of 1/5 of the cost of the mines, as if it were a "straight line" rate of depreciation, was correctly held by the Tax Court not to be
authorized by the Tax Code.
ACCORDINGLY, the judgment of the Court of Tax Appeals, subject of the appeals in Cases Nos. L-21551 and L-21557, as modified by the crediting of the
losses of P36,722.42 disallowed in 1951 and 1952 to the taxpayer for the year 1953 as directed in paragraph 1 (c) of this decision, is hereby affirmed. The
judgment of the Court of Tax Appeals appealed from in Cases Nos. L-24972 and L-24978 is affirmed in toto. No costs. So ordered.
SUPREME COURT
Manila
EN BANC
G.R. No. 34774 September 21, 1931
EL ORIENTE FABRICA DE TABACOS, INC., plaintiff-appellant,
vs.
JUAN POSADAS, Collector of Internal Revenue, defendant-appellee.
Gibbs and McDonough and Roman Ozaeta for appellant.
Attorney-General Jaranilla for appellee.
MALCOLM, J.:
The issue in this case is whether the proceeds of insurance taken by a corporation on the life of an important official to indemnify it against loss in case of his
death, are taxable as income under the Philippine Income Tax Law.
The parties submitted the case to the Court of First Instance of Manila for decision upon the following agreed statement of facts:
1. That the plaintiff is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippine Islands, having its principal
office at No. 732 Calle Evangelista, Manila, P.I.; and that the defendant is the duly appointed, qualified and acting Collector of Internal Revenue of the
Philippine Islands.
2. That on March 18, 1925, plaintiff, in order to protect itself against the loss that it might suffer by reason of the death of its manager, A. Velhagen,
who had had more than thirty-five (35) years of experience in the manufacture of cigars in the Philippine Islands, and whose death would be a serious
loss to the plaintiff, procured from the Manufacturers Life Insurance Co., of Toronto, Canada, thru its local agent E.E. Elser, an insurance policy on the
life of the said A. Velhagen for the sum of $50,000, United States currency.
3. That the plaintiff, El Oriente, Fabrica de Tabacos, Inc., designated itself as the sole beneficiary of said policy on the life of its said manager.
4. That during the time the life insurance policy hereinbefore referred to was in force and effect plaintiff paid from its funds all the insurance premiums
due thereon.
5. That the plaintiff charged as expenses of its business all the said premiums and deducted the same from its gross incomes as reported in its
annual income tax returns, which deductions were allowed by the defendant upon a showing made by the plaintiff that such premiums were legitimate
expenses of its (plaintiff's) business.
6. That the said A. Velhagen, the insured, had no interest or participation in the proceeds of said life insurance policy.
7. That upon the death of said A. Velhagen in the year 1929, the plaintiff received all the proceeds of the said life insurance policy, together with the
interests and the dividends accruing thereon, aggregating P104,957.88.
8. That over the protest of the plaintiff, which claimed exemption under section 4 of the Income Tax Law, the defendant Collector of Internal Revenue
assessed and levied the sum of P3,148.74 as income tax on the proceeds of the insurance policy mentioned in the preceding paragraph, which tax
the plaintiff paid under instant protest on July 2, 1930; and that defendant overruled said protest on July 9, 1930.
Thereupon, a decision was handed down which absolved the defendant from the complaint, with costs against the plaintiff. From this judgment, the plaintiff
appealed, and its counsel now allege that:
1. That trial court erred in holding that section 4 of the Income Tax Law (Act No. 2833) is not applicable to the present case.
2. The trial court erred in reading into the law certain exceptions and distinctions not warranted by its clear and unequivocal provisions.
3. The trial court erred in assuming that the proceeds of the life insurance policy in question represented a net profit to the plaintiff when, as a matter
of fact, it merely represented an indemnity, for the loss suffered by it thru the death of its manager, the insured.
4. The trial court erred in refusing to hold that the proceeds of the life insurance policy in question is not taxable income, and in absolving the
defendant from the complaint.
The Income Tax Law for the Philippines is Act No. 2833, as amended. It is divided into four chapters: Chapter I On Individuals, Chapter II On Corporations,
Chapter III General Administrative Provisions, and Chapter IV General Provisions. In chapter I On Individuals, is to be found section 4 which provides that,
"The following incomes shall be exempt from the provisions of this law: (a) The proceeds of life insurance policies paid to beneficiaries upon the death of the
insured ... ." Section 10, as amended, in Chapter II On Corporations, provides that, There shall be levied, assessed, collected, and paid annually upon the
total net income received in the preceding calendar year from all sources by every corporation ... a tax of three per centum upon such income ... ." Section 11
in the same chapter, provides the exemptions under the law, but neither here nor in any other section is reference made to the provisions of section 4 in
Chapter I.
Under the view we take of the case, it is sufficient for our purposes to direct attention to the anomalous and vague condition of the law. It is certain that the
proceeds of life insurance policies are exempt. It is not so certain that the proceeds of life insurance policies paid to corporate beneficiaries upon the death of
the insured are likewise exempt. But at least, it may be said that the law is indefinite in phraseology and does not permit us unequivocally to hold that the
proceeds of life insurance policies received by corporations constitute income which is taxable.
The situation will be better elucidated by a brief reference to laws on the same subject in the United States. The Income Tax Law of 1916 extended to the
Philippine Legislature, when it came to enact Act No. 2833, to copy the American statute. Subsequently, the Congress of the United States enacted its
Income Tax Law of 1919, in which certain doubtful subjects were clarified. Thus, as to the point before us, it was made clear, when not only in the part of the
law concerning individuals were exemptions provided for beneficiaries, but also in the part concerning corporations, specific reference was made to the
exemptions in favor of individuals, thereby making the same applicable to corporations. This was authoritatively pointed out and decided by the United States
Supreme Court in the case of United States vs. Supplee-Biddle Hardware Co. ( [1924], 265 U.S., 189), which involved facts quite similar to those before us.
We do not think the decision of the higher court in this case is necessarily controlling on account of the divergences noted in the federal statute and the local
statute, but we find in the decision certain language of a general nature which appears to furnish the clue to the correct disposition of the instant appeal.
Conceding, therefore, without necessarily having to decide, the assignments of error Nos. 1 and 2 are not well taken, we would turn to the third assignment of
error.
It will be recalled that El Oriente, Fabrica de Tabacos, Inc., took out the insurance on the life of its manager, who had had more than thirty-five years'
experience in the manufacture of cigars in the Philippines, to protect itself against the loss it might suffer by reason of the death of its manager. We do not
believe that this fact signifies that when the plaintiff received P104,957.88 from the insurance on the life of its manager, it thereby realized a net profit in this
amount. It is true that the Income Tax Law, in exempting individual beneficiaries, speaks of the proceeds of life insurance policies as income, but this is a very
slight indication of legislative intention. In reality, what the plaintiff received was in the nature of an indemnity for the loss which it actually suffered because of
the death of its manager.
To quote the exact words in the cited case of Chief Justice Taft delivering the opinion of the court:
It is earnestly pressed upon us that proceeds of life insurance paid on the death of the insured are in fact capital, and cannot be taxed as income
under the Sixteenth Amendment. Eisner vs. Macomber, 252 U.S., 189, 207; Merchants' Loan & Trust Co. vs. Smietanka, 255 U.S., 509, 518. We are
not required to meet this question. It is enough to sustain our construction of the act to say that proceeds of a life insurance policy paid on the death
of the insured are not usually classed as income.
. . . Life insurance in such a case is like that of fire and marine insurance, — a contract of indemnity. Central Nat. Bank vs. Hume, 128 U.S., 195. The
benefit to be gained by death has no periodicity. It is a substitution of money value for something permanently lost, either in a house, a ship, or a life.
Assuming, without deciding, that Congress could call the proceeds of such indemnity income, and validly tax it as such, we think that, in view of the
popular conception of the life insurance as resulting in a single addition of a total sum to the resources of the beneficiary, and not in a periodical
return, such a purpose on its part should be express, as it certainly is not here.
Considering, therefore, the purport of the stipulated facts, considering the uncertainty of Philippine law, and considering the lack of express legislative
intention to tax the proceeds of life insurance policies paid to corporate beneficiaries, particularly when in the exemption in favor of individual beneficiaries in
the chapter on this subject, the clause is inserted "exempt from the provisions of this law," we deem it reasonable to hold the proceeds of the life insurance
policy in question as representing an indemnity and not taxable income.
The foregoing pronouncement will result in the judgment being reversed and in another judgment being rendered in favor of the plaintiff and against the
defendant for the sum of P3,148.74. So ordered, without costs in either instance.

SUPREME COURT
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 96016 October 17, 1991
vs.
THE COURT OF APPEALS and EFREN P. CASTANEDA, respondents.
Leovigildo Monasterial for private respondent.
RESOLUTION
PADILLA, J.:
The issue to be resolved in this petition for review on certiorari is whether or not terminal leave pay received by a government official or employee on the
occasion of his compulsory retirement from the government service is subject to withholding (income) tax.
We resolve the issue in the negative.
Private respondent Efren P. Castaneda retired from the government service as Revenue Attache in the Philippine Embassy in London, England, on 10
December 1982 under the provisions of Section 12 (c) of Commonwealth Act 186, as amended. Upon retirement, he received, among other benefits, terminal
leave pay from which petitioner Commissioner of Internal Revenue withheld P12,557.13 allegedly representing income tax thereon.
Castaneda filed a formal written claim with petitioner for a refund of the P12,557.13, contending that the cash equivalent of his terminal leave is exempt from
income tax. To comply with the two-year prescriptive period within which claims for refund may be filed, Castaneda filed on 16 July 1984 with the Court of Tax
Appeals a Petition for Review, seeking the refund of income tax withheld from his terminal leave pay.
The Court of Tax Appeals found for private respondent Castaneda and ordered the Commissioner of Internal Revenue to refund Castaneda the sum of
P12,557.13 withheld as income tax. (,Annex "C", petition).
Petitioner appealed the above-mentioned Court of Tax Appeals decision to this Court, which was docketed as G.R. No. 80320. In turn, we referred the case
to the Court of Appeals for resolution. The case was docketed in the Court of Appeals as CA-G.R. SP No. 20482.
On 26 September 1990, the Court of Appeals dismissed the petition for review and affirmed the decision of the Court of Tax Appeals. Hence, the present
recourse by the Commissioner of Internal Revenue.
The Solicitor General, acting on behalf of the Commissioner of Internal Revenue, contends that the terminal leave pay is income derived from employer-
employee relationship, citing in support of his stand Section 28 of the National Internal Revenue Code; that as part of the compensation for services
rendered, terminal leave pay is actually part of gross income of the recipient. Thus —
. . . It (terminal leave pay) cannot be viewed as salary for purposes which would reduce it. . . . there can thus be no "commutation of salary" when a
government retiree applies for terminal leave because he is not receiving it as salary. What he applies for is a "commutation of leave credits." It is an
accumulation of credits intended for old age or separation from service. . . .
The Court has already ruled that the terminal leave pay received by a government official or employee is not subject to withholding (income) tax. In the recent
case of Jesus N. Borromeo vs. The Hon. Civil Service Commission, et al.,G.R. No. 96032, 31 July 1991, the Court explained the rationale behind the
employee's entitlement to an exemption from withholding (income) tax on his terminal leave pay as follows:
. . . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is
separated from the service through no fault of his own. (Manual on Leave Administration Course for Effectiveness published by the Civil Service
Commission, pages 16-17). In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The
Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg
which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same
policy considerations governing retirement benefits.
In fine, not being part of the gross salary or income of a government official or employee but a retirement benefit, terminal leave pay is not subject to income
tax.
ACCORDINGLY, the petition for review is hereby DENIED.
SO ORDERED.
Paras and Regalado, JJ., concur.
Melencio-Herrera (Chairman), J., is on leave.
G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
CRUZ, J.:
We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous. We have carefully studied it and find it is not; on the
contrary, it is supported by law and doctrine. So finding, we affirm.
Reduced to simplest terms, the background facts are as follows.
The national Development Company entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of twelve ocean-
1 2
going vessels. The purchase price was to come from the proceeds of bonds issued by the Central Bank. Initial payments were made in cash and through
3
irrevocable letters of credit. Fourteen promissory notes were signed for the balance by the NDC and, as required by the shipbuilders, guaranteed by the
4
Republic of the Philippines. Pursuant thereto, the remaining payments and the interests thereon were remitted in due time by the NDC to Tokyo. The
5
vessels were eventually completed and delivered to the NDC in Tokyo.
The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the purchase price. No tax was withheld.
The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon served on the
6
NDC a warrant of distraint and levy to enforce collection of the claimed amount. The NDC went to the Court of Tax Appeals.
7
The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of P900.00, representing the compromise penalty. The NDC
then came to this Court in a petition for certiorari.
The petition must fail for the following reasons.
The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code, thus:
SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within the Philippines. — The following items of gross
income shall be treated as gross income from sources within the Philippines:
(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise;
xxx xxx xxx
The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision because all the related activities — the signing of the
8
contract, the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC — were done in Tokyo. The law, however, does
not speak of activity but of "source," which in this case is the NDC. This is a domestic and resident corporation with principal offices in Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the Government's right to levy and collect income tax on interest received by foreign corporations
not engaged in trade or business within the Philippines is not planted upon the condition that 'the activity or labor — and the sale from which the
(interest) income flowed had its situs' in the Philippines. The law specifies: 'Interest derived from sources within the Philippines, and interest on
bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the 'act or activity' of non-resident
corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical
location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income. (Mertens, Law of Federal
Income Taxation, Vol. 8, p. 128, citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412;
Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the obligor is a resident of the Philippines the interest
payment paid by him can have no other source than within the Philippines. The interest is paid not by the bond, note or other interest-bearing
obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)
Here in the case at bar, petitioner National Development Company, a corporation duly organized and existing under the laws of the Republic of the
Philippines, with address and principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to pay the Japanese
shipbuilders, as obligor in fourteen (14) promissory notes for each vessel, the balance of the contract price of the twelve (12) ocean-going vessels
purchased and acquired by it from the Japanese corporations, including the interest on the principal sum at the rate of five per cent (5%) per annum.
(See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11, Partial Stipulation of Facts.) And pursuant to the terms and conditions of these
promisory notes, which are duly signed by its Vice Chairman and General Manager, petitioner remitted to the Japanese shipbuilders in Japan during
the years 1960, 1961, and 1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest on the unpaid balance of the
purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation of Facts.)
The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid the interest under consideration, petitioner herein, is
Calle Pureza, Sta. Mesa, Manila, Philippines; and as a corporation duly organized and existing under the laws of the Philippines, it is a domestic
corporation, resident of the Philippines. (Sec. 84(c), National Internal Revenue Code.) The interest paid by petitioner, which is admittedly a resident of
the Philippines, is on the promissory notes issued by it. Clearly, therefore, the interest remitted to the Japanese shipbuilders in Japan in 1960, 1961
and 1962 on the unpaid balance of the purchase price of the vessels acquired by petitioner is interest derived from sources within the Philippines
9
subject to income tax under the then Section 24(b)(1) of the National Internal Revenue Code.
There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the promissory notes of the NDC were
government securities exempt from taxation under Section 29(b)[4] of the Tax Code, reading as follows:
SEC. 29. Gross Income. — xxxx xxx xxx xxx
(b) Exclusion from gross income. — The following items shall not be included in gross income and shall be exempt from taxation under this Title:
xxx xxx xxx
(4) Interest on Government Securities. — Interest upon the obligations of the Government of the Republic of the Philippines or any political
subdivision thereof, but in the case of such obligations issued after approval of this Code, only to the extent provided in the act authorizing the issue
thereof. (As amended by Section 6, R.A. No. 82; emphasis supplied)
The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in fact is silent on this matter. C.A. No. 182 as amended by
C.A. No. 311 does carry such authorization but, like R.A. No. 1407, does not exempt from taxes the interests on such securities.
It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest remitted because of the undertaking signed by the
Secretary of Finance in each of the promissory notes that:
Upon authority of the President of the Republic of the Philippines, the undersigned, for value received, hereby absolutely and unconditionally
10
guarantee (sic), on behalf of the Republic of the Philippines, the due and punctual payment of both principal and interest of the above note.
There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a clear waiver therein of the right to tax interests.
11
Tax exemptions cannot be merely implied but must be categorically and unmistakably expressed. Any doubt concerning this question must be resolved in
12
favor of the taxing power.
Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes. In fact, such undertaking was made by the government
in consonance with and certainly not against the following provisions of the Tax Code:
Sec. 53(b). Nonresident aliens. — All persons, corporations and general co-partnership (companies colectivas), in whatever capacity acting, including
lessees or mortgagors of real or personal capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and all officers and
employees of the Government of the Philippines having control, receipt, custody; disposal or payment of interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or categorical gains, profits and income of
any nonresident alien individual, not engaged in trade or business within the Philippines and not having any office or place of business therein, shall
(except in the cases provided for in subsection (a) of this section) deduct and withhold from such annual or periodical gains, profits and income a tax
to twenty (now 30%) per centum thereof: ...
Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations subject to taxation under this Title not engaged in trade
or business within the Philippines and not having any office or place of business therein, there shall be deducted and withheld at the source in the
same manner and upon the same items as is provided in section fifty-three a tax equal to thirty (now 35%) per centum thereof, and such tax shall be
returned and paid in the same manner and subject to the same conditions as provided in that section:....
Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the NDC but without diminution of its taxing power
under existing laws.
In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the petitioner closes its eyes to the nature of this entity
as a corporation. As such, it is governed in its proprietary activities not only by its charter but also by the Corporation Code and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income
of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such
liability is imposed by Section 53(c) of the Tax Code, thus:
Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax under this section shall make return thereof, in
duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount
withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is
indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section.
(As amended by Section 9, R.A. No. 2343.)
13
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax Appeals, the Court quoted with approval the following regulation
of the BIR on the responsibilities of withholding agents:
In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly causing a query to be addressed to the
Commissioner of Internal Revenue for the determination whether or not the income paid to an individual is not subject to withholding. In case the
Commissioner of Internal Revenue decides that the income paid to an individual is not subject to withholding, the withholding agent may thereupon
remit the amount of a tax withheld. (2nd par., Sec. 200, Income Tax Regulations).
"Strict observance of said steps is required of a withholding agent before he could be released from liability," so said Justice Jose P. Bengson, who wrote the
"Strict observance of said steps is required of a withholding agent before he could be released from liability," so said Justice Jose P. Bengson, who wrote the
14
decision. "Generally, the law frowns upon exemption from taxation; hence, an exempting provision should be construed strictissimi juris."
The petitioner was remiss in the discharge of its obligation as the withholding agent of the government an so should be held liable for its omission.
WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is so ordered.

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-54908 January 22, 1990
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX
APPEALS, respondents.
G.R. No. 80041 January 22, 1990
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX
APPEALS, respondents.
Gadioma Law Offices for respondents.
REGALADO, J.:
These cases, involving the same issue being contested by the same parties and having originated from the same factual antecedents generating the claims
for tax credit of private respondents, the same were consolidated by resolution of this Court dated May 31, 1989 and are jointly decided herein.
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation (hereinafter, Atlas) entered into a Loan and Sales
Contract with Mitsubishi Metal Corporation (Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines, for purposes of
the projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in
the amount of $20,000,000.00, United States currency, for the installation of a new concentrator for copper production. Atlas, in turn undertook to sell to
Mitsubishi all the copper concentrates produced from said machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was
1
to be used for the purchase of the concentrator machinery from Japan.
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short) obviously for purposes of its obligation under said contract.
Its loan application was approved on May 26, 1970 in the sum of ¥4,320,000,000.00, at about the same time as the approval of its loan for ¥2,880,000,000.00
from a consortium of Japanese banks. The total amount of both loans is equivalent to $20,000,000.00 in United States currency at the then prevailing
exchange rate. The records in the Bureau of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to the condition that
Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back
2
the total amount of loan by September 30, 1981.
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter totalling P13,143,966.79 for the years 1974
and 1975. The corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the
3
National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the Government.
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be applied against their existing and future tax
liabilities. Parenthetically, it was later noted by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and
4
disclaimer of its interest in the claim for tax credit in favor of Atlas.
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a petition for review with respondent court, docketed
5
therein as CTA Case No. 2801. The petition was grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution
owned, controlled and financed by the Japanese Government. Such governmental status of Eximbank, if it may be so called, is the basis for private
repondents' claim for exemption from paying the tax on the interest payments on the loan as earlier stated. It was further claimed that the interest payments
on the loan from the consortium of Japanese banks were likewise exempt because said loan supposedly came from or were financed by Eximbank. The
6
provision of the National Internal Revenue Code relied upon is Section 29 (b) (7) (A), which excludes from gross income:
(A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in
banks in the Philippines by (1) foreign governments, (2) financing institutions owned, controlled, or enjoying refinancing from them, and (3)
international or regional financing institutions established by governments.
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was later reset upon manifestation of petitioner that the claim for
tax credit of the alleged erroneous payment was still being reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show that on
November 16, 1976, the said division recommended to petitioner the approval of private respondent's claim. However, before action could be taken thereon,
respondent court scheduled the case for hearing on September 30, 1977, during which trial private respondents presented their evidence while petitioner
7
submitted his case on the basis of the records of the Bureau of Internal Revenue and the pleadings.
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in favor of Atlas in the amount of P1,971,595.01.
Interestingly, the tax court held that petitioner admitted the material averments of private respondents when he supposedly prayed "for judgment on the
8
pleadings without off-spring proof as to the truth of his allegations." Furthermore, the court declared that all papers and documents pertaining to the loan of
¥4,320,000,000.00 obtained by Mitsubishi from Eximbank show that this was the same amount given to Atlas. It also observed that the money for the loans
from the consortium of private Japanese banks in the sum of ¥2,880,000,000.00 "originated" from Eximbank. From these, respondent court concluded that
the ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere "arranger or conduit through which the loans flowed from the creditor Export-
9
Import Bank of Japan to the debtor Atlas Consolidated Mining & Development Corporation."
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to this Court, docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the amount of P439,167.95 on the P2,927,789.06 interest
payments for the years 1977 and 1978 was withheld and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the
same basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed as CTA Case No. 3015. Petitioner filed his answer
thereto on August 14, 1979, and, in a letter to private respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or legal
10
basis.
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered judgment ordering the petitioner to credit Atlas the
aforesaid amount of tax paid. A motion for reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution dated September 7,
1987. A notice of appeal was filed on September 22, 1987 by petitioner with respondent court and a petition for review was filed with this Court on December
19, 1987. Said later case is now before us as G.R. No. 80041 and is consolidated with G.R. No. 54908.
The principal issue in both petitions is whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income
taxation pursuant to Section 29 b) (7) (A) of the tax code and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or not
Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose investments in the Philippines on loans are exempt from taxes
under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner should be deemed to have admitted the allegations of
the private respondents when it submitted the case on the basis of the pleadings and records of the bureau. There is nothing to indicate such admission on
the part of petitioner nor can we accept respondent court's pronouncement that petitioner did not offer to prove the truth of its allegations. The records of the
Bureau of Internal Revenue relevant to the case were duly submitted and admitted as petitioner's supporting evidence. Additionally, a hearing was conducted,
with presentation of evidence, and the findings of respondent court were based not only on the pleadings but on the evidence adduced by the parties. There
could, therefore, not have been a judgment on the pleadings, with the theorized admissions imputed to petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only be disturbed on appeal if they
11
are not supported by substantial evidence or if there is a showing of gross error or abuse on the part of the tax court. Thus, ordinarily, we could give due
consideration to the holding of respondent court that Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining and proven in these cases,
however, warrant a departure from said general rule since we are convinced that there is a misapprehension of facts on the part of the tax court to the extent
that its conclusions are speculative in nature.
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential reference to Eximbank whatsoever. The agreement is
strictly between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper concentrates. From the categorical language used in the
document, one prestation was in consideration of the other. The specific terms and the reciprocal nature of their obligations make it implausible, if not
vacuous to give credit to the cavalier assertion that Mitsubishi was a mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in its loan application with the former was that the
12
amount being procured would be used as a loan to and in consideration for importing copper concentrates from Atlas. Such an innocuous statement of
purpose could not have been intended for, nor could it legally constitute, a contract of agency. If that had been the purpose as respondent court believes, said
corporations would have specifically so stated, especially considering their experience and expertise in financial transactions, not to speak of the amount
involved and its purchasing value in 1970.
A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the following arguments of petitioner:
The nature of the above contract shows that the same is not just a simple contract of loan. It is not a mere creditor-debtor relationship. It is more of a
reciprocal obligation between ATLAS and MITSUBISHI where the latter shall provide the funds in the installation of a new concentrator at the former's
Toledo mines in Cebu, while ATLAS in consideration of which, shall sell to MITSUBISHI, for a term of 15 years, the entire copper concentrate that will
be produced by the installed concentrator.
Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term was the consideration of the granting of the amount of
$20 million to ATLAS. MITSUBISHI, in order to fulfill its part of the contract, had to obtain funds. Hence, it had to secure a loan or loans from other
sources. And from what sources, it is immaterial as far as ATLAS in concerned. In this case, MITSUBISHI obtained the $20 million from the
EXIMBANK, of Japan and the consortium of Japanese banks financed through the EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a private entity and not as a conduit of the consortium of
Japanese banks or the EXIMBANK of Japan. While the loans were secured by MITSUBISHI primarily "as a loan to and in consideration for importing
copper concentrates from ATLAS," the fact remains that it was a loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.
Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and separate contract from that entered into by MITSUBISHI
and ATLAS. Surely, in the latter contract, it is not EXIMBANK, that was intended to be benefited. It is MITSUBISHI which stood to profit. Besides, the
Loan and Sales Contract cannot be any clearer. The only signatories to the same were MITSUBISHI and ATLAS. Nowhere in the contract can it be
inferred that MITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any entity, private or public, for that matter.
Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a contract of loan is completed, the money ceases to
be the property of the former owner and becomes the sole property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK, of Japan, said amount ceased to be the property of the bank
and became the property of MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of ATLAS, the former being the owner of the $20 million upon
completion of its loan contract with EXIMBANK of Japan.
The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different from the interest income paid by MITSUBISHI to
EXIMBANK, of Japan. What was the subject of the 15% withholding tax is not the interest income paid by MITSUBISHI to EXIMBANK, but the
13
interest income earned by MITSUBISHI from the loan to ATLAS. . . .
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does not appear to be suppletory or collateral to another
contract and is, therefore, not to be distorted by other considerations aliunde. The application for the loan was approved on May 20, 1970, or more than a
month after the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the contract of loan with Eximbank, Mitsubishi
agreed to use the amount as a loan to and in consideration for importing copper concentrates from Atlas, but all that this proves is the justification for the loan
as represented by Mitsubishi, a standard banking practice for evaluating the prospects of due repayment. There is nothing wrong with such stipulation as the
parties in a contract are free to agree on such lawful terms and conditions as they see fit. Limiting the disbursement of the amount borrowed to a certain
person or to a certain purpose is not unusual, especially in the case of Eximbank which, aside from protecting its financial exposure, must see to it that the
same are in line with the provisions and objectives of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from making loans except to Japanese individuals and
corporations. We are not impressed. Not only is there a failure to establish such submission by adequate evidence but it posits the unfair and unexplained
imputation that, for reasons subject only of surmise, said financing institution would deliberately circumvent its own charter to accommodate an alien borrower
through a manipulated subterfuge, but with it as a principal and the real obligee.
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming the truth thereof, is too tenuous and conjectural to
support the proposition that Mitsubishi is a mere conduit. Furthermore, the remittance of the interest payments may also be logically viewed as an
arrangement in paying Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon by Eximbank and Mitsubishi as to the manner or
procedure for the payment of the latter's obligation is their own concern. It should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate
of 75% per annum, while Mitsubishis contract with Atlas merely states that the "interest on the amount of the loan shall be the actual cost beginning from and
14
including other dates of releases against loan."
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the
juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the
party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus petitioners have failed to discharge. Significantly, private
respondents are not even among the entities which, under Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which should indispensably be
the party in interest in this case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic analysis" alone without substantial supportive
evidence, lest governmental operations suffer due to diminution of much needed funds. Nor can we close this discussion without taking cognizance of
petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in this case on the nebulous representation that the funds
involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws.
Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans or other domestic securities with private foreign entities, which
in turn will negotiate independently with their governments, could be availed of to take advantage of the tax exemption law under discussion.
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April 18, 1980 and January 15, 1981, respectively, are
hereby REVERSED and SET ASIDE.

SUPREME COURT
Manila
EN BANC
G.R. No. L-19865 July 31, 1965
MARIA CARLA PIROVANO, etc., et al., petitioners-appellants,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.
Angel S. Gamboa for petitioners-appellants.
Office of the Solicitor General for respondent-appellee.
REYES, J.B.L., J.:
This case is a sequel to the case of Pirovano vs. De la Rama Steamship Co., 96 Phil. 335.
Briefly, the facts of the aforestated case may be stated as follows:
Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the early part of 1941, De la Rama Steamship Co. insured the life of said
Enrico Pirovano, who was then its President and General Manager until the time of his death, with various Philippine and American insurance companies for
a total sum of one million pesos, designating itself as the beneficiary of the policies, obtained by it. Due to the Japanese occupation of the Philippines during
the second World War, the Company was unable to pay the premiums on the policies issued by its Philippine insurers and these policies lapsed, while the
policies issued by its American insurers were kept effective and subsisting, the New York office of the Company having continued paying its premiums from
year to year.
During the Japanese occupation , or more particularly in the latter part of 1944, said Enrico Pirovano died.
After the liberation of the Philippines from the Japanese forces, the Board of Directors of De la Rama Steamship Co. adopted a resolution dated July 10,
1946 granting and setting aside, out of the proceeds expected to be collected on the insurance policies taken on the life of said Enrico Pirovano, the sum of
P400,000.00 for equal division among the four (4) minor children of the deceased, said sum of money to be convertible into 4,000 shares of stock of the
Company, at par, or 1,000 shares for each child. Shortly thereafter, the Company received the total sum of P643,000.00 as proceeds of the said life insurance
policies obtained from American insurers.
Upon receipt of the last stated sum of money, the Board of Directors of the Company modified, on January 6, 1947, the above-mentioned resolution by
renouncing all its rights title, and interest to the said amount of P643,000.00 in favor of the minor children of the deceased, subject to the express condition
renouncing all its rights title, and interest to the said amount of P643,000.00 in favor of the minor children of the deceased, subject to the express condition
that said amount should be retained by the Company in the nature of a loan to it, drawing interest at the rate of five per centum (5%) per annum, and payable
to the Pirovano children after the Company shall have first settled in full the balance of its present remaining bonded indebtedness in the sum of
approximately P5,000,000.00. This latter resolution was carried out in a Memorandum Agreement on January 10, 1947 and June 17, 1947., respectively,
executed by the Company and Mrs. Estefania R. Pirovano, the latter acting in her capacity as guardian of her children (petitioners-appellants herein) find
pursuant to an express authority granted her by the court.
On June 24, 1947, the Board of Directors of the Company further modified the last mentioned resolution providing therein that the Company shall pay the
proceeds of said life insurance policies to the heirs of the said Enrico Pirovano after the Company shall have settled in full the balance of its present
remaining bonded indebtedness, but the annual interests accruing on the principal shall be paid to the heirs of the said Enrico Pirovano, or their duly
appointed representative, whenever the Company is in a position to meet said obligation.
On February 26, 1948, Mrs. Estefania R. Pirovano, in behalf of her children, executed a public document formally accepting the donation; and, on the same
date, the Company through its Board of Directors, took official notice of this formal acceptance.
On September 13, 1949, the stockholders of the Company formally ratified the various resolutions hereinabove mentioned with certain clarifying modifications
that the payment of the donation shall not be effected until such time as the Company shall have first duly liquidated its present bonded indebtedness in the
amount of P3,260,855.77 with the National Development Company, or fully redeemed the preferred shares of stock in the amount which shall be issued to the
National Development Company in lieu thereof; and that any and all taxes, legal fees, and expenses in any way connected with the above transaction shall
be chargeable and deducted from the proceeds of the life insurance policies mentioned in the resolutions of the Board of Directors.
On March 8, 1951, however, the majority stockholders of the Company voted to revoke the resolution approving the donation in favor of the Pirovano
children.
As a consequence of this revocation and refusal of the Company to pay the balance of the donation amounting to P564,980.90 despite demands therefor, the
herein petitioners-appellants represented by their natural guardian, Mrs. Estefania R. Pirovano, brought an action for the recovery of said amount, plus
interest and damages against De la Rama Steamship Co., in the Court of First Instance of Rizal, which case ultimately culminated to an appeal to this Court.
On December 29, 1954, this court rendered its decision in the appealed case (96 Phil. 335) holding that the donation was valid and remunerative in nature,
the dispositive part of which reads:
Wherefore, the decision appealed from should be modified as follows: (a) that the donation in favor of the children of the late Enrico Pirovano of the
proceeds of the insurance policies taken on his life is valid and binding on the defendant corporation; (b) that said donation, which amounts to a total
of P583,813.59, including interest, as it appears in the books of the corporation as of August 31, 1951, plus interest thereon at the rate of 5 per cent
per annum from the filing of the complaint, should be paid to the plaintiffs after the defendant corporation shall have fully redeemed the preferred
shares issued to the National Development Company under the terms and conditions stared in the resolutions of the Board of Directors of January 6,
1947 and June 24, 1947, as amended by the resolution of the stockholders adopted on September 13, 1949; and (c) defendant shall pay to plaintiffs
an additional amount equivalent to 10 per cent of said amount of P583,813.59 as damages by way of attorney's fees, and to pay the costs of action.
(Pirovano et al. vs. De la Rama Steamship Co., 96 Phil. 367-368)
The above decision became final and executory. In compliance therewith, De la Rama Steamship Co. made, on April 6, 1955, a partial payment on the
amount of the judgment and paid the balance thereof on May 12, 1955.
On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of P60,869.67 as donees' gift tax, inclusive of surcharges, interests
and other penalties, against each of the petitioners-appellants, or for the total sum of P243,478.68; and, on April 23, 1955, a donor's gift tax in the total
amount of P34,371.76 was also assessed against De la Rama Steamship Co., which the latter paid.
Petitioners-appellants herein contested respondent Commissioner's assessment and imposition of the donees' gift taxes and donor's gift tax and also made a
claim for refund of the donor's gift tax so collected. Respondent Commissioner overruled petitioners' claims; hence, the latter presented two (2) petitions for
review against respondent's rulings before the Court of Tax Appeals, said petitions having been docketed as CTA Cases Nos. 347 and 375. CTA Case No.
347 relates to the petition disputing the legality of the assessment of donees' gift taxes and donor's gift tax while CTA Case No. 375 refers to the claim for
refund of the donor's gift tax already paid.
After the filing of respondent's usual answers to the petitions, the two cases, being interrelated to each other, were tried jointly and terminated.
On January 31, 1962, the Court of Tax Appeals rendered its decision in the two cases, the dispositive part of which reads:
In resume, we are of the opinion, that (1) the donor's gift tax in the sum of P34,371.76 was erroneously assessed and collected, hence, petitioners
are entitled to the refund thereof; (2) the donees' gift taxes were correctly assessed; (3) the imposition of the surcharge of 25% is not proper; (4) the
surcharge of 5% is legally due; and (5) the interest of 1% per month on the deficiency donees' gift taxes is due from petitioners from March 8, 1955
until the taxes are paid.
IN LINE WITH THE FOREGOING OPINION, petitioners are hereby ordered to pay the donees' gift taxes as assessed by respondent, plus 5%
surcharge and interest at the rate of 1% per month from March 8, 1955 to the date of payment of said donees' gift taxes. Respondent is ordered to
apply the sum of P34,371.76 which is refundable to petitioners, against the amount due from petitioners. With costs against petitioners in Case No.
347.
Petitioners-appellants herein filed a motion to reconsider the above decision, which the lower court denied. Hence, this appeal before us.
In the instant appeal, petitioners-appellants herein question only that portion of the decision of the lower court ordering the payment of donees' gift taxes as
assessed by respondent as well as the imposition of surcharge and interest on the amount of donees' gift taxes.
In their brief and memorandum, they dispute the factual finding of the lower court that De la Rama Steamship Company's renunciation of its rights, title, and
interest over the proceeds of said life insurance policies in favor of the Pirovano children "was motivated solely and exclusively by its sense of gratitude, an
act of pure liberality, and not to pay additional compensation for services inadequately paid for." Petitioners now contend that the lower court's finding was
erroneous in seemingly considering the disputed grant as a simple donation, since our previous decision (96 Phil. 335) had already declared that the transfer
to the Pirovano children was a remuneratory donation. Petitioners further contend that the same was made not for an insufficient or inadequate consideration
but rather it a was made for a full and adequate compensation for the valuable services rendered by the late Enrico Pirovano to the De la Rama Steamship
Co.; hence, the donation does not constitute a taxable gift under the provisions of Section 108 of the National Internal Revenue Code.
The argument for petitioners-appellants fails to take into account the fact that neither in Spanish nor in Anglo-American law was it considered that past
services, rendered without relying on a coetaneous promise, express or implied, that such services would be paid for in the future, constituted cause or
consideration that would make a conveyance of property anything else but a gift or donation. This conclusion flows from the text of Article 619 of the Code of
1889 (identical with Article 726 of the present Civil Code of the Philippines):
When a person gives to another a thing ... on account of the latter's merits or of the services rendered by him to the donor, provided they do not
constitute a demandable debt, ..., there is also a donation. ... .
There is nothing on record to show that when the late Enrico Pirovano rendered services as President and General Manager of the De la Rama Steamship
Co. he was not fully compensated for such services, or that, because they were "largely responsible for the rapid and very successful development of the
activities of the company" (Res. of July 10, 1946). Pirovano expected or was promised further compensation over and in addition to his regular emoluments
as President and General Manager. The fact that his services contributed in a large measure to the success of the company did not give rise to a recoverable
debt, and the conveyances made by the company to his heirs remain a gift or donation. This is emphasized by the directors' Resolution of January 6, 1947,
that "out of gratitude" the company decided to renounce in favor of Pirovano's heirs the proceeds of the life insurance policies in question. The true
consideration for the donation was, therefore, the company's gratitude for his services, and not the services themselves.
That the tax court regarded the conveyance as a simple donation, instead of a remuneratory one as it was declared to be in our previous decision, is but an
innocuous error; whether remuneratory or simple, the conveyance remained a gift, taxable under Chapter 2, Title III of the Internal Revenue Code.
But then appellants contend, the entire property or right donated should not be considered as a gift for taxation purposes; only that portion of the value of the
property or right transferred, if any, which is in excess of the value of the services rendered should be considered as a taxable gift. They cite in support
Section 111 of the Tax Code which provides that —
Where property is transferred for less, than an adequate and full consideration in money or money's worth, then the amount by which the value of the
property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, ... .
The flaw in this argument lies in the fact that, as copied from American law, the term consideration used in this section refers to the technical "consideration"
defined by the American Law Institute (Restatement of Contracts) as "anything that is bargained for by the promisor and given by the promisee in exchange
for the promise" (Also, Corbin on Contracts, Vol. I, p. 359). But, as we have seen, Pirovano's successful activities as officer of the De la Rama Steamship Co.
cannot be deemed such consideration for the gift to his heirs, since the services were rendered long before the Company ceded the value of the life policies
to said heirs; cession and services were not the result of one bargain or of a mutual exchange of promises.
And the Anglo-American law treats a subsequent promise to pay for past services (like one to pay for improvements already made without prior request from
the promisor) to be a nudum pactum (Roscorla vs. Thomas, 3 Q.B. 234; Peters vs. Poro, 25 ALR 615; Carson vs. Clark, 25 Am. Dec. 79; Boston vs. Dodge,
12 Am. Dec. 206), i.e., one that is unenforceable in view of the common law rule that consideration must consist in a legal benefit to the promisee or some
legal detriment to the promisor.
What is more, the actual consideration for the cession of the policies, as previously shown, was the Company's gratitude to Pirovano; so that under section
111 of the Code there is no consideration the value of which can be deducted from that of the property transferred as a gift. Like "love and affection," gratitude
has no economic value and is not "consideration" in the sense that the word is used in this section of the Tax Code.
As stated by Chief Justice Griffith of the Supreme Court of Mississippi in his well-known book, "Outlines of the Law" (p. 204) —
Love and affection are not considerations of value — they are not estimable in terms of value. Nor are sentiments of gratitude for gratuitous part favors or
kindnesses; nor are obligations which are merely moral. It has been well said that if a moral obligation were alone sufficient it would remove the necessity for
any consideration at all, since the fact of making a promise impose, the moral obligation to perform it."
It is of course perfectly possible that a donation or gift should at the same time impose a burden or condition on the donee involving some economic liability
for him. A, for example, may donate a parcel of land to B on condition that the latter assume a mortgage existing on the donated land. In this case the donee
may rightfully insist that the gift tax be computed only on the value of the land less the value of the mortgage. This, in fact, is contemplated by Article 619 of
the Civil Code of 1889 (Art. 726 of the Tax Code) when it provides that there is also a donation "when the gift imposes upon the donee a burden which is less
than the value of the thing given." Section 111 of the Tax Code has in view situations of this kind, since it also prescribes that "the amount by which the value
of the property exceeded the value of the consideration" shall be deemed a gift for the purpose of the tax. .
Petitioners finally contend that, even assuming that the donation in question is subject to donees' gift taxes, the imposition of the surcharge of 5% and interest
of 1% per month from March 8, 1955 was not justified because the proceeds of the life insurance policies were actually received on April 6, 1955 and May 12,
1955 only and in accordance with Section 115(c) of the Tax Code; the filing of the returns of such tax became due on March 1, 1956 and the tax became
payable on May 15, 1956, as provided for in Section 116(a) of the same Code. In other words, petitioners maintain that the assessment and demand for
donees' gift taxes was prematurely made and of no legal effect; hence, they should not be held liable for such surcharge and interest.
It is well to note, and it is not disputed, that petitioners-donees have failed to file any gift tax return and that they also failed to pay the amount of the
assessment made against them by respondent in 1955. This situation is covered by Section 119(b) (1) and (c) and Section 120 of the Tax Code:
(b) Deficiency.
(1) Payment not extended. — Where a deficiency, or any interest assessed in connection therewith, or any addition to the taxes provided for in
section one hundred twenty is not paid in full within thirty days from the date of the notice and demand from the Commissioner, there shall be
collected as a part of the taxes, interest upon the unpaid amount at the rate of one per centum a month from the date of such notice and demand until
it is paid. (section 119)
(c) Surcharge. — If any amount of the taxes included in the notice and demand from the Commissioner of Internal Revenue is not paid in full within
thirty days after such notice and demand, there shall be collected in addition to the interest prescribed above as a part of the taxes a surcharge of five
per centum of the unpaid amount. (sec. 119)
The failure to file a return was found by the lower court to be due to reasonable cause and not to willful neglect. On this score, the elimination by the lower
court of the 25% surcharge is ad valorem penalty which respondent Commissioner had imposed pursuant to Section 120 of the Tax Code was proper, since
said Section 120 vests in the Commissioner of Internal Revenue or in the tax court power and authority to impose or not to impose such penalty depending
upon whether or not reasonable cause has been shown in the non-filing of such return.
On the other hand, unlike said Section 120, Section 119, paragraphs (b) (1) and (c) of the Tax Code, does not confer on the Commissioner of Internal
Revenue or on the courts any power and discretion not to impose such interest and surcharge. It is likewise provided for by law that an appeal to the Court of
Tax Appeals from a decision of the Commissioner of Internal Revenue shall not suspend the payment or collection of the tax liability of the taxpayer unless a
motion to that effect shall have been presented to the court and granted by it on the ground that such collection will jeopardize the interest of the taxpayer
(Sec. 11, Republic Act No. 1125; Rule 12, Rules of the Court of Tax Appeals). It should further be noted that —
It has been the uniform holding of this Court that no suit for enjoining the collection of a tax, disputed or undisputed, can be brought, the remedy
being to pay the tax first, formerly under protest and now without need of protect, file the claim with the Collector, and if he denies it, bring an action
for recovery against him. (David v. Ramos, et al., 90 Phil. 351)
Section 306 of the National Internal Revenue Code ... lays down the procedure to be followed in those cases wherein a taxpayer entertains some
doubt about the correctness of a tax sought to be collected. Said section provides that the tax, should first be paid and the taxpayer should sue for its
recovery afterwards. The purpose of the law obviously is to prevent delay in the collection of taxes, upon which the Government depends for its
existence. To allow a taxpayer to first secure a ruling as regards the validity of the tax before paying it would be to defeat this purpose. (National
Dental Supply Co. vs. Meer, 90 Phil. 265)
Petitioners did not file in the lower court any motion for the suspension of payment or collection of the amount of assessment made against them.
On the basis of the above-stated provisions of law and applicable authorities, it is evident that the imposition of 1% interest monthly and 5% surcharge is
justified and legal. As succinctly stated by the court below, said imposition is "mandatory and may not be waived by the Commissioner of Internal Revenue or
by the courts" (Resolution on petitioners' motion for reconsideration, Annex XIV, petition). Hence, said imposition of interest and surcharge by the lower court
should be upheld.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. Costs against petitioners Pirovano.
SUPREME COURT
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 182722
DUMAGUETE CATHEDRAL CREDIT COOPERATIVE [DCCCO], Represented by Felicidad L. Ruiz, its General Manager, Petitioner,
vs.
DECISION
DEL CASTILLO, J.:
The clashing interests of the State and the taxpayers are again pitted against each other. Two basic principles, the State’s inherent power of taxation and its
declared policy of fostering the creation and growth of cooperatives come into play. However, the one that embodies the spirit of the law and the true intent of
the legislature prevails.
1
This Petition for Review on Certiorari under Section 11 of Republic Act (RA) No. 9282, in relation to Rule 45 of the Rules of Court, seeks to set aside the
2
December 18, 2007 Decision of the Court of Tax Appeals (CTA), ordering petitioner to pay deficiency withholding taxes on interest from savings and time
deposits of its members for taxable years 1999 and 2000, pursuant to Section 24(B)(1) of the National Internal Revenue Code of 1997 (NIRC), as well as the
3
delinquency interest of 20% per annum under Section 249(C) of the same Code. It also assails the April 11, 2008 Resolution denying petitioner’s Motion for
Reconsideration.
Factual Antecedents
Petitioner Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative duly registered with and regulated by the Cooperative Development
4 5
Authority (CDA). It was established on February 17, 1968 with the following objectives and purposes: (1) to increase the income and purchasing power of
the members; (2) to pool the resources of the members by encouraging savings and promoting thrift to mobilize capital formation for development activities;
6
and (3) to extend loans to members for provident and productive purposes. It has the power (1) to draw, make, accept, endorse, guarantee, execute, and
issue promissory notes, mortgages, bills of exchange, drafts, warrants, certificates and all kinds of obligations and instruments in connection with and in
furtherance of its business operations; and (2) to issue bonds, debentures, and other obligations; to contract indebtedness; and to secure the same with a
7
mortgage or deed of trust, or pledge or lien on any or all of its real and personal properties.
On November 27, 2001, the Bureau of Internal Revenue (BIR) Operations Group Deputy Commissioner, Lilian B. Hefti, issued Letters of Authority Nos.
63222 and 63223, authorizing BIR Officers Tomas Rambuyon and Tarcisio Cubillan of Revenue Region No. 12, Bacolod City, to examine petitioner’s books of
8
accounts and other accounting records for all internal revenue taxes for the taxable years 1999 and 2000.
Proceedings before the BIR Regional Office
On June 26, 2002, petitioner received two Pre-Assessment Notices for deficiency withholding taxes for taxable years 1999 and 2000 which were protested by
9
petitioner on July 23, 2002. Thereafter, on October 16, 2002, petitioner received two other Pre-Assessment Notices for deficiency withholding taxes also for
10
taxable years 1999 and 2000. The deficiency withholding taxes cover the payments of the honorarium of the Board of Directors, security and janitorial
services, legal and professional fees, and interest on savings and time deposits of its members.
On October 22, 2002, petitioner informed BIR Regional Director Sonia L. Flores that it would only pay the deficiency withholding taxes corresponding to the
honorarium of the Board of Directors, security and janitorial services, legal and professional fees for the year 1999 in the amount of ₱87,977.86, excluding
11
penalties and interest.
In another letter dated November 8, 2002, petitioner also informed the BIR Assistant Regional Director, Rogelio B. Zambarrano, that it would pay the
withholding taxes due on the honorarium and per diems of the Board of Directors, security and janitorial services, commissions and legal & professional fees
for the year 2000 in the amount of ₱119,889.37, excluding penalties and interest, and that it would avail of the Voluntary Assessment and Abatement
12
Program (VAAP) of the BIR under Revenue Regulations No. 17-2002.
13
On November 29, 2002, petitioner availed of the VAAP and paid the amounts of ₱105,574.62 and ₱143,867.24 corresponding to the withholding taxes on
the payments for the compensation, honorarium of the Board of Directors, security and janitorial services, and legal and professional services, for the years
1999 and 2000, respectively.
On April 24, 2003, petitioner received from the BIR Regional Director, Sonia L. Flores, Letters of Demand Nos. 00027-2003 and 00026-2003, with attached
Transcripts of Assessment and Audit Results/Assessment Notices, ordering petitioner to pay the deficiency withholding taxes, inclusive of penalties, for the
14
years 1999 and 2000 in the amounts of ₱1,489,065.30 and ₱1,462,644.90, respectively.
Proceedings before the Commissioner of Internal Revenue
15
On May 9, 2003, petitioner protested the Letters of Demand and Assessment Notices with the Commissioner of Internal Revenue (CIR). However, the latter
failed to act on the protest within the prescribed 180-day period. Hence, on December 3, 2003, petitioner filed a Petition for Review before the CTA, docketed
16
as C.T.A. Case No. 6827.
Proceedings before the CTA First Division
The case was raffled to the First Division of the CTA which rendered its Decision on February 6, 2007, disposing of the case in this wise:
IN VIEW OF ALL THE FOREGOING, the Petition for Review is hereby PARTIALLY GRANTED. Assessment Notice Nos. 00026-2003 and 00027-2003 are
hereby MODIFIED and the assessment for deficiency withholding taxes on the honorarium and per diems of petitioner’s Board of Directors, security and
janitorial services, commissions and legal and professional fees are hereby CANCELLED. However, the assessments for deficiency withholding taxes on
interests are hereby AFFIRMED.
Accordingly, petitioner is ORDERED TO PAY the respondent the respective amounts of ₱1,280,145.89 and ₱1,357,881.14 representing deficiency
withholding taxes on interests from savings and time deposits of its members for the taxable years 1999 and 2000. In addition, petitioner is ordered to pay the
20% delinquency interest from May 26, 2003 until the amount of deficiency withholding taxes are fully paid pursuant to Section 249 (C) of the Tax Code.
17
SO ORDERED.
18
Dissatisfied, petitioner moved for a partial reconsideration, but it was denied by the First Division in its Resolution dated May 29, 2007.
Proceedings before the CTA En Banc
19
On July 3, 2007, petitioner filed a Petition for Review with the CTA En Banc, interposing the lone issue of whether or not petitioner is liable to pay the
deficiency withholding taxes on interest from savings and time deposits of its members for taxable years 1999 and 2000, and the consequent delinquency
20
interest of 20% per annum.
Finding no reversible error in the Decision dated February 6, 2007 and the Resolution dated May 29, 2007 of the CTA First Division, the CTA En Banc denied
21 22
the Petition for Review as well as petitioner’s Motion for Reconsideration.
The CTA En Banc held that Section 57 of the NIRC requires the withholding of tax at source. Pursuant thereto, Revenue Regulations No. 2-98 was issued
enumerating the income payments subject to final withholding tax, among which is "interest from any peso bank deposit and yield, or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements x x x". According to the CTA En Banc, petitioner’s business falls under the
phrase "similar arrangements;" as such, it should have withheld the corresponding 20% final tax on the interest from the deposits of its members.
Issue
Hence, the present recourse, where petitioner raises the issue of whether or not it is liable to pay the deficiency withholding taxes on interest from savings
and time deposits of its members for the taxable years 1999 and 2000, as well as the delinquency interest of 20% per annum.
Petitioner’s Arguments
Petitioner argues that Section 24(B)(1) of the NIRC which reads in part, to wit:
SECTION 24. Income Tax Rates. —
xxxx
(B) Rate of Tax on Certain Passive Income: —
(1) Interests, Royalties, Prizes, and Other Winnings. — A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any
currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; x x x
applies only to banks and not to cooperatives, since the phrase "similar arrangements" is preceded by terms referring to banking transactions that have
deposit peculiarities. Petitioner thus posits that the savings and time deposits of members of cooperatives are not included in the enumeration, and thus not
23 24
subject to the 20% final tax. To bolster its position, petitioner cites BIR Ruling No. 551-888 and BIR Ruling [DA-591-2006] where the BIR ruled that
interests from deposits maintained by members of cooperative are not subject to withholding tax under Section 24(B)(1) of the NIRC. Petitioner further
25
contends that pursuant to Article XII, Section 15 of the Constitution and Article 2 of Republic Act No. 6938 (RA 6938) or the Cooperative Code of the
26
Philippines, cooperatives enjoy a preferential tax treatment which exempts their members from the application of Section 24(B)(1) of the NIRC.
Respondent’s Arguments
As a counter-argument, respondent invokes the legal maxim "Ubi lex non distinguit nec nos distinguere debemos" (where the law does not distinguish, the
courts should not distinguish). Respondent maintains that Section 24(B)(1) of the NIRC applies to cooperatives as the phrase "similar arrangements" is not
limited to banks, but includes cooperatives that are depositaries of their members. Regarding the exemption relied upon by petitioner, respondent adverts to
the jurisprudential rule that tax exemptions are highly disfavored and construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.
In this connection, respondent likewise points out that the deficiency tax assessments were issued against petitioner not as a taxpayer but as a withholding
agent.
Our Ruling
The petition has merit.
Petitioner’s invocation of BIR Ruling No. 551-888, reiterated in BIR Ruling [DA-591-2006], is proper.
On November 16, 1988, the BIR declared in BIR Ruling No. 551-888 that cooperatives are not required to withhold taxes on interest from savings and time
deposits of their members. The pertinent BIR Ruling reads:
November 16, 1988
BIR RULING NO. 551-888
24 369-88 551-888
Gentlemen:
This refers to your letter dated September 5, 1988 stating that you are a corporation established under P.D. No. 175 and duly registered with the Bureau of
Cooperatives Development as full fledged cooperative of good standing with Certificate of Registration No. FF 563-RR dated August 8, 1985; and that one of
your objectives is to provide and strengthen cooperative endeavor and extend assistance to members and non-members through credit scheme both in cash
and in kind.
Based on the foregoing representations, you now request in effect a ruling as to whether or not you are exempt from the following:
1. Payment of sales tax
2. Filing and payment of income tax
3. Withholding taxes from compensation of employees and savings account and time deposits of members. (Underscoring ours)
In reply, please be informed that Executive Order No. 93 which took effect on March 10, 1987 withdrew all tax exemptions and preferential privileges e.g.,
income tax and sales tax, granted to cooperatives under P.D. No. 175 which were previously withdrawn by P.D. No. 1955 effective October 15, 1984 and
restored by P.D. No. 2008 effective January 8, 1986. However, implementation of said Executive Order insofar as electric, agricultural, irrigation and
waterworks cooperatives are concerned was suspended until June 30, 1987. (Memorandum Order No. 65 dated January 21, 1987 of the President)
Accordingly, your tax exemption privilege expired as of June 30, 1987. Such being the case, you are now subject to income and sales taxes.
Moreover, under Section 72(a) of the Tax Code, as amended, every employer making payment of wages shall deduct and withhold upon such wages a tax at
the rates prescribed by Section 21(a) in relation to section 71, Chapter X, Title II, of the same Code as amended by Batas Pambansa Blg. 135 and
implemented by Revenue Regulations No. 6-82 as amended. Accordingly, as an employer you are required to withhold the corresponding tax due from the
compensation of your employees.
Furthermore, under Section 50(a) of the Tax Code, as amended, the tax imposed or prescribed by Section 21(c) of the same 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 51 of
the Tax Code, as amended. Such being the case, and since interest from any Philippine currency bank deposit and yield or any other monetary benefit from
deposit substitutes are paid by banks, you are not the party required to withhold the corresponding tax on the aforesaid savings account and time deposits of
your members. (Underscoring ours)
Very truly yours,

(SGD.) BIENVENIDO A. TAN, JR.
Commissioner
The CTA First Division, however, disregarded the above quoted ruling in determining whether petitioner is liable to pay the deficiency withholding taxes on
interest from the deposits of its members. It ratiocinated in this wise:
This Court does not agree. As correctly pointed out by respondent in his Memorandum, nothing in the above quoted resolution will give the conclusion that
savings account and time deposits of members of a cooperative are tax-exempt. What is entirely clear is the opinion of the Commissioner that the proper
party to withhold the corresponding taxes on certain specified items of income is the payor-corporation and/or person. In the same way, in the case of
interests earned from Philippine currency deposits made in a bank, then it is the bank which is liable to withhold the corresponding taxes considering that the
bank is the payor-corporation. Thus, the ruling that a cooperative is not the proper party to withhold the corresponding taxes on the aforementioned accounts
is correct. However, this ruling does not hold true if the savings and time deposits are being maintained in the cooperative, for in this case, it is the
cooperative which becomes the payor-corporation, a separate entity acting no more than an agent of the government for the collection of taxes, liable to
27
withhold the corresponding taxes on the interests earned. (Underscoring ours)
The CTA En Banc affirmed the above-quoted Decision and found petitioner’s invocation of BIR Ruling No. 551-88 misplaced. According to the CTA En Banc,
28
the BIR Ruling was based on the premise that the savings and time deposits were placed by the members of the cooperative in the bank. Consequently, it
ruled that the BIR Ruling does not apply when the deposits are maintained in the cooperative such as the instant case.
We disagree.
There is nothing in the ruling to suggest that it applies only when deposits are maintained in a bank. Rather, the ruling clearly states, without any qualification,
that since interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes are paid by banks, cooperatives
are not required to withhold the corresponding tax on the interest from savings and time deposits of their members. This interpretation was reiterated in BIR
Ruling [DA-591-2006] dated October 5, 2006, which was issued by Assistant Commissioner James H. Roldan upon the request of the cooperatives for a
confirmatory ruling on several issues, among which is the alleged exemption of interest income on members’ deposit (over and above the share capital
confirmatory ruling on several issues, among which is the alleged exemption of interest income on members’ deposit (over and above the share capital
holdings) from the 20% final withholding tax. In the said ruling, the BIR opined that:
xxxx
3. Exemption of interest income on members’ deposit (over and above the share capital holdings) from the 20% Final Withholding Tax.
The National Internal Revenue Code states that a "final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency
bank deposit and yield or any other monetary benefit from the deposit substitutes and from trust funds and similar arrangement x x x" for individuals under
Section 24(B)(1) and for domestic corporations under Section 27(D)(1). Considering the members’ deposits with the cooperatives are not currency bank
deposits nor deposit substitutes, Section 24(B)(1) and Section 27(D)(1), therefore, do not apply to members of cooperatives and to deposits of primaries with
federations, respectively.
It bears stressing that interpretations of administrative agencies in charge of enforcing a law are entitled to great weight and consideration by the courts,
29
unless such interpretations are in a sharp conflict with the governing statute or the Constitution and other laws. In this case, BIR Ruling No. 551-888 and
BIR Ruling [DA-591-2006] are in perfect harmony with the Constitution and the laws they seek to implement. Accordingly, the interpretation in BIR Ruling No.
551-888 that cooperatives are not required to withhold the corresponding tax on the interest from savings and time deposits of their members, which was
reiterated in BIR Ruling [DA-591-2006], applies to the instant case.
Members of cooperatives deserve a preferential tax treatment pursuant to RA 6938, as amended by RA 9520.
Given that petitioner is a credit cooperative duly registered with the Cooperative Development Authority (CDA), Section 24(B)(1) of the NIRC must be read
together with RA 6938, as amended by RA 9520.
Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to foster the creation and growth of cooperatives as a practical
vehicle for promoting self-reliance and harnessing people power towards the attainment of economic development and social justice. Thus, to encourage the
formation of cooperatives and to create an atmosphere conducive to their growth and development, the State extends all forms of assistance to them, one of
which is providing cooperatives a preferential tax treatment.
The legislative intent to give cooperatives a preferential tax treatment is apparent in Articles 61 and 62 of RA 6938, which read:
ART. 61. Tax Treatment of Cooperatives. — Duly registered cooperatives under this Code which do not transact any business with non-members or the
general public shall not be subject to any government taxes and fees imposed under the Internal Revenue Laws and other tax laws. Cooperatives not falling
under this article shall be governed by the succeeding section.
ART. 62. Tax and Other Exemptions. — Cooperatives transacting business with both members and nonmembers shall not be subject to tax on their
transactions to members. Notwithstanding the provision of any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the
following tax exemptions; x x x.
This exemption extends to members of cooperatives. It must be emphasized that cooperatives exist for the benefit of their members. In fact, the primary
objective of every cooperative is to provide goods and services to its members to enable them to attain increased income, savings, investments, and
30
productivity. Therefore, limiting the application of the tax exemption to cooperatives would go against the very purpose of a credit cooperative. Extending the
exemption to members of cooperatives, on the other hand, would be consistent with the intent of the legislature. Thus, although the tax exemption only
mentions cooperatives, this should be construed to include the members, pursuant to Article 126 of RA 6938, which provides:
ART. 126. Interpretation and Construction. – In case of doubt as to the meaning of any provision of this Code or the regulations issued in pursuance thereof,
the same shall be resolved liberally in favor of the cooperatives and their members.
We need not belabor that what is within the spirit is within the law even if it is not within the letter of the law because the spirit prevails over the
31 32
letter. Apropos is the ruling in the case of Alonzo v. Intermediate Appellate Court, to wit:
But as has also been aptly observed, we test a law by its results; and likewise, we may add, by its purposes. It is a cardinal rule that, in seeking the meaning
of the law, the first concern of the judge should be to discover in its provisions the intent of the lawmaker. Unquestionably, the law should never be interpreted
in such a way as to cause injustice as this is never within the legislative intent. An indispensable part of that intent, in fact, for we presume the good motives
of the legislature, is to render justice.1avvphi1
Thus, we interpret and apply the law not independently of but in consonance with justice. Law and justice are inseparable, and we must keep them so. To be
sure, there are some laws that, while generally valid, may seem arbitrary when applied in a particular case because of its peculiar circumstances. In such a
situation, we are not bound, because only of our nature and functions, to apply them just the same, [is] slavish obedience to their language. What we do
instead is find a balance between the word and the will, that justice may be done even as the law is obeyed.
As judges, we are not automatons. We do not and must not unfeelingly apply the law as it is worded, yielding like robots to the literal command without regard
to its cause and consequence. "Courts are apt to err by sticking too closely to the words of a law," so we are warned, by Justice Holmes again, "where these
words import a policy that goes beyond them." While we admittedly may not legislate, we nevertheless have the power to interpret the law in such a way as to
reflect the will of the legislature. While we may not read into the law a purpose that is not there, we nevertheless have the right to read out of it the reason for
its enactment. In doing so, we defer not to "the letter that killeth" but to "the spirit that vivifieth," to give effect to the lawmaker’s will.
The spirit, rather than the letter of a statute determines its construction, hence, a statute must be read according to its spirit or intent. For what is within the
spirit is within the statute although it is not within the letter thereof, and that which is within the letter but not within the spirit is not within the statute. Stated
differently, a thing which is within the intent of the lawmaker is as much within the statute as if within the letter; and a thing which is within the letter of the
statute is not within the statute unless within the intent of the lawmakers. (Underscoring ours)
It is also worthy to note that the tax exemption in RA 6938 was retained in RA 9520. The only difference is that Article 61 of RA 9520 (formerly Section 62 of
RA 6938) now expressly states that transactions of members with the cooperatives are not subject to any taxes and fees. Thus:
ART. 61. Tax and Other Exemptions. Cooperatives transacting business with both members and non-members shall not be subjected to tax on their
transactions with members. In relation to this, the transactions of members with the cooperative shall not be subject to any taxes and fees, including but not
limited to final taxes on members’ deposits and documentary tax. Notwithstanding the provisions of any law or regulation to the contrary, such cooperatives
dealing with nonmembers shall enjoy the following tax exemptions: (Underscoring ours)
xxxx
This amendment in Article 61 of RA 9520, specifically providing that members of cooperatives are not subject to final taxes on their deposits, affirms the
interpretation of the BIR that Section 24(B)(1) of the NIRC does not apply to cooperatives and confirms that such ruling carries out the legislative intent.
Under the principle of legislative approval of administrative interpretation by reenactment, the reenactment of a statute substantially unchanged is persuasive
33
indication of the adoption by Congress of a prior executive construction.
Moreover, no less than our Constitution guarantees the protection of cooperatives. Section 15, Article XII of the Constitution considers cooperatives as
instruments for social justice and economic development. At the same time, Section 10 of Article II of the Constitution declares that it is a policy of the State
to promote social justice in all phases of national development. In relation thereto, Section 2 of Article XIII of the Constitution states that the promotion of
social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance. Bearing in mind the foregoing
provisions, we find that an interpretation exempting the members of cooperatives from the imposition of the final tax under Section 24(B)(1) of the NIRC is
more in keeping with the letter and spirit of our Constitution.
All told, we hold that petitioner is not liable to pay the assessed deficiency withholding taxes on interest from the savings and time deposits of its members, as
well as the delinquency interest of 20% per annum.
In closing, cooperatives, including their members, deserve a preferential tax treatment because of the vital role they play in the attainment of economic
development and social justice. Thus, although taxes are the lifeblood of the government, the State’s power to tax must give way to foster the creation and
growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: "The power of taxation, while indispensable, is not absolute and may be subordinated
34
to the demands of social justice."
WHEREFORE, the Petition is hereby GRANTED. The assailed December 18, 2007 Decision of the Court of Tax Appeals and the April 11, 2008 Resolution
are REVERSED and SET ASIDE. Accordingly, the assessments for deficiency withholding taxes on interest from the savings and time deposits of petitioner’s
are REVERSED and SET ASIDE. Accordingly, the assessments for deficiency withholding taxes on interest from the savings and time deposits of petitioner’s
members for the taxable years 1999 and 2000 as well as the delinquency interest of 20% per annum are hereby CANCELLED.

SUPREME COURT
Manila
FIRST DIVISION
G.R. Nos. L-18843 and L-18844 August 29, 1974

CONSOLIDATED MINES, INC., petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. Nos. L-18853 & L-18854 August 29, 1974
vs.
CONSOLIDATED MINES, INC., respondent.
Office of the Solicitor General for Commissioner of Internal Revenue.
Tañada, Carreon & Tañada for Consolidated Mines, Inc.
MAKALINTAL, C.J.:p
These are appeals from the amended decision of the Court of Tax Appeals dated August 7, 1961, in CTA Cases No. 565 and 578, both entitled "Consolidated
Mines, Inc. vs. Commissioner of Internal Revenue," ordering the Consolidated Mines, Inc., hereinafter referred to as the Company, to pay the Commissioner
of Internal Revenue the amounts of P79,812.93, P51,528.24 and P71,392.82 as deficiency income taxes for the years 1953, 1954 and 1956, respectively, or
the total sum of P202,733.99, plus 5% surcharge and 1% monthly interest from the date of finality of the decision.
The Company, a domestic corporation engaged in mining, had filed its income tax returns for 1951, 1952, 1953 and 1956. In 1957 examiners of the Bureau of
Internal Revenue investigated the income tax returns filed by the Company because on August 10, 1954, its auditor, Felipe Ollada claimed the refund of the
sum of P107,472.00 representing alleged overpayments of income taxes for the year 1951. After the investigation the examiners reported that (A) for the
years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the
Company's mines, although for income tax purposes the Company had reported income and expenses on the accrual basis; (2) depletion and depreciation
expenses had been overcharged; and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly
substantiated; and that (B) for the year 1956 (1) the Company had overstated its claim for depletion; and (2) certain claims for miscellaneous expenses were
not duly supported by evidence.
In view of said reports the Commissioner of Internal Revenue sent the Company a letter of demand requiring it to pay certain deficiency income taxes for the
years 1951 to 1954, inclusive, and for the year 1956. Deficiency income tax assessment notices for said years were also sent to the Company. The Company
requested a reconsideration of the assessment, but the Commissioner refused to reconsider, hence the Company appealed to the Court of Tax Appeals. The
assessments for 1951 to 1954 were contested in CTA Case No. 565, while that for 1956 was contested in CTA Case No. 578. Upon agreement of the parties
the two cases were heard and decided jointly.
On May 6, 1961 the Tax Court rendered judgment ordering the Company to pay the amounts of P107,846.56, P134,033.01 and P71,392.82 as deficiency
income taxes for the years 1953, 1954 and 1956, respectively. The Tax Court nullified the assessments for the years 1951 and 1952 on the ground that they
were issued beyond the five-year period prescribed by Section 331 of the National Internal Revenue Code.
However, on August 7, 1961, upon motion of the Company, the Tax Court reconsidered its decision and further reduced the deficiency income tax liabilities of
the Company to P79,812.93, P51,528.24 and P71,382.82 for the years 1953, 1954 and 1956, respectively. In this amended decision the Tax Court
subscribed to the theory of the Company that Benguet Consolidated Mining Company, hereafter referred to as Benguet, had no right to share in "Accounts
Receivable," hence one-half thereof may not be accrued as an expense of the Company for a given year.
Both the Company and the Commissioner appealed to this Court. The Company questions the rate of mine depletion adopted by the Court of Tax Appeals
and the disallowance of depreciation charges and certain miscellaneous expenses (G.R. Nos.
L-18843 & L-18844). The Commissioner, on the other hand, questions what he characterizes as the "hybrid" or "mixed" method of accounting utilized by the
Company, and approved by the Tax Court, in treating the share of Benguet in the net profits from the operation of the mines in connection with its income tax
returns (G.R. Nos. L-18853 &
L-18854).
With respect to methods of accounting, the Tax Code states:
Sec. 38. General Rules. The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar
year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer but if no
such method of accounting has been so employed or if the method employed does not clearly reflect the income the computation shall be
made in accordance with such methods as in the opinion of the Commissioner of Internal Revenue does clearly reflect the income ...
Sec. 39. Period in which items of gross income included. — The amount of all items of gross income shall be included in the gross income for
the taxable year in which received by the taxpayer, unless, under the methods of accounting permitted under section 38, any such amounts
are to be properly accounted for as of a different period ...
Sec. 40. Period for which deductions and credits taken. — The deductions 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,
unless in order to clearly reflect the income the deductions should be taken as of a different period ...
1
It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. The U.S. Internal
2
Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business, and requires only that taxable income generally be
2
Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business, and requires only that taxable income generally be
3
based on the method of accounting regularly employed in keeping the taxpayer's books, provided that the method clearly reflects income.
The Company used the accrual method of accounting in computing its income. One of its expenses is the amount-paid to Benguet as mine operator, which
amount is computed as 50% of "net income." The Company deducts as an expense 50% of cash receipts minus disbursements, but does not deduct at the
end of each calendar year what the Commissioner alleges is "50% of the share of Benguet" in the "accounts receivable." However, it deducts Benguet's 50%
if and when the "accounts receivable" are actually paid. It would seem, therefore, that the Company has been deducting a portion of this expense (Benguet's
share as mine operator) on the "cash & carry" basis. The question is whether or not the accounting system used by the Company justifies such a treatment of
this item; and if not, whether said method used by the Company, and characterized by the Commissioner as a "hybrid method," may be allowed under the
4
aforequoted provisions of our tax code.
For a proper understanding of the situation the following facts are stated: The Company has certain mining claims located in Masinloc, Zambales. Because it
wanted to relieve itself of the work and expense necessary for developing the claims, the Company, on July 9, 1934, entered into an agreement (Exhibit L)
with Benguet, a domestic anonymous partnership engaged in the production and marketing of chromite, whereby the latter undertook to "explore, develop,
mine, concentrate and market" the pay ore in said mining claims.
The pertinent provisions of their agreement, as amended by the supplemental agreements of September 14, 1939 (Exhibit L-1) and October 2, 1941 (Exhibit
L-2), are as follows:
IV. Benguet further agrees to provide such funds from its own resources as are in its judgment necessary for the exploration and
development of said claims and properties, for the purchase and construction of said concentrator plant and for the installation of the proper
transportation facilities as provided in paragraphs I, II and III hereof until such time as the said properties are on a profit producing basis and
agrees thereafter to expand additional funds from its own resources, if the income from the said claims is insufficient therefor, in the
exploration and development of said properties or in the enlargement or extension of said concentration and transportation facilities if in its
judgment good mining practice requires such additional expenditures. Such expenditures from its own resources prior to the time the said
properties are put on a profit producing basis shall be reimbursed as provided in paragraph VIII hereof. Expenditures from its own resources
thereafter shall be charged against the subsequent gross income of the properties as provided in paragraph X hereof.
VII. As soon as practicable after the close of each month Benguet shall furnish Consolidated with a statement showing its expenditures made
and ore settlements received under this agreement for the preceding month which statement shall betaken as accepted by Consolidated
unless exception is taken thereto or to any item thereof within ten days in writing in which case the dispute shall be settled by agreement or
by arbitration as provided in paragraph XXII hereof.
VIII. While Benguet is being reimbursed for all its expenditures, advances and disbursements hereunder as evidenced by said statements of
accounts, the net profits resulting from the operation of the aforesaid claims or properties shall be divided ninety per cent (90%) to Benguet
and ten per cent (10%) to Consolidated. Such division of net profits shall be based on the receipts, and expenditures during each calendar
year, and shall continue until such time as the ninety per cent (90%) of the net profits pertaining to Benguet hereunder shall equal the amount
of such expenditures, advances and disbursements. The net profits shall be computed as provided in Paragraph X hereof.
X. After Benguet has been fully reimbursed for its expenditures, advances and disbursements as aforesaid the net profits from the operation
shall be divided between Benguet and Consolidated share and share alike, it being understood however, that the net profits as the term is
used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature
whatsoever as may be made in order to carry out the terms of this agreement.
XIII. It is understood that Benguet shall receive no compensation for services rendered as manager or technical consultants in connection
with the carrying out of this agreement. It may, however, charge against the operation actual additional expenses incurred in its Manila Office
in connection with the carrying out of the terms of this agreement including traveling expenses of consulting staff to the mines. Such
expenses, however, shall not exceed the sum of One Thousand Pesos (P1,000.00) per month. Otherwise, the sole compensation of Benguet
shall be its proportion of the net profits of the operation as herein above set forth.
XIV. All payments due Consolidated by Benguet under the terms of this agreement with respect to expenditures made and ore settlements
received during the preceding calendar month, shall be payable on or before the twentieth day of each month.
There is no question with respect to the 90%-10% sharing of profits while Benguet was being reimbursed the expenses disbursed during the period it was
5
trying to put the mines on a profit-producing basis. It appears that by 1953 Benguet had completely recouped said advances, because they were then
dividing the profits share and share alike. .
As heretofore stated the question is: Under the arrangement between the Company and Benguet, when did Benguet's 50% share in the "Accounts
Receivable
6
accrue?
The following table (summary, Exhibit A, of examiner's report of January 28, 1967, Exh. 8) prepared for the Commissioner graphically illustrates the effect of
the inclusion of one-half of "Accounts Receivable" as expense in the computation of the net income of the Company:
SUMMARY: 1951 1952 1953 1954
Original share of 1,313,640.26 3,521,751,94 2,340,624.59 2,622,968.58

Benguet
Additional share of 383,829.87 677,504.76 577,394.66 282,724.76

Rec'bles
Total share of 1,697,470.13 4,199,256.70 2,918,009.25 2,905,693.34

Benguet
Less: Receipts due 269,619.00 383,829.87 677,504.76 577,384.66

from prior year
operation
Share of Benguet 1,427,851.13 3,815,426.83 2,240,504.49 2,328,308.68

as adjusted
(Acc'rd)
Less: Participation 1,313,640.26 3,521,751.94 2,340,624.59 2,622,968.58

of Benguet already
deducted
Additional Expense 114,210.87 293,674.89 (100,120.10) (294,659.90)

(Income)
In the aforesaid table "Additional share on Rec'bles" is one-half of "Total Rec'bles minus "Total Payables." It indicates, from the Commissioner's viewpoint,
that there were years when the Company had been overstating its income (1951 and 1952) and there were years when it had been understating its income
7
(1953 and 1954). The Commissioner is not interested in the taxes for 1951 and 1952 (which had prescribed anyway) when the Company had overstated its
income, but in those for 1953 and 1954, in each of which years the amount of the "Accounts Receivable" was less than that of the previous year, and the
Company, therefore, appears to have deducted, as expense, compensation to Benguet bigger (than what the Commissioner claims is due) by one-half of the
difference between the year's "Accounts Receivable" and the previous year's "Accounts Receivable," thus apparently understating its income to that extent.
According to the agreement between the Company and Benguet the net profits "shall be computed by deducting from gross income all operating expenses
According to the agreement between the Company and Benguet the net profits "shall be computed by deducting from gross income all operating expenses
and all expenses of any nature whatsoever." Periodically, Benguet was to furnish the Company with the statement of accounts for a given month "as soon as
practicable after the close" of that month. The Company had ten days from receipt of the statement to register its objections thereto. Thereafter, the statement
was considered binding on the Company. And all payments due the Company "with respect to the expenditures made and ore settlements received during
the calendar month shall be payable on or before the twentieth of each month."
The agreement does not say that Benguet was to share in "Accounts Receivable." But may this be implied from the terms of the agreement? The statement
8
of accounts (par. VIII) and the payment part (XIV) that Benguet must make are both with respect to "expenditures made and ore settlements received."
9
"Expenditures" are payments of money. This is the meaning intended by the parties, considering the provision that Benguet agreed to "provide such funds
from its own resources, etc."; and that "such expenditures from its own resources" were to be reimbursed first as provided in par. VIII, and later as provided in
10
par. X. "Settlement" does not necessarily mean payment or satisfaction, though it may mean that; it frequently means adjustment or arrangement. The term
"settlement" may be used in the sense of "payment," or it may be used in the sense of "adjustment" or "ascertainment," or it may be used in the sense of
"adjustment" or "ascertainment of a balance between contending parties," depending upon the circumstances under which, and the connection in which, use
11
of the term is made. In the term "ore settlements received," the word "settlement" was not used in the concept of "adjustment," "arrangement" or
"ascertainment of a balance between contending parties," since all these are "made," not "received." "Payment," then, is the more appropriate equivalent of,
and interchangeable with, the term "Settlement." Hence, "ore settlements received" means "ore payments received," which excludes "Accounts Receivable."
Thus, both par. VIII and par. XIV refer to "payment," either received or paid by Benguet.
According to par. X, the 50-50 sharing should be on "net profits;" and "net profits" shall be computed "by deducting from gross income all operating expenses
and all disbursements of any nature whatsoever as may be made in order to carry out the terms of the agreement." The term "gross profit" was not defined. In
the accrual method of accounting "gross income" would include both "cash receipts" and "Accounts Receivable." But the term "gross income" does not carry
a definite and inflexible meaning under all circumstances, and should be defined in such a way as to ascertain the sense in which the parties have used it in
12 13
contracting. According to par. VIII the "division of net profits shall be based on the receipts and expenditures." The term "expenditures" we have already
14
analyzed. As used, receipts" means "money received." The same par. VIII uses the term "expenditures, advances and disbursements." "Disbursements"
15 16
means "payment," while the word "advances" when used in a contract ordinarily means money furnished with an expectation that it shall be returned. It is
thus clear from par. VIII that in the computation of "net profits" (to be divided on the 90%-10% sharing arrangement) only "cash payments" received and "cash
disbursements" made by Benguet were to be considered. On the presumption that the parties were consistent in the use of the term, the same meaning must
be given to "net profits" as used in par. X, and "gross income," accordingly, must be equated with "cash receipts." The language used by the parties show
their intention to compute Benguet's 50% share on the excess of actual receipts over disbursements, without considering "Accounts Receivable" and
"Accounts Payable" as factors in the computation. Benguet then did not have a right to share in "Accounts Receivable," and, correspondingly, the Company
did not have the liability to pay Benguet any part of that item. And a deduction cannot be accrued until an actual liability is incurred, even if payment has not
17
been made.
Here we have to distinguish between (1) the method of accounting used by the Company in determining its net income for tax purposes; and (2) the method
of computation agreed upon between the Company and Benguet in determining the amount of compensation that was to be paid by the former to the latter.
The parties, being free to do so, had contracted that in the method of computing compensation the basis were "cash receipts" and "cash payments." Once
determined in accordance with the stipulated bases and procedure, then the amount due Benguet for each month accrued at the end of that month, whether
the Company had made payment or not (see par. XIV of the agreement). To make the Company deduct as an expense one-half of the "Accounts Receivable"
would, in effect, be equivalent to giving Benguet a right which it did not have under the contract, and to substitute for the parties' choice a mode of
18
computation of compensation not contemplated by them.
Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct in not accruing said one-half as a deduction. The Company
was not using a hybrid method of accounting, but was consistent in its use of the accrual method of accounting. The first issue raised by the Company is with
respect to the rate of mine depletion used by the Court of Tax Appeals. The Tax Code provides that in computing net income there shall be allowed as
deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has
19
been mined and sold during the year for which the return is made [Sec. 30(g) (1) (B)].
20
The formula for computing the rate of depletion is:
Cost of Mine Property
---------------------- = Rate of Depletion Per Unit Estimated ore Deposit of Product Mined and sold
The Commissioner and the Company do not agree as to the figures corresponding to either factor that affects the rate of depletion per unit. The figures
according to the Commissioner are:
P2,646,878.44 (mine cost) P0.59189 (rate of
------------------------- = depletion per ton)
4,471,892 tons (estimated ore deposit)
while the Company insists they are:
P4,238,974.57 (mine cost) P1.0197 (rate of
------------------------- - = depletion per ton)
4,156,888 tons (estimated
ore deposit)
They agree, however, that the "cost of the mine property" consists of (1) mine cost; and (2) expenses of development before production. As to mine cost, the
parties are practically in agreement — the Commissioner says it is P2,515,000 (the Company puts it at P2,500,000). As to expenses of development before
production the Commissioner and the Company widely differ. The Company claims it is P1,738,974.56, while the Commissioner says it is only P131,878.44.
The Company argues that the Commissioner's figure is "a patently insignificant and inadequate figure when one considers the tens of millions of pesos of
revenue and production that petitioner's chromite mine fields have finally produced."
21 22
As an income tax concept, depletion is wholly a creation of the statute — "solely a matter of legislative grace." Hence, the taxpayer has the burden of
23
justifying the allowance of any deduction claimed. As in connection with all other tax controversies, the burden of proof to show that a disallowance of
depletion by the Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer, and this is true with respect to the value of the
24
property constituting the basis of the deduction. This burden-of-proof rule has been frequently applied and a value claimed has been disallowed for lack of
25
evidence.
As proof that the amount spent for developing the mines was P1,738,974.56, the Company relies on the testimony of Eligio S. Garcia and on Exhibits 1, 31
and 38.
Exhibit I is the Company's report to its stockholders for the year 1947. It contains the Company's balance sheet as of December 31, 1946 (Exhibit I-1). Among
the assets listed is "Mines, Improvement & Dev." in the amount of P4,238,974.57, which, according to the Company, consisted of P2,500,000, purchase price
of the mine, and P1,738,974.56, cost of developing it. The Company also points to the statement therein that "Benguet invested approximately P2,500,000 to
put the property in operation, the greater part of such investment being devoted to the construction of a 25-kilometer road and the installation of port
facilities." This amount of P2,500,000 was only an estimate. The Company has not explained in detail in what this amount or the lesser amount of
P1,738,974.56 consisted. Nor has it explained how that bigger amount became P1,738,974.56 in the balance sheet for December 31, 1946.
According to the Company the total sum of P4,238,974.57 as "Mines, Improvement & Dev." was taken from its pre-war balance sheet of December 31, 1940.
As proof of this it cites the sworn certification (Exhibit 38) executed on October 25, 1946 by R.P. Flood, in his capacity as treasurer of the Company, and
attached to other papers of the Company filed with the Securities and Exchange Commission in compliance with the provisions of Republic Act No. 62 (An
Act to require the presentation of proof of ownership of securities and the reconstruction of corporate and partnership records, and for other purposes). In
said certification there are statements to the effect that "the Statement of Assets & Liabilities of Consolidated Mines, Incorporated, submitted to the Securities
& Exchange Commission as a requirement for the reconstitution of the records of the said corporation, is as of September 4, 1946;" and that "the figure
P4,238,974.57 representing the value of Mines, Improvements and Developments appearing therein, was taken from the Balance Sheet as of December 31,
1940, which is the only available source of information of the Corporation regarding the above and consequently the undersigned considers the stated figure
to be only an estimate of the value of those items at the present time. "This figure, the Company claims, is based on entries made in the ordinary and regular
to be only an estimate of the value of those items at the present time. "This figure, the Company claims, is based on entries made in the ordinary and regular
course of its business dating as far back as before the war. The Company places reliance on Sec. 39, Rule 130, Revised Rules of Court (formerly Sec. 34,
Rule 123), which provides that entries made at, or near the time of the transactions to which they refer, by a person deceased, outside of the Philippines or
unable to testify, who was in a position to know the facts therein stated, may be received as prima facie evidence, if such person made the entries in his
professional capacity or in the performance of duty and in the ordinary or regular course of business or duty."
Note that Exhibit 38 is not the "entries," covered by the rule. The Company, however, urges, unreasonably, we think, that it should be afforded the same
probative value since it is based on such "entries" meaning the balance sheet of December 31, 1940, which was not presented in evidence. Even with the
presentation of said balance sheet the Company would still have had to prove (1) that the person who made the entry did so in his professional capacity or in
the performance of a duty; (2) that the entry was made in the ordinary course of business or duty; (3) that the entry was made at or near the time of the
transaction to which it related; (4) that the one who made it was in a position to know the facts stated in the entry; and (5) that he is dead, outside the
26
Philippines or unable to testify
A balance sheet may not be considered as "entries made in the ordinary course of business," which, according to Moran:
means that the entries have been made regularly, as is usual, in the management of the trade or business. It is essential, therefore, that there
be regularity in the entries. The entry which is being introduced in evidence should appear to be part of a group of regular entries. ... The
27
regularity of the entries maybe proved by the form in which they appear in the corresponding book.
A balance sheet, as that word is uniformly used by bookkeepers and businessmen, is a paper which shows "a summation or general balance of all accounts,"
but not the particular items going to make up the several accounts; and it is therefore essentially different from a paper embracing "a full and complete
statement of all the disbursements and receipts, showing from what sources such receipts were derived, and for what and to whom such disbursements or
payments were made, and for what object or purpose the same were made;" but such matters may find an appropriate place in an itemized
28
account. Neither can it be said that a balance sheet complies with the third requisite, since the entries therein were not made at or near the time of the
transactions to which they related.
In order to render admissible books of account it must appear that they are books of original entry, that the entries were made in the ordinary
course of business, contemporaneously with the facts recorded, and by one who had knowledge of the facts. San Francisco Teaming Co v
Gray (1909) 11 CA 314, 104 P 999. See Brown v Ball (1932) 123 CA 758, 12 P2d 28, to the effect that the books must be kept in the regular
29
course of business.
A "ledger" is a book of accounts in which are collected and arranged, each under its appropriate head, the various transactions scattered
throughout the journal or daybook, land is not a "book of original entries," within the rule making such books competent evidence. First Nat.
30
Building Co. v. Vanderberg, 119 P 224, 227; 29 Okl. 583.
Code Iowa, No. 3658, providing that "books of account" are receivable in evidence, etc., means a book containing charges, and showing a
continuous dealing with persons generally. A book, to be admissible, must be kept as an account book, and the charges made in the usual
31
course of business. Security Co. v. Graybeal, 52 NW 497, 85 Iowa 543, 39 Am St Rep 311.
Books of account may therefore be admissible under the rule. In tax cases, however, this Court appears not to place too high a probative value on them,
32
considering the statement in the case of Collector of Internal Revenue v. Reyes that "books of account do not prove per se that they are veracious; in fact
33
they may be more consistent than truthful." Indeed, books of account may be used to carry out a plan of tax evasion.
At most, therefore, the presentation of the balance sheet of December 31, 1940 would only prove that the figure P4,238,974.57 appears therein as
corresponding to mine cost. But the Company would still need to present proof to justify its adoption of that figure. It had burden of establishing the
components of the amount of P1,738,974.57: what were the particular expenses made and the corresponding amount of each, so that it may be determined
whether the expenses were actually made and whether the items are properly part of cost of mine development, or are actually depreciable items.
In this connection we take up Exhibit 31 of the Commissioner. This is the memorandum of BIR Examiner Cesar P. Aguirre to the Chief of the Investigating
Division of the Bureau of Internal Revenue. According to this report "the counsel of the taxpayer alleges that the cost of Masinloc Mine properties and
improvement is P4,238,974.56 instead of P2,646,879.44 as taken up in this report," and that the expenses as of 1941 were as follows:
Assets subject to:
1941
1. Depletion P2,646,878.44
2. 10 years depreciation 1,188,987.76
3. 3 years depreciation 78,283.75
4. 20 years depreciation 9,143.63
5. 10% amortization 171,985.00
Less: Cost Chromite Field P4,085,277.58
Expenses by operator 2,515,000.00 P1,570,277.58
The examiner concluded that "in the light of the figures listed above, the counsel for the taxpayer fairly stated the amount disbursed by the operator until the
mine property was put to production in 1939." The Company capitalizes on this conclusion, completely disregarding the examiner's other statements, as
follows:
The counsel, however, is not aware of the fact that the expenses made by the operator are those which are depreciable and\or amortizable
instead of depletable expenditures. The first post-war Balance Sheet (12/31/46) of the taxpayer shows that its Mines, Improvement & Dev. is
P4,328,974.57. Considering the expenditures incurred by Benguet Consolidated as of 1941 (P1,570,277.58); the rehabilitation expenses in
1946 (P211,223.72); and the cost of the Masinloc Chromite Field, the total cost would only be P4,296,501.30. Of the total expenditure of
P1,570,277.58 as of 1941, P1,438,389.124 were spent on depreciable and/or amortizable expenses and P131,878.44 were made for the
direct improvement of the mine property.
In as much as the expenditure of the operator as of 1941 and the cost of the mine property were taken up in the account Mines, Improvement
& Rehabilitation in 1946, all its assets that were rightfully subject to depletion was P2,646,878.44.
34 35
Because of the above qualification a large part of the amount spent by the operator may not be allowed for purpose of depletion deduction, depletion
36
being different from depreciation.
The Company's balance sheet for December 31, 1947 lists the "mine cost" of P2,500,000 as "development cost" and the amount of P1,738,974.37 as
"suspense account (mining properties subject to war losses)." The Company claims that its accountant, Mr. Calpo, made these errors, because he was then
new at the job. Granting that was what had happened, it does not affect the fact that the, evidence on hand is insufficient to prove the cost of development
alleged by the Company.
Nor can we rely on the statements of Eligio S. Garcia, who was the Company's treasurer and assistant secretary at the time he testified on August 14, 1959.
He admitted that he did not know how the figure P4,238,974.57 was arrived at, explaining: "I only know that it is the figure appearing on the balance sheet as
of December 31, 1946 as certified by the Company's auditors; and this we made as the basis of the valuation of the depletable value of the mines." (p. 94,
t.s.n.)
We, therefore, have to rely on the Commissioner's assertion that the "development cost" was P131,878.44, broken down as follows: assessment,
P34,092.12; development, P61,484.63; exploration, P13,966.62; and diamond drilling, P22,335.07.
37
The question as to which figure should properly correspond to "mine cost" is one of fact. The findings of fact of the Tax Court, where reasonably supported
38
by evidence, are conclusive upon the Supreme Court.
As regards the estimated ore deposit of the Company's mines, the Company's figure is "4,156,888 tons," while that of the Commissioner is the larger figure
"4,471,892 tons." The difference of 315,004 tons was due to the fact that the Commissioner took into account all the ore that could probably be removed and
"4,471,892 tons." The difference of 315,004 tons was due to the fact that the Commissioner took into account all the ore that could probably be removed and
marketed by the Company, utilizing the total tonnage shipped before and after the war (933,180 tons) and the total reserve of shipping material pegged at
3,583,712 tons. On the other hand the Company's estimate was arrived at by taking into consideration only the quantity shipped from solid ore namely,
733,180 tons (deducting from the total tonnage shipped before and after the war an estimated float of 200,000 tons), and then adding the total recoverable
ore which was assessed at 3,423,708 tons.
39
The above-stated figures were obtained from the report of geologist Paul A. Schaeffer, who had been earlier commissioned by the Company to conduct a
study of the metallurgical possibilities of the Company's mines. In order to have a fair understanding of how the contending parties arrived at their respective
figures, We quote a pertinent portion of the geologist's report:
Milling Data
Ore mined before the war ............... 336,850 tons
Ore mined after the war ............... 1,779,350 tons
Total ........................................... 2,116,200 tons
x Ore shipped before the war ......... 337,611 tons
xx Ore shipped after the war ............ 595,569 tons
Total ................................................ 933,180 tons
Less an estimated float of .................. 200,000 tons
Total shipped from solid ore .............. 733,180 tons
Proportion shipped 733,180
-------- = -----------
mined 2,116,200
or approximately 35% of mine ore is shipped.
Dumps
Material on dumps now total 383,346 tons. Using the above tonnage for ore shipped from mining (excluding float) there should have been a total of 1,383,020
tons of waste produced of which almost 1,000,00 tons has been removed from the mining area of the hill. I believe that half still remains as alluviuma long the
three principal intermittent creeks which head in the mining area, and the remaining half million has washed into the river. Of course this is pure speculation.
x — much was float material, probably about one half, leaving about 170.000 tons mined from the hill.
xx — some float included.
xxx xxx xxx
Ore Reserve
The A and B ore is considered sufficiently developed by drilling and tunnels to constitute the ore reserve. C ore must be checked by drilling.
Tons
A . . . . . . . . . . . . . 7,729,800
B . . . . . . . . . . . . . 1,780,500
Total . . . . . . . . . . 9,510,300
C . . . . . . . . . . . . . 2,212,00
Grand Total . . . . 11,722,300
Therefore, the total ore reserve may be considered to be 9,510,300 tons. Based on past experience 35% is shipping ore.
With the present mill there is considerably more recovery. The ore is mined selectively (between dikes). The results are about as follows:
Of 1,500 tons mined, 500 tons are sorted and shipped direct, the remaining 1,000 tons going to the mill from which 250 tons ore recovered for shipment.
Thus 50% of the selectively mined ore is recovered.
Thus for the reserve tonnage:
Total reserve . . . . . . . . . . . . . . . 9,510,300
Less 20% dike material . . . . . . . 1,902,060
7,608,240
Less 10% low grade ore . . . . . . 760,824
6,847,416
x
.50 =
Total recoverable ore . . . . . . . . . . 3,423,708 tons
It is probable that 30% of the dump material could be recovered by milling. So adding to the above 115,004 ore recoverable from the dumps,
we get a total reserve of shipping material of 3,538,712 tons. With the sink float section added to the mill this should be increased by perhaps
20%.
On the basis of the above report the Company faults the Tax Court is sustaining the Commissioner's estimate of the ore deposit. While the figures
corresponding to the total gross tonnage shipped before and after the war have not been assailed as erroneous, the Company maintains that the estimated
float 40 of 200,000 tons as reported in the geologist's study should have been deducted therefrom, such that the combined total of the ore shipped should
have been placed at a net of 733,180 tons instead of 933,180 tons. The other figure the Company assails as having been improperly included by the
Commissioner in his statement of ore reserve refers to the "Recoverable ore from dump material — 115,004 tons." The Company's argument in this regard
runs thus:
... This apparently was included by respondent by virtue of the geologist's report that "it is probable that 30% of the dump material should be
recovered by milling." Actually, however, such recovery from dump or waste material is problematical and is merely a contingency, and
hence, the item of 115,004 tons should not be included in the statement of the ore reserves. Taking out these two items improperly and
erroneously included in respondent Commissioner of Internal Revenue's examiner's report, to wit, float or waste material of 200,060 tons and
supposedly recoverable ore from dump materials of 115,004 tons, totaling 315,004 tons, from the total figure of 4,471,892 tons given by him,
the figure of 4,156.888 tons results as the proper statement of the total estimated ore as correctly used by petitioner in its statement of ore
41
reserves for purposes of depletion.
We agree with the Company's observation on this point. The geological report appears clear enough: the estimated float of 200,000 tons consisting of pieces
of ore that had broken loose and become detached by erosion from their original position could hardly be viewed as still forming part of the total estimated ore
deposit. Having already been broken up into numerous small pieces and practically rendered useless for mining purposes, the same could not appreciably
increase the ore potentials of the Company's mines. As to the 115,004 tons which geologist Paul A. Schaeffer believed could still be recovered by milling from
the material on dumps, there are no sufficient data on which to affirm or deny the accuracy of the said figure. It may, however, be taken as correct,
42
considering that it came from the Company's own commissioned geologist and that by the Company's own admission by 1957 it had mined and sold much
43
more than its original estimated ore deposit of 4,156,888 tons. We think that 4,271,892 tons would be a fair estimate of the ore deposit in the Company's
mines.
The correct figures therefore are:
P2,515,000.00 (mine cost proper) + P131,878.44 (development cost)
4,271,892 (estimated ore deposit)
or
P2,646,878.44 (mine cost) = P0.6196 (rate of depletion
4,271,892 (estimated ore per ton)
deposit)
In its second assigned error, the Company questions the disallowance by the Tax Court of the depreciation charges claimed by the Company as deductions
44
from its gross income The items thus disallowed consist mainly of depreciation expenses for the years 1953 and 1954 allegedly sustained as a result of the
deterioration of some of the Company's incomplete constructions.
45
The initial memorandum of the BIR examiner assigned to verify the income tax liabilities of the Company pursuant to the latter's claim of having overpaid its
income taxes states the basic reason why the Company's claimed depreciation should be disallowed or re-adjusted, thus: since "..., up to its completion (the
incomplete asset) has not been and is not capable of use in the operation, the depreciation claimed could not, in fairness to the Government and the
taxpayer, be considered as proper deduction for income tax purposes as the said asset is still under construction." Vis-a-Vis the Commissioner's consistent
46
position in this regard the company simply repeatedly requested for time — in view of the alleged voluminous working sheets that had to be re-evaluated
and recomputed to justify its claimed depreciation items within which to submit a separate memorandum in itemized form detailing the Company's objections
to the items of depreciation adjustments or disallowances for the years involved. Strangely enough, despite the period granted, the record is bare that the
Company ever submitted its itemized objection as proposed. Inasmuch as the taxpayer has the burden of justifying the deductions claimed for depreciation,
the Company's failure to discharge the burden prevents this Court, from disturbing the Commissioner's computation. For taxation purposes the phrase "out of
its not being used," with reference to depreciation allowable on assets which are idle or the use of which is temporarily suspended, should be understood to
refer only to property that has once been used in the trade or business, not to property that has never been actually devoted to the taxpayer's business,
particularly incomplete assets that have yet to be used. .
The Company's third assigned error assails the Court of Tax Appeals in not allowing the deduction from its gross income of certain miscellaneous business
expenditures in the course of its operation for the years 1954 and 1956. For 1954 the deduction claimed amounted to P38,081.20, of which the Court allowed
47
P25,600.00 and disallowed P13,481.20, "for lack of any supporting paper or evidence." For the year 1956 the claim amounted to P20,050.00 of which the
Court allowed P2,460.00, representing the one-month salary Christmas bonus given to some of the employees, and upheld the disallowance of P17,590.00
on the ground that the Company "failed to prove substantially that said expenses were actually incurred and are legally deductible expenses."
Regarding the disallowed amount of P13,481.20 the year 1954, the Company submits that it consisted of expenses supported by "vouchers and cancelled
checks evidencing payments of these amounts," and were necessary and ordinary expenses of business for that year. On the disallowance by the Tax Court
of the sum of P17,590.00 out of a total deduction for miscellaneous expenses for 1956 among to P20,050.00, the Company advances the same argument,
namely, that the amount consisted of normal and regular expenses for that year as evidenced by vouchers and cancelled checks.
These vouchers and cancelled checks of the Company, however, only show that the amounts claimed had indeed been spent, and confirm the fact of
disbursement, but do not necessarily prove that the expenses for which they we're disbursed are deductible items. In the case of Collector of Internal
48
Revenue vs. Goodrich International Rubber Co. this Court rejected the taxpayer's similar claim for deduction of alleged representation expenses, based
upon receipts issued not by the entities to which the alleged expenses but by the officers of taxpayer corporation who allegedly paid them. It was there stated:
If the expenses had really been incurred, receipts or chits would have been issued by the entities to which the payments have been made,
and it would have been easy for Goodrich or its officers to produce such receipts. These receipts issued by said officers merely attest to
their claim that they had incurred and paid said expenses. They do not establish payment of said alleged expenses to the entities in which
the same are said to have been incurred.
In the case before Us, except for the Company's own vouchers and cancelled checks, together with the Company treasurer's lone and uncorroborated
testimony regarding the purpose of said disbursements, there is no other supporting evidence to show that the expenses were legally deductible items. We
therefore affirm the Tax Court's disallowance of the same.
In resume, this Court finds:
(1) that the Company was not using a "hybrid" method of accounting in the preparation of its income tax returns, but was consistent in its use of the accrual
method of accounting;
49
(2) that the rate of depletion per ton of the ore deposit mined and sold by the Company is P0.6196 per ton not P0.59189 as contended by the
Commissioner nor P1.0197 as claimed by the Company;
(3) that the disallowance by the Tax Court of the depreciation charges claimed by the Company is correct in view of the latter's failure to itemize and/or
substantiate with definite proof that the Commissioner's own method of determining depreciation is unreasonable or inaccurate;
(4) that for lack of supporting evidence to show that the Company's claimed expenses were legally deductible items, the Tax Court's disallowance of the same
is affirmed.
As recomputed then, the deficiency income taxes due from the Company are as follows:
1953
Net income as per audited return _________________ P5,193,716.89
Unallowable deductions & additional income
Depletion overcharged _________________________ P178,477.04 Depreciation adjustment ________________________ 93,862.96
Total adjustments _____________________________ 272,340.00
Net income as per investigation ___________________ 5,466,056.89
50
Income tax due thereon _______________________ 1,522,495.92
Less amount already assessed ____________________ 1,446,241.00 DEFICIENCY TAX DUE ______________________ 76,254.92
1954
Net income as per audited return _________________ P3,320,307.68 Unallowable deductions & additional
income
Depletion overcharged _________________________ P147,895.72 Depreciation adjustment ________________________ 11,878.12 Miscellaneous
expenses ________________________ 13,481.20
Net income as per investigation ___________________ 3,493,562.72
Income tax due thereon _________________________ 970,197.56
Less amount already assessed ____________________ 921,686.00 DEFICIENCY TAX DUE ______________________ 48,511.56
1956
Net income as per audited return _________________ P11,504,483.97 Unallowable deductions & additional
income
Depletion overcharged _________________________ P221,272.98 Miscellaneous expenses ________________________ 17,590.00
Net income as per investigation __________________ 11,743,346.95
Income tax due thereon ________________________ 3,280,137.14
Less amount already assessed ___________________ 3,213,256.00 DEFICIENCY TAX DUE ______________________ 66,881.14
TOTAL DEFICIENCY TAXES DUE _____________ 191,647.62
WHEREFORE, the appealed decision is hereby modified by ordering Consolidated Mines, Inc. to pay the Commissioner of Internal Revenue the amounts of
P76,254.92, P48,511.56 and P66,881.14 as deficiency income taxes for the years 1953, 1954 and 1956, respectively, or the total sum of P191,647.62 under
the terms specified by the Tax Court, without pronouncement as to costs.
Castro, Makasiar, Esguerra and Muñoz Palma, JJ., concur.
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 71122 March 25, 1988
vs.
ARNOLDUS CARPENTRY SHOP, INC. and COURT OF TAX APPEALS, respondents.
The Solicitor General for petitioner.
Generoso Jacinto for respondents.
CORTES, J.:
Assailed in this petition is the decision of the Court of Tax Appeals in CTA case No. 3357 entitled "ARNOLDUS CARPENTRY SHOP, INC. v.
COMMISSIONER OF INTERNAL REVENUE."
The facts are simple.
Arnoldus Carpentry Shop, Inc. (private respondent herein) is a domestic corporation which has been in existence since 1960. It has for its secondary purpose
the "preparing, processing, buying, selling, exporting, importing, manufacturing, trading and dealing in cabinet shop products, wood and metal home and
office furniture, cabinets, doors, windows, etc., including their component parts and materials, of any and all nature and description" (Rollo, pp. 160-161).
These furniture, cabinets and other woodwork were sold locally and exported abroad.
For this business venture, private respondent kept samples or models of its woodwork on display from where its customers may refer to when placing their
orders.
Sometime in March 1979, the examiners of the petitioner Commissioner of Internal Revenue conducted an investigation of the business tax liabilities of
private respondent pursuant to Letter of Authority No. 08307 NA dated November 23, 1978. As per the examination, the total gross sales of private
respondent for the year 1977 from both its local and foreign dealings amounted to P5,162,787.59 (Rollo. p. 60). From this amount, private respondent
reported in its quarterly percentage tax returns P2,471,981.62 for its gross local sales. The balance of P2,690,805.97, which is 52% of the total gross sales,
was considered as its gross export sales (CTA Decision, p. 12).
Based on such an examination, BIR examiners Honesto A. Vergel de Dios and Voltaire Trinidad made a report to the Commissioner classifying private
respondent as an "other independent contractor" under Sec. 205 (16) [now Sec. 169 (q)] of the Tax Code. The relevant portion of the report reads:
Examination of the records show that per purchase orders, which are hereby attached, of the taxpayer's customers during the period under
review, subject corporation should be considered a contractor and not a manufacturer. The corporation renders service in the course of an
independent occupation representing the will of his employer only as to the result of his work, and not as to the means by which it is
accomplished, (Luzon Stevedoring Co. v. Trinidad, 43 Phil. 803). Hence, in the computation of the percentage tax, the 3% contractor's tax
should be imposed instead of the 7% manufacturer's tax. [Rollo, p. 591 (Emphasis supplied.)
xxx xxx xxx
As a result thereof, the examiners assessed private respondent for deficiency tax in the amount of EIGHTY EIGHT THOUSAND NINE HUNDRED SEVENTY
TWO PESOS AND TWENTY THREE CENTAVOS ( P88,972.23 ). Later, on January 31, 1981, private respondent received a letter/notice of tax deficiency
assessment inclusive of charges and interest for the year 1977 in the amount of ONE HUNDRED EIGHT THOUSAND SEVEN HUNDRED TWENTY PESOS
AND NINETY TWO CENTAVOS ( P 108,720.92 ). This tax deficiency was a consequence of the 3% tax imposed on private respondent's gross export sales
which, in turn, resulted from the examiners' finding that categorized private respondent as a contractor (CTA decision, p.2).
Against this assessment, private respondent filed on February 19, 1981 a protest with the petitioner Commissioner of Internal Revenue. In the protest letter,
private respondent's manager maintained that the carpentry shop is a manufacturer and therefor entitled to tax exemption on its gross export sales under
Section 202 (e) of the National Internal Revenue Code. He explained that it was the 7% tax exemption on export sales which prompted private respondent to
exploit the foreign market which resulted in the increase of its foreign sales to at least 52% of its total gross sales in 1977 (CTA decision, pp. 1213).
On June 23, 1981, private respondent received the final decision of the petitioner stating:
It is the stand of this Office that you are considered a contractor an not a manufacturer. Records show that you manufacture woodworks only
upon previous order from supposed manufacturers and only in accordance with the latter's own design, model number, color, etc. [Rollo p.
64] (Emphasis supplied.)
On July 22, 1981, private respondent appealed to the Court of Tax Appeals alleging that the decision of the Commissioner was contrary to law and the facts
of the case.
On April 22, 1985, respondent Court of Tax Appeals rendered the questioned decision holding that private respondent was a manufacturer thereby reversing
the decision of the petitioner.
Hence, this petition for review wherein petitioner raises the sole issue of. Whether or not the Court of Tax Appeals erred in holding that private respondent is a
manufacturer and not a contractor and therefore not liable for the amount of P108,720.92, as deficiency contractor's tax, inclusive of surcharge and interest,
for the year 1977.
The petition is without merit.
1. Private respondent is a "manufacturer" as defined in the Tax Code and not a "contractor" under Section 205(e) of the Tax Code as petitioner would have
this Court decide.
(a) Section 205 (16) [now Sec. 170 (q)] of the Tax Code defines "independent contractors" as:
... persons (juridical and natural) not enumerated above (but not including individuals subject to the occupation tax under Section 12 of the
Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance
of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. (Emphasis supplied.)
Private respondent's business does not fall under this definition.
Petitioner contends that the fact that private respondent "designs and makes samples or models that are 'displayed' or presented or 'submitted' to prospective
buyers who 'might choose' therefrom" signifies that what private respondent is selling is a kind of service its shop is capable of rendering in terms of
woodwork skills and craftsmanship (Brief for Petitioner, p. 6). He further stresses the point that if there are no orders placed for goods as represented by the
sample or model, the shop does not produce anything; on the other hand, if there are orders placed, the shop goes into fall production to fill up the quantity
ordered (Petitioner's Brief, p. 7).
The facts of the case do not support petitioner's claim. Petitioner is ignoring the fact that private respondent sells goods which it keeps in stock and not
services. As the respondent Tax Court had found:
xxx xxx xxx
Petitioner [private respondent herein] claims, and the records bear petitioner out, that it had a ready stock of its shop products for sale to its
foreign and local buyers. As a matter of fact, the purchase orders from its foreign buyers showed that they ordered by referring to the models
designated by petitioner. Even purchases by local buyers for television cabinets (Exhs. '2 to13', pp. 1-13, BIR records) were by orders for
existing models except only for some adjustments in sizes and accessories utilized.
With regard to the television cabinets, petitioner presented three witnesses its bookkeeper, production manager and manager who testified
that samples of television cabinets were designed and made by petitioner, from which models the television companies such as Hitachi
National and others might choose, then specified whatever innovations they desired. If found to be saleable, some television cabinets were
manufactured for display and sold to the general public. These cabinets were not exported but only sold locally. (t.s.n., pp. 2235, February
18,1982; t.s.n., pp. 7-10, March 25, 1982; t.s.n., pp. 3-6, August 10, 1983.)
xxx xxx xxx
In the case of petitioner's other woodwork products such as barometer cases, knife racks, church furniture, school furniture, knock down
chairs, etc., petitioner's above-mentioned witnesses testified that these were manufactured without previous orders. Samples were displayed,
and if in stock, were available for immediate sale to local and foreign customers. Such testimony was not contradicted by respondent
(petitioner herein). And in all the purchase orders presented as exhibits, whether from foreign or local buyers, reference was made to the
model number of the product being ordered or to the sample submitted by petitioner.
Respondent's examiners, in their memorandum to the Commissioner of Internal Revenue, stated that petitioner manufactured only upon
previous orders from customers and "only in accordance with the latter's own design, model number, color, etc." (Exh. '1', p. 27, BIR
records.) Their bare statement that the model numbers and designs were the customers' own, unaccompanied by adequate evidence, is
difficult to believe. It ignores commonly accepted and recognized business practices that it is not the customer but the manufacturer who
furnishes the samples or models from which the customers select when placing their orders, The evidence adduced by petitioner to prove
that the model numbers and designs were its own is more convincing [CTA decision, pp. 6-8.] (Emphasis supplied)
xxx xxx xxx
This Court finds no reason to disagree with the Tax Court's finding of fact. It has been consistently held that while the decisions of the Court of Tax Appeals
are appealable to the Supreme Court, the former's finding of fact are entitled to the highest respect. The factual findings can only be disturbed on the part of
the tax court [Collector of Intern. al Revenue v. Henderson, L-12954, February 28, 1961, 1 SCRA 649; Aznar v. Court of Tax Appeals, L-20569, Aug. 23,
1974, 58 SCRA 519; Raymundo v. de Joya, L-27733, Dec. 3, 1980, 101 SCRA 495; Industrial Textiles Manufacturing Co. of the Phils. , Inc. v. Commissioner
of Internal Revenue, L-27718 and L-27768, May 27,1985,136 SCRA 549.]
(b) Neither can Article 1467 of the New Civil Code help petitioner's cause. Article 1467 states:
A contract for the delivery at a certain price of an article Which the vendor in the ordinary course of his business manufactures or procures for the - general
market, whether the same is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his
special order, and not for the general market, it is a contract for a piece of work.
Petitioner alleged that what exists prior to any order is but the sample model only, nothing more, nothing less and the ordered quantity would never have
come into existence but for the particular order as represented by the sample or model [Brief for Petitioner, pp. 9-101.]
Petitioner wants to impress upon this Court that under Article 1467, the true test of whether or not the contract is a piece of work (and thus classifying private
respondent as a contractor) or a contract of sale (which would classify private respondent as a manufacturer) is the mere existence of the product at the time
of the perfection of the contract such that if the thing already exists, the contract is of sale, if not, it is work.
This is not the test followed in this jurisdiction. As can be clearly seen from the wordings of Art. 1467, what determines whether the contract is one of work or
of sale is whether the thing has been manufactured specially for the customer and upon his special order." Thus, if the thing is specially done at the order of
another, this is a contract for a piece of work. If, on the other hand, the thing is manufactured or procured for the general market in the ordinary course of
one's business, it is a b contract of sale.
Jurisprudence has followed this criterion. As held in Commissioner of Internal Revenue v. Engineering Equipment and Supply Co. (L-27044 and L-27452,
June 30, 1975, 64 SCRA 590, 597), "the distinction between a contract of sale and one for work, labor and materials is tested by the inquiry whether the thing
transferred is one not in existence and which never would have existed but for the order of the party desiring to acquire it, or a thing which would have existed
and has been the subject of sale to some other persons even if the order had not been given." (Emphasis supplied.) And in a BIR ruling, which as per Sec.
326 (now Sec. 277) of the Tax Court the Commissioner has the power to make and which, as per settled jurisprudence is entitled to the greatest weight as an
administrative view [National Federation of Sugar Workers (NFSW) v. Ovejera, G.R. No. 59743, May 31, 1982, 114 SCRA 354, 391; Sierra Madre Trust v.
Hon. Sec. of Agriculture and Natural Resources, Nos. 32370 and 32767, April 20, 1983,121 SCRA 384; Espanol v. Chairman and Members of the Board of
Administrators, Phil. Veterans Administration, L-44616, June 29, 1985, 137 SCRA 3141, "one who has ready for the sale to the general public finished
furniture is a manufacturer, and the mere fact that he did not have on hand a particular piece or pieces of furniture ordered does not make him a contractor
only" (BIR Ruling No. 33-1, series of 1960). Likewise,
xxx xxx xxx
When the vendor enters into a contract for the delivery of an article which in the ordinary course of his business he manufactures or procures
for the general market at a price certain (Art. 1458) such contract is one of sale even if at the time of contracting he may not have such article
on hand. Such articles fall within the meaning of "future goods" mentioned in Art. 1462, par. 1. [5 Padilla, Civil Law: Civil Code Annotated 139
(1974)
xxx xxx xxx
These considerations were what precisely moved the respondent Court of Tax Appeals to rule that 'the fact that [private respondent] kept models of its
products... indicate that these products were for sale to the general public and not for special orders,' citing Celestino Co and Co. v. Collector of Internal
Revenue [99 Phil, 841 (1956)]. (CTA Decision, pp. 8-9.)
Petitioner alleges that the error of the respondent Tax Court was due to the 'heavy albeit misplaced and indiscriminate reliance on the case of Celestino Co
and Co. v. Collector of Internal Revenue [99 Phil. 841, 842 (1956)] which is not a case in point' 1 Brief for Petitioner, pp. 14-15). The Commissioner of Internal
Revenue made capital of the difference between the kinds of business establishments involved a FACTORY in the Celestino Co case and a CARPENTRY
SHOP in this case (Brief for Petitioner, pp. 14-18). Petitioner seems to have missed the whole point in the former case.
True, the former case did mention the fact of the business concern being a FACTORY, Thus:
xxx xxx xxx
... I cannot believe that petitioner company would take, as in fact it has taken, all the trouble and expense of registering a special trade name
for its sash business and then orders company stationery carrying the bold print "Oriental Sash Factory (Celestino Co and Company, Prop.)
926 Raon St., Quiapo, Manila, Tel. No. 33076, Manufacturers of all kinds of doors, windows, sashes furniture, etc. used season dried and
kiln-dried lumber, of the best quality workmanship" solely for the purpose of supplying the need for doors, windows and sash of its special
and limited customers. One will note that petitioner has chosen for its trade name and has offered itself to the public as a FACTORY, which
means it is out to do business in its chosen lines on a big scale. As a general rule, sash factories receive orders for doors and windows of
special design only in particular cases but the bulk of their sales is derived from ready-made doors and windows of standard sizes for the
average home. [Emphasis supplied.]
xxx xxx xxx
However, these findings were merely attendant facts to show what the Court was really driving at — the habitualityof the production of the goods involved for
the general public.
In the instant case, it may be that what is involved is a CARPENTRY SHOP. But, in the same vein, there are also attendant facts herein to show habituality of
the production for the general public.
In this wise, it is noteworthy to again cite the findings of fact of the respondent Tax Court:
xxx xxx xxx
Petitioner [private respondent herein] claims, and the records bear petitioner out, that it had a ready stock of its shop products for sale to its
foreign and local buyers. As a matter of fact, the purchase orders from its foreign buyers showed that they ordered by referring to the models
designed by petitioner. Even purchases by local buyers for television cabinets... were by orders for existing models. ...
With regard to the television cabinets, petitioner presented three witnesses... who testified that samples of television cabinets were designed
and made by petitioner, from which models the television companies ... might choose, then specified whatever innovations they desired. If
found to be saleable, some television cabinets were manufactured for display and sold to the general public.
xxx xxx xxx
In the case of petitioner's other woodwork products... these were manufactured without previous orders. Samples were displayed, and if in
stock, were available for immediate sale to local and foreign customers. (CTA decision, pp. 6-8.1 [Emphasis supplied.]
(c) The private respondent not being a "contractor" as defined by the Tax Code or of the New Civil Code, is it a 'manufacturer' as countered by the carpentry
shop?
Sec. 187 (x) [now Sec. 157 (x)] of the Tax Code defines a manufacturer' as follows:
"Manufacturer" includes every person who by physical or chemical process alters the exterior texture or form or inner substance of any raw
material or manufactured or partially manufactured product in such manner as to prepare it for a special use or uses to which it could not
have been in its original condition, or who by any such process alters the quality or any such raw material or manufactured or partially
manufactured product so as to reduce it to marketable shape or prepare it for any of the uses of industry, or who by any such process
combines any such raw material or manufactured or partially manufactured products with other materials or products of the same or different
kinds and in such manner that the finished product of such process or manufacture can be put to a special use or uses to which such raw
material or manufactured or partially manufactured products in their original condition would not have been put, and who in addition alters
such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the
purpose of their sale or distribution to others and not for his own use or consumption.
It is a basic rule in statutory construction that when the language of the law is clear and unequivocal, the law must be taken to mean exactly what it says
[Banawa et al. v. Mirano et al., L-24750, May 16, 1980, 97 SCRA 517, 533].
The term "manufacturer" had been considered in its ordinary and general usage. The term has been construed broadly to include such processes as buying
and converting duck eggs to salted eggs ('balut") [Ngo Shiek v. Collector of Internal Revenue, 100 Phil. 60 (1956)1; the processing of unhusked kapok into
clean kapok fiber [Oriental Kapok Industries v. Commissioner of Internal Revenue, L-17837, Jan. 31, 1963, 7 SCRA 132]; or making charcoal out of firewood
Bermejo v. Collector of Internal Revenue, 87 Phil. 96 (1950)].
2. As the Court of Tax Appeals did not err in holding that private respondent is a "manufacturer," then private respondent is entitled to the tax exemption under
See. 202 (d) and (e) mow Sec. 167 (d) and (e)] of the Tax Code which states:
Sec. 202. Articles not subject to percentage tax on sales. The following shall be exempt from the percentage taxes imposed in Sections 194,
195, 196, 197, 198, 199, and 201:
xxx xxx xxx
(d) Articles shipped or exported by the manufacturer or producer, irrespective of any shipping arrangement that may be agreed upon which
may influence or determine the transfer of ownership of the articles so exported.
(e) Articles sold by "registered export producers" to (1) other" registered export producers" (2) "registered export traders' or (3) foreign
tourists or travelers, which are considered as "export sales."
The law is clear on this point. It is conceded that as a rule, as argued by petitioner, any claim for tax exemption from tax statutes is strictly construed against
the taxpayer and it is contingent upon private respondent as taxpayer to establish a clear right to tax exemption [Brief for Petitioners, p. 181. Tax exemptions
are strictly construed against the grantee and generally in favor of the taxing authority [City of Baguio v. Busuego, L-29772, Sept. 18, 1980, 100 SCRA 1161;
they are looked upon with disfavor [Western Minolco Corp. v. Commissioner Internal Revenue, G.R. No. 61632, Aug. 16,1983,124 1211. They are held strictly
against the taxpayer and if expressly mentioned in the law, must at least be within its purview by clear legislative intent [Commissioner of Customs v. Phil.,
Acetylene Co., L-22443, May 29, 1971, 39 SCRA 70, Light and Power Co. v. Commissioner of Customs, G.R. L-28739 and L-28902, March 29, 1972, 44
SCRA 122].
Conversely therefore, if there is an express mention or if the taxpayer falls within the purview of the exemption by clear legislative intent, then the rule on strict
construction will not apply. In the present case the respondent Tax Court did not err in classifying private respondent as a "manufacturer". Clearly, the 'latter
falls with the term 'manufacturer' mentioned in Art. 202 (d) and (e) of the Tax Code. As the only question raised by petitioner in relation to this tax exemption
claim by private respondent is the classification of the latter as a manufacturer, this Court affirms the holding of respondent Tax Court that private respondent
is entitled to the percentage tax exemption on its export sales.
There is nothing illegal in taking advantage of tax exemptions. When the private respondent was still exporting less and producing locally more, the petitioner
did not question its classification as a manufacturer. But when in 1977 the private respondent produced locally less and exported more, petitioner did a
turnabout and imposed the contractor's tax. By classifying the private respondent as a contractor, petitioner would likewise take away the tax exemptions
granted under Sec. 202 for manufacturers. Petitioner's action finds no support in the applicable law.
WHEREFORE, the Court hereby DENIES the Petition for lack of merit and AFFIRMS the Court of Tax Appeals decision in CTA Case No. 3357.
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All events test Republic of the Philippines

Republic of the Philippines

Basic Surcharges Interest Total

Deficiency ₱774,200.55 ₱193,550.14 ₱312.227.34 ₱1,279,978.03

Deficiency 132,724.02 33,181.01 53,526.27 219,431.30

Deficiency 299,391.84 74,847.96 120,741.73 494,981.53

TOTALS ₱1,206,316.41 ₱301,579.11 ₱486,495.34 ₱1,994,390.86

Republic of the Philippines

G.R. No. 72780 February 13, 1992

Republic of the Philippines

Net Income P29,573.79

Less:Personal Exemption 2,500.00

Amount subject to tax P27,073.79

Net Income P31,817.66

Less:Personal Exemption 2,500.00

Amount subject to tax P29,317.66

Net Income P34,815.74

Less:Personal Exemption 3,000.00

Amount subject to tax P31,815.74

Net Income P32,605.83

Less:Personal Exemption 3,000.00

Amount subject to tax P29,605.83

Net Income P36,780.11

Less:Personal Exemption 3,000.00

Amount subject to tax P33,780.11

14 May 1949, O.R. No. 52991, Exhibit B ....……….. P2,068.12

12 September 1950, O.R. No. 160473, Exhibit B-1 . 2,068.11

Total Paid ......................................................... P4,136.23

13 May 1950, O.R. No. 232366, Exhibit G ...........… P2,314.95

15 September 1950, O.R. No. 247918, Exhibit G-1 . 2,314.94

Total Paid ......................................................... P4,629.89

27 April 1951, O.R. No. 323173, Exhibit K ...………. P7,273.00

Amount withheld from salary and paid by employer . P5,780.40

15 May 1952, O.R. No. 33250, Exhibit O ................. 360.50

15 August 1952, O.R. No. 383318, Exhibit O-1 ..….. 361.20

Total Paid ......................................................... P6,502.10

Amount withheld from salary and paid by employer . P5,660.40

18 May 1953, O.R. No. 438026, Exhibit T ..………… 1,160.30

13 August 1953, O.R. No. 443483, Exhibit T-1 ...….. 1,160.30

Total Paid ......................................................... P7,981.00

Net income per return ..................................……………………… P29,573.79

Rent expense .........................................................…….. 7,200.00

Manager's residential expense (2/29/48 a/c/#4.51) 1,400.00

Manager's residential expense (refer to 1948 P & L) .. 1,849.32

Entrance fee — Marikina Gun & Country Club ..…….. 200.00

Net income per investigation .........................................………... P46,723.11

Less: Personal exemption ...............................................………. 2,500.00

Net taxable income ..........................................................……… P44,223.11

Tax due thereon ...............................................................……… P8,562.47

Less: Amount of tax already paid per OR #52991 &

Deficiency tax still due & assessable ............................ P4,426.24

Net income per return ..................................……………………… P31,817.66

Capital loss (no capital gain) ................... P3,248.84

Undeclared bonus ...................………….. 3,857.75

Rental allowance from A.I.U. ................... 1,800.00

Subsistence allowance from A.I.U. .…….. 6,051.30 14,958.09

Net income per investigation .........................................………... P46,775.75

Less: Personal exemption ...............................................……….. 2,500.00

Amount of income subject to tax ..................................…………. 43,275.75

Tax due thereon ...............................................................………. P8,292.21

Deficiency tax due ............................................................………. P3,662.23

(Should be) ...................................................................... 3,662.32

Net income per return ..................................……………………… P34,815.74