Ae = a Ae Ae — — 4 Refurlic of Fue Cittaceriry Court of Tax Apfeals Qlvget Ony Philippine Bank of Communication vs. C.1T.A Case No. 2725 Commissioner of Internal Revenue

DECISION -

CTA CASE NO. 2725 May 18, 1973 and June 5, 1972, Revenue Examiner Antonio Aguilar of the Financing, Real Estate and Transfer Taxes Audit Division, was authorized by respondent Commissioner of Internal Revenue to examine petitioner's books of accounts and other accounting records covering the year 1972 and all unverified prior years. (Exh. ly fox 29 V@ies Ty GIR rec.; see also Exh. 13, p. 87, Vol. 1, BIR records.) Examiner Aquilar after his investigation prepared a report dated June 18, 1973 addressed to the respondent Commissioner finding petitioner liable for deficiency income tax in the amounts of P277,837.62 and P258,791.16 for the years 1971 and 1972, respectively. (Exh. 8, p. 69, Vol. 1, BIR rec.) Likewise, on the same date June 13, 1973, said examiner submitted another report to the respondent Commissioner finding petitioner liable for deficiency 5% bank tax and surcharge in the amounts of 254,984.15 and P58,408.80 for the same years 1971 and 1972 respectively, and rec- ommended that an assessment be issued to the peti- tioner to enforce the collection of said deficiency taxes in question. (Exh. 13, p. 87, Vol. 1, BIR rec.)

DECISION -

CTA CASE NO. 2725 In view of the aforesaid recommendation of the examiner, respondent Commissioner issued an assess~ ment dated June 25, 1973 (Exh. 14, pp. 936896, Vol. I, BIR rec.), demanding payment from the petitioner the said deficiency income tax and the 5% bank tax cover- ing the years 1971 and 1972 computed as follows:

Year Income Tax Bank Tax Total

VOT) 282,765.77 P54,984.15 P3537, 749.92 1972 261,639.72 58,408.80 _ 520g DAC. 52 Total P5444, 405449 P113,392.95 P657,798.44 (see also Par. 2, Petition for review, admitted in Paragraph 1, Answer, pp. 1 and 11, CTA rec.) Petitioner, through its auditor, protested the said assessment in a letter dated August 13, 1973, (Exh. 15, pp. 100-104, Vol. 1, BIR rec.; see Par. 3, Petition, admitted in paragraph 1, Answer pp. 1 and 11, CTA rec.) As to the deficiency income tax, petitioner contends that the disallowance was due to the fact that said amounts represent interest paid to various depositors whose bank deposits were invested in the purchase of government bonds or securities,

DECTIStON -

CTA CASE NO. 2725 the ineame of whieh is tax-exempt, and the examiners must have relied on a ruling to the effeet that bank deposits used to purchase tax-free government bond constitutes loans payable by the banks to its depo- sitors and therefore the interest paid on sueh depo- sits is not deductible. Petitioner submits that the interest on bank deposits used to purchase government bonds or securities, the income of whieh is tax-exempt constitutes atlowabte deduction. This is beeause the indebtedness represented by deposits in sur bank is not of a kind of indebtedness contemplated under Section 30(b) (1) of the Revenue Code as "indebtedness incurred or continued to purchase and carry obliqations." As veqards the deficiency bank bax, petitioner contends Lhe sole reason given by the examiners in assessing the

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a bank tax on the interest derived from tax-exempt government bonds is that the exemption applies only to income tax and that this is withoul legal basis. The certificates of the government bonds purchased by Philippine Bank of Communication for which it derived interest income shows clearly the qranting of the tax exemptions and extends to all forms of the exemptians of the Philippine Government.

DECTSION -

CTA CASE NO. 2°25

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Petitioner's protest was decided by respondent in his letter dated June 27, 1975, denying petitioner's reconsideration, and reiterated his demand For the payment of the alleged defiecieney income tax and bank taxes in the total amount of P657,798.44 which letter of denial was allegedly received by petitioner on July 26, 1975, (Exh. 16, pp. 125-127, Vol. 1, BIR rec.; see also, paragraph 4, Answer, pp. 2 and 11, CIA rec.)

In view of respondent's letter of denial, peti- tioner was constrained to interpose tks appeal ta this Court on August 25, 1975. (p. 1, CIA rec.) On Oetober tl, 1975, respondent filed its answer to said petition and set up the following special and affirmalive defenses:

4, Deposits in banks, whelbher commercial or savings bank, im current account or in savings, fixed or time deposits, constitute loans payable by the banks to its depositors and are gaverned by the provisions coneerning simple loans;

t >». Deposits used by pelitioner Lo purchase government bonds constitute an indebtedness of petitioner to its depositors;

6. The government bonds purchased by petilioner are directly payable to petitioner and not to its depositors;

DLCISTOQN -

CTA CASE NO, 2725 7.

ereditors for tioner are not pursuant to

8. In deficiency petitioner is interest thereon, by Republic Act Na.

monthly deficiency the pravisions of Section amended by amended as Code, as 9.

tax provided 10.

ceipts items under The 5

From

treated

Section

ll.

tax-free excluded receipts the year 197] 12, The 25% surcharge for late payment in addition to the deficiency bank tax due the petitioner pursuant to Section 250 of the Tax Code;

13. The assessments involved herein were issued in accordance with Jaw and regulation the matter. (see pp. 11-12, CTA rec.)

In the of Internal Revenue, memorandum addressed Jnterest paid use interest-bearing deductible the provisions of addition incame tax liabilities liable to pay 1/2% monthly to Section Dd1fd), and Petitioner is under mo oO any as

Interesks

interest by the in computing and meantime, 6 by petitioner to its of funds invested on tax-free investments payable to peti- to pursuant interest

Seetion

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bank tax source earned by petitioner on bearing investments were petitioner from its qros the 5% bank tax due for 1972;

on October 17, to the Chief, interest the 197] in 51(€e) (2)

Presidential

subject to 249 bhased whatever "gross income", 29 of the Tax Cade;

EXPCNSES

Section 30(b)(1) and in 2343, of

Decree

the 5 of the on as 1979 is Finaneing, 1972 question, mow a qras including 1.16% accordance with

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No.

Tax

bank Tax Code;

s Pre- those defined

the Deputy Commissioner

ssued g

Real

69;

1s from r

DE CIS ION -

CTA CASE NO . 27 25 7 Es tat e & Tra nsfer Ta xes , requesting the l atter thnt respondent ' s assessment issued to the petitioner for deficiency in co me t ax and Bank tax be recomputed pur s uAnt to th e lat est ruling of the OIII r~dd r essed to th e Bank er ' s Ass oci ation of the Philippines. (Ex h .

17 , p . 2 , BIR rec ., Vol. Il.)

Aft e r a r ec omput ati on of th e s nid de fi r.ie ncy income t ax a nd ba nk tax by Examiner Antonio Ag uil nr , he recommended that the originAl assessme n t for th e d e fi c i e ncy in th e r~ mount s of e 282 , 765 .77 nnd e 26 1, 639 .7 2 for the years 197 1 nnd 1972 be se t as id e , ond a modified assessment in the a mount s of e 20B , 363 . 67 a nd e 222 , 634 . 65 be issued for the a for esaid years . (Exh. 22 , p . 19, Vol. II , Bill r ec . ) .

As r e qards the h a nk tax , said Examiner Antonio Aguil ;:J r in hi s m e rno rr~ ndum rlnt e cl Fe bruary 28 , 198 0 r eco mm e nd ed th at the oriqin<ll nssess- me nt of e 54 ,984 . 15 nnd e58,4DR . RO fo r the y~nrs 1 97 1 nnd 197 2 be set aside , r~ nrl a modif ied 0ssessment be i. ss uerl in th e a mount s of ell , 518 . 28 and e 22 , 205 . 23 for th e sa id yea r s 197 1 nnd 1972 .

(sec [xll. 26 , p . 31, Vol. II , BIR r ec.)

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DECISION -

CTA CASE NO. 27.°5 In the meantime, after the termination of the hearing of the instant case in 1983, petitioner on February 17, 1983 filed its consolidated memorandum in CIA Cases Nos. 2979, 3059 and 2725, (see pp. 105- 188, CTA rec.) However, on July 17, 1984, a com- promise agreement was reach by the parties as regards the settlement of the income tax aspect of this ease. (see par. 3, of respondent memorandum filed on April 8, 1986, pp. 229, CIA rec.) Henee, the only issue unresolved and which is now pending before this Court is the 5% bank tax assessment against petitioner. The parties, however, does not question the mathematical computation of the bank bax in question, The only issue posed before this Court for re- solution is whether or not interest income derived by petitioner on Central Bank Certificates of Indebbedness for the years £971 and 1972 should form part of its gross receipt for the purposes of the 5% bank tax provided for in Section 249 of the Tax Code.

The provision of the law refied upon by res- pondent in imposing the 5% bank tax is Section 249 (now Section 206) of the Tax Code, which provides as follows:

f

DECI SION -

CTA CA SE NO.

27 25 9 Se c . 24 9 .

lo x on Gonk s- Ther e nh nll be coll ec t e d n tn x of fiv e r c r ce ntum on urn ss r ece ipt de riv e d b y all bonk s doing bu s in ess in th e Philippines from int e r es t s , disc ount s , di- vid e nd s , c ommi ss ion s , profit s fr om exc h a ng e , roy alti es , r e nt a l s of prop e rt y , r ea l a nd pe r- s on a l, and nll oth e r it e ms tr en t e d as gro ss in c om e und e r Section tw e nt y-nin e of thi s Cod e . It s hould be not e d th a t a ft e r a r e -in ves tig a ti on by Exa m.il e r Antonio L.' Aguilar, h e s ubmitt ed a me mo- randum r e port d a t e d Fe bru a r y 28, 1980 a ddr esse d t o th e Chi e f, Fina 11r: inl), ll e8 l Es tat e <J nd Tr a ns f e r Tax Divi s ion, r ec omm e ndinl) th e r e du c tion of th e 5% bonk l ox fr om e 54,904.1 5 to ell, 5l8.28 for th e yea r 1971, a nd from e 58 , 408.80 to e 22, 205 . 23 for th e yea r 197 2 , l)iVing th e r e ns on thnt petiti one r' s gro ss r ece ipt s from i nt e - r es t in c om e der iv e d by it from ce rtain qo ver nm e nt bond s a r e c on ce de dly e ith e r exe mpt fr om tn x a t ion or exe mpt from all ln xes .

( [ xh. 26 , pnr. 3 , p. 31, Bill r ec ., Vol. ll ) How e ve r, th ose i nt e r es t in co me from Ce ntr a l Bonk Cer tifi c at es o f Ind e bt e dn ess (CBC I ' s) ar e exc ludible for purpo ses of sa id 5% b a nk t nx . Th e pe rtin e nt portion of the ass umption c lau se of th e sa id Centr a l Ba nk Certificate of Ind e bt e dne ss i s he r e by quot e d a s follow s :

"A ss umption of t ax liabil i ty . The b<Jnk ass um e paym e nt of th e corr es ponding t ax on int e r es t e orn e d a nd pr e mium, if an y , 9

DECTSTON -

CTA CASE NO. 2725 10 paid to holder of this certificate" (Exh, D-2, p. 98, BIR rec., Vol. ll, see also pp. 232-233, CTA rec.).

Petitioner contends that inasmuch as the assumption of tax liability clause in the above-quoted Central Bank Certificate of Indebtedness, in not qualifying or limiting the tax assumed to income tax only, such provision should apply literally to include the 5% bank tax in question.

As early as 1971, the Governor of the Central Bank, Gregorio Licaros, had already issued a Central Bank ruling to the effect that only the income tax liability of the holder is covered, and the Bureau of Internal Revenue has understood the Central Bank's assumption of tax liability clause to refer to income tax aspect solely. For ready reference, we hereby quote the said ruling as follows:

November ll, 1971

The Acting Presidént

Bankers Association of the Philippines

Manila

This is in reply to your letter of October 20, 1971 relative to the question raised by Prudential Bank & Trust Company du .-

DECISION -

CTA CASE NO . 27 25 11 as to whether or not th e 5% ta x (u nd e r Sec tion 249 of the National Internal Revenue Code) co rr espo nding to the int e re s t ear ned by a bank on it s CBCI ' s i s included in the ass umpti o n of tax li abi lity on the pa rt of th e Central Bank .

I wi s h to advise that the qu ery i s a nswera bl e in the negativ e . In reply o f the Dir ect or, Sec ur ities Market De partment of this Bank, to th e ~l a 1m l1l e d 5y Prud e nt1al Ba nk on May 4 , 1971 ex a n na ur e of the a ov e me n lone a ss 11mpt io n of t ax liability of the Central Bank , a nd alr ea dy c l a rified th a t only the incom e ta x liability of th e hold er is covered . Th e Bureau of Int e rn a l Revenue und erstood the Ce ntr a l Bank" s ass umption of li abi lit y to refer s olely to th e income ta x a nd th e comp ut atio n of wh a t th e Ce ntr al Bank remit s periodically to th e Bureau wns base d on th e bes t esti mate o f the income taxes whi c h th e hold ers would have paid on th e inter est ear ning s .

A c lo se r ea ding of the pertinent c l a use in th e ce rtificat e to th e effect that the bank ass um es payment of th e cor r es- ponding ta x on int e r~ s t ea rn e d a nd pr e mium, i f a ny , paid to. th e hold er o f thi s cer tifi ca t e l ea ds to th e in esca pable co nc lu s ion th at t here is only on e typ e of tax which i s a ss umed by the Central Bank in favor of the hold e r. Thi s ta x ca n onl ,. be the incom e ta x , si nce hold e r s i n g e n e r a 1 , 8 r e n o t s u b j e c t t o t h e 5 ?~ t n x o n th e gro ss incom e o f bank s und e r Sec tion 249 of the National Internal Re venu e Co de . Please be guided 8ccordi ng l y .

( Under lining s uppli e d. )

Very truly your s , (SG D. ) G. S . LI CAR OS

Governor"

11

DECISION -

CTA CASE NO. 2725 12 Sametime on Mareh ll, 1976 the Bureau of Internal Revenue has reiterated the Central Bank ruling tai the effect that the Central Bank Certificate of Indebtedness are nok among those government bonds and securilies en- joying exemption from taxation. The said Bureau of Internal Revenue Ruling is hereby quoted as follows:

March IL, 1976

Bankers Association of the Philippines

Philippine Banking Corporation Building

Bonifacio Drive, Hoan ida

Gentlemen:

LT have the hanor ta ainform you Ehat this Office has ruled that, for purposes of computing the 5% bank tax, interests From government bonds of securities, which by specifie provision of Jaw, ate “exempt From taxation" or "exempt from all taxes" do not form part of the yross receipts on which said tax is imposed, for to inelude such tax-free interest income as part of the basis af the bank tax would, in effect, nullify the Fax exemption specifteally provided For in the Jaw.

it should be noted, _however, that Central Bank Cer- tificates of Indebtedness (CBCI) are” hot among Uhos e overnment bonds and securities enjoying exemplion from

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taxation; for al although the. purchasers ; thereat are nol

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innade to pay income ‘tax on Thteresta “earned. by 4 hewn From said certificates ’ said interests | care not vac tux free as the Central Bank | assumes pa ment of t

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ally tax- > income a t vereon. Sue int 1 er interests “earnec tax due ttl u h bei T the yy Le ie narned by banks a Central Bank Certificates. “of. ‘ndebt tedness form par their gtoss receipts con which the, “5% bank tax tan Zz computed, Very truly yours, (SGD.) EFREN T. PLANA

Acting Commissioner of Internal Revenue

TAN-1456-040- 3

(cited under the 2nd par., Lxh. 263 Underlining supplied. )

lé

DECISION -

CTA CASE NO. 2725 3 Petitioner relied entirely on the assumption tax liability clause of the Central Bank Certificate of Indebtedness which state that "the bank assumes payment of the correspanding tax on interest earned and premium, if any, paid to the holder of the cer- tificate." It is to be noted that this assumption tax liability clause does not explicitly, equivacally and expressly provide the kind of interest or premitm to be included as exempt in the payment of the tax. Nothing is mentioned to the effect that the 5% bank tax in question is included in the exemption, other- wise, it would have so stated in aforesaid assumption tax liability clause as an exemption in the payment of the same. On the contrary, Central Bank as well as the Bureau of Internal Revenue has expressly men- tioned in its respeetive rulings that Central Rank Certificate of Indebtedness are not among thase government bonds and securities enjoying exemption from taxation.

A “Certificate of Indebtedness" is defined as a short-term negotiable promissory note issued by a government or corporation as evidence of a floating ,

DECI SION -

CTA CASE NO . 2725 14 indebtedness . "

( p . 266 , Third New Int e rnntional Dictionary , 1976 [ rl . )

A c J ose scr utin y of soid cer - tifi ca t e of ind e bt e dn ess (Ex h . "D- 2", p . 98 , Vol. I, BI~ rec . ) will c l ea rl y s how that the Central Bonk h as unil a t era l oblig a tion to c ompl y wi th the ro ndit io ns os provid e d for in sa id cer tifi ca t e . It is not , th e r efore, o bil atera l co ntr act as arg ued by the petit ion er nnd the cite d provi s ion s or the instant case . De f'init e ly , th e ir1terpretation of sai d ass umption of tax li nhi lit y c l a use i s withit t the discretion of th e CR n trn l Ba nk s in ce it is th e nqency of governm e nt that issue t he bond in qu est i o n .

To ho l d t he petitio ner not liabl e to the 5% b a nk tax me r e ly on th e basis of its interpretotion on th e a for esai d c l a use , which i s not ex press l y nnd c J cnr l y provid e d for by l a w i s not f ovore d in this juri sd i c tion . Se ttl e d i s th e rul e th a t t ax s t at ut es mu s t-. be st ri ct l y co nstr u e d aqainst th e one c lniming th e exe mption beca use th e law does not look with f a vor on t ax exe mption s and t hat he wh o would seek to be thus privil ege d mu s t ju s - tify it by word s too p]ain to be mi s tak e n a nd too ca te - gorical to be mi s i nterpreted.

(Co mmi ss i o ne r o f Int e rnol “<q

DECISION -

CTA CASE NO. 2725 Revenue vs. J.P. Kiener Co., Ltd. G.R. No. L-24754, July 18, 1975, 65 SCRA 142., see also Union Garment, Inc., vs. Court of Tax Appeals, G.R. No. 16809 January 31, 1982, 4 SCRA 304; Commissioner of Internal Revenue vs. Guerrero, L-20942, September 22, 1967, 21 SCRA 180, Republic Flour Mills Inc. vs. Commissioner af Internal Revenue, G.R. No. 25602, February 18, 1970, 31 SCRA 520.). Thus, it was held that exemption from taxation are highly disfavored in law; and he who claims an exemption must be able to justify his claim by the clearest grant of organic or-statute law. An exemption from the common burden cannot be permitted to exist upon vaque implication. (Collector of Internal Revenue vs. Manila Jockey Club, Inc, G.R. No. L-8755, Warch 23, 1956; 98 Phil. 670; see also House vs. Posadas, 53 Phil., 338 Asintic Petroleum Co. vs. Llanes, 49 Phil., 466.) In the instant case, there exist no showing that the assumption tax Liability clause expressly exempt petitioner from the liability of the 5% bank tax in question.

IN VIEW OF THE FOREGOING, petitioner is hereby ordered to pay the amount of B11,518.28 and B22,205.23

DLCISION -

CTA CASE NO. 2725 16 as deficiency 5%) bank tax for years 1971 and 1972, res- pectively, inclusive of the 25% surcharge as provided in Sections 249 and 250 (now sections 260 and 262) of the Tax Code. With costs against petitioner.

Associate Judge

4

WE CONCUR:

Gat lid

AMANTE /F TILLER

Presiding Judge

Z. REYES

Associate Judge

CER T J F £EOCA TT ON

I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article

AMANTE A ILLER

Presidifig Judge

Court of Tax Appeals

VIII of the Constitution.

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