DCCCO vs. Commissioner of Internal Revenue

Interest from savings and time deposits maintained by members in a credit cooperative is not subject to the 20% final withholding tax under Section 24(B)(1) of the NIRC, as such deposits are not currency bank deposits or deposit substitutes, and the cooperative is not the payor-corporation required to withhold the tax.

Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative registered with the Cooperative Development Authority, established in 1968 to pool member resources, encourage savings, and extend loans. In 2001, the Bureau of Internal Revenue authorized an examination of DCCCO's books for taxable years 1999 and 2000.

• The Cooperative: DCCCO is a credit cooperative registered with the Cooperative Development Authority, established to pool resources and extend loans to members.
• The BIR Audit: In November 2001, the BIR authorized an examination of DCCCO's books for 1999 and 2000. Pre-assessment notices were issued for deficiency withholding taxes covering honoraria, services, professional fees, and interest on members' savings and time deposits.
• Partial Payment: DCCCO agreed to pay the deficiency taxes on honoraria, services, and professional fees, availing of the Voluntary Assessment and Abatement Program (VAAP), but contested the assessment on the interest from members' deposits.
• The Assessment: The BIR Regional Director issued Letters of Demand ordering DCCCO to pay deficiency withholding taxes inclusive of penalties (over ₱1.4 million for each year), attributing liability primarily to the unwithheld tax on members' deposit interest.

• Applicability of Section 24(B)(1) NIRC: Petitioner argued that Section 24(B)(1) applies only to banks, not cooperatives, because the phrase "similar arrangements" is preceded by terms referring to banking transactions.
• BIR Rulings: Petitioner invoked BIR Ruling No. 551-888 and BIR Ruling [DA-591-2006], which explicitly state that cooperatives are not required to withhold taxes on interest from members' deposits.
• Preferential Tax Treatment: Petitioner maintained that under Article XII, Section 15 of the Constitution and Article 2 of RA 6938 (Cooperative Code), cooperatives enjoy preferential tax treatment, exempting their members from the 20% final tax.

• Literal Interpretation: Respondent countered, invoking "Ubi lex non distinguit nec nos distinguere debemos," that Section 24(B)(1) applies to cooperatives as the phrase "similar arrangements" includes cooperatives acting as depositaries.
• Strict Construction of Tax Exemptions: Respondent argued that tax exemptions are highly disfavored and construed strictissimi juris against the taxpayer, noting that the assessment was issued against DCCCO as a withholding agent, not as a taxpayer claiming exemption.

• Withholding Tax Liability: Whether DCCCO is liable to pay deficiency withholding taxes on interest from savings and time deposits of its members for taxable years 1999 and 2000, as well as the 20% delinquency interest.

• Withholding Tax Liability: The assessment was cancelled. BIR Ruling No. 551-888, reiterated in BIR Ruling [DA-591-2006], correctly interprets that cooperatives are not the proper parties to withhold the tax on members' deposits, as such deposits are not currency bank deposits or deposit substitutes paid by banks. The CTA's interpretation that the BIR ruling only applied when deposits were maintained in a bank was erroneous; the ruling applies without qualification. Furthermore, the Constitution and RA 6938 mandate preferential tax treatment for cooperatives and their members. The tax exemption under RA 6938 extends to the members, as limiting it to the cooperative alone would defeat the purpose of a credit cooperative. This is affirmed by Article 126 of RA 6938, which requires doubts to be resolved liberally in favor of cooperatives and their members, and by the subsequent amendment in RA 9520 expressly exempting members' deposits from final taxes.

• Preferential Tax Treatment of Cooperatives — The State's inherent power of taxation must yield to its declared policy of fostering the creation and growth of cooperatives. Cooperatives and their members enjoy preferential tax treatment under the Constitution and the Cooperative Code, and tax exemptions granted to cooperatives must be construed to include their members to effectuate the law's intent.
• Legislative Approval of Administrative Interpretation — The reenactment of a statute substantially unchanged is a persuasive indication of the adoption by Congress of a prior executive construction. RA 9520's express exemption of members' deposits from final taxes affirmed the BIR's prior administrative interpretation.
• Spirit Prevails Over the Letter of the Law — What is within the spirit is within the statute although it is not within the letter thereof. A statute must be read according to its spirit or intent to render justice.

• "The power of taxation, while indispensable, is not absolute and may be subordinated to the demands of social justice."
• "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."

• Alonzo v. Intermediate Appellate Court, 234 Phil. 267 (1987) — Followed. Cited for the doctrine that the spirit rather than the letter of a statute determines its construction, and a thing within the intent of the lawmaker is as much within the statute as if within the letter.
• Commissioner of Internal Revenue v. American Express International, Inc., 500 Phil. 586 (2005) — Followed. Cited for the principle of legislative approval of administrative interpretation by reenactment.
• Nestle Philippines, Inc. v. Court of Appeals, G.R. No. 86738, November 13, 1991 — Followed. Cited for the rule that interpretations of administrative agencies in charge of enforcing a law are entitled to great weight, unless in sharp conflict with the governing statute or Constitution.
• Tañada and Macapagal v. Cuenco, et al., 103 Phil. 1051 (1957) — Followed. Cited for the principle that what is within the spirit is within the law even if not within the letter.
• Republic of the Philippines v. Judge Peralta, 234 Phil. 40 (1987) — Followed. Cited (Dissent of Cruz, J.) for the proposition that the power of taxation may be subordinated to the demands of social justice.

• Section 24(B)(1), National Internal Revenue Code of 1997 — Imposes a 20% final tax on interest from currency bank deposits and yield or monetary benefit from deposit substitutes and similar arrangements. Held inapplicable to interest from members' deposits in cooperatives.
• Article XII, Section 15, 1987 Constitution — Mandates Congress to create an agency to promote the viability and growth of cooperatives as instruments for social justice and economic development.
• Article 2, Republic Act No. 6938 (Cooperative Code of the Philippines) — Declares the policy to foster the creation and growth of cooperatives as vehicles for economic development and social justice.
• Articles 61 and 62, Republic Act No. 6938 — Grants tax exemptions to cooperatives. Interpreted to extend to members to fulfill the cooperative's purpose.
• Article 126, Republic Act No. 6938 — Provides that doubts in the meaning of any provision of the Code shall be resolved liberally in favor of cooperatives and their members.
• Article 61, Republic Act No. 9520 (Philippine Cooperative Code of 2008) — Expressly exempts transactions of members with cooperatives from any taxes and fees, including final taxes on members' deposits. Cited as legislative approval of the BIR's prior administrative interpretation.

Carpio (Chairperson), Brion, Abad, Perez.