China Banking Corporation vs. Commissioner of Internal Revenue, et al.

decision

of respondent Commiss ione r cf Internal Revenue dated June 13, 1978 hold i ng petitioner 1 iab 1 e for· def ic ienc:y income ta>: in the amount of P517~475.47 for the year 1973 . Petitioner is a commercial bank j. ng corporation duly organized and existing in accordance with laws of the Philippines~ with main office at Dasmarinas Corner Juan Luna Str·eet, Ma n i 1 a; whi 1 e respondent is the CC'Jmmissioner· of Inter·nal Revenue and may be served with summons and ott1er legal processes at the B.I.R.

Building, Quezon City, Metro Manila .

13

- 2 -- (Petition , adm.i t ted in par. 1, Answer, pp. 1 and 53, CTA rec.)

By virtue of a Letter of Authority No. 34297 dated April 26, 1974, the Commissioner of Internal Revenue issued in favor of Revenue Examiner Antonio Aguilar an authority to investigate petitioner's books of accoLm t <:\nd other accoun t :i. ng records for· all internal revenue taxes covering the years 1973 and all unverified prior years. (p. 3, BIR, rec.)

After the termina ti.on of the said investigation, said Examiner Aguilar prepared and submitted a memorandum report addressed to the Commissioner of Internal Revenue elated Jun ::; 10, 1974 recommending t hat a notice of assessment be sent to the taxpayer for a deficiency income tax in the amount of P616,418.12 for the year 1973. ( p. 4 5, B I R rec. ) Likewise, the Chief of Financing, Real Estate and Transfer Ta}: Divis ion, Aqui 1 ino T. Larin, in his 1st Indor·sement dated August 13, 1974 (p. 46, BIR rec.)

addressed to the Commissioner of Internal Revenue, requested that a letter of assessment a nd demand be sen t to the ta:·:payer in the amount of P517, 475 . 47 as deficiency percentage ta:·: covering t he year 1973.

14

On the basis of the aforesaid recommendations, respondent Commissioner of Internal Revenue on September 9, 1974 issued ae formal letter of assessment to the petitioner in the amount of F623,897.08 for deficiency income tax, as well as deficiency S% Bank tax in the amount of FS17,475.47 for the year 1973. (See Annexes A, Av-1l and A-2, pp. 11-12, CTA rec.3; see also par. 2, petition, admitted in par. 2, Answer, pp. 1 and S232 CTA rec.) computed as follows:

1973 Net income per returm oo. . 2 » « « F25,268,606.722 Add: Unallowable deduction: Over-claimed interest expense soe ee Net income per investigation . . . F Income t « due thereon. . . 2. . « F 8,736,275.00 Less: Ircome tax due per return . — 8,174,012.00 Balance er O02 , 365.0) Add: 14% int. per annum fr. 4-25-74 to 9-10-74 ww . TOTAL. AMOUNT DUE AND COLLECTIBLE . Fo

KM HO HK

Interest income per investigation. F_8,278,807.61 5% bank tax due thereon . . 1 8 « 413,940.28 Add: 25% surcharge re ee 103, 485.09 Compromise penalty . 2... . 20.00 TOTAL. AMOUNT DUE AND COLLECTIBLE . Fo 917,475.47 These assessments were timely protested by the petitioner in its letter dated October 19, 1974 10 DECISION CTA CASE NO . 2984 - 4 - praying that a reinvestigation of said assessment be granted on the following gr-ound, to wit:

( 1) that it did receive the usua 1 10 days notice which is procedur-al before an assessment could be issued which was not fol l owed by the respondent in this case ;

(2) t hat all interest e:-:pense deduc tions reported in its Income Ta:< Return for 1973 were l egally incurred and duly paid; (3) t hat petitioner was not appraised of the sourc es and how the amounts in the assessment was arrived by the respondent.

As regards interest income ·fr·om F'W, ED, DBF' and NF'C bonds whi c h are compl ete ly tax exempt should not be subject to 51. tax and income t.:.:n:.

Inter-est income from Centr-al Bank Certificates of I n debtedness and Dividend s rec e ived from p ri vate corpor-ations should not have been inc 1 uded in the computation as ba!5is for the 51. bank ta :-: on gross receipts inasmuc h as the corresponding taxes t hereon wer·e alread y paid by the Bank. (Anne}: B, pp. 14-16, CTA rec.)

On June 13, 1978, respondent: Commissioner o ·f Internal Revenue rendered a alleged ly 16

- 5 -· received by petitioner on November 14, 197 8. This letter decision eliminated the 5% Bank tax amending and super·seding the original assessment dated September 9, 1979, by mean s of issuance of an Amended Income Assess ment Notice No.

34-4-700067-73 reducing the income tax liability of the petitioner from P633,987.05 to P526 , 909.46 (Anne:·:

C and C- .1 p.

17, CTA rec. ) , computed as follows:

Net incorre per retLtrn . . .• Add:

U1allowable deduct.ic:n Over-claimed interest e}:penses Net incorre per re-investigation • Ta:·: due therecrl Less:

Pfno...U1t paid Def icier'll:y ta:-:

Add:

1· (''~ annual int. fr. 4- .. :5-·74 to 4-25-78 • • • • TOTAL M'J...NT DLE F2 3, 268, f::l.)6. 32 E.~4 '328 s.Z§Z.!!~Q p 8,~)5,075.00 _.J;! . .s.!:!4 .J.Q..t£~S~> p 371 ,(>6.3.00 In view of the aforesaid deci s ion, petitioner on December 9, 1978 inter·posed its appeal to this Court by way o ·f petition ·for review. Respondent Commissioner of Internal Revenue on June 13, 1979, filed his answer to the said petition setting up the following Special and Affirmative Defenses, to wit:

17

- 6 - Respondent respectfully alleges - 8.

That petitioner- , just l.ike other banks, purchased tax - exempt government bonds out of its conglomerated funds consisting of time, savings, demand, margin deposits, capita 1 and other sources of funds; 9.

That interest- bearing bank deposits (time and savings) are in the nature of borrowed funds which banks have the obligation to return with earne d interest to depositors; 10.

That income from investment i n tax - exempt government bonds are tax - exempt and said investment can also serve as part of legal reserve against deposit liabilities;

11.

That since the inc ome fr o m investment in tax - exempt government bond s with interest-bearing deposit s is t ax exempt, it follows that intere st on said deposits paid by petitioner to depositor s are not deduc tible interest- e xpense under Sec.

30(b) (1) of the TaH Code, as amended and it is a well-e stablished principle that tax exemption provisions , being a legislative grace and highly desfavored by law, should be construed strict 1 y against the ta:·: payer. To ho 1 d otherwise would allow petitioner to enjoy interest-expense deduction on interest- bearing depclsi ts used to pur-chase ta:·:- t:?:·:empt govern ment bonds the earnings of which are a 1 r-eady tax - e:·:empt, thus, resulting in double tax exemption pr-ivileges;

12.

Th <;~.t contr-ary to the mistaken notion of petitioner, res pondent did not actually disallow the whole sum invested 18

DECI S ION

CTA CASE NO . 2984 - 7 - in ta:{ - eNempt government bonds (as a 11 interest- bearing deposit liabilities) but only the interest-expense on interest bearing depcmi ts used to purr: hase said bonds; interest bearing deposits (savings and time) constitute only a portion of the funds used to pur-e hase ta:-:- e:·:empt. government funds~ hence, the necessity of a formula of allocation; 13.

That during the investigation of the taN in question~ it was ascertained that petitioners' funds which flowed from different sources (time~ savings~ demand~ margin deposits, capital, etc.)

were conglomerated and that it was not possible to identify the particular- ·funds use~d to pur-c hase ta:-:-- e:·:empt gover-nment bonds; hence~ the use of aforesaid reason~ble fo r mula to allocate the!

interest bearing ·funds invested in taN-exempt government funds; 14.

That Central Bank Circular No. 93 dated Febr-uary 2, .1952 requi r·es that 5% of saving and time deposits (interest. bear-·ing) must be depo~;i ted by banks in cash w ~ th the Central Bank as legal reserve . to protect their depositors but the whole of this 5% may be invested in government tax-exempt bonds instead of in cash;

15.

That since the said 5% legal reserve requirement for interest bearing deposit liabilities (time and savings) may be in the form of investment in tax - e}:empt government bonds instead o·f the usual cash deposited with the Central Bank , it is for the best interest of petitioner to invest the whole 5% of interest bearing deposit liabilities (savings and time) in ta:·:-e:·:empt government bonds which earns interest- income and at the same time serve as 19 DECISION CTA CASE NO . 2984 - 8 -- legal reserv~ instead of just depositing the same with the Central Bank in cash as r-eserve;

16.

That in computing its net taxable income involved in this case, petitioner deducted from its gross income the total amount of P15,490.89.46 as in terest-e:·: pense, of which amount r-espondent disallowed on 1 y P1, 060,041.90 r-epr·esenting interests paid on deposits used to buy ta:·:--eNempt governme nt bond~;

under the provision of Sec. 30(b)(1) of the Tax Code, as amended; and 17.

That the tax assessment in this case is in accordance with existing laws and regulations on the matter. The records show that this case was submitted ·for- decision by the Court upon motion of counsel for respondent (s~e p. 88, CTn rec.), without the parties having presented evidence 011 the merits of this case.

Neither did the parties submitted memoranda in support their respective contentions.

As we have said, since the original assessment has been superseded and amended, and that the 5/. Ba n k tax having been eliminated, the only remaining issue now posed before this Court for resolution is whe ther or not the deduction claim in the amount of P1, 060,181.39 as interest expens e in its income tax f or t he year 1973 is allowable. 20 -

- 9 -- The pr·ov is .ion of the 1 aw app 1 icab 1 e on the case at bar is Section 30(b)(1) of the T r.1>: Code which we hereby quote below as follows: Sec. 3(>.

XHX (b) Interest:

( .1) In general The amount of interest paid within the tax a ble year on indebtedness, except on indebtedness incur-red on continued to purchase or to carr-y obligations the interes t upon whi c h is e:·:empt from ta:·:i:\tion as income under· this title.

The law seems clear and specific. It merely ca 11 s for its app 1 ica tion as wor·ded. The general rule is inter-est paid within the t.a:-:able year on indebtedness .is an allowable deduction from the gross .in cor i"?..

However, the exception is in those cases were the ta:-:payer- incurr-ed indebtedness on the purchase of to c:ar-r·y ob 1 .i.ga t.i.cms t.he interest o ·f wh.i.c:h is e>:empt ·fr·om ta>:at.ion, then such interest expense incurred is not a deductible e}:pense.

Going back to the instant c:ase , .it .is not den ied by petitioner that it did purchase ta x- e:-:empt gover·nnu;?n t. bonds and secur- i. t.i.es. (par. B, 21 ..

l DECISION CTA CASE NO . 298 4 -- 1.0 -- Petition) Definitely, on the bas is of the above I quoted that interest pro / .is.ion of the law, .it cannot now claim Oil deposits used to purchase ta>:- e>:empt government bonds and securities a re interest e>:pense and should therefore be allowabl e .

To adhere to petitioner's contention would, in effect, allow the petitioner to enjoy interest expense deduction on interest- bearing d e posit u s ed to purchase taH e:·:empt goven11nent bond s and secur·it.ies, the e .:u -nin(J nf whi c h a r-e aln::.?a d y ta :·:-- e:·:empt, resulting on the doubl e t,::~ :·: - e :·: e mp t i em privileges.

Settled is the rule in thi s ju r isdiction, that statutes must be strictly c on s trued again s t the one claiming the e:·:e•mpt.ion becaus e t hf?.

l.;l.•.·J does not look with favor· em ta:·: e;·:empt.ion and that he who would seek to be thus privileged must justif y it by words too plain to be mistaken and too categorical to be misinter·pr·eted.

(Philippine Bank Co••uni c ation vs. Co••issioner of Internal Rev enu e~ CTA Ca:..=:e No.

~January 6 .• 1988 ,;

citing Co••i ss i oner of Inte rnal Revenue vs. J.P. Kiener Co . , Ltd., G.R. No . L-24754, July 18~ 1975, 65 SCRA 22

- 11 - 142; Union Gar•ent, Inc ., vs. Court o~ Tax Appeals , G.R.

No.

16809 .

January 31~ 198?, 4

SC RA

304;

Coaaissioner o~ Internal Revenue vs. Guerrero, G.R. No.

September .;22 .• 19t·7.

21 SCRA 180.:

Republic Flour Hills Inc.

vs.

Co••issioner o~ Internal Revenue, G.R.

No.

l. -25602 .• Februa ry 18 .• 1970~ 31 SCRA 520.)

F'eti tioner· claims that r·esponden t disregarded the Bureau' s ruling deci s ion dated November· 16, 1969 whic h at the time was the prevai 1 ing ru 1 ing or doctrine cn1 the rna t ter· .

The records show that this i s mer·e 1 y c:\n a 11 eg a tion of the petitioner which is not subs t antiated by evidence.

As we have said, t his case was submit t e d for decision to the Court without the parties availing of their rights to present their ev idence in support of the i r respec tive s tand. Likewi~ · ' , pt?ti tioner al s o cla ims t hat no forma 1 or in forma 1 hearing in c onnec ticm with its request for recon s ideration of said assessment was had befor·e the Bureau, and t.ha t the ten ( 10) days notice befor·e the issuance o ·f assessment was not received by it thus depri vi ng the petitioner the 23

- .1.2 -- due process of law.

We find this contention without merit.

It is worth to note that the hearing before thi s Cour·t is in t he nature of a trial de n ' vo, where parties are given all the opportunies tn pr·esent t.hei r· r·espec ti ve evidence in suppor-t of the!ir· case and sincP. peti t.ioner did not avai 1 o ·f s uch an oppor· tun.i ty ~ .it cannot now claim that it has been deprived of the due process of law.

Definitely, this Court finds no alternative but to sustain the presumption of correctness of the assessment in qu@stion. To state a well settled rule~ i t is incumbent upon the ta:·:payer to s how clearly that the assessment is erroneous in order to relieve himself from it~ for it is a established principle in ta:{ation that an assessment issued by respondent Commissioner is pt· ima f ac i.e c:or-r-ec t ~ a nd as suc h it is incumbent upon the t.a)-:payer to overcome s uch a presumption of cor·rec tness.

Fur·thermore, the taxpayer must show that the claimed deduction comes (Daiichi Chuo Kisen Kais ha vs. Co••· of Int. Rev., 24

- 13 - CTA Case No. 1277, Hay 31, 1969; Corporacion de PP. August inos vs.

Co••. of Int. Ret'._. CTA Ca s e No, 1735, Hay 29_. 1970.) We are ther·efore of th!?

opinlon that petitioner is liable for def .ic .i.ency income tax covering the year 1973 computed as follows: Net incc:me per· r·etul"n • . . r?~~,268 , 60tJ. 2T.2 Add:

l..hallowable deduct.i.c:n Over·--c: J.airned i.nten;:.>st. el·(P:,.lfl<:':>E' .... _l._ .... Qg<;~,!§.t!_;;;~ Net i.ncane pel"· re-investigatic:n --~-'!s.:.~""§.,_Z§Z.!Oq T a:·: due t.hen?<:n • • . • • • • .

8, ~)5, 075. 00 Less:

ATaJn t paid . • • • • • • • __ .J~.,J1.1J..~~~12.!_~~ DE-ficiency ta :· ~ • • • • • • • • 371 ~06.3 .00 Add:

14/. annual int. fr . 4-2:':r-74 to 4-25-78 • • - ·--.... !;2P.,.§1g .1(~ TDT?'L Pi'O..Nf CtE • • • • • • • F;,.,,, .. ,,_"~:?,S>"s.~,?;t_"! '~~~

WHEREFORE, petitioner Chi n a B.:mk.ing Corporation is he reby ordered to pay the respondent Commissioner of Internal Fi:evenue~ the s um of P526~909.46 as deficiency income tax fo r 1973~ inclusive of delinquency inter·ests, plus 5/.

surcharge, at the rate of 14/. per a nnum fr o m June 13 ~ 1978 ~ ntil it is paid~ provi ded that the maximum amount that be collected as interest on the delinquency shall in no case exceed the amount corresponding to three (:3) years pLwsuan t to 25

DECI S ION -

·- 14 -· Section 51(e)( 2 )( 3 ) of the J a x Code, as a me nded by F'.D . No. 69.

WE

AMANTE F LLER

Presidin Judge o::/)R~ As soc i a t.e ,Judge C E R T I F I C A T I 0 N I hereby certi fy that t his decision was r eached afte r due c ons ul t at ion a mo ng t he me mbers of the Court of Ta x Appe al s i n accordance wi th Section 13 , A rtie! ~ VIII of the Cons titution. ILLER Pres.i d ng Judg e Cour t of Ta x Appea ls 26