Republic of the Philippines Court of Tax Appeals ~~, et al. vs. Commissioner of Internal Revenue

DECISION -

- 5 - Such co nt e ntio n failed to convin~e t hi s Court. On the c ont r a ry, We gave credence to the testim ony of Mrs. Guia D. Hasaganda , the Fin anc ial Accountant of here in Petitioner , during the hearing of this case on October 19, 1990, thus: "ATTY. LOBRIN:

Q.

Now, let 's come t o the interest that wa s paid corporation in 198 5. proof of by your Did you submit with the in c ome tax return filed for the year 1985 the 1701B contain in g a list of creditors to whom interests were paid in 1985?

A.

Yes, sir.

This is attached to th e inc ome t ax return we filed in 1985.

BIR Form 1701B re fer s to income p a yments not subjected to withholding tax.

Q.

Will y o u be ab l e to locate from here? A.

Yes, this one.

!\TTY. LOBRIN:

We would like to make it of record that thi s bunch of papers which I am now handling is the docket or of fi cia l record of the Bureau of Internal Revenue on this case, def i cien c y income t ax f or the year 1985.

And on page 195 of this docket appear s the BIR Form 1701B submitted for the Calendar Year 1985 whi c h I respectfully request to be marked as Exhibit "A".

JUDGE ROAQUIN:

lfark it.

1'7

DEC I SION -

C.T.A. CASE NO. 4 408 - 6 - (T he deputy c lerk so mark s .) Q.

I am shoHing to you, t1s . 'fiS <tganda, this docum ent marked ~s Exhj it "A" which is png~ lqS of t.hA OIR record .

What relation has this documen t , Exhibit "A", with t h e do cumen t which you said y ou attached to the income tax re tu rn of the corporation f o r 198 5 i ndicating creditors , the i r addresses and the amounts of in t e rest paid to the m by the petitioner?

A.

~h at is the same doc ume nt He attached to the i nco me tax re t urn we filed wit h thP Bur eau of Intern a l P.ev,..nut: as '-' required by the law.

( See T.S. N. , pp. 5-6)

X X X

Q.

No w, t h e total of this as nppParl ng in Exhibit "A"' is P49,972 , 321.90.

This figure I have just read f or P49 million plus represents the to tal nf int e r Ps t paid by your corpor.1 i o n this list "A" .

ns marked appear ing in as Exhibit A.

Yes , sir .

Q.

Are these the only int~rests ynur l\ .

No .

corporation p aid on loans and obligations incur r e d in con n ecti o n wi t h the b usiness of the corpora t ion?

Q.

Th ere are so me more not listed in Exhibit " A".

A.

Yes.

10 .)

-- 7 - Q.

Did y ou report to the 13ttrf"!<:ltt nf !\.

Interna l Revenue t h ose interests which you s i.d cn·p not yet listed in Exhibit "A" ? Ye s , sir.

We submitted a sP par at~ a lph a list to th e Bureau of Internal Revenue because t hese are the interests paid by th e co mpany which were s ubject~d to withholdi ng tax.

Q .

Now , let us g et thi s clear. In Exhibit "A" I is itemized interest p aid by y our c orporat i o n, Philippine Refining Company, t o numerous bank s a nd l ending ins tituti ons.

In a ddi tion to the intere sts r ef le cte d in Exhibit "A" y o u said you r c)mpa ny pa id interes t also on some oth er obligations. Do y o u h a ve document to prove th is other interest not in cluded in Exhibit "A''?

!\.

Yes , sir .

I have h ere t he annu:-11 re t.u rn of final in come tax Hithheld su bmi tted to the BIR on J an uary 3 1, 1986 a s required.

Toget her v ith this is th e Alp ha list of all incomP p a ytl)ent s subjected to final Hit hh o lrli ng tax during t h e y ea r 1 98 5, p ar t of tvhich is the inter est port. ion.

(See T. S .N., pp. 8-9)

X X X"

Hence, the contention of the Respondent that the interest expense of P2 , 666 , 545 .1 9 s h ould be di sa llowe d for being unsupported , was belied by the fact that t he Alpha List which cont a ined all income pRymelts subjected to final withholding t ax during 19 · '

- 8 - .)

the ye a r 198!i, part of uh ich Hns the interest } 1 , J 9.8 § (E xhibit "8"). From the t e s tim on y o f th e same 1vi t n e s s of the Petitione r, this Court takes cog n izan ce of the followin g established facts : 1.

That the tot a l interest ded u~ ~d as expense in the in come tax return of PRC fo 1985, amo unted t o P52 , 517,l17 . 97 ; 2 .

Th a t of the sai d amount:

of P5 2 , 51 7,117. ?7 , t.he investigating E·.aminer a llovted only F49, 97 2,321 . 90, wh ic h is the tota l of the interest lis ted in BIR For m 1701 - B, marke d "A" ; 3 .

That the Investigating Examiner di ~_;C\ ll o\;~ed the differe n ce bet.Heen the above t\..ro figures (P5 2 , 517,117 .97 and P49, 9 72,321.90}, or a diff r:>re nce of r;; , 666,5 45. 19 ;

nnd treated this !

difference as "lll'lsupp ort~d " Rnd di sa llov1ed it and mn de it a b as is for the deficiency income tax in questio n;

4.

That the Investig a t i ng Exami ner did not · take up and did not consider as part of dedu c tible interest the additional intere st li s ted n t he seco nd doc ument , th e Alpha Li st , marked as Exhibi t "B " ;

2

DECISION -

C.T.A. CASE NO . 4408 - 9 - 5.

T h ;=, t t ll e j n t ~ 1'1:' ;· t 1 i r· t P d in the Alpha.

List Hould "' ipe out iscrepan c y of P 2 , 666 , 545 . 19; .;mel t h ere could be n o more i.nt.erest disallowance to serve as basi s for de ficiency in come t ax assessment ; and 6.

The Investig a ting Examiner , admitted all the fore going except the interest stated in t he Alph a List (Exh . "B") . Why, the n , did the i nvesti gat ing e xaminer not conside r as deducti bl e expe ns e the interest listed in th e Alpha List?

To this question , this Court d iscred its the co nfu si ng and in co here nt ansHer of the investigating exam iner , Hr. Edgardo Raquid. First , he testifi ed that h e did not see the .... /\.l.ph a L:i_,s_t. , but o n f u rther questioning by the cou nsel of the F e t i t i on e r , he a d mi .t. .. t: .. €!. .. <1. t h a t he sa H an d e x am i n e d 0 n cro ss·- exam i n a t i o n i n the h ea ring o f Januar y 27 , 1 992 , l1r. Raquid t estified as follows:

ATTY. LOBRIN:

Q.

x x

x.

But what I a m after is, a nother li sti ng included in the alpha list whic h BIR re gulations require t o be submitted within one mont h foll o wing the end of the year .

You did not SPe th at a l pha Jist containing an n hPr listing of intPrPst?

2.i s ep ar1!· P

A. But I ask this from the

JUDGE ROAQUIN:

No, answer directly the question.

Q. Did you see this?

A. No, Sir.

consider ment as part of the payment during the (See T.S.N., pp 20-22) x xX xX Q. The Alpha List is the device that the BIR rules and regulations provide so that the BIR may know right away what are those items subject to withholding tax that are paid by the taxpayer, and that is called the Alpha List?

A. Yes, Q. And you. did not see that alpha list in your investigation?

I_saw it. It’s here. This is the Alpha List. I saw it." (See T.S.N., p. 29) A. Yes, 1 We consider the conflicting declarations of” witness Raquid as unreliable. As ruled by the Supreme Court in the case of Mondragon vs. Court of Appeals, 61 SCRA 511 (1974), “involving a witness in contradictions during cross-examination is one of the recognized modes of impeachment which a 22 - 11 - renders the evicl~:~nce from his ] ips 1•0rt.hless for b oth parties .

Neither one of his contra1ic ory can be relied upon".

Suc h contradictory d~clar at ion s fortified Our belief that the witn ess of the petitioner was the one telling the truth, not only because of such contradictory declarations by witness of respondent but, more so be cause of the presence of the Alp ha List.

NOH I

we come to the dist::ussi on I)[ ba-1 r1nbts. The allege d b ad debts are : Ham~ of Debtor

TRADE DSRTCRS :

R~~oblas Store T·rnas Stor~ (~~g~no, Rizal) A r F C S S C~ Variety St re Potronila Catap (Pet ~ in i Grocer7 ) U'Pen H~rt Int~rprise h 0unt of Debt p 11,961.00 16,842 .79 13,833.62 10 ,895.82 29 , 0~8.30 I 10 ,487 .08 / R~>son f.or adjudgi~g the ~ccount 1s Bad Debts Th~ star~ was totally burned by fire th~t hit Urdaneta ~h•ppir~ ~oFpl~x in N~vesber J0g1;

debtor h s n1 visibl! assets a~d C0 l o~~i cn is Vfti f@ J ~tn ;

Th! own!rs wer~ rurder!1; ~· ~h ao c e of coll~cti0 O~tst1ndi ng accounts since 1°32 / 1983; dis1llJWPd 2% dis~o~~t and dare>ged stocks d~do:te~ in ai~~n~e R~PCRS under nev manage~~nt; no chance to collect; Store was hit by fire ./ custo~e r cannot be located; in Alabang;

Writ of execution c~n.no t be . pl~ment~d as cu stom~r transferred residence and whereabouts remain unknown; Balance of an acco un : ; nwner of store c3n no long~r b~ loca ed;

2 ~

Esther Suinto ?

(Esther $/§ Store) 254,375.54 c Customer insclvent and nsw residing abroad per credit investigation, sheriff's return, pestman’s return and sales report;

Manuel Qrea a (Elvan Gen, Mdsq.} 44,272.82 ¢ Writ of execution canrat be inplemented as customer has no leviable assets; :

SUNDRY DEBTORS

Aboitiz Shipping Corp. . P 89,483, 40 30% discount given on hijacked shiprent of 298,278.00;

J, Ratz Trucking 69,640.34 30% discount on hijacked shipment of P232, 134.47;

Renats Alejandro 13,559.90 Balance of account of a gaparated enployee who is now ingolvent; Lucite Sta, Marta (Davao City} 13,772.00 Value of stock shortages due to robbery/holp-up in July 1985; Craig, ‘Mostyn Pty.

Ltd, 23,738.00 Short shipment of tallow; claim was declined by the insurers;

C. Itoh 19,272.22 Short shipment of pale oil; clate aqainst supplier filed in 1982 but remained unacknowledged; ;

Crocklaan B.Y. 77,690.00 Cost. of reprocessing a rejected shipment; clain filed in 1982 was declined by supplier;

Enriched Food Corp. 24,158.00 Value of rejected shipment of dried red onions; clain unacknowledged by supplier despite many follow-ups, Out of the sixteen (16) accounts alleged as bad debts, We find that only three (3) accounts have met the requirements of the worthlessness of 24

- 13 - the acco unts, li0n<:" Here p ropr>rly ~~r j tt,en of f as bad debts, name ly:

1.

2.

3.

Petro nt la Catap (P et Hint Grocery) Esther Guinto (Esther Sari-sari Store ) Hanuel Orea (Elman Gen. Mdsg.

T ,0 T A L F 29 ,0 98.3 0 25 4, 375.5 4 34,2 72.82 .!.>.}_!. .?. ... l ... ?. ~ .. ?. ... ~ .... ? .. §. . ................................................................ Our statute permits the de duction of debts "actually ascertained to be worthless within the taxable ye ar ", to prevent arbitrary action b y the taxpayer to unduly avoi d tax li abi li ty.

The requireme nt o f ascertainm0nt of vl or t h l e s s ness requires proof of two f a cts:

(1) th a t the tax payer did in fact ascertai n the debt to he worthless in the year for which the deduction YTas sought ; and ( 2) that , in d o in g so, he a~tPd in good faith .

Good faith on thr:!

part of the tcl'··payer is not.

enoug h.

He mu st s h o11 also the1t he had re aso nably investigated the relevant facts and had drawn a reasonable inference from the informati on thus obtained by him.

(Collector VS.

Goodri ch International Rubber Co., 21 SCRA 1 336 , December 26 , 1967).

The creditor must be able to demonst rate that the debt is not o nly uncollectible but also appears un co lle c tible at any time in the 25 "'

DECISION -

C.T.A. CASE NO . 4408 - 14 - fu t.u re .

So, where the recover y is merel y doubtf ul, deductio n will not b e all owed. Th ~ following ste ps s h o uld be followed: 1.

sending of statements of accounts; 2 .

sending of c ollecti o n letter s ; 3 .

giving th e account to a lawyer for colle c tion; and 4.

filing a collection case in court. Al l of the foregoing requireme nts have been satisfied .

In fact, the writ of executions issued r1.ga in st the above-ment ' oned acc0 nnt s have been returned s in ce they cannot be im p lemented either b-?r·ause the owner h as a l rPElrly t _ransferred residence and his \'1 he r e a bout~ s unkn oHn or he is insolvent. vri th regar d to the other accounts, n a me l y : 1.

Rem obl as Store p 11, 96 1. 00 .)

2.

Tom as Store 1 6 ,8 42.79 3 .

AFPCE S

1 3 ,833.6 2 4 .

CH Varie ty store 10 ,895. 82 5.

U'Ren Hart Enterpr i se 10 ,487.0 8 ' 6 .

Aboitiz Shipping Corp. 8 9,483.40 7.

J. Ruiz Trucking 6 9 ,640.3 4 8 .

Rena to Alejan dro 13 , 550 . 0 0 9.

Cra tg , lfostyn Pty. Ltd. 23 ,7 38.00 10.

c. Ito h 19,272.22 11.

Crocklaa n B.V.

77 , 690.00 2G

- 15 -

12. Enriched Food Crop. 24,158.00

13. Lucito Sta. Maria _13,772,00 Too T AL ; P395 324.27 We find that said accounts have not satisfied the requirements of the "“worthlessness of a debt". Mere testimony of the Financial Accountant of the Petitioner explaining the worthlessness of said debts is seen by this Court as nothing more than a self-serving exercise which lacks probative value. There was no iota of documentary evidence (e.g., collection letters sent, report from investigating fieldmen, letter of referral to their legal department, police report/affidavit that the owners were bankrupt due to fire that engulfed their stores or that the owner has been murdered, ¢tc.), to give support to the seat imony of an employee of the Petitioner. Mere allegations cannot prove the worthlessness of sich debts in 1985. Hence, the claim for deduction of these thirteen (13) debts should be rejected.

In view of the foregoing, petitioner’s deficiency income tax for the year.1985 is computed as follows:

Net income per return P197,502,568.00 Add: (disallowed Bad Debt) meee ASEH: 27 Net taxable income per decision P197,897,89 7 > aw) wd a

- 16 - In come tax rluP therPon Less:

T 8 X

rt l r r rt (l y p rt i rl P G9,764.2G2 .29 6 9 I !1 s ,B 9 9 .. · .. .9..0.. Defir:ien c y inr:nmP. trtX per doo.cis'nn 1\rlcl:

201; int erest ( 60% m~x.

) p 1118,363 . 29 .... 8 9 , 0 1 7 . . 9..?. Total amount due and collec tibl e p 2 3 7 , } .B. ~ ... : ... ?..?.

WHEREFORE, the findings of respondent Commissioner of Internal Revenue is hereby modified .

Petitioner is ordered to pay respondent . the amount of two hundred thirty seven thousand three hundred eighty one pesos and 26/100 (P237,381.26), as deficiency income tax for the year 1985, plus surcharge and interest incident to delinquency, pursuant to the provisions of Sec. 248 and 249 of the app licable Internal Revenue Code, as amended.

\'IE CONCUR:

/ I Q~Q~~ ERNESTO D. ACOSTA Presiding Judge GRUBA I 'I ~~ p~. ~ / · . RAMON 0. DE'ifty Associate Judg 20

DECISION -

C.T.A. CASE 0 . 4408 - 17 - CER.'TIFICA'TIO I hereby certify that th is deci sion was r eached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. 23 <e...,.~Q_ .. ~ ERNESTO D. ACOSTA Presiding Judge Court of Ta x Appeals ..- J