Philippine Bank of Communication vs. Commissioner of Internal Revenue

DECISION

PALANCA-ENRIQUEZ, J.:

THE CASE

This is a Petition for Review filed by Philippine Bank of Communication (hereafter "petitioner") praying for the cancellation of the assessments for deficiency income tax, percentage tax, withholding tax on compensation, 20% final tax, 1 0% onshore final tax and documentary stamp taxes for the years 1996 and 1997 and that respondent be ordered to desist from collecting said taxes from petition~

~ I

THE PARTIES

2 PBCom is a banking corporation organized and existing under the laws of the Republic of the Philippines, with principal office address at PBCom Building, Juan Luna Street, Binondo, Manila. Respondent Commissioner of Internal Revenue, on the other hand, is the Chief of the Bureau of Internal Revenue ("BIR"), the government agency charged with the collection of national internal revenue taxes, with office at the BIR National Office Building, Diliman, Quezon City, where she may be served with summons and other processes.

THE FACTS

The facts of the case, as culled from the records, are as follows: On December 14, 1999, PBCom received a Final Notice of Assessment dated November 5, 1999 and eight (8) Assessment Notices with Assessment Nos. ST-INC-96-0115-99; ST-GRT-96-0116-99; ST- WC-96-0117-99; ST-FT-97-0118-99; ST-OFT-0119-99; ST-OFT-97- 1020-99; ST-DST-96-0121; and ST-DST-97-0122-99, all bearing the same date, from the BIR, through Asst. Commissioner-Enforcement Service, Percival T. Salazar, Esq., in connection with PBCom's alleged 1996 and 1997 internal revenue tax liabilities. ~ ~/

3 The total deficiency tax of petitioner for taxable years 1996 to 1997 amounts to P389, 185,343.78 1, detailed as follows: A. Income Tax 1996 1997

Total

Basic

P53,287,765.11 -

Interest

29,278,666.50 -

Compromise

-

Amount Due & Collectible

P82,566,43 1.61 - P82,566,43 1.6I B. Percentage Tax (Gross

Receipt Tax)

Basic

P5,528, I 06.44 -

Interest

3,286,152.16 -

Compromise

- -

Amount Due & Collectible

P8,8I4,258.60 - P8,814,258.60 C. Withholding Tax on

Compensation

Basic

P3,637.46 -

Interest

2,2I0.77 -

Compromise

- -

Amount Due & Collectible

P5,848.23 - P5,848.23 D. 20% Final Tax

Basic

- PI 0,668,737.52

Interest

- 4,172,661.78

Compromise

- -

Amount Due & Collectible

PI4,84I,399.30 E. I 0% Onshore Final Tax

Basic

PI ,565,5 I2.36 P548,382.36 P2,113,903.72

Interest

929,745.74 2I4,478.43 I, 144,224.17

Compromise

- - 45,000.00

Amount Due & Collectible

P2,495,267.I 0 P762,860.79 P3,303, 127.89 F. Documentary Stamp Tax

Basic

p I54,454,966.84 22,295,384.20 176,750,35 1.04

Interest

93,874,296.5I 9,029,630.60 I 02,903,927.II

Amount Due & Collectible

P248,329,263.35 P3I ,325,0I4.80 P279,654,278.15 (Annex "A", Petition for Revie&¥ 1 In the Formal Notice dated November 5, 1999, the total assessment of deficiency tax is P389, 140,343.78. There is a difference of P45,000.00 vis-a-vis the sum of the details of the deficiency assessment.

wn J

4 On January 13, 2000, petitioner filed a protest letter to the Assessment Notices.

On March 13, 2000, petitioner filed with the BIR the supporting documents for such protest.

Since respondent failed to act on the protest within the 180-day period, on October 9, 2000, petitioner elevated its case to this Court by way of Petition for Review.

In his "Answer" filed on December 1, 2000, respondent, by way of special and affirmative defenses, alleged that: the worthlessness of the loans cannot be ascertained; the assessment for deficiency withholding tax on payment of compensation is based on Section 34 (K) of the 1997 Tax Code; the proceeds of petitioner's Initial Public Offering ("IPO") from previous years were placed in its trust department declared as income allegedly subjected to final tax. However, petitioner's allegation that correct taxes were withheld was not supported. Thus, respondent added said income placed in trust department to petitioner's taxable income, pursuant to Sec. 2. 57 (A) of Revenue Regulations No. 2-98; the investigation conducted shows that petitioner failed to include other interest income in its gross income, which petitioner claimed to have already been subjected to the 20% final tax. Thus, petitioner w~

5 assessed of deficiency gross receipts tax on the basis of Section 121 of the Tax Code on Tax on Banks and Non-bank Financial Intermediaries; the investigation conducted shows that there was a discrepancy in the 20% final withholding tax on interest expense for the year 1997; hence petitioner was assessed of deficiency tax; petitioner was assessed of the 10% deficiency onshore final withholding tax on the basis of Section 27 (D) (3) of the 199 7 Tax Code, in relation to Section 2 8 (a) (7) (b) of the same Code. For 1996 and 1997, there is a discrepancy; the investigation conducted revealed that some of the bank transactions were not subjected to documentary stamp tax, under Sections 180, 181, and 182 of the Tax Code.

Petitioner presented Domingo Aure, Pepita Bravo, Rene Alejandrino, Rowena Ong Tan, Annabelle Yeo, Lorenzo Francisco, Richard Arvisu, Charisee Dolina, Leo Villanueva, Felimon Baltazar, Francisco Capalar, Ave Reyes, as witnesses, and Revenue Officer Edison Larin, as an adverse witness, and formally offered documentary evidence, marked as Exhibits "A" to "RRR ", inclusive of their submarkings, which were admitted by the Court in a Resolution dated May 18, 2005, except for Exhibits "QQQ-5" to "QQQ-8 ", "QQQ-12 ", "QQQ-17 ", "QQQ- 19" to "QQQ-21", "QQQ-23" to "QQQ-28", "QQQ-31 " to "QQ~ 6 46", "QQQ-49 ", "QQQ-50", "QQQ-51-b ", "QQQ-53", and "QQQ- 54 ", which were denied admission for failure to present their original coptes.

On the other hand, respondent presented Revenue Officer Edison Larin, as witness, and formally offered documentary evidence, marked as Exhibits "1" and "2 ", which were all admitted by this Court in a Resolution dated March 19, 2007.

Thereafter, both parties were granted thirty days from notice to file their simultaneous memoranda, afterwhich the case shall be deemed submitted for decision.

Petitioner having filed its memorandum, without respondent filing the same, the case was deemed submitted for decision. Hence, the instant Petition for Review raising the following:

ISSUES

As stipulated upon by the parties, the following are the issues for this Court's consideration:

I

WHETHER THE BIR CORRECTLY DISALLOWED THE

ACCOUNTS WRITTEN OFF IN THE YEARS 1996 ANDn. i i 1997.

{91'"-

II

WHETHER THE BIR CORRECTLY ASSESSED THE

DEFICIENCY WITHHOLDING TAX ON PAYMENT OF

COMPENSATION FOR 1996.

III

WHETHER THE BIR CORRECTLY COMPUTED THE

TAXABLE INCOME OF PBCOM FOR 1997 AS BASIS

FOR THE FINAL WITHHOLDING TAX.

IV

WHETHER THE BASIS USED BY THE BIR IN

COMPUTING

THE

GROSS

RECEIPT

TAX

WAS

CORRECT.

v

WHETHER THE BASIS USED BY THE BIR IN

COMPUTING THE FINAL WITHHOLDING TAX ON

"INTEREST EXPENSE

ON

BORROWINGS"

WAS

CORRECT.

VI

WHETHER THE BIR CORRECTLY COMPUTED THE

1996 AND 1997 FINAL TAX ON ONSHORE INCOME.

VII

WHETHER THE BIR CAN LEGALLY ASSESS PBCOM

FOR ALLEGED DOCUMENTARY STAMP TAX FOR

1996 AND 1997.

THE COURT'S RULING

The petition is partly meritorious.

7

The First. Second and Third Issues 8 The first, second and third issues, being interrelated and pertain to deficiency assessment for income tax, will be discussed jointly. A. Income Tax for Taxable Year 1996 Petitioner was assessed by respondent of deficiency income tax in the aggregate amount of P82,566,431.61, inclusive of interest, for taxable year 1996 (Assessment No. ST-INC-96-0115-99), computed as follows:

Computation of Proposed Deficiency Income Tax

For the Year 1996

Net Income per Return

57,243,533.00

Add: Adjustments

Salaries & Wages

18,765.46 Interest income from trust 41 ,862,957.00 Interest income from others (Note A) 67,536,016.29 Accounts Written off 11 '796,000.00 121,213,738.75

Adjusted Net Income

178,457,271.75

Rate of Tax

35.00%

Tax Due Thereon

62,460,045. 11

Less: Payments

Per Annual Return

Per Quarterly Returns

2,729,700.00

Creditable Withholding Tax

6,442,580.00 9,172,280.00

Sub-Total

53,287,765.11

Add: Penalties

Interest ( 4-16-97 to 6-30-99)

29,278,666.50

Compromise

- 29,278,666.50

Deficiency Income Tax Year 96

82,566,431.61

(Exhibit "2" and Exhibit "III'')

From the above computations, it appears that the following items were added back to petitioner's net interest income per return: a) Accounts written-off disallowed as an expense in taxable year 1996 amounting to Pll, 796,000.00;

b) Compensation not subjected to withholding tax, disallowed as an expense, amounting to P18,765.46; ~

9 c) Interest income from trust, for allegedly not being subjected to final tax, amounting to P41,862,957.00; and d) Interest income from other sources, for allegedly not being subjected to final tax, amounting to P67,536,016.29. While the amount of P6,442,580.00 was deducted as creditable withholding tax.

First Issue

a) Accounts written-off disallowed as an expense for taxable year 1996 amounting to Pll, 796,000.00.

Petitioner's Arguments

Petitioner avers that it complied with the requirements of write-off with respect to the amount ofP11,296,000.00; that the borrowers have no leviable properties; the value of the mortgaged properties (collateral) is substantially less than the outstanding loan and the expenses that will be deducted if the property was to be foreclosed.

Respondent's Counter-Arguments

Respondent counters that pursuant to Section 34 (E) of the NIRC of 1997, as amended, the accounts written-off were disallowed as expense, although approved by the BSP, as said accounts could not be ascertained to be worthless based on the schedule submitted; that there are lands and checks used a collateral for the loans.

10 In this regard, Section 29(e) of the NIRC of 1977, as amended, provides, as follows:

"SEC. 29.

Deductions from gross income. - In computing taxable income subject to tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section: Provided, however, That in computing taxable income subject to tax under Section 21 (f) in the case of individuals engaged in business or practice of profession, only the following direct costs shall be allowed as deductions:

XXX

XXX

(e) Bad Debts. - In general. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 30 (b) of this Code."

Pursuant to the foregoing provision, the requisites for deductibility of bad debts are:

1) There must be an existing indebtedness;

2) The debt must be ascertained to be worthless, as when the debtor is insolvent;

3) It must be actually charged off within the taxable year; and 4) The debt must be connected with one's profession, trade or business.

''

11 After a careful review of the evidence on record, the Court finds that petitioner failed to comply with the said requirements. Being interrelated, the first and fourth requisites will be discussed jointly. Petitioner failed to prove that the amount of P11 ,796,000.00 constitutes existing indebtedness due to petitioner that are connected with its trade or business. Without petitioner's books of accounts and source documents, there is no way for the Court to determine whether the amount of P11 ,796,000.00 represents loans and advances that are valid, legally demandable and enforceable against the debtors, and that said amount was granted in the ordinary course of petitioner's business. As regards the second requisite, although the Bangko Sentral ng Pilipinas ("BSP") ascertained the worthlessness and uncollectibility of the accounts and authorized that the same be written-off (Exhibits "B ", "B-1 " to "B-6 ''), under the NIRC of 1977, as amended, which is the applicable law to the instant case, the approval of the BSP is not one of the requirements for the deductibility of bad debts. Moreover, well-settled is the rule that the burden of proof is on the taxpayer to show not only that the debt is worthless but also that it became worthless during the taxable year. The burden accorded the taxpayer can be overcome if the taxpayer can point ~ 12 to some certain event or events occurring within the taxable year which evidences the worthlessness of the debt (Hunsaker vs. Comm, 615 F.2d 1253). In the present case, although petitioner claims that the amount of P11,796,000.00 represents worthless and uncollectible accounts, and petitioner presented notices, demand letters and complaints against its creditors (Exhibits "F to "PP ") to support its claim; however, some of the documents presented by petitioner do not show any connection to the accounts subject of write-off. Specifically, Exhibit "EE", which is an "Application With Motion To Recall Warrant of Arrest" in Crim. Case No. 3636, entitled "People of the Philippines vs. Clarita de Guzman ", does not show any iota of connection with the account of Clarita de Guzman amounting to P1 ,140,000.00 and P3,670,000.00, respectively, subject of write-off in the instant case. While Exhibit "CC" is an Order of the Regional Trial Court of San Fernando, La Union in Civil Case No. 5073, entitled "Philippine Bank of Communication vs. Cynthia de Guzman ", declaring defendant in default. But, nowhere in the said Order was it indicated that the said case was filed against Cynthia de Guzman in connection with the amount of P200,000.00, subject of write-off in the instant case. Moreover, petitioner failed to establish the worthlessness and uncollectibility of the following accounts: ~ ~)

NAME OF BORROWER

1) Abat, Ernesto 2) Chan, Ernesto 3) Chan, Laureano 4) Guzman, Antonio de 5) Guzman, Gerardo de 6) Jallorena, Miguel 7) Lucero, Domingo 8) Tan, Melchor 13

AMOUNT

REQUESTED FOR

WRITE-OFF

P150,000.00 100,000.00 100,000.00 150,000.00 140,000.00 100,000.00 100,000.00 100,000.00 In other words, other than the mere schedule of Accounts Requested for Write-Off (Exhibits "B-2" and "B-3 ''), showing the name of the borrowers, booking unit, collateral, date turned past due, amount requested for write-off and justification for write-off, petitioner did not present any proof that notices and/or demand letters were sent and/or actions were instituted against the aforementioned accounts. Even assuming arguendo that the accounts composing of the amount of P11,796,000.00 were indeed worthless and uncollectible, it bears stressing that in the schedule of Accounts Requested for Write-Off (Exhibits "B-2" and "B-3 ''), the dates the accounts subject of write-off turned passed due were as early as 1983, 1984, 1993. The latest is only in 1994. With said schedule showing that the component accounts in the aggregate amount of P11 ,796,000.00 became past due as early as 1983, 1984, 1993 and 1994, petitioner failed to prove that said accounts ha~

14 become worthless in taxable year 1996, the year when said bad debts were claimed as expenses.

Contrary to petitioner's claim that the accounts contained in the Schedule of Accounts Requested for Write-Off are worthless and uncollectible, however, petitioner's witness, Pepita Bravo, on direct examination testified that petitioner was able to collect the collectible accounts from the following persons: Emesto Chan, Romano Chan, Antonio de Guzman, Gerano de Guzman, Miguel Jallorina, Rolando de Jesus, Domingo Lucero, Emesto Abad and Ariel Galvez (TSN dated October 4, 2001, p. 28) .

Petitioner, therefore, failed to comply with the second requisite. As regards the third requisite, although petitioner presented a Secretary's Certificate regarding a Resolution dated March 26, 1996 approving the write-off of various accounts in the sum of Pl3,040,474.97 (Exhibit "C") and Letter dated April 26, 1996 informing the BSP of the write-off of the total accounts of P13,040,416.97, consisting of 20 accounts with individual balances of P1 00,000.00 or more amounting to P11 ,796,000.00, and 38 accounts with individual balances of less than P100,000.00 amounting to P1,244,474.97 (Exhibit "E''), petitioner failed to ~ 15 prove that said accounts were actually written-off from its books of accounts during the taxable year 1996.

Considering that petitioner failed to comply with the prescribed requisites for the deductibility of bad debts, We uphold respondent's disallowance, as expense, the accounts written-off amounting to P11 ,796,000.00 for taxable year 1996.

a-1) Accounts Written-off disallowed as expense for taxable year 1997 amounting to P22,255,863.18.

As to respondent's disallowance of accounts written-off for the year 1997 in the amount of P22,255,863.18, the same is erroneous and has no relevance to the instant case. Petitioner was not assessed of any deficiency income tax for taxable year 1997 in the Final Notice dated November 5, 1999 (Annex "A", Petitionfor Review) .

Second Issue

b) Compensation not subjected to withholding tax, disallowed as an expense, amounting to P18, 765.46.

Anent the second issue, respondent partly disallowed the salaries and wages amounting to P18,765.46 incurred by petitioner for taxable year 1996 due to alleged non-compliance with the Revenue Regulations on withholding tax on compensation, pursuant to Section 34 (k) of the Tax Code.

,

16 Petitioner counters that respondent arbitrarily imputed an alleged variance of P18,765.46, without explaining how said amount was arrived at.

After a careful examination of the records of the case, the Court finds that in respondent's Analysis of Withholding Taxes on Compensation For Taxable Year 1996 (Exhibit "2 ", BIR Records, p. 99), respondent erroneously used the amount of "Compensation and Fringe Benefit", per FS in comparing with petitioner's salaries and compensation, per alphalist to arrive at the alleged salaries and wages expense not subjected to withholding tax in the amount ofP18,765.46. Since what is being disallowed is petitioner's claimed compensation expense allegedly not subjected to withholding tax, respondent should have compared the compensation per alphalist with petitioner's claimed "Salaries and Wages", per Account Information Form (BIR Form 1702AIF- I , BIR Records, p. 380). This is so, because the amount of "Salaries and Wages", per Account Information Form, is the one that is being deducted in the computation of petitioner's taxable income. Considering that respondent used an erroneous basis m determining whether petitioner's salaries and wages expense was indeed subjected to withholding tax, it necessarily follows that the amount of ~

17 Pl8,765.46 found by respondent, as salaries and wages allegedly not subjected to withholding tax, is also erroneous. Thus, respondent's disallowance of the amount of Pl8,765.46, as deduction from gross income, is without factual and legal basis. c) Interest income from trust, added to the taxable income for allegedly not being subjected to final tax, amounting to P41,862,957.00. Respondent added the taxable income from trust amounting to P41 ,862,957.00 for taxable year 1996 to petitioner's taxable income for petitioner's failure to submit proof that said amount was subjected to final tax.

Petitioner, on the other hand, counters that respondent's inclusion of the interest income from trust ofP41 ,862,957.00 to petitioner's income subject to corporate income tax is tantamount to double taxation for the following reasons: (1) said interest income not subjected to income tax was earnings from investment of petitioner's capital (equity) funds generated from the public offering of its shares; (2) said interest income was previously subjected to final withholding tax of 20%, which the BSP withheld; and (3) said interest income was already added, as an adjustment to the account "other income" in petitioner's audited financial ~

18 statement, as evidenced by petitioner's Working Profit and Loss for Taxable Year 1996 (Exhibits "DDD " and "DDD-1 "). An examination of the records shows that other than petitioner's bare allegation that the amount of P41,862,957.00 pertains to earning from investment of petitioner's capital (equity) funds generated from the public offering of its shares, petitioner did not present any documentary evidence that will determine the nature of the amount of P41 ,862,957.00. Said proof of the nature of the amount ofP41 ,862,957.00 is material for purposes of determining the applicable tax/tax rate, considering that petitioner claims that the amount of P41,862,957.00 has been previously subjected to final tax.

Petitioner's allegation that the amount ofP41,862,957.00 is subject to final tax and therefore should not form part of its taxable income is even contrary to its own averments and actuations. Petitioner averred, also tried to prove during trial (TSN dated September 16, 2004, pp. 9-11), and even presented documentary evidence (Exhibits "DDD " and "DDD-1 '') that the amount ofP41,862,957.00 was added as an adjustment to petitioner's "net interest earnings" reflected in its audited Financial Statements ("FS"). Petitioner's act of adjusting its net interest earnings per FS by adding the amount of P41,862,957.00 clearly shows that said amoun~ 19 was not subjected to final tax, since petitioner believes that an income subject to final withholding tax is not required to be reported in the income tax return of the taxpayer (Petitioner 's Memorandum dated May 10, 2007, p. 12).

In fact, during the trial, petitioner's witness, Annabelle Yeo, testified that petitioner did not submit documentary evidence to prove that correct taxes were withheld and remitted to respondent on the interest income from trust (TSN dated September 16, 2004, pp. 17-18). Petitioner's contention that since the amount of P41 ,862,957.00 was already added to petitioner's net interest earnings perFS, as shown in its Working Profit and Loss for Taxable Year 1996 (Exhibits "DDD " and "DDD-1 "), respondent's inclusion in the computation of petitioner's deficiency income tax is tantamount to double taxation, is devoid of merit.

A perusal of said Working Profit and Loss for the Taxable Year 1996 shows that the amount ofP32,685,333.00 was added as an adjusting entry to the account "Interest Income on Trading and Investment Securities".

A careful examination of Part V of petitioner's Account Information Form (BIR Form 1702AIF -1 ), attached to the Annual Income ~ ~)

20 Tax Return for 1996, reveals that the amount of interest income on "trading account securities" subjected to corporate income tax reflected only the amount of P1 ,736,876.00. A comparison of the trading account securities, per Account Information Form with petitioner's Schedule of Interest Income and Other Income for the period ending December 31, 1996 (Exhibit "FFF '') shows that the amount of P1,736,876.00 trading account securities reflected in petitioner's Account Information Form (subjected to corporate income tax), consisted only of the following accounts:

(I)

Interest income - taxable investment p 538,020.83 (2) Interest income - reverse repo (RRP) 1,181,894.60 (3) Interest income on trading and investment sec 16,960.00 - branches

Total

P1,736,875.43 Rounded off to P1,736,876.00 The adjusting entry of P32,685,333.00 (forming part of the P41,862,957.00 alleged income from trust) was not reported in petitioner's Account Information Form, as interest income on trading account receivables.

Clearly, notwithstanding said petitioner's adjustment of the alleged income from trust to form part of its net interest earnings per FS, the adjustment of P41,862,957.00 (consisting of addition to interest on and trading and investment account in the amount of P32,685,333.00 ~ ~ /

21 deduction in the interest expense in the amount of P9, 177,624.00 (Exhibits "DDD " and "DDD-1 ''), was still not reported in petitioner's Account Information Form, as one of the taxable incomes. Therefore, contrary to petitioner's claim, the adjustment ofP41,862,957.00 was not subjected to corporate income tax.

Considering that under Section 28 of the NJRC of 1977, as amended, gross income is defined as "all income from whatever source derived, including (but not limited to) the following items: xxx (4) Interest; xxx", respondent's addition ofthe amount ofP41 ,862,957.00 to petitioner's net income per return for purposes of computing petitioner's deficiency income tax for taxable year 1996 (Exhibit "III'') has therefore legal and factual basis.

Accordingly, We sustain respondent's inclusion of the amount of P41,862,957.00 to petitioner's income subject to corporate income tax. d) Interest income from other sources, also added to the taxable income for allegedly not being subjected to final tax, amounting to P67,536,016.29.

Respondent avers that petitioner failed to submit documents to prove that the amount of P67,536,016.29, computed as follows, was not subjected to final tax: ~

Interest income per Reconciliation

Earnings

On Trading Account Securities

On Tax Paid Investment

On Tax Paid Investment (Acctg)

On Interbank Call Loans

On Tax Paid Trading Gain

Less: Interest income per F/S On trading & investment On deposit with banks

Understatement of Interest Income of Income & Retained

p 71 ,106,609.28 124,117,261.66 199,750.69 171,472,905.66 23,100,380.00 837~320.00 P390~834~227.29 P233,767,718.00 89~530~493.00 P323,298,211.00 P67,536,016.29 (Note A, Exhibits "2" and "III'') 22 Petitioner counters that (1) respondent misclassified certain items of interest and erroneously applied the corresponding tax rate; (2) in computing the alleged deficiency income tax for the taxable years 1996 and 1997, respondent failed to properly consider the sub-accounts classified respectively under the account Interest Income, namely: (i.) Interest Income on Receivables from Customer; (ii.) Interest Income on Deposit with Banks; and (iii.) Interest Income on Trading and Investment Securities (Exhibit "JJJ-1 '') ; (3) the BIR examiners unjustifiably failed to include in their analysis of petitioner's interest income the account "Interest Income on Receivables from Customers". The only items considered and included were "Interest Income on Deposit with Banks" and "Interest Income on Trading and Investment Securities"; and ( 4) ~

Q)

23 during the trial, petitioner proved that what the BIR examiners did was to obtain some of the component accounts (or sub-accounts) of the "Interest Income on Deposit with Banks" and "Interest Income on Trading and Investment Securities" only. That, in making said comparison or reconciliation, the account "Interest Income on Receivables from Customer" was not taken into consideration. Thus, a variance would definitely and logically result therefrom. Hence, it is erroneous for the BIR examiners to treat such variance, which they themselves had created, as deficiency income tax for the years 1996 and 1997.

1. Interest Income on Receivables from Customers, including Interbank Call Loans of P171,472,905.66. While We agree with petitioner that its account "Interest Income" consists of the following sub-accounts: (i.) Interest Income on Receivables from Customer; (ii.) Interest Income on Deposit with Banks; and (iii.) Interest Income on Trading and Investment Securities (Exhibit "JJJ-1 ''), We, however, do not agree with petitioner that respondent examiner's non-inclusion of the account "Interest Income on Receivables from Customers" in its comparison/reconciliation of petitioner's interest income is unjustifiable. ~ 24 Respondent is correct in not deducting the account "Interest Income on Receivables from Customers" from the said amount of P390,834,227.29, consisting of the sum of interest income items found by respondent that were not subjected to corporate income tax. A review of the records reveals that the account "Interest Income on Receivables from Customers" is composed of the following sub- accounts: (Exhibit "FFF") :

Head Office

Branches

Total-Regular

FCDU

Total Per Books

Adjusting

Entries

Interest

Income-

P518,236,828.1 ~

Discount Earned

Interest

Income-

9,462.5(

Demand Loans

Interest

Income-

I 76,356,037.4(

Time Loans

Interest Income-Past

38 , 742,232.7~

Due/TTL

Interest

Income-

Import

Bills

& 93 ,208 , 595.2~

Acceptances

Interest

Income-

Interbank

Call

3,156,990.50

Loans Receivable

Interest

Income-

Interbank

Loans

Receivable-Tx Pd

171 ,472,905.66 fNTEREST

Audited

Balance

INCOME

ON I ,00 I, 183,052.2 1 911 ,853,689.00 1,9 13,036,741.21 125,936,342.0( 2,038,973,083.21 25,455,717.79 2,064,428,80 I.OC

RECEIVABLES

FROM

CUSTOMERS

A comparison of the above audited balance of Interest Income on Receivables from Customers with the Interest Income on Receivables from Customers, as reported in petitioner's Account Information Form, subjected to corporate income tax, shows a difference ofP297,409 ,248.0~ ,•

25 (P2,064,428,801.00- P1,767,019,553.00). Said difference was accounted by this Court, as follows:

Amount

Exhibit

Interest income receivable -FCDU (subject to a 125,936,342.00

"FFF"

separate return)

Interest Income-Interbank Loans Receivable-Tx Pd

171 ,472,905.66

"FFF"

?297,409,247.66

Total

rounded off into P297,409,248.00 On the basis of the foregoing, it is clear that the amount of P171,472,905.66, representing interest income-Interbank

Loans

Receivable-Tx Pd was not declared by petitioner, as income subject to corporate income tax.

Hence, respondent is correct when it did not deduct the total amount of interest income on receivables from customer from the sum of interest income items found by respondent that were not subjected to corporate income tax.

Petitioner, however, contends that the above interest income on interbank len dings (Interbank Loans Receivable-Tx Pd) was subjected to 20% final withholding tax by petitioner's borrowers; hence, the same should not be subjected to corporate income tax. Further verification of the records reveals that out of the interest income from Interbank Loans Receivable of P171 ,472,905.66, only the amount of P128,518,452.48 was subjected to 20% final withholding tax, pi

26 as certified by the Court-Commissioned Independent CPA (Exhibit "MA- 3", TSN dated Jan. 22, 2003, p. 15) . This is evidenced by BIR Forms No. 1745 and certifications from various banks {Annexes "B-1 " to "B-24 " of Exhibit "MA-3 ") that the total amount of P25,703,690.00, representing 20% final tax, was withheld on the amounts due from them (Exhibit "MA- 3 '').

The Court, therefore, finds that the Interest Income - Interbank Loans Receivables - Tax Pd that was not subjected to final withholding tax and was not included in the income subjected to corporate income tax and should therefore be added to petitioner's income subject to corporate mcome tax 1s only P42,954,453.18 (P171,472,905.66 P128,518,452.48), and not the whole amount of P171 ,472,905.66, as computed by the respondent.

2. Interest Income on Trading Account Securities of P71,106,609.28, on

Tax

Paid

Investment

of P124,117,261.66, on Tax Paid Investment (Acctg) of P199,750.69, and on

Tax

Exempt Investment of

P83 7,320. 00.

In the reconciliation of petitioner's income (Note A, Exhibits "2" and "III''), respondent deducted the amount of P233,767,718.00 representing Interest Income per F IS on Trading and Investment Securities, from the amount of P390,834,227.29, the sum of interest income items found by ~ ~ ) 27 respondent that were not subjected to income tax. Considering that in petitioner's Schedule of Interest Income and Other Income (Exhibit "FFF "), the accounts interest income on Trading Account Securities of P71 ,106,609.28, Tax Paid Investment of P124,117,261.66, Tax Paid Investment (Acctg) of P199,750.69 and Tax Exempt Investment of P837,320.00 are component accounts of Interest Income on Trading and Investment Sec of P233,767,717.08, respondent's findings that said accounts were not subjected to corporate income tax was deemed offset. Respondent, having accounted said understatement of interest income, the deficiency assessment on Trading Account Securities ofP71,106,609.28, Tax Paid Investment ofP124,117,261.66, Tax Paid Investment (Acctg) of P199,750.69 and Tax Exempt Investment of P837,320.00 are hereby ordered cancelled.

3. Interest Income on Tax Paid Trading Gain of P23,100,380.00 vis-a-vis

Deposit

with

Banks

of P89,530,493.00.

In respondent's computation of petitioner's understatement of interest income (Note A, Exhibits "2" and "III''), respondent found that the amount of P23, 100,3 80.00 interest income on tax paid trading gain was not subjected to corporate income tax. In reconciling said deficiency assessment, respondent compared the amount of P23,100,380.00,

{9R

~1\ • ••

28 allegedly pertaining to tax paid trading gam, with the amount of P89,530,493.00, representing interest income per F/S on deposit with banks, by deducting the amount of P89,530,493.00 from the amount of P390,834,227.29, consisting of the sum of interest income items found by respondent that were not subjected to income tax. We find this erroneous considering that per petitioner's Schedule of Interest Income and Other Income (Exhibit "FFF"), interest income on tax paid trading gain is not a component account of the interest income on deposit with banks. The account interest income on deposit with banks with a total amount of P89,530,493.00 consists only of the following accounts: Interest income · with foreign banks and interest income-deposit with BSP . Since the interest income on tax paid trading gam of P23,100,380.00 is not a component of the account interest income on deposit with banks of P89,530,493.00, the Court finds that there is a mismatching in respondent's computation of petitioner's understatement of interest income with respect to these two accounts.

Further

examination of the records shows that respondent failed to provide a computation on how the deficiency assessment on tax paid trading gain of P23,100,380.00 was arrived at.

29 We, therefore, cancel the deficiency income tax assessment with respect to the amount of P23,100,380.00 for lack of factual and legal basis.

In sum, out of the understated interest income of P67,536,016.29 found by the respondent, the Court finds that petitioner is liable to pay deficiency income tax of P42,954,453.18 only, computed as follows:

PER

RESPONDENT'S

PER THIS COURT'S FINDINGS

FINDINGS

Ordered

Interest Income

Cancelled/

Defi ciency Excluded from

Income Tax the Assessment

(1) On Interbank Call Loans Pl71 ,472,905.66 p 128,518,452.48 P42,954,453.18

(2) On Trading Account Securities 71 ,106,609.28 71 ,106,609.28

On Tax Paid Investment

124,117,26 1.66 124,117,26 1.66

On Tax Paid Investment (Acctg)

199,750.69 199,750.69

On Tax Exempt Govt

Securities

837,320.00 837,320.00

(3) On Tax Paid Trading Gain 23, I 00,380.00 23, I 00,3 80.00

Total

P390,834,227.29 P347,879,774. 1 I P42,954,453.18 Less: Interest income per F/S On trading & investment 233,767,718.00 233,767,718.00 On deposit with banks 89,530,493.00 89,530,493.00

Sub-total

323,298,211.00 323,298,2 11.00

Understatement

of

Interest

Income

P67 ,536,016.29 P24,581,563.11 P42,954,453.18 e) Creditable withholding tax of P6,442,580. 00. Petitioner contends that respondent failed to recogmze the creditable withholding tax m favor of petitioner in the amount~

30

P21,945,212.29 (Exhibits "QQQ "and "RRR '') . As a result, petitioner's income tax liability has increased by P21 ,945,212.29. A perusal of the records shows that most of the amounts claimed as creditable withholding tax by petitioner pertain to capital gains tax assumed and paid by petitioner's buyers. Petitioner contends that pursuant to Revenue Memorandum Circular ("RMC'') No. 7-90, all sales, exchanges, or transfers of real properties (whether classified as ordinary or capital asset) by corporations, consummated on or after January 1, 1990, are subject to creditable withholding tax. That the amount of withholding tax paid is creditable against its income tax liability for the quarter in which payment or remittance of tax was made. Thus, petitioner claims that it is entitled to deduct those creditable withholding taxes for the sale of its assets in 1996 from its income tax liability for the same taxable year.

Paragraph 2 of RMC No. 7-90, however, provides: "2. When tax deducted and withheld creditable. In case of a corporation all sales or exchange of real property, whether classified as ordinary or capital asset, shall be subject to the expanded withholding tax. The amount of withholding tax paid during the quarter to the BIR evidenced by Confirmation/Official Receipts (CR/ROR) and covered by BIR Form Nos. 1743W and 1743-B, is creditable against its income tax liability for the quarter in which payments or remittance of taxes were made.

~ ~ )

On the other hand, the sale or exchange of real property by an individual, estate, or trust becomes subject to withholding tax only if the property is classified as an ordinary asset.

The corresponding withholding taxes deducted and withheld, which are paid or remitted to the BIR (CR/ROR and BIR Form Nos. 1743W and 1743-B, may be credited against his income tax liability for the taxable year. No withholding of tax is required where the real property sold by an individual is a capital asset subject to the 5% capital gains (final) tax."

31 Pursuant to the foregoing provision, all sales of real property, whether classified as ordinary or capital asset, by a corporation, shall be subject to the expanded withholding tax. The amount of withholding tax paid during the quarter, as evidenced by Confirmation/Official Receipts (CR/ROR) and covered by BIR Form Nos. 1743W and 1743-B shall be creditable against its income tax liability. In this regard, in Banco Filipino Savings and Mortgage Bank vs. Court of Appeals, 519 SCRA 99, the Supreme Court ruled as follows: "Petitioner also asserts that the confusion or difficulty in the implementation of Revenue Memorandum Circular 7- 90 was the reason why CDB took upon itself the task of withholding the taxes arising from the sale, to ensure accuracy. Assuming this were true, CDB should have, nevertheless, accomplished the necessary returns to clearly identify the nature of the payments made and file the same with the BIR. Section 2 of the circular clearly provides that the amount of withholding tax paid by a corporation to the BIR during the quarter on sales or exchanges of property and which are creditable against the corporation's tax liability are ~ evidenced by Confirmation/Official Receipts and covered by BIR Form Nos. 1743W and 1743-B. On the other hand, Revenue Regulation 6-85 states that BIR Form No. 1743.1 establishes the fact of withholding. Since no competent evidence was adduced by petitioner, the failure to offer these returns as evidence of the amount of petitioner's entitlement during the trial phase of this case is fatal to its cause". 32 A perusal of the documentary evidence presented by petitioner shows that most of them are Capital Gains Tax Returns (BIR Form 1701- E/A), and not BIR Form Nos. 1743W and 1743-B, as prescribed by RMC No. 7-90. Petitioner, therefore, failed to comply with the provisions of RMC 7-90. Pursuant to the aforecited case, failure to offer competent evidence is fatal to petitioner's case.

Also, it bears stressing that in a Resolution dated May 18, 2005, this Court denied admission most of the documentary evidence offered by petitioner in support of its claim for creditable withholding tax of P21 ,945,212.29 for petitioner's failure to present the originals thereof. In this regard, it is with more reason that We should deny the amounts claimed by petitioner as creditable against its income tax liability with regard to those exhibits that were denied admission. Finally, further verification shows that some of the amounts included in petitioner's Schedule of Creditable Withholding Tax were not supported by documentary evidence.

33 For all the foregoing, this Court allows the amount of P8,683,575.00 only, as creditable withholding tax against petitioner's income tax liability.

The Schedule of Creditable Withholding Tax

Allowed and Disallowed, as found by this Court, is hereby made part and parcel of this decision as Annex "A".

In sum, petitioner is liable to pay deficiency income tax for taxable year 1996 in the reduced amount of P64,154,921.34 (inclusive of deficiency interest), computed as follows:

Net Income per Return

P57,243,533.00

Add:

Adjustments

Accounts Written-off

Pll ,796,000.00 Interest Income from trust 41 ,862,957.00 Interest Income from others 42,954,453.18 P96,613,410.18

Adjusted Net Income

p 153,856,943.18

Rate of Tax

35%

Tax Due Thereon

P53,849,930.11

Less:

Payments

Prior years credit (1995 Corporate

Annual

Income

Tax

Return,

BlR

Records, p. 368) P2,729,700.00

Creditable Withholding Tax (Hereto

attached as Annex "A'') 8,683,575.00 11 ,413,275.00 Basic deficiency Income Tax P42,436,655.11

Add: Interest ( 4-16-97 to 11-5-99)

21,718,266.23

Deficiency Income Tax Liability for 1996

P64 154 921.34

Fourth Issue

Whether the basis used by the BIR in computing the gross receipts tax is correct.

.·

34 B. Percentage Tax (Gross Receipts Tax) For Taxable Year 1996 Respondent alleged that the deficiency gross receipts tax for 1996 amounting to P8,814,258.61 represents the discrepancy between the GRT returns filed and the computation based on audit, pursuant to Section 121 of the Tax Code.

Respondent's computation of said deficiency is reproduced hereunder, to wit (Exhibit "HHH"):

Interest Income

On Receivable from customer On Trading and investment securities On deposits with banks

Other Income

Other income (see income notes) Interest income from trust Service charges Trading foreign exchange gains

Miscellaneous

Gross Income perFS

Less:

20% Final Tax paid on Income Tax exempt income

Dividend Income

FCDU

Share in subsidiary

Net Taxable Income

Add:

Unearned discount, end Advance rental received Accrued interest receivable, beg

Sub-total

Less:

Unearned discount, beg Advance rental 1995 Accrued interest receivable, end Tax base per verification Tax base per GRT

Difference

Rate of Tax

Add: Interest

Compromise

Deficiency on GRT

2,064,428,801.00 233,767,718.00 89,530,493.00 67,536,016.29 4 I ,862,957.00 117,904,601.00 36,171,770.00 205,222.337.00 33,939,448.31 837,320.00 345,604.00 202,981,061.00 37I 578.00 34,986,542.00 973,803.00 43,490,997.00 29,332,574.00 1,019,703.00 58,053,686.00 2,387,727,012.00 468,697,681 .29 2,856,424,693.29 238,475,011.31 2,617,949,681.98 79,451,342.00 2,697,401,023.98 88,405,963.00 2,608,995,060.98 2.498,432,932.11 110,562,128.87 5% 5,528,106.44 3,286,152.16 8,814,258.6 ~

35 Petitioner claims that (1) in computing the GR T for the year 1996, the basis used by the BIR was erroneous; (2) the BIR examiners committed a double inclusion of certain income that was already included under its account "Interest Income". The "Analysis of GR T for the Year Ended 1996" demonstrates that the BIR considered twice the accounts "Interest Income from Trust" amounting to P41 ,862,957.00 and "Other Income" amounting to P67,536,016.29, which already formed part of the account "Interest Income" reflected in its audited financial statements (Exhibit "HHH''); (3) in order to properly determine the tax base for GRT, only the account "Interest Income on Receivable from Customer" must be considered in the computation, and the variance of P67,536,016.29 for 1996 and P12,781,130.78 for 1997 must not be added anymore because they are already part of the said account; and ( 4) as proved during the trial, the main reason for the assessment of deficiency GRT was the double counting of "Other Income" and "Interest Income from Trust" (Exhibit "KKK'') .

Other Income of P67,536,016.29.

We agree with the petitioner that respondent's addition of the amount of P67,536,016.29 to petitioner's income subject to GRT is tantamount to subjecting to GRT said income twice. In respondent's

36 computation of deficiency GRT (Exhibit "HHH''), respondent already added the following items of interest mcome reflected m petitioner's audited FS:

Interest Income

On Receivable from customers On Trading and investment securities On Deposit with banks

Other Income

Service Charges

Trading foreign exchange gains

Miscellaneous

Gross Income per FS

P2,064,428,80 1.00 233,767,718.00 89,530,493.00 2,387,727,012.00 P117,904,601.00 36,171 ,770.00 205,222,337.00 359,298,708.00 P2,747,025,720.00 It is well to note that the amount ofP67,536,016.29 (Exhibit "III'') is composed of the above-mentioned accounts, namely: (1) interest income on receivable from customers, specifically interest income-interbank loans receivable-txpd amounting to P171 ,472,905.66 (Exhibit "FFF''); (2) interest income on trading and investment sec, specifically, (i) interest income-trading account securities-tx pd amounting to P71 ,106,609.28, (ii) interest income-tax paid investment amounting to P124,117,261.66, (iii) interest income-tax exempt investment amounting to P837,320.00, and (iv) interest income-tax paid investment (Acctg) amounting to P199,750.69 (Exhibit "FFF '') ; and (3) trading foreign exchange gain or tax paid foreign gain amounting to P23,100,380.00. Clearly, the amount of P67,536,016.29 already formed part of the above gross income per FS.

37 To add the amount of P67,536,016.29 again to petitioner's gross income perFS would be tantamount to subjecting said amount twice to GRT. Interest Income from Trust of P41,862,957.00. As regards the interest income from trust, petitioner contends that said amount was already adjusted by its external auditors to form part of the account "Interest Income" reflected in its audited financial statements (Exhibit "HHH"). However, a perusal of petitioner's Working Profit and Loss Statement (Exhibit "DDD ") shows that out of the total interest income from trust of P41,862,957.00, only the amount of P32,685,333.00 was added to trading and investment securities to arrive at the audited amount of P233,767,718.00, reflected in petitioner's FS (Column 6, Row 4, Exhibit "DDD "). The remaining amount of P9, 177,624.00 was adjusted to interest expense (Column 6, Row 7, Exhibit "DDD "). Thus, what was added by the external auditors to petitioner's gross interest income was only the net amount of P32,685,333.00, and not the whole/gross amount of P41,862,957.00. Since petitioner failed to prove that the balance of P9,177,624.00 (P41,862,957.00- P32,685,333.00) was included to form part of petitioner's gross income, then said amount must be added to the tax base for purposes of computing the deficiency GRT. ~

20% Final Tax Deducted from the Gross Income per FS 38 Petitioner contends that respondent understated the item "20% Final Tax Paid on Income", representing the 20% final withholding tax on income from its investment in government securities, trading securities, etc; the BIR examiners erroneously recorded or deducted the amount of P33,939,448.31, instead of P74,206,854.00, thereby resulting to an understatement by P40,267,406.00 of the amount of final tax actually paid.

Petitioner's contention is without merit. It must be noted that for purposes of computing the GRT, the 20% final withholding tax is not excluded from the tax base. In China Banking Corporation vs. Court of Appeals, 403 SCRA 643, involving the issue of whether the 20% final withholding tax on interest income should form part of CBC's gross receipts in computing the GR T on banks, the Supreme Court categorically ruled in the negative, to wit: "We rule that the amount of interest income withheld in payment of the 20% final withholding tax forms part of CBC's gross receipt in computing the gross receipts tax on banks."

Pursuant to the above jurisprudence, We find that there is no understatement of P40,267,406.00 by the respondent. In fact, the final ~ ~ )

39 withholding tax on treasury bills withheld by the Bureau of the Treasury in the amount of P33,939,448.31 should not be deducted from the gross income perFS. To do otherwise would be contrary to the above settled doctrine.

Petitioner, therefore, is liable for deficiency GRT for 1996 in the reduced amount of P3,450,218.30 (inclusive of deficiency interest), computed as follows:

Interest Income

On Receivable from customers ?2,064,428,80 1.00 On Trading and investment securities 233,767,718.00 On deposit with banks 89,530,493.00 P2,387,727,012.00

Other Income

Interest income from trust P9, 177,624.00 Service charges 117,904,601.00 Trading foreign exchange gains 36,171,770.00

Miscellaneous

205,222,337.00 368,476,332.00 Gross I nco me per FS P2, 756,203,344.00

Less:

Tax exempt income 837,320.00 Dividend income 345,604.00

FCDU

202,981,061.00 Share in subsidiary 371,578.00 204,535,563.00

Net Taxable Income

2,551,667,781.00

Add:

Unearned discount, end 34,986,542.00 Advance rental received 973,803.00 Accrued interest receivable, beg 43,490,997.00 79,45I,342.00

Sub-total

2,631 ,119,123.00

Less:

Unearned discount, beg 29,332,574.00 Advance rental 1995 I ,019,703.00 Accrued interest receivable, end 58,053,686.00 88,405,963.00 Tax base per verification 2,542,713,160.00 Tax base per GRT 2,498,432,932.11

Difference

44,280,227.89

Rate of Tax

5% Basic deficiency GRT P2,2I4,01l.39

Add: Interest (01-21-97 to 11-05-99)

1,236,206.91

Deficiency GRT for 1996

P3,450,218.30 ,•

Fi(th Issue 40 Whether the basis used by the BIR in computing the final withholding tax on "Interest Expense on Borrowings" is correct. C. 20% Final Tax For Taxable Year 1997 Respondent computed the 20% final tax on interest expense from savings, time deposits and other deposit substitutes for taxable year 1997 based on Section 24(e) of the Tax Code, which resulted to the deficiency final tax on interest expense amounting to P14,841,399.30 (Exhibit "2"), computed as follows:

Interest Expense on Deposits (Per FS)

Interest Expense on Borrowed Funds

Total

Less: Interest Expense (FCDU)

Interest Expense on RBU

Less: Tax Exempt (EI & RP)

Agri Loan Fund

Tax Base

Rate of Tax

Final Tax Due

Less: Tax Paid per Return

1st Quarter 2"d Quarter 3'd Quarter 4th Quarter

Sub-total

Interest ( 1-26-96 to 12-31-99)

Compromise

Deficiency 20% Final Tax

44,156,250.30 13 413.97 73,456,5 12.08 85,133,854.16 111 ,645,83 1.08 136.440,557.11 4,172,661.78 I ,758,458, 712.00 768,283,055.00 2,526,741 ,767.00 395,844,643.00 2, 130,897,124.00 44,169,664.27 2,086, 727,459.73 20% 417,345,491.95 406,676,754.43 I 0,668, 737.52 4,172,661.78 Pl4,841,399.3~ •'

41 Petitioner contends that the basis of the BIR's computation of the Final Withholding Tax is overstated. Accordingly, this computation includes the following types of interest expense, which are not subject to 20% final withholding tax, but to ordinary income tax, namely: a) Interest paid on Bills Payable (Borrowed Funds) - Private Firms and Individuals;

b) Interest paid on Borrowed Funds -

Interbank Call

Loans;

c) Other Expense - Premium Paid.

Petitioner claims that (1) the interest paid on Bills Payable represents the interest payments on direct borrowings it obtained from private firms (other than banks and non-bank financial intermediaries) and individuals for the limited purpose of financing its needs, hence, not subject to the 20% final tax; (2) the interest payments on the inter-bank call loans cover the deficiency in reserves are not considered as deposit substitute, hence, any interest thereon is not subject to the 20% withholding tax; and (3) the other expense account represents premium paid on foreign exchange forward contracts with clients, which is different from interest income.

42 Petitioner further argues that of the interest expense incurred in Foreign Exchange Forward Contracts for 1997, a total of P2,251,698.91 represents revaluation gains that were not subject to income or other taxes (Exhibit "AAA-4 ").

Although petitioner contends that respondent's computation of deficiency final tax is overstated smce there are expenses that are allegedly not subject to final tax, but to ordinary income tax, petitioner failed to establish how much of said interest expense computed by the respondent was not subject to interest income. Petitioner only made a general statement that part of the interest expense of P2,526,741,767.00 was not subject to final tax for the aforesaid reasons stated by petitioner. Without presentation of concrete documentary proof to support its claim, there is no way for the Court to determine the veracity of petitioner's claim. Hence, We are constrained to uphold respondent's assessment on deficiency final withholding of P14,841,399.30. D. 10 % Onshore Final Taxes for Taxable Years 1996 and 1997 Respondent assessed petitioner of deficiency final taxes on onshore income for taxable years 1996 and 1997, in the amounts ofP2,495,267.10 and P762,860.79, respectively, pursuant to Section 27(D)(3) of the Tax Code, computed as follows:

~ {;);

Taxable Year 1996

Onshore Income Subject to I 0% Final Tax

Rate of Tax

Tax Due Thereon

Less:

Tax Absorb by Borrower

Sub-total

Less:

Payments

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Sub-total

Add:

Penalties

Interest ( 1-26-97 to 12-31-99)

929,745.74

Compromise

-

Deficiency 10% Final Tax

Taxable Year 1997

Onshore Income Subject to I 0% Final Tax

Rate of Tax

Tax Due Thereon

Less:

Tax Absorb by Borrower

Sub-total

Add: All others

Sub-total

Less:

Tax Payments (FCDU QRT)

First Quarter

237,661.85

Second Quarter

534,842.77

Third Quarter

381,969.39

Fourth Quarter

582,360.00

Onshore Income Subject to 10% Final Tax

Less:

Payments (Per 1743w WCI90 [10%]

January

2,553,065.27

February

2,215,864.13

March

2,565,927.26

April

2,680,966.54

May

2,783,696.75

June

2,786,634.62

July

3,507,267.01

August

3,649,330.23

September

4,033, 713.61

October

4,628,649.66

November

4, 180,792.88

December

4,646,404.38

Sub-total

Add:

Penalties

Interest ( 1-26-98 to 9-15-99)

214,478.43

Compromise

-

Deficiency 10% Final Tax

43 p 125,936,342.00 10% 12,593,634.20 - 12,593,634.20 11028,112.84 I ,565,521.36 929,745.74 P2,495,267.10

(Exhibit "2 ")

P407,806,947.00 10% P40, 780,694.70 - P40,780,694.70 I, 736,834.00 P42,517,528.70 1,736,834.00 P40,780,694.69 P40,232,312.34 548,382.36 214,478.43 P762 860.79

(Exhibit "2 '') ~

~)

44 Petitioner avers that (1) in computing the 1996 and 1997 Final Taxes on Onshore Income, respondent included certain incomes which were already subjected to Final Withholding Tax; and (2) the deficiency final tax resulted from respondent's failure to consider the taxes already withheld by borrowers/clients amounting to P763,980.52 and P661,142.61 for the years 1996 and 1997, respectively, as shown in the "Comparison of the BIR Assessment and the Bank's Verification of the 10% Final Tax" for the taxable years 1996 and 1997. As summarized and certified by the Court-Commissioned Independent CPA, the amounts of P763,980.52 and P661,142.61, corresponding to 10% final withholding taxes for 1996 and 1997, respectively, were assumed and paid by petitioner's borrowers, to wit:

Date

Withholding Agent

TIN of

10% Tax

10% Tax

Remitted

Withholding

Withheld

Withheld

Agent in US$ in Peso

1996

10-Apr

Philippine Global Communications, Inc.

000-665-693 4,976.56 130,346.12

10-Jul

Philippine Global Communications, Inc.

000-665-693 4,695.83 123,040.23 10-0ct Philippine Global Communications, Inc.

000-665-693 4,732.67 124,317.72

24-Apr

Manila Electric Company

350-000-101-528 3,133.90 82,061.10

25-Jul

Manila Electric Company

350-000-101-528 2,642.77 69,171.97 25-0ct

Manila Electric Company

350-000-10 1-528 2,396.64 62,910.47 1997

10-Apr

PhilipJ>ine Global Communications, Inc.

000-665-693 4,419.25 116,305.79

27-Jan

Manila Electric Company

350-000-101-528 2,123 .35 55,827.12

TOTAL FOR 1996

$29 120.97 763 980.52 1997

25-Apr

Manila Electric Company

350-000-101-528 1,788.46 47,074.16

25-Jul

Manila Electric Company

350-000-101-528 1,496.40 39,451.01 25-0ct

Manila Electric Company

350-000-101-528 1,254.17 38,064.03

10-Apr

Philippine Global Communications, Inc.

000-665-693 3,972.22 104,727.64

10-Jul

Philippine Global Communications, Inc.

000-665-693 4,038.16 106,607.31 10-0ct Philippine Global Communications, Inc.

000-665-693 3,791.67 134,850.63

1998

12-Jan

Philippine Global Communications, Inc.

24-Jan

Philippine Global Communications, Inc.

TOTAL FOR 1997

000-665-693 000-665-693 45 3,515.19 157,810.99 929.89 32,556.84 $20,786.16 661,142.61 (Exhibit "AAA-7'').

A careful examination of the records shows that indeed the amounts of P763,980.52 and P661, 142.61 corresponding to 10% final withholding taxes for 1996 and 1997, respectively, were assumed and paid by Philippine Global Communications, Inc. and Manila Electric Company, as evidenced by their Summary of Interest Payments and Withholding Tax and Monthly Remittance Return of Income Taxes Withheld (Annexes "F-1 " to "F-35" of Exhibit "AAA-7''). Hence, petitioner is liable for deficiency onshore final tax for taxable year 1996 in the reduced amount of P1,246,890.11, computed as follows:

Deficiency Final Tax on Onshore Income for Taxable Year 1996

Onshore Income Subject to I 0% Final Tax

p 125,936,342.00

Rate of Tax

10%

Tax Due Thereon

p 12,593,634.20

Less: I Tax Assessed and Paid

763,980.52

Sub-total

P11,829,653.68

Less: I Payments

11,028,112.84

Sub-total

P801 ,540.84

Add: I Interest (1-26-97 to 11-5-99)

445,349.27

Deficiency 10% Final Tax

P1,246,890.11 However, for taxable year 1997, considering that the amount of P661,142.61 final withholding tax on onshore income that was withheld ~ ~ ) ..

46 and paid by petitioner's borrowers is more than the basic 10% final tax deficiency assessment of P548,382.36, as computed by the respondent, the 10% final tax deficiency assessment in the amount of P762,860.79 (basic: P548,382.36 +interest: P214,478.43), is without factual and legal basis, and is hereby ordered cancelled.

E. Documentary Stamp Taxes for Taxable Years 1996 and 1997 Respondent assessed petitioner of deficiency documentary stamp taxes in the amounts of P248,329,263.35 and P31,325,014.80 for taxable years 1996 and 1997, respectively, pursuant to Sections 17 5, 179, 180, 181, 182, 195 and 196 of the Tax Code, computed as follows:

Computation of Proposed Deficiency DST -HO

For the Taxable Year 1996

Beginning Balance

P1 ,091,032.50

Add: Purchases

63,300,000.00

Total Available for Use

P64,391 ,032.50

Less: Ending Balance

1,832,853.05

Total Documentary Stamp Used

P62,558, 179.45 Less: Documentary stamp tax due (Hereto attached as Annex "B'') 217,013,146.29

Sub-total

p 154,454,966.84

Add:

Penalties

Interest

P93,874,296.51

Compromise

- 93,874,296.51 Deficiency documentary stamp tax P248 329 263.35

(Exhibit "2 '')

Computation of Proposed Deficiency DST-HO

For the Taxable Year 1997

Beginning Balance

P3,586, 184.27

Add: Purchases

64,690,495.89

Total Available for Use

P68,276,680.16

Less: Ending Balance

3, 11 9,819.84

Total Documentary Staml' Used

P48,0 I 0,417.02

Less: Documentary stamp attached as Annex "C'')

Sub-total

Add: I Penalties

I 20% Interest Sec. 249 tax due Deficiency documentary stamp tax 47

(Hereto

70,305,801.22 ?22,295,384.20 9,029,630.60 P31 325 014.80

(Exhibit "2 ")

On the other hand, petitioner counter-argues that the deficiency DST assessments for 1996 and 1997 is without factual and/or legal basis on the ground that respondent's computation of the taxable base is patently overstated.

The Court will now determine the validity of the assessments for deficiency DST.

1996DST

a) DST on sale of real properties.

Petitioner contends that the amount of P1 ,981 ,654.00 DST was assumed and paid by its buyers.

A review of the records reveals that out of P1,981 ,654.00 DST certified by the Court-Commissioned Independent CPA (Exhibit "AAA-2 "), as having been assumed and paid by petitioner's buyers, only the amount of P1,948,654.00 was duly supported and substantiated by petitioner (Annexes "A-93 " to "A-106", "A-147" to "A-211 " of Exhibit "AAA-2 ", Exhibits "QQQ-57" to "QQQ-61 ''). ~ '.

48 Considering that petitioner's buyers had already remitted to the BIR the DST in the amount of P1 ,948,654.00, the deficiency DST assessment of P1 ,563,115.00 has clearly no basis and is hereby ordered cancelled.

b) DST on letters of credits.

Petitioner contends that the DST was improperly and unjustifiably imposed on each stage of a single letter of credit transaction considering that the cycle of a letter of credit consists of three stages. On the alleged first stage, when the buyer applied with petitioner for the opening of a letter of credit, petitioner booked the approved letters of credit for domestic transactions in "Unused letter of credit-domestic" and "Letter of Credit Foreign" for importations.

On the alleged second stage, when petitioner forwarded the approved letters of credit to the advising bank and the advising bank paid the seller/exporter after the latter delivered the goods to the buyer/importer, petitioner used the "Customer Liability Foreign Account".

The third or final stage according to petitioner happens when the applicant has insufficient funds with petitioner, thus requires t~

49 recording of the "trust receipts account". In 1996, petitioner used the account "Import Bill under TR" and "Domestic Bill under TR". Petitioner's contention cannot be sustained. Petitioner did not present any evidence to support its claim. The same are pure allegations. The settled rule is that bare allegations, unsubstantiated by evidence, are not equivalent to proof under our Rules (Manzano vs. Perez, 362 SCRA 439). Without any documentary evidence showing that indeed the accounts "Unused Letter of Credit-Domestic" and "Letter of Credit Foreign", "Customer Liability Foreign Account", and "Import Bill under TR" and "Domestic Bill under TR" arose from only one transaction - letter of credit transaction, We sustain respondent's imposition of DST on each of the foregoing accounts.

In fact, a simple reading of the foregoing accounts will readily show that there is a great disparity in the amounts and the accounts under each of the alleged stages. In the alleged first stage, the account "Unused LC Domestic" has a balance of P189,031 ,227.47, and the account "LC Foreign" has a balance of P3,038,308,281.03. For the alleged second stage, petitioner has only the account "Customer Liability Foreign" with a balance of only P780,122,658.76. While in the alleged third stage, there are again two accounts, one is "Domestic Bills under TR" with a balanc~ ~)

50 of P211,252,710.15, and another "Import Bill under TR" with a balance of P1 ,907,449,852.17. If petitioner's allegation is true that all said four different accounts only constitute stages and pertain to one transaction - the letter of credit transaction, it is incomprehensible why in the alleged first stage, there are two accounts, one for the alleged domestic transactions and another for the alleged foreign importations, while in the alleged second stage there is only one account, the "Customer Liability Foreign", which by its title obviously pertains to importations. But, in the alleged third stage there are again two accounts, one denominated as domestic bill and another import bill. Said denomination of accounts is inconsistent with petitioner's averments. Moreover, the balances of the accounts appearing on every stage do not reconcile with one another. For this alone, petitioner's contention cannot be given credence. Furthermore, a letter of credit and a trust receipt are two distinct and separate documents. A letter of credit is an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit.

Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds ()1# ~ . '

51 mentioned in the letter of credit, plus credit or commitment fees mutually agreed upon (Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 267). Thus, there is in effect a loan agreement between the buyer and the issuing bank in a letter of credit (Notes and Cases on Banks, Negotiable Instruments and Other Commercial Documents, Aquino, F 1 ed., p. 512). Letters of credit are, therefore, subject to DST under Section 182 of the NIRC of 1977, as amended, if they are drawn in but payable out of the Philippines. A "trust receipt", on the other hand, is defined as an agreement by virtue of which a banker advances money to a person for the importation of goods, the former taking full title to the goods at the very beginning and continuing to do so until he is paid, or if the goods have been sold, until the proceeds of the sale are turned over to him by the importer or successors in interest. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale be turned over to him by the importer or by his representative or successor in interest (Philippine National Bank vs. Viuda e Hijos de Angel Jose, 63 Phil. 821). A trust receipt is considered, therefore, as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the

52 importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased (53 Am. Jur. 961, cited in Sarno vs. People, 115 Phil. 349). Trust receipt therefore, is a contract distinct from the letters of credit. Settled is the rule that a trust receipt, executed to secure an indebtedness, accomplished and effected as a security for the payment of an account, with authority to sell the property or merchandise to pay the debt or obligation, requires no further argument to show that, as in deeds of trusts, they are subject to the affixture ofDST, pursuant to Section 195 of the NIRC of 1977, as amended.

Considering that DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto, petitioner's use of the facility of the trust receipt is a privilege subject to DST. Said privilege of using the facility of trust receipt for purposes of security is distinct and separate from the privilege of using the facility of the letters of credit, which is for the purpose of obtaining loan. Accordingly, letters of credit are subject to DST, separate and distinct from the DST imposed on trust receipts. ~~ (J;

. \ c) DST on Interbank Call Loans 53 Petitioner contends that interbank call loans entered into by banks not for a lending purpose, but primarily, to cover its cash position at the end of the day shall not be considered as deposit substitutes; that under the 1993 Tax Code, they are exempt from DST; and even if they are considered deposit substitutes under Section 180 of the 1993 Tax Code, deposit substitutes are not one of the enumerated items subject to DST. While We cannot give credence to petitioner's allegation that the interbank call loans were entered into by petitioner only for the purpose of covering its deficiency in reserves, absent any documentary evidence to substantiate its claim, We agree, however, with petitioner that under Section 180 of the NIRC of 1977, as amended, deposit substitutes are not one of the enumerated items subject to DST. The provision subjecting deposit substitutes to DST appeared only in the NIRC of 1997, which took effect on January 1, 1998. Considering that the taxable period involved in this case is 1996, the applicable law is the NIRC of 1977, as amended, and not the NIRC of 1997, as amended. In Section 2, h(a) of Revenue Regulations 17-84, otherwise known as "Income Taxation of Interest Derived from Bank Deposits and Yield from Deposit Substitutes", one of the implementing regulations of th~

54 NIRC of 1977, as amended, interbank borrowings by or among banks and non-bank financial institutions, shall be considered as deposit substitutes. Since deposit substitutes are not one of the enumerated items in Section 180 of the NJRC of 1977, as amended, subject to DST, petitioner's interbank call loans are, therefore, not subject to DST. Hence, respondent's imposition of deficiency DST on interbank call loans is hereby ordered cancelled.

d) DST on Reverse Repurchase Agreement Like in the case of interbank call loans, the provision regarding the reverse repurchase agreement, appeared only in the NJRC of 1997, as amended, when the definition of deposit substitutes was expanded to include not only repurchase agreements, but "repurchase agreements including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank xxx". However, prior to the passage of the NJRC of 1997, Section 20(y) of the NIRC of 1977, as amended, which is the governing law in the present case, defines deposit substitutes, to wit: "xxx an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their o~ ~ ) needs or the needs of their agent or dealer.

These

instruments may include but need not be limited to banker's acceptances, promissory notes, repurchase agreements, certificates of assignments or participation and similar instruments with recourse xxx. (emphasis supplied) 55 Since reverse repurchase agreement was not considered as one of the deposit substitutes under the NIRC of 1977, as amended, the same is likewise not subject to DST, by express mandate of Section 180 of the NIRC of 1977, as amended, that deposit substitutes is not one of the enumerated items subject to DST.

Accordingly, respondent's imposition of DST on reverse repurchase agreement is hereby ordered cancelled. e) Bills Payable-Deposit Substitutes amounting to P84,851,004,023.15. Petitioner contends that the amount of Bills-Payable indicated in the schedule of DST for 1996 is exorbitantly and grossly overstated; the financial records of petitioner recognized and reported only Bills Payable Account of P5,151 ,376,708.02 for taxable year 1996 (Exhibits "PPP " and "PPP-1 ") ; however the amount of Bills Payable, as computed by respondent amounted to P84,851,004,023.15. We agree with petitioner that the amount of P84,851 ,004,023.15 Bills Payable computed by respondent is grossly overstated. This Court cannot ascertain how respondent was able to arrive at said amount of w ~ )

56 P84,851,004,023.15, when petitioner's bills payable in 1994 amount to P7,925,821,223.16 only (Exhibits "000 " and "000-1 "); in 1995 to P8,240,952,078.38 only (Exhibits "000-2" and "000-3 '') ; and in 1997 to P7,448,979,091.53 only (Exhibit "MMM'') . Moreover, in the daily posting of petitioner's Bills Payable for the whole year of 1996, the total amount of Bills Payable recorded by petitioner is P5, 151,376,708.02 only (Exhibits "PPP and "PPP-1 '').

Said amount is more correct, taking into consideration the amount of petitioner's Bills Payable appearing in its Schedule ofDST for the years 1994 to 1997, compared with respondent's computation, which has no basis at all.

Finally, as heretofore ruled, deposit substitutes under the NIRC of 1977, as amended, were not yet subject to DST. Since petitioner's Bills Payable partake of deposit substitutes, pursuant to Section 180 of the NIRC of 1977, as amended, the same is not subject to DST. Thus, respondent's assessment of DST on Bills Payable-deposit substitute is hereby ordered cancelled.

By and large, the Court finds the following assessments against petitioner without factual and legal basis: I terns/ Accounts

Amount

Rate

DST Amount

.30 on each P200

I)

Bills Payable

?84,851 ,004,023.15 or .15% p 127,276,506.03 .30 on each P200 2) Interbank loan 23,043,000,000.00 or .15% 34,564,500.00

3)

Sale

of properties real

Reverse

repurchase 4) agreement

Total

104,207,666.67 12,198,575,780.18 57 P1 5.00 for every P1 ,000.00 or 1.50% 1,563, 11 5.00 .30 on each P200 or .15% 18,297,863.67 P l81 ,701,984.70 Considering that the above disallowed DST assessment, as found by this Court, is higher that the basic deficiency DST assessment of P154,454,966.84, as computed by the respondent, clearly the deficiency DST assessment for 1996 against petitioner in the amount of P248,329,263.35 (basic: P154,454,966.84 + interest: P93,874,296.52) is without factual and legal basis, and is hereby ordered cancelled.

1997 DST

a) DST on sale of real properties.

Respondent assessed petitioner of deficiency DST on sale of real properties in the amount ofP733,910.22 (Exhibit "2"). Petitioner contends that for petitioner's sale of real property in 1997, the amount of P4,591 ,748.00 DST was assumed and paid by its buyers.

The Court-Commissioned Independent CPA, in its Schedule of Creditable Withholding Tax Remitted, Capital Gains Tax Paid and Documentary Stamp Tax Paid (Exhibit "AAA-2 "), certified that the total ~ ..

58 amount of DST assumed and paid by its buyers for 1997 1s P4,591,748.00.

However, a rev1ew of the records reveals that the Court- Commissioned Independent CPA committed an error in adding the total DST assumed and paid by petitioner's buyers. As verified by this Court, the total DST assumed and paid by petitioner's buyers amounts to P628,440.00 only, and not P4,591,748.00. Further verification of the documentary evidence adduced by petitioner (Annexes "A-2 " to "A-92 " of Exhibit "AAA-2", "A-108" to "A-142" of Exhibit "AAA-2", Exhibits "QQQ-26-a " and "QQQ-24-a'') shows that the amount of P628,440.00 DST was indeed paid and remitted to the BIR.

Petitioner, therefore, is liable to pay deficiency DST on sale of real properties in the reduced amount of P105,470.22 (assessment of P733,910.22- assumed and paid ofP628,440.00). b) DST on letters of credits.

Petitioner claims that the deficiency DST was improperly and unjustifiably imposed on each of the three stages of a single letters of credit transaction; that in the alleged first stage consisting of approved letters of credit, petitioner allegedly used the account "Unused Letter of Credit Domestic"; while in the alleged second stage, petitioner used (j)J) (w)

59 accounts such as "Inward Bills for Collection", "Outward Bills for Collection - Domestic", and "Outward Bills for Collection - Foreign"; and in the alleged third stage, petitioner used the accounts "Loans under TR - Local" and "Loans under TR - Foreign". Petitioner's contention is unmeritorious, being pure allegations. Petitioner failed to present any evidence to support its claim that indeed the accounts "Unused Letter of Credit Domestic", "Inward Bills for Collection", "Outward Bills for Collection - Domestic", "Outward Bills for Collection - Foreign", "Loans under TR- Local", and "Loans under TR - Foreign" arose from only one transaction - the letter of credit transaction.

Furthermore, a simple reading of the foregoing accounts and a comparison of the Schedule of the DST for the year 1997 (Exhibit "MMM") with the Schedule of DST for the year 1996 (Exhibit "LLL "), clearly shows inconsistency in petitioner's contention. The accounts "Inward Bills for Collection", "Outward Bills for Collection - Domestic", and "Outward Bills for Collection - Foreign", purportedly the accounts used in the second stage of its 1997 letters of credit transaction, were also present in the Schedule of DST for the year 1996 (Exhibit "LLL "); yet, in 1996 the same were not part of the alleged second stage. According to petitioner,

(Wv

{;2) . '

60 for the second stage it used the account "Customer Liability Foreign Account". With such inconsistencies in petitioner's averments, this Court cannot give evidentiary weight to its argument that the aforesaid accounts partake of only one transaction - the letter of credit transactions. To reiterate, a trust receipt is separate and distinct from a letter of credit. Petitioner's use of the facility of a trust receipt is a privilege subject to DST, separate and distinct from the privilege of using the facility of a letter of credit, which accordingly, is also subject to a different DST.

Hence, We sustain respondent's imposition ofDST on each ofthe accounts: "Unused Letter of Credit Domestic", "Inward Bills for Collection", "Outward Bills for Collection - Domestic", "Outward Bills for Collection - Foreign", "Loans under TR - Local", and "Loans under TR - Foreign".

c) DST on Interbank Loans As heretofore discussed m the related assessment for 1996 deficiency DST, under Revenue Regulations 17-84, interbank loans are considered as deposit substitutes. Since Section 180 of the NIRC of 1977, as amended, the governing law in this assessment, does not impose DST

61 on deposit substitutes, petitioner's interbank loans in the amount of P19,387,500,000.00 are, therefore, not subject to DST. As such, respondent's imposition of deficiency DST on interbank loans is hereby ordered cancelled.

d) DST on Reverse Repurchase Agreement.

As previously discussed, reverse repurchase agreement under the NIRC of 1977, as amended, is not one of the items subject to DST. It is only in the NIRC of 1997 that reverse repurchase agreement was considered as deposit substitute subject to DST. We, therefore, cancel the deficiency DST assessment on reverse repurchase agreement.

e) DST on Assets Held In Trust- Loans.

Petitioner argues that the imposition of DST on assets-held-in-trust is without legal basis on the ground that they are not deposits accounts or deposit substitutes.

We agree with petitioner that assets-held-in-trust are not subject to DST. Trust agreements or assets-held-in-trust accounts do not fall under the term "certificates of deposit" because no debtor-creditor relationship arises in both transactions. What is established, rather, is a trustor-trustee relationship. In a trust agreement, no absolute transfer of ownership over

(}II

62 the money or property happens. What is merely extended to the trustee- bank is the right to manage and invest the object of the trust under the instructions of the trustor-client.

Therefore, the trustee-bank is not obliged to guarantee a positive return on the money or property subject of the trust.

Considering that assets-held-in-trust does not fall under the term "certificate of deposit", respondent's assessment against petitioner for deficiency DST on its assets-held-in-trust transactions is without factual and legal basis, and is hereby ordered cancelled. f) Mathematical error in respondent's computation of petitioner's deficiency DST for 1997.

We

agree with petitioner that respondent committed a mathematical error in computing petitioner's alleged DST liability for taxable year 1997. In deducting the ending balance of P3,119,819.94 from the total available for use of P68,276,680.16, respondent came up with a difference of P48,010,417.02, pertaining to the total documentary stamp used. But, the same is erroneous. As a result, petitioner was assessed of basic deficiency DST ofP22,295,384.20, plus 20% deficiency interest ofP9,029,630.60, or for a total amount ofP31 ,325,014.80.

63 However, as correctly pointed out by petitioner, the correct documentary stamp used should be P65, 156,860.32 (P68,276,680.16 - P3, 119,819.94), and not P48,010,417.02, as computed by respondent. Thus, the correct computation of the basic deficiency DST assessment for 1997 should be:

Beginning Balance

Add: Purchases

Total Available for Use

Less: Ending Balance

Total Documentary Stamp Used

Less: Documentary Stamp Tax Due

Deficiency DST

P3,586, 184.27 64,690,495.89 68,276,680.16 (3,119,819.94) P65,156,860.32 (70,305,80 1.22) p 5,148,941.10 In sum, in addition to the above erroneous computation, the Court finds the following DST assessment against petitioner without factual and legal basis:

Items/ Accounts

Amount

Rate

DST Amount

.30 on each P200

I)

Interbank loan p 19,387,500,000.00 or .15% P29,081 ,250.00 P628,440.00 2)

Sale

of real (pertains to properties DST assumed and paid by petitioner's buyers

Reverse

3) repurchase .30 on each P200 agreement P3,468,898,307.74 or .15% P5,203,347.46

Assets-held-in-

.30 on each P200 4) trust P3,160,305,925.70 or .15% P4,740,458.89

Total

P39,653,496.35 Since the above disallowed DST assessment found by this Court is more than the deficiency DST assessment of P31,325,014.80, as '.

64 computed by the respondent, the deficiency DST assessment for 1997 against petitioner in the amount ofP31,325,014.80 is without factual and legal basis, and is hereby ordered cancelled.

WHEREFORE, premises considered, the present Petition For Review is PARTIALLY GRANTED. Accordingly, petitioner is hereby ORDERED to pay respondent Commissioner of Internal Revenue the reduced amounts of SIXTY FOUR MILLION ONE HUNDRED FIFTY

FOUR THOUSAND NINE HUNDRED TWENTY ONE AND 34/100

PESOS (P64,154,921.34), representing deficiency income tax; THREE

MILLION FOUR HUNDRED FIFTY THOUSAND TWO HUNDRED

EIGHTEEN

AND

30/100

PESOS

(P3,450,218.30), representing deficiency gross receipts tax; and ONE MILLION TWO HUNDRED

FORTY SIX THOUSAND EIGHT HUNDRED NINETY AND 11/100

PESOS (P1,246,890.11), representing deficiency 10% final tax on onshore income, all for taxable year 1996, or the total amount of SIXTY

EIGHT MILLION EIGHT HUNDRED FIFTY TWO THOUSAND

TWENTY

NINE

AND

75/100

PESOS

(P68,852,029. 75);

and

FOURTEEN MILLION EIGHT HUNDRED FORTY ONE THOUSAND

THREE

HUNDRED

NINETY

NINE

AND

30/100

PESOS

(P14,841,399.30), representing deficiency 20% final tax for taxable y~ M1o)

65 1997, or the aggregate amount of P83,693,429.05 for both taxable years 1996 and 1997, broken down as follows:

DEFICIENCY TAX DUE

1996

Income Tax

GRT

10% Final Tax

Total

Basic

P42,436,655.11 P2,214,011.39 P80 I ,540.84 P45,452,207 .34

Interest

21,718,266.23 I ,236,206.91 445,349.27 23,399,822.41

Total

P64,154,921.34 P3,450,218.30 P1,246,890.11 P68,852,029. 75 1997

20% Final Withholding Tax

Basic

PI0,668,737.52

Interest

4,172,661.78

Total

P14,841,399.30

AGGREGATE AMOUNT (1996 and 1997)

P83,693,429.05 In addition, petitioner is hereby ORDERED to pay respondent 20% delinquency interest per annum on the total amount of P83,693,429.05, computed from December 14, 1999, until full payment thereof, pursuant to Section 249(C) of the NIRC of 1997, as amended. The deficiency assessments ofP762,860.79, representing 10% final tax on onshore income for taxable year 1997, P248,329,263.35, representing DST for taxable year 1996, and P31,325,014.80, representing DST for taxable year 1997, are hereby ordered cancelled.

OLGA PALANCA-ENRIQUEZ

Associate Justice

~ )

WE CONCUR:

~ G. -at:ro.-U!~ ,c;;...

JUANITO C. CASTANEm, JR.

Associate Justice

' E~.UY

A~

1 ~stice 66

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the cases were assigned to the writer of the opinion of the Court's Division.

~~~a.

. ~,Q.

JUANITO C. CASTANEDA,CJR:

Associate Justice

Chairperson, Second Division

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the cases were assigned to the writer of the opinion of the Court's Division. ~--~ - ~ ERNESTO D. ACOSTA

Presiding Justice

~)

67 Annex "A" Schedule of Creditable Withholding Tax Allowed and Disallowed Per this Court's Findings

Particulars

Supporting

Exhibit

Admitted/

Denied/

Reason

Document!Natu

Number

Allowed

Disallowed

re I) Juan ito Lim

Monthly

"QQQ-1"

P31 ,250.00

Remittance

Return

of

Income

Taxes

Withheld (BIR

Form 1743-W)

2) Adela Rulloda

BIR

Form

"QQQ-2"

34,620.00

1743-W

3) Leonardo Sia

B!R

Form

"QQQ-3"

15,000.00

1743-W

4)

Southwest

Lines

Capital

Gains

"QQQ-4"

83,250.00

Ruling

in

Banco

Limqueco

Compound

Tax Return

Filipino Savings and

Culiat, T. Sora, Q.C.

Mortgage

Bank

vs.

Court of Appeals (519

SCRA 99)

5) Sps.

Severino

&

Capital

Gains

"QQQ-5"

P89,897.58 Resolution dated May

Aniceta Francisco

Tax Return

18, 2005 - failure to present original copy, and ruling in Banco

Filipino Savings and

Mortgage

Bank

vs.

Court

of Appeals, Sl!J2Ia

6) Raul Jose Go

Capital

Gains

"QQQ-6"

81 ,241.80 Same reason as No. 5

Tax Return

7) Sps. Rosendo & Emma

Capital

Gains

"QQQ-7"

206,131.51 Same reason as No. 5

Lopez

Tax Return

8) Sps. Antonio & Filma

Capital

Gains

"QQQ-8"

101,558.10 Same reason as No. 5

Galla

Tax Return

9) Nat' I Conciliation &

Certificate

of

"QQQ-9"

4,595.76 Pertains to prior year

Mediation Board

Creditable Tax

Withheld

at

Source for the

period Jan. to Sept. 1995 I 0) Phil. Spring Water

Certificate of "QQQ-10"

2,250.00 Pertains to pric..r year

Creditable Tax

Withheld

at

Source for the

period April 95

to December 95

II) Wenelita R. Pamatong

BIR

Form

"QQQ-11 "

71 ,250.00

1743-W

12) Philip Paul Trading

BIR

Form

"QQQ-12"

5,475,000.00 Resolution dated May

1743-W

18, 2005 - failure to present original copy.

13) Oscar Cruz

BIR

Form

"QQQ-13"

39,300.00

1743-W

14) Phil.

Spring

Water

Certificate

of

Resources

Creditable Tax

Withheld

at

Source for the

period Jan. to

March 96

15) Bo. Mapulang Lupa,

BIR

Form

Valenzuela, M.M.

1743-W

16) Ulpiano Tamayo

BIR

Form

1743-W

17) Sps. Florencio & Rigor

Capital

Gains

Javier

Tax Return

18) Sps.

Elpidio

&

Capital

Gains

Milagros Apo

Tax Return

19) 1. Pelaez

Capital

Gains

Tax Return

20) Sps. Lino and A. Lim

Capital

Gains

Tax Return

21) Sps. Antonio & L.

Capital

Gains

Asok

Tax Return

22)Lawrence Chan

Capital

Gains

Tax Return

23) Sps. Macario Balaan &

Capital

Gains

Aida Balaan

Tax Return

24) Sps.

Leng

Leng

Capital

Gains

Castillo Uy

&

Mariano

Tax Return

Loo

25) Phi l. Water Resources

Certificate

of

Creditable Tax

Withheld

at

Source

26) Nestor Mendoza

Capital

Gains

Tax Return

27) 100 1 "

Century

BIR

Form

Townhouse, 20th Ave.,

1743-W

Cubao

28)Emmanuel Caballero &

BIR

Form

Spouse

1743-W

29) Phil.

Spring Water

Certificate

of

Resources

Creditable Tax

Withheld

at

Source for the

period Aug. to Oct. 96 30)Clavall Properties, Inc.

BIR

Form

1743-W/

Certificate

of

Creditable Tax

Withheld

at

Source

31) Mr. Benito Ang as

Capital

Gains

AIF of Felomina Arancon

Tax Return

32) Mr. Nathaniel Del a

Capital

Gains

Pen a

& Sps.

Tax Return

Richard/Prescila Sabillo, as 68

"QQQ-14"

800.00

"QQQ-15"

608,025.00

"QQQ-16"

140,000.00

"QQQ-17"

182,770.22 Same reason as No. 5

"QQQ-18"

278,755.55 Same reason as No. 4 "QQQ-1 9 21,485.47 Same reason as No. 5

"QQQ-20"

40,078.25 Same reason as No. 5

"QQQ-21"

37,268.46 Same reason as No. 5

"QQQ-22"

206,215.18 Same reason as No. 4

"QQQ-23"

31,628.22 Same reason as No. 5

"QQQ-24"

246,533.39 Same reason as No. 5

"QQQ-25"

900.00

"QQQ-26"

48,205.88 Same reason as No. 5

"QQQ-27"

165,000.00 Same reason as No. 12

"QQQ-28"

33,750.00 Same reason as No. 12

"QQQ-29"

900.00

"QQQ-30"

6,439,680.00

"QQQ-31"

11 ,511.68 Same reason as No. 5

"QQQ-32"

36,362.86 Same reason as No. 5

NF of AgaQitl Dela Pena

33) Sps.

Eusebio/Vietor

Capital

Gains

Buchan

Tax Return

34) Sps. Eusebio/Vietor

Capital

Gains

Buchan

Tax Return

35) Sps. Alfredo/Erlinda

Capital

Gains

Marcos

Tax Return

36) Sps. Alfredo/Erlinda

Capital

Gains

Marcos

Tax Return

37) Sps. Paganono!Lourdes

Capital

Gains

Ursua

Tax Return

38) Mr. Benito Ang, as

Capital

Gains

NF of Sps. Licerio/Araceli

Tax Return

Pagdilao

39) Sps. Carmelito/Teresita

Capital

Gains

Obrero

Tax Return

40) Sps. Benito/Betty Ang

Capital

Gains

Tax Return

41) Sps. Paganini/Lourdes

Capital

Gains

Ursula

Tax Return

42) Sps.

Daniei!Leticia

Capital

Gains

Salanga

Tax Return

43) Sps. Jacinto!Rosalinda

Capital

Gains

lndong

Tax Return

44) Sps. Rainer/Mary Beth

Capital

Gains

Garay

Tax Return

45) Sps. Wilfredo/Vangie

Capital

Gains

Montero

Tax Return

46) Sps. Bonifacio/Salome

Capital

Gains

Yuson

Tax Return

47) Tan Kam Enterprises/

BIR

Form

Toppers

Knitting

1743-W

Corporation

48) Jose T. Cabrera

Certificate

of

Withholding

Tax at Source

49) Cirilo Basalo, Jr.

Capital

Gains

Tax Return

50) Sps. Ronald Dennis &

Capital

Gains

Helen Joseph Arellano

Tax Return

51) Sps. Alejandro/Joselita

Capital

Gains

Lim

Tax Return

52)

Phil

Spring

Water

Certificate

of

Resources

Creditable Tax

Withheld

at

Source

(BIR

Form

No.

1743/750) 53) Sps. Conrado/Neriza

Capital

Gains

Elcamel

Tax Return

54)

Teodoro

Legal

&

Capital

Gains

Spouse

Tax Return

55) Sps.

Emmanuel

Caballero

69

"QQQ-33"

237,663.23 Same reason as No. 5

"QQQ-34"

150,457.40 Same reason as No. 5

"QQQ-35"

50,235.30 Same reason as No. 5

"QQQ-36"

32,157.23 Same reason as No. 5

"QQQ-37"

12,205.45 Same reason as No. 5

"QQQ-38"

29,591.05 Same reason as No. 5

"QQQ-39"

112,3 15.10 Same reason as No. 5

"QQ-40"

47,737.37 Same reason as No. 5

"QQQ-41 "

194,666.27 Same reason as No. 5 "QQQ-42' 30,356.60 Same reason as No. 5

"QQQ-43"

44,843.00 Same reason as No. 5

"QQQ-44"

21,307.00 Same reason as No. 5

"QQQ-45"

25,2 17.11 Same reason as No. 5

"QQQ-46"

4,603.23 Same reason as No. 5

"QQQ-47"

I ,200,000.00

"QQQ-48"

16,770.00

"QQQ-49"

28,724.72 Same reason as No. 5

"QQQ-50"

23,962.17 Same reason as No. 5

"QQQ-51"

623,598.73 Same reason as No. 4

"QQQ-52"

300.00

"QQQ-53"

120,665.46 Same reason as No. 5

"QQQ-54"

84,660.57 Same reason as No. 5 33,750.00

No

supporting documentary evidence w

Q )

56) Gonzalo Brillantes III

Capital

Gains

Tax Return

57) Suzanne Berba

Certificate

Authorizing

Registration

58) Milagros Canieso

Certificate

Authorizing

Registration

59) Fidel Gemudiano

Certificate

Authorizing

Registration

60) Ma. Nemia Lizada

Certificate

Authorizing

Registration

61) Jaime & Evelyn Uy

62) Mrs. Jamili (Pueblo

Concepcion)

63) Aty. Builders

64) CA Square

65)

Miller Construction/

Capital

Gains

Betty Go

Tax Return

66) Eastern Global Corp.

67) ETY DTD 11.18.96

"QQQ-55"

"QQQ-58"

"QQQ-59"

"QQQ-60"

"QQQ-61"

"QQQ-62"

Total Creditable Withholding Tax-Allowed/Disallowed

Error on petitioner's addition (attributed to creditable tax withheld on Suzanne Berba, which was reflected a ~ P 12,96750, but per verification, the correct amount should be ?12,967.50)

Total Creditable Withholding Tax per Schedule

70 12,265.00 Same reason as No. 4 12,967.50

Certificate

Authorizing

Registration states that it was subject to withholding tax withheld and remitted to the

BIR

under

Official

Receipt

indicated therein as evidenced by

BIR

Nos. 1743W/1743B 11,407.50 Same reason as No. 57 15,405.00 Same reason as No. 57 45,000.00 Same reason as No. 57 1,233,119.22

No

supporting documentary evidence 52,061.00

No

supporting documentary evidence 158,514.00

No

supporting documentary evidence 722,535.03

No

supporting documentary evidence 344,686.94 Same reason as No. 4 130,400.00

No

supporting documentary evidence 32,066.70

No

supporting documentary evidence P8,683,575.00 Pll ,977 ,854. 79 I ,283,782.50 P8,683,575.00 Pl3,261 ,637.29 P21,945,212.29

71 Annex "B"- Schedule of DST for 1996, as computed by the

BIR

Schedule of DST

For the Year 1996

Transaction

Amount

A.

092-

Bills Discounted

P7 ,679,602,822.12 093-

Time Loans-Clean

1,362,681,355.24 111 -

Other Agri-Credit Loan

2,263,620,003.33 121 -

Export Bills Purchase

595,739,846.61 122-

Domestic Bills Purchase

49,475,276.76 123-

Foreign Bills Purchase

24,586,783.54 131 -

Customers Liability (Import Bill)

1,893,850,213.66 132- Import Bill under TR 1,907,449,852.17 133- Domestic Bills under TR 211 ,252,710.15 142-

Customer Liability Foreign

780,122,658.76 281 -

Time Certificate of Deposit

2,715,873,190.22 290-

TCD Special Financing

9,000,000.00 371-

Bills Payable- Deposit Substitute

84,851 ,004,023.15 390-

Cash LC

495,950,502.51 500-

Unused LC Domestic

189,031 ,227.4 7 510-

LC Foreign

3,03 8,308,281 .03 530-

Inward Bills for Collection

70,488,558.96 540-

Outward Bills for Collection- Domestic

33,139,780.05 550-

Outward Bill for Collection - Foreign

220,601,327.52

Interbank Loan

23,043,000,000.00

Total

P131 ,434,778,413.25

Rate

0.15%

Documentary Stamp Tax Due

p 197,152,167.62 B. On proceeds from sale of real property

Total Amount

PI 04,207,666.67

Rate of Tax

1.50%

Basic Tax Due

Pl ,563,115.00 C. Industry Issue

RRP

p 12,198,575,780.18

Rate

0.15%

Basic Tax Still Due

p 18,297,863.67 D. Capital Stocks

Subscribed 1995

8,391,977.00

Subscribed 1996

8,391,977.00

Additional Subscribed Capital Stock

-

Rate of Tax

1.00%

Tax Due

-

Tax Paid

0

Tax Deficiency

-

Total Tax Due

P217,013, 146.29

72 Annex "C"- Schedule of DST for 1997, as computed by the

BIR

Schedule of DST

For the Tax Year 1997

Transaction

Amount

A.

12500-

Export Bills Purchase - Reg

P828, 709,882.49 12510-

PDO

2,614,600.64 12600-

Domestic Bills Purchase

31,066,739.19 12601 -

Foreign Bills Purchase

10,762,769.35 12800- Loans under TR - Domestic 764,164,989.86 12801 -

Local CY

2,959,459,552.12 12802-

Foreign

2,039,069,386.21 20200-

Time Certificate of Deposit - Dom

404,541,116.77 20300-

TCD Special Financing

33,904,583.29 21202-

Bills Payable - Domestic & Priv Firm

7,448,979,091.53 21700-

Cash LC

393,883,237.56 51000-

Unused LC Domestic - Sight

483,484,595. 11 51001 -

Unused LC Domestic- Usance

2,422,976.50 51002-

Unused LC Domestic - Standby

5,097,670.00 51100-

Unused Comm LC Foreign - Sight

3,058,778,361.90 51 101-

Unused Comm LC Foreign- Usance

I, 190,602,938.35 51102-

Unused Comm LC Foreign- Standby

233,788,454.63 52001 -

Inward Bills for Collection

39,5 19,064.72 52100 -

Outward Bill for Collection- Domestic

42,413,571.83 52101-

Outward Bill for Collection- Foreign

391 ' 129,550.73 11 603-

Interbank Loan

19,387,500,000.00

Total

P39,751 ,893, 132.78

Rate

0.15%

Documentary Stamp Tax Due

P59,627,839.70 B. On sale of Real Properties Proceeds from disposal of real properties (F/S) 48,927,348.00 Rate of tax 1.50% P733,910.22 C. Industry Issue 13600 - Govt Sec. Purchase under RRP 3,468,898,3 07.74 55200 - Assets held in Trust- Loans 3,160,305,925.70

Total

P6,629,204,233.44

Rate

0. 15%

Basic Tax Still Due

9,943,806.35 D. Capital Stocks

Subscribed 1996

839,197,700.00

Subscribed 1997 per F/S

2,629,482,795.00

Additional Subscribed Capital Stock

I ,790,285,095.00

Rate of Tax

1.00%

Tax Due

P17,902,850.95

Tax Deficiency

17,902,606.00 244.95 TOTAL DST DEFICIENCY (Inc! oflndustry issue) P70,305,80 1.22 {;)_ )