\0 Kbpubllc of the Philippines Court of Tax Appbals Qubrzon Ulyy Clty Trust Anvbestment Philippines, et al. vs. Cc 4. A. Case No. 4443 THR Cummlssloner of Lnyernal Kevenuk, et al.

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KBPUBLLC OF THE PHILIPPINES

COURT OF TAX APPBALS

QUBRZON ULYY

CLTY TRUST ANVBESTMENT PHILIPPINES,

UNG. (Lormeriy Citicorp investment

Philippines, ine.),

Petitioner,

_ versus - Cc 4. A. Case No. 4443

THR CUMMLSSLONER OF LNYERNAL

KEVENUK , Heupondeie. . ded

Pete Se se ee ee Se oo ee |

Dbl SS LUN

Philippines, ince. comeS bDeLtore this Court praying ror

ib this case, petitioner ‘Citytrust Investment

the nullirication OL the i@edaeunene covering its

alleyged delticiency income tax tor the taxable year

1982.

the racts of this case are brietly as tollows:

kespondent Commissioner or internal Kevenue issued

assessments against petitioner dated July 30, 1987

which were received by the Latter on August 4, 198/.

The assessments were tor deticiency income tax,

deticiency documentary stamp tax, dericiency expanded

withholding tax, and deticiency withholding tax on'

interest expense, all tor the taxable year 1982.

art

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C.Y. A. Case No. 4443

Lnoa idkicet dated August Ls, 198/ received by

respondent on August 25, LY8/, cmedtd bbe protested the

assessments. Another protest-Lletter ot September t1,

198s was tiled berore the respondent on September Lo,

LyBsB.

Kespondent, on March 20, 199U issued her final

decision on the matter. ie her decision, the

assessments involving dericiency documentary stamp tax

and deticiency withholding tax on interest expense were

cancelled while the assessments regarding deticiency

income tax and deticlency axparded withholding tax were

moditied as trollows:

1982 Dericiency tncome tax

HWeLicirency income tax P424,114.00

Add: 20% interest per

. anhum( 60% max. ) 254,468.55

Total amount due and

collectible Po /8,582.55

c98¢ Vetaciency Bxpanded Withholding fax

Veticiency expanded

withholding tax PF 9Y9,/33.68

Add: 25% Surcharge 2,433.42

zu% Lnterest per annum

({l-25-83 to 1-25-89) 1,186.94

Compromise penalty 1,000.90

total amount due and

collectible P 20,954.04

Petitioner, in its bid to lessen its liability,

“ortered to settle by way ot a compromise the deticiency

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c.{.('.A. Case No. 4443

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income tax. it proposed to pay ten (10%) per cent ot

the basic tax or the amount or P42,411.40. Yhereafter

or on April 27, 41990, petitioner paid the amount of

P20,954.04 as deticliency expanded withholding tax.

Without awaiting any reply trom the respondent

with regard to the proposed compromise’ settlement,

petitioner on April 146, 1990 tiled betore this Court

this instant petition tor review. “ It is now

questioning the validity of the P678,582.55 deficiency

income tax assessment. |

Before this Court tor determination is the issue

ot whe ches or not petitioner is Iliable for the

additional income tax ‘resulting trom the disallowance

ot expenses allocable to incomés arising trom interest

and reversal of overprovision ie prior years ot

allowance tor probable losses.

, Respondent claims that petitioner, having derived

its gross income both taxable and non-taxable in 1982,

declared only in its income tax return the income which

is taxable but ha vAE THE Leeds claimed as deductions all

the expenses it had tor the. taxable dadte,, She

determined the portions or said expenses which

correspond to the incomes not subject to ordinary

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c.¥W.A. Case No. 4443

income tax and disallowed the same thus resulting to

the deticiency income tax assessment.

4n disallowing the amount ot P1,211,755.55 as

deductible expenses, respondent computed the ratio of

incomes not subject to ordinary income tax as against

the worporation’s gross income - amounting to

P4/,%18,//4.00. She totalled the tollowing:

tuterest on savings account P 60,595.00

interest earned on government

securities ‘ 833,063.00

interest earned on trust placement 863,542.00

Reversal ot overprovision in

prior years ot allowance tor

probable losses

256,417.00

fotal P2Z,013,61/.00

the basic deticié€ncy income tax was arrived at

based on the computation as shown below: (B.£.R.

Records, p. LUY)

come not subject incom tax x 'iotal Expenses x Tax

te

H Ie

w iS

Gross income

P_2,013,617.00

P4/,818,//74.00 x P32,97/5,566.00 = P1,211,755.55*

39%

DeLiciency income tax PRP 424,114.0N

* should be PL, 388,579.29

the Court tinds tor the petitioner.

AS previously discussed, respondent totalled the

incomes not subject to regular income tax and

‘disatlLowed the expenses allocated to them. She

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C.Y.A. Case No. 4443

considered lnterest incomes as .non-taxable incomes

unmindtul ot the tact that under Section 24(cc) of the

Yax Code then, interest incomes were subject to a tinal

tax.

Prior to 1LY¥8U, the prevailing law is Presidential

Decree (P.U.) No. Lilbo which was promuigated on June 3,

19// mandating tor the withholding ot tax on interest

income on bank déposits. At that time, interest income

was included in the computation ot gross income.

former Commissioner urren Plana said on the reason

tor withholding tax on interest income arising from

bank deposits:

“Yhe circum8tances that Led to the

Imposition or the tax on interest on deposit

substitutes also led to the promulgation of

ty No. Lido. Vespite the tract that interest

income 18 taxable, many individual depositors

Lailed to report their interest income trom

their bank deposit accounts in their income

Lax returns. The contidential nature of bank

deposits has practically barred the B.1.k.

Lrom ettectively entorcing the income tax law

on these types or taxable income resulting in

revenue Losses. in order to collect income

tax on interest income which was heretofore

undeclared, it was decided to require banks

to withhold tor the government the tax on

anterest on deposit accounts without

disciosing the names ot depositors and the

amounts ot their deposits. the contidential

nature or bank deposits is absolutely

Maintained. “ (Nolledo and Nolledo, the

National Internal Revenue Code, 1993 leth and

Revised kKd., p. 430)

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C.T.A. Case t.lo. 4443

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un :::>eptember 11, l':HW,

P.U. No.

1/39 was enacted

changing

the

nature

ot

tlle

wi t hl\olding

tax

credita ble to tina! tax.

lt provides:

" :::iMC. 3.

:::>ection

~4 ot the same Code is

hereby

a mende d

by

adding

a

new

subsection

( cc) be ween subsect ons (c) and (d) to read

as tallows :

( cc J •

fl t:e-.::

or

cax

on

1n t erest

from

depo:n. ts

~nd y,1.eld

l : t• m dapos1 t

s ubstl tutes.

ln erest

on

~hili pine

Cur rency

bank

ciHP.OSl s

and yield

ro m deposit substitutes

rece ved

y u roes

c

or

r esident

foreign

corp ratlO II S s h 11 be s ubJ ect to a .t.ill?l tax

on the tota l

amount the eot as tollows:

(a)

1~% or

he in ·terest on savings depo si ts; and

(b)

~ U t ot the interest on t ime depos it s and

y1e l d rrom deposit sub ·titute s whi ch shall be

coll c ted a nd

aid as pro v ' d d in :::iections 53

and

~ 4 o t

11 i s

Code :

P 1-o v 1 a e d ,

'1' h at i t

the

t·eci p.tent. ot

suc h

in erest is exempt

trom

1ncome t · x tion, n

L x s hall b

· mpo sed and

that,

iL

11 ·

is

e nJoying

p retere utl 1

jncome

· eatment ,

then the

p1:e.tere ntial tax rate · so provide d shall be

1mpo~ ed

.

" (Uncterscoring s upplied)

fro m

'i'lie J:espondent, on November '/, 191:30 issued Hevenue

Hegulations No.

12-~0, as amended providing tor the

t1n a l

wLthhol~ing income tax on bank deposits.

~ection

3(a) ot the Hegulations reads as tallows:

" ~l:C.

3.

lmposlt~on of 'l'ax.

'l'he

tollowtng taxes on income shall be imposed:

(a) l 'lnal Wl tl1l1ol d 1ng lllcome tax on -

( 1)

ln terest on sav1ng depos1 t.

In

general, the rate ot tinal withholding tax to

be imposed on savings deposit maintained with

authorized agent bank shall be tifteen (15%)

per cent based

on

adjusted gross interest

45

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C.’.A. Case No. 4443

paid or accured. However, where the

recipirlent/depositor is enjoying preterential

1ncome tax treatment under existing laws, the

withholding tax rate to be appYried shail be

the tax rate applicable to said class oft

Laxpayers or to such type ot income as shown

Ln the certiticate or preterential tax

treatment issued by the Commissioner of

Jnternad Revenue,

De

KX XXX XXX

(2) interest on time deposit or yield

On deposit substitute, - in general, the

Late cot Linal withholding tax to be imposed

oh interest on time deposits by authorized

aqent banks and on yield on deposit

substitutes by authorized agent banks and

non-bank Linaneral intermediaries shali be

tventy per centum (20%). However, where the

depositor/investor 18 enyoying preterential

tax treatment under existing Laws, the

Withholding tax rate to be applied shall be

the tax rate applicable to the said class ot

taxpayer or to such type ot income as shown

in the certitioate OL preterential tax

treatment issued by the Conmissioner of

internal Revenue,

at

XXX? XXX xxx"

Chlassitying interest incomes as non-taxabie

incomes is a misnomer since income arising trom hank

deposits, yovernment securities or trust placements are

b

taxed teparately under the ax Code. P

°

furthermore, income trom interest which is

‘

“

considered as passive and tixed income -can be realized

without the necessity ot incurring expenses. in

earning interest income, taxpayers need not spend for

y — eg ;

Salaries, wages, commissions, ‘ management or

.

*

A&G

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C.T.A. Case No. 4443

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protessional

tees ,

rental

and

other

uti lities,

advertising and promotion s , depreciatibn, supplies and

the lik.e.

Normally, once the money is invested, there

is nothing lett tor the taxpayers to do.

The invested

<

mon·ey will surely earn interest income.

Consequently,

there j_s no logical basis to allocate expense to this

kind ' ot Hlcome.

Likewise, reversal ot overprovision in prior years

ot

al .LoHance

tor

probable '

losses

is

merely

an

accounting entry whith will not result to any tangible

"

income on tile part ot the petitioner; thus, no expenses

can

be

rightly allocated

to it.

In

peti ti·oner' s

tinanc1al statement, it noted that:

"Allowan . .Q_e __ _!Q.L __ .I:' robaq_le

Losses

'I' he

Company

provides

allowance

tor

doubtful

accounts ba s ed on a review by management

of

the

c urrent

status

ot

all

the

existing

r eceivable" (B.l.l<. l<ecords, p.

~6).

1:' r ov is lon tor probable los se s, unlike bad debts

written-ott is

not

a

deductible expense

as tar as

computing tile taxable income is concerned.

Conversely,

a reversal entry ( overprovision) cannot be considered

as income.

'!'he incomes used by the respondent as bases for

disallowance of expenses cannot justify her assessment.

As

explained

above,

no

expenses

can

be

rightly

4

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