COMMISSIONER V.

PALANCA 18 SCRA 496 REGALA, October 29, 1966

NATURE Petition for Review by certiorari of CTA Decision FACTS -July 1950, Don Carlos Palanca, Sr., donated to his son Carlos Jr., shares of stock in La Tondea, Inc. amounting to 12,500 shares. Carlos Jr. failed to file a return on the donation within the statutory period so Carlos Jr. was assessed P97,691.23 (gift tax), P24,442.81 (25% surcharge), P47,868.70 (interest), which he paid on June 22, 1955. -March 1,1956, Carlos Jr. filed with BIR his ITR for 1955 claiming a deduction for interest of P9,706.45 and reporting a taxable income of P65,982.12. He was assessed P21,052.01 as income tax. -November 1956, Carlos Jr. filed an amended return for 1955, claiming an additional deduction of P47,868.70 (allegedly the interest paid on the donees gift tax based on Sec.30(b)(1) of the Tax Code) so taxable income is P18,113.42 (not P65,982.12) and tax due thereon in sum of P3,167.00. He claimed for a refund of P17,885.01 (P21,052.01 - P3,167.00) BIR denied -Carlos Jr. reiterated claim for refund, BIR denied -BIR considered the donation by Carlos Sr. as a transfer in contemplation of death so Carlos Jr. was assessed P191,591.62 as estate and inheritance taxes. Carlos paid P17,002.74 on June 22, 1955 as gift tax (includes interest and surcharge) which was applied to his estate and inheritance tax liability. Petitioner paid P60,581.80 as interest for delinquency. -August 1958, Carlos Jr. filed again an amended ITR for 1955 claiming the following: As interest deductions: P9,706.45 (as in the original ITR) + P60,581.80 (interest on the estate and inheritance taxes); Net Taxable income: P5,400.32; Income tax due: P428.00; claimed a refund of P20,624.01 (P21,052.01 P428) . Even before BIR ruled on his claim, Carlos Jr. filed petition for review before CTA -CTA: BIR refund Carlos P20,624.01 ISSUES 1. WON there is a difference between indebtedness and taxes to determine the deductible interest (WON Palanca could claim interest deductions based on tax liability) 2. WON claim for refund of Palanca already expired HELD

1. NO. Distinction became inconsequential. Interest on taxes should be considered as interests of indebtedness Ratio. While the distinction between taxes and debts was recognized in this jurisdiction, the variance in their legal conception does not extend to the interests paid on them, at least insofar as Sec.30(b)(1) of the NIRC1 is concerned (which authorizes deduction from gross income of interest paid within the taxable year on indebtedness). Reasoning. CIR argues that Carlos Jr. cannot deduct the interest due to its tax liabilities from his gross income since it is not interest ON INDEBTEDNESS but interest on TAX (liabilities). -however, in CIR v. PRIETO (wherein deductions of interest on donors tax was allowed) it was held that the term indebtedness was defined as the unconditional and legally enforceable obligation for the payment of money. It Thus, it is apparent that a tax may be considered an indebtedness. 2. NO Ratio. Where the claim for refund was filed with the CTA even before it had been denied by the BIR, then the 30-day prescription period under Sec.11, RA 1124(25) did not even commence to run. Where the tax account was paid by installment, then the computation of the two-year prescriptive period under Sec. 306 of the Tax Code should be from the date of the last installment Reasoning. CIR argued that under Sec.11(may appeal to CTA within 30-days from receipt of decision or ruling), claim for refund already prescribed because outside 30-day period. Under Sec.306 of Tax Code (No suit/proceeding shall be begun for recovery of tax erroneously or illegally collected after the expiration of 2years from the date of payment of the tax penalty) CIR claims that under Palancas withheld tax and under Receipt dated May 11, 1956, amounts paid by Carlos Jr. may no longer be refunded as it was filed in court only on August 13, 1958 (beyond 2yr period) -on 30-day period: did not even commence when case was filed because there was no final decision from BIR yet when Carlos Jr. filed case with CTA -on 2yr period: Palanca paid on installment. His last payment was on August 14, 1956. Therefore, since
1 "Sec. 30. Deductions from gross income. In computing net income
there shall be allowed as deductions xxx 'Interest: '(1) In general. The amount of interest paid within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations the interest upon which is exempt from taxation as income under this Title. xxx xxx

the period of counting should be from time of last installment, he still filed claim on time on August 13, 1958! Disposition. WHEREFORE, the decision appealed from is affirmed in full, without pronouncements on costs.