Tax Digests

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Madrigal v. Rafferty
Facts:
Vicente Madrigal and Susana Paterno were legally
married prior to January 1, 1914, contracted under the
provisions of law concerning conjugal partnerships !n
191", Madrigal filed a sworn declaration with the #!$
showing that his total net income for the year 1914
was P%9&,'(%)' Su*se+uently Madrigal su*mitted
the claim that the said P%9&,'(%)' did not represent
his income for the year 1914, *ut was in fact the
income of the conjugal partnershipe,isting *etween
himself and his wife Susana Paterno, and that in
computing and assessing the additional income ta,
provided *y the-ct of #ongress of .cto*er ', 191',
the income declared *y Vicente Madrigal should *e
divided into two e+ual parts, one/half to *e considered
the income of Vicente Madrigal and the other half of
Susana Paterno
-fter payment under protest, and after the protest of
Madrigal had *een decided adversely *y the #!$,
action was *egun *y Madrigal and his wife Paterno in
the #0! of Manila against #ollector of !nternal
$evenue and the 1eputy #ollector of !nternal
$evenue #0! decided against Madrigal and Paterno
-ppellees contend that the ta,es imposed *y
the !ncome 2a, 3aware as the name implies ta,es
upon income ta, and not upon capital and property4
that the fact that Madrigal was a married man, and his
marriage contracted under the provisions governing
the conjugal partnership, has no *earing on income
considered as income, and that the distinction must *e
drawn *etween the ordinary form of commercial
partnership and the conjugal partnership of spouses
resulting from the relation of marriage
Issue: 5hether or not the additional income ta,
should *e divided into two e+ual parts *ecause of the
conjugal partnership
Held:
!ncome as contrasted with capital or property
is to *e the test 2he essential difference *etween
capital and income is that capital is a fund4 income is a
flow - fund of property e,isting at an instant of time is
called capital - flow of services rendered *y that
capital *y the payment of money from it or any other
*enefit rendered *y a fund of capital in relation to such
fund through a period of time is called an income
#apital is wealth, while income is the service of wealth
Susana Paterno, wife of Vicente Madrigal, has an
inchoate right in the property of her hus*and Vicente
Madrigal during the life of the conjugal partnership
She has an interest in the ultimate property rights and
in the ultimate ownership of property ac+uired as
income after such income has *ecome capital Susana
Paterno has no a*solute right to one/half the income
of the conjugal partnership 6ot *eing sei7ed of a
separate estate, Susana Paterno cannot ma8e a
separate return in order to receive the *enefit of
the e,emption which would arise *y reason of the
additional ta, -s she has no estate and income,
actually and legally vested in her and entirely distinct
from her hus*and9s property, the income cannot
properly *e considered the separate income of the
wife for the purposes of the additional ta, Moreover,
the !ncome 2a, 3aw does not loo8 on the spouses as
individual partners in an ordinary partnership 2he
hus*and and wife are only entitled to the e,emption of
P:,((( specifically granted *y the law 2he
higher schedules of the additional ta, directed at the
incomes of the wealthy may not *e partially defeated
*y reliance on provisions in our #ivil #ode dealing with
the conjugal partnership and having no application to
the !ncome 2a, 3aw 2he aims and purposes of
the !ncome 2a, 3aw must *e given effect
Fisher v. Trinidad
Facts: Philippine -merican 1rug #ompany was a
corporation duly organi7ed and e,isting under the laws
of the Philippine !slands, doing *usiness in the #ity of
Manila 0isher was a stoc8holder in said corporation
Said corporation, as result of the *usiness for that
year, declared a ;stoc8 dividend; and that the
proportionate share of said stoc8 divided of 0isher was
P%4,:(( Said the stoc8 dividend for that amount was
issued to 0isher 0or this reason, 2rinidad demanded
payment of income ta, for the stoc8 dividend received
*y 0isher 0isher paid under protest the sum of
P::991 as income ta, on said stoc8 dividend 0isher
filed an action for the recovery of P::991 2rinidad
demurred to the petition upon the ground that it did not
state facts sufficient to constitute cause of action 2he
demurrer was sustained and 0isher appealed
Issue: 5hether or not the stoc8 dividend was an
income and therefore ta,a*le
Held: 6o <enerally spea8ing, stoc8 dividends
represent undistri*uted increase in the capital of
corporations or firms, joint stoc8 companies, etc, etc,
for a particular period 2he inventory of the property of
the corporation for particular period shows an increase
in its capital, so that the stoc8 theretofore issued does
not show the real value of the stoc8holder9s interest,
and additional stoc8 is issued showing the increase in
the actual capital, or property, or assets of the
corporation
!n the case of <ray vs 1arlington =:% >S, &"'?, the
>S Supreme #ourt held that mere advance in value
does not constitute the ;income; specified in the
revenue law as ;income; of the owner for the year in
which the sale of the property was made Such
advance constitutes and can *e treated merely as an
increase of capital
!n the case of 2owne vs @isner, income was defined in
an income ta, law to mean cash or its e+uivalent,
unless it is otherwise specified !t does not mean
unreali7ed increments in the value of the property -
stoc8 dividend really ta8es nothing from the property of
the corporation, and adds nothing to the interests of
the shareholders !ts property is not diminished and
their interest are not increased 2he proportional
interest of each shareholder remains the same !n
short, the corporation is no poorer and the stoc8holder
is no richer then they were *efore
!n the case of 1oyle vs Mitchell Aros #o =%4) >S,
1)9?, Mr Justice Pitney, said that the term ;income; in
its natural and o*vious sense, imports something
distinct from principal or capital and conveying the idea
of gain or increase arising from corporate activity
!n the case of @isner vs Macom*er =%"% >S, 1:9?,
income was defined as the gain derived from capital,
from la*or, or from *oth com*ined, provided it *e
understood to include profit gained through a sale or
conversion of capital assets
5hen a corporation or company issues ;stoc8
dividends; it shows that the company9s accumulated
profits have *een capitali7ed, instead of distri*uted to
the stoc8holders or retained as surplus availa*le for
distri*ution, in money or in 8ind, should opportunity
offer 2he essential and controlling fact is that the
stoc8holder has received nothing out of the company9s
assets for his separate use and *enefit4 on the
contrary, every dollar of his original investment,
together with whatever accretions and accumulations
resulting from employment of his money and that of
the other stoc8holders in the *usiness of the company,
still remains the property of the company, and su*ject
to *usiness ris8s which may result in wiping out of the
entire investment 2he stoc8holder *y virtue of the
stoc8 dividend has in fact received nothing
that answers the definition of an ;income;
2he stoc8holder who receives a stoc8 dividend has
received nothing *ut a representation of his increased
interest in the capital of the corporation 2here has
*een no separation or segregation of his interest -ll
the property or capital of the corporation still *elongs
to the corporation 2here has *een no separation of
the interest of the stoc8holder from the general capital
of the corporation 2he stoc8holder, *y virtue of the
stoc8 dividend, has no separate or individual control
over the interest represented there*y, further than he
had *efore the stoc8 dividend was issued Be cannot
use it for the reason that it is still the property of the
corporation and not the property of the individual
holder of stoc8 dividend - certificate of stoc8
represented *y the stoc8 dividend is simply a
statement of his proportional interest or participation in
the capital of the corporation 2he receipt of a stoc8
dividend in no way increases the money received of a
stoc8holder nor his cash account at the close of the
year !t simply shows that there has *een an increase
in the amount of the capital of the corporation during
the particular period, which may *e due to an
increased *usiness or to a natural increase of the
value of the capital due to *usiness, economic, or
other reasons 5e *elieve that the 3egislature, when it
provided for an ;income ta,,; intended to ta, only the
;income; of corporations, firms or individuals, as that
term is generally used in its common acceptation4 that
is that the income means money received, coming to a
person or corporation for services, interest, or profit
from investments 5e do not *elieve that the
3egislature intended that a mere increase in the value
of the capital or assets of a corporation, firm, or
individual, should *e ta,ed as ;income;
- stoc8 dividend, still *eing the property of the
corporation and not the stoc8holder, may *e reached
*y an e,ecution against the corporation, and sold as a
part of the property of the corporation !n such a case,
if all the property of the corporation is sold, then the
stoc8holder certainly could not *e charged with having
received an income *y virtue of the issuance of the
stoc8 dividend >ntil the dividend is declared and paid,
the corporate profits still *elong to the corporation, not
to the stoc8holders, and are lia*le for corporate
inde*tedness 2he rule is well esta*lished that cash
dividend, whether large or small, are regarded as
;income; and all stoc8 dividends, as capital or assets
!f the ownership of the property represented *y a stoc8
dividend is still in the corporation and not in the holder
of such stoc8, then it is difficult to understand how it
can *e regarded as income to the stoc8holder and not
as a part of the capital or assets of the corporation !f
the holder of the stoc8 dividend is re+uired to pay an
income ta, on the same, the result would *e that he
has paid a ta, upon an income which he never
received Such a conclusion is a*solutely contradictory
to the idea of an income
-s stoc8 dividends are not ;income,; the same cannot
*e considered ta,es under that provision of -ct 6o
%:'' 0or all of the foregoing reasons, S# held that
the judgment of the lower court should *e revo8ed
Limpan Investment Corp. v. CIR
3impan !nvestment #ompany deemed to have
constructively received rental payments in 19") when
they were deposited in court due to its refusal to
receive them
0-#2SC
D A!$ assessed deficiency ta,es on 3impan #orp, a
company that leases real property, for under/declaring
its rental income for years 19"&/") *y around P%(E
and P:1E respectively
D Petitioner appeals on the ground that portions of
these underdeclared rents are yet to *e collected *y
the previous owners and turned over or received *y
the corporation
D Petitioner cited that some rents were deposited with
the court, such that the corporation does not have
actual nor constructive control over them
D 2he sole witness for the petitioner, Solis =#orporate
Secretary/ 2reasurer? admitted to some undeclared
rents in 19"& and19"), and that some *alances were
not collected *y the corporation in 19"& *ecause the
lessees refused to recogni7e and pay rent to the new
owners and that the corpFs president !sa*elo 3im
collected some rent and reported it in his personal
income statement, *ut did not turn over the rent to the
corporation
D Be also cites lac8 of actual or constructive control
over rents deposited with the court
!SS>@C
5hether or not the A!$ was correct in assessing
deficiency ta,es against 3impan #orp for undeclared
rental income
B@31C
Ges Petitioner admitted that it indeed had undeclared
income =although only a part and not the full amount
assessed *y A!$? 2hus, it has *ecome incum*ent
upon them to prove their e,cuses *y clear and
convincing evidence, which it has failed to do 5hen is
there constructive receipt of rentH 5ith regard to 19")
rents deposited with the court, and withdrawn only in
19":, the court viewed the corporation as having
constructively received said rents 2he non/collection
was the petitionerFs fault since it refused to refused to
accept the rent, and not due to nonpayment of
lessees Bence, although the corporation did not
actually receive the rent, it is deemed to have
constructively received them
Conwi et al. v. CT and CIR
Facts: Petitioners are employees of Procter and
<am*le =Philippine Manufacturing #orporation,
su*sidiary of Procter I <am*le, a foreign
corporation?1uring the years 19)( and 19)1,
petitioners were assigned to other su*sidiaries of
Procter I <am*le outside the Philippines, for which
petitioners were paid >S dollars as compensation
Petitioners filed their !2$s for 19)( and 19)1,
computing ta, due *yapplying the dollar/to/peso
conversion *ased on the floating rate under A!$ $uling
6o )(/(%) !n 19)', petitioners filed amened !2$s for
19)( and 19)1, this time using the par value of the
peso as *asis 2his resulted in the alleged
overpayments, refund andJor ta, credit, for which
claims for refund were filed
#2- held that the proper conversion rate for the
purpose of reporting and paying the Philippine income
ta, on the dollar earnings of petitioners are the rates
prescri*ed under $evenue
Memorandum#irculars 6os )/)1 and 41/)1 2he
refund claims were denied
Issues:
=1? 5hether or not petitioners9 dollar earnings are
receipts derived from foreign e,change transactions4
6.
=%? 5hether or not the proper rate of conversion of
petitioners9 dollar earnings for ta, purposes in the
prevailing free mar8et rate of e,change and not the
par value of the peso4 G@S
Held: 0or the proper resolution of income ta, cases,
income may *e defined as an amount of money
coming to a person or corporation within a specified
time, whether as payment for services, interest or
profit from investment >nless otherwise specified, it
means cash or its e+uivalent !ncome can also *e
though of as flow of the fruits of one9s la*or
Petitioners are correct as to their claim that their dollar
earnings are not receipts derived from foreign
e,change transactions 0or a foreign e,change
transaction is simply that K a transaction in foreign
e,change, foreign e,change *eing ;the conversion of
an amount of money or currency of one country into an
e+uivalent amount of money or currency of another;
5hen petitioners were assigned to the foreign
su*sidiaries of Procter I <am*le, they were earning in
their assigned nation9s currency and were -3S.
spending in said currency 2here was no conversion,
therefore, from one currency to another
2he dollar earnings of petitioners are the fruits of their
la*ors in the foreign su*sidiaries of Procter I <am*le
!t was a definite amount of money which came to them
within a specified period of time of twoyears as
payment for their services
-nd in the implementation for the proper enforcement
of the 6ational !nternal $evenue #ode, Section '':
thereof empowers the Secretary of 0inance to
;promulgate all needful rules and regulations; to
effectively enforce its provisions pursuant to this
authority, $evenue Memorandum #ircular 6os )/)1
and 41/)1 were issued to prescri*ed a uniform rate of
e,change from >S dollars to Philippine pesos for
!62@$6-3 $@V@6>@ 2-L P>$P.S@S for the years
19)( and 19)1, respectively Said
revenue circulars were a valid e,ercise of the authority
given to the Secretary of 0inance *y the 3egislature
which enacted the !nternal $evenue #ode -nd these
are presumed to *e a valid interpretation of said code
until revo8ed *y the Secretary of 0inance himself
Petitioners are citi7ens of the Philippines, and their
income, within or without, and in these cases wholly
without, are su*ject to income ta, Sec %1, 6!$#, as
amended, does not *roo8 any e,emption
!anas" #r. $. C
%.R. &o. '()*+, Fe-ruary '(" )(((
!I!I&. $. !/0" #R." petitioner,
vs
C.1RT .F 223L0" 41ILI&. T. LRI&"
R.5.LF. T16.& &5 2R.C.2I.
TL.&" respondents
41I01M!I&%" J.:
0or review is the 1ecision of the #ourt of -ppeals in
#-/#$ #V 6o 1)%"1 promulgated on 6ovem*er %9,
1991 !t affirmed in toto the judgment of the $egional
2rial #ourt =$2#?, Aranch '9, Manila, in #ivil #ase 6o
:%/1%1() Said judgment disposed as followsC
0.$ -33 2B@ 0.$@<.!6<
#.6S!1@$-2!.6S, this #ourt here*y
renders judgment 1!SM!SS!6< the complaint
against all the defendants and ordering
plaintiff Mherein petitionerN to pay defendant
3arin the amount of P%((,((((( =2wo
Bundred 2housand Pesos? as actual and
compensatory damages4 P%((,((((( as
moral damages4 and P"(,((((( as
e,emplary damages and attorneys fees of
P1((,(((((
1
2he facts, which we find supported *y the records,
have *een summari7ed *y the #ourt of -ppeals as
followsC
.n 0e*ruary %(, 19)&, petitioner, Ai*iano V AaOas Jr
sold to -yala !nvestment #orporation =-G-3-?,
1%:,%&" s+uare meters of land located at Aayanan,
Muntinlupa, for two million, three hundred eight
thousand, seven hundred seventy =P%,'(:,))(((?
pesos 2he 1eed of Sale provided that upon the
signing of the contract -G-3- shall pay four hundred
si,ty/one thousand, seven hundred fifty/four
=P4&1,)"4((? pesos 2he *alance of one million, eight
hundred forty/seven thousand and si,teen
=P1,:4),(1&((? pesos was to *e paid in four e+ual
consecutive annual installments, with twelve =1%P?
percent interest per annum on the outstanding
*alance -G-3- issued one promissory note covering
four e+ual annual installments @ach periodic payment
of P4&1,)"4(( pesos shall *e paya*le starting on
0e*ruary %(, 19)), and every year thereafter, or until
0e*ruary %(, 19:(
2he same day, petitioner discounted the promissory
note with -G-3-, for its face value of P1,:4),(1&((,
evidenced *y a 1eed of -ssignment signed *y the
petitioner and -G-3- -G-3- issued nine =9? chec8s to
petitioner, all dated 0e*ruary %(, 19)&, drawn against
Aan8 of the Philippine !slands with the uniform amount
of two hundred five thousand, two hundred twenty/four
=P%(",%%4((? pesos
!n his 19)& !ncome 2a, $eturn, petitioner reported the
P4&1,)"4 initial payment as income from disposition of
capital asset
%
Selling Price of 3and P%,'(:,))(((
3ess !nitial Payment 4&1,)"4((
'
>nreali7ed <ain
P1,:4),(1&((
19)& 1eclaration of !ncome on 1isposition of
#apital -sset su*ject to 2a,C
!nitial Payment P4&1,)"4((
3essC #ost of land and
other incidental @,penses
= )&,"4)9(?
!ncome P':",%(&1(
!ncome su*ject to ta,
=P':",%(& 1( , "(P?
P19%,&('&"
!n the succeeding years, until 19)9, petitioner reported
a uniform income of two hundred thirty thousand, eight
hundred seventy/seven =P%'(,:))((? pesos
4
as gain
from sale of capital asset !n his 19:( income ta,
amnesty return, petitioner also reported the same
amount of P%'(,:))(( as the reali7ed gain on
disposition of capital asset for the year
.n -pril 11, 19):, then $evenue 1irector Mauro
#alaguio authori7ed ta, e,aminers, $odolfo 2ua7on
and Procopio 2alon to e,amine the *oo8s and records
of petitioner for the year 19)& 2hey discovered that
petitioner had no outstanding receiva*le from the 19)&
land sale to -G-3- and concluded that the sale was
cash and the entire profit should have *een ta,a*le in
19)& since the income was wholly derived in 19)&
2ua7on and 2alon filed their audit report and declared
a discrepancy of two million, ninety/five thousand, nine
hundred fifteen =P%,(9",91"((? pesos in petitioner9s
19)& net income 2hey recommended deficiency ta,
assessment for two million, four hundred seventy/three
thousand, si, hundred seventy/three =P%,4)',&)'((?
pesos
Meantime, -+uilino 3arin succeeded #alaguio as
$egional 1irector of Manila $egion !V/- -fter
reviewing the e,aminers9 report, 3arin directed the
revision of the audit report, with instruction to consider
the land as capital asset 2he ta, due was only fifty
="(P? percent of the total gain from sale of the
property held *y the ta,payer *eyond twelve months
pursuant to Section '4
"
of the 19)) 6ational !nternal
$evenue #ode =6!$#? 2he deficiency ta, assessment
was reduced to nine hundred thirty si, thousand, five
hundred ninety/eight pesos and fifty centavos
=P9'&,"9:"(?, inclusive of surcharges and penalties
for the year 19)&
.n June %), 19:(, respondent 3arin sent a letter to
petitioner informing of the income ta, deficiency that
must *e settled him immediately
.n Septem*er %&, 19:(, petitioner ac8nowledged
receipt of the letter *ut insisted that the sale of his land
to -G-3- was on installment
.n June :, 19:1, the matter was endorsed to the
-cting #hief of the 3egal Aranch of the 6ational .ffice
of the A!$ 2he #hief of the 2a, 0raud >nit
recommended the prosecution of a criminal case for
conspiring to file false and fraudulent returns, in
violation of Section "1 of the 2a, #ode against
petitioner and his accountants, -ndres P -lejandre
and #onrado AaOas
.n June 1), 19:1, 3arin filed a criminal complaint for
ta, evasion against the petitioner
.n July 1, 19:1, news items appeared in the now
defunct @vening @,press with the headlineC ;A!$
#harges $ealtor; and another in the defunct @vening
Post with a news itemC ;A!$ raps $ealtor, %
accountants; -nother news item also appeared in the
July %, 19:1, issue of the Aulletin 2oday entitledC ;'/
face P1/M ta, evasion raps; -ll news items
mentioned petitioner9s false income ta, return
concerning the sale of land to -G-3-
.n July %, 19:1, petitioner filed an -mnesty 2a,
$eturn under P1 1)4( and paid the amount of forty/
one thousand, seven hundred twenty/nine pesos and
eighty/one centavos =P41,)%9:1? .n 6ovem*er %,
19:1, petitioner again filed an -mnesty 2a, $eturn
under P1 1:4( and paid an additional amount of one
thousand, five hundred twenty/five pesos and si,ty/two
centavos =P1,"%"&%? !n *oth, petitioner did not
recogni7e that his sale of land to -G-3- was on cash
*asis
$eacting to the complaint for ta, evasion and the news
reports, petitioner filed with the $2# of Manila an
action
&
for damages against respondents 3arin, 2ua7on
and 2alon for e,tortion and malicious pu*lication of the
A!$9s ta, audit report Be claimed that the filing of
criminal complaints against him for violation of ta, laws
were improper *ecause he had already availed of two
ta, amnesty decrees, Presidential 1ecree 6os 1)4(
and 1:4(
2he trial court decided in favor of the respondents and
awarded 3arin damages, as already stated Petitioner
seasona*ly appealed to the #ourt of -ppeals !n its
decision of 6ovem*er %9, 1991, the respondent court
affirmed the trial court9s decision, thusC
2he finding of the court a quo that plaintiff/
appellant9s actions against defendant/appellee
3arin were unwarranted and *aseless and as
a result thereof, defendant/appellee 3arin was
su*jected to unnecessary an,iety and
humiliation is therefore supported *y the
evidence on record1âwphi1.nêt
1efendant/appellee 3arin acted only in
pursuance of the authority granted to him !n
fact, the criminal charges filed against him in
the 2anod*ayan and in the #ity 0iscal9s .ffice
were all dismissed
5B@$@0.$@, the appealed judgment is
here*y -00!$M@1 in toto
)
Bence this petition, wherein petitioner raises *efore us
the following +ueriesC
! 5B@2B@$ 2B@ #.>$2 .0 -PP@-3S
@$$@1 !6 !2S !62@$P$@2-2!.6 .0
P@$2!6@62 2-L 3-5S, 2B>S !2 0-!3@1 2.
-PP$@#!-2@ 2B@ #.$$@#26@SS -61
-##>$-#G .0 P@2!2!.6@$9S $@2>$6 .0
2B@ !6#.M@ 1@$!V@1 0$.M 2B@ S-3@
.0 2B@ 3-61 2. -G-3-
!! 5B@2B@$ 2B@ [email protected]@62 #.>$2
@$$@1 !6 6.2 0!61!6< 2B-2 2B@$@ 5-S
-6 -33@<@1 -22@MP2 2. @L2.$2
MM.6@G 0$.MN P@2!2!.6@$ AG P$!V-2@
[email protected]@62S
!!! 5B@2B@$ 2B@ [email protected]@62 #.>$2
@$$@1 !6 !2S !62@$P$@2-2!.6 .0
P$@S!1@62!-3 1@#$@@ 6.S 1)4( -61
1:4(, -M.6< .2B@$S, P@2!2!.6@$9S
!MM>6!2G 0$.M #$!M!6-3
P$.S@#>2!.6
!V 5B@2B@$ 2B@ [email protected]@62 #.>$2
@$$@1 !6 !2S !62@$P$@2-2!.6 .0 5@33/
@S2-A3!SB@1 1.#2$!6@S .0 2B!S
B.6.$-A3@ #.>$2 -S $@<-$1S 2B@
-5-$1 .0 -#2>-3, M.$-3 -61
@L@MP3-$G 1-M-<@S !6 0-V.$ .0
[email protected]@62 3-$!6
!n essence, petitioner as8s the #ourt to
resolve seriatim the following issuesC
1 5hether respondent court erred in ruling
that there was no e,tortion attempt *y A!$
officials4
% 5hether respondent court erred in holding
that P1 1)4( and 1:4( granting ta,
amnesties did not grant immunity from ta,
suits4
' 5hether respondent court erred in finding
that petitioner9s income from the sale of land in
19)& should *e declared as a cash transaction
in his ta, return for the same year =*ecause
the *uyer discounted the promissory note
issued to the seller on future installment
payments of the sale, on the same day of the
sale?4
4 5hether respondent court erred and
committed grave a*use of discretion in
awarding damages to respondent 3arin
2he first issue, on whether the #ourt of -ppeals erred
in finding that there was no e,tortion, involves a
determination of fact 2he #ourt of -ppeals o*served,
2he only evidence to esta*lish the alleged
e,tortion attempt *y defendants/appellees is
the plaintiff/appellant9s self serving
declarations
-s found *y the court a quo, ;said attempt was
8nown to plaintiff/appellant9s son/in/law and
counsel on record, yet, said counsel did not
ta8e the witness stand to corro*orate the
testimony of plaintiff;
:
-s repeatedly held, findings of fact *y the #ourt of
-ppeals especially if they affirm factual findings of the
trial court will not *e distur*ed *y this #ourt, unless
these findings are not supported *y
evidence
9
Similarly, neither should we distur* a
finding of the trial court and appellate court that an
allegation is not supported *y evidence on record
2hus, we agree with the conclusion of respondent
court that herein private respondents, on the *asis of
evidence, could not *e held lia*le for e,tortion
.n the second issue of whether P1 6os 1)4( and
1:4( which granted ta, amnesties also granted
immunity from criminal prosecution against ta,
offenses, the pertinent sections of these laws stateC
P1 6o 1)4( #.61.6!6<
P@6-32!@S 0.$ #@$2-!6
V!.3-2!.6S .0 2B@ !6#.M@ 2-L
3-5 >P.6 V.3>62-$G
1!S#3.S>$@ .0 >61@#3-$@1
!6#.M@ 0.$ !6#.M@ 2-L
P>$P.S@S -61 $@Q>!$!6<
P@$!.1!# S>AM!SS!.6 .0 6@2
5.$2B S2-2@M@62
, , , , , , , , ,
Sec 1 Voluntary Disclosure of Correct
Taxable Income K -ny individual who, for any
or all of the ta,a*le years 19)4 to 19)9, had
failed to file a return is here*y, allowed to file a
return for each of the aforesaid ta,a*le years
and accurately declare therein the true and
correct income, deductions and e,emptions
and pay the income ta, due per return
3i8ewise, any individual who filed a false or
fraudulent return for any ta,a*le year in the
period mentioned a*ove may amend his return
and pay the correct amount of ta, due after
deducting the ta,es already paid, if any, in the
original declaration =emphasis ours?
, , , , , , , , ,
Sec " Immunity from Penalties K -ny
individual who voluntarily files a return under
this 1ecree and pays the income ta, due
thereon shall *e immune from the penalties,
civil or criminal, under the 6ational !nternal
$evenue #ode arising from failure to pay the
correct income ta, with respect to the ta,a*le
years from which an amended return was filed
or for which an original return was filed in
cases where no return has *een filed for any
of the ta,a*le years 19)4 to
19)9C Proi!e!, howeer, 2hat these
immunities shall not apply in cases where the
amount of net ta,a*le income declared under
this 1ecree is understated to the e,tent of
%"P or more of the correct net ta,a*le
income =emphasis ours?
P1 6. 1:4( K <$-62!6< - 2-L
-M6@S2G .6 >62-L@1 !6#.M@
-61J.$ 5@-32B @-$6@1 .$
-#Q>!$@1 1>$!6< 2B@ 2-L-A3@
G@-$S 19)4 2. 19:( -61
$@Q>!$!6< 2B@ 0!3!6< .0 2B@
S2-2@M@62 .0 -SS@2S,
3!-A!3!2!@S, -61 6@2 5.$2B
Sec 1 Coera"e K !n case of voluntary
disclosure of previously unta,ed income
andJor wealth such as earnings, receipts, gifts,
*e+uests or any other ac+uisition from any
source whatsoever, reali7ed here or a*road,
*y any individual ta,payer, which are ta,a*le
under the 6ational !nternal $evenue #ode, as
amended, the assessment and collection of all
internal revenue ta,es, including the
increments or penalties on account of non/
payment, as well as all civil, criminal or
administrative lia*ilities arising from or incident
thereto under the 6ational !nternal $evenue
#ode, are here*y condoned provided that the
individual ta,payer shall pay =emphasis
ours?
Sec % Con!itions for Immunity K 2he
immunity granted under Section one of this
1ecree shall apply only under the following
conditionsC
a? Such previously unta,ed income
andJor wealth must have *een earned
or reali7ed in any of the years 19)4 to
19:(4
*? 2he ta,payer must file an amnesty
return on or *efore 6ovem*er '(,
19:1, and fully pay the ta, due
thereon4
c? 2he amnesty ta, paid *y the
ta,payer under this 1ecree shall not
*e less than P1,((((( per ta,a*le
year4 and
d? 2he ta,payer must file a statement
of assets, lia*ilities and net worth as
of 1ecem*er '1, 19:(, as re+uired
under Section & hereof =emphasis
ours?
!t will *e recalled that petitioner entered into a deed of
sale purportedly on installment .n the same day, he
discounted the promissory note covering the future
installments 2he discounting seems +uestiona*le
*ecause ordinarily, when a *ill is discounted, the
lender =e.". *an8s, financial institution? charges or
deducts a certain percentage from the principal value
as its compensation Bere, the discounting was done
*y the *uyer .n July %, 19:1, two wee8s after the
filing of the ta, evasion complaint against him *y
respondent 3arin on June 1), 19:1, petitioner availed
of the ta, amnesty under P1 6o 1)4( Bis amended
ta, return for the years 19)4 / 19)9 was filed with the
A!$ office of Valen7uela, Aulacan, instead of Manila
where the petitioner9s principal office was located Be
again availed of the ta, amnesty under P1 6o 1:4(
Bis disclosure, however, did not include the income
from his sale of land to -G-3- on cash *asis !nstead
he insisted that such sale was on installment Be did
not amend his income ta, return Be did not pay the
ta, which was considera*ly increased *y the income
derived from the discounting Be did not meet the twin
re+uirements of P1 1)4( and 1:4(, declaration of his
unta,ed income and full payment of ta, due thereon
#learly, the petitioner is not entitled to the *enefits of
P1 6os 1)4( and 1:4( 2he mere filing of ta,
amnesty return under P1 1)4( and 1:4( does
not ipso facto shield him from immunity against
prosecution 2a, amnesty is a general pardon to
ta,payers who want to start a clean ta, slate !t also
gives the government a chance to collect uncollected
ta, from ta, evaders without having to go through the
tedious process of a ta, case 2o avail of a ta,
amnesty granted *y the government, and to *e
immune from suit on its delin+uencies, the ta, payer
must have voluntarily disclosed his previously unta,ed
income and must have paid the corresponding ta, on
such previously unta,ed income
1(
!t also *ears noting that a ta, amnesty, much li8e a ta,
e,emption, is never favored nor presumed in law and if
granted *y statute, the terms of the amnesty li8e that
of a ta, e,emption must *e construed strictly against
the ta,payer and li*erally in favor of the ta,ing
authority
11
Bence, on this matter, it is our view that
petitioner9s claim of immunity from prosecution under
the shield of availing ta, amnesty is untena*le
.n the third issue, petitioner asserts that his sale of
the land to -G-3- was not on cash *asis *ut on
installment as clearly specified in the 1eed of Sale
which statesC
2hat for and in consideration of the sum of
25. M!33!.6 2B$@@ B>61$@1 @!<B2
2B.>S-61 S@V@6 B>61$@1 S@V@62G
=P%,'(:,))(((? [email protected] Philippine #urrency,
to *e paid as followsC
1 P4&1,)"4((, upon the signing of
the 1eed of Sale4 and,
% 2he *alance of P1,:4),(1&((, to
*e paid in four =4? e+ual, consecutive,
annual installments with interest
thereon at the rate of twelve percent
=1%P? per annum, *eginning on
0e*ruary %(, 19)&, said installments
to *e evidenced *y four =4? negotia*le
promissory notes
1%
Petitioner resorts to Section 4' of the 6!$# and Sec
1)" of $evenue $egulation 6o % to support his claim
Sec 4' of the 19)) 6!$# states,
!nstallment *asis K =a? 1ealers in personal
property K
=*? #ales of realty an! casual sales of
personalty K !n the case =1? of a casual sale
or other casual disposition of personal
property =other than property of a 8ind which
would properly *e included in the inventory of
the ta,payer if on hand at the close of the
ta,a*le year?, for a price e,ceeding one
thousand pesos, or =%? of a sale or other
disposition of real property if in either case the
initial payments do not e,ceed twenty/
five percentum of the selling price, the income
may, under regulations prescri*ed *y the
Minister of 0inance, *e returned on the *asis
and in the manner a*ove prescri*ed in this
section -s used in this section the term ;initial
payment; means the payments received in
cash or property other than evidences of
inde*tedness of the purchaser during the
ta,a*le period in which the sale or other
disposition is made =emphasis ours?
$evenue $egulation 6o %, Section 1)" provides,
#ale of real property inolin" !eferre!
payments K >nder section 4' deferred/
payment sales of real property include =1?
agreements of purchase and sale which
contemplate that a conveyance is not to *e
made at the outset, *ut only after all or a
su*stantial portion of the selling price has
*een paid, and =*? sales in which there is an
immediate transfer of title, the vendor *eing
protected *y a mortgage or other lien as to
deferred payments Such sales either under
=a? or =*?, fall into two classes when
considered with respect to the terms of sale,
as followsC
=1? Sales of property on the
installment plan, that is, sales in which
the payments received in cash or
property other than evidences of
inde*tedness of the purchaser during
the ta,a*le year in which the sale is
made do not e,ceed %" per cent of
the selling price4
=%? 1eferred/payment sales not on the
installment plan, that is sales in which
the payments received in cash or
property other than evidences of
inde*tedness of the purchaser during
the ta,a*le year in which the sale is
made e,ceed %" per cent of the
selling price4
!n the sale of mortgaged property the amount
of the mortgage, whether the property is
merely ta8en su*ject to the mortgage or
whether the mortgage is assumed *y the
purchaser, shall *e included as a part of the
;selling price; *ut the amount of the mortgage,
to the e,tent it does not e,ceed the *asis to
the vendor of the property sold, shall not *e
considered as a part of the ;initial payments;
or of the ;total contract price,; as those terms
are used in section 4' of the #ode, in sections
1)4 and 1)& of these regulations, and in this
section 2he term ;initial payments; does not
include amounts received *y the vendor in the
year of sale from the disposition to a third
person of notes given *y the vendee as part of
the purchase price which are due and paya*le
in su*se+uent years #ommissions and other
selling e,penses paid or incurred *y the
vendor are not to *e deducted or ta8en into
account in determining the amount of the
;initial payments,; the ;total contract price,; or
the ;selling price; 2he term ;initial payments;
contemplates at least one other payment in
addition to the initial payment !f the entire
purchase price is to *e paid in a lump sum in a
later year, there *eing no payment during the
year, the income may not *e returned on the
installment *asis !ncome may not *e returned
on the installment *asis where no payment in
cash or property, other than evidences of
inde*tedness of the purchaser, is received
during the first year, the purchaser having
promised to ma8e two or more payments, in
later years
Petitioner asserts that Sec 4' allows him to return as
income in the ta,a*le years involved, the respective
installments as provided *y the deed of sale *etween
him and -G-3- #onse+uently, he religiously reported
his yearly income from sale of capital asset, su*ject to
ta,, as followsC
Gear 19)) ="(P of P4&1,)"4? P%'(,:))((
19): %'(,:))((
19)9 %'(,:))((
19:( %'(,:))((
Petitioner says that his ta, declarations are accepta*le
modes of payment under Section 1)" of the $evenue
$egulations =$$? 6o % 2he term ;initial payment;, he
argues, does not include amounts received *y the
vendor which are part of the complete purchase price,
still due and paya*le in su*se+uent years 2hus, the
proceeds of the promissory notes, not yet due which
he discounted to -G-3- should not *e included as
income reali7ed in 19)& Petitioner states that the
original agreement in the 1eed of Sale should not *e
affected *y the su*se+uent discounting of the *ill
.n the other hand, respondents assert that ta,ation is
a matter of su*stance and not of form $eturns are
scrutini7ed to determine if transactions are what they
are and not declared to evade ta,es #onsidering the
progressive nature of our income ta,ation, when
income is spread over several installment payments
through the years, the ta,a*le income goes down and
the ta, due correspondingly decreases 5hen
payment is in lump sum the ta, for the year
proportionately increases >ltimately, a declaration that
a sale is on installment diminishes government ta,es
for the year of initial installment as against a
declaration of cash sale where ta,es to the
government is larger
-s a general rule, the whole profit accruing from a sale
of property is ta,a*le as income in the year the sale is
made Aut, if not all of the sale price is received during
such year, and a statute provides that income shall *e
ta,a*le in the year in which it is ;received,; the profit
from an installment sale is to *e apportioned *etween
or among the years in which such installments are
paid and received
1'
Sec 4' and Sec 1)" says that among the entities
who may use the a*ove/mentioned installment method
is a seller of real property who disposes his property
on installment, provided that the initial payment does
not e,ceed %"P of the selling price 2hey also state
what may *e regarded as installment payment and
what constitutes initial payment !nitial payment means
the payment received in cash or property e,cluding
evidences of inde*tedness due and paya*le in
su*se+uent years, li8e promissory notes or mortgages,
given of the purchaser during the ta,a*le year of sale
!nitial payment does not include amounts received *y
the vendor in the year of sale from the disposition to a
third person of notes given *y the vendee as part of
the purchase price which are due and paya*le in
su*se+uent years
14
Such disposition or discounting of
receiva*le is material only as to the computation of the
initial payment !f the initial payment is within %"P of
total contract price, e,clusive of the proceeds of
discounted notes, the sale +ualifies as an installment
sale, otherwise it is a deferred sale
1"
-lthough the proceed of a discounted promissory note
is not considered part of the initial payment, it is still
ta,a*le income for the year it was converted into cash
2he su*se+uent payments or li+uidation of certificates
of inde*tedness is reported using the installment
method in computing the proportionate income
1&
to *e
returned, during the respective year it was reali7ed
6on/dealer sales of real or personal property may *e
reported as income under the installment method
provided that the o*ligation is still outstanding at the
close of that year !f the seller disposes the entire
installment o*ligation *y discounting the *ill or the
promissory note, he necessarily must report the
*alance of the income from the discounting not only
income from the initial installment payment
5here an installment o*ligation is discounted at a
*an8 or finance company, a ta,a*le disposition results,
even if the seller guarantees its payment, continues to
collect on the installment o*ligation, or handles
repossession of merchandise in case of default
1)
2his
rule prevails in the >nited States
1:
Since our income
ta, laws are of -merican origin,
19
interpretations *y
-merican courts an our parallel ta, laws have
persuasive effect on the interpretation of these
laws
%(
2hus, *y analogy, all the more would a ta,a*le
disposition result when the discounting of the
promissory note is done *y the seller himself #learly,
the inde*tedness of the *uyer is discharged, while the
seller ac+uires money for the settlement of his
receiva*les 3ogically then, the income should *e
reported at the time of the actual gain 0or income ta,
purposes, income is an actual gain or an actual
increase of wealth
%1
-lthough the proceeds of a
discounted promissory note is not considered initial
payment, still it must *e included as ta,a*le income on
the year it was converted to cash 5hen petitioner had
the promissory notes covering the succeeding
installment payments of the land issued *y -G-3-,
discounted *y -G-3- itself, on the same day of the
sale, he lost entitlement to report the sale as a sale on
installment since, a ta,a*le disposition resulted and
petitioner was re+uired *y law to report in his returns
the income derived from the discounting 5hat
petitioner did is tantamount to an attempt to
circumvent the rule on payment of income ta,es
gained from the sale of the land to -G-3- for the year
19)&
3astly, petitioner +uestions the damages awarded to
respondent 3arin
-ny person who see8s to *e awarded actual or
compensatory damages due to acts of another has the
*urden of proving said damages as well as the amount
thereof
%%
3arin says the e,tortion cases filed against
him hampered his immediate promotion, caused him
strong an,iety and social humiliation 2he trial court
awarded him two hundred thousand =P%((,(((,((?
pesos as actual damages Bowever, the appellate
court stated that, despite pendency of this case, 3arin
was given a promotion at the A!$ Said respondent
courtC
5e find nothing on record, aside from
defendant/appellee 3arin9s statements =2S6,
pp &/), 11 1ecem*er 19:"?, to show that he
suffered loss of seniority that allegedly *arred
his promotion !n fact, he was promoted to his
present position despite the pendency of the
instant case =2S6, pp '"/'9, (4 6ovem*er
19:"?
%'
Moreover, the records of the case contain no
statement whatsoever of the amount of the actual
damages sustained *y the respondents -ctual
damages cannot *e allowed unless supported *y
evidence on the record
%4
2he court cannot rely on
speculation, conjectures or guesswor8 as to the fact
and amount of damages
%"
2o justify a grant of actual
or compensatory damages, it is necessary to prove
with a reasona*le degree of certainty, the actual
amount of loss
%&
Since we have no *asis with which to
assess, with certainty, the actual or compensatory
damages counter/claimed *y respondent 3arin, the
award of such damages should *e deleted
Moral damages may *e recovered in cases involving
acts referred to in -rticle %1
%)
of the #ivil #ode
%:
-s a
rule, a pu*lic official may not recover damages for
charges of falsehood related to his official conduct
unless he proves that the statement was made with
actual malice !n $abst, et al s %ational Intelli"ence
$oar!, et al, 1'% S#$- '1&, ''( =19:4?, we
reiterated the test for actual malice as set forth in the
landmar8 -merican case of %ew &or' Times
s #ullian,
%9
which we have long adopted, in
defamation and li*el cases, i(C
with 8nowledge that it was false or with
rec8less disregard of whether it was false or
not
5e appreciate petitioner9s claim that he filed his 19)&
return in good faith and that he had honestly *elieved
that the law allowed him to declare the sale of the
land, in installment 5e can further grant that the
pertinent ta, laws needed construction, as we have
earlier done 2hat petitioner was offended *y the
headlines alluding to him as ta, evader is also fully
understanda*le -ll these, however, do not justify what
amounted to a *aseless prosecution of respondent
3arin Petitioner presented no evidence to prove 3arin
e,torted money from him Be even admitted that he
never met nor tal8ed to respondent 3arin 5hen the
ta, investigation against the petitioner started, 3arin
was not yet the $egional 1irector of A!$ $egion !V/-,
Manila .n respondent 3arin9s instruction, petitioner9s
ta, assessment was considered one involving a sale
of capital asset, the income from which was su*jected
to only fifty percent ="(P? assessment, thus reducing
the original ta, assessment *y half 2hese
circumstances may *e ta8en to show that 3arin9s
involvement in e,tortion was not indu*ita*le Get,
petitioner went on to file the e,tortion cases against
3arin in different fora 2his is where actual malice
could attach on petitioner9s part Significantly, the trial
court did not err in dismissing petitioner9s complaints, a
ruling affirmed *y the #ourt of -ppeals
Eeeping all these in mind, we are constrained to agree
that there is sufficient *asis for the award of moral and
e,emplary damages in favor of respondent 3arin 2he
appellate court *elieved respondent 3arin when he
said he suffered an,iety and humiliation *ecause of
the unfounded charges against him Petitioner9s
actions against 3arin were found ;unwarranted and
*aseless,; and the criminal charges filed against him
in the 2anod*ayan and #ity 0iscal9s .ffice were all
dismissed
'(
Bence, there is ade+uate support for
respondent court9s conclusion that moral damages
have *een proved
6ow, however, what would *e a fair amount to *e paid
as compensation for moral damages also re+uires
determination @ach case must *e governed *y its own
peculiar circumstances
'1
.n this score, Del )osario
sCourt of *ppeals,
'%
cites several cases where no
actual damages were adjudicated, and where moral
and e,emplary damages were reduced for *eing ;too
e,cessive,; thusC
!n the case of P%$ C.*., M%"& S#$- '(9
=199&?N, this #ourt +uoted with approval the
following o*servation from )CPI
)o!ri"ue(, i(C
77 77 6evertheless, we find the award
of P1((,((((( as moral damages in
favor of respondent $odrigue7
e,cessive and unconsciona*le !n the
case of Pru!encia!o *lliance
Transport #ystem,Inc =14: S#$- 44(
M19:)N? we saidC M!Nt is undisputed
that the trial courts are given
discretion to determine the amount of
moral damages =-lcantara v Surro, 9'
Phil 4)%? and that the #ourt of
-ppeals can only modify or change
the amount awarded when they are
palpa*ly and scandalously e,cessive
;so as to indicate that it was the result
of passion, prejudice or corruption on
the part of the trial court; =<ellada v
5arner Aarnes I #o, !nc, ") .< M4N
)'4), )'":4 Sadie v Aacharach
Motors #o, !nc, ") .< M4N &'& and
-done v Aacharach Motor #o, !nc,
") .< &"&? Aut in more recent
cases where the awards of moral and
e,emplary damages are far too
e,cessive compared to the actual
loses sustained *y the aggrieved
party, this #ourt ruled that they should
*e reduced to more reasona*le
amounts =@mphasis ours?
!n other words, the moral damages
awarded must *e commensurate with
the loss or injury suffered
!n the same case =P6A v #-?, this #ourt
found the amount of e,emplary damages
re+uired to *e paid =P1,(((,(((,((? ;too
e,cessive; and reduced it to an ;e+uita*le
level; =P%",(((((?
!t will *e noted that in a*ove cases, the parties who
were awarded moral damages were not pu*lic
officials #onsidering that here, the award is in favor of
a government official in connection with his official
function, it is with caution that we affirm granting moral
damages, for it might open the floodgates for
government officials counter/claiming damages in suits
filed against them in connection with their functions
Moreover, we must *e careful lest the amounts
awarded ma8e citi7ens hesitate to e,pose corruption
in the government, for fear of lawsuits from vindictive
government officials 2hus, conforma*ly with our
declaration that moral damages are not intended to
enrich anyone,
''
we here*y reduce the moral damages
award in this case from two hundred thousand
=P%((,(((((? pesos to seventy five thousand
=P)",(((((? pesos, while the e,emplary damage is
set at P%",((((( only
2he law allows the award of attorney9s fees when
e,emplary damages are awarded, and when the party
to a suit was compelled to incur e,penses to protect
his interest
'4
2hough government officers are usually
represented *y the Solicitor <eneral in cases
connected with the performance of official functions,
considering the nature of the charges, herein
respondent 3arin was compelled to hire a private
lawyer for the conduct of his defense as well as the
successful pursuit of his counterclaims !n our view,
given the circumstances of this case, there is ample
ground to award in his favor P"(,(((,(( as reasona*le
attorney9s fees
5B@$@0.$@, the assailed decision of the #ourt of
-ppeals dated 6ovem*er %9, 1991, is here*y
-00!$M@1 with M.1!0!#-2!.6 so that the award of
actual damages are deleted4 and that petitioner is
here*y .$1@$@1 to pay to respondent 3arin moral
damages in the amount of P)",(((((, e,emplary
damages in the amount of P%",(((((, and attorney9s
fees in the amount of P"(,((((( only1âwphi1.nêt
6o pronouncement as to costs
S. .$1@$@1
<arrison et al vs #ourt of -ppeals
M<$ 6os 44"(1/(" July 19, 199(N
1octrineC -n alien actually present in the Philippines
who is not a mere transient or sojourner is a resident
of the Philippines for purposes of income ta,
0actsC
• Petitioners, John <arrison, 0ran8 $o*ertson,
$o*ert #athey, James $o*ertson, 0elicitas de
<u7man and @dward Mc<ur8 =P@2!2!.6@$S? are >S
#iti7ens who entered the country through the
Philippine !mmigration -ct of 194( and are employed
in the >S 6aval Aase in .longapo #ity 2hey earn no
Philippine source income and it is also their intention
to return to the >S as soon as their employment has
ended
• 2he A!$ sent notices to Petitioners stating that
they did not file their !ncome 2a, $eturns =!2$? for
19&9 2he A!$ claimed that they were resident aliens
and re+uired them to file their returns
• >nder then then !nternal $evenue #ode
resident aliens may *e ta,ed regardless of whether the
gross income was derived from Philippine sources
• Petitioners refused stating that they were not
resident aliens *ut only special temporary visitors
Bence, they were not re+uired to file !2$s 2hey also
claimed e,emption *y virtue of the $P/>S Military
Aases -greement
• >nder Military Aases -greement, a Rnational of
the >nited States serving in or employed in the
Philippines in connection with construction,
maintenance, operation or defense of the *ases and
reside in the Philippines *y reason only of such
employmentS is only lia*le for ta, on Philippine
sources of income
• 2he #ourt of -ppeals held that the Aases
-greement Rspea8s of e,emption from the payment of
income ta,, not from the filing of the income ta,
returns S
!ssueC
1 5hether or not Petitioners can *e considered
resident aliens
% 5hether or not Petitioners are e,empt from income
ta, under the $P/>S Military Aases -greement
' 5hether or not Petitioners must still file !2$
notwithstanding the e,emption
BeldC
1 Ges
$evenue $egulations 6o % Section " providesC Rn
alien actually present in the 2hilippines who is not
a mere transient or so8ourner is a resident of the
2hilippines for purposes of income ta9.S5hether or
not an alian is a transient or not is further determined
*y hisC Rintentions with regards to the length and
nature of his stay - mere floating intention indefinite
as to time, to return to another country is not sufficient
to constitute him as transient !f he lives in the
Philippines and has no definite intention as to his stay,
he is a residentS 2he Section " further provides that if
the alien is in the 2hilippines for a definite purpose
which -y its nature may -e promptly
accomplished" he is considered a
transient.Bowever, if an e9tended stay is necessary
for him to accomplsh his purpose" he is
considered a resident, Rthough it may *e his intention
at all times to return to his domicile a*road when the
purpose for which he came has *een consummated or
a*andonedS
% Ges
6otwithstanding the fact that the Petitioners are
resident aliens who are generally ta,a*le, their class is
nonetheless e9empt from paying ta9es on income
derived from their employment in the naval -ase
-y virtue of the R2:10 Military -ases
agreement.2he Aases -greement identifies the
persons 6.2 Rlia*le to pay income ta, in the
Philippines e,cept in regard to income derived from
Philippine sources or sources other than the >S
sourcesS 2hey are the persons in whom concur the
following re+uisites, to witC
1? nationals of the >nited States serving in or
employed in the Philippines4
%? their service or employment is ;in connection with
construction,maintenance, operation or defense of the
*ases4
'? they reside in the Philippines *y reason only of such
employment4 and
4? their income is derived e,clusively from R>S
SourcesS
' Ges
@ven though the petitioners are e,empt from paying
ta,es from their employment in the 6aval Aase, they
must nevertheless file an !2$ 2he Supreme #ourt
held that the filing of an !2$ and the payment of ta,es
are two distinct o*ligations 5hile income derived from
employment connected with the 6aval Aase is e,empt,
income from Philippine Sources is not The
re;uirement of filing an ITR is so that the !IR can
determine whether or not the 10 &ational should
-e ta9ed. R2he duty rests on the >S nationals
concerned to invo8e and prima facie esta*lish their
ta,/e,empt status !t cannot simply *e presumed that
they earned no income from any other sources than
their employment in the -merican *ases and are
therefore totally e,empt from income ta,S
CRM3LI&. F. 2&0C.L"
Petitioner,
G.R. No. 159991




/ versus /
PresentC

Q>!S>MA!6<,
#-$P!.,
#-$P!. M.$-3@S,
2!6<-, and
V@3-S#., J$,

C.MMI00I.&3R .F I&T3R&L R3$3&13"
$espondent
PromulgatedC

6ovem*er 1&, %((&
9: : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : :
: : : : : : : : : : : :9

53CI0I.&

41I01M!I&%" J.:
0or review on certiorari is the
1ecision
<'=
dated June ", %((' of the #ourt of -ppeals
in #-/<$ SP 6o &(4)" 2he appellate court
denied petitionerFs availment of the increased amounts
of personal and additional e,emptions under $epu*lic
-ct 6o :4%4, the 6ational !nternal $evenue #ode of
199)
<)=
=6!$#?, which too8 effect on January 1,
199: -lso assailed is the appellate courtFs
$esolution
<>=
dated Septem*er 11, %((', denying the
motion for reconsideration

2he facts are undisputed
.n -pril 1', 199:, petitioner #armelino 0
Pansacola filed his income ta, return for the ta,a*le
year 199) that reflected an overpayment of P",9"( !n
it he claimed the increased amounts of personal and
additional e,emptions under Section '"
<?=
of the 6!$#,
although his certificate of income ta, withheld on
compensation indicated the lesser allowed
amounts
<@=
on these e,emptions Be claimed a refund
of P",9"( with the Aureau of !nternal $evenue, which
was denied 3ater, the #ourt of 2a, -ppeals also
denied his claim *ecause according to the ta, court, Rit
would *e a*surd for the law to allow the deduction
from a ta,payerFs gross income earned on a certain
year of e,emptions availing on a different ta,a*le
yearTS
<+=
Petitioner sought reconsideration, *ut the
same was denied
<,=

.n appeal, the #ourt of -ppeals denied his
petition for lac8 of merit 2he appellate court ruled
that +mali . ,stanislao-
<A=
relied upon *y petitioner,
was inapplica*le to his case !t further ruled that the
6!$# too8 effect on January 1, 199:, thus the
increased e,emptions were effective only to cover
ta,a*le year 199: and cannot *e applied retroactively

Petitioner, *efore us, raises a single issueC
TM5Nhether or not the increased personal and
additional e,emptions under Mthe 6!$#N can
*e availed of *y the MpNetitioner for purposes of
computing his income ta, lia*ility for the
ta,a*le year 199) and thus *e entitled to the
refund
<*=
Simply stated, the issue isC #ould the
e,emptions under Section '" of the 6!$#, which too8
effect on January 1, 199:, *e availed of for the ta,a*le
year 199)H

Petitioner argues that the personal and
additional e,emptions are of a fi,ed character *ased
on Section '" =-? and =A? of the 6!$#
<'(=
and as ruled
*y this #ourt in +mali, these personal and additional
e,emptions are fi,ed amounts to which an individual
ta,payer is entitled Be contends that unli8e other
allowa*le deductions, the availa*ility of these
e,emptions does not depend on the ta,payerFs
profession, trade or *usiness for a particular ta,a*le
period $elying again in +mali, petitioner alleges that
the #ourt of -ppeals erred in ruling that the increased
e,emptions were meant to *e applied *eginning
ta,a*le year 199: and were to *e reflected in the
ta,payersF returns to *e filed on or *efore -pril 1",
1999 Petitioner reasons that such ruling would
postpone the availa*ility of the increased e,emptions
and literally defer the effectivity of the 6!$# to January
1, 1999 Petitioner insists that the increased
e,emptions were already availa*le on -pril 1", 199:,
the deadline for filing income ta, returns for ta,a*le
year 199), *ecause the 6!$# was already effective

$espondent, through the .ffice of the Solicitor
<eneral, counters that the increased e,emptions were
not yet availa*le for ta,a*le year 199) *ecause all
provisions of the 6!$# too8 effect on January 1, 199:
only4 that the fi,ed character of personal and additional
e,emptions does not necessarily mean that these
were not time *ound4 and petitionerFs proposition was
contrary to Section '" =#?
<''=
of the 6!$# !t further
stated that petitionerFs e,emptions were determined as
of 1ecem*er '1, 199) and the effectivity of the 6!$#
during the period of January 1 to -pril 1", 199: did not
affect his ta, lia*ilities within the ta,a*le year 199)4
and the inclusive period from January 1 to -pril 1",
199:, the filing dates and deadline for administrative
purposes, was outside of the ta,a*le year
199) $espondent also maintains that +mali is not
applica*le to this case

Prefatorily, personal and additional
e,emptions under Section '" of the 6!$# are fi,ed
amounts to which certain individual ta,payers
=citi7ens, resident aliens?
<')=
are entitled Personal
e,emptions are the theoretical personal, living and
family e,penses of an individual allowed to *e
deducted from the gross or net income of an individual
ta,payer 2hese are ar*itrary amounts which have
*een calculated *y our lawma8ers to *e roughly
e+uivalent to the minimum of su*sistence,
<'>=
ta8ing
into account the personal status and additional
+ualified dependents of the ta,payer 2hey are fi,ed
amounts in the sense that the amounts have *een
predetermined *y our lawma8ers as provided under
Section '" =-? and =A? >nless and until our
lawma8ers ma8e new adjustments on these personal
e,emptions, the amounts allowed to *e deducted *y a
ta,payer are fi,ed as predetermined *y #ongress

- careful scrutiny of the provisions
<'?=
of the
6!$# specifically shows that Section )9 =1?
<'@=
provides that the personal and additional
e,emptions shall *e determined in accordance with
the main provisions in 2itle !! of the 6!$# !ts main
provisions pertain to Section '" =-? and =A? which
state,

S@# '" Allowance of Personal
Exemption for Individal
!axpa"er. :
=-? In .eneral/#or prposes
of determinin$ t%e tax provided
in &ection '()A* of t%is !itle+
<'+=
there shall *e allowed a *asic
personal e,emption as followsC
, , , ,
0or each married individual
U 2>)"(((
, , , ,
=A? *!!itional ,xemption for
Depen!ents.U2here shall *e
allowed an additional e,emption
of @ight thousand pesos =2A"(((?
for each dependent not e,ceeding
four =4? =@mphasis ours?
Section '" =-? and =A? allow the *asic personal
and additional e,emptions as deductions from gross or
net income, as the case may*e, to arrive at the correct
ta,a*le income of certain individual
ta,payers Section %4 =-? =1? =a? imposed income ta,
on a resident citi7enFs ta,a*le income derived for each
ta,a*le year !t provides as followsC
S@# %4 Income !ax Rates. B
/*0 )ates of Income Tax on In!ii!ual Citi(en
1
C'D n income ta9 is here-y imposed:
=a? ,n t%e taxa-le income
defined in &ection .1 of
t%is /ode, other than
income su*ject to ta, under
Su*sections =A?,
<',=
=#?,
<'A=
and =1?
<'*=
of this
Section, derived for eac%
taxa-le "ear from all
sources within and without
the Philippines *y every
individual citi7en of the
Philippines residing
therein4 =@mphasis ours?
Section '1 defines Rta,a*le incomeS as the
pertinent items of gross income specified in the 6!$#,
less the deductions andJor personal and additional
e,emptions, if any, authori7ed for such types of
income *y the 6!$# or other special laws -s defined
in Section %% =P?,
<)(=
Rta,a*le yearS means the calendar
year, upon the *asis of which the net income is
computed under 2itle !! of the 6!$# Section
4'
<)'=
also supports the rule that the ta,a*le income of
an individual shall *e computed on the *asis of the
calendar year !n addition, Section 4"
<))=
provides that
the deductions provided for under 2itle !! of the 6!$#
shall *e ta8en for the ta9a-le year in which they are
Rpaid or accruedS or Rpaid or incurredS

Moreover, Section )9 =B?
<)>=
re+uires the
employer to determine, on or *efore the end of the
calendar year *ut prior to the payment of the
compensation for the last payroll period, the ta, due
from each employeeFs ta,a*le compensation income
for the entire ta,a*le year in accordance with Section
%4 =-? 2his is for the purpose of either withholding
from the employeeFs 1ecem*er salary, or refunding to
him not later than January %" of the succeeding year,
the difference *etween the ta, due and the ta,
withheld

2herefore, as provided in Section %4 =-? =1? =a?
in relation to Sections '1 and %% =P? and Sections 4',
4" and )9 =B? of the 6!$#, the income su*ject to
income ta, is the ta,payerFs income as derived and
computed during the calendar year, his ta,a*le year

#learly from the a*ove+uoted provisions, what
the law should consider for the purpose of determining
the ta, due from an individual ta,payer is his status
and +ualified dependents at the close of the ta9a-le
year and not at the time the return is filed and the ta,
due thereon is paid 6ow comes Section '" =#? of the
6!$# which provides,
Sec '" *llowance of Personal
,xemption for In!ii!ual
Taxpayer. B
, , , ,
=#? Chan"e of #tatus U !f the
ta,payer marries or should have
additional dependent=s? as
defined a*ove during the ta,a*le
year, the ta,payer may claim the
corresponding additional
e,emption, as the case may *e, in
full for such year
!f the ta,payer dies during the
ta,a*le year, his estate may still
claim the personal and additional
e,emptions for himself and his
dependent=s? as if he died at the
close of such year
!f the spouse or any of the
dependents dies or if any of such
dependents marries, *ecomes
twenty/one =%1? years old or
*ecomes gainfully employed
during the ta,a*le year, the
ta,payer may still claim the same
e,emptions as if the spouse or
any of the dependents died, or as
if such dependents married,
*ecame twenty/one =%1? years old
or *ecame gainfully employed at
the close of such year
@mphasis must *e made that Section '" =#?
of the 6!$# allows a ta,payer to still claim the
corresponding full amount of e,emption for a ta,a*le
year, e.". if he marries4 have additional dependents4
he, his spouse, or any of his dependents die4 and if
any of his dependents marry, turn %1 years old4 or
*ecome gainfully employed !t is as if the changes in
his or his dependentsF status too8 place at the close of
the ta,a*le year

#onse+uently, his correct ta,a*le income and
his corresponding allowa*le deductions e.". personal
and additional deductions, if any, had already *een
determined as of the end of the calendar year

!n the case of petitioner, the availa*ility of the
aforementioned deductions if he is thus entitled, would
*e reflected on his ta, return filed on or *efore the
1"
th
day of -pril 1999 as mandated *y Section "1 =#?
=1?
<)?=
Since the 6!$# too8 effect on January 1, 199:,
the increased amounts of personal and additional
e,emptions under Section '", can only *e allowed as
deductions from the individual ta,payerFs gross or net
income, as the case may*e, for the ta,a*le year 199:
to *e filed in 1999 2he 6!$# made no reference that
the personal and additional e,emptions shall apply on
income earned *efore January 1, 199:

2hus, petitionerFs reliance in +mali is
misplaced
!n +mali, we noted that despite *eing given
authority *y Section %9 =1? =4?
<)@=
of the 6ational
!nternal $evenue #ode of 19)) to adjust these
e,emptions, no adjustments were made to cover
19:9 6ote that $ep -ct 6o )1&) is entitled R*n *ct
*!2ustin" the $asic Personal an! *!!itional
,xemptions *llowable to In!ii!uals for Income Tax
Purposes to the Poerty Threshol! 3eel- *men!in"
for the Purpose #ection 45- Para"raph /30- Items /10
an! /40 /*0- of the %ational Internal )eenue Co!e- *s
*men!e!- an! 6or 7ther PurposesS 2hus, we said
in +mali- that the adjustment provided *y $ep -ct 6o
)1&) effective 199%, should consider the poverty
threshold level in 1991, the time it was enacted -nd
we o*served therein that since the e,emptions would
especially *enefit lower and middle/income ta,payers,
the e,emption should *e made to cover the past year
1991 2o such an e,tent, $ep -ct 6o )1&) was a
social legislation intended to remedy the non/
adjustment in 19:9 -nd as cited in +mali, this
legislative intent is also clear in the records of the
Bouse of $epresentativesF Journal

2his is not so in the case at *ar 2here is
nothing in the 6!$# that e,presses any such
intent 2he policy declarations in its enactment do not
indicate it was a social legislation that adjusted
personal and additional e,emptions according to the
poverty threshold level nor is there any indication that
its application should retroact -t the time petitioner
filed his 199) return and paid the ta, due thereon in
-pril 199:, the increased amounts of personal and
additional e,emptions in Section '" were not yet
availa*le !t has not yet accrued as of 1ecem*er '1,
199), the last day of his ta,a*le year PetitionerFs
ta,a*le income covers his income for the calendar
year 199) 2he law cannot *e given retroactive
effect !t is esta*lished that ta, laws are prospective in
application, unless it is e,pressly provided to apply
retroactively
<)+=
!n the 6!$#, we note, there is no
specific mention that the increased amounts of
personal and additional e,emptions under Section '"
shall *e given retroactive effect #onforma*ly too,
personal and additional e,emptions are considered as
deductions from gross income 1eductions for income
ta, purposes parta8e of the nature of ta, e,emptions,
hence strictly construed
<),=
against the ta,payer
<)A=
and
cannot *e allowed unless granted in the most e,plicit
and categorical language
<)*=
too plain to *e mista8en
<>(=
2hey cannot *e e,tended *y mere implication or
inference
<>'=
-nd, where a provision of law spea8s
categorically, the need for interpretation is o*viated, no
plausi*le pretense *eing entertained to justify non/
compliance -ll that has to *e done is to apply it in
every case that falls within its terms
<>)=

-ccordingly, the #ourt of -ppeals and the
#ourt of 2a, -ppeals were correct in denying
petitionerFs claim for refund

EH3R3F.R3, the petition is 53&I35 for lac8
of merit 2he 1ecision dated June ", %((' and the
$esolution dated Septem*er 11, %((' of the #ourt of
-ppeals in #-/<$ SP 6o &(4)" are
here*y FFIRM35
0. .R53R35.
%.R. &o. ,A'>> .cto-er 'A" '*AA
MRI&. 2. 20C1L and R3&T. 2.
5R%.&" petitioners,
vs
TH3 C.MMI00I.&3R .F I&T3R&L R3$3&13
and C.1RT .F TF 223L0" respondents
De la Cuesta- De las *las an! Callanta 3aw 7ffices for
petitioners.
The #olicitor .eneral for respon!ents

%&CGC." J.:
2he distinction *etween co/ownership and an
unregistered partnership or joint venture for income ta,
purposes is the issue in this petition
.n June %%, 19&", petitioners *ought two =%? parcels
of land from Santiago Aernardino, et al and on May
%:, 19&&, they *ought another three ='? parcels of land
from Juan $o+ue 2he first two parcels of land were
sold *y petitioners in 19&: toMarenir 1evelopment
#orporation, while the three parcels of land were sold
*y petitioners to @rlinda $eyes and Maria Samson on
March 19,19)( Petitioners reali7ed a net profit in the
sale made in 19&: in the amount of P1&",%%4)(,
while they reali7ed a net profit of P&(,((((( in the
sale made in 19)( 2he corresponding capital gains
ta,es were paid *y petitioners in 19)' and 19)4 *y
availing of the ta, amnesties granted in the said years
Bowever, in a letter dated March '1, 19)9 of then
-cting A!$ #ommissioner @fren ! Plana, petitioners
were assessed and re+uired to pay a total amount of
P1(),1(1)( as alleged deficiency corporate income
ta,es for the years 19&: and 19)(
Petitioners protested the said assessment in a letter of
June %&, 19)9 asserting that they had availed of ta,
amnesties way *ac8 in 19)4
!n a reply of -ugust %%, 19)9, respondent
#ommissioner informed petitioners that in the years
19&: and 19)(, petitioners as co/owners in the real
estate transactions formed an unregistered partnership
or joint venture ta,a*le as a corporation under Section
%(=*? and its income was su*ject to the ta,es
prescri*ed under Section %4, *oth of the 6ational
!nternal $evenue #ode
'
that the unregistered
partnership was su*ject to corporate income ta, as
distinguished from profits derived from the partnership
*y them which is su*ject to individual income ta,4 and
that the availment of ta, amnesty under P1 6o %',
as amended, *y petitioners relieved petitioners of their
individual income ta, lia*ilities *ut did not relieve them
from the ta, lia*ility of the unregistered partnership
Bence, the petitioners were re+uired to pay the
deficiency income ta, assessed
Petitioners filed a petition for review with the
respondent #ourt of 2a, -ppeals doc8eted as #2-
#ase 6o '(4" !n due course, the respondent court
*y a majority decision of March '(, 19:),
)
affirmed
the decision and action ta8en *y respondent
commissioner with costs against petitioners
!t ruled that on the *asis of the principle enunciated
in ,an"elista
>
an unregistered partnership was in
fact formed *y petitioners which li8e a corporation was
su*ject to corporate income ta, distinct from that
imposed on the partners
!n a separate dissenting opinion, -ssociate Judge
#onstante $oa+uin stated that considering the
circumstances of this case, although there might in
fact *e a co/ownership *etween the petitioners, there
was no ade+uate *asis for the conclusion that they
there*y formed an unregistered partnership which
made ;hem lia*le for corporate income ta, under the
2a, #ode
Bence, this petition wherein petitioners invo8e as *asis
thereof the following alleged errors of the respondent
courtC
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1%/1', $ollo?
2he petition is meritorious
2he *asis of the su*ject decision of the respondent
court is the ruling of this #ourt in ,an"elista
?
!n the said case, petitioners *orrowed a sum of money
from their father which together with their own
personal funds they used in *uying several real
properties 2hey appointed their *rother to manage
their properties with full power to lease, collect, rent,
issue receipts, etc 2hey had the real properties rented
or leased to various tenants for several years and they
gained net profits from the rental income 2hus, the
#ollector of !nternal $evenue demanded the payment
of income ta, on a corporation, among others, from
them
!n resolving the issue, this #ourt held as followsC
2he issue in this case is whether
petitioners are su*ject to the ta, on
corporations provided for in section %4
of #ommonwealth -ct 6o 4&&,
otherwise 8nown as the 6ational
!nternal $evenue #ode, as well as to
the residence ta, for corporations and
the real estate dealers9 fi,ed ta, 5ith
respect to the ta, on corporations, the
issue hinges on the meaning of the
terms corporation and partnership as
used in sections %4 and :4 of said
#ode, the pertinent parts of which
readC
Sec %4 )ate of the tax on
corporationsK2here shall *e levied,
assessed, collected, and paid
annually upon the total net income
received in the preceding ta,a*le year
from all sources *y every corporation
organi7ed in, or e,isting under the
laws of the Philippines, no matter how
created or organi7ed *ut not including
duly registered general co/
partnerships =companies collectives?,
a ta, upon such income e+ual to the
sum of the followingC
Sec :4=*? 2he term ;corporation;
includes partnerships, no matter how
created or organi7ed, joint/stoc8
companies, joint accounts =cuentas en
participation?, associations or
insurance companies, *ut does not
include duly registered general co/
partnerships =companies colectivas?
-rticle 1)&) of the #ivil #ode of the
Philippines providesC
Ay the contract of partnership two or
more persons *ind themselves to
contri*ute money, property, or industry
to a common fund, with the intention
of dividing the profits among
themselves
Pursuant to this article, the essential
elements of a partnership are two-
namely8 /a0 an a"reement to
contribute money- property or in!ustry
to a common fun!9 an! /b0 intent to
!ii!e the profits amon" the
contractin" parties 2he first element
is undou*tedly present in the case at
*ar, for, admittedly, petitioners have
agreed to, and did, contri*ute money
and property to a common
fund :ence- the issue narrows !own
to their intent in actin" as they !i!
>pon consideration of all the facts and
circumstances surrounding the
case, we are fully satisfie! that their
purpose was to en"a"e in real estate
transactions for monetary "ain an!
then !ii!e the same amon"
themseles, *ecauseC
1 #ai! common fun! was not
somethin" they foun! alrea!y in
existence !t was not a property
inherited *y them pro indiviso
2hey create! it purposely 5hat is
more they jointly *orrowed a
su*stantial portion thereof in order to
esta*lish said common fund
% 2hey ineste! the same- not merely
in one transaction- but in a series of
transactions .n 0e*ruary %, 194',
they *ought a lot for P1((,((((( .n
-pril ', 1944, they purchased %1 lots
for P1:,((((( 2his was soon
followed, on -pril %', 1944, *y the
ac+uisition of another real estate for
P1(:,:%"(( 0ive ="? days later =-pril
%:, 1944?, they got a fourth lot for
P%'),%'414 The number of lots /4;0
acquire! an! transcations un!erta'en-
as well as the brief interre"num
between each- particularly the last
three purchases- is stron"ly in!icatie
of a pattern or common !esi"n that
was not limite! to the conseration
an! preseration of the
aforementione! common fun! or een
of the property acquire! by petitioners
in 6ebruary- 15;<. In other wor!s- one
cannot but perceie a character of
habituality peculiar to business
transactions en"a"e! in for purposes
of "ain.
' The aforesai! lots were not !eote!
to resi!ential purposes or to other
personal uses- of petitioners herein
2he properties were leased separately
to several persons, who, from 194" to
194: inclusive, paid the total sum of
P)(,(&:'( *y way of rentals
Seemingly, the lots are still *eing so
let, for petitioners do not even suggest
that there has *een any change in the
utili7ation thereof
4 Since -ugust, 194", the properties
hae been un!er the mana"ement of
one person, namely, Simeon
@vangelists, with full power to lease,
to collect rents, to issue receipts, to
*ring suits, to sign letters and
contracts, and to indorse and deposit
notes and chec8s Thus- the affairs
relatie to sai! properties hae been
han!le! as if the same belon"e! to a
corporation or business enterprise
operate! for profit.
" The fore"oin" con!itions hae
existe! for more than ten /1=0 years,
or, to *e e,act, over fifteen =1"? years,
since the first property was ac+uired,
and over twelve =1%? years, since
Simeon @vangelists *ecame the
manager
& Petitioners have not testified or
introduced any evidence, either on
their purpose in creating the set up
already adverted to, or on the causes
for its continued e,istence 2hey did
not even try to offer an e,planation
therefor
-lthough, ta8en singly, they might not
suffice to esta*lish the intent
necessary to constitute a
partnership, the collectie effect of
these circumstances is such as to
leae no room for !oubt on the
existence of sai! intent in petitioners
herein. 7nly one or two of the
aforementione! circumstances were
present in the cases cite! by
petitioners herein- an!- hence- those
cases are not in point
@
!n the present case, there is no evidence that
petitioners entered into an agreement to contri*ute
money, property or industry to a common fund, and
that they intended to divide the profits among
themselves $espondent commissioner andJ or his
representative just assumed these conditions to *e
present on the *asis of the fact that petitioners
purchased certain parcels of land and *ecame co/
owners thereof
!n @vangelists, there was a series of transactions
where petitioners purchase! twenty>four /4;0
lots showing that the purpose was not limited to the
conservation or preservation of the common fund or
even the properties ac+uired *y them The character
of habituality peculiar to business transactions
en"a"e! in for the purpose of "ain was present
!n the instant case, petitioners *ought two =%? parcels
of land in 19&" 2hey did not sell the same nor ma8e
any improvements thereon !n 19&&, they *ought
another three ='? parcels of land from one seller !t was
only 19&: when they sold the two =%? parcels of land
after which they did not ma8e any additional or new
purchase 2he remaining three ='? parcels were sold
*y them in 19)( 2he transactions were isolated 2he
character of ha*ituality peculiar to *usiness
transactions for the purpose of gain was not present
!n ,an"elista, the properties were leased out to
tenants for several years 2he *usiness was under the
management of one of the partners Such condition
e,isted for over fifteen =1"? years 6one of the
circumstances are present in the case at *ar 2he co/
ownership started only in 19&" and ended in 19)(
2hus, in the concurring opinion of Mr Justice -ngelo
Aautista in ,an"elista he saidC
! wish however to ma8e the following
o*servation -rticle 1)&9 of the new
#ivil #ode lays down the rule for
determining when a transaction
should *e deemed a partnership or a
co/ownership Said article paragraphs
% and ', provides4
=%? #o/ownership or co/possession
does not itself esta*lish a partnership,
whether such co/owners or co/
possessors do or do not share any
profits made *y the use of the
property4
='? 2he sharing of gross returns does
not of itself esta*lish a partnership,
whether or not the persons sharing
them have a joint or common right or
interest in any property from which the
returns are derived4
6rom the aboe it appears that the
fact that those who a"ree to form a
co> ownership share or !o not share
any profits ma!e by the use of the
property hel! in common !oes not
conert their enture into a
partnership. 7r the sharin" of the
"ross returns !oes not of itself
establish a partnership whether or not
the persons sharin" therein hae a
2oint or common ri"ht or interest in the
property. This only means that- asi!e
from the circumstance of profit- the
presence of other elements
constitutin" partnership is necessary-
such as the clear intent to form a
partnership- the existence of a
2uri!ical personality !ifferent from that
of the in!ii!ual partners- an! the
free!om to transfer or assi"n any
interest in the property by one with the
consent of the others =Padilla, #ivil
#ode of the Philippines -nnotated,
Vol !, 19"' ed, pp &'"/&'&?
It is ei!ent that an isolate!
transaction whereby two or more
persons contribute fun!s to buy
certain real estate for profit in the
absence of other circumstances
showin" a contrary intention cannot
be consi!ere! a partnership.
Persons who contri*ute property or
funds for a common enterprise and
agree to share the gross returns of
that enterprise in proportion to their
contri*ution, *ut who severally retain
the title to their respective
contri*ution, are not there*y rendered
partners 2hey have no common stoc8
or capital, and no community of
interest as principal proprietors in the
*usiness itself which the proceeds
derived =@lements of the 3aw of
Partnership *y 0lord 1 Mechem %nd
@d, section :', p )4?
- joint purchase of land, *y two, does
not constitute a co/partnership in
respect thereto4 nor does an
agreement to share the profits and
losses on the sale of land create a
partnership4 the parties are only
tenants in common =#lar8 vs
Sideway, 14% >S &:%,1% #t '%), '"
3 @d, 11")?
5here plaintiff, his *rother, and
another agreed to *ecome owners of
a single tract of realty, holding as
tenants in common, and to divide the
profits of disposing of it, the *rother
and the other not *eing entitled to
share in plaintiffs commission, no
partnership e,isted as *etween the
three parties, whatever their relation
may have *een as to third parties
=Magee vs Magee 1%' 6@ &)', %''
Mass '41?
In or!er to constitute a partnership
inter sese there must be8 /a0 *n intent
to form the same9 /b0 "enerally
participatin" in both profits an! losses9
/c0 an! such a community of interest-
as far as thir! persons are concerne!
as enables each party to ma'e
contract- mana"e the business- an!
!ispose of the whole property.>
?unicipal Pain" Co. s. :errin" 1@=
P. 1=AB- @= III ;B=.0
2he common ownership of property
does not itself create a partnership
*etween the owners, though they may
use it for the purpose of ma8ing gains4
and they may, without *ecoming
partners, agree among themselves as
to the management, and use of such
property and the application of the
proceeds therefrom =Spurloc8 vs
5ilson, 14% S5 '&',1&( 6o -pp
14?
+
2he sharing of returns does not in itself esta*lish a
partnership whether or not the persons sharing therein
have a joint or common right or interest in the property
2here must *e a clear intent to form a partnership, the
e,istence of a juridical personality different from the
individual partners, and the freedom of each party to
transfer or assign the whole property
!n the present case, there is clear evidence of co/
ownership *etween the petitioners 2here is no
ade+uate *asis to support the proposition that they
there*y formed an unregistered partnership 2he two
isolated transactions where*y they purchased
properties and sold the same a few years thereafter
did not there*y ma8e them partners 2hey shared in
the gross profits as co/ owners and paid their capital
gains ta,es on their net profits and availed of the ta,
amnesty there*y >nder the circumstances, they
cannot *e considered to have formed an unregistered
partnership which is there*y lia*le for corporate
income ta,, as the respondent commissioner
proposes
-nd even assuming for the sa8e of argument that such
unregistered partnership appears to have *een
formed, since there is no such e,isting unregistered
partnership with a distinct personality nor with assets
that can *e held lia*le for said deficiency corporate
income ta,, then petitioners can *e held individually
lia*le as partners for this unpaid o*ligation of the
partnership p
,
Bowever, as petitioners have availed
of the *enefits of ta, amnesty as individual ta,payers
in these transactions, they are there*y relieved of any
further ta, lia*ility arising therefrom
5B@$@0$.M, the petition is here*y <$-62@1 and
the decision of the respondent #ourt of 2a, -ppeals of
March '(, 19:) is here*y $@V@$S@1 and S@2
-S!1@ and another decision is here*y rendered
relieving petitioners of the corporate income ta, lia*ility
in this case, without pronouncement as to costs
S. .$1@$@1
Cru(- .riCo>*quino an! ?e!ial!ea- DD.- concur.
%arasa- D.- too' no part.

#.03 2. .!ILL.0" #R." 0RH 2. .!ILL.0"
R.M3. 2. .!ILL.0 and R3M35I.0 2. .!ILL.0"
-rothers and sisters" petitioners
vs
C.MMI00I.&3R .F I&T3R&L R3$3&13 and
C.1RT .F TF 223L0" respondents
Demosthenes $. .a!ioma for petitioners.

41I&." J.:
2his case is a*out the income ta, lia*ility of four
*rothers and sisters who sold two parcels of land
which they had ac+uired from their father
.n March %, 19)' Jose .*illos, Sr completed
payment to .rtigas I #o, 3td on two lots with areas
of 1,1%4 and 9&' s+uare meters located at <reenhills,
San Juan, $i7al 2he ne,t day he transferred his rights
to his four children, the petitioners, to ena*le them to
*uild their residences 2he company sold the two lots
to petitioners for P1):,)(:1% on March 1' =@,h -
and A, p 44, $ollo? Presuma*ly, the 2orrens titles
issued to them would show that they were co/owners
of the two lots
!n 19)4, or after having held the two lots for more than
a year, the petitioners resold them to the 5alled #ity
Securities #orporation and .lga #ru7 #anda for the
total sum of P'1',("( =@,h # and 1? 2hey derived
from the sale a total profit of P1'4,'41:: or P'',":4
for each of them 2hey treated the profit as a capital
gain and paid an income ta, on one/half thereof or of
P1&,)9%
!n -pril, 19:(, or one day *efore the e,piration of the
five/year prescriptive period, the #ommissioner of
!nternal $evenue re+uired the four petitioners to
pay corporate income tax on the total profit of
P1'4,''& in addition to individual income ta, on their
shares thereof Be assessed P'),(1: as corporate
income ta,, P1:,"(9 as "(P fraud surcharge and
P1","4)"& as 4%P accumulated interest, or a total
of PB1-=B;.@A
6ot only that Be considered the share of the profits of
each petitioner in the sum of P'',":4 as a ; ta,a*le in
full =not a mere capital gain of which V is ta,a*le? and
re+uired them to pay deficiency income ta,es
aggregating P"&,)()%( including the "(P fraud
surcharge and the accumulated interest
2hus, the petitioners are *eing held lia*le for
deficiency income ta,es and penalties totalling
P1%),):1)& on their profit of P1'4,''&, in addition to
the ta, on capital gains already paid *y them
2he #ommissioner acted on the theory that the four
petitioners had formed an unregistered partnership or
joint venture within the meaning of sections %4=a? and
:4=*? of the 2a, #ode =#ollector of !nternal $evenue
vs Aatangas 2rans #o, 1(% Phil :%%?
2he petitioners contested the assessments 2wo
Judges of the 2a, #ourt sustained the same Judge
$oa+uin dissented Bence, the instant appeal
5e hold that it is error to consider the petitioners as
having formed a partnership under article 1)&) of the
#ivil #ode simply *ecause they allegedly contri*uted
P1):,)(:1% to *uy the two lots, resold the same and
divided the profit among themselves
2o regard the petitioners as having formed a ta,a*le
unregistered partnership would result in oppressive
ta,ation and confirm the dictum that the power to ta,
involves the power to destroy 2hat eventuality should
*e o*viated
-s testified *y Jose .*illos, Jr, they had no such
intention 2hey were co/owners pure and simple 2o
consider them as partners would o*literate the
distinction *etween a co/ownership and a partnership
2he petitioners were not engaged in any joint venture
*y reason of that isolated transaction
2heir original purpose was to divide the lots for
residential purposes !f later on they found it not
feasi*le to *uild their residences on the lots *ecause
of the high cost of construction, then they had no
choice *ut to resell the same to dissolve the co/
ownership 2he division of the profit was merely
incidental to the dissolution of the co/ownership which
was in the nature of things a temporary state !t had to
*e terminated sooner or later #astan 2o*eOas saysC
#omo esta*lecer el deslinde entre la
comunidad ordinaria o copropiedad y
la sociedadH
@l criterio diferencial/segun la doctrina
mas generali7ada/estaC por ra7on del
origen, en +ue la sociedad presupone
necesariamente la convencion,
mentras +ue la comunidad puede
e,istir y e,iste ordinariamente sin ela4
y por ra7on del fin o*jecto, en +ue el
o*jeto de la sociedad es o*tener
lucro, mientras +ue el de la indivision
es solo mantener en su integridad la
cosa comun y favorecer su
conservacion
$eflejo de este criterio es la sentencia
de 1" de .ctu*re de 194(, en la +ue
se dice +ue si en nuestro 1erecho
positive se ofrecen a veces
dificultades al tratar de fijar la linea
divisoria entre comunidad de *ienes y
contrato de sociedad, la moderna
orientacion de la doctrina cientifica
seOala como nota fundamental de
diferenciacion aparte del origen de
fuente de +ue surgen, no siempre
uniforme, la finalidad perseguida por
los interesadosC lucro comun
partible en la sociedad, y mera
conseracion y aprovechamiento en la
comunidad =1erecho #ivil @spanol,
Vol %, Part 1, 1( @d, 19)1, '%:/ '%9?
-rticle 1)&9='? of the #ivil #ode provides that ;the
sharing of gross returns does not of itself esta*lish a
partnership, whether or not the persons sharing them
have a joint or common right or interest in any property
from which the returns are derived; 2here must *e an
unmista8a*le intention to form a partnership or joint
venture7
Such intent was present in <atchalian vs #ollector of
!nternal $evenue, &) Phil &&&, where 1" persons
contri*uted small amounts to purchase a two/peso
sweepsta8es tic8et with the agreement that they would
divide the pri7e 2he tic8et won the third pri7e of
P"(,((( 2he 1" persons were held lia*le for income
ta, as an unregistered partnership
2he instant case is distinguisha*le from the cases
where the parties engaged in joint ventures for profit
2hus, in .Oa vs
WW 2his view is supported *y the following rulings of
respondent #ommissionerC
Co>owership !istin"uishe! from
partnershipK5e find that the case at
*ar is fundamentally similar to the 1e
3eon case 2hus, li8e the 1e 3eon
heirs, the 3onga heirs inherited the
9hacienda9 in +uestionpro>in!iiso from
their deceased parents4 they did not
contri*ute or invest additional 9 capital
to increase or e,pand the inherited
properties4 they merely continued
dedicating the property to the use to
which it had *een put *y their
fore*ears4 they individually reported in
their ta, returns their corresponding
shares in the income and e,penses of
the 9hacienda9, and they continued for
many years the status of co/
ownership in order, as conceded *y
respondent, 9to preserve its =the
9hacienda9? value and to continue the
e,isting contractual relations with the
#entral -7ucarera de Aais for milling
purposes 3onga vs -ranas, #2-
#ase 6o &"', July '1, 19&'?
*ll co>ownerships are not !eeme!
unre"istere! pratnership.E#o/
.wnership who own properties which
produce income should not
automatically *e considered partners
of an unregistered partnership, or a
corporation, within the purview of the
income ta, law 2o hold otherwise,
would *e to su*ject the income of all
co>ownerships of inherited properties
to the ta, on corporations, inasmuch
as if a property does not produce an
income at all, it is not su*ject to any
8ind of income ta,, whether the
income ta, on individuals or the
income ta, on corporation =1e 3eon
vs #! $, #2- #ase 6o )':,
Septem*er 11, 19&1, cited in -raOas,
19)) 2a, #ode -nnotated, Vol 1,
19)9 @d, pp ))/):?
#ommissioner of !nternal $evenue, 3/19'4%, May %",
19)%, 4" S#$- )4, where after an e,trajudicial
settlement the co/heirs used the inheritance or the
incomes derived therefrom as a common fund to
produce profits for themselves, it was held that they
were ta,a*le as an unregistered partnership
!t is li8ewise different from $eyes vs #ommissioner of
!nternal $evenue, %4 S#$- 19:, where father and son
purchased a lot and *uilding, entrusted the
administration of the *uilding to an administrator and
divided e+ually the net income, and from @vangelista
vs #ollector of !nternal $evenue, 1(% Phil 14(, where
the three @vangelista sisters *ought four pieces of real
property which they leased to various tenants and
derived rentals therefrom #learly, the petitioners in
these two cases had formed an unregistered
partnership
!n the instant case, what the #ommissioner should
have investigated was whether the father donated the
two lots to the petitioners and whether he paid the
donor9s ta, =See -rt 144:, #ivil #ode? 5e are not
prejudging this matter !t might have already
prescri*ed
5B@$@0.$@, the judgment of the 2a, #ourt is
reversed and set aside 2he assessments are
cancelled 6o costs
S. .$1@$@1
.na v #!$
Facts:
Julia AuOales died leaving as heirs her surviving
spouse, 3oren7o .Oa and her five children - civil case
was instituted for the settlement of her state, in which
.Oa was appointed administrator and later on the
guardian of the three heirs who were still minors when
the project for partition was approved 2his shows that
the heirs have undivided V interest in 1( parcels of
land, & houses and money from the 5ar 1amage
#ommission
-lthough the project of partition was approved *y the
#ourt, no attempt was made to divide the properties
and they remained under the management of .Oa who
used said properties in *usiness *y leasing or selling
them and investing the income derived therefrom and
the proceeds from the sales thereof in real properties
and securities -s a result, petitionersF properties and
investments gradually increased Petitioners returned
for income ta, purposes their shares in the net income
*ut they did not actually receive their shares *ecause
this left with .Oa who invested them
Aased on these facts, #!$ decided that petitioners
formed an unregistered partnership and therefore,
su*ject to the corporate income ta,, particularly for
years 19"" and 19"& Petitioners as8ed for
reconsideration, which was denied hence this petition
for review from #2-Fs decision
Issue:
5J6 there was a co/ownership or an unregistered
partnership
5J6 the petitioners are lia*le for the deficiency
corporate income ta,
Held:
1nregistered partnership. 2he 2a, #ourt found that
instead of actually distri*uting the estate of the
deceased among themselves pursuant to the project
of partition, the heirs allowed their properties to remain
under the management of .Oa and let him use their
shares as part of the common fund for their ventures,
even as they paid corresponding income ta,es on their
respective shares
Ges. 0or ta, purposes, the co/ownership of inherited
properties is automatically converted into an
unregistered partnership the moment the said common
properties andJor the incomes derived therefrom are
used as a common fund with intent to produce profits
for the heirs in proportion to their respective shares in
the inheritance as determined in a project partition
either duly e,ecuted in an e,trajudicial settlement or
approved *y the court in the corresponding testate or
intestate proceeding 2he reason is simple 0rom the
moment of such partition, the heirs are entitled already
to their respective definite shares of the estate and the
incomes thereof, for each of them to manage and
dispose of as e,clusively his own without the
intervention of the other heirs, and, accordingly, he
*ecomes lia*le individually for all ta,es in connection
therewith !f after such partition, he allows his share to
*e held in common with his co/heirs under a single
management to *e used with the intent of ma8ing
profit there*y in proportion to his share, there can *e
no dou*t that, even if no document or instrument were
e,ecuted, for the purpose, for ta, purposes, at least,
an unregistered partnership is formed
0or purposes of the ta, on corporations, our 6ational
!nternal $evenue #ode includes these partnerships K
The term FpartnershipG inclu!es a syn!icate- "roup-
pool- 2oint enture or other unincorporate!
or"ani(ation- throu"h or by means of which any
business- financial operation- or enture is carrie!
on1 /H ?ertenIs 3aw of 6e!eral Income Taxation- p.
@A4 %ote A<9 emphasis ours.0
with the e,ception only of duly registered general
copartnerships K within the purview of the term
RcorporationS !t is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as
said #ode is concerned, and are su*ject to the income
ta, for corporations
C.MMI00I.&3R .F I&T3R&L R3$3&13 vs.
M&&I&%
L:)A>*A H ug +" '*,@ H 2etition for Review H Castro
2etitioner: Commissioner of Internal Revenue
Respondents: #ohn Manning" E.5. Mc5onald" 3.3.
0immons I CT
4uicJ 0ummary:
#acts: $eese, the majority stoc8holder of Mantrasco,
e,ecuted a trust agreement *etween him, Mantrasco,
$oss, Selph, carrascoso I Janda law firm and the
minority stoc8holders, Manning, Mc1onald and
Simmons Said agreement was entered into *ecause
of $eeseFs desire that Mantrasco and MantrasocFs %
su*sidiaries, Mantrasco <uam and Port Motors, to
continue under the management of Manning,
Mc1onald and Simmons upon his M$eeseN death
5hen $eese died, Mantrasco paid $eeseFs estate the
value of his shares 5hen said purchase price has
*een fully paid, the %4,)(( shares, which were
declared as dividends, were proportionately distri*uted
to Manning, Mc1onald and Simmons Aecause of this,
the A!$ issued assessments on Manning, Mc1onald
and Simmons for deficiency income ta, for 19":
Manning et al, opposed this assessment *ut the A!$
still found them lia*le Manning et al appealed to the
#2-, which a*solved them from any lia*ility
0eld: 2he manifest intention of the parties to the trust
agreement was, in sum and su*stance, to treat the
%4,)(( shares of $eese as a*solutely outstanding
shares of $eese9s estate until they were fully paid
Such *eing the true nature of the %4,)(( shares, their
declaration as treasury stoc8 dividend in 19": was a
complete nullity and plainly violative of pu*lic policy -
stoc8 dividend, *eing one paya*le in capital stoc8,
cannot *e declared out of outstanding corporate stoc8,
*ut only from retained earnings
- stoc8 dividend always involves a transfer of surplus
=or profit? to capital stoc8 - stoc8 dividend is a
conversion of surplus or undivided profits into capital
stoc8, which is distri*uted to stoc8holders in lieu of a
cash dividend
Facts:
 19"% / Mantrasco had an authori7ed capital
stoc8 of P%"M divided into %",((( common
shares %4,)(( of these shares are owned *y
Julius $eese while the rest, at 1(( each, are
owned *y Manning, Mc1onald I Simmons
 0e*ruary %9, 19": / a trust agreement was
e,ecuted *etween $eese, Mantrasco, $oss,
Selph, carrascoso I Janda law firm, Manning,
Mc1onald and Simmons Said agreement was
entered into *ecause of $eeseFs desire that
Mantrasco and MantrasocFs % su*sidiaries,
Mantrasco <uam and Port Motors, to continue
under the management of Manning, Mc1onald
and Simmons upon his M$eeseN death
 .cto*er 19, 19"4 / $eese died Bowever, the
projected transfer of his shares in the name of
Mantrasco could not *e immediately effected
for lac8 of sufficient funds to cover the initial
payment on the shares
 0e*ruary %, 19"" / after Mantrasco made a
partial payment of $eese9s shares, the
certificate for the %4,)(( shares in $eese9s
name was cancelled and a new certificate was
issued in the name of Mantrasco -lso, new
certificate was endorsed to the law firm of
$oss, Selph, #arrascoso and Janda, as
trustees for and in *ehalf of Mantrasco
 1ecem*er %%, 19": / a resolution was passed
during a special meeting of Mantrasco
stoc8holders
 6ovem*er %", 19&' / entire purchase price of
$eese9s interest in Mantrasco was finally paid
in full *y Mantrasco
 May 4, 19&4 / trust agreement was terminated
and the trustees delivered to Mantrasco all the
shares which they were holding in trust
 Septem*er 14, 19&% / A!$ ordered an
e,amination of MantrascoFs *oo8s 2his
e,amination disclosed thatC
1 as of 1ecem*er '1, 19": the %4,)((
shares declared as dividends had *een
proportionately distri*uted to Manning,
Mc1onald I Simmons, representing a
total *oo8 value or ac+uisition cost of
P),9)',&&(
% Manning, Mc1onald I Simmons failed to
declare the said stoc8 dividends as part of
their ta,a*le income for the year 19":
 2hus, !IR e9aminers concluded that the
distri-ution of ReeseKs shares as stocJ
dividends was in effect a distri-ution of the
Lasset or property of the corporation as
may -e gleaned from the payment of cash
for the redemption of said stocJ and
distri-uting the same as stocJ dividend;
 -pril 14, 19&" / #ommissioner of !nternal
$evenue issued notices of assessment for
deficiency income ta,es to Manning,
Mc1onald I Simmons for the year 19":
 Manning, Mc1onald I Simmons opposed said
assessments A!$ still held them lia*le for
these assessments
 Manning, Mc1onald I Simmons appealed to
the #2-
 CTC a-solved Manning" Mc5onald I
0immons from any lia-ility on the ground
that their respective 'M> interest in
Mantrasco remained the same -efore and
after the declaration of stocJ dividends and
only the num-er of shares held -y each of
them changed
Issues:
1 5.6 the shares are treasury shares M&.N
% 5.6 Manning, Mc1onald I Simmons should
pay for deficiency income ta,es MG30N
Ratio:
1 Treasury shares are stocJs issued and
fully paid for and re:ac;uired -y the
corporation either -y purchase" donation"
forfeiture or other means 2reasury shares
are therefore issued shares" -ut -eing in the
treasury they do not have the status of
outstanding shares #onse+uently, although
a treasury share" not having -een retired
-y the corporation re:ac;uiring it" may -e
re:issued or sold again, such share" as long
as it is held -y the corporation as a
treasury share" participates neither in
dividends, *ecause dividends cannot *e
declared *y the corporation to itself, nor in
the meetings of the corporation as voting
stocJ, for otherwise e+ual distri*ution of
voting powers among stoc8holders will *e
effectively lost and the directors will *e a*le to
perpetuate their control of the corporation,
though it still represents a paid/for interest in
the property of the corporation
 !n this case, such essential features of a
treasury share are lacJing in the former
shares of Reese
 2he manifest intention of the parties to
the trust agreement was, in sum and
su*stance, to treat the )?",(( shares of
Reese as a-solutely outstanding
shares of ReeseKs estate until they
were fully paid Such *eing the true
nature of the %4,)(( shares, their
declaration as treasury stocJ dividend
in '*@A was a complete nullity and
plainly violative of pu-lic policy -
stocJ dividend" -eing one paya-le in
capital stocJ" cannot -e declared out of
outstanding corporate stocJ" -ut only
from retained earnings

Natre of a stoc1 dividend
 - stoc8 dividend always involves a
transfer of surplus =or profit? to capital
stoc8
 - stoc8 dividend is a conversion of surplus
or undivided profits into capital stoc8,
which is distri*uted to stoc8holders in lieu
of a cash dividend
% 2he ultimate purpose which the parties to the
trust agreement aimed to reali7e is to maJe
Manning" Mc5onalds I 0immons the sole
owners of ReeseNs interest in Mantrasco *y
utiliOing the periodic earnings of Mantrasco
and its su-sidiaries to directly su-sidiOe
their purchase of said interests and *y
maJing it appear that they have not
received any income from those firms
when, in fact, *y the formal declaration of non/
e,istent stoc8 dividends in the treasury they
secured to themselves the means to turn
around as full owners of $eeseFs shares
 Manning, Mc1onald I Simmons, using the
trust instrument as a convenient technical
device, *estowed unto themselves the full
worth and value of $eese9s corporate
holdings with the use of the very earnings
of the companies
 Such pac8age device, o*viously not
designed to carry out the usual stoc8
dividend purpose of corporate e,pansion
reinvestment *ut e,clusively for e,panding
the capital *ase of Manning, Mc1onald I
Simmons in Mantrasco, cannot *e allowed
to deflect their responsi*ilities toward our
income ta, laws
 ll these amounts are su-8ect to
income ta9 as -eing a flow of cash
-enefits to Manning" Mc5onald I
0immons
/ommissioner2s assessment is erroneos
 #ommissioner should not have assessed
the income ta, on the total ac+uisition cost
of the alleged treasury stoc8 dividends in 1
lump sum
 2he record shows that the earnings of
Mantrasco over a period of years were
used to gradually wipe out the holdings of
$eese
 #onse+uently, those earnings should *e
ta,ed for each of the corresponding years
when payments were made to $eeseFs
estate on account of his %4,)(( shares
5ispositive: #2- judgment set aside #ase remanded
to the #2- for further proceedings for the
recomputation of the income ta, lia*ilities of Manning,
Mc1onald I Simmons
CIR v. 2L
0-#2SC
PB!3!PP!6@ -!$3!6@S, !6# had 7ero ta,a*le income
for %((( *ut would have *een lia*le for Minimum
#orporate !ncome 2a, *ased on its gross income
Bowever, PB!3!PP!6@ -!$3!6@S, !6# did not pay the
Minimum #orporate !ncome 2a, using as *asis its
franchise which e,empts it from Rall other ta,esS upon
payment of whichever is lower of either =a? the *asic
corporate income ta, *ased on the net ta,a*le income
or =*? a franchise ta, of %P
!SS>@C
!s P-3 lia*le for Minimum #orporate !ncome 2a,H
B@31C
6. PB!3!PP!6@ -!$3!6@S, !6#Fs franchise clearly
refers to ;*asic corporate income ta,; which refers to
the general rate of '"P =now '(P? !n addition, there
is an apparent distinction under the 2a, #ode *etween
ta,a*le income, which is the *asis for *asic corporate
income ta, under Sec %) =-? and gross income, which
is the *asis for the Minimum #orporate !ncome 2a,
under Section %) =@? 2he two terms have their
respective technical meanings and cannot *e used
interchangea*ly 6ot *eing covered *y the #harter
which ma8es P-3 lia*le only for *asic corporate
income ta,, then Minimum #orporate !ncome 2a, is
included in ;all other ta,es; from which PB!3!PP!6@
-!$3!6@S, !6# is e,empted

2he #!$ also can not point to the RSu*stitution 2heoryS
which states that $espondent may not invo8e the Rin
lieu of all other ta,esS provision if it did not pay
anything at all as *asic corporate income ta, or
franchise ta, 2he #ourt ruled that it is not the fact ta,
payment that e,empts $espondent *ut the e,ercise of
its option 2he #ourt even pointed out the fallacy of the
argument in that a measly sum of one peso would
suffice to e,empt P-3 from other ta,es while a 7ero
lia*ility would not and said that there is really no
su*stantial distinction *etween a 7ero ta, and a one/
peso ta, lia*ility 3astly, the $evenue Memorandum
#ircular stating the applica*ility of the M#!2 to P-3
does more than just clarify a previous regulation and
goes *eyond mere internal administration and thus
cannot *e given effect without previous notice or
pu*lication to those who will *e affected there*y

Manila !anJing Corp. v. CIR
The intent of Con"ress relatie to the minimum
corporate income tax/?CIT0 is to "rant a ;>year
suspension of tax payment to newly forme!
corporations. Corporations still startin" their business
operations hae to stabili(e their enture in or!er to
obtain a stron"hol! in the in!ustry.
0actsC
D 19&1/ Manila Aan8ing #orp was incorporated !t
engaged in the *an8ing industry til 19:)
D May 19:)/ Monetary Aoard of Aang8o Sentral ng
Pilipinas =ASP? issued $esolution X "(" Ypursuant to
the #entral Aan8 -ct =$- %&"?Z prohi*iting Manila
Aan8 from engaging in *usiness *y reason of
insolvency So, Manila Aan8 ceased operations and its
assets and lia*ilities were placed under charge of a
gov/ appointed receiver
D 199:/ #omprehensive 2a, $eform -ct =$-:4%4?
imposed a minimum corporate income ta, on domestic
and resident foreign corporations
o !mplementing lawC $evenue $egulation X 9/9:
stating that the law allows a 4year period from the time
the corporations were registered with the A!$ during
which the minimum corporate income ta, should not
*e imposed
D June %', 1999/ ASP authori7ed Manila Aan8 to
operate as a thrift *an8
o 6.2@C June 1", 1999 $evenue $egulation X4/9"
=pursuant to 2hrift Aan8 -ct of 199"? provides that the
date of commencement of operations shall *e
understood to mean the date when the thrift *an8 was
registered with S@# or when #ertificate of -uthority to
.perate was issued *y the Monetary Aoard, whichever
comes 3-2@$
D 1ec 1999/ Manila Aan8 wrote to A!$ re+uesting a
ruling on whether it is entitled to the 4 year grace
period under $$ 9/9:
D -pril %(((/ Manila *an8 filed with A!$ annual income
ta, return for ta,a*le year 1999 and paid ''M
D 0e* %((1/ A!$ issued A!$ $uling )/%((1 stating that
Manila Aan8 is entitled to the 4year grace period
Since it reopened in 1999, the min corporate income
ta, may *e imposed not earlier than %((% !t stressed
that although it had *een registered with the A!$
*efore 1994, *ut it ceased operations 19:)/1999 due
to involuntary closure
o Manila Aan8, then, filed with A!$ for the refund D
1ue to the inaction of A!$ on the claim, it filed with
#2- for a petition for review, which was denied and
found that Manila Aan8Fs payment of ''M is correct,
since its operations were merely interrupted during
19:)/1999 #- affirmed #2-
!ssueC 5hether or not Manila Aan8 is entitled to a
refund of its minimum corporate income ta,
paid to A!$ for 1999
BeldC Ges
D #!$Fs contensions are without merit Be contended
that *ased on $$X 9/9:, Manila Aan8 should pay the
min corporate income ta, *eg 199: as it did not close
its operations in 19:) *ut merely suspended it @ven if
placed under suspended receivership, its corporate
e,istence was never affected 2hus falling under the
category of a e,isting corporation recommencing its
*an8ing *usiness operations
WW Sec %) @ of the 2a, #ode provides the Minimum
#orporate !ncome 2a, =mcit? on 1omestic
#orporations
o =1? !mposition of 2a,/ M#!2 of %P of gross income
as of the end of the ta,a*le year, as defined here in, is
here*y imposed on a corporation ta,a*le under this
title, *eginning on the 4th ta,a*le year immediately
following the year in which such corp commenced its
*usiness operations, when the mcit is greater than the
ta, computed under Su*sec - of this section for the
ta,a*le year
o =%? -ny e,cess in the mcit over the normal income
ta,T shall *e carried forward and credited against the
normal income ta, for the ' succeeding ta,a*le years
D 3et it *e stressed that $$ 9/9: imposed the mcit on
corps, the date when *usiness operations commence
is the year in which the domestic corporation
registered with the A!$ Aut under $$ 4/9", the date of
commencement of operations of thrift *an8s, is the
date of issuance of certificate *y Monetary Aoard or
registration with S@#, whichever comes later #learly
then, $$ 4/9" applies to Manila *an8s, *eing a thrift
*an8 4/year period[ counted from June 1999
CR3! v. Romulo" et. al
0-#2SC
#$@A- assails the imposition of the minimum
corporate income ta, =M#!2? as *eing violative of the
due process clause as it levies income ta, even if
there is no reali7ed gain 2hey also +uestion the
credita*le withholding ta, =#52? on sales of real
properties classified as ordinary assets stating that =1?
they ignore the different treatment of ordinary assets
and capital assets4 =%? the use of gross selling price or
fair mar8et value as *asis for the #52 and the
collection of ta, on a per transaction *asis =and not on
the net income at the end of the year? are inconsistent
with the ta, on ordinary real properties4 ='? the
government collects income ta, even when the net
income has not yet *een determined4 and =4? the #52
is *eing levied upon real estate enterprises *ut not on
other enterprises, more particularly those in the
manufacturing sector
!SS>@C
-re the impositions of the M#!2 on domestic
corporations and #52 on income from sales of real
properties classified as ordinary assets
unconstitutionalH
B@31C
6. M#!2 does not ta, capital *ut only ta,es income
as shown *y the fact that the M#!2 is arrived at *y
deducting the capital spent *y a corporation in the sale
of its goods, ie, the cost of goods and other direct
e,penses from gross sales Aesides, there are
sufficient safeguards that e,ist for the M#!2C =1? it is
only imposed on the 4th year of operations4 =%? the law
allows the carry forward of any e,cess M#!2 paid over
the normal income ta,4 and ='? the Secretary of
0inance can suspend the imposition of M#!2 in
justifia*le instances
2he regulations on #52 did not shift the ta, *ase of a
real estate *usinessF income ta, from net income to
<SP or 0MV of the property sold since the ta,es
withheld are in the nature of advance ta, payments
and they are thus just installments on the annual ta,
which may *e due at the end of the ta,a*le year -s
such the ta, *ase for the sale of real property
classified as ordinary assets remains to *e the net
ta,a*le income and the use of the <SP or 0MV is
*ecause these are the only factors reasona*ly 8nown
to the *uyer in connection with the performance of the
duties as a withholding agent
6either is there violation of e+ual protection even if the
#52 is levied only on the real industry as the real
estate industry is, *y itself, a class on its own and can
*e validly treated different from other *usinesses
C.MMI00I.&3R .F I&T3R&L
R3$3&13" Petitioner, vs !RITI0H .$3R030
IREG0 C.R2.RTI.& and C.1RT .F TF
223L0" )espon!ents
Juasha- *sperilla- *ncheta- PeCa- Valmonte K ?arcos
for respon!ent $ritish *irways.
M3L3&CI.:H3RR3R" J.:
Petitioner #ommissioner of !nternal $evenue =#!$?
see8s a review on certiorari of the joint 1ecision of the
#ourt of 2a, -ppeals =#2-? in #2- #ases 6os %')'
and %"&1, dated %& January 19:', which set aside
petitioner9s assessment of deficiency income ta,es
against respondent Aritish .verseas -irways
#orporation =A.-#? for the fiscal years 19"9 to 19&),
19&:/&9 to 19)(/)1, respectively, as well as its
$esolution of 1: 6ovem*er, 19:' denying
reconsiderationchanro*lesvirtualawli*rary chanro*les
virtual law li*rary
A.-# is a 1((P Aritish <overnment/owned
corporation organi7ed and e,isting under the laws of
the >nited Eingdom !t is engaged in the international
airline *usiness and is a mem*er/signatory of the
!nterline -ir 2ransport -ssociation =!-2-? -s such it
operates air transportation service and sells
transportation tic8ets over the routes of the other
airline mem*ers 1uring the periods covered *y the
disputed assessments, it is admitted that A.-# had
no landing rights for traffic purposes in the Philippines,
and was not granted a #ertificate of pu*lic
convenience and necessity to operate in the
Philippines *y the #ivil -eronautics Aoard =#-A?,
e,cept for a nine/month period, partly in 19&1 and
partly in 19&%, when it was granted a temporary
landing permit *y the #-A #onse+uently, it did not
carry passengers andJor cargo to or from the
Philippines, although during the period covered *y the
assessments, it maintained a general sales agent in
the Philippines / 5amer Aarnes and #ompany, 3td,
and later Qantas -irways / which was responsi*le for
selling A.-# tic8ets covering passengers and
cargoes
'
..). %o. A@BB< =#2- #ase 6o %')', the 0irst
#ase? chanro*les virtual law li*rary
.n ) May 19&:, petitioner #ommissioner of !nternal
$evenue =#!$, for *revity? assessed A.-# the
aggregate amount of P%,49:,'":"& for deficiency
income ta,es covering the years 19"9 to 19&' 2his
was protested *y A.-# Su*se+uent investigation
resulted in the issuance of a new assessment, dated
1& January 19)( for the years 19"9 to 19&) in the
amount of P:":,'())9 A.-# paid this new
assessment under
protestchanro*lesvirtualawli*rary chanro*les virtual
law li*rary
.n ) .cto*er 19)(, A.-# filed a claim for refund of
the amount of P:":,'())9, which claim was denied
*y the #!$ on 1& 0e*ruary 19)% Aut *efore said
denial, A.-# had already filed a petition for review
with the 2a, #ourt on %) January 19)%, assailing the
assessment and praying for the refund of the amount
paid
..). %o. A@BB; =#2- #ase 6o %"&1, the Second
#ase? chanro*les virtual law li*rary
.n 1) 6ovem*er 19)1, A.-# was assessed
deficiency income ta,es, interests, and penalty for the
fiscal years 19&:/19&9 to 19)(/19)1 in the aggregate
amount of P"49,'%)4', and the additional amounts of
P1,((((( and P1,:(((( as compromise penalties for
violation of Section 4& =re+uiring the filing of
corporation returns? penali7ed under Section )4 of the
6ational !nternal $evenue #ode
=6!$#?chanro*lesvirtualawli*rary chanro*les virtual
law li*rary
.n %" 6ovem*er 19)1, A.-# re+uested that the
assessment *e countermanded and set aside !n a
letter, dated 1& 0e*ruary 19)%, however, the #!$ not
only denied the A.-# re+uest for refund in the 0irst
#ase *ut also re/issued in the Second #ase the
deficiency income ta, assessment for P"'4,1'%(: for
the years 19&9 to 19)(/)1 plus P1,((((( as
compromise penalty under Section )4 of the 2a,
#ode A.-#9s re+uest for reconsideration was denied
*y the #!$ on %4 -ugust 19)' 2his prompted A.-#
to file the Second #ase *efore the 2a, #ourt praying
that it *e a*solved of lia*ility for deficiency income ta,
for the years 19&9 to
19)1chanro*lesvirtualawli*rary chanro*les virtual law
li*rary
2his case was su*se+uently tried jointly with the 0irst
#asechanro*lesvirtualawli*rary chanro*les virtual law
li*rary
.n %& January 19:', the 2a, #ourt rendered the
assailed joint 1ecision reversing the #!$ 2he 2a,
#ourt held that the proceeds of sales of A.-#
passage tic8ets in the Philippines *y 5arner Aarnes
and #ompany, 3td, and later *y Qantas -irways,
during the period in +uestion, do not constitute A.-#
income from Philippine sources ;since no service of
carriage of passengers or freight was performed *y
A.-# within the Philippines; and, therefore, said
income is not su*ject to Philippine income ta, 2he
#2- position was that income from transportation is
income from services so that the place where services
are rendered determines the source 2hus, in the
dispositive portion of its 1ecision, the 2a, #ourt
ordered petitioner to credit A.-# with the sum of
P:":,'())9, and to cancel the deficiency income ta,
assessments against A.-# in the amount of
P"'4,1'%(: for the fiscal years 19&:/&9 to 19)(/
)1chanro*lesvirtualawli*rary chanro*les virtual law
li*rary
Bence, this Petition for $eview on certiorari of the
1ecision of the 2a,
#ourtchanro*lesvirtualawli*rary chanro*les virtual law
li*rary
2he Solicitor <eneral, in representation of the #!$,
has aptly defined the issues, thusC
1 5hether or not the revenue derived *y private
respondent Aritish .verseas -irways #orporation
=A.-#? from sales of tic8ets in the Philippines for air
transportation, while having no landing rights here,
constitute income of A.-# from Philippine sources,
and, accordingly,
ta,a*lechanro*lesvirtualawli*rary chanro*les virtual
law li*rary
% 5hether or not during the fiscal years in +uestion
A.-# s a resident foreign corporation doing *usiness
in the Philippines or has an office or place of *usiness
in the
Philippineschanro*lesvirtualawli*rary chanro*les
virtual law li*rary
' !n the alternative that private respondent may not *e
considered a resident foreign corporation *ut a non/
resident foreign corporation, then it is lia*le to
Philippine income ta, at the rate of thirty/five per cent
='"P? of its gross income received from all sources
within the Philippines
>nder Section %( of the 19)) 2a, #odeC
=h? the term resident foreign corporation engaged in
trade or *usiness within the Philippines or having an
office or place of *usiness
thereinchanro*lesvirtualawli*rary chanro*les virtual
law li*rary
=i? 2he term ;non/resident foreign corporation; applies
to a foreign corporation not engaged in trade or
*usiness within the Philippines and not having any
office or place of *usiness therein
!t is our considered opinion that A.-# is a resident
foreign corporation 2here is no specific criterion as to
what constitutes ;doing; or ;engaging in; or
;transacting; *usiness @ach case must *e judged in
the light of its peculiar environmental circumstances
2he term implies a continuity of commercial dealings
and arrangements, and contemplates, to that e,tent,
the performance of acts or wor8s or the e,ercise of
some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the
purpose and o*ject of the *usiness organi7ation
)
;!n
order that a foreign corporation may *e regarded as
doing *usiness within a State, there must *e continuity
of conduct and intention to esta*lish a continuous
*usiness, such as the appointment of a local agent,
and not one of a temporary character
>
chanro*les
virtual law li*rary
A.-#, during the periods covered *y the su*ject /
assessments, maintained a general sales agent in the
Philippines, 2hat general sales agent, from 19"9 to
19)1, ;was engaged in =1? selling and issuing tic8ets4
=%? *rea8ing down the whole trip into series of trips /
each trip in the series corresponding to a different
airline company4 ='? receiving the fare from the whole
trip4 and =4? conse+uently allocating to the various
airline companies on the *asis of their participation in
the services rendered through the mode of interline
settlement as prescri*ed *y -rticle V! of the $esolution
6o :"( of the !-2- -greement;
?
2hose activities
were in e,ercise of the functions which are normally
incident to, and are in progressive pursuit of, the
purpose and o*ject of its organi7ation as an
international air carrier !n fact, the regular sale of
tic8ets, its main activity, is the very life*lood of the
airline *usiness, the generation of sales *eing the
paramount o*jective 2here should *e no dou*t then
that A.-# was ;engaged in; *usiness in the
Philippines through a local agent during the period
covered *y the assessments -ccordingly, it is a
resident foreign corporation su*ject to ta, upon its total
net income received in the preceding ta,a*le year
from all sources within the Philippines
@
Sec %4 $ates of ta, on corporations /
chanro*lesvirtualawli*rarychanro*les virtual law
li*rary
=*? 2a, on foreign corporations /
chanro*lesvirtualawli*rarychanro*les virtual law
li*rary
=%? $esident corporations / - corporation organi7ed,
authori7ed, or e,isting under the laws of any foreign
country, e,cept a foreign fife insurance company,
engaged in trade or *usiness within the Philippines,
shall *e ta,a*le as provided in su*section =a? of this
section upon the total net income received in the
preceding ta,a*le year from all sources within the
Philippines. =@mphasis supplied?
6e,t, we address ourselves to the issue of whether or
not the revenue from sales of tic8ets *y A.-# in the
Philippines constitutes income from Philippine sources
and, accordingly, ta,a*le under our income ta,
lawschanro*lesvirtualawli*rary chanro*les virtual law
li*rary
2he 2a, #ode defines ;gross income; thusC
;<ross income; includes gains, profits, and income
derived from salaries, wages or compensation for
personal service of whatever 8ind and in whatever
form paid, or from profession, vocations,
trades, business- commerce, sales, or dealings in
property, whether real or personal, growing out of the
ownership or use of or interest in such property4 also
from interests, rents, dividends, securities, or
the transactions of any business carrie! on for "ain or
profile- or gains, profits, and income !erie! from any
source whateer =Sec %9M'N4 @mphasis supplied?
2he definition is *road and comprehensive to include
proceeds from sales of transport documents ;2he
words 9income from any source whatever9 disclose a
legislative policy to include all income not e,pressly
e,empted within the class of ta,a*le income under our
laws; !ncome means ;cash received or its e+uivalent;4
it is the amount of money coming to a person within a
specific time 4 it means something distinct from
principal or capital 0or, while capital is a fund, income
is a flow -s used in our income ta, law, ;income;
refers to the flow of wealth
+
chanro*les virtual law
li*rary
2he records show that the Philippine gross income of
A.-# for the fiscal years 19&:/&9 to 19)(/)1
amounted to P1(,4%:,'&: ((
,
chanro*les virtual law
li*rary
1id such ;flow of wealth; come from ;sources within
the Philippines;, chanro*les virtual law li*rary
2he source of an income is the property, activity or
service that produced the income
A
0or the source of
income to *e considered as coming from the
Philippines, it is sufficient that the income is derived
from activity within the Philippines !n A.-#9s case,
the sale of tic8ets in the Philippines is the activity that
produces the income 2he tic8ets e,changed hands
here and payments for fares were also made here in
Philippine currency 2he site of the source of payments
is the Philippines 2he flow of wealth proceeded from,
and occurred within, Philippine territory, enjoying the
protection accorded *y the Philippine government !n
consideration of such protection, the flow of wealth
should share the *urden of supporting the
governmentchanro*lesvirtualawli*rary chanro*les
virtual law li*rary
- transportation tic8et is not a mere piece of paper
5hen issued *y a common carrier, it constitutes the
contract *etween the tic8et/holder and the carrier !t
gives rise to the o*ligation of the purchaser of the
tic8et to pay the fare and the corresponding o*ligation
of the carrier to transport the passenger upon the
terms and conditions set forth thereon 2he ordinary
tic8et issued to mem*ers of the traveling pu*lic in
general em*races within its terms all the elements to
constitute it a valid contract, *inding upon the parties
entering into the relationship
*
chanro*les virtual law
li*rary
2rue, Section ')=a? of the 2a, #ode, which
enumerates items of gross income from sources within
the Philippines, namelyC =1? interest, =%1? dividends, ='?
service, =4? rentals and royalties, ="? sale of real
property, and =&? sale of personal property, does not
mention income from the sale of tic8ets for
international transportation Bowever, that does not
render it less an income from sources within the
Philippines Section '), *y its language, does not
intend the enumeration to *e e,clusive !t merely
directs that the types of income listed therein *e
treated as income from sources within the Philippines
- cursory reading of the section will show that it does
not state that it is an all/inclusive enumeration, and
that no other 8ind of income may *e so considered
;
'(
chanro*les virtual law li*rary
A.-#, however, would impress upon this #ourt that
income derived from transportation is income for
services, with the result that the place where the
services are rendered determines the source4 and
since A.-#9s service of transportation is performed
outside the Philippines, the income derived is from
sources without the Philippines and, therefore, not
ta,a*le under our income ta, laws 2he 2a, #ourt
upholds that stand in the joint 1ecision under
reviewchanro*lesvirtualawli*rary chanro*les virtual
law li*rary
2he a*sence of flight operations to and from the
Philippines is not determinative of the source of
income or the site of income ta,ation -dmittedly,
A.-# was an off/line international airline at the time
pertinent to this case 2he test of ta,a*ility is the
;source;4 and the source of an income is that activity
which produced the income
''
>n+uestiona*ly, the
passage documentations in these cases were sold in
the Philippines and the revenue therefrom was derived
from a activity regularly pursued within the Philippines
*usiness a -nd even if the A.-# tic8ets sold covered
the ;transport of passengers and cargo to and from
foreign cities;,
')
it cannot alter the fact that income
from the sale of tic8ets was derived from the
Philippines 2he word ;source; conveys one essential
idea, that of origin, and the origin of the income herein
is the Philippines '>
!t should *e pointed out, however, that the
assessments upheld herein apply only to the fiscal
years covered *y the +uestioned deficiency income ta,
assessments in these cases, or, from 19"9 to 19&),
19&:/&9 to 19)(/)1 0or, pursuant to Presidential
1ecree 6o &9, promulgated on %4 6ovem*er, 19)%,
international carriers are now ta,ed as followsC
Provided, however, 2hat international carriers shall
pay a ta, of %/� per cent on their cross Philippine
*illings =Sec %4M*N M%1, 2a, #ode?
Presidential 1ecree 6o 1'"", promulgated on %1
-pril, 19):, provided a statutory definition of the term
;gross Philippine *illings,; thusC
;<ross Philippine *illings; includes gross revenue
reali7ed from uplifts anywhere in the world *y any
international carrier doing *usiness in the Philippines
of passage documents sold therein, whether for
passenger, e,cess *aggage or mail provided the cargo
or mail originates from the Philippines
2he foregoing provision ensures that international
airlines are ta,ed on their income from Philippine
sources 2he %/� P ta, on gross Philippine *illings is
an income ta, !f it had *een intended as an e,cise or
percentage ta, it would have *een place under 2itle V
of the 2a, #ode covering 2a,es on
Ausinesschanro*lesvirtualawli*rary chanro*les virtual
law li*rary
3astly, we find as untena*le the A.-# argument that
the dismissal for lac8 of merit *y this #ourt of the
appeal in D*3 s. Commissioner of Internal
)eenue =<$ 6o 3/'((41? on 0e*ruary ', 19&9,
is res 2u!icata to the present case 2he ruling *y the
2a, #ourt in that case was to the effect that the mere
sale of tic8ets, unaccompanied *y the physical act of
carriage of transportation, does not render the
ta,payer therein su*ject to the common carrier9s ta,
-s elucidated *y the 2a, #ourt, however, the common
carrier9s ta, is an e,cise ta,, *eing a ta, on the activity
of transporting, conveying or removing passengers
and cargo from one place to another !t purports to ta,
the *usiness of transportation 14 Aeing an e,cise ta,,
the same can *e levied *y the State only when the
acts, privileges or *usinesses are done or performed
within the jurisdiction of the Philippines 2he su*ject
matter of the case under consideration is income ta,, a
direct ta, on the income of persons and other entities
;of whatever 8ind and in whatever form derived from
any source; Since the two cases treat of a different
su*ject matter, the decision in one cannot *e res
2u!icata to the
otherchanro*lesvirtualawli*rary chanro*les virtual law
li*rary
5B@$@0.$@, the appealed joint 1ecision of the
#ourt of 2a, -ppeals is here*y S@2 -S!1@ Private
respondent, the Aritish .verseas -irways #orporation
=A.-#?, is here*y ordered to pay the amount of
P"'4,1'%(: as deficiency income ta, for the fiscal
years 19&:/&9 to 19)(/)1 plus "P surcharge, and 1P
monthly interest from -pril 1&, 19)% for a period not to
e,ceed three ='? years in accordance with the 2a,
#ode 2he A.-# claim for refund in the amount of
P:":,'())9 is here*y denied 5ithout
costschanro*lesvirtualawli*rarychanro*les virtual law
li*rary
S. .$1@$@1
!anJ of merican &T I 0 v. C
In the 1@L remittance tax- the law specifies its own
tax base to be on the Fprofit remitte! abroa!.G There is
absolutely nothin" equiocal or uncertain about the
lan"ua"e of the proision. The tax is impose! on the
amount sent abroa!- an! the law calls for nothin"
further.
0-#2SC
1 Aan8 of -merica is a foreign corporation licensed to
engage in *usiness in the Philippines through a *ranch
in Ma8ati
% Aan8 of -merica paid 1"P *ranch profit remittance
ta, amounting to PhP)"M from its $@<>3-$ >6!2
.P@$-2!.6S and another 4("E PhP from its
0.$@!<6 #>$$@6#G [email protected]!2 .P@$-2!.6S
' 2he ta, was *ased on net profits after income ta,
without deducting the amount corresponding to the
1"P ta,
4 Aan8 of -merica thereafter filed a claim for refund
with the A!$ for the portion the corresponds with the
1"P *ranch profit remittance ta, A.-Fs claimC RA!$
should ta, us *ased on the profits actually remitted
=4"M?, and 6.2 on the amount *efore profit
remittance ta, ="'M? 2he *asis should *e the
amount actually remitted a*roadS
" #!$ contends otherwise and holds that in computing
the 1"P remittance ta,, the ta, should *e inclusive of
the sum deemed remitted
!SS>@SC 5hether or not the *ranch profit remittance
ta, should *e *ase on the amount actually
remittedH
B@31C G@S
1 !t should *e *ased on the amount actually
committed, 6.2 what was applied for
% 2here is nothing in Section %4which indicates that
the 1"P ta,J*ranch profit remittance is on the total
amount of profit4 where the law does 6.2 +ualify that
the ta, is imposed and collected at source, the
+ualification should not *e read into law
' $ationale of 1"PC 2o e+uali7eJ share the *urden of
income ta,ation with foreign corporations
CIR $0 0C #.H&0.& I 0.&" I&C0 &5 C <%.R.
&o. '),'(@. #une )@" '***=
$espondent, J.B6S.6 -61 S.6, !6# a domestic
corporation organi7ed and operating under the
Philippine laws, entered into a license agreement with
S# Johnson and Son, >nited States of -merica =>S-?,
a non/resident foreign corporation *ased in the >S-
pursuant to which the MrespondentN was granted the
right to use the trademar8, patents and technology
owned *y the latter including the right to manufacture,
pac8age and distri*ute the products covered *y the
-greement and secure assistance in management,
mar8eting and production from S# Johnson and Son,
> S -
2he said 3icense -greement was duly registered with
the 2echnology 2ransfer Aoard of the Aureau of
Patents, 2rade Mar8s and 2echnology 2ransfer under
#ertificate of $egistration 6o :(&4 0or the use of the
trademar8 or technology, S# J.B6S.6 -61 S.6,
!6# was o*liged to pay S# Johnson and Son, >S-
royalties *ased on a percentage of net sales and
su*jected the same to %"P withholding ta, on royalty
payments which respondent paid for the period
covering July 199% to May 199'(( .n .cto*er %9,
199', S# J.B6S.6 -61 S.6, >S- filed with the
!nternational 2a, -ffairs 1ivision =!2-1? of the A!$ a
claim for refund of overpaid withholding ta, on
royalties arguing that, since the agreement was
approved *y the 2echnology 2ransfer Aoard, the
preferential ta, rate of 1(P should apply to the
respondent $espondent su*mits that royalties paid to
S# Johnson and Son, >S- is only su*ject to 1(P
withholding ta, pursuant to the most/favored nation
clause of the $P/>S 2a, 2reaty in relation to the $P/
5est <ermany 2a, 2reaty 2he !nternal 2a, -ffairs
1ivision of the A!$ ruled against S# Johnson and Son,
!nc and an appeal was filed *y the former to the #ourt
of ta, appeals
2he #2- ruled against #!$ and ordered that a ta,
credit *e issued in favor of S# Johnson and Son, !nc
>npleased with the decision, the #!$ filed an appeal to
the #- which su*se+uently affirmed in toto the
decision of the #2- Bence, an appeal on certiorari
was filed to the S#
TH3 MI& I0013:
E.& 0C #.H&0.& &5 0.&"10 I0 3&TITL35
T. TH3 M.0T F$.R35 &TI.& TF RT3 .F
'(P .& R.GLTI30 0 2R.$I535 I& TH3 R2:10
TF TR3TG I& R3LTI.& T. TH3 R2:E30T
%3RM&G TF TR3TG.
The concessional tax rate of 1= percent proi!e! for in
the )P>.ermany Tax Treaty coul! not apply to taxes
impose! upon royalties in the )P>+# Tax Treaty since
the two taxes impose! un!er the two tax treaties are
not pai! un!er similar circumstances- they are not
containin" similar proisions on tax cre!itin".
2he >nited States is the state of residence since the
ta,payer, S # Johnson and Son, > S -, is *ased
there >nder the $P/>S 2a, 2reaty, the state of
residence and the state of source are *oth permitted to
ta, the royalties, with a restraint on the ta, that may *e
collected *y the state of source 0urthermore, the
method employed to give relief from dou*le ta,ation is
the allowance of a ta, credit to citi7ens or residents of
the >nited States against the >nited States ta,, *ut
such amount shall not e,ceed the limitations provided
*y >nited States law for the ta,a*le year 2he
Philippines may impose one of three rates/ %" percent
of the gross amount of the royalties4 1" percent when
the royalties are paid *y a corporation registered with
the Philippine Aoard of !nvestments and engaged in
preferred areas of activities4 or the lowest rate of
Philippine ta, that may *e imposed on royalties of the
same 8ind paid under similar circumstances to a
resident of a third state
<iven the purpose underlying ta, treaties and the
rationale for the most favored nation clause, the 2a,
2reaty should apply only if the ta,es imposed upon
royalties in the $P/>S 2a, 2reaty and in the $P/
<ermany 2a, 2reaty are paid under similar
circumstances 2his would mean that private
respondent must prove that the $P/>S 2a, 2reaty
grants similar ta, reliefs to residents of the >nited
States in respect of the ta,es imposa*le upon royalties
earned from sources within the Philippines as those
allowed to their <erman counterparts under the
$P<ermany 2a, 2reaty 2he $P/>S and the $P/5est
<ermany 2a, 2reaties do not contain similar provisions
on ta, crediting -rticle %4 of the $P/<ermany 2a,
2reaty, supra, e,pressly allows crediting against
<erman income and corporation ta, of %(P of the
gross amount of royalties paid under the law of the
Philippines .n the other hand, -rticle %' of the $P/>S
2a, 2reaty, which is the counterpart provision with
respect to relief for dou*le ta,ation, does not provide
for similar crediting of %(P of the gross amount of
royalties paid
-t the same time, the intention *ehind the adoption of
the provision on relief from dou*le ta,ation in the two
ta, treaties in +uestion should *e considered in light of
the purpose *ehind the most favored nation clause
Ehat is the most favored nation clauseQ
2he purpose of a most favored nation clause is to
grant to the contracting party treatment not less
favora*le than that which has *een or may *e granted
to the Rmost favoredS among other countries !t is
intended to esta*lish the principle of e+uality of
international treatment *y providing that the citi7ens or
su*jects of the contracting nations may enjoy the
privileges accorded *y either party to those of the most
favored nation 2he essence of the principle is to allow
the ta,payer in one state to avail of more li*eral
provisions granted in another ta, treaty to which the
country of residence of such ta,payer is also a party
provided that the su*ject matter of ta,ation, in this
case royalty income, is the same as that in the ta,
treaty under which the ta,payer is lia*le
2he $P/>S 2a, 2reaty does not give a matching ta,
credit of %( percent for the ta,es paid to the
Philippines on royalties as allowed under the $P/5est
<ermany 2a, 2reaty, private respondent cannot *e
deemed entitled to the 1( percent rate granted under
the latter treaty for the reason that there is no payment
of ta,es on royalties under similar circumstances
TFTI.& R3LT35 T.2IC0:
Ehat is the purpose of a ta9 treatyQ
2he purpose of these international agreements is to
reconcile the national fiscal legislations of the
contracting parties in order to help the ta,payer avoid
simultaneous ta,ation in two different jurisdictions
2he goal of dou*le ta,ation conventions would *e
thwarted if such treaties did not provide for effective
measures to minimi7e, if not completely eliminate, the
ta, *urden laid upon the income or capital of the
investor 2hus, if the rates of ta, are lowered *y the
state of source, in this case, *y the Philippines, there
should *e a concomitant commitment on the part of
the state of residence to grant some form of ta, relief,
whether this *e in the form of a ta, credit or
e,emption .therwise, the ta, which could have *een
collected *y the Philippine government will simply *e
collected *y another state, defeating the o*ject of the
ta, treaty since the ta, *urden imposed upon the
investorwould remain unrelieved !f the state of
residence does not grant some form of ta, relief to the
investor, no *enefit would redound to the Philippines,
i.e.- increased investment resulting from a favora*le
ta, regime, should it impose a lower ta, rate on the
royalty earnings of the investor, and it would *e *etter
to impose the regular rate rather than lose much/
needed revenues to another country
Ehat is international dou-le ta9ation and the
rationale for doing away with itQ
!nternational juridical dou*le ta,ation is defined as the
imposition of compara*le ta,es in two or more states
on the same ta,payer in respect of the same su*ject
matter and for identical periods4 2he apparent
rationale for doing away with dou*le ta,ation is to
encourage the free flow of goods and services and the
movement of capital, technology and persons *etween
countries, conditions deemed vital in creating ro*ust
and dynamic economies
Ehen is there dou-le ta9ationQ
1ou*le ta,ation usually ta8es place when a person is
resident of a contracting state and derives income
from, or owns capital in, the other contracting state
and *oth states impose ta, on that income or capital
Ehat are the methods of eliminating dou-le
ta9ationQ
• 0irst, it sets out the respective rights to ta, of
the state of source or situs and of the state of
residence with regard to certain classes of
income or capital !n some cases, an e,clusive
right to ta, is conferred on one of the
contracting states4 however, for other items of
income or capital, *oth states are given the
right to ta,, although the amount of ta, that
may *e imposed *y the state of source is
limited
• 2he second method for the elimination of
dou*le ta,ation applies whenever the state of
source is given a full or limited right to ta,
together with the state of residence !n this
case, the treaties ma8e it incum*ent upon the
state of residence to allow relief in order to
avoid dou*le ta,ation !n this case, the treaties
ma8e it incum*ent upon the state of residence
to allow relief in order to avoid dou*le
ta,ation
Ehat are the methods of relief under the
second methodQ
2here are two methods of reliefKthe
e,emption method and the credit method
• @,emption method, the income or capital
which is ta,a*le in the state of source or situs
is e,empted in the state of residence, although
in some instances it may *e ta8en into
account in determining the rate of ta,
applica*le to the ta,payerFs remaining income
or capital
• #redit method, although the income or capital
which is ta,ed in the state of source is still
ta,a*le in the state of residence, the ta, paid
in the former is credited against the ta, levied
in the latter
• 2he *asic difference -etween the two
methods is that in the e,emption method, the
focus is on the income or capital itself,
whereas the credit method focuses upon the
ta,
Ehat is the rationale of reducing ta9 rates in
negotiating ta9 treatiesQ
!n negotiating ta, treaties, the underlying rationale for
reducing the ta, rate is that the
Philippines will give up a part of the ta, in the
e,pectation that the ta, given up for this particular
investment is not ta,ed *y the other country
Ehat are ta9 refundsQ
2a, refunds are in the nature of ta, e,emptions, and
as such they are regarded as in derogation of
sovereign authority and to *e construed strictissimi
2uris against the person or entity claiming the
e,emption
Eho has the -urden of proof in ta9 e9emptionQ
2he *urden of proof is upon him who claims the
e,emption in his favor and he must *e a*le to justify
his claim *y the clearest grant of organic or statute
law
Maru-eni v. CIR
Maru-eni vs. CIR
Post under case digests, 2a,ation at 0riday, March (%,
%(1% Posted *y Schi7ophrenic Mind
Facts: Petitioner Maru*eni s a foreign corporation
duly organi7edunder the e,isting laws of Japan and
duly licensed to engage in *usiness under Philippine
laws
Maru*eni of Japan has e+uity investments in -tlantic
<ulf I Pacific #o of Manila
-<IP declared and directly remitted the cash
dividends to Maru*eniFs head office in 2o8yo net of the
final dividend ta, and withholding profit remittance ta,
2hereafter, Maru*eni, through S<V, sought a ruling
from the A!$ on whether or not the dividends it
received from -<IP are effectively connected with
its *usiness in the Philippines as to *e considered
*ranch profits su*ject to profit remittance ta,
2he -cting #ommissioner ruled that the dividends
received *y Maru*eni are not income from the
*usiness activity in which it is engaged 2hus, the
dividend if remitted a*road are not considered *ranch
profits su*ject to profit remittance ta,
Pursuant to such ruling, petitioner filed a claim
for refund for the profit ta, remittance erroneously paid
on the dividends remitted *y -<I P
$espondent #ommissioner denied the claim !t ruled
that since Maru*eni is a non resident corporation not
engaged in trade or*usiness in the Philippines it shall
*e su*ject to ta, on income earned from Philippine
sources at the rate of '"P of its gross income
.n the other hand, Maru*eni contends that, following
the principal/agent relationship theory, Maru*eni
Japan is a resident foreign corporation su*ject only to
final ta, on dividends received from a domestic
corporation
Issue: 5hether or not Maru*eni Japan is a resident
foreign corporation
Held: 6o 2he general rule is a foreign corporation is
the same juridical entity as its *ranch office in the
Philippines 2he rule is *ased on the premise that the
*usiness of the foreign corporation is conducted
through its *ranch office, following the principal/agent
relationship theory !t is understood that the *ranch
*ecomes its agent
Bowever, when the foreign corporation
transacts *usiness in the Philippines independently of
its *ranch, the principal/agent relationship is set aside
2he transaction *ecomes one of the foreign
corporation, not of the *ranch #onse+uently, the
ta,payer is the foreign corporation, not the *ranch or
the resident foreign corporation
2hus, the alleged overpaid ta,es were incurred for
the remittance of dividend income to the head office in
Japan which is considered as a separate and distinct
income ta,payer from the *ranch in the Philippines
&.$. &eeri8 RmsterdamS and Royal Interocean
Lines v. CIR
In or!er that a forei"n corporation may be consi!ere!
en"a"e! in tra!e or business- its business
transactions must be continuous
0-#2SC
D Aoth vessels of petitioner 6V $eederij R-msterdamS
called on Philippine ports to load cargoes for foreign
destinations
D 2he freight fees for these transactions were paid in
a*road !n these two transactions, petition $oyal
!nterocean 3ines acted as hus*anding agent for a fee
or commission on said vessels 6o income ta, has
*een paid *y R-msterdamS on the freight receipts
D -s a result, #ommissioner of !nternal $evenue filed
the corresponding income ta, returns for the petitioner
#ommissioner assessed petitioner for deficiency of
income ta,, as a non/resident foreign corporation 6.2
engaged in trade or *usiness
D .n the assumption that the said petitioner is a foreign
corporation engaged in trade or *usiness in the
Philippines, petitioner $oyal !nterocean 3ines filed an
income ta, return of the aforementioned vessels and
paid the ta, in pursuant to their supposed
classification
D .n the same date, petitioner $oyal !nterocean 3ines,
as the hus*anding agent of R-msterdamS, filed a
written protest against the a*ovementioned
assessment made *y the respondent #ommissioner
2he protest was denied
D .n appeal, #2- modified the assessment *y
eliminating the "(P fraud compromise penalties
imposed upon petitioners Petitioner still was not
satisfied and decided to appeal to the S#
!SS>@C 5hether or not 6V $eederij R-msterdamS
should *e ta,ed as a foreign corporation not
engaged in trade or *usiness in the
PhilippinesH
B@31C
D Petitioner is a foreign corporation not authori7ed or
licensed to do *usiness in the Philippines !t does not
have a *ranch in the Philippines, and it only made two
calls in Philippine ports, one in 19&' and the other in
19&4
D !n order that a foreign corporation may *e considered
engaged in trade or *usiness, its *usiness
transactions must *e continuous - casual *usiness
activity in the Philippines *y a foreign corporation does
not amount to engaging in trade or *usiness in the
Philippines for income ta, purposes
D - foreign corporation doing *usiness in the
Philippines is ta,a*le on income solely from sources
within the Philippines !t is permitted to claim
deductions from gross income *ut only to the e,tent
connected with income earned in the Philippines .n
the other hand, foreign corporations not doing
*usiness in the Philippines are ta,a*le on income from
all sources within the Philippines 2he ta, is '(P =now
'"P for non/resident foreign corp which is also 8nown
as foreign corp not engaged in trade or *usiness? of
such gross income =Wta8e note that in a resident
foreign corp, what is *eing ta,ed is the ta,a*le
income, which is with deductions, as compared to a
non/resident foreign corp which the ta, *ase is gross
income?
D Petiioner R-msterdamS is a non/resident foreign
corporation, organi7ed and e,isting under the laws of
the 6etherlands with principal office in -msterdam and
not licensed to do *usiness in the Philippines
03C.&5 5I$I0I.&
<%.R. &o. L:)+'?@. Fe-ruary )(" '*A?.=
TH3 M&IL EI&3 M3RCH&T0" I&C." Petitioner"
v. TH3 C.MMI00I.&3R .F I&T3R&L R3$3&13"
Respondent.
Rafael 5. 0alcedo for Petitioner.
The 0olicitor %eneral for Respondent.
0GLL!10
1 2-L-2!.64 6-2!.6-3 !62@$6-3 $@V@6>@
#.1@4 #.$P.$-2@ !6#.M@ 2-L4 -11!2!.6-3
2-L .6 -##>M>3-2@1 @-$6!6<S4 @L@MP2!.6
2B@$@0$.M K - prere+uisite to the imposition of
the ta, has *een that the corporation *e formed or
availed of for the purpose of avoiding the income ta,
=or surta,? on its shareholders, or on the shareholders
of any other corporation *y permitting the earnings and
profits of the corporation to accumulate instead of
dividing them among or distri*uting them to the
shareholders !f the earnings and profits were
distri*uted, the shareholders would *e re+uired to pay
an income ta, thereon whereas, if the distri*ution were
not made to them, they would incur no ta, in respect to
the undistri*uted earnings and profits of the
corporation =Mertens, 3aw on 0ederal !ncome
2a,ation, Vol ), #hapter '9, p 44? 2he touchstone of
lia*ility is the purpose *ehind the accumulation of the
income and not the conse+uences of the accumulation
=!*id, p 4)? 2hus, if the failure to pay dividends is due
to some other cause, such as the use of undistri*uted
earnings and profits for the reasona*le needs of the
*usiness, such purpose does not fall within the
interdiction of the statute =!*id, p 4"?
% !14 !14 !14 !14 !14 5B@6 -##>M>3-2!.6
#.6S!1@$@1 >[email protected]@ K -n
accumulation of earnings or profits =including
undistri*uted earnings or profits of prior years? is
unreasona*le if it is not re+uired for the purpose of the
*usiness, considering all the circumstances of the
case =Sec %1, $evenue $egulations 6o %?
' !14 !14 !14 !14 !14 ;[email protected]@ 6@@1S .0
2B@ A>S!6@SS,; #.6S2$>@1 K 2o determine the
;reasona*le needs; of the *usiness in order to justify
an accumulation of earnings, the #ourts of the >nited
States have invented the so/called ;!mmediacy 2est;
which construed the words ;reasona*le needs of the
*usiness; to mean the immediate needs of the
*usiness, and it was generally held that if the
corporation did not prove an immediate need for the
accumulation of the earnings and profits, the
accumulation was not for the reasona*le needs of the
*usiness, and the penalty ta, would apply -merican
cases li8ewise hold that investment of the earnings
and profits of the corporation in stoc8 or securities of
an unrelated *usiness usually indicates an
accumulation *eyond the reasona*le needs of the
*usiness =Belvering v #hicago Stoc8yards #o, '1:
>S &9'4 Belvering v 6ational <rocery #o, '(4 >S
%:%?
4 $@M@1!-3 3-54 -PP@-3S4 0-#2>-3 0!61!6<S
.0 2B@ #.>$2 .0 2-L -PP@-3S, A!61!6< K 2he
finding of the #ourt of 2a, -ppeals that the purchase
of the >S- 2reasury *onds were in no way related to
petitionerFs *usiness of importing and selling wines
whis8y, li+uors and distilled spirits, and thus construed
as an investment *eyond the reasona*le needs of the
*usiness is *inding on >s, the same *eing factual
=$enato $aymundo v Bon 1e Jova, 1(1 S#$- 49"?
0urthermore, the wisdom *ehind thus finding cannot
*e dou*ted, 2he case of JM Perry I #o v
#ommissioner of !nternal $evenue supports the same
" 2-L-2!.64 6-2!.6-3 !62@$6-3 $@V@6>@
#.1@4 !6#.M@ 2-L .0 #.$P.$-2!.6S4
-11!2!.6-3 2-L .6 -##>M>3-2@1 @-$6!6<S4
@L#@P2!.6 2B@$@0$.M4 -##>M>3-2!.6 .0
@-$6!6<S, M>S2 A@ >S@1 0.$ [email protected]@
6@@1S .0 A>S!6@SS 5!2B!6 - [email protected]@
2!M@ K 2he records further reveal that from May
19"1 when petitioner purchased the >S- 2reasury
shares, until 19&% when it finally li+uidated the same, it
=petitioner? never had the occasion to use the said
shares in aiding or financing its importation 2his
militates against the purpose enunciated earlier *y
petitioner that the shares were purchased to finance its
importation *usiness 2o justify an accumulation of
earnings and profits for the reasona*ly anticipated
future needs, such accumulation must *e used within
a reasona*le time after the close of the ta,a*le year
=Mertens, !*id, p 1(4?
& !14 !14 !14 !14 !14 !14 !62@62!.6 -2 2B@ 2!M@
.0 -##>M>3-2!.6, A-S!S .0 2B@ 2-L4
-##>M>3-2!.6 .0 P$.0!2S !6 #-S@ -2 A-$,
>[email protected]@ K !n order to determine whether
profits are accumulated for the reasona*le needs of
the *usiness as to avoid the surta, upon shareholders,
the controlling intention of the ta,payer is that which is
manifested at the time of accumulation not
su*se+uently declared intentions which are merely the
product of afterthought =Aasilan @states, !nc v #omm
of !nternal $evenue, %1 S#$- 1) citing Jaco*
Mertens, Jr, 2he law of 0ederal !ncome 2a,ation, Vol
), #umulative Supplement, p %1'4 Smoot and SanI
<ravel #orp v #omm, %41 0 %d 19)? - speculative
and indefinite purpose will not suffice 2he mere
recognition of a future pro*lem and the discussion of
possi*le and alternative solutions is not sufficient
1efiniteness of plan coupled with action ta8en towards
its consummation are essential =0uel #arriers, !nc v
>S %(% 0 supp 49)4 Smoot Sand I <ravel #orp v
#omm, supra? Viewed on the foregoing analysis and
tested under the ;immediacy doctrine,; 5e are
convinced that the #ourt of 2a, -ppeals is correct in
finding that the investment made *y petitioner in the
>S- 2reasury shares in 19"1 was an accumulation
of profits in e,cess of the reasona*le needs of
petitionerFs *usinesschanro*lesvirtuallawli*rary
) !14 !14 !14 !14 -##>M>3-2!.6S .0 P$!.$
G@-$S 2-E@6 !62. -##.>62 !6
1@2@$M!6-2!.6 .0 3!-A!3!2G 2B@$@0.$ K 2he
rule is now settled in .ur jurisprudence that
undistri*uted earnings or profits of prior years are
ta8en into consideration in determining unreasona*le
accumulation for purposes of the %"P surta, 2he
case of Aasilan @states, !nc v #ommissioner of
!nternal $evenue further strengthen this rule in
determining unreasona*le accumulation for the year
concernedF!n determining whether accumulations of
earnings or profits in a particular year are within the
reasona*le needs of a corporation, it is necessary to
ta8e into account prior accumulations, since
accumulations prior to the year involved may have
*een sufficient to cover the *usiness needs and
additional accumulations during the year involved
would not reasona*ly *e necessary
5 3 C I 0 I . &
%13RR3R." J.:
!n this Petition for $eview on Certiorari, Petitioner, the
Manila 5ine Merchants, !nc, disputes the decision of
the #ourt of 2a, -ppeals ordering it =petitioner? to pay
respondent, the #ommissioner of !nternal $evenue,
the amount of P:&,:(4': as %"P surta, plus interest
which represents the additional ta, due petitioner for
improperly accumulating profits or surplus in the
ta,a*le year 19") under Sec %" of the 6ational
!nternal $evenue
#odechanro*lesvirtualawli*rarychanro*lescomCchanr
o*lescomph
2he #ourt of 2a, -ppeals made the following finding of
facts, to witCjgcCchanro*lescomph
;Petitioner, a domestic corporation organi7ed in 19'),
is principally engaged in the importation and sale of
whis8y, wines, li+uors and distilled spirits !ts original
su*scri*ed and paid capital was P"((,((((( !ts
capital of P"((,((((( was reduced to P%"(,((((( in
19"( with the approval of the Securities and @,change
#ommission *ut the reduction of the capital was never
implemented .n June %1, 19":, petitionerFs capital
was increased to P1,(((,((((( with the approval of
the said #ommission
.n 1ecem*er '1, 19"), herein respondent caused the
e,amination of herein petitionerFs *oo8 of account and
found the latter of having unreasona*ly accumulated
surplus of P4%:,9'4'% for the calendar year 194) to
19"), in e,cess of the reasona*le needs of the
*usiness su*ject to the %"P surta, imposed *y
Section %" of the 2a, #ode
.n 0e*ruary %&, 19&', the #ommissioner of !nternal
$evenue demanded upon the Manila 5ine Merchants,
!nc payment of P1%&,"'&1% as %"P surta, and
interest on the latterFs unreasona*le accumulation of
profits and surplus for the year 19"), computed as
followsCchanro*1es virtual 1aw li*rary
>nreasona*le accumulation of surta, P4%:,9'44%
KKKKK
%"P surta, due thereon P1(),%'4((
-ddC 1J%P monthly interest from June %(,
19"9 to June %(, 19&% 19,'(%1%
KKKKK
2.2-3 -M.>62 1>@ -61 #.33@#2!A3@
P1%&,"'&1%
[[[[[[[[[
$espondent contends that petitioner has accumulated
earnings *eyond the reasona*le needs of its *usiness
*ecause the average ratio of the cash dividends
declared and paid *y petitioner from 194) to 19") was
4(''P of the total surplus availa*le for distri*ution at
the end of each calendar year .n the other hand,
petitioner contends that in 19"), it distri*uted 1((P of
its net earnings after income ta, and part of the
surplus for prior years $espondent further su*mits
that the accumulated earnings ta, should *e *ased on
%"P of the total surplus availa*le at the end of each
calendar year while petitioner maintains that the %"P
surta, is imposed on the total surplus or net income for
the year after deducting therefrom the income ta, due
2he records show the following analysis of petitionerFs
net income, cash dividends and earned surplus for the
years 194& to 19")C 1
Percentage of
1ividends to
6et !ncome 2otal #ash 6et !ncome Aalance
-fter !ncome 1ividends -fter of @arned
Gear 2a, Paid !ncome 2a, Surplus
194& P &1',)9((( P %((,((( '%":P P %'4,1(4:1
194) 4%",)19:) '&(,(((:4"&P 19",1&)1(
194: 41","91:' ')",(((9(%'P %)%,991':
1949 ''",(":(& %((,((("9&9P :9',11'4%
19"( '99,&9:(9 &((,(((1"(11P %'4,9:)()
19"1 '4&,%")%& '((,(((:&&4P %:1,%44''
19"% 19&,1&19) %((,(((1(19&P %)),4(&'(
19"' 1&9,)14(4 %((,(((11):"P '(1,1'::4
19"4 %':,1%4:" %"(,(((1(499P %:9,%&%&9
19"" '1%,%:4)4 %((,(((&4(4P 4(1,"4:4'
19"& ')4,%4(%: '((,(((:(1&P 4)",)::)1
19") '"',14")1 4((,((( 11'%)P 4%:,9'44%
KKKKKK KKKKK KKKK KKKKKK
P4,1)9,):)'& P',":"((( :"))P P',):"&::"(
[[[[[[[[[[ [[[[[[[[[ [[[[[[[ [[[[[[[[[[
-nother *asis of respondent in assessing petitioner for
accumulated earnings ta, is its su*stantial investment
of surplus or profits in unrelated *usiness 2hese
investments are itemi7ed as followsCchanro*1es virtual
1aw li*rary
1 -cme #ommercial #o, !nc P %),"(1((
%>nion !nsurance Society
of #anton 1,14")&
' >S- 2reasury Aond '4),%1)"(
4 5ac85ac8 <olf I
#ountry #lu* 1((
KKKKK
')",:&"%&
[[[[[[[[[
-s to the investment of P%),"(1(( made *y petitioner
in the -cme #ommercial #o, !nc, Mr 6$@
Baw8ins, president of the petitioner corporation %
e,plained as followsCchanro*1es virtual 1aw li*rary
\2he first item consists of shares of -cme #ommercial
#o, !nc which the #ompany ac+uired in 194) and
1949 !n the said years, we thought it prudent to invest
in a *usiness which patroni7es us -s a supermar8et,
-cme #ommercial #o, !nc is one of our *est
customers 2he investment has proven to *e *eneficial
to the stoc8holders of this #ompany -s an e,ample,
the #ompany received cash dividends in 19&1 totalling
P1&,:)"(( which was included in its income ta,
return for the said yearF
-s to the investments of petitioner in >nion !nsurance
Society of #anton and 5ac85ac8 <olf #lu* in the
sums of P1,14")& and P1((, respectively, the same
official of the petitioner/corporation stated thatC '
\2he second and fourth items are small amounts which
we *elieve would not affect this case su*stantially -s
regards the >nion !nsurance Society of #anton
shares, this was a pre/war investment, when 5ise I
#o, !nc, Manila 5ine Merchants and the said
insurance firm were common stoc8holders of the 5ise
Aldg #o,, !nc and the three companies were all
housed in the same *uilding >nion !nsurance invested
in 5ise Aldg #o, !nc *ut invited Manila 5ine
Merchants, !nc to *uy a few of its sharesF
-s to the >S- 2reasury Aonds amounting to
P'4),%1)"(, Mr Baw8ins e,plained as followsC 4
\5ith regards to the >S- 2reasury Aills in the
amount of P'4),%1)"(, in 19"(, our *alance sheet for
the said year shows the #ompany had deposited in
current account in various *an8s P&%9,4('&4 which
was not earning any interest 5e decided to utili7e part
of this money as reserve to finance our importations
and to ta8e care of future e,pansion including
ac+uisition of a lot and the construction of our own
office *uilding and *ottling plant
-t that time, we *elieved that a dollar reserve a*road
would *e useful to the #ompany in meeting immediate
urgent orders of its local customers !n order that the
money may earn interest, the #ompany, on May '1,
19"1 purchased >S 2reasury *ills with 9(/day maturity
and earning appro,imately 1P interest with the face
value of >S]1)",((((( >S 2reasury Aills are easily
converti*le into cash and for the said reason they may
*e *etter classified as cash rather than investments
2he 2reasury Aills in +uestion were held as such for
many years in view of our e,pectation that the #entral
Aan8 inspite of the controls would allow no/dollar
licenses importations Bowever, since the #entral
Aan8 did not rela, its policy with respect thereto, we
decided sometime in 19") to hold the *ills for a few
more years in view of our plan to *uy a lot and
construct a *uilding of our own -ccording to the lease
agreement over the *uilding formerly occupied *y us in
1asmariOas St, the lease was to e,pire sometime in
19") -t that time, the #ompany was not yet +ualified
to own real property in the Philippines 5e therefore
waited until &(P of the stoc8s of the #ompany would
*e owned *y 0ilipino citi7ens *efore ma8ing definite
plans 2hen in 19"9 when the #ompany was already
more than &(P 0ilipino owned, we commenced
loo8ing for a suita*le location and then finally in 19&1,
we *ought the man lot with an old *uilding on .tis St,
Paco, our present site, for P&&",((((( -djoining
smaller lots were *ought later -fter the purchase of
the main property, we proceeded with the remodelling
of the old *uilding and the construction of additions,
which were completed at a cost of P14',:9&(( in
-pril, 19&%
!n view of the needs of the *usiness of this #ompany
and the purchase of the .tis lots and the construction
of the improvements thereon, most of its availa*le
funds including the 2reasury Aills had *een utili7ed,
*ut inspite of the said e,penses the #ompany
consistently declared dividends to its stoc8holders
2he 2reasury Aills were li+uidated on 0e*ruary 1",
19&%F
$espondent found that the accumulated surplus in
+uestion were invested to \unrelated *usinessF which
were not considered in the \immediate needsF of the
#ompany such that the %"P surta, *e imposed
therefrom;cralaw virtua1aw li*rary
Petitioner appealed to the #ourt of 2a, -ppeals
.n the *asis of the ta*ulated figures, supra, the #ourt
of 2a, -ppeals found that the average percentage of
cash dividends distri*uted was :"))P for a period of
11 years from 194& to 19") and not only 4(''P of
the total surplus availa*le for distri*ution at the end of
each calendar year actually distri*uted *y the
petitioner to its stoc8holders, which is indicative of the
view that the Manila 5ine Merchants, !nc was not
formed for the purpose of preventing the imposition of
income ta, upon its shareholders "
5ith regards to the alleged su*stantial investment of
surplus or profits in unrelated *usiness, the #ourt of
2a, -ppeals held that the investment of petitioner with
-cme #ommercial #o, !nc, >nion !nsurance Society
of #anton and with the 5ac85ac8 <olf and #ountry
#lu* are harmless accumulation of surplus and,
therefore, not su*ject to the %"P surta, provided in
Section %" of the 2a, #ode &
-s to the >S- 2reasury Aonds amounting to
P'4),%1)"(, the #ourt of 2a, -ppeals ruled that its
purchase was in no way related to petitionerFs
*usiness of importing and selling wines, whis8y,
li+uors and distilled spirits $espondent #ourt was
convinced that the surplus of P'4),%1)"( which was
invested in the >S- 2reasury Aonds was availed of
*y petitioner for the purpose of preventing the
imposition of the surta, upon petitionerFs shareholders
*y permitting its earnings and profits to accumulate
*eyond the reasona*le needs of *usiness Bence, the
#ourt of 2a, -ppeals modified respondentFs decision
*y imposing upon petitioner the %"P surta, for 19")
only in the amount of P:&,:(4': computed as
followsCchanro*1es virtual 1aw li*rary
>nreasona*le accumulation
of surplus P'4),%1)"(
KKKKK
%"P surta, due thereon P :&,:(4': )
.n May '(, 19&&, the #ourt of 2a, -ppeals denied the
motion for reconsideration filed *y petitioner on March
'(, 19&& Bence, this petition
Petition assigns the following errorsCchanro*1es virtual
1aw li*rary
!
2he #ourt of 2a, -ppeals erred in holding that
petitioner was availed of for the purpose of preventing
the imposition of a surta, on its shareholders
!!
2he #ourt of 2a, -ppeals erred in holding that
petitionerFs purchase of >S- 2reasury Aills in 19"1
was an investment in unrelated *usiness su*ject to the
%"P surta, in 19") as surplus profits improperly
accumulated in the latter years
!!!
2he #ourt of 2a, -ppeals erred in not finding that
petitioner did not accumulate its surplus profits
improperly in 19"), and in not holding that such
surplus profits, including the so/called unrelated
investments, were necessary for its reasona*le
*usiness needs
!V
2he #ourt of 2a, -ppeals erred in not holding that
petitioner had overcome the prima facie presumption
provided for in Section %"=c? of the $evenue #ode
V
2he #ourt of 2a, -ppeals erred in finding petition lia*le
for the payment of the surta, of P:&,:(4': and in
denying petitionerFs Motion for $econsideration andJor
6ew 2rial
2he issues in this case can *e summari7ed as followsC
=1? whether the purchase of the >S- 2reasury *onds
*y petitioner in 19"1 can *e construed as an
investment to an unrelated *usiness and hence, such
was availed of *y petitioner for the purpose of
preventing the imposition of the surta, upon
petitionerFs shareholders *y permitting its earnings and
profits to accumulate *eyond the reasona*le needs of
the *usiness, and if so, =%? whether the penalty ta, of
twenty/five percent =%"P? can *e imposed on such
improper accumulation in 19") despite the fact that
the accumulation occurred in 19"1chanro*les
virtualawli*rarychanro*lescomCchanro*lescomph
2he pertinent provision of the 6ational !nternal
$evenue #ode reads as
followsCjgcCchanro*lescomph
;Sec %" -dditional ta, on corporations improperly
accumulating profits or surplusK =a? !mposition of
2a, K !f any corporation, e,cept *an8s, insurance
companies, or personal holding companies whether
domestic or foreign, is formed or availed of for the
purpose of preventing the imposition of the ta, upon its
shareholders or mem*ers or the shareholders or
mem*ers of another corporation, through the medium
of permitting its gains and profits to accumulate
instead of *eing divided or distri*uted, there is levied
and assessed against such corporation, for each
ta,a*le year, a ta, e+ual to twenty/five per centum of
the undistri*uted portion of its accumulated profits or
surplus which shall *e in addition to the ta, imposed
*y section twenty/four and shall *e computed,
collected and paid in the same manner and su*ject to
the same provisions of law, including penalties, as that
ta,C Provided, that no such ta, shall *e levied upon
any accumulated profits or surplus, if they are invested
in any dollar/producing or dollar/saving industry or in
the purchase of *onds issued *y the #entral Aan8 of
the Philippines
x x x
=c? @vidence determinative of purpose K 2he fact that
the earnings of profits of a corporation are permitted to
accumulate *eyond the reasona*le needs of the
*usiness shall *e determinative of the purpose to
avoid the ta, upon its shareholders or mem*ers unless
the corporation, *y clear preponderance of evidence,
shall prove the contrary; =-s amended *y $epu*lic
-ct 6o 1:%'?
-s correctly pointed out *y the #ourt of 2a, -ppeals,
inasmuch as the provisions of Section %" of the
6ational !nternal $evenue #ode were *odily lifted from
Section 1(% of the >S !nternal $evenue #ode of
19'9, including the regulations issued in connection
therewith, it would *e proper to resort to applica*le
cases decided *y the -merican 0ederal #ourts for
guidance and enlightenmentchanro*les virtual
lawli*rary
- prere+uisite to the imposition of the ta, has *een
that the corporation *e formed or availed of for the
purpose of avoiding the income ta, =or surta,? on its
shareholders, or on the shareholders of any other
corporation *y permitting the earnings and profits of
the corporation to accumulate instead of dividing them
among or distri*uting them to the shareholders !f the
earnings and profits were distri*uted, the shareholders
would *e re+uired to pay an income ta, thereon
whereas, if the distri*ution were not made to them,
they would incur no ta, in respect to the undistri*uted
earnings and profits of the corporation : 2he
touchstone of lia*ility is the purpose *ehind the
accumulation of the income and not the conse+uences
of the accumulation 9 2hus, if the failure to pay
dividends is due to some other cause, such as the use
of undistri*uted earnings and profits for the reasona*le
needs of the *usiness, such purpose does not fall
within the interdiction of the statute 1(
-n accumulation of earnings or profits =including
undistri*uted earnings or profits of prior years? is
unreasona*le if it is not re+uired for the purpose of the
*usiness, considering all the circumstances of the
case 11
!n purchasing the >S- 2reasury Aonds, in 19"1,
petitioner argues that these *onds were so purchased
=1? in order to finance their importation4 and that a
dollar reserve a*road would *e useful to the #ompany
in meeting urgent orders of its local customers and =%?
to ta8e care of future e,pansion including the
ac+uisition of a lot and the construction of their office
*uilding and *ottling plant
5e find no merit in the petition
2o avoid the twenty/five percent =%"P? surta,,
petitioner has to prove that the purchase of the >S-
2reasury Aonds in 19"1 with a face value of
]1)",((((( was an investment within the reasona*le
needs of the #orporation
2o determine the ;reasona*le needs; of the *usiness
in order to justify an accumulation of earnings, the
#ourts of the >nited States have invented the so/
called ;!mmediacy 2est; which construed the words
;reasona*le needs of the *usiness; to mean the
immediate needs of the *usiness, and it was generally
held that if the corporation did not prove an immediate
need for the accumulation of the earnings and profits,
the accumulation was not for the reasona*le needs of
the *usiness, and the penalty ta, would apply 1%
-merican cases li8ewise hold that investment of the
earnings and profits of the corporation in stoc8 or
securities of an unrelated *usiness usually indicates
an accumulation *eyond the reasona*le needs of the
*usiness 1'
2he finding of the #ourt of 2a, -ppeals that the
purchase of the >S- 2reasury *onds were in no way
related to petitionerFs *usiness of importing and selling
wines whis8y, li+uors and distilled spirits, and thus
construed as an investment *eyond the reasona*le
needs of the *usiness 14 is *inding on >s, the same
*eing factual 1" 0urthermore, the wisdom *ehind thus
finding cannot *e dou*ted, 2he case of JM Perry I
#o v #ommissioner of !nternal $evenue 1& supports
the same !n that case, the >S #ourt said the
followingCjgcCchanro*lescomph
;!t appears that the ta,payer corporation was engaged
in the *usiness of cold storage and wareshousing in
Gahima, 5ashington !t maintained a cold storage
plant, divided into four units, having a total capacity of
49(,((( *o,es of fruits !t presented evidence to the
effect that various alterations and repairs to its plant
were contemplated in the ta, years,
!t also appeared that in spite of the fact that the
ta,payer contended that it needed to maintain this
large cash reserve on hand, it proceeded to ma8e
various investments which had no relation to its
storage *usiness !n 19'4, it purchased mining stoc8
which it sold in 19'" at a profit of >S ]4),99"%9
-ll these things may reasona*ly have appealed to the
Aoard as incompati*le with a purpose to strengthen
the financial position of the ta,payer and to provide for
needed alteration;cralaw virtua1aw li*rary
2he records further reveal that from May 19"1 when
petitioner purchased the >S- 2reasury shares, until
19&% when it finally li+uidated the same, it =petitioner?
never had the occasion to use the said shares in
aiding or financing its importation 2his militates
against the purpose enunciated earlier *y petitioner
that the shares were purchased to finance its
importation *usiness 2o justify an accumulation of
earnings and profits for the reasona*ly anticipated
future needs, such accumulation must *e used within
a reasona*le time after the close of the ta,a*le year
1)
Petitioner advanced the argument that the >S-
2reasury shares were held for a few more years from
19"), in view of a plan to *uy a lot and construct a
*uilding of their own4 that at that time =19")?, the
#ompany was not yet +ualified to own real property in
the Philippines, hence it =petitioner? had to wait until
si,ty percent =&(P? of the stoc8s of the #ompany
would *e owned *y 0ilipino citi7ens *efore ma8ing
definite plans 1:
2hese arguments of petitioner indicate that it considers
the >S- 2reasury shares not only for the purpose of
aiding or financing its importation *ut li8ewise for the
purpose of *uying a lot and constructing a *uilding
thereon in the near future, *ut conditioned upon the
completion of the &(P citi7enship re+uirement of stoc8
ownership of the #ompany in order to +ualify it to
purchase and own a lot 2he time when the company
would *e a*le to esta*lish itself to meet the said
re+uirement and the decision to pursue the same are
dependent upon various future contingencies 5hether
these contingencies would unfold favora*ly to the
#ompany and if so, whether the #ompany would
decide later to utili7e the >S- 2reasury shares
according to its plan, remains to *e seen 0rom these
assertions of petitioner, 5e cannot gather anything
definite or certain 2his, 5e cannot
approvechanro*les law li*rary
!n order to determine whether profits are accumulated
for the reasona*le needs of the *usiness as to avoid
the surta, upon shareholders, the controlling intention
of the ta,payer is that which is manifested at the time
of accumulation not su*se+uently declared intentions
which are merely the product of afterthought 19 -
speculative and indefinite purpose will not suffice 2he
mere recognition of a future pro*lem and the
discussion of possi*le and alternative solutions is not
sufficient 1efiniteness of plan coupled with action
ta8en towards its consummation are essential %( 2he
#ourt of 2a, -ppeals correctly made the following
rulingC %1
;-s to the statement of Mr Baw8ins in @,h ;A;
regarding the e,pansion program of the petitioner *y
purchasing a lot and *uilding of its own, we find no
justifia*le reason for the retention in 19") or thereafter
of the >S 2reasury Aonds which were purchased in
19"1
x x x
;Moreover, if there was any thought for the purchase of
a lot and *uilding for the needs of petitionerFs
*usiness, the corporation may not with impunity permit
its earnings to pile up merely *ecause at some future
time certain outlays would have to *e made Profits
may only *e accumulated for the reasona*le needs of
the *usiness, and implicit in this is further re+uirement
of a reasona*le time;cralaw virtua1aw li*rary
Viewed on the foregoing analysis and tested under the
;immediacy doctrine,; 5e are convinced that the #ourt
of 2a, -ppeals is correct in finding that the investment
made *y petitioner in the >S- 2reasury shares in
19"1 was an accumulation of profits in e,cess of the
reasona*le needs of petitionerFs *usiness
0inally, petitioner asserts that the surplus profits
allegedly accumulated in the form of >S- 2reasury
shares in 19"1 *y it =petitioner? should not *e su*ject
to the surta, in 19") !n other words, petitioner claims
that the surta, of %"P should *e *ased on the surplus
accumulated in 19"1 and not in 19")
2his is devoid of merit
2he rule is now settled in .ur jurisprudence that
undistri*uted earnings or profits of prior years are
ta8en into consideration in determining unreasona*le
accumulation for purposes of the %"P surta, %% 2he
case of Aasilan @states, !nc v #ommissioner of
!nternal $evenue %' further strengthen this rule, and
5e +uoteCjgcCchanro*lescomph
;Petitioner +uestions why the e,aminer covered the
period from 194:/19"' when the ta,a*le year on
review was 19"' 2he surplus of P'4),"()(1 was
ta8en *y the e,aminer from the *alance sheet of the
petitioner for 19"' 2o chec8 the figure arrived at, the
e,aminer traced the accumulation process from 194)
until 19"', and petitionerFs figure stood out to *e
correct 2here was no error in the process applied, for
previous accumulations should *e considered in
determining unreasona*le accumulation for the year
concernedF!n determining whether accumulations of
earnings or profits in a particular year are within the
reasona*le needs of a corporation, it is necessary to
ta8e into account prior accumulations, since
accumulations prior to the year involved may have
*een sufficient to cover the *usiness needs and
additional accumulations during the year involved
would not reasona*ly *e necessaryF;
chanro*lesvirtuallawli*rary
5B@$@0.$@, !6 V!@5 .0 2B@ 0.$@<.!6<, the
decision of the #ourt of 2a, -ppeals is -00!$M@1 in
toto, with costs against petitioner
S. .$1@$@1
%.R. &o. A@,?* May '@" '*A*
C.MMI00I.&3R .F I&T3R&L R3$3&13"
petitioner,
vs
&T.&I. T10.&" I&C. and TH3 C.1RT .F TF
223L0" respondents
The 7ffice of the #olicitor .eneral for petitioner.
?en!o(a K Papa an! )oman ?. +mali for priate
respon!ent.

%RI/.:41I&." J.:
@levated to this #ourt for review is the decision dated
.cto*er 14, 19:: of the #ourt of 2a, -ppeals in #2-
#ase 6o ':&", entitled ;*ntonio Tuason- Inc. s.
Commissioner of Internal )eenue-; which set aside
the petitioner $evenue #ommissioner9s assessment of
P1,1"1,14&9: as the %"P surta, on the private
respondent9s unreasona*le accumulation of surplus for
the years 19)"/19):
>nder date of 0e*ruary %), 19:1, the petitioner,
#ommissioner of !nternal $evenue, assessed -ntonio
2uason, !nc
a 1eficiency income ta, for the years
19)",19)& and 19):
TTTTTTTTTTTT
P'),491:'
=*? 1eficiency corporate +uarterly
income ta, for the first +uarter of 19)"
T 1&149
=c? %"P surta, on unreasona*le
accumulation of surplus for the years
19)"/19):
1,1"1,14&9:
2he private respondent did not o*ject to the first and
second items and, therefore, paid the amounts
demanded Bowever, it protested the assessment on a
%"P surta, on the third item on the ground that the
accumulation of surplus profits during the years in
+uestion was solely for the purpose of e,panding its
*usiness operations as real estate *ro8er 2he re+uest
for reinvestigation was granted on condition that a
waiver of the statute of limitations should *e filed *y
the private respondent 2he latter replied that there
was no need of a waiver of the statute of limitaitons
*ecause the right of the <overnment to assess said
ta, does not prescri*e
6o investigation was conducted nor a decision
rendered on -ntonio 2ua7on !nc9s protest meantime,
the $evenue #ommissioner issued warrants of
distraint and levy to enforce collection of the total
amount originally assessed including the amounts
already paid
2he private respondent filed a petition for review in the
#ourt of 2a, -ppeals with a re+uest that pending
determination of the case on the merits, an order *e
issued restraining the #ommissioner andJor his
representatives from enforcing the warrants of distraint
and levy Since the right asserted *y the
#ommissioner to collect the ta,es involved herein *y
the summary methods of distraint and levy was not
clear, and it was shown that portions of the ta,
lia*ilities involved in the assessment had already *een
paid, a writ of injunction was issued *y the 2a, #ourt
on 6ovem*er %&, 19:4, ordering the #ommissioner to
refrain fron enforcing said warrants of distraint and
levy !t did not re+uire the petitioner to file a *ond
=-nne, -, pp %:/'(, $ollo?
!n view of the reversal of the #ommissioner9s decision
*y the #ourt of 2a, -ppeals, the petitioner appealed to
this #ourt, raising the following issuesC
1 5hether or not private respondent
-ntonio 2uason, !nc is a holding
company andJor investment company4
% 5hether or not privaaate
respondent -ntonio 2uason, !nc
accumulated surplus for the years
19)" to 19):4 and
' 5hether or not -ntonio 2uason, !nc
is lia*le for the %"P surta, on undue
accumulation of surplus for the years
19)" to 19):
Section %" of the 2a, #ode at the time the surta, was
assessed, providedC
Sec %"*!!itional tax on corporation
improperly accumulatin" profits or
surplus.E
=a? Imposition of tax. K !f any
corporation, e,cept *an8s, insurance
companies, or personal holding
companies, whether domestic or
foreign, is formed or availed of for the
purpose of preventing the imposition
of the ta, upon its shareholders or
mem*ers or the shareholders or
mem*ers of another corporation,
through the medium of permitting its
gains and profits to accumulate
instead of *eing divided or distri*uted,
there is levied and assessed against
such corporation, for each ta,a*le
year, a ta, e+ual to twenty/five per
centum of the undistri*uted portion of
its accumulated profits or surplus
which shall *e in addition to the ta,
imposed *y section twenty/four, and
shall *e computed, collected and paid
in the same manner and su*ject to the
same provisions of law, including
penalties, as that ta,
=*? Prima facie ei!ence. K 2he fact
that any corporation is a mere holding
company shall *e prima facie
evidence of a purpose to avoid the ta,
upon its shareholders or mem*ers
Similar presumption will lie in the case
of an investment company where at
any time during the ta,a*le year more
than fifty per centum in value of its
outstanding stoc8 is owned, directly or
indirectly, *y one person
=c? ,i!ence !eterminatie of
purpose K 2he fact that the earnings
or profits of a corporation are
permitted to accumulate *eyond the
reasona*le needs of the *usiness
shall *e determinative of the purpose
to avoid the ta, upon its shareholders
or mem*ers unless the corporation, *y
clear preponderance of evidence,
shall prove the contrary
2he petition for review is meritorious
2he #ourt of 2a, -ppeals conceded that the $evenue
#ommissioner9s determination that -ntonio 2uason,
!nc was a mere holding or investment company, was
;presumptively correct; =p ), -nne, -?, for the
corporation did not involve itself in the development of
su*divisions *ut merely su*divided its own lots and
sold them for *igger profits !t derived its income
mostly from interest, dividends and rental reali7ed from
the sale of realty
-nother circumstance supporting that presumption is
that 9999P in value of the outstanding stoc8 of
-ntonio 2uason, !nc, is owned *y -ntonio 2uason
himself 2he #ommissioner ;conclusively presumed;
that when the corporation accumulated =instead of
distri*uting to the shareholders? a surplus of over P'
million fron its earnings in 19)" up to 19):, the
purpose was to avoid the imposition of the progressive
income ta, on its shareholders
2hat -ntonio 2uason, !nc accumulated surplus profits
amounting to P',%&','(":: for 19)" up to 19): is not
disputed Bowever, the private respondent vehemently
denies that its purpose was to evade payment of the
progressive income ta, on such dividends *y its
stoc8holders -ccording to the private respondent,
surplus profits were set aside *y the company to *uild
up sufficient capital for its e,pansion program which
included the construction in 19)9/19:1 of an
apartment *uilding, and the purchase in 19:( of a
condominium unit which was intended for resale or
lease
Bowever, while these investments were actually made,
the #ommissioner points out that the corporation did
not use up its surplus profits !t allegation that
P1,"%",&)%)4 was spent for the construction of an
apartment *uilding in 19)9 and P1,)"%,''%:) for the
purchase of a condominium unit in >rdaneta Village in
19:( was refuted *y the 1eclaration of $eal Property
on the apartment *uilding =@,h #? which shows that
its mar8et value is only P4%9,:9(((, and the 2a,
1eclaration on the condominium unit which reflects a
mar8et value of P%9',:'((( only =@,h 1/1? 2he
enormous discrepancy *etween the alleged
investment cost and the declared mar8et value of
these pieces of real estate was not denied nor
e,plained *y the private respondent
Since the company as of the time of the assessment in
19:1, had invested in its *usiness operations only P
))',)%( out of its accumulated surplus profits of
P',%&','(":: for 19)"/19):, its remaining
accumulated surplus profits of P%,4:9,:"::: are
su*ject to the %"P surta,
-ll presumptions are in favor of the correctness of
petitioner9s assessment against the private
respondent !t is incum*ent upon the ta,payer to prove
the contrary =Mindanao Aus #ompany vs
#ommissioner of !nternal $evenue, 1 S#$- "':?
>nfortunately, the private respondent failed to
overcome the presumption of correctness of the
#ommissioner9s assessment
2he touchstone of lia*ility is the purpose *ehind the
accumulation of the income and not the conse+uences
of the accumulation 2hus, if the failure to pay
dividends were for the purpose of using the
undistri*uted earnings and profits for the reasona*le
needs of the *usiness, that purpose would not fall
within the interdiction of the statute; =Mertens 3aw of
0ederal !ncome 2a,ation, Vol ), #hapter '9, p 4"
cited in Manila 5ine Merchants, !nc vs #ommissioner
of !nternal $evenue, 1%) S#$- 4:', 49'?
!t is plain to see that the company9s failure to distri*ute
dividends to its stoc8holders in 19)"/19): was for
reasons other than the reasona*le needs of the
*usiness, there*y falling within the interdiction of
Section %" of the 2a, #ode of 19))
5B@$@0.$@, the appealed decision of the #ourt of
2a, -ppeals is here*y set aside 2he petitioner9s
assessment of a %"P surta, against the -ntonio
2uason, !nc is reinstated *ut only on the latter9s
unspent accumulated surplus profits of P%,4:9,":"::
6o costs
S. .$1@$@1
Cyanamid 2hilippines" Inc. v. Tuason
Facts: Petitioner, #yanamid Philippines, !nc, a
corporationorgani7ed under Philippine laws, is a wholly
owned su*sidiary of -merican #yanamid #o *ased in
Maine, >S- !t is engaged in the manufacture
of pharmaceutical products and chemicals, a
wholesaler of imported finished goods, and an
importerJindenter
0e*ruary ), 19:", the #!$ sent an assessment letter
to petitioner and demanded the
payment of deficiency in come ta, of P119,:1) for
ta,a*le year 19:1 which the petitioner on March 4,
19:", protested particularly =1? %"P
surta, assessment of P',))4,:&)"(4 =%?
19:1deficiency income ta, assessment of P119,:1)4
='? 19:1 deficiencypercentage assessment of
P','4&)% #!$ refused to allow the cancellation of
the assessment notices
1uring the pendency of the case on appeal to the
#2-, *oth parties agreed to compromise the
19:1 deficiency income assessment of P119,:1) and
reduced to P%&,")) as compromise settlement Aut
the surta, on improperly accumulated profits remained
unresolved Petitioner claimed that
the assessment representing the %"P surta, had no
legal *asis for the following reasonsC =a? petitioner
accumulated its earnings and profits for reasona*le
*usiness re+uirements to meet wor8ing capital needs
and retirement of inde*tedness, =*? petitioner is wholly
owned su*sidiary of -merican #yanamid #o, a
corporation organi7ed under the laws of the State
ofMaine, in the >S-, whose shares of stoc8 are listed
and traded in 6ew Gor8 Stoc8 @,change 2his *eing
the case, no individual shareholder of petitioner could
have evaded or prevented the imposition of individual
income ta,es *y petitionerFs accumulation of earnings
and profits,instead contri*ution of the same
#2- denied said petition
Issue: 5hether petitioner is lia*le for the accumulated
earnings ta, for the year 19:1
Held: 2he amendatory provision of Sec %" of the
19)) 6!$#, which was P11)'9, enumerated the
corporations e,empt from the imposition of improperly
accumulated ta,C =a? *an8s, =*? non/*an8 financial
intermediaries4 =c? insurance companies4 and =d?
corporationsorgani7ed primarily and authori7ed *y the
#entral Aan8 to hold shares of stoc8s of *an8s
Petitioner does not fall among those e,empt classes
Aesides, the laws granting e,emption form ta, are
construed strictissimi juris against the ta,payer and
li*erally in favor of the ta,ing power 2a,ation is the
rule and e,emption is the e,ception 2he *urden of
proof rests upon the party claiming the e,emption to
prove that it is, in fact, covered *y the e,emption so
claimed4 a *urden which petitioner here has failed to
discharge
>nless re*utted, all presumptions generally are
indulged in favor of the correctness of the
#!$Fs assessment against the ta,payer 5ith
petitionerFs failure to prove the #!$ incorrect, clearly
and conclusively, this court is constrained to uphold
the correctness of ta, courtFs ruling as affirmed *y the
#-
CIR $0. $. %. 0I&C. 351C. C.R
<%.R. &o. L:*),+. .cto-er )>" '*@+.=
FCT0: 2his is an appeal from a decision of the #ourt
of 2a, -ppeals which orders the #!$ to refund
to )espon!ent/*ppellee the sum of P",'&4))
representing income ta, paid *y said *ppellee for the
years 19"( and 19"1
!n June, 1949, Vicente < Sinco esta*lished and
operated an educational institution 8nown as
0oundation #ollege of 1umaguete Sinco would have
continued operating said college were it not for the
re+uirement of the 1epartment of @ducation that as far
as practica*le schools and colleges recogni7ed *y the
government should *e incorporated, and so on
Septem*er %1, 19"1, the V < Sinco @ducational
!nstitution was organi7ed 2his corporation was non/
stoc8 and was capitali7ed *y V < Sinco and mem*ers
of his immediate family 2his corporation continued the
operations of 0oundation #ollege of 1umaguete
Since its operation, this college derived, *y way of
tuition fees gross profits
2he #!$ assessed against the college an income ta,
for the years 19"( and 19"1 in the aggregate sum of
P",'&4)), which was paid *y the college 2wo years
thereafter, the corporation commenced an action in the
#0! of 6egros .riental for the refund of this amount
alleging that it is e,empt from income ta, under
section %) =e? of the 6ational !nternal $evenue #ode
Pursuant to the provisions of $epu*lic -ct 11%", the
case was remanded to the #ourt of 2a, -ppeals
which, after due trial, decided the case in favor of the
corporation
!nvo8ing section %) =e? of the 6ational !nternal
$evenue #ode, the *ppellee claims that it is e,empt
from the payment of the income ta, *ecause it is
organi7ed and maintained e,clusively for the
educational purposes and no part of its net income
inures to the *enefit of any private individual .n the
other hand, the *ppellant maintains that part of the net
income accumulated *y the *ppellee inured to the
*enefit of V < Sinco, president and founder of the
corporation, and therefore the *ppellee is not entitled
to the e,emption prescri*ed *y the law
!SS>@C !s it really correct to say that the *ppellee is an
educational institution in which part of its income
inures to the *enefit of one of its stoc8holders as
maintained *y *ppellantH
B@31C 2he decision appealed from is affirmed
#onsidering that this claim is mainly
predicated on certain entries appearing in the *alance
sheets of the corporation for the years 19"( and 19"1,
there is need to clarify the purposes for which said
entries were made, particularly those referring to the
accounts paya*le to V < Sinco and the #ommunity
Pu*lishers !nc
5ith regard to this accounts, 1ean Sinco made the
following clarificationCcBe acted as president of the
0oundation #ollege and as chairman of its Aoard of
1irectors4 yin 1949 he served as its teacher for a
time4 ythe accountant of the college suggested that a
certain amount *e set aside as his salary for purposes
of orderly and practical accounting4 y*ut
notwithstanding this suggestion, he never collected his
salary for which reason it was carried in the *oo8s as
accrued e,penses 5ith regard to the account of the
#ommunity Pu*lishers, !nc, Sinco said that this is a
distinct and separate corporation although he is one of
its stoc8holders 2he account represents payment for
services rendered *y this entity to the college 2hese
are two different entities and whatever relation there is
*etween the two is that the former merely e,tends help
to the latter to ena*le it to comply with the
re+uirements of the law and to fill its needs for
educational purposes 2his clarification made *y Sinco
stand undisputed
#onsidering this e,planation, it is indeed too sweeping
if not unfair to conclude that part of the income of
the *ppellee as an institution inured to the *enefit of
one of its stoc8holders simply *ecause part of the
income was carried in its *oo8s as accumulated
salaries of its president and teacher Much less can it
*e said that the payments made *y the college to the
#ommunity Pu*lishers, !nc redounded to the personal
*enefit of Sinco simply *ecause he is one of its
stoc8holders 2he fact is that, as it has *een
esta*lished, the *ppellee is a non/profit institution and
since its organi7ation it has never distri*uted any
dividend or profit to its stoc8holders .f course, part of
its income went to the payment of its teachers or
professors and to the other e,penses of the college
incident to an educational institution *ut none of the
income has ever *een channeled to the *enefit of any
individual stoc8holder 2he authorities are clear to the
effect that whatever payment is made to those who
wor8 for a school or college as a remuneration for their
services is not considered as distri*ution of profit as
would ma8e the school one conducted for profit 2hus,
in the case of Mayor and #ommon #ouncil of Aorough
of Princeton vs State Aoard of 2a,es I -ssessments,
et al, 11" -tl, '4%, wherein the principal officer of the
school was formerly its owner and principal and such
principal he was given a salary for his services, the
court held that school is not conducted for profit merely
*ecause moderate salaries were paid to the principal
and to the teachers
.f course, it is not denied that the *ppellee charges
tuition fees and other fees for the different services it
renders to the students and in fact it is its only source
of income, *ut such fact does not in itself ma8e the
school a profit/ma8ing enterprise that would place it
*eyond the purview of the law
R-gain, the amount of fees charged *y a school,
college or university depends, ultimately, upon the
policy and a given administration, at a particular time
!t is not conclusive of the purposes of the institution
.therwise, such purpose would vary with the particular
persons in charge of the administration of the
organi7ationS =Jesus Sacred Beart #ollege vs
#ollector of !nternal $evenue, 9" Phil, 1&?
5ith regard to the claim of *ppellant that *ppellee is
not entitled to e,emption *ecause it has not complied
with the re+uirement of section %4, $egulation 6o % of
the 1epartment of 0inance, we find correct the
following o*servation of the #ourt of 2a, -ppealsC
R-nd regarding the proof of e,emption
re+uired *y section %4, $egulation 6o %,
1epartment of 0inance which, according to
the Defen!ant, is a condition precedent *efore
an educational institution can avail itself of the
e,emption under consideration, we
understand that it was pro*a*ly promulgated
for the effective enforcement of the provisions
of the 2a, #ode pursuant to Section '': of the
6ational !nternal $evenue #ode !ntended to
relieve the ta,payer of the duty of filing returns
and paying the ta,, it cannot *e said that the
failure to o*serve the re+uirement called for
therein constitutes a waiver of the right to
enjoy the e,emption 2o hold otherwise would
*e tantamount to incorporating into our ta,
laws some legislative matter *y administrative
regulationS
CIR v. C
1on -ndres Soriano formed -6S#.$, a corporation
194) / -6S#.$ declared stoc8 dividends
19&4 / 1on -ndres died Shares were transferred to
1ona #armen, his wife
19&& / stoc8 dividends worth 4&, %9( and 4&,%:)
shares were respectively received *y the estate and
1ona #armen from -6S#.$
19&: / -6S#.$ redeemed %:((( common shares
from the estate
19&) / -6S#.$ redeemed :(,((( common shares
from the estate
19)' / A!$ assessed -6S#.$ for deficiency
withholding ta,/at/source, despite -6S#.$9s claim
that it availed of a ta, amnesty under P1 %'
-6S#.$ filed a petition for review with the #2-
assailing the ta, assessments on the redemptions and
e,change of stoc8s #2- reversed the #!$, and the
#- affirmed the #2-9s ruling
!SS>@C 5J6 -6S#.$9s redemption of stoc8s from its
stoc8holder 1on -ndres, can *e considered as
;essentially e+uivalent to the distri*ution of ta,a*le
dividend; ma8ing the proceeds ta,a*le
B@31C G@S
1 Ta9 e9emption. 2he #ourt held that -6S#.$ was
not covered *y the amnesty it is claiming
% Ta9 dividends.
Section :'=*? of the 19'9 $evenue -ct 1istri*ution of
dividends or assets *y corporations K
=*? Stoc8 dividends K - stoc8 dividend
representing the transfer of surplus to capital
account shall not *e su*ject to ta, Bowever, if a
corporation cancels or redeems stoc8 issued as a
dividend atsuch time and in such manner as to
ma8e the distri*ution and cancellation or
redemption, in whole or in part, essentially
e+uivalent to the distri*ution of a ta,a*le dividend,
the amount so distri*uted in redemption or
cancellation of the stoc8 shall *e considered
as ta,a*le income to the e,tent it represents a
distri*ution of earnings or profits accumulated after
March first, nineteen hundred and thirteen
$edemption / repurchase, a reac+uisition of
stoc8 *y a corporation which issued the stoc8
A*
in
e,change for property, whether or not the ac+uired
stoc8 is cancelled, retired or held in the
treasury @ssentially, the corporation gets *ac8 some
of its stoc8, distri*utes cash or property to the
shareholder in payment for the stoc8,
2he application of Sec :'=*? depends on the special
factual circumstances of each case
<eneral ruleC - stoc8 dividend representing the
transfer of surplus to capital account shall not *e
su*ject to ta,
@,ceptionC !f a corporation cancels or redeems
stoc8 issued as a dividend at such time and in such
manner as to ma8e the distri*ution and cancellation or
redemption, in whole or in part, essentially e+uivalent
to the distri*ution of a ta,a*le dividend, the amount so
distri*uted in redemption or cancellation of the stoc8
shall *e considered as ta,a*le income to the e,tent it
represents a distri*ution of earnings or profits
accumulated
Stoc8 dividends, strictly spea8ing, represent
capital and do not constitute income to its
recipient 2he mere issuance is not yet su*ject to
income ta, as they are nothing *ut an ;enrichment
through increase in value of capital investment; !t
postpones profits *ecause stoc8s as capital is no
longer availa*le for actual distri*ution =a8a sale?
!ncome in ta, law is ;an amount of money
coming to a person within a specified time, whether as
payment for services, interest, or profit from
investment;
1epending on the circumstances, the proceeds
of redemption of stoc8 dividends are essentially
distri*ution of cash dividends, which when paid
*ecomes the a*solute property of the stoc8holder
Baving reali7ed gain from that redemption, the income
earner cannot escape income ta,
0or the e,empting clause of Section, :'=*? to
apply, it is indispensa*le thatC
=a? there is redemption or cancellation4
=*? the transaction involves stoc8 dividends and
=c? the ;time and manner; of the transaction
ma8es it ;essentially e+uivalent to a distri*ution of
ta,a*le dividends;
.f these, the most important is the third
' pplication to this case. -6S#.$ redeemed
shares of stoc8s from a stoc8holder =1on -ndres?
twice =%:,((( and :(,((( common shares? Aut where
did the shares redeemed come fromH
!f its source is the original capital su*scriptions
upon esta*lishment of the corporation or from initial
capital investment in an e,isting enterprise, its
redemption to the concurrent value of ac+uisition may
not invite the application of Sec :'=*? under the 19'9
2a, #ode, as it is not income *ut a mere return of
capital .n the contrary, if the redeemed shares are
from stoc8 dividend declarations other than as initial
capital investment, the proceeds of the redemption is
additional wealth, for it is not merely a return of capital
*ut a gain thereon
Aut here, it is undisputed that at the time of the
last redemption, the original common shares owned *y
the estate were only %",%4)" 2his means that from
the total of 1(:,((( shares redeemed from the estate,
the *alance of :%,)"%" =1(:,((( less %",%4)"? must
have come from stoc8 dividends
-s to the 'rd element, the stoc8 dividends that
were redeemed were issued just % to ' years earlier
2he issuance of stoc8 dividends and its su*se+uent
redemption must *e separate, distinct, and not related,
for the redemption to *e considered a legitimate ta,
scheme $edemption cannot *e used as a cloa8 to
distri*ute corporate earnings
2he three elements in the imposition of income
ta, areC =1? there must *e gain or and profit, =%? that
the gain or profit is reali7ed or received, actually or
constructively, and ='? it is not e,empted *y law or
treaty from income ta,
2he test of ta,a*ility under the e,empting clause
of Section :'=*? is, whether income was reali7ed
through the redemption of stoc8 dividends
2he two purposes invo8ed *y -6S#.$ are no
e,cuse for its ta, lia*ility
0irst, the alleged ;filipini7ation; plan cannot *e
considered legitimate as it was not implemented until
the A!$ started ma8ing assessments on the proceeds
of the redemption $ecords show that despite the
e,istence of enormous corporate profits no cash
dividend was ever declared *y -6S#.$ from 194"
until the A!$ started ma8ing assessments in the early
19)(9s 2his circumstance negates the legitimacy of
-6S#.$9s alleged purposes
-6S#.$ argued that to treat as ;ta,a*le
dividend; the proceeds of the redeemed stoc8
dividends would *e to impose on such stoc8 an
undisclosed lien and would *e e,tremely unfair to
intervening purchase Such argument, however, *ears
no relevance in this case as no intervening *uyer is
involved
-fter considering the manner and the
circumstances *y which the issuance and redemption
of stoc8 dividends were made, there is no other
conclusion *ut that the proceeds thereof are
essentially considered e+uivalent to a distri*ution of
ta,a*le dividends -s ;ta,a*le dividend; under Section
:'=*?, it is part of the ;entire income; su*ject to ta,
EI03 &5 C.." I&C. $0 M33R
%.R. &.. ?A)>' #1&3 >(" '*?,
2.&3&T3: HIL5." #.
C03 5I%30T !G: L165I." L.1RG M3 M.
0actsC .n June 1, 19'), Manila 5ine Merchants, 3td,
a Bong8ong company, was li+uidated and its capital
stoc8 was distri*uted to its stoc8holders, one of which
is the petitioner -s part of its li+uidation, the
corporation was sold to Manila 5ine Merchants, !nc
for Php4((,((( 2he said earnings, declared as
dividends, were distri*uted to its stoc8holders 2he
Bong8ong company then paid the income ta, for the
entire earnings -s a result of the sale of its *usiness
and assets, a surplus was reali7ed *y the Bong8ong
company after deducting the dividends 2his surplus
was also distri*uted to its stoc8holders 2he Bong8ong
company also paid the income ta, for the said surplus
2he petitioners then filed their respective income ta,
returns 2he respondent #ommissioner, then, made a
deficiency assessment charging the individual
stoc8holders for ta,es on the shares distri*uted to
them despite the fact that income ta, was already paid
*y the Bong8ong company 2he petitioners paid the
assessed amount in protest 2he lower courts ruled in
favor of the #ommissioner of !nternal $evenue, hence,
this action
!ssue=s?C
1 5hether the amount received *y the
petitioners were ordinary dividends or li+uidating
dividends
% 5hether such dividends were ta,a*le or
not
' 5hether or not the profits reali7ed *y the
non/resident alien individual appellants constitute
Rincome from the PhilippinesS considering that the sale
too8 place outside the Philippines
BeldC
1 2he dividends are li+uidating dividends or payments
for surrendered or relin+uished stoc8 in a corporation
in complete li+uidation !t was stipulated in the deed of
sale that the sale and transfer of the corporation shall
ta8e effect on June 1, 19') while distri*ution too8
place on June : 2hey could not consistently deem all
the *usiness and assets of the corporation sold as of
June 1, 19'), and still say that said corporation, as a
going concern, distri*uted ordinary dividends to them
thereafter
% Ges Petitioners received the said distri*utions in
e,change for the surrender and relin+uishment *y
them of their stoc8 in the li+uidated corporation 2hat
money in the hands of the corporation formed a part of
its income and was properly ta,a*le to it under the
!ncome 2a, 3aw 5hen the corporation was dissolved
in the process of complete li+uidation and its
shareholders surrendered their stoc8 to it and it paid
the sums in +uestion to them in e,change, a
transaction too8 place 2he shareholder who received
the consideration for the stoc8 earned received that
money as income of his own, which again was
properly ta,a*le to him under the !ncome 2a, 3aw
' 2he contention of the petitioners that the earnings
cannot *e considered as income from the Philippines
*ecause the sale was made outside the Philippines
and is not su*ject to Philippine ta, law is untena*le -t
the time of the sale, the Bong8ong company was
engage in its *usiness in the Philippines !ts successor
was a domestic corporation and doing *usiness also in
the Philippines !t must *e ta8en into consideration that
the Bong8ong company was incorporated for the
purpose of carrying *usiness in the Philippine !slands
Bence, its earnings, profits and assets, including those
from whose proceeds the distri*ution was made, had
*een earned and ac+uired in the Philippines !t is clear
that the distri*utions in +uestions were income Rfrom
Philippine sourcesS, hence, ta,a*le under Philippine
law
%.R. &o. *@()) March )>" '**)
C.MMI00I.&3R .F I&T3R&L
R3$3&13" petitioner,
vs
TH3 H.&. C.1RT .F 223L0" TH3 C.1RT .F
TF 223L0" %CL R3TIR3M3&T 2L&"
represented -y its Trustee:5irector" respondents
0actsC
<#3 $etirement Plan is an employees9 trust
maintained *y the employer, <#3 !nc, to provide
retirement, pension, disa*ility and death *enefits to its
employees 2he Plan as su*mitted was approved and
+ualified as e,empt from income ta, *y Petitioner
#ommissioner of !nternal $evenue in accordance with
$ep -ct 6o 491)
!n 19:4, $espondent <#3 made investsments and
earned therefrom interest income from which was
witheld the fifteen per centum =1"P? final witholding
ta, imposed *y Pres 1ecree 6o 19"9,
)
which too8
effect on 1" .cto*er 19:4
<#3 filed with Petitioner a claim for refund in the
amounts of P1,'1%&& withheld *y -nscor #apital and
!nvestment #orp, and P%,(&41" *y #ommercial Aan8
of Manila .n 1% 0e*ruary 19:", it filed a second claim
for refund of the amount of P),9%"(( withheld *y
-nscor, stating in *oth letters that it disagreed with the
collection of the 1"P final withholding ta, from the
interest income as it is an entity fully e,empt from
income ta, as proi!e! under $ep -ct 6o 491) in
relation to Section "& =*?
>
of the 2a, #ode
#!$ U denied the refund, Petitioner elevated the matter
to #2-
#2- / ruled in favor of <#3, holding that employees9
trusts are e,empt from the 1"P final withholding ta,
on interest income and ordering a refund of the ta,
withheld
#- / upheld the #2- 1ecision
#!$F s #ontention / the e,emption from withholding ta,
on interest on *an8 deposits previously e,tended *y
Pres 1ecree 6o 1)'9 if the recipient =individual or
corporation? of the interest income is e,empt from
income ta,ation, and the imposition of the preferential
ta, rates if the recipient of the income is enjoying
preferential income ta, treatment, were *oth a*olished
*y Pres 1ecree 6o 19"9 Petitioner thus su*mits that
the deletion of the e,empting and preferential ta,
treatment provisions under the old law is a clear
manifestation that the single 1"P =now %(P? rate is
impossi*le on all interest incomes from deposits,
deposit su*stitutes, trust funds and similar
arrangements, regardless of the ta, status or
character of the recipients thereof !n short, petitioner9s
position is that from 1" .cto*er 19:4 when Pres
1ecree 6o 19"9 was promulgated, employees9 trusts
ceased to *e e,empt and thereafter *ecame su*ject to
the final withholding ta,
^<#3 contention / the ta, e,empt status of the
employees9 trusts applies to all 8inds of ta,es,
including the final withholding ta, on interest income
2hat e,emption, according to <#3, is derived from
Section "&=*? and not from Section %1 =d? or %4 =cc? of
the 2a, #ode
!ssueC 5hether <#3 is e,empted from !ncome 2a,
BeldC
<#3 Plan was +ualified as e,empt from income ta, *y
the #ommissioner of !nternal $evenue in accordance
with $ep -ct 6o 491) approved on 1) June 19&) !n
so far as employees9 trusts are concerned, the
foregoing provision should *e ta8en in relation to then
Section "&=*? =now "'M*N? of the 2a, #ode, as
amended *y $ep -ct 6o 19:', supra- which too8
effect on %% June 19")
2he ta,/e,emption privilege of employees9 trusts, as
distinguished from any other 8ind of property held in
trust, springs from the foregoing provision !t is
unam*iguous Manifest therefrom is that the ta, law
has singled out employees9 trusts for ta, e,emption
-nd rightly so, *y virtue of the raison !eMetre *ehind
the creation of employees9 trusts @mployees9 trusts or
*enefit plans normally provide economic assistance to
employees upon the occurrence of certain
contingencies, particularly, old age retirement, death,
sic8ness, or disa*ility !t provides security against
certain ha7ards to which mem*ers of the Plan may *e
e,posed !t is an independent and additional source of
protection for the wor8ing group 5hat is more, it is
esta*lished for their e,clusive *enefit and for no other
purpose
2he deletion in Pres 1ecree 6o 19"9 of the provisos
regarding ta, e,emption and preferential ta, rates
under the old law, therefore, can not *e deemed to
e,tent to employees9 trusts Said 1ecree, *eing a
general law, can not repeal *y implication a specific
provision, Section "&=*? now "' M*N? in relation to $ep
-ct 6o 491) granting e,emption from income ta, to
employees9 trusts $ep -ct 19:', which e,cepted
employees9 trusts in its Section "& =*? was effective on
%% June 19") while $ep -ct 6o 491) was enacted on
1) June 19&), long *efore the issuance of Pres
1ecree 6o 19"9 on 1" .cto*er 19:4 - su*se+uent
statute, general in character as to its terms and
application, is not to *e construed as repealing a
special or specific enactment, unless the legislative
purpose to do so is manifested 2his is so even if the
provisions of the latter are sufficiently comprehensive
to include what was set forth in the special act
=Villegas v Su*ido, <$ 6o 3/'1)11, '( Septem*er
19)1, 41 S#$- 19(?
2here can *e no denying either that the final
withholding ta, is collected from income in respect of
which employees9 trusts are declared e,empt =Sec "&
M*N, now "' M*N, 2a, #ode? 2he application of the
withholdings system to interest on *an8 deposits or
yield from deposit su*stitutes is essentially to
ma,imi7e and e,pedite the collection of income ta,es
*y re+uiring its payment at the source !f an
employees9 trust li8e the <#3 enjoys a ta,/e,empt
status from income, we see no logic in withholding a
certain percentage of that income which it is not
supposed to pay in the first place
5e herein rule that Pres 1ecree 6o 19"9 did not
have the effect of revo8ing the ta, e,emption enjoyed
*y employees9 trusts, reliance on those authorities is
now misplaced
5B@$@0.$@, the 5rit of Certiorari prayed for is
1@6!@1 2he judgment of respondent #ourt of
-ppeals, affirming that of the #ourt of 2a, -ppeals is
>PB@31 6o costs
C.MMI00I.&3R .F I&T3R&L
R3$3&13" Petitioner" v. TH3 C.1RT .F 223L0
and 3FR3& 2. C0T/35" Respondents.
Leovigildo Monasterial for Private Respondent.
0GLL!10
1 2-L-2!.64 5!2BB.31!6< 2-L4 2@$M!6-3
3@-V@ P-G4 6.2 S>AJ@#2 2B@[email protected] K 2he #ourt
has already ruled that the terminal leave pay received
*y a government official or employee is not su*ject to
withholding =income? ta, !n the recent case of Jesus
6 Aorromeo v 2he Bon #ivil Service #ommission, @t
-l, <$ 6o 9&('%, '1 July 1991, the #ourt e,plained
the rationale *ehind the employeeFs entitlement to an
e,emption from withholding =income? ta, on his
terminal leave pay as followsC commutation of
leave credits, more commonly 8nown as terminal
leave, is applied for *y an officer or employee who
retires, resigns or is separated from the service
through no fault of his own =Manual on 3eave
-dministration #ourse for @ffectiveness pu*lished *y
the #ivil Service #ommission, pages 1&/1)? !n the
e,ercise of sound personnel policy, the <overnment
encourages unused leaves to *e accumulated 2he
<overnment recogni7es that for most pu*lic servants,
retirement pay is always less than generous if not
meager and scrimpy - modest nest egg which the
senior citi7en may loo8 forward to is thus avoided
2erminal leave payments are given not only at the
same time *ut also for the same policy considerations
governing retirement *enefits;
R 3 0 . L 1 T I . &
25ILL" J.:
2he issue to *e resolved in this petition for review
on certiorari is whether or not terminal leave pay
received *y a government official or employee on the
occasion of his compulsory retirement from the
government service is su*ject to withholding =income?
ta,
5e resolve the issue in the negative
Private respondent @fren P #astaOeda retired from
the government service as $evenue -ttache in the
Philippine @m*assy in 3ondon, @ngland, on 1(
1ecem*er 19:% under the provisions of Section 1% =c?
of #ommonwealth -ct 1:&, as amended >pon
retirement, he received, among other *enefits, terminal
leave pay from which petitioner #ommissioner of
!nternal $evenue withheld P1%,"")1' allegedly
representing income ta, thereon
#astaOeda filed a formal written claim with petitioner
for a refund of the P1%,"")1', contending that the
cash e+uivalent of his terminal leave is e,empt from
income ta, 2o comply with the two/year prescriptive
period within which claims for refund may *e filed,
#astaOeda filed on 1& July 19:4 with the #ourt of 2a,
-ppeals a Petition for $eview, see8ing the refund of
income ta, withheld from his terminal leave pay
2he #ourt of 2a, -ppeals found for private respondent
#astaOeda and ordered the #ommissioner of !nternal
$evenue to refund #astaOeda the sum of P1%,"")1'
withheld as income ta, =-nne, ;#;,
petition?chanro*les virtual lawli*rary
Petitioner appealed the a*ove/mentioned #ourt of 2a,
-ppeals decision to this #ourt, which was doc8eted as
<$ 6o :('%( !n turn, we referred the case to the
#ourt of -ppeals for resolution 2he case was
doc8eted in the #ourt of -ppeals as #-/<$ SP 6o
%(4:%
.n %& Septem*er 199(, the #ourt of -ppeals
dismissed the petition for review and affirmed the
decision of the #ourt of 2a, -ppeals Bence, the
present recourse *y the #ommissioner of !nternal
$evenue
2he Solicitor <eneral, acting on *ehalf of the
#ommissioner of !nternal $evenue, contends that the
terminal leave pay is income derived from employer/
employee relationship, citing in support of his stand
Section %: of the 6ational !nternal $evenue #ode4 that
as part of the compensation for services rendered,
terminal leave pay is actually part of gross income of
the recipient 2hus K
; !t =terminal leave pay? cannot *e viewed as
salary for purposes which would reduce it there
can thus *e no \commutation of salaryF when a
government retiree applies for terminal leave /*ecause
he is not receiving it as salary 5hat he applies for is a
\commutation of leave creditsF !t is an accumulation of
credits intended for old age or separation from service
;cralaw virtua1aw li*rary
2he #ourt has already ruled that the terminal leave
pay received *y a government official or employee is
not su*ject to withholding =income? ta, !n the recent
case of Jesus 6 Aorromeo v 2he Bon #ivil Service
#ommission, @t -l, <$ 6o 9&('%, '1 July 1991, the
#ourt e,plained the rationale *ehind the employeeFs
entitlement to an e,emption from withholding =income?
ta, on his terminal leave pay as
followsCjgcCchanro*lescomph
; commutation of leave credits, more commonly
8nown as terminal leave, is applied for *y an officer or
employee who retires, resigns or is separated from the
service through no fault of his own =Manual on 3eave
-dministration #ourse for @ffectiveness pu*lished *y
the #ivil Service #ommission, pages 1&/1)? !n the
e,ercise of sound personnel policy, the <overnment
encourages unused leaves to *e accumulated 2he
<overnment recogni7es that for most pu*lic servants,
retirement pay is always less than generous if not
meager and scrimpy - modest nest egg which the
senior citi7en may loo8 forward to is thus avoided
2erminal leave payments are given not only at the
same time *ut also for the same policy considerations
governing retirement *enefits;cralaw virtua1aw li*rary
!n fine, not *eing part of the gross salary or income of
a government official or employee *ut a retirement
*enefit, terminal leave pay is not su*ject to income
ta,chanro*les virtual lawli*rary
-##.$1!6<3G, the petition for review is here*y
1@6!@1
S. .$1@$@1
Paras and $egalado, DD., concur
.M. &o. *(:+:('@:0C .cto-er 'A" '**(
R3: R34130T .F TTG. !3R&R5. 6ILCIT
F.R R3C.&0I53RTI.& .F TH3 CTI.& .F TH3
FI&&CIL &5 !15%3T .FFIC3

R 3 0 . L 1 T I . &

%1TI3RR36" #R." J.:
.n -ugust %', 199(, a resolution of the #ourt @n Aanc
was issued regarding the amounts claimed *y -tty
Aernardo 0 _ialcita on the occasion of his retirement
2he resolution states, among othersC
2he terminal leave pay of -tty _ialcita
received *y virtue of his compulsory
retirement can never *e considered a
part of his salary su*ject to the
payment of income ta, *ut falls under
the phrase ;other similar *enefits
received *y retiring employees and
wor8ers;, within the meaning of
Section 1 of P1 6o %%( and is thus
e,empt from the payment of income
ta, 2hat the money value of his
accrued leave credits is not a part of
his salary is further *uttressed *y Sec
' of P1 6o 9:", otherwise 8nown as
2he ;Audgetary $eform 1ecree on
#ompensation and Position
#lassification of 19)&; particularly
Sec ' =a? thereof, which ma8es it
clear that the actual serice is the
period of time for which pay has been
receie!- exclu!in" the perio!
coere! by terminal leae
2he dispositive portion providesC
-ccordingly, the #ourt $esolved to =1?
.$1@$ the 0iscal Management and
Audget .ffice to $@0>61 -tty
_ialcita the amount of P"9,"(%''
which was deducted from his terminal
leave pay as withholding ta,4 and =%?
1@#3-$@ that henceforth no
withholding ta, shall *e deducted
*y any 7ffice of this Court from the
terminal leave pay *enefits of all
retirees similarly situated including
those who have already retired and
from whose retirement *enefits such
withholding ta,es were deducted
Sarmiento, J, is on leave
.n Septem*er 1:, 199(, the #ommissioner of !nternal
$evenue, as intervenor/movant and through the
Solicitor <eneral, filed a motion for clarification andJor
reconsideration with this #ourt
-fter careful deli*eration, the #ourt resolved to deny
the motion for reconsideration and here*y holds that
the money value of the accumulated leave credits of
-tty Aernardo _ialcita are not ta,a*le for the following
reasonsC
1? -tty _ialcita opted to retire under the provisions of
$epu*lic -ct &&(, which is incorporated in
#ommonwealth -ct 6o 1:& Section 1%=c? of #- 1:&
statesC
.fficials and employees retired
under this -ct shall *e entitled to the
commutation of the unused vacation
leave and sic8 leave, *ased on the
highest rate received, which they may
have to their credit at the time of
retirement
Section %:=c? of the same -ct, in turn, providesC
=c? @,cept as herein otherwise
provided, the <overnment Service
!nsurance System, all benefits
"rante! un!er this *ct, and all its
forms and documents re+uired of the
mem*ers shall *e exempt from all
types of taxes, documentary stamps,
duties and contri*utions, fiscal or
municipal, direct or indirect,
esta*lished or to *e esta*lished4
=@mphasis supplied?
-pplying the two aforesaid provisions, it can
*e concluded that the amount received *y
-tty _ialcita as a result of the conversion of
these unused leaves into cash is e,empt from
income ta,
%? 2he commutation of leave credits is commonly
8nown as terminal leae =Manual on 3eave
-dministration #ourse for @ffectiveness, pu*lished *y
the #ivil Service #ommission, p 1)? 2erminal leave is
applied for *y an officer or employee who retires,
resigns or is separated from the service through no
fault of his own =supra, p 1&? Since terminal leave is
applied for *y an officer or employee who has already
severed his connection with his employer and who is
no longer wor8ing, then it follows that the terminal
leave pay, which is the cash value of his accumulated
leave credits, is no longer compensation for services
rendered !t can not *e viewed as salary
'? @,ecutive .rder 6o 1()), Section 1, providesC
-ny officer or employee of the
government who retires or voluntarily
resigns or is separated from the
service throu"h no fault of his
own and whose leave *enefits are not
covered *y special law, shag *e
entitled to the commutation of all the
accumulated vacation andJor sic8
leaves to his credit, e,clusive of
Saturdays, Sundays and holidays,
without litigation as to the num*er of
days of vacation and sic8 leaves that
he may accumulate =@mphasis
supplied?
Meanwhile, Section %:=*? )=*? of the 6ational !nternal
$evenue #ode =6!$#? statesC
Sec %: =*? K @,clusions from gross
income K 2he following items shall
not *e included in gross income and
shall *e e,empt from ta,ation under
this titleC
,,, ,,, ,,,
=)? $etirement *enefits, pensions,
gratuities, etc
,,, ,,, ,,,
=*? -ny amount received *y an official
or employee or *y his heirs from the
employer as a conse+uence of
separation of such official or employee
from the service of the employer due
to death, sic8ness or other physical
disa*ility or for any cause beyon! the
control of the said official or employee
=@mphasis supplied?
!n the case of -tty _ialcita, he rendered government
service from March 1', 19&% up to 0e*ruary 1", 199(
2he ne,t day, or on 0e*ruary 1&, 199(, he reached the
compulsory retirement age of &" years >pon his
compulsory retirement, he is entitled to the
commutation of his accumulated leave credits to its
money value 5ithin the purview of the a*ove/
mentioned provisions of the 63$#, compulsory
retirement may *e considered as a ;cause beyon! the
control of the sai! official or employee; #onse+uently,
the amount that he received *y way of commutation of
his accumulated leave credits as a result of his
compulsory retirement, or his terminal leave pay, fags
within the enumerated e,clusions from gross income
and is therefore not su*ject to ta,
4 2he terminal leave pay of -tty _ialcita may li8ewise
*e viewed as a ;retirement gratuity received *y
government officials and employees; which is also
another e,clusion from gross income as provided for in
Section %:=*?, )=f? of the 63$# - gratuity is that paid
to the *eneficiary for past services rendered purely out
of generosity of the giver or grantor =Peralta v -uditor
<eneral, 1(( Phil 1("1 M19")N? !t is a mere *ounty
given *y the government in consideration or in
recognition of meritorious services and springs from
the appreciation and graciousness of the government
=Pirovano v 1e la $ama Steamship #o, 9& Phil ''",
'") M19"4N? 5hen a government employee chooses to
go to wor8 rather than a*sent himself and consume his
leave credits, there is no dou*t that the government is
there*y *enefited *y the employee9s uninterrupted and
continuous service !t is in cogni7ance of this fact that
laws were passed entitling retiring government
employees, among others, to the commutation of their
accumulated leave credits 2hat which is given to him
after retirement is out of the <overnment9s generosity
and an appreciation for his having continued wor8ing
when he could very well have gone on vacation
Section %:& of $evised -dministrative #ode, as
amended *y $- 1(:1, provides that ;whenever any
officer, employee or la*orer of the <overnment of the
Philippines shall voluntarily resign or *e separated
from the service throu"h no fault of his own, he shall
*e entitle! to the commutation of all accumulate!
acation an!Nor sic' leae to his cre!itC ; =@mphasis
supplied? @,ecutive .rder 6o 1()), mentioned
a*ove, later amended Section %:& *y removing the
limitation on the num*er of leave days that may *e
accumulated and e,plicitly allowing retiring
government employees to commute their accumulated
leaves 2he commutation of accumulated leave credits
may thus *e considered a retirement gratuity, within
the import of Section %:=*?, )=f? of the 63$#, since it is
given only upon retirement and in consideration of the
retiree9s meritorious services
!t is clear that the law e,presses the government9s
appreciation for many years of service already
rendered and the clear intention to reward faithful and
often underpaid wor8ers after the official relationship
had *een terminated
"? Section %:4 of the $evised -dministrative #ode
grants to a government employee 1" days vacation
leave and 1" days sic8 leave for every year of service
Bence, even if the government employee a*sents
himself and e,hausts his leave credits, he is
still !eeme! to have wor8ed and to have rendered
services Bis leave *enefits are already imputed in,
and form part of, his salary which in turn is su*jected
to withholding ta, on income Be is ta,ed on the
entirety of his salaries without any deductions for any
leaves not utili7ed !t follows then that the money
values corresponding to these leave *enefits *oth the
used and unused have already *een ta,ed during the
year that they were earned 2o ta, them again when
the retiring employee receives their money value as a
form of government concern and appreciation plainly
constitutes an attempt to ta, the employee a second
time 2his is tantamount to dou*le ta,ation
2he #ommissioner of !nternal $evenue see8s, in the
alternative, to *e clarified with respect to the followingC
a the applica*ility of the -ugust %', 199( $esolution
to other government officials and employees4 and
* to those who have already retired and from whose
retirement *enefits withholding ta,es have *een
deducted, whether or not the deducted ta,es are
refunda*le even without a written re+uest for refund
from the ta,payer/retiree
2he case of -tty Aernardo _ialcita =entitled
-dministrative Matter 6o 9(/&/(1"/S#? is merely an
administrative matter involving an employee of this
#ourt who applied for retirement *enefits and who
+uestioned the deductions on the *enefits given to
him Bence, our resolution applies only to employees
of the Judiciary !f we e,tend the effects of the
aforementioned resolution to all other government
employees, in the a*sence of an actual case and
controversy, we would in principle *e rendering an
advisory opinion 5e cannot foresee at this time and
for all cases all factors *earing upon the rights of
government wor8ers of varying categories from
diverse offices 2he authorities concerned will have to
determine and rule on each case as it arises
;Similarly situated; is a most am*iguous and
undefined term whose application cannot *e fi,ed in
advance
5ith respect to the need for a written re+uest for
refund, we rule that -tty _ialcita need no longer file a
formal re+uest for refund since the -ugust %', 199(
$esolution, which principally deals with his case,
already *inds the intervenor/movant #ommissioner of
!nternal $evenue Bowever, with respect to other
retirees allegedly similarly situated and from whom
withholding ta,es on terminal leave pay have *een
deducted, we rule that these retirees should file a
written re+uest for refund within two years from the
date of promulgation of this resolution 0iscal
considerations do not allow that this matter *e left
hanging for an indefinite period while retirees ma8e up
their minds as to whether or hot they are entitled to
refunds
2he #hief of the 0inance 1ivision of this #ourt li8ewise
see8s clarification with respect to the applica*ility of
our -ugust %', 199( $esolution to the following
employees of this #ourtC
a? those who avail of optional retirement4 and
*? those who resign or are separated from the service
through no fault of their own
2he two groups mentioned a*ove are also entitled to
terminal leave pay in accordance with Section %:& of
the $evised -dministrative #ode, as amended *y $-
1(:1 !n the light of our ruling that to ta, terminal leave
pay would result in the ta,ation of *enefits given after
and as direct conse+uences of retirement and would,
in effect, constitute dou*le ta,ation, we rule that this
resolution also applies to those who avail of optional
retirement and to those who resign or are separated
from the service through no fault of their own
2he #ourt understands the urgent need of
<overnment to tap all possi*le sources of revenue
*ecause of its heavy e,penditures and the failure of
actual income to cover all dis*ursements Bowever,
the solution is not the levying of ta,es on *enefits and
gratuities which *y law are not supposed to *e ta,ed
2he remedy is to either amend the retirement law
su*ject, of course, to constitutional constraints or to
institute vastly improved and effective ta, collection
efforts
*ll salarie! wor'ers an! wa"e earners, whether in the
pu*lic or the private sector, are ta,ed to the last
centavo of their incomes throughout the entirety of
their wor8ing lives 2he same cannot *e said of factory
wor8ers, leaders of industry, merchants, self/employed
professionals, movie stars, fishing magnates, *us and
jeepney operators, vice lords, theatre owners, and real
estate lessors, to name only a few - middle or lower
echelon employee who retires after thirty or forty years
of service helplessly sees his retirement pensions or
*enefits unavoida*ly and rapidly decrease in value in
only a few years even as his cost of living, age, health,
and other personal circumstances call for increased
e,penditures 5e fail to see the logic in viewing with
eager eyes for purposes of ta, revenues the fruits of a
wor8ing lifetime of la*or simply *ecause fi,ed salaries
and retirement *enefits are so visi*le and so
convenient to levy upon $etirees who are most
deserving of compassion and who can least carry the
multifarious *urdens of <overnment should not *e so
readily encum*ered on a strained interpretation of the
law
5B@$@0.$@, the #ourt $esolved to =1? 1@6G with
0!6-3!2G the motion for reconsideration of the
intervenor/movant and the Solicitor <eneral4 and =%?
1@#3-$@ =a? that the -ugust %', 199( $esolution on
-M 6o 9(/&/(1"/S# specifically applies only to
employees and officers of the Judiciary who retire,
resign or are separated through no fault of their own4
and =*? that retirees and former employees of the
Judiciary4 e,cept -tty _ialcita, from whose terminal
leave pay withholding ta,es have *een deducted, must
file a written claim for refund with the #ommissioner of
!nternal $evenue within two years from the date of
promulgation of this resolution
S. .$1@$@1
CIR vs. Mitsu-ishi Metal Corporation
Facts: .n -pril 1), 19)(, -tlas #onsolidated Mining
and 1evelopment #orporation entered into a 3oan
and Sales #ontractwith Mitsu*ishi Metal #orporation,
a Japanese corporation licensed to engage in
*usiness in the Philippines, for purposes of the
projected e,pansion of the productive capacity of the
former9s mines in 2oledo, #e*u >nder said
contract, Mitsu*ishi agreed to e,tend a loan to -tlas
9in the amount of ]%(,(((,(((((, >nited States
currency -tlas, in turn undertoo8 to sell
to Mitsu*ishi all the copper concentrates produced for
a period of fifteen =1"? years Mitsu*ishithereafter
applied for a loan with the @,port/!mport Aan8 of
Japan =@,im*an8? for purposes of its o*ligation under
said contract !ts loan application was approved on
May %&, 19)( in the e+uivalent sum of ]%(,(((,(((((
in >nited States currency at the then prevailing
e,change rate 2he records in the Aureau of !nternal
$evenue show that the approval of the loan *y
@,im*an8 to Mitsu*ishi was su*ject to the condition
that Mitsu*ishi would use the amount as a loan to
-tlas and as a consideration for importing copper
concentrates from -tlas, and that Mitsu*ishi had to pay
*ac8 the total amount of loan *y Septem*er '(, 19:1
Pursuant to the contract *etween -tlas andMitsu*ishi,
interest payments were made *y the former to the
latter totaling P1',14',9&&)9 for the years 19)4 and
19)" 2he corresponding 1"P ta, thereon in the
amount of P1,9)1,"9"(1 was withheld pursuant to
Section %4 =*? =1? and Section "' =*? =%? of the
6ational !nternal $evenue #ode, as amended *y
Presidential 1ecree 6o 1'1, and duly remitted to the
<overnment
Issue: 5hether or not the interest income from the
loans e,tended to -tlas *y Mitsu*ishi is e,cludi*le
from gross income ta,ationpursuant to Section %9 of
the ta, code and, therefore, e,empt from withholding
ta,
HeldC 2he court ruled in the negative @,im*an8 had
nothing to do with the sale of the copper concentrates
since all that Mitsu*ishistated in its loan
application with the former was that the amount*eing
procured would *e used as a loan to and in
consideration for importing copper concentrates from
-tlas Such an innocuous statement of purpose could
not have *een intended for, nor could it legally
constitute, a contract of agency 2he conclusion is
indu*ita*le4 M!2S>A!SB!, and 6.2 @L!MA-6E, is the
sole creditor of -23-S, the former *eing the owner of
the ]%( million upon completion of its loan contract
with @L!MA-6E of Japan !t is settled a rule in this
jurisdiction that laws granting e,emption from ta, are
construed strictissimi juris against the ta,payer and
li*erally in favor of the ta,ing power 2a,ation is the
rule and e,emption is the e,ception 2he *urden of
proof rests upon the party claiming e,emption to prove
that it is in fact covered *y the e,emption so claimed,
which the petitioners have failed to discharge
Significantly, private respondents are not among the
entities which, under Section %9 of the ta, code, are
entitled to e,emption and which should indispensa*ly
*e the party in interest in this case
%1I&L5. I&510TRI30 v CIR
FCT0:
-guinaldo !ndustries #orporation =-!#? is a domestic
corporation engaged in the manufacture of fishing
nets, a ta,/e,empt industry and the manufacture of
furniture 0or accounting purposes, each division is
provided with separate *oo8s of accounts Previously,
-!# ac+uired a parcel of land in Muntinlupa, $i7al, as
site of the fishing net factory 3ater, it sold the
Muntinlupa property -!# derived profit from this sale
which was entered in the *oo8s of the 0ish 6ets
1ivision as miscellaneous income to distinguish it from
its ta,/e,empt income
0or the year 19"), -!# filed two separate income ta,
returns for each division -fter investigation, the
e,aminers of the A!$ found that the 0ish 6ets 1ivision
deducted from its gross income for that year the
amount of P&1,1:)4: as additional remuneration paid
to the officers of -!# 2his amount was ta8en from the
net profit of an isolated transaction =sale of Muntinlupa
land? not in the course of or carrying on of -!#9s trade
or *usiness, and was reported as part of the selling
e,penses of the Muntinlupa land >pon
recommendation of the e,aminer that the said sum of
P&1,1:)4: *e disallowed as deduction from gross
income, petitioner asserted in its letter of 0e*ruary 19,
19":, that said amount should *e allowed as
deduction *ecause it was paid to its officers as
allowance or *onus pursuant to its *y/laws
I0013MH3L5C 5J6 the *onus given to the officers of
the petitioner upon the sale of its Muntinlupa land is an
ordinary and necessary *usiness e,pense deducti*le
for income ta, purposes / 6.
RTI.C Sec '( =a? =1? of the 2a, #ode provides that in
computing net income, there shall *e allowed as
deductions \@,penses, including all the ordinary and
necessary e,penses paid or incurred during the
ta,a*le year in carrying on any trade or *usiness,
including a reasonable allowance for personal services
actually ren!ere!
2he *onus given to the officers of the petitioner as
their share of the profit reali7ed from the sale of
petitioner9s Muntinglupa land cannot *e deemed a
deducti*le e,pense for ta, purposes, even if the
aforesaid sale could *e considered as a transaction for
carrying on the trade or *usiness of the petitioner and
the grant of the *onus to the corporate officers
pursuant to petitioner9s *y/laws could, as an intra/
corporate matter, *e sustained 2he records show that
the sale was effected through a *ro8er who was paid
*y petitioner a commission of P"1,)%')% for his
services .n the other hand, there is a*solutely no
evidence of any service actually rendered *y
petitioner9s officers which could *e the *asis of a grant
to them of a *onus out of the profit derived from the
sale 2his *eing so, the payment of a *onus to them
out of the gain reali7ed from the sale cannot *e
considered as a selling e,pense4 nor can it *e deemed
reasona*le and necessary so as to ma8e it deducti*le
for ta, purposes 2he e,traordinary and unusual
amounts paid *y petitioner to these directors in the
guise and form of compensation for their supposed
services as such, without any relation to the measure
of their actual serices- cannot be re"ar!e! as
or!inary an! necessary expenses within the meaning
of the law 2his is in line with the doctrine in the law of
ta,ation that the ta,payer must show that its claimed
deductions clearly come within the language of the law
since allowances, li8e e,emptions, are matters of
legislative grace
TL0 C.&0.LI5T35 MI&I&% v CIR
FCT0:
-tlas is a corporation engaged in the mining industry
registered .n -ugust 19&%, #!$ assessed against
-tlas for deficiency income ta,es for the years 19")
and 19": 0or the year 19"), it was the opinion of the
#!$ that -tlas is not entitled to e,emption from the
income ta, under $- 9(9 *ecause same covers only
gold mines 0or the year 19":, the deficiency income
ta, covers the disallowance of items claimed *y -tlas
as deducti*le from gross income -tlas protested for
reconsideration and cancellation, thus the #!$
conducted a reinvestigation of the case
.n .cto*er 19&%, the Secretary of 0inance ruled that
the e,emption provided in $- 9(9 em*races all new
mines and old mines whether gold or other minerals
-ccordingly, the #!$ recomputed -tlas deficiency
income ta, lia*ilities in the light of said ruling .n June
19&4, the #!$ issued a revised assessment entirely
eliminating the assessment for the year 19") 2he
assessment for 19": was reduced from which -tlas
appealed to the #2-, assailing the disallowance of the
following items claimed as deducti*le from its gross
income for 19":C 2ransfer agent9s fee, Stoc8holders
relation service fee, >S stoc8 listing e,penses, Suit
e,penses, and Provision for contingencies 2he #2-
allowed said items as deduction e,cept those
denominated *y -tlas as stoc8holders relation service
fee and suit e,penses
Aoth parties appealed the #2- decision to the S# *y
way of two =%? separate petitions for review -tlas
appealed only the disallowance of the deduction from
gross income of the so/called stoc8holders relation
service fee
I0013MH3L5C 5J6 the \annual pu*lic relations
e,penseF =a8a stoc8holders relation service fee? paid
to a pu*lic relations consultant is a deducti*le e,pense
from gross income
RTI.C Section '( =a? =1? of the 2a, #ode allows a
deduction of ;all the ordinary and necessary e,penses
paid or incurred during the ta,a*le year in carrying on
any trade or *usiness; -n item of e,penditure, in
order to *e deducti*le under this section of the statute,
must fall s+uarely within its language 2o *e deducti*le
as a *usiness e,pense, three conditions are imposed,
namelyC =1? the e,pense must *e ordinary and
necessary, =%? it must *e paid or incurred within the
ta,a*le year, and ='? it must *e paid or incurred in
carrying in a trade or *usiness !n addition, not only
must the ta,payer meet the *usiness test, he must
su*stantially prove *y evidence or records the
deductions claimed under the law, otherwise, the same
will *e disallowed 2he mere allegation of the ta,payer
that an item of e,pense is ordinary and necessary
does not justify its deduction
2he S# has never attempted to define with precision
the terms ;ordinary and necessary; -s a guiding
principle, ordinarily, an e,pense will *e considered
;necessary; where the e,penditure is appropriate and
helpful in the development of the ta,payer9s *usiness
!t is ;ordinary; when it connotes a payment which is
normal in relation to the *usiness of the ta,payer and
the surrounding circumstances 2he term ;ordinary;
does not re+uire that the payments *e ha*itual or
normal in the sense that the same ta,payer will have
to ma8e them often4 the payment may *e uni+ue or
non/recurring to the particular ta,payer affected
2here is thus no hard and fast rule on the matter 2he
right to a deduction depends in each case on the
particular facts and the relation of the payment to the
type of *usiness in which the ta,payer is engaged
2he intention of the ta,payer often may *e the
controlling fact in ma8ing the determination -ssuming
that the e,penditure is ordinary and necessary in the
operation of the ta,payer9s *usiness, the answer to the
+uestion as to whether the e,penditure is an allowa*le
deduction as a *usiness e,pense must *e determined
from the nature of the e,penditure itself, which in turn
depends on the e,tent and permanency of the wor8
accomplished *y the e,penditure
!t appears that on 1ecem*er 19"), -tlas increased its
capital stoc8 !t claimed that its shares of stoc8 were
sold in the >nited States *ecause of the services
rendered *y the pu*lic relations firm 2he information
a*out -tlas given out and played up in the mass
communication media resulted in full su*scription of
the additional shares issued *y -tlas4 conse+uently,
the \stoc8holders relation service feeF, the
compensation for services carrying on the selling
campaign, was in effect spent for the ac+uisition of
additional capital, ergo, a capital e,penditure, and not
an ordinary e,pense !t is not deducti*le from -tlas
gross income in 19": *ecause e,penses relating to
recapitali7ation and reorgani7ation of the corporation,
the cost of o*taining stoc8 su*scription, promotion
e,penses, and commission or fees paid for the sale of
stoc8 reorgani7ation are capital e,penditures 2hat the
e,pense in +uestion was incurred to create a favora*le
image of the corporation in order to gain or maintain
the pu*lic9s and its stoc8holders9 patronage, does not
ma8e it deducti*le as *usiness e,pense -s held in a
>S case- efforts to esta*lish reputation are a8in to
ac+uisition of capital assets and, therefore, e,penses
related thereto are not *usiness e,pense *ut capital
e,penditures
6oteC 2he *urden of proof that the e,penses incurred
are ordinary and necessary is on the ta,payer and
does not rest upon the <overnment 2o avail of the
claimed deduction, it is incum*ent upon the ta,payer
to adduce su*stantial evidence to esta*lish a
reasona*ly pro,imate relation petition *etween the
e,penses to the ordinary conduct of the *usiness of
the ta,payer - logical lin8 or ne,us *etween the
e,pense and the ta,payer9s *usiness must *e
esta*lished *y the ta,payer
R.F0 v CT
FCT0:
1on Pedro $o,as and 1ona #armen -yala, Spanish
su*jects, transmitted to their grandchildren *y
hereditary succession agricultural lands in Aatangas, a
residential house and lot in Manila, and shares of
stoc8s in different corporations 2o manage the
properties, said children, namely, -ntonio, @duardo
and Jose $o,as formed a partnership called $o,as y
#ompania
.n June 19":, the #!$ assessed deficiency income
ta,es against the $o,as Arothers for the years 19"'
and 19"" Part of the deficiency income ta,es resulted
from the disallowance of deductions from gross
income of various *usiness e,penses and
contri*utions claimed *y $o,as /see expense items
below0
2he $o,as *rothers protested the assessment *ut
inasmuch as said protest was denied, they instituted
an appeal in the #2-, which sustained the assessment
e,cept the demand for the payment of the fi,ed ta, on
dealer of securities and the disallowance of the
deductions for contri*utions to the Philippine -ir 0orce
#hapel and Bijas de Jesus9 $etiro de Manresa 6ot
satisfied, $o,as *rothers appealed to the S# 2he #!$
did not appeal
I00130MH3L5: 5J6 the deductions for *usiness
e,penses and contri*utions deducti*le
RTI.: 5ith regard to the disallowed deductions
=e,penses for tic8ets to a *an+uet given in honor of
Sergio .smena and *eer given as gifts to various
persons, la*elled as representation e,penses?,
representation e,penses are deducti*le from gross
income as e,penditures incurred in carrying on a trade
or *usiness under Section '(=a? of the 2a, #ode
provided the ta,payer proves that they are reasona*le
in amount, ordinary and necessary, and incurred in
connection with his *usiness !n the case at *ar, the
evidence does not show such lin8 *etween the
e,penses and the *usiness of $o,as
2he petitioners also claim deductions for contri*utions
to the Pasay #ity Police, Pasay #ity 0iremen, and
Aaguio #ity Police #hristmas funds, Manila Police
2rust 0und, Philippines Berald9s fund for Manila9s
neediest families and .ur 3ady of 0atima chapel at
0ar @astern >niversity 2he contri*utions to the
#hristmas funds of the Pasay #ity Police, Pasay #ity
0iremen and Aaguio #ity Police are not deducti*le for
the reason that the #hristmas funds were not spent for
public purposes *ut as #hristmas gifts to the families
of the mem*ers of said entities >nder Section '9=h?,
a contribution to a "oernment entity is !e!uctible
when use! exclusiely for public purposes 0or this
reason, the disallowance must *e sustained .n the
other hand, the contri*ution to the Manila Police trust
fund is an allowa*le deduction for said trust fund
*elongs to the Manila Police, a government entity,
intended to *e used e,clusively for its pu*lic functions
2he contri*utions to the Philippines Berald9s fund for
Manila9s neediest families were disallowed on the
ground that the Philippines Berald is not a corporation
or an association contemplated in Section '( =h? of the
2a, #ode !t should *e noted however that the
contri*utions were not made to the Philippines Berald
*ut to a group of civic spirited citi7ens organi7ed *y the
Philippines Berald solely for charita*le purposes
2here is no +uestion that the mem*ers of this group of
citi7ens do not receive profits, for all the funds they
raised were for Manila9s neediest families Such a
group of citi7ens may *e classified as an association
organi7ed e,clusively for charita*le purposes
mentioned in Section '(=h? of the 2a, #ode
2he contri*ution to .ur 3ady of 0atima chapel at the
0ar @astern >niversity should also *e disallowed on
the ground that the said university gives dividends to
its stoc8holders 3ocated within the premises of the
university, the chapel in +uestion has not *een shown
to *elong to the #atholic #hurch or any religious
organi7ation !t *elongs to the 0ar @astern >niversity,
contri*utions to which are not deducti*le under Section
'(=h? of the 2a, #ode for the reason that the net
income of said university injures to the *enefit of its
stoc8holders
6M.R v CIR
FCT0:
Mariano _amora, owner of the Aay View Botel and
0armacia _amora, filed his income ta, returns 2he
#!$ found that he failed to file his return of the capital
gains derived from the sale of certain real properties
and claimed deductions which were not allowa*le 2he
collector re+uired him to pay deficiency income ta, .n
appeal *y _amora, the #2- reduced the amount of
deficiency income ta,
_amora appealed, alleging that the #2- erred in
dissallowing P1(,4):"(, as promotion e,penses
incurred *y his wife for the promotion of the Aay View
Botel and 0armacia _amora =which is V of
P%(,9")((, supposed *usiness e,penses?
_amora alleged that the #2- erred in disallowing
P1(,4):"( as promotion e,penses incurred *y his
wife for the promotion of the Aay View Botel and
0armacia _amora Be contends that the whole amount
of P%(,9")(( as promotion e,penses, should *e
allowed and not merely one/half of it, on the ground
that, while not all the itemi7ed e,penses are supported
*y receipts, the a*sence of some supporting receipts
has *een sufficiently and satisfactorily esta*lished
I0013: wJn #2- erred in allowing only one half of the
promotion e,penses 6.
H3L5:
Section '(, of the 2a, #ode, provides that in
computing net income, there shall *e allowed as
deductions all the ordinary and necessary e,penses
paid or incurred during the ta,a*le year, in carrying on
any trade or *usiness Since promotion e,penses
constitute one of the deductions in conducting a
*usiness, same must satisfy these re+uirements
#laim for the deduction of promotion e,penses or
entertainment e,penses must also *e su*stantiated or
supported *y record showing in detail the amount and
nature of the e,penses incurred
#onsidering, as heretofore stated, that the application
of Mrs _amora for dollar allocation shows that she
went a*road on a com*ined medical and *usiness trip,
not all of her e,penses came under the category of
ordinary and necessary e,penses4 part thereof
constituted her personal e,penses 2here having *een
no means *y which to ascertain which e,pense was
incurred *y her in connection with the *usiness of
Mariano _amora and which was incurred for her
personal *enefit, the #ollector and the #2- in their
decisions, considered "(P of the said amount of
P%(,9")(( as *usiness e,penses and the other "(P,
as her personal e,penses 5e hold that said allocation
is very fair to Mariano _amora, there having *een no
receipt whatsoever, su*mitted to e,plain the alleged
*usiness e,penses, or proof of the connection which
said e,penses had to the *usiness or the
reasona*leness of the said amount of P%(,9")((
!n the case of Visayan #e*u 2erminal #o, !nc v #!$,
it was declared that representation e9penses fall
under the category of -usiness e9penses which
are allowa-le deductions from gross income" if
they meet the conditions prescri-ed -y law"
particularly section >( CaD <'=" of the Ta9 CodeT that
to -e deducti-le" said -usiness e9penses must -e
ordinary and necessary e9penses paid or incurred
in carrying on any trade or -usinessT that those
e9penses must also meet the further test of
reasona-leness in amount. They should also -e
covered -y supporting papersT in the a-sence
thereof the amount properly deducti-le as
representation e9penses should -e determined
from availa-le data.
,xpenses
C.M. H.0UI&0IC." I&C. v CIR
Facts:
Petitioner, a domestic corporation engaged in the real
estate *usiness as *ro8ers, managing agents and
administrators, filed its income ta, return for its fiscal
year ending Septem*er '(, 19") showing a net
income of P9%,"4(%" and a ta, lia*ility due thereon of
P1:,"(:((, which it paid in due course >pon
verification of its return, #!$, disallowed four items of
deduction in petitioner9s ta, returns and assessed
against it an income ta, deficiency in the amount of
P%:,("4(( plus interests 2he #ourt of 2a, -ppeals
upon reviewing the assessment at the ta,payer9s
petition, upheld respondent9s disallowance of the
principal item of petitioner9s having paid to Mr # M
Bos8ins, its founder and controlling stoc8holder the
amount of P99,9))91 representing "(P of
supervision fees earned *y it and set aside
respondent9s disallowance of three other minor items
Petitioner +uestions in this appeal the 2a, #ourt9s
findings that the disallowed payment to Bos8ins was
an inordinately large one, which *ore a close
relationship to the recipient9s dominant stoc8holdings
and therefore amounted in law to a distri*ution of its
earnings and profits
Issue: 5hether the "(P supervision fee paid to
Bos8in may *e deducti*le for income ta, purposes
Ruling: &..
Ratio:
Bos8in owns 99&P of the #M Bos8ins I #o Be was
also the President and #hairman of the Aoard 2hat as
chairman of the Aoard of 1irectors, he received a
salary of P',)"((( a month, plus a salary *onus of
a*out P4(,((((( a year and an amounting to an
annual compensation of P4",((((( and an annual
salary *onus of P4(,(((((, plus free use of the
company car and receipt of other similar allowances
and *enefits, the 2a, #ourt correctly ruled that the
payment *y petitioner to Bos8ins of the additional sum
of P99,9))91 as his e+ual or "(P share of the :P
supervision fees received *y petitioner as managing
agents of the real estate, su*division projects of
Paradise 0arms, !nc and $ealty !nvestments, !nc was
inordinately large and could not -e accorded the
treatment of ordinary and necessary e9penses
allowed as deducti-le items within the purview of
the Ta9 Code
2he fact that such payment was authori7ed *y a
standing resolution of petitioner9s *oard of directors,
since ;Bos8ins had personally conceived and planned
the project; cannot change the picture 2here could *e
no +uestion that as #hairman of the *oard and
practically an a*solutely controlling stoc8holder of
petitioner, Bos8ins wielded tremendous power and
influence in the formulation and ma8ing of the
company9s policies and decisions @ven just as *oard
chairman, going *y petitioner9s own enumeration of the
powers of the office, Bos8ins, could e,ercise great
power and influence within the corporation, such as
directing the policy of the corporation, delegating
powers to the president and advising the corporation in
determining e,ecutive salaries, *onus plans and
pensions, dividend policies, etc
!t is a general rule that 9Aonuses to employees made
in good faith and as additional compensation for the
services actually rendered *y the employees are
deducti*le, provided such payments, when added to
the stipulated salaries, do not e,ceed a reasona*le
compensation for the services rendered 2he
conditions precedent to the deduction of *onuses to
employees areC =1? the payment of the *onuses is in
fact compensation4 =%? it must *e for personal services
actually rendered4 and ='? the *onuses, when added to
the salaries, are 9reasona*le when measured *y the
amount and +uality of the services performed with
relation to the *usiness of the particular ta,payer
2here is no fi,ed test for determining the
reasona*leness of a given *onus as compensation
2his depends upon many factors, one of them *eing
the amount and +uality of the services performed with
relation to the *usiness9 .ther tests suggested areC
payment must *e 9made in good faith94 9the character of
the ta,payer9s *usiness, the volume and amount of its
net earnings, its locality, the type and e,tent of the
services rendered, the salary policy of the corporation94
9the si7e of the particular *usiness94 9the employees9
+ualifications and contri*utions to the *usiness
venture94 and 9general economic conditions Bowever,
9in determining whether the particular salary or
compensation payment is reasona*le, the situation
must *e considered as whole .rdinarily, no single
factor is decisive it is important to 8eep in mind
that it seldom happens that the application of one test
can give satisfactory answer, and that ordinarily it is
the interplay of several factors, properly weighted for
the particular case, which must furnish the final
answer;
Petitioner9s case fails to pass the test .n the right of
the employer as against respondent #ommissioner to
fi, the compensation of its officers and employees, we
there held further that while the employer9s right may
*e conceded, the +uestion of the allowance or
disallowance thereof as deducti*le e,penses for
income ta, purposes is su*ject to determination *y
#!$ -s far as petitioner9s contention that as employer
it has the right to fi, the compensation of its officers
and employees and that it was in the e,ercise of such
right that it deemed proper to pay the *onuses in
+uestion, all that 5e need say is thisC that right may *e
conceded, *ut for income ta, purposes the employer
cannot legally claim such *onuses as deducti*le
e,penses unless they are shown to *e reasona*le 2o
hold otherwise would open the gate of rampant ta,
evasion
3astly, 5e must not lose sight of the fact that the
+uestion of allowing or disallowing as deducti*le
e,penses the amounts paid to corporate officers *y
way of *onus is determined *y respondent e,clusively
for income ta, purposes #oncededly, he has no
authority to fi, the amounts to *e paid to corporate
officers *y way of *asic salary, *onus or additional
remuneration K a matter that lies more or less
e,clusively within the sound discretion of the
corporation itself Aut this right of the corporation is, of
course, not a*solute !t cannot e,ercise it for the
purpose of evading payment of ta,es legitimately due
to the State;
U13&6L3 I 0TR3IF" I&C. v CIR
FCT0:
Petitioner is a domestic corporation engaged in the
importation of te,tiles, hardware, sundries, chemicals,
pharmaceuticals, lum*ers, groceries, wines and li+uor4
in insurance and lum*er4 and in some e,ports 5hen
Petitioner filed its !ncome 2a, $eturn, it deducted from
its gross income the following itemsC
1. salaries, directors9 fees and *onuses of its
non/resident president and vice/president4
2. *onuses of its resident officers and
employees4 and
3. interests on earned *ut unpaid salaries and
*onuses of its officers and employees
2he #!$ disallowed the deductions and assessed
Petitioner for deficiency income ta,es Petitioner
re+uested for re/e,amination of the assessment #!$
modified the same *y allowing as deducti*le all items
comprising directors9 fees and salaries of the non/
resident president and vice/president, *ut disallowing
the *onuses insofar as they e,ceed the salaries of the
recipients, as well as the interests on earned *ut
unpaid salaries and *onuses
2he #2- modified the assessment and ruled that while
the *onuses given to the non/resident officers are
reasona*le, *onuses given to the resident officers and
employees are +uite e,cessive
I00130MR1LI&%:
5J6 the #2- erred in ruling that the measure
of the reasona*leness of the *onuses paid to
its non/resident president and vice/president
should *e applied to the *onuses given to
resident officers and employees in determining
their deducti*ilityH 6.
!t is a general rule that ;Aonuses to employees made
in good faith and as additional compensation for the
services actually rendered *y the employees are
deducti*le, provided such payments, when added to
the stipulated salaries, do not e,ceed a reasona*le
compensation for the services renderedS 2he
condition precedents to the deduction of *onuses to
employees areC
1 the payment of the *onuses is in fact
compensation4
% it must *e for personal services actually
rendered4 and
' the *onuses, when added to the salaries, are
reasona*le when measured *y the amount
and +uality of the services performed with
relation to the *usiness of the particular
ta,payer
2here is no fi,ed test for determining
the reasonableness of a given *onus as
compensation Bowever, in determining whether the
particular salary or compensation payment is
reasona*le, the situation must *e considered as a
whole
Petitioner contended that it is error to apply the same
measure of reasona*leness to *oth resident and non/
resident officers *ecause the nature, e,tent and +uality
of the services performed *y each with relation to the
*usiness of the corporation widely differ Said non/
resident officers had rendered the same amount of
efficient personal service and contri*ution to deserve
e+ual treatment in compensation and other
emoluments 2here is no special reason for granting
greater *onuses to such lower ran8ing officers than
those given to the non/resident president and vice
president
5J6 the #2- erred in allowing the deduction
of the *onuses in e,cess of the yearly salaries
of the employeesH 6.
2he deducti*le amount of said *onuses cannot *e
only equal to their respective yearly salaries
considering the post/war policy of the corporation in
giving salaries at low levels *ecause of the unsettled
conditions resulting from war and the imposition of
government controls on imports and e,ports and on
the use of foreign e,change which resulted in the
diminution of the amount of *usiness and the
conse+uent loss of profits on the part of the
corporation 2he payment of *onuses in amounts a
little more than the yearly salaries received
considering the prevailing circumstances is in our
opinion reasona*le
5J6 the #2- erred in disallowing the
deduction of interests on earned *ut unpaid
salaries and *onusesH 6.
>nder the law, in order that interest may *e deducti*le,
it must *e paid ;on inde*tedness; !t is therefore
imperative to show that there is an existin"
in!ebte!ness which may *e su*jected to the payment
of interest Bere the items involved are unclaimed
salaries and *onus participation which cannot
constitute inde*tedness within the meaning of the law
*ecause while they constitute an o*ligation on the part
of the corporation, it is not the latter9s fault if they
remained unclaimed 5hatever an employee may fail
to collect cannot *e considered an inde*tedness for it
is the concern of the employee to collect it in due time
2he willingness of the corporation to pay interest
thereon cannot *e considered a justification to warrant
deduction
Interest
223R I&510TRI30 v C C 5ec. '" '**@D
0actsC
.n various years =19&9, 19)% and 19))?,
Picop o*tained loans from foreign creditors in order to
finance the purchase of machinery and e+uipment
needed for its operations !n its 19)) !ncome 2a,
$eturn, Picop claimed interest payments made in
19)), amounting to P4%,:4(,1'1((, on these loans as
a deduction from its 19)) gross income
2he #!$ disallowed this deduction upon the
ground that, *ecause the loans had *een incurred for
the purchase of machinery and e+uipment, the interest
payments on those loans should have *een capitali7ed
instead and claimed as a depreciation deduction
ta8ing into account the adjusted *asis of the
machinery and e+uipment =original ac+uisition cost
plus interest charges? over the useful life of such
assets
Aoth the #2- and the #ourt of -ppeals
sustained the position of Picop and held that the
interest deduction claimed *y Picop was proper and
allowa*le !n the instant Petition, the #!$ insists on its
original position
!SS>@C
5hether Picop is entitled to deductions
against income of interest payments on loans for the
purchase of machinery and e+uipment
B@31C
G@S !nterest payments on loans incurred *y a
ta,payer =whether A.!/registered or not? are allowed
*y the 6!$# as deductions against the ta,payer9s
gross income 2he *asis is 19)) 2a, #ode Sec '(
=*?
1
2hus, the general rule is that interest e,penses
are deducti*le against gross income and this certainly
includes interest paid under loans incurred in
connection with the carrying on of the *usiness of the
ta,payer !n the instant case, the #!$ does not dispute
that the interest payments were made *y Picop on
loans incurre! in connection with the carryin" on of the
re"istere! operations of Picop, ie, the financing of the
purchase of machinery and e+uipment actually used in
the registered operations of Picop 6either does the
#!$ deny that such interest payments were le"ally !ue
an! !eman!able under the terms of such loans, and in
fact paid *y Picop during the ta, year 19))
1 Sec. 30. Deduction from Gross Income. —
The following may be deducted from gross
income:
xxx xxx xxx
(b Interest:
(1 In general. — The amount
of interest paid within the taxable year
on indebtedness! exce"t on indebtedness
incurred or continued to "urchase or carry
obligations the interest u"on which is
exem"t from taxation as income under this
Title: . . . (#m"hasis su""lied
2he contention of #!$ does not spring of the
19)) 2a, #ode *ut from $evenue $egulations % Sec
)9
%
Bowever, the #ourt said that the term RinterestS
here should *e construed as the so/called
Ltheoretical interest"L that is to say, interest
;calculate!; or computed Cand not incrred or paidD
for the purpose of determining the Lopportunity
costL of investing funds in a given -usiness. 0uch
LtheoreticalL or imputed interest does not arise
from a legally demanda-le interest:-earing
o-ligation incurred -y the ta9payer who however
wishes to find out, e", whether he would have *een
*etter off *y lending out his funds and earning interest
rather than investing such funds in his *usiness .ne
thing that Section )9 +uoted a*ove ma8es clear is that
interest which does constitute a charge arising under
an interest/*earing o*ligation is an allowa*le
deduction from gross income
.nly if sir asJs: CFor further discussion of CIRNs
contentionD
!t is claimed *y the #!$ that Section )9 of
$evenue $egulations 6o % was ;patterned after;
paragraph 1%&&/1 =*?, entitled ;2a,es and #arrying
#harges #hargea*le to #apital -ccount and 2reated
as #apital !tems; of the >S !ncome 2a, $egulations,
which paragraph reads as followsC
=A? Taxes an! Carryin" Char"es K
2he items thus chargea*le to capital
accounts are K
=11? !n the case of real property,
whether improved or unimproved and
whether productive or nonproductive
=a? !nterest on a loan =*ut not
theoretical interest of a ta,payer using
his own funds?
2he truncated e,cerpt of the >S !ncome 2a,
$egulations +uoted *y the #!$ needs to *e related to
the relevant provisions of the >S !nternal $evenue
#ode, which provisions deal with the general topic of
adjusted *asis for determining allowa*le gain or loss
on sales or e,changes of property and allowa*le
depreciation and depletion of capital assets of the
ta,payerC
Present )ule 2he !nternal $evenue
#ode, and the $egulations
promulgated thereunder provide that
;%o !e!uction shall be allowe! for
amounts pai! or accrued for such
ta,es and carryin" char"es as, under
regulations prescri*ed *y the
Secretary or his delegate, are
chargea*le to capital account with
respect to property, if the taxpayer
elects, in accordance with such
regulations, to treat such ta,es
orchar"es as so char"eable;
-t the same time, under the
adjustment of *asis provisions which
have just *een discussed, it is
provided that adjustment shall *e
made for all ;e,penditures, receipts,
2 Sec )9 Interest on Capital V Interest calculated for cost:
Jeeping or other purposes on account of capital or surplus
invested in the *usiness, which !oes not represent a char"e arisin"
un!er an interest>bearin" obli"ation" is not allowa-le deduction
from gross income =@mphases supplied?
losses, or other items; properly
chargea*le to a capital account, thus
including ta,es and carrying charges4
however, an exception exists, in which
eent such a!2ustment to the capital
account is not ma!e- with respect to
taxes an! carryin" char"es which the
taxpayer has not electe! to capitali(e
but for which a !e!uction instea! has
been ta'en
))
=@mphasis supplied?
2he ;carrying charges; which may *e
capitali7ed under the a*ove +uoted provisions
of the >S !nternal $evenue #ode include, as
the #!$ has pointed out, interest on a loan
;=*ut not theoretical interest of a ta,payer
using his own funds?; 5hat the #!$ failed to
point out is that such ;carryin" char"es; may,
at the election of the ta,payer, either be /a0
capitali(e! in which case the cost *asis of the
capital assets, eg, machinery and e+uipment,
will *e adjusted *y adding the amount of such
interest payments or alternatively, *e /b0
!e!ucte! from "ross income of the ta,payer
Should the ta,payer elect to deduct the
interest payments against its gross income,
the ta,payer cannot at the same
time capitali7e the interest payments !n other
words, the ta,payer is not entitled to both the
!e!uction from "ross income an! the a!2uste!
/increase!0 basis for determining gain or loss
and the allowa*le depreciation charge 2he
>S !nternal $evenue #ode !oes not prohibit
the !e!uction of interest on a loan o*tained for
purchasing machinery and e+uipment against
gross income, unless the ta,payer has also or
preiously capitali(e! the same interest
payments and there*y adjusted the cost *asis
of such assets
CIR v $5 53 2RI3T.
FCT0:
.n 1ecem*er 4, 194", the respondent conveyed *y
way of gifts to her four children, namely, -ntonio,
Aenito, #armen and Mauro, all surnamed Prieto, real
property with a total assessed value of P:9%,49)"(
-fter the filing of the gift ta, returns on or a*out
0e*ruary 1, 19"4, the petitioner #ommissioner of
!nternal $evenue appraised the real property donated
for gift ta, purposes at P1,%'1,%&:((, and assessed
the total sum of P11),)(&"( as donor9s gift ta,,
interest and compromises due thereon .f the total
sum of P11),)(&"( paid *y respondent on -pril %9,
19"4, the sum of P"",9):&" represents the total
interest on account of deli+uency 2his sum of
P"",9):&" was claimed as deduction, among others,
*y respondent in her 19"4 income ta, return
Petitioner, however, disallowed the claim and as a
conse+uence of such disallowance assessed
respondent for 19"4 the total sum of P%1,41(': as
deficiency income ta, due on the aforesaid
P"",9):&", including interest up to March '1, 19"),
surcharge and compromise for the late payment
>nder the law, for interest to *e deducti*le, it must *e
shown that there *e an inde*tedness, that there
should *e interest upon it, and that what is claimed as
an interest deduction should have *een paid or
accrued within the year !t is here conceded that the
interest paid *y respondent was in conse+uence of the
late payment of her donor9s ta,, and the same was
paid within the year it is sought to *e declared
2o sustain the proposition that the interest payment in
+uestion is not deducti*le for the purpose of computing
respondent9s net income, petitioner relies heavily on
section :( of $evenue $egulation 6o % =8nown as
!ncome 2a, $egulation? promulgated *y the
1epartment of 0inance, which provides that ;the word
`ta,es9 means ta,es proper and no deductions should
*e allowed for amounts representing interest,
surcharge, or penalties incident to delin+uency; 2he
court *elow, however, held section :( as inapplica*le
to the instant case *ecause while it implements
sections '(=c? of the 2a, #ode governing deduction of
ta,es, the respondent ta,payer see8s to come under
section '(=*? of the same #ode providing for
deduction of interest on inde*tedness
I0013:
5hether or not such interest was paid upon an
inde*tedness within the contemplation of section '(
=*? =1? of the 2a, #odeH
R1LI&%:
Ges -ccording to the Supreme #ourt, although
interest payment for delin+uent ta,es is not deducti*le
as ta, under Section '(=c? of the 2a, #ode and
section :( of the !ncome 2a, $egulations, the
ta,payer is not precluded there*y from claiming said
interest payment as deduction under section '(=*? of
the same #ode
S@# '( De!uctions from "ross income K !n
computing net income there shall *e allowed as
deductions K
=*? !nterestC
=1? In "eneral K 2he amount of interest paid
within the ta,a*le year on inde*tedness,
e,cept on inde*tedness incurred or continued
to purchase or carry o*ligations the interest
upon which is e,empt from ta,ation as income
under this 2itle
2he term ;inde*tedness; as used in the 2a, #ode of
the >nited States containing similar provisions as in
the a*ove/+uoted section has *een defined as an
unconditional and legally enforcea*le o*ligation for the
payment of money
2o give to the +uoted portion of section :( of our
!ncome 2a, $egulations the meaning that the
petitioner gives it would run counter to the provision of
section '(=*? of the 2a, #ode and the construction
given to it *y courts in the >nited States Such effect
would thus ma8e the regulation invalid for a ;regulation
which operates to create a rule out of harmony with
the statute, is a mere nullity; -s already stated,
section :( implements only section '(=c? of the 2a,
#ode, or the provision allowing deduction of ta,es,
while herein respondent see8s to *e allowed deduction
under section '(=*?, which provides for deduction of
interest on inde*tedness
!IR R1LI&% &. ((+:((
Taxes
#!$ V 3@16!#EG
0-#2SC
• $esp spouses V@ 3ednic8y and Maria Valero
3ednic8y are -merican #iti7ens residing in the
Philippines and derived their income from
Philippine sources for the ta,a*le years in
+uestion
• 19") U Sps filed their !2$ for 19"& reporting a
gross income P1,(1),%:)&" and a net income
of P)'',:(944 on which P'1),'9"4( was
assessed after deducting P4,:(""9 as
withholding ta,
• Sps paid '%&,%4)41 on -pril 19")
• March 19"9 U Sps filed an amended !2$ for
19"& 2hey claimed a deduction of
P%(",9'9%4 paid in 19"& to >S govFt
$espondents re+uested refund of 11%,4')9(
• #!$ failed to answer the claim for refund,
resps filed their petition with the 2a, #ourt
• <$ 6o 3/1:1&9 formerly #2- case
")(Mdifferent caseJyearN is also a claim for
refund in the amount of P1"(,%&9(( as
alleged overpaid income ta, for 19""
o 0actsC
 !n 0e* 19"& Sps filed !2$ for
19"" [ gross income of
P1,)))1,1%4&' and net
income of P1,("%,""(&)
 19"& U sps filed an amended
!2$
 Aac8 in 19"", sps filed with
the >S !nternal $evenue
-gent in Manila their federal
!2$ for the years 194),19"1/
"4 on income from Phil
sources on a cash *asis
 19": U Sps amended their
Phil !2$ for 19"" to include
the deductions of >S 0ederal
income ta,es, interest
accrued up to May 1", 19"",
and e,change and *an8
charges
 #2- case ")( was filed
• <$ 6o %14'4 formerly #2- #ase 6o ):',
facts are similar *ut refer to 3ednic8ysF .2$
for 19") filed in 0e* 19":
o !n 19"9 sps filed amended return for
19") claiming deductions
representing ta,es paid to >S <ovFt
W 2ac ,ourt held that the ta,es may *e deducted
*ecause the Sps did not signify in their !2$a desire to
avail themselves of the *enefits of paragraph '=A? of
Sec '(
#.MM.6 !SS>@C 5.6 a citi7en of the >S residing in
Phils who derives income wholly from sources within
the Phils may deduct from his gross income the
income ta,es he has paid to >S govFt for the ta,a*le
yearH
B@31J$-2!.C
• S#C #!$ correct that the construction and
wording of Sec '(c=1?A of the !nternal
$evenue -ct shows the lawFs intent that the
right to deduct income ta,es paid to foreign
government from the ta,payerFs gross income
is given only as an alternative or su*stitute to
his right to claim a ta, credit for such foreign
income ta,es
o =A? U !ncome, war/profits, and e,cess
profits ta,es imposed *y the authority
of any foreign country4 *ut this
deduction shall *e allowed in the case
of a ta,payer who does not signify in
his return his desire to have any
e,tent the *enefits of paragraph ='? of
this su*section =relating to credit for
foreign countries?
• So that unless the alien resident has a right to
claim such ta, credit if he so chooses, he is
precluded from deducting the foreign income
ta,es from his gross income
• 0or it is o*vious that in prescri*ing that such
deduction shall *e allowed in the case of a
ta,payer who does not signify in his return his
desire to have any e,tent *enefits of
paragraph ', the statute assumes that the
ta,payer in +uestion may signify his desire to
claim a ta, credit and waive the deduction4
otherwise, the foreign ta,es would always *e
deducti*le and their mention in the list on non/
deducti*le items in Sec '(c might as well
have *een omitted or at least e,pressly limited
to ta,es on income from sources outside the
Philippine !slands
• Bad the law intended that foreign income
ta,es could *e deducted from gross income in
any event, regardless of the ta,payerFs right to
claim a ta, credit, it is the latter right that
should *e conditioned upon the ta,payerFs
waiving the deduction
• 6o danger of dou*le creditJta,ation
o 1ou*le ta,ation *ecomes o*no,ious
only where the ta,payer is ta,ed twice
for the *enefit of the same
governmental entity
o 2he Philippine government only
receives the proceeds of one ta,
o Justice and e+uity demand that the
ta, on the income should accrue to
the *enefit of the Philippines
o -ny relief from the alleged dou*le
ta,ation should come from the >S
since the formerFs right to *urden the
ta,payer is solely predicated in is
citi7enship, without contri*uting to the
production of wealth that is *eing
ta,ed
o 2o allow an alien resident to deduct
from his gross income whatever ta,es
he pays to his own government
amounts to conferring on the latter the
power to reduce the ta, income of the
Philippine government simply *y
increasing the ta, rates on the alien
resident
3osses
223R I&510TRI30 v C C 5ec. '" '**@D
• 2he Paper !ndustries #orporation of the
Philippines =;Picop;?, is a Philippine
corporation registered with the Aoard of
!nvestments =;A.!;? as a preferred pioneer
enterprise with respect to its integrated pulp
and paper mill, and as a preferred non>
pioneer enterprise with respect to its
integrated plywood and veneer mills
• !n 19&9, 19)% and 19)), Picop o*tained loans
from foreign creditors in order to finance the
purchase of machinery and e+uipment needed
for its operations
• Picop also issued promissory notes of a*out
P%'(M, on wJc it paid P4"M in interest
• !n its 19)) !ncome 2a, $eturn, Picop claimed
the interest payments on the loans as
1@1>#2!.6S from its 19)) gross income
• 2he #!$ disallowed this deduction upon the
ground that, *ecause the loans had *een
incurred for the purchase of machinery and
e+uipment, the interest payments on those
loans should have *een capitali7ed instead
and claimed as a depreciation dedction
ta8ing into account the adjusted *asis of the
machinery and e+uipment =original ac+uisition
cost plus interest charges? over the useful life
of such assets
• !C 5Jn the interest payments can *e deducted
from gross income U G@S transaction ta,
• $C
• 2he 19)) 6!$# does not prohi*it the
deduction of interest on a loan incurred for
ac+uiring machinery and e+uipment 6either
does our 19)) 6!$# compel the capitali7ation
of interest payments on such a loan
• 2he 19)) 2a, #ode is simply silent on a
ta,payer9s right to elect one or the other ta,
treatment of such interest payments
-ccordingly, the general rule that interest
payments on a legally demanda*le loan are
deducti*le from gross income must *e applied
• !n this case, the #!$ does not dispute that the
interest payments were made *y Picop on
loans incurre! in connection with the carryin"
on of the re"istere! operations of Picop, ie,
the financing of the purchase of machinery
and e+uipment actually used in the registered
operations of Picop 6either does the #!$
deny that such interest payments were le"ally
!ue an! !eman!able under the terms of such
loans, and in fact paid *y Picop during the ta,
year 19))
• 2he #!$ has *een una*le to point to any
provision of the 19)) 2a, #ode or any other
Statute that re+uires the disallowance of the
interest payments made *y Picop
• 2B!S P-$2 1! E. S>P@$ M-<@2SC
• 2he #!$ invo8es Section )9 of $evenue
$egulations 6o % wJc provides that Interest
calculated for cost/8eeping or other purposes
on account of capital or surplus invested in the
*usiness, which !oes not represent a char"e
arisin" un!er an interest>bearin" obli"ation, is
not allowa*le deduction from gross income
• !t is claimed *y the #!$ that Section )9 of
$evenue $egulations 6o % was ;patterned
after; paragraph 1%&&/1 =*?, entitled ;2a,es
and #arrying #harges #hargea*le to #apital
-ccount and 2reated as #apital !tems; of the
>S !ncome 2a, $egulations, which
paragraph reads as followsC
=A? Taxes an! Carryin" Char"es K
2he items thus chargea*le to capital
accounts are K
=11? !n the case of real property,
whether improved or unimproved and
whether productive or nonproductive
=a? !nterest on a loan =*ut not
theoretical interest of a ta,payer using
his own funds?
)'
2he truncated e,cerpt of the >S !ncome 2a,
$egulations +uoted *y the #!$ needs to *e related to
the relevant provisions of the >S !nternal $evenue
#ode, which provisions deal with the general topic of
adjusted *asis for determining allowa*le gain or loss
on sales or e,changes of property and allowa*le
depreciation and depletion of capital assets of the
ta,payerC
Present )ule 2he !nternal $evenue
#ode, and the $egulations
promulgated thereunder provide that
;%o !e!uction shall be allowe! for
amounts pai! or accrued for such
ta,es and carryin" char"es as, under
regulations prescri*ed *y the
Secretary or his delegate, are
chargea*le to capital account with
respect to property, if the taxpayer
elects, in accordance with such
regulations, to treat such ta,es or
char"es as so char"eable;
-t the same time, under the
adjustment of *asis provisions which
have just *een discussed, it is
provided that adjustment shall *e
made for all ;e,penditures, receipts,
losses, or other items; properly
chargea*le to a capital account, thus
including ta,es and carrying charges4
however, an exception exists, in which
eent such a!2ustment to the capital
account is not ma!e- with respect to
taxes an! carryin" char"es which the
taxpayer has not electe! to capitali(e
but for which a !e!uction instea! has
been ta'en
2he ;carrying charges; which may *e
capitali7ed under the a*ove +uoted provisions
of the >S !nternal $evenue #ode include, as
the #!$ has pointed out, interest on a loan
;=*ut not theoretical interest of a ta,payer
using his own funds?; 5hat the #!$ failed to
point out is that such ;carryin" char"es; may,
at the election of the ta,payer, either be /a0
capitali(e! in which case the cost *asis of the
capital assets, eg, machinery and e+uipment,
will *e adjusted *y adding the amount of such
interest payments or alternatively, *e /b0
!e!ucte! from "ross income of the ta,payer
Should the ta,payer elect to deduct the
interest payments against its gross income,
the ta,payer cannot at the same time
capitali7e the interest payments !n other
words, the ta,payer is not entitled to both the
!e!uction from "ross income an! the a!2uste!
/increase!0 basis for determining gain or loss
and the allowa*le depreciation charge 2he
>S !nternal $evenue #ode !oes not prohibit
the !e!uction of interest on a loan o*tained for
purchasing machinery and e+uipment against
gross income, unless the ta,payer has also or
preiously capitali(e! the same interest
payments and there*y adjusted the cost *asis
of such assets
!IR R1LI&% >(:((
5igest of !IR Ruling &o. (>(:)((( dated ugust
'(" )(((
I&C.M3 TFT Ta9:free merger under certain
condition / Pursuant to Section 4(=c?=%?
of the 2a, #ode, no gain or loss shall *e recogni7ed *y
Alue #ircle Philippines, !nc =A#P!?, $ound $oyal, !nc
=$$!?, SM !nvestment #orporation =SM!#?, Sysmart
#orporation and #<I@ Boldings on the transfer of
their 0ortune, _eus and !ligan shares to $epu*lic, in
e,change for ne $epu*lic shares, *ecause they
together hold more than "1P of the total voting stoc8
of $epu*lic after the transfer 2he transfer through the
facilities of the PS@ *y the &th to the last transferor of
their 0ortune and _eus shares to $epu*lic in
e,change for new $epu*lic shares will *e su*ject to
the V of 1P stoc8 transaction ta, *ased on the gross
selling price or gross value in money of the shares
transferred, while the &th to the last transferor of the
!ligan shares will *e su*ject to capital gains ta, =#<2?
at the rate of "P, of the par value of the shares
transferred 2he new $epu*lic shares to *e issued,
*eing original issuances, are su*ject to the 1S2
imposed under Section 1)" of the 2a, #ode at the rate
of P% on each P%((, or fractional part thereof, of the
par value of
the new $epu*lic shares issued 2he net operating
losses of each of $epu*lic, 0ortune, MP## and !ligan
are preserved after the proposed share swap and
may *e carried over and claimed as a deduction from
their respective gross income, pursuant to Section
'4=1?='? of the 2a, #ode, *ecause there is no
su*stantial change in the either $epu*lic or 0ortune or
MP## or !ligan;
!IR R1LI&% )(+:*(
2his is letter re+uesting in *ehalf of Porcelana
Mariwasa, !nc =PM!?, a ruling confirming an opinion
that the foreign e,change loss incurred *y PM! is a
deducti*le loss in 199(
!t is represented that PM! is a corporation esta*lished
and organi7ed under Philippine laws4 that it has
e,isting >S dollar loans from 6orita8e #ompany,
3imited =6orita8e? and 2oyota 2susho #orporation
=2oyota? in the aggregate amounts of >S
]),&'&,&)91) and >S ]',("4,&)1%), respectively,
that in 19:9, the parties agreed to convert the said
dollar denominated loans into pesos at the e,change
rate prevailing on June '(, 19:94 that in 1ecem*er
19:9, *oth agreements were approved *y the #entral
Aan8 su*ject to the su*mission of a copy each of the
signed agreements incorporating the conversion4
thereafter, drafts of the amended agreements were
su*mitted to the #entral Aan8 for pre/approval4 that on
January %9, 199(, the #entral Aan8 advised PM!9s
counsel on their findings and comments on the said
drafts which were considered and incorporated in the
final amended agreements4 that in June 199(, the
parties su*mitted to the #entral Aan8 the signed
agreements4 that counsel of PM! is of the opinion that
in the case of PM!, the resultant loss on conversion of
>S dollar denominated loans to peso is more than a
shrin8age in value of money4 that the approval *y the
#entral Aan8 and the signing *y the parties of the
agreements covering the said conversion esta*lished
the loss, after which, the loss *ecame final and
irrevoca*le, so that recoupment is reasona*ly
impossi*le4 and that having *een fi,ed and
determina*le, the loss is no longer suscepti*le to
change, hence, it could fairly *e stated that such has
*een sustained in a closed and completed transaction
!n reply the commissioner informed PM! that the
annual increase in value of an asset is not ta,a*le
income *ecause such increase has not yet *een
reali7ed 2he increase in value ie, the gain, could
only *e ta,ed when a disposition of the property
occurred which was of such a nature as to constitute a
reali7ation of such gain, that is, a severance of the
gain from the original capital invested in the property
2he same conclusion o*tains as to losses 2he annual
decline in the value of property is not normally
allowa*le as a deduction Bence, to *e allowa*le the
loss must *e reali7ed
5hen foreign currency ac+uired in connection with a
transaction in the regular course of *usiness is
disposed ordinary gain or loss results from the
fluctuation 2he loss is deducti*le only for the year it is
actually sustained !t is sustained during the year in
which the loss occurs as evidenced *y the completed
transaction and as fi,ed *y identifia*le occurring in
that year 6o ta,ation event has as yet *een
consummated prior to the remittance of the scheduled
amorti7ation -ccordingly, PM!9s re+uest for
confirmation of opinion was denied considering that
foreign e,change losses sustained as a result of
conversion or devaluation of the peso vis/a/vis the
foreign currency or >S dollar and vice versa *ut which
remittance of scheduled amorti7ation consisting of
principal and interests payment on a foreign loan had
not actually *een made are not deducti*le from gross
income for income ta, purposes
!IR R1LI&% '??:A@
=2echnically, this ruling has no stated facts !t just said
that a re+uest for ruling dated July 1, 19:" was sent to
the A!$ for the purpose of clarifying the issue, as
herein stated?
FCT0:
$e+uest to clarify the deducti*ility of foreign e,change
losses incurred *y reason of the devaluation of the
peso 2he losses arose from matured *ut unremitted
principal repayments on loans affected *y the de*t/
restructuring program in the Philippines
I0013:
5hether or not foreign e,change losses are deducti*le
for income ta, purposes
H3L5: 6.
2he annual increase in value of an asset is 6.2
2-L-A3@ !6#.M@ *ecause such increase has not
yet *een reali7ed 2he increase in value, ie, the gain,
could only *e ta,ed when a disposition of the property
occurred which was of such a nature as to constitute a
reali7ation of such gain, that is, a severance of the
gain from the original capital invested in the property
2he aforementioned rule also applies to losses 2he
annual decrease in the value of property is not
normally allowa*le as a loss Bence, to *e allowa*le
the loss must *e reali7ed
5hen foreign currency ac+uired in connection with a
transaction in the regular course of *usiness is
disposed of, ordinary gain or loss results from the
foreign e,change fluctuations 2B@ 3.SS !S
1@1>#2!A3@ .63G 0.$ 2B@ G@-$ !2 !S
-#2>-33G S>S2-!6@1 2hus, there is no ta,a*le
event prior to the remittance of the scheduled
amorti7ation
-ccordingly, foreign e,change losses sustained as a
result of devaluation of the peso vis/a/vis the foreign
currency eg, >S dollar, *ut which remittance of
scheduled amorti7ation consisting of principal and
interests payments on a foreign loan has not actually
*een made are 6.2 1@1>#2!A3@ from gross income
for income ta, purposes
&.T3:
• 2o sustain a loss means that the loss has occurred
as evidenced *y a closed and completed
transaction and as fi,ed *y identifia*le events
occurring in that year
• - closed transaction is a ta,a*le event which has
*een consummated
$a! !ebts
2HIL3F MI&I&% v CIR
FactsC Phile, Mining entered into a management
agreement with Aaguio <old 2he parties9 agreement
was denominated as ;Power of -ttorney; which
provided among othersC
a 0unds availa*le for Phile, Mining during
the management agreement4 and
* #ompensation to Phile, Mining which
shall *e fifty per cent ="(P? of the net
profit4
!n the course of managing and operating the
project, Phile, Mining made advances of cash and
property in accordance with the agreement Bowever,
the mine suffered continuing losses over the years
which resulted to petitioner9s withdrawal as manager
and cessation of mine operations
2he parties e,ecuted a ;#ompromise with
1ation in Payment; wherein Aaguio <old admitted an
inde*tedness to Phile, Mining, which was
su*se+uently amended to include additional
o*ligations
Su*se+uently, Phile, Mining wrote off in its
19:% *oo8s of account the remaining outstanding
inde*tedness of Aaguio <old *y charging
P11%,1'&,((((( to allowances and reserves that
were set up in 19:1 and P%,:&(,)&:(( to the 19:%
operations
!n its 19:% annual income ta, return, Phile,
Mining deducted from its gross income the amount of
P11%,1'&,((((( as ;loss on settlement of receiva*les
from Aaguio <old against reserves and allowances;
Bowever, A!$ disallowed the amount as deduction for
*ad de*t and assessed petitioner a deficiency income
ta, of P&%,:11,1&1'9
IssueC 5hether the deduction for *ad de*ts was validH
HeldC 6o 0or a deduction for *ad de*ts to *e
allowed, all re+uisites must *e satisfied, to witC =a?
there was a valid and e,isting de*t4 =*? the de*t was
ascertained to *e worthless4 and =c? it was charged off
within the ta,a*le year when it was determined to *e
worthless
2here was no valid and e,isting de*t 2he
nature of agreement *etween Phile, Mining and
Aaguio <old is that of a partnership or joint venture
>nder a contract of partnership, two or more persons
*ind themselves to contri*ute money, property, or
industry to a common fund, with the intention of
dividing the profits among themselves
Perusal of the agreement denominated as the
;Power of -ttorney; indicates that the parties had
intended to create a partnership and esta*lish a
common fund for the purpose 2hey also had a joint
interest in the profits of the *usiness as shown *y a
"(/"( sharing in the income of the mine
Viewed from this light, the advances can *e
characteri7ed as petitionerFs investment in a
partnership with Aaguio <old for the development and
e,ploitation of the Sto 6ino mine Since the advanced
amount partoo8 of the nature of an investment, it could
not *e deducted as a *ad de*t from petitioner9s gross
income
2HILI22I&3 R3FI&I&% C. v C
FCT0:
Philippine $efining #orp =P$#? was assessed
deficiency ta, payments for the year 19:" in the
amount of around 1:M 2his figure was computed
*ased on the disallowance of the claim of *ad de*ts *y
P$# P$# duly protested the assessment claiming
that under the law, *ad de*ts and interest e,pense are
allowa*le deductions
5hen the A!$ su*se+uently garnished some of P$#Fs
properties, the latter considered the protest as *eing
denied and filed an appeal to the #2- which set aside
the disallowance of the interest e,pense and modified
the disallowance of the *ad de*ts *y allowing '
accounts to *e claimed as deductions Bowever, 1'
supposed R*ad de*tsS were disallowed as the #2-
claimed that these were not su*stantiated and did not
satisfy the jurisprudential re+uirement of
Rworthlessness of a de*tS 2he #- denied the petition
for review
I0013: 5hether or not the #- was correct in
disallowing the 1' accounts as *ad de*ts
R1LI&%:G@S
Aoth the #2- and #- relied on the case of #ollector
vs <oodrich !nternational, which laid down the
re+uisites for Rworthlessness of a de*tS to witC
!n said case, we held that for de*ts to *e considered
as ;worthless,; and there*y +ualify as ;*ad de*ts;
ma8ing them deducti*le, the ta,payer should show
that C'D there is a valid and su-sisting de-t. C)D the
de-t must -e actually ascertained to -e worthless
and uncollecti-le during the ta9a-le yearT C>D the
de-t must -e charged off during the ta9a-le yearT
and C?D the de-t must arise from the -usiness or
trade of the ta9payer. dditionally" -efore a de-t
can -e considered worthless" the ta9payer must
also show that it is indeed uncollecti-le even in
the future.
0urthermore, there are steps outlined to *e underta8en
*y the ta,payer to prove that he e,erted diligent efforts
to collect the de*ts, i(C C'D sending of statement of
accountsT C)D sending of collection lettersT C>D
giving the account to a lawyer for collectionT and
C?D filing a collection case in court.
P$# only used the testimony of its accountant Ms
Masagana in order to prove that these accounts were
*ad de*ts 2his was considered *y all ' courts to *e
self/serving 2he S# said that P$# failed to e,ercise
due diligence in order to ascertain that these de*ts
were uncollecti*le !n fact, P$# did not even show the
demand letters they allegedly gave to some of their
de*tors
F3R&&536 H3RM&.0 v CIR
0actsC
0ernande7 Bermanos is an investment company 2he
#!$ assessed it for alleged deficiency income ta,es !t
claimed as deduction, among others, losses in or *ad
de*ts of Palawan Manganese Mines !nc which the
#!$ disallowed and was sustained *y the #2-
!ssueC 5J6 disallowance is correct
BeldC G@S
!t was shown that Palawan Manganese Mines sought
financial help from 0ernande7 to resume its mining
operations hence a Memorandum of -greement
=M.-? was e,ecuted where 0ernande7 would give
yearly advances to Palawan Aut it still continued to
suffer loses and 0ernande7 reali7ed it could no longer
recover the advances hence claimed it as worthless
3oo8ing at the M.-, 0ernande7 did not e,pect to *e
repaid 2he consideration for the advances was 1"P
of the net profits !f there were no earnings or profits
there was no o*ligation to repay Voluntary advances
without e,pectation of repayment do not result in
deducti*le losses 0ernande7 cannot even sue for
recovery as the o*ligation to repay will only arise if
there was net profits 6o *ad de*t could arise where
there is no valid and su*sisting de*t
@ven assuming that there was valid or su*sisting de*t,
the de*t was not deducti*le in 19"1 as a worthless
de*t as Palawan was still in operation in 19"1 and
19"% as 0ernande7 continued to give advances in
those years !t has *een held that if the de*tor
corporation although losing money or insolvent was
still operating at the end of the ta,a*le year, the de*t is
not considered worthless and therefore not deducti*le
Depreciation
!0IL& 30TT30" I&C." petitioner,
vs
TH3 C.MMI00I.&3R .F I&T3R&L R3$3&13
and TH3 C.1RT .F TF 223L0" respondents
6elix *. .ulfin an! *ntonio #. *lano for petitioner.
7ffice of the #olicitor .eneral for respon!ents.

!3&%6.&" #.2." J.:
- Philippine corporation engaged in the coconut
industry, Aasilan @states, !nc, with principal offices in
Aasilan #ity, filed on March %4, 19"4 its income ta,
returns for 19"' and paid an income ta, of P:,(%: .n
0e*ruary %&, 19"9, the #ommissioner of !nternal
$evenue, per e,aminers9 report of 0e*ruary 19, 19"9,
assessed Aasilan @states, !nc, a deficiency income
ta, of P',91% for 19"' and P:&,:)&:" as %"P surta,
on unreasona*ly accumulated profits as of 19"'
pursuant to Section %" of the 2a, #ode .n non/
payment of the assessed amount, a warrant of
distraint and levy was issued *ut the same was not
e,ecuted *ecause Aasilan @states, !nc succeeded in
getting the 1eputy #ommissioner of !nternal $evenue
to order the 1irector of the district in _am*oanga #ity
to hold e,ecution and maintain constructive em*argo
instead Aecause of its refusal to waive the period of
prescription, the corporation9s re+uest for
reinvestigation was not given due course, and on
1ecem*er %, 19&(, notice was served the corporation
that the warrant of distraint and levy would *e
e,ecuted
.n 1ecem*er %(, 19&(, Aasilan @states, !nc filed
*efore the #ourt of 2a, -ppeals a petition for review of
the #ommissioner9s assessment, alleging prescription
of the period for assessment and collection4 error in
disallowing claimed depreciations, travelling and
miscellaneous e,penses4 and error in finding the
e,istence of unreasona*ly accumulated profits and the
imposition of %"P surta, thereon .n .cto*er '1,
19&', the #ourt of 2a, -ppeals found that there was
no prescription and affirmed the deficiency
assessment in toto
.n 0e*ruary %1, 19&4, the case was appealed to >s
*y the ta,payer, upon the following issuesC
1 Bas the #ommissioner9s right to collect deficiency
income ta, prescri*edH
% 5as the disallowance of items claimed as
deducti*le properH
' Bave there *een unreasona*ly accumulated profitsH
!f so, should the %"P surta, *e imposed on the
*alance of the entire surplus from 194)/19"', or only
for 19"'H
4 !s the petitioner e,empt from the penalty ta, under
$epu*lic -ct 1:%' amending Section %" of the 2a,
#odeH
2R30CRI2TI.&
2here is no dispute that the assessment of the
deficiency ta, was made on 0e*ruary %&, 19"94 *ut
the petitioner claims that it never received notice of
such assessment or if it did, it received the notice
*eyond the five/year prescriptive period 2o show
prescription, the annotation on the notice =@,hi*it 1(,
6o "%, -#$, p "4/- of the A!$ records? ;6o
accompanying letter 11J%"J; is advanced as indicative
of the fact that receipt of the notice was after March
%4, 19"9, the last date of the five/year period within
which to assess deficiency ta,, since the original
returns were filed on March %4, 19"4
-lthough the evidence is not clear on this point, 5e
cannot accept this interpretation of the petitioner,
considering the presence of circumstances that lead
>s to presume regularity in the performance of official
functions 2he notice of assessment shows the
assessment to have *een made on 0e*ruary %&, 19"9,
well within the five/year period .n the right side of the
notice is also stamped ;0e* %&, 19"9; K denoting the
date of release, according to Aureau of !nternal
$evenue practice 2he #ommissioner himself in his
letter =@,h B, p :4 of A!$ records? answering
petitioner9s re+uest to lift, the warrant of distraint and
levy, asserts that notice had *een sent to petitioner !n
the letter of the $egional 1irector forwarding the case
to the #hief of the !nvestigation 1ivision which the
latter received on March 1(, 19"9 =p )1 of the A!$
records?, notice of assessment was said to have *een
sent to petitioner Su*se+uently, the #hief of the
!nvestigation 1ivision indorsed on March 1:, 19"9 =p
%4 of the A!$ records? the case to the #hief of the 3aw
1ivision 2here it was alleged that notice was already
sent to petitioner on 0e*ruary %&, 19"9 2hese
circumstances pointing to official performance of duty
must necessarily prevail over petitioner9s contrary
interpretation Aesides, even granting that notice had
*een received *y the petitioner late, as alleged, under
Section ''1 of the 2a, #ode re+uiring five years within
which to assess deficiency ta,es, the assessment is
deemed made when notice to this effect is released,
mailed or sent *y the #ollector to the ta,payer and it is
not re+uired that the notice *e received *y the
ta,payer within the aforementioned five/year period
1
00300M3&T
2he +uestioned assessment is as followsC
6et !ncome per return P4(,14%9(
-ddC .ver/claimed depreciation P1(,"((49
Mis e,penses disallowed &,)"91)
.fficer9s travelling e,penses
disallowed
%,'((4( 19,"&((&
6et !ncome per !nvestigation P"9,)(%9&
%(P ta, on P"9,)(%9& 11,94(((
3essC 2a, already assessed :,(%:((
1eficiency income ta, P',91%((
-ddC -dditional ta, of %"P on P'4),"()(1 :&,:)&)"
2a, 1ue I #ollecti*le P9(,)::)"
[[[[[[[[[
2he #ommissioner disallowedC
.ver/claimed depreciation P1(,"((49
Miscellaneous e,penses &,)"91)
.fficer9s travelling e,penses %,'((4(
5351CTI.&0
- Depreciation K Aasilan @states, !nc claimed
deductions for the depreciation of its assets up to 1949
on the *asis of their ac+uisition cost -s of January 1,
19"( it changed the deprecia*le value of said assets
*y increasing it to conform with the increase in cost for
their replacement -ccordingly, from 19"( to 19"' it
deducted from gross income the value of depreciation
computed on the reappraised value
!n 19"', the year involved in this case, ta,payer
claimed the following depreciation deductionC
$eappraised assets
6ew assets consisting of hospital *uilding and
e+uipment
2otal depreciation
>pon investigation and e,amination of ta,payer9s
*oo8s and papers, the #ommissioner of !nternal
$evenue found that the reappraised assets
depreciated in 19"' were the same ones upon which
depreciation was claimed in 19"% -nd for the year
19"%, the #ommissioner had already determined, with
ta,payer9s concurrence, the depreciation allowa*le on
said assets to *e P'&,:4%(4, computed on their
ac+uisition cost at rates fi,ed *y the ta,payer Bence,
the #ommissioner pegged the deducti*le depreciation
for 19"' on the same old assets at P'&,:4%(4 and
disallowed the e,cess thereof in the amount of
P1(,"((49
2he +uestion for resolution therefore is whether
depreciation shall *e determined on the ac+uisition
cost or on the reappraised value of the assets
1epreciation is the gradual diminution in the useful
value of tangi*le property resulting from wear and tear
and normal o*solescense 2he term is also applied to
amorti7ation of the value of intangi*le assets, the use
of which in the trade or *usiness is definitely limited in
duration
%
1epreciation commences with the
ac+uisition of the property and its owner is not *ound
to see his property gradually waste, without ma8ing
provision out of earnings for its replacement !t is
entitled to see that from earnings the value of the
property invested is 8ept unimpaired, so that at the
end of any given term of years, the original investment
remains as it was in the *eginning !t is not only the
right of a company to ma8e such a provision, *ut it is
its duty to its *ond and stoc8holders, and, in the case
of a pu*lic service corporation, at least, its plain duty to
the pu*lic
'
-ccordingly, the law permits the ta,payer
to recover gradually his capital investment in wasting
assets free from income ta,
4
Precisely, Section '( =f?
=1? which statesC
=1?In "eneral K - reasona*le allowance for
deterioration of property arising out of its use
or employment in the *usiness or trade, or out
of its not *eing usedC Proi!e!, 2hat when the
allowance authori7ed under this su*section
shall e+ual the capital invested *y the
ta,payer no further allowance shall *e
made
allows a deduction from gross income for depreciation
*ut limits the recovery to the capital invested in the
asset *eing depreciated
2he income ta, law does not authori7e the
depreciation of an asset *eyond its ac+uisition cost
Bence, a deduction over and a*ove such cost cannot
*e claimed and allowed 2he reason is that deductions
from gross income are privileges,
"
not matters of
right
&
2hey are not created *y implication *ut upon
clear e,pression in the law
)
Moreover, the recovery, free of income ta,, of an
amount more than the invested capital in an asset will
transgress the underlying purpose of a depreciation
allowance 0or then what the ta,payer would recover
will *e, not only the ac+uisition cost, *ut also some
profit $ecovery in due time thru depreciation of
investment made is the philosophy *ehind
depreciation allowance4 the idea of profit on the
investment made has never *een the underlying
reason for the allowance of a deduction for
depreciation
-ccordingly, the claim for depreciation *eyond
P'&,:4%(4 or in the amount of P1(,"((49 has no
justification in the law 2he determination, therefore, of
the #ommissioner of !nternal $evenue disallowing
said amount, affirmed *y the #ourt of 2a, -ppeals, is
sustained
A ,xpenses K 2he ne,t item involves disallowed
e,penses incurred in 19"', *ro8en as followsC
Miscellaneous e,penses P&,)"91)
.fficer9s travelling e,penses %,'((4(
2otal
P9,("9")
2hese were disallowed on the ground that the nature
of these e,penses could not *e satisfactorily e,plained
nor could the same *e supported *y appropriate
papers
0eli, <ulfin, petitioner9s accountant, e,plained the
P&,)"91) was actual e,penses credited to the
account of the president of the corporation incurred in
the interest of the corporation during the president9s
trip to Manila =pp ''/'4 of 2S6 of 1ec ", 19&%?4 he
stated that the P%,'((4( was the president9s travelling
e,penses to and from Manila as to the vouchers and
receipts of these, he said the same were made *ut got
*urned during the Aasilan fire on March '(, 19&% =p
4( of same 2S6? Petitioner further argues that when it
sent its records to Manila in 0e*ruary, 19"9, the
papers in support of these miscellaneous and
travelling e,penses were not included for the reason
that *y 0e*ruary 9, 19"9, when the Aureau of !nternal
$evenue decided to investigate, petitioner had no
more o*ligation to 8eep the same since five years had
lapsed from the time these e,penses were incurred =p
41 of same 2S6? .n this ground, the petitioner may
*e sustained, for under Section '') of the 2a, #ode,
receipts and papers supporting such e,penses need
*e 8ept *y the ta,payer for a period of five years from
the last entry -t the time of the investigation, said five
years had lapsed 2a,payer9s stand on this issue is
therefore sustained
1&R30.&!LG CC1M1LT35 2R.FIT0
Section %" of the 2a, #ode which imposes a surta, on
profits unreasona*ly accumulated, providesC
Sec %" *!!itional tax on corporations
improperly accumulatin" profits or surplus E
/a0 Imposition of tax K !f any corporation,
e,cept *an8s, insurance companies, or
personal holding companies, whether
domestic or foreign, is formed or availed of for
the purpose of preventing the imposition of the
ta, upon its shareholders or mem*ers or the
shareholders or mem*ers of another
corporation, through the medium of permitting
its gains and profits to accumulate instead of
*eing divided or distri*uted, there is levied and
assessed against such corporation, for each
ta,a*le year, a ta, e+ual to twenty/five per
centum of the undistri*uted portion of its
accumulated profits or surplus which shall *e
in addition to the ta, imposed *y section
twenty/four, and shall *e computed, collected
and paid in the same manner and su*ject to
the same provisions of law, including
penalties, as that ta,1awphOl.nPt
2he #ommissioner found that in violation of the
a*ove+uoted section, petitioner had unreasona*ly
accumulated profits as of 19"' in the amount of
P'4),"()(1, *ased on the following circumstances
=@,aminer9s $eport pp &%/&: of A!$ records?C
1 Strong financial position of the petitioner as
of 1ecem*er '1, 19"' -ssets were
P'::,&1)(( while the lia*ilities amounted to
only P&1,11)'1 or a ratio of &C1
% -s of 19"', the corporation had
considera*le capital ade+uate to meet the
reasona*le needs of the *usiness amounting
to P'%),499&9 =assets less lia*ilities?
' 2he P%((,((( reserved for electrification of
drier and mechani7ation and the P"(,(((
reserved for malaria control were reverted to
its surplus in 19"'
4 5ithdrawal *y shareholders, of large sums
of money as personal loans
" !nvestment of undistri*uted earnings in
assets having no pro,imate connection with
the *usiness K as hospital *uilding and
e+uipment worth P"9,)94)%
& !n 19"', with an increase of surplus
amounting to P&)),%'%(1, the capital stoc8
was increased to P"((,((( although there
was no need for such increase
Petitioner tried to show that in considering the surplus,
the e,aminer did not ta8e into account the possi*le
e,penses for cultivation, la*or, fertilitation, drainage,
irrigation, repair, etc =pp %'"/%') of 2S6 of 1ec ),
19&%? -s aptly answered *y the e,aminer himself,
however, they were already included as part of the
wor8ing capital =pp %')/%': of 2S6 of 1ec ), 19&%?
!n the unreasona*le accumulation of P'4),"()(1 are
included P%((,((( for electrification of driers and
mechani7ation and P"(,((( for malaria control which
were reserved way *ac8 in 194: =p &) of the A!$
records? *ut reverted to the general fund only in 19"'
!f there were any plans for these amounts to *e used
in further e,pansion through projects, it did not appear
in the records as was properly indicated in 194: when
such amounts were reserved 2hus, while in 194: it
was already clear that the money was intended to go
to future projects, in 19"' upon reversion to the
general fund, no such intention was shown Such
reversion therefore gave occasion for the <overnment
to consider the same for ta, purposes 2he P%"(,(((
reverted to the general fund was sought to *e
e,plained as later used elsewhereC ;part of it in the
Bilano !ndustries, !nc in *uilding the factory site and
*uildings to house technical men part of it was
spent in the facilities for the waterwor8s system and for
industriali7ation of the coconut industry; =p 11) of 2S6
of 1ec &, 19&%? 2his is not sufficient e,planation
Persuasive jurisprudence on the matter such as those
in the >nited States from where our ta, law was
derived,
:
has it thatC ;!n order to determine whether
profits were accumulated for the reasona*le needs of
the *usiness or to avoid the surta, upon shareholders,
the controlling intention of the ta,payer is that which is
manifested at the time of the accumulation, not
su*se+uently declared intentions which are merely the
products of after/thought;
9
2he reversion here was
made *ecause the reserved amount was not enough
for the projects intended, without any intent to channel
the same to some particular future projects in mind
Petitioner argues that since it has P"&(,)1)44 as its
e,penses for the year 19"', a surplus of P'4),"()(1
is not unreasona*ly accumulated -s rightly contended
*y the <overnment, there is no need to have such a
large amount at the *eginning of the following year
*ecause during the year, current assets are converted
into cash and with the income reali7ed from the
*usiness as the year goes, these e,penses may well
*e ta8en care of =pp %': of 2S6 of 1ec ), 19&%?
2hus, it is erroneous to say that the ta,payer is entitled
to retain enough li+uid net assets in amounts
appro,imately e+ual to current operating needs for the
year to cover ;cost of goods sold and operating
e,penses; for ;it e,cludes proper consideration of
funds generated *y the collection of notes receiva*le
as trade accounts during the course of the year;
1(
!n
fact, just *ecause the fatal accumulations are less than
)(P of the annual operating e,penses of the year, it
does not mean that the accumulations are reasona*le
as a matter of law;
11
Petitioner tried to show that investments were made
with Aasilan #oconut Producers #ooperative
-ssociation and Aasilan Bospital =pp 1('/1(" of 2S6
of 1ec &, 19&%? totalling P"9,)94)% as of 1ecem*er
'1, 19"' 2his shows all the more the unreasona*le
accumulation -s of 1ecem*er '1, 19"' already
P"9,)94)% was spent K yet as of that date there was
still a surplus of P'4),"()(1
Petitioner +uestions why the e,aminer covered the
period from 194:/19"' when the ta,a*le year on
review was 19"' 2he surplus of P'4),"()(1 was
ta8en *y the e,aminer from the *alance sheet of
petitioner for 19"' 2o chec8 the figure arrived at, the
e,aminer traced the accumulation process from 194)
until 19"', and petitioner9s figure stood out to *e
correct 2here was no error in the process applied, for
previous accumulations should *e considered in
determining unreasona*le accumulations for the year
concerned ;!n determining whether accumulations of
earnings or profits in a particular year are within the
reasona*le needs of a corporation, it is neccessary to
ta8e into account prior accumulations, since
accumulations prior to the year involved may have
*een sufficient to cover the *usiness needs and
additional accumulations during the year involved
would not reasona*ly *e necessary;
1%
-nother factor that stands out to show unreasona*le
accumulation is the fact that large amounts were
withdrawn *y or advanced to the stoc8holders 0or the
year 19"' alone these totalled P19),%%9%& Get the
surplus of P'4),"()(1 was left as of 1ecem*er '1,
19"' 5e find unaccepta*le petitioner9s e,planation
that these were advances made in furtherance of the
*usiness purposes of the petitioner -s correctly held
*y the #ourt of 2a, -ppeals, while certain e,penses of
the corporation were credited against these amounts,
the unspent *alance was retained *y the stoc8holders
without refunding them to petitioner at the end of each
year 2hese advances were in fact indirect loans to the
stoc8holders indicating the unreasona*le accumulation
of surplus *eyond the needs of the *usiness
LL3%35 3F3M2TI.&
Petitioner wishes to avail of the e,empting proviso in
Sec %" of the !nternal $evenue #ode as amended *y
$- 1:%', approved June %%, 19"), where*y
accumulated profits or surplus if invested in any dollar/
producing or dollar/earning industry or in the purchase
of *onds issued *y the #entral Aan8, may not *e
su*ject to the %"P surta, 5e have *ut to point out
that the unreasona*le accumulation was in 19"' 2he
e,emption was *y virtue of $epu*lic -ct 1:%' which
amended Sec %" only on June %%, 19") K more than
three years after the period covered *y the
assessment
!n resume, Aasilan @states, !nc is lia*le for the
payment of deficiency income ta, and surta, for the
year 19"' in the amount of P::,9))4%, computed as
followsC
6et !ncome per return P4(,14%9(
-ddC .ver/claimed depreciation 1(,"((49
6et income per finding P"(,&4''9
%(P ta, on P"(,&4''9 P1(,1%:&)
3essC 2a, already assessed :,(%:((
1eficiency income ta, P%,1((&)
-ddC %"P surta, on P'4),"()(1 :&,:)&)"
2otal ta, due and collecti*le P::,9))4%
[[[[[[[[[[[
5B@$@0.$@, the judgment appealed from is
modified to the e,tent that petitioner is allowed its
deductions for travelling and miscellaneous e,penses,
*ut affirmed insofar as the petitioner is lia*le for
P%,1((&) as deficiency income ta, for 19"' and
P:&,:)&)" as %"P surta, on the unreasona*ly
accumulated profit of P'4),"()(1 6o costs So
ordered
Concepcion- C.D.- )eyes- D.$.3.- Di(on- ?a'alintal-
Qal!iar- #anche(- Castro- *n"eles an! 6ernan!o- DD.-
concur.
LIM2& I&$30TM3&T v CIR
0-#2SC
A!$ assessed deficiency ta,es on 3impan #orp, a
companythat leases real property, for underdeclaring
its rental incomefor years 19"&/") *y around P%(E
and P:1E respectivelyPetitioner appeals on the
ground that portions of theseunderdeclared rents are
yet to *e collected *y the previousowners and turned
over or received *y the corporationPetitioner cited that
some rents were deposited with the court,such that the
corporation does not have actual nor
constructivecontrol over them2he sole witness for the
petitioner, Solis =#orporate Secretary/2reasurer?
admitted to some undeclared rents in 19"& and19"),
and that some *alances were not collected *y
thecorporation in 19"& *ecause the lessees refused to
recogni7eand pay rent to the new owners and that the
corpFs president!sa*elo 3im collected some rent and
reported it in his personalincome statement, *ut did
not turn over the rent to thecorporation Be also cites
lac8 of actual or constructive controlover rents
deposited with the court
!SS>@C 5.6 the A!$ was correct in assessing
deficiency ta,esagainst 3impan #orp for undeclared
rental income
B@31C
Ges Petitioner admitted that it indeed had
undeclaredincome =although only a part and not the
full amount assessed*y A!$? 2hus, it has *ecome
incum*ent upon them to provetheir e,cuses *y clear
and convincing evidence, which it hasfailed to
do!ssueC 5hen is there constructive receipt of rentH
5ith regard to 19") rents deposited with the court,
andwithdrawn only in 19":, the court viewed the
corporation ashaving constructively received said
rents 2he non/collectionwas the petitionerFs fault since
it refused to refused to acceptthe rent, and not due to
non/payment of lessees Bence,although the
corporation did not actually receive the rent, it
isdeemed to have constructively received them
Depletion
C.&0.LI5T35 MI&30 v CT
!IR R1LI&% '*:('
FCT0:
.n .cto*er ', %(((, the Philippine #ouncil for 6<.
#ertification =P#6#? sent a re+uest for ruling to the
A!$, mainly to see8 an opinion if #onservation
!nternational =#!?, an international organi7ation, can *e
granted a donee institution status 6ote that #!Fs home
office and *oard mem*ers are *ased a*road, hence,
P#6#Fs evaluation process on governance cannot *e
fully e,ecuted
I0013:
5hether or not international organi7ations with home
offices a*road are +ualified to *e granted donee
institution status
H3L5: 6.
Sec '4=B?=l? of the 6!$#
'
specifically mentions
;accredited domestic corporation or associations; and
;non/government organi7ations; .n the other hand,
su*paragraph =%?=c? of the same Section of the 2a,
#ode defines a ;non/government organi7ation; to
mean a non/profit domestic corporation
!n implementing Sec '4=B? of the 6!$#, $$ 1'/9:
4
was issued and in relation to the type of entities that
may *e accredited, which specifically refers to
organi7ations or associations created or organi7ed
under Philippine laws
3 ($ %haritable and &ther %ontributions. —
(l 'n (eneral. — %ontributions or gifts actually "aid or made
within the taxable year to! or for the use of the (o)ernment
of the *hili""ines or any of its agencies or any "olitical
subdi)ision thereof exclusi)ely for "ublic "ur"oses! or to
accredited domestic cor"orations or associations organi+ed
and o"erated exclusi)ely for religious! charitable! scienti,c!
youth and s"orts de)elo"ment! cultural or educational
"ur"oses or for the rehabilitation of )eterans! or to social
welfare institutions or to non-go)ernment organi+ations! in
accordance with rules and regulations "romulgated by the
Secretary of .inance! u"on recommendation of the
%ommissioner! no "art of the net income of which inures to
the bene,t of any "ri)ate stoc/holder or indi)idual in an
amount not in excess of ten "ercent (100 in the case of an
indi)idual! and ,)e "ercent (10 in the case of a
cor"oration of the tax"ayer2s taxable income deri)ed from
trade! business or "rofession as com"uted without the
bene,t of this and the following sub"aragra"hs3.
4 S#%. 1. 5e,nition of Terms. — .or "ur"oses of
these 6egulations! the terms herein enumerated shall ha)e
the following meanings:
a 37on-stoc/! non-"ro,t cor"oration or organi+ation3 —
shall refer to a cor"oration or association8 organi+ation
referred to under Section 30 (# and (( of the Tax %ode
created or organi+ed under *hili""ine laws exclusi)ely for
one or more of the following "ur"oses:
xxx xxx xxx
b 37on-go)ernment &rgani+ation (7(&3 — shall refer to a
non-stoc/! non-"ro,t domestic cor"oration or organi+ation
as de,ned under Section 34($(2(c of the Tax %ode
organi+ed and o"erated exclusi)ely . . .3
2hus, the A!$ opined that a non/stoc8, non/profit
corporation or organi7ation must *e created or
organi7ed under Philippine 3aws and that an 6<.
must *e a non/profit domestic corporation, this .ffice
is of the opinion that a foreign corporation, li8e
#onservation !nternational, whether resident or non/
resident, cannot *e accredited as donee institution
>M 2HILI22I&30 v CIR
FactsC
'M Philippines, !nc is a su*sidiary of the Minnesota
Mining and Manufacturing #ompany =or ;'M/St Paul;?
a non/resident foreign corporation with principal office
in St Paul, Minnesota, >S- !t is the e,clusive
importer, manufacturer, wholesaler, and distri*utor in
the Philippines of all products of 'M/St Paul 2o
ena*le it to manufacture, pac8age, promote, mar8et,
sell and install the highly speciali7ed products of its
parent company, and render the necessary post/sales
service and maintenance to its customers, 'M Phils
entered into a ;Service !nformation and 2echnical
-ssistance -greement; and a ;Patent and 2rademar8
3icense -greement; with the latter under which the 'm
Phils agreed to pay to 'M/St Paul a technical service
fee of 'P and a royalty of %P of its net sales Aoth
agreements were su*mitted to, and approved *y, the
#entral Aan8 of the Philippines the petitioner claimed
the following deductions as *usiness e,pensesC
=a? royalties and technical service fees of P
',("(,&4&((4 and
=*? pre/operational cost of tape coater of P9),4:"(:
-s to =a?, the #ommissioner of !nternal $evenue
allowed a deduction of P)9),(4&(9 only as technical
service fee and royalty for locally manufactured
products, *ut disallowed the sum of P%,'%',"99(%
alleged to have *een paid *y the petitioner to 'M/St
Paul as technical service fee and royalty on
P4&,4)1,99:(( worth of finished products imported *y
the petitioner from the parent company, on the ground
that the fee and royalty should *e *ased only on
locally manufactured goods 5hile as to =*?, the #!$
only allowed P19,"44)) or one/fifth =1J"? of 'M
Philscapital e,penditure of P9),(4&(9 for its tape
coater which was installed in 19)' *ecause such
e,penditure should *e amorti7ed for a period of five ="?
years, hence, payment of the disallowed *alance of
P)),)4(': should *e spread over the ne,t four =4?
years 2he #!$ ordered 'M Phil to pay P:4(,"4( as
deficiency income ta, on its 19)4 return, plus
P'"',(%&:( as 14P interest per annum from
0e*ruary 1", 19)" to 0e*ruary 1", 19)&, or a total of
P1,19',"&&:(
'M Phils protested the #!$Fs assessment *ut it did not
answer the protest, instead issuing a warrant of levy
2he #2- affirmed the assessment on appeal
!ssueC
5hether or not 'M Phils is entitled to the deductions
due to royaltiesH
$ulingC
6o #A #ircular 6o '9' =$egulations <overning
$oyaltiesJ$entals? dated 1ecem*er ), 19)' was
promulgated *y the #entral Aan8 as an e,change
control regulation to conserve foreign e,change and
avoid unnecessary drain on the country9s international
reserves =&9 .< 6o "1, pp 11)')/':? Section '/#
of the circular provides that royalties shall *e paid only
on commodities manufactured *y the licensee under
the royalty agreementC
Section ' $e+uirements for -pproval and
$egistration K 2he re+uirements for approval and
registration as provided for in Section % a*ove include,
*ut are not limited to the followingC
a ,,, ,,, ,,,
* ,,, ,,, ,,,
c 2he royaltyJrental contracts involving manufacturing9
royalty, eg, actual transfers of technological services
such as secret formulaJprocesses, technical 8now how
and the li8e shall not e,ceed five ="? per cent of the
wholesale price of the commodityJties manufactured
under the royalty agreement 0or contracts involving
9mar8eting9 services such as the use of foreign *rands
or trade names or trademar8s, the royaltyJrental rate
shall not e,ceed two =%? per cent of the wholesale
price of the commodityJties manufactured under the
royalty agreement 2he producer9s or foreign licensor9s
share in the proceeds from the distri*utionJe,hi*ition of
the films shall not e,ceed si,ty =&(? per cent of the net
proceeds =gross proceeds less local e,penses? from
the e,hi*itionJdistri*ution of the films =@mphasis
supplied? =p %), $ollo?
#learly, no royalty is paya*le on the wholesale price of
finished products imported *y the licensee from the
licensor Bowever, petitioner argues that the law
applica*le to its case is only Section %9=a?=1? of the
2a, #ode which providesC
=a? @,penses K =1? Ausiness e,penses K =-? !n
general K -ll ordinary and necessary e,penses paid
or incurred during the ta,a*le year in carrying on any
trade or *usiness, including a reasona*le allowance
for salaries or other compensation for personal
services actually rendered4 travelling e,penses while
away from home in the pursuit of a trade, profession or
*usiness, rentals or other payments re+uired to *e
made as a condition to the continued use or
possession, for the purpose of the trade, profession or
*usiness, for property to which the ta,payer has not
ta8en or is not ta8ing title or in which he has no e+uity
Petitioner points out that the #entral *an8 ;has no say
in the assessment and collection of internal revenue
ta,es as such power is lodged in the Aureau of
!nternal $evenue,; that the 2a, #ode ;never mentions
#ircular '9' and there is no law or regulation
governing deduction of *usiness e,penses that refers
to said circular; =p 9, Petition?
2he argument is specious, for, although the 2a, #ode
allows payments of royalty to *e deducted from gross
income as *usiness e,penses, it is #A #ircular 6o
'9' that defines what royalty payments are proper
Bence, improper payments of royalty are not
deducti*le as legitimate *usiness e,penses
300. 0T&5R5 v CIR
FCT0:
@SS. deducted from its gross income, as part of its
ordinary and necessary *usiness e,penses, the
amount it had spent for drilling and e,ploration of its
petroleum concessions 2his claim was disallowed *y
the #!$ on the ground that the e,penses should *e
capitali7ed and might *e written off as a loss only
when a ;dry hole; should result
@SS. then filed an amended return and claimed as
ordinary and necessary e,penses margin fees it had
paid to the #entral Aan8 on its profit remittances to its
6ew Gor8 head office 2he #!$ disallowed the claimed
deduction for the margin fees paid #!$ assessed
@SS. a deficiency income ta, which arose from the
disallowance of the margin fees
@SS. paid under protest and claimed for a refund
#!$ denied the claims for refund, holding that the
margin fees paid to the #entral Aan8 could not *e
considered ta,es or allowed as deducti*le *usiness
e,penses
I00130:
1 wJn margin fee is a ta, and should *e
deducti*le from @SS.Fs gross income 6.
% !f margin fees are not ta,es, wJn they should
nevertheless *e considered necessary and
ordinary *usiness e,penses and therefore still
deducti*le from its gross income 6.
H3L5:
1 6. - margin is not a ta, *ut an e,action designed
to cur* the e,cessive demands upon our
international reserves 2he margin fee was
imposed *y the State in the e,ercise of its police
power and not the power of ta,ation
% 6.
2o *e deducti*le as a *usiness e,pense, three
conditions are imposed, namelyC
=1? the e,pense must *e ordinary and
necessary,
=%? it must *e paid or incurred within the
ta,a*le year, and
='? it must *e paid or incurred in carrying on a
trade or *usiness
!n addition, not only must the ta,payer meet the
*usiness test, he must su*stantially prove *y
evidence or records the deductions claimed under
the law, otherwise, the same will *e disallowed
2he mere allegation of the ta,payer that an item of
e,pense is ordinary and necessary does not justify
its deduction
.rdinarily, an e,pense will *e considered
9necessary9 where the e,penditure is appropriate
and helpful in the development of the ta,payer9s
*usiness !t is 9ordinary9 when it connotes a
payment which is normal in relation to the
*usiness of the ta,payer and the surrounding
circumstances 2he term 9ordinary9 does not
re+uire that the payments *e ha*itual or normal in
the sense that the same ta,payer will have to
ma8e them often4 the payment may *e uni+ue or
non/recurring to the particular ta,payer affected
2here is thus no hard and fast rule on the matter
2he right to a deduction depends in each case on
the particular facts and the relation of the payment
to the type of *usiness in which the ta,payer is
engaged 2he intention of the ta,payer often may
*e the controlling fact in ma8ing the determination
-ssuming that the e,penditure is ordinary and
necessary in the operation of the ta,payer9s
*usiness, the answer to the +uestion as to whether
the e,penditure is an allowa*le deduction as a
*usiness e,pense must *e determined from the
nature of the e,penditure itself, which in turn
depends on the e,tent and permanency of the
wor8 accomplished *y the e,penditure

Since the margin fees in +uestion were incurred
for the remittance of funds to petitioner9s Bead
.ffice in 6ew Gor8, which is a separate and
distinct income ta,payer from the *ranch in the
Philippines, for its disposal a*road, it can never *e
said therefore that the margin fees were
appropriate and helpful in the development of
petitioner9s *usiness in the Philippines e,clusively
@SS. has not shown that the remittance to the
head office of part of its profits was made in
furtherance of its own trade or *usiness and
therefore cannot *e claimed as an ordinary and
necessary e,pense paid or incurred in carrying on
its own trade or *usiness
R. C2ITL %I&0 and L.0030
Capital assets
CL0&6 v CIR
Facts: Petitioner >rsula #alasan7 inherited from her
father de 2orres an agricultural land located in $i7al
with an area of 1&M s+m !n order to li+uidate her
inheritance, >rsula #alasan7 had the land surveyed
and su*divided into lots !mprovements, such as good
roads, concrete gutters, drainage and lighting system,
were introduced to ma8e the lots salea*le Soon after,
the lots were sold to the pu*lic at a profit
!n their joint income ta, return for the year 19") filed
with the Aureau of !nternal $evenue on March '1,
19":, petitioners disclosed a profit of P'1,(&((&
reali7ed from the sale of the su*divided lots, and
reported fifty per centum thereof or P1","'((' as
ta,a*le capital gains
>pon an audit and review of the return thus filed, the
$evenue @,aminer adjudged petitioners engaged in
*usiness as real estate dealers, as defined in the
6!$#, and re+uired them to pay the real estate
dealer9s ta, and assessed a deficiency income ta, on
profits derived from the sale of the lots *ased on the
rates for ordinary income
2a, court upheld the finding of the #!$, hence, the
present appeal
Issues:
a 5hether or not petitioners are real estate dealers
lia*le for real estate dealer9s fi,ed ta, G@S
* 5hether the gains reali7ed from the sale of the lots
are ta,a*le in full as ordinary income or capital gains
ta,a*le at capital gain rates .$1!6-$G !6#.M@
Ratio:
2he assets of a ta,payer are classified for income ta,
purposes into ordinary assets and capital assets
Section '4MaN M1N of the 6ational !nternal $evenue
#ode *roadly defines capital assets as followsC
M1N #apital assets/2he term 9capital
assets9 means property held *y the
ta,payer Mwhether or not connected
with his trade or *usinessN, *ut does
not include, stoc8 in trade of the
ta,payer or other property of a 8ind
which would properly *e included, in
the inventory of the ta,payer if on
hand at the close of the ta,a*le year,
or property held *y the ta,payer
primarily for sale to customers in the
ordinary course of his trade or
*usiness, or property used in the trade
or *usiness of a character which is
su*ject to the allowance for
depreciation provided in su*section MfN
of section thirty4 or real property used
in the trade or *usiness of the
ta,payer
2he statutory definition of capital assets is negative in
nature !f the asset is not among the e,ceptions, it is a
capital asset4 conversely, assets falling within the
e,ceptions are ordinary assets -nd necessarily, any
gain resulting from the sale or e,change of an asset is
a capital gain or an ordinary gain depending on the
8ind of asset involved in the transaction
Bowever, there is no rigid rule or fi,ed formula *y
which it can *e determined with finality whether
property sold *y a ta,payer was held primarily for sale
to customers in the ordinary course of his trade or
*usiness or whether it was sold as a capital
asset -lthough several factors or indices have *een
recogni7ed as helpful guides in ma8ing a
determination, none of these is decisive4 neither is the
presence nor the a*sence of these factors conclusive
@ach case must in the last analysis rest upon its own
peculiar facts and circumstances
-lso a property initially classified as a capital asset
may thereafter *e treated as an ordinary asset if a
com*ination of the factors indu*ita*ly tend to show
that the activity was in furtherance of or in the course
of the ta,payer9s trade or *usiness 2hus, a sale of
inherited real property usually gives capital gain or loss
even though the property has to *e su*divided or
improved or *oth to ma8e it sala*le Bowever, if the
inherited property is su*stantially improved or very
actively sold or *oth it may *e treated as held primarily
for sale to customers in the ordinary course of the
heir9s *usiness
!n this case, the su*ject land is considered as an
ordinary asset Petitioners did not sell the land in the
condition in which they ac+uired it 5hile the land was
originally devoted to rice and fruit trees, it was
su*divided into small lots and in the process converted
into a residential su*division and given the name 1on
Mariano Su*division @,tensive improvements li8e the
laying out of streets, construction of concrete gutters
and installation of lighting system and drainage
facilities, among others, were underta8en to enhance
the value of the lots and ma8e them more attractive to
prospective *uyers 2he audited financial
statements su*mitted together with the ta, return in
+uestion disclosed that a considera*le amount was
e,pended to cover the cost of improvements 2here is
authority that a property ceases to *e a capital asset if
the amount e,pended to improve it is dou*le its
original cost, for the e,tensive improvement indicates
that the seller held the property primarily for sale to
customers in the ordinary course of his *usiness

-nother distinctive feature of the real estate *usiness
discerni*le from the records is the e,istence of
contracts receiva*les, which stood at P'9",&9''"
2he si7a*le amount of receiva*les in comparison with
the sales volume of P44&,4()(( during the same
period signifies that the lots were sold on installment
*asis and suggests the num*er, continuity and
fre+uency of the sales -lso of significance is the
circumstance that the lots were advertised for sale to
the pu*lic and that sales and collection commissions
were paid out during the period in +uestion
Petitioners argument that they are merely li+uidating
the land must also fail !n ,hrman s.
Commissioner-

the -merican court in clear and
categorical terms rejected the li+uidation test in
determining whether or not a ta,payer is carrying on a
trade or *usiness 2he court o*served that the fact that
property is sold for purposes of li+uidation does not
foreclose a determination that a ;trade or *usiness; is
*eing conducted *y the seller
.ne may, of course, li+uidate a capital asset 2o do so,
it is necessary to sell 2he sale may *e conducted in
the most advantageous manner to the seller and he
will not lose the *enefits of the capital gain provision of
the statute unless he enters the real estate *usiness
and carries on the sale in the manner in which such a
*usiness is ordinarily conducted !n that event, the
li+uidation constitutes a *usiness and a sale in the
ordinary course of such a *usiness and the preferred
ta, status is lost
!IR R1LI&% ),:()
$egistration with B3>$A or B>1## shall *e sufficient
for a sellerJtransferor to *e considered as ha*itually
engaged in real estate *usiness !f the sellerJtransferor
is not registered with the B3>$A or B>1##, heJit may
prove that heJit is engaged in the real estate *usiness
*y offering other satisfactory evidence =eg
consummation during the preceding year at least &
ta,a*le real estate transactions regardless of amount?
=A!$ $uling 6o (%)/%((% dated July ', %((%?
Capital assets
<%.R. &o. ')@@(A. #uly '*" )(((=
CHI& !&UI&% C.R2.RTI.&" petitioner+
vs. C.1RT .F 223L0" C.MMI00I.&3R
.F I&T3R&L R3$3&13 and C.1RT .F
TF 223L0"respondents.
5 3 C I 0 I . &
$IT1%" J.:
2he #ommissioner of !nternal $evenue denied
the deduction from gross income of ;securities
*ecoming worthless; claimed *y #hina Aan8ing
#orporation =R#A#S? 2he #ommissionerFs
disallowance was sustained *y the #ourt of 2a,
-ppeals =;#2-;? 5hen the ruling was appealed to the
#ourt of -ppeals =;#-;?, the appellate court upheld the
#2- 2he case is now *efore us on a Petition for
$eview on Certiorari
Sometime in 19:(, petitioner #hina Aan8ing
#orporation made a "'P e+uity investment in the 0irst
#A# #apital =-sia? 3td, a Bong8ong su*sidiary
engaged in financing and investment with ;deposit/
ta8ing; function 2he investment amounted to
P1&,%%),:"1:(, consisting of 1(&,((( shares with a
par Value of P1(( per share
!n the course of the regular e,amination of the
financial *oo8s and investment portfolios of petitioner
conducted *y $an"'o #entral in 19:&, it was shown
that 0irst #A# #apital =-sia?, 3td, has *ecome
insolvent 5ith the approval of $an"'o #entral,
petitioner wrote/off as *eing worthless its investment in
0irst #A# #apital =-sia?, 3td, in its 19:) !ncome 2a,
$eturn and treated it as a *ad de*t or as an ordinary
loss deducti*le from its gross income
$espondent #ommissioner of internal $evenue
disallowed the deduction and assessed petitioner for
income ta, deficiency in the amount of P:,"'','%:(4,
inclusive of surcharge, interest and compromise
penalty 2he disallowance of the deduction was made
on the ground that the investment should not *e
classified as *eing ;worthless; and that, although the
Bong8ong Aan8ing #ommissioner had revo8ed the
license of 0irst #A# #apital as a ;deposit/taping;
company, the latter could still e,ercise, however, its
financing and investment activities -ssuming that the
securities had indeed *ecome worthless, respondent
#ommissioner of !nternal $evenue held the view that
they should then *e classified as ;capital loss,; and not
as a *ad de*t e,pense there *eing no inde*tedness to
spea8 of *etween petitioner and its su*sidiary
Petitioner contested the ruling of respondent
#ommissioner *efore the #2- 2he ta, court
sustained the #ommissioner, holding that the
securities had not indeed *ecome worthless and
ordered petitioner to pay its deficiency income ta, for
19:) of P:,"'','%:(4 plus %(P interest per annum
until fully paid 5hen the decision was appealed to
the #ourt of -ppeals, the latter upheld the #2- !n its
instant petition for review on certiorari, petitioner *an8
assails the #- decision
2he petition must fail
2he claim of petitioner that the shares of stoc8 in
+uestion have *ecome worthless is *ased on a Profit
and 3oss -ccount for the Gear/@nd '1 1ecem*er
19:), and the recommendation of $an"'o #entral that
the e+uity investment *e written/off due to the
insolvency of the su*sidiary 5hile the matter may not
*e indu*ita*le =considering that certain classes of
intangi*les, li8e franchises and goodwill, are not
always given corresponding values in financial
statements
M1N
, there may really *e no need, however, to
go of length into this issue since, even to assume the
worthlessness of the shares, the deducti*ility thereof
would still *e nil in this particular case -t all events,
the #ourt is not prepared to hold that *oth the ta, court
and the appellate court are utterly devoid of su*stantial
*asis for their own factual findings
Su*ject to certain e,ceptions, such as the
compensation income of individuals and passive
income su*ject to final ta,, as well as income of non/
resident aliens and foreign corporations not engaged
in trade or *usiness in the Philippines, the ta, on
income is imposed on the net income allowing certain
specified deductions from gross income to *e claimed
*y the ta,payer -mong the deducti*le items allowed
*y the 6ational !nternal $evenue #ode =;6!$#;?
are -ad de-ts and losses
M%N
-n e+uity investment is a capital, not
ordinary, asset of the investor the sale or e,change of
which results in either a capital gain or a capital
loss 2he gain or the loss is ordinary when the
property sold or e,changed is not a capital asset
M'N
-
capital asset is defined negatively in Section ''=1? of
the 6!$#4 i(8
=1? #apital assets / 2he term 9capital assets9 means
property held *y the ta,payer =whether or not
connected with his trade or *usiness?, *ut does not
include stoc8 in trade of the ta,payer or other property
of a 8ind which would properly *e included in the
inventory of the ta,payer if on hand at the close of the
ta,a*le year, or property held *y the ta,payer primarily
for sale to customers in the ordinary course of his
trade or *usiness, or property used in the trade or
*usiness, of a character which is su*ject to the
allowance for depreciation provided in su*section =f? of
section twenty/nine4 or real property used in the trade
or *usiness of the ta,payerS
2hus, shares of stoc84 li8e the other securities
defined in Section %(=t?
M4N
of the 6!$#, would
*e ordinary assets only to a dealer in securities or a
person engaged in the purchase and sale of" or an
active trader Cfor his own accountD in"
securities. Section %(=u? of the 6!$# defines a
dealer in securities thusC
;=u? 2he term 9dealer in securities9 means a merchant
of stoc8s or securities, whether an individual,
partnership or corporation, with an esta*lished place of
*usiness, regularly engaged in the purchase of
securities and their resale to customers4 that is, one
who as a merchant *uys securities and sells them to
customers with a view to the gains and profits that may
*e derived therefrom;
!n the hands, however, of another who holds the
shares of stoc8 *y way of an investment, the shares to
him would *e capital assets 5hen the shares held
-y such investor -ecome worthless" the loss is
deemed to -e a loss from the sale or e9change of
capital assets Section %9=d?=4?=A? of the 6!$#
statesC
;=A? Securities *ecoming worthless / !f securities as
defined in Section %( *ecome worthless during the
ta,; year and are capital assets, the loss resulting
therefrom shall, for the purposes of his 2itle, *e
considered as a loss from the sale or e,change, on the
last day of such ta,a*le year, of capital assets;
2he a*ove provision conveys that the loss sustained
*y the holder of the securities, which are capital assets
=to him?, is to *e treated as a capital loss as if
incurred from a sale or e9change transaction -
capital gain or a capital loss normally re+uires the
concurrence of two conditions for it to resultC =1? 2here
is a sale or e,change4 and =%? the thing sold or
e,changed is a capital asset 5hen securities
*ecome worthless, there is strictly no sale or e,change
*ut the law deems the loss anyway to *e ;a loss from
the sale or e,change of capital assetsS
M"N
- similar 8ind
of treatment is given, *y the 6!$# on the retirement of
certificates of inde*tedness with interest coupons or in
registered form, short sales and options to *uy or sell
property where no sale or e,change strictly e,ists
M&N
!n
these cases, the 6!$# dispenses, in effect, with the
standard re+uirement of a sale or e,change for the
application of the capital gain and loss provisions of
the code
Capital losses are allowed to -e deducted
only to the e9tent of capital gains" i.e." gains
derived from the sale or e9change of capital
assets" and not from any other income of the
ta9payer.
!n the case at *ar, 0irst #A# #apital =-sia?, 3td,
the investee corporation, is a su*sidiary corporation of
petitioner *an8 whose shares in said investee
corporation are not intended for purchase or sale *ut
as an investment >n+uestiona*ly then, any loss
therefrom would *e a capital loss, not an ordinary loss,
to the investor
Section %9=d?=4?=-?, of the 6!$# e,pressesC
;=-? 3imitations / 3osses from sales or e,changes of
capital assets shall *e allowed only to the e,tent
provided in Section '';
2he pertinent provisions of Section '' of the 6!$#
referred to in the aforesaid Section %9=d?=4?=-?, readC
;Section '' #apital gains and losses /
R, , , , , , , , ,
;=c? 3imitation on capital losses / Losses from sales
or e9change of capital assets shall -e allowed only
to the e9tent of the gains from such sales or
e9changes !f a *an8 or trust company incorporated
under the laws of the Philippines, a su*stantial part of
whose *usiness is the receipt of deposits, sells any
*ond, de*enture, note, or certificate or other
evidence of inde-tedness issued *y any corporation
=including one issued *y a government or political
su*division thereof?, with interest coupons or in
registered form, any loss resulting from such sale
shall not *e su*ject to the foregoing limitation an shall
not *e included in determining the applica*ility of such
limitation to other lossesS
2he e,clusionary clause found in the foregoing
te,t of the law does not include all forms of securities
*ut specifically covers only -onds" de-entures"
notes" certificates or other evidence of
inde-tedness" with interest coupons or in
registered form, which are the instruments of credit
normally dealt with in the usual lending operations of a
financial institution @+uity holdings cannot come
close to *eing, within the purview of ;evidence of
inde-tedness; under the second sentence of the
afore+uoted paragraph Verily, it is for a li8e thesis
that the loss of petitioner *an8 in its e;uity in
vestment in the HongJong su-sidiary cannot also
*e deducti*le as a *ad de*t 2he shares of stoc8 in
+uestion do not constitute a loan e,tended *y it to its
su*sidiary =0irst #A# #apital? or a de*t su*ject to
o*ligatory repayment *y the latter, essential elements
to constitute a *ad de*t, *ut a long term investment
made *y #A#
.ne other item Section '4=c?=1? of the 6!$# ,
states that the entire amount of the gain or loss upon
the sale or e,change of property, as the case may *e,
shall *e recogniOed 2he complete te,t readsC
RS@#2!.6 '4 1etermination of amount of and
recognition of gain or loss/
;=a? #omputation of gain or loss / 2he gain from the
sale or other disposition of property shall *e the
e,cess of the amount reali7ed therefrom over the
*asis or adjusted *asis for determining gain and the
loss shall *e the e,cess of the *asis or adjusted *asis
for determining loss over the amount reali7ed 2he
amount reali7ed from the sale or other disposition of
property shall *e to sum of money received plus the
fair mar8et value of the property =other than money?
received =-s amended *y @. 6o ')?
;=*? Aasis for determining gain or loss from sale or
disposition of property / 2he *asis of property shall *e
/ =1? 2he cost thereof in cases of property ac+uired on
or *efore March 1, 191', if such property was ac+uired
*y purchase4 or
;=%? 2he fair mar8et price or value as of the date of
ac+uisition if the same was ac+uired *y inheritance4 or
;='? !f the property was ac+uired *y gift the *asis shall
*e the same as if it would *e in the hands of the donor
or the last preceding owner *y whom it was not
ac+uired *y gift, e,cept that if such *asis is greater
than the fair mar8et value of the property at the time of
the gift, then for the purpose of determining loss the
*asis shall *e such fair mar8et value4 or
;=4? !f the property, other than capital asset referred to
in Section %1 =e?, was ac+uired for less than an
ade+uate consideration in money or moneys worth,
the *asis of such property is =i? the amount paid *y the
transferee for the property or =ii? the transferor9s
adjusted *asis at the time of the transfer whichever is
greater
;="? 2he *asis as defined in paragraph =c? ="? of this
section if the property was ac+uired in a transaction
where gain or loss is not recogni7ed under paragraph
=c? =%? of this section =-s amended *y @. 6o ')?
R=c? @,change of property
;=1? <eneral rule/ @,cept as herein provided, upon the
sale or e,change of property, the entire amount of the
gain or loss, as the case may *e, shall *e recogni7ed
;=%? @,ception / 6o gain or loss shall *e recogni7ed if
in pursuance of a plan of merger or consolidation =a? a
corporation which is a party to a merger or
consolidation e,changes property solely for stoc8 in a
corporation which is, a party to the merger or
consolidation, =*? a shareholder e,changes stoc8 in a
corporation which is a party to the merger or
consolidation solely for the stoc8 in another
corporation also a party to the merger or consolidation,
or =c? a security holder of a corporation which is a
party to the merger or consolidation e,changes his
securities in such corporation solely for stoc8 or
securities in another corporation, a party to the merger
or consolidation
;6o gain or loss shall also *e recogni7ed if property is
transferred to a corporation *y a person in e,change
for stoc8 in such corporation of which as a result of
such e,change said person, alone or together with
others, not e,ceeding four persons, gains control of
said corporationC Provided, 2hat stoc8s issued for
services shall not *e considered as issued in return of
property;
2he a*ove law should *e ta8en within conte,t on
the general su*ject of the determination, and
recognition of gain or loss4 it is not preclusive of, let
alone renders completely inconse+uential, the more
specific provisions of the code 2hus, pursuant, to the
same section of the law, no such recognition shall *e
made if the sale or e,change is made in pursuance of
a plan of corporate merger or consolidation or, if as a
result of an e,change of property for stoc8s, the
e,changer, alone or together with others not
e,ceeding four, gains control of the corporation
M)N
2hen, too, how the resulting gain might *e ta,ed, or
whether or not the loss would *e deducti*le and how,
are matters properly dealt with elsewhere in various
other sections of the 6!$#
M:N
-t all events, it may not
*e amiss to once again stress that the *asic rule is still
that any capital loss can -e deducted only from
capital gains under Section ''=c? of the 6!$#
!n sum /
=a? 2he e+uity investment in shares of stoc8 held
*y #A# of appro,imately "'P in its Bong8ong
su*sidiary, the 0irst #A# #apital =-sia?, 3td, is not an
inde*tedness, and it is a capital, not an
ordinary, asset
M9N
=*? -ssuming that the e+uity investment of #A#
has indeed *ecome ;worthless,; the loss sustained is
a capital" not an ordinary, loss
M1(N
=c? 2he capital loss sustained *y #A# can only *e
deducted from capital gains if any derived *y it during
the same ta,a*le year that the securities have *ecome
;worthless;
M11N
EH3R3F.R3, the Petition is 1@6!@1 2he
decision of the #ourt of -ppeals disallowing the
claimed deduction of P1&,%%),:"1:( is -00!$M@1
0. .R53R35.
Dai!e- Dr.- C.D.- $ellosillo- ?elo- Puno- Rapunan-
?en!o(a- Pan"aniban- Juisumbin"- Purisima- Par!o-
$uena- .on(a"a>)eyes- &nares>#antia"o- and De
3eon- Dr.- DD.- concur
0. 53T3RMI&TI.& .F %I& .R L.00 FR.M
0L3 .R TR&0F3R .F 2R.23RTG
,xchan"e of property
CIR v R1FI&.
FCT0:
2he private respondents were the majority
stoc8holders of the defunct @astern 2heatrical #o,
!nc, =.ld #orporation? @rnesto $ufino was the
president 2he private respondents were also the
majority and controlling stoc8holders of another
corporation, the @astern 2heatrical #o !nc, =6ew
#orporation? 2his corporation was engaged in the
same 8ind of *usiness as the .ld #orporation, ie
operating theaters, opera houses, places of
amusement and other related *usiness enterprises
Vicente $ufino was the <eneral Manager
2he .ld #orporation held a special meeting of
stoc8holders where a resolution was passed
authori7ing the .ld #orporation to merge with the 6ew
#orporation Pursuant to the said resolution, the .ld
#orporation, represented *y @rnesto $ufino as
President, and the 6ew #orporation, represented *y
Vicente $ufino as <eneral Manager, signed a 1eed of
-ssignment providing for the conveyance and transfer
of all the *usiness, property assets, goodwill, and
lia*ilities of the .ld #orporation to the 6ew
#orporation in e,change for the latter9s shares of stoc8
to *e distri*uted among the shareholders on the *asis
of one stoc8 for each stoc8 held in the .ld
#orporation 2his agreement was made retroactive
2he aforesaid transfer was eventually made 2he
resolution and the 1eed of -ssignment were approved
in a resolution *y the stoc8holders of the 6ew
#orporation in their special meeting 2he increased
capitali7ation of the 6ew #orporation was registered
and approved *y the S@#
2he A!$, after e,amination, declared that the merger
was not underta8en for a bona fi!e *usiness purpose
*ut merely to avoid lia*ility for the capital gains ta, on
the e,change of the old for the new shares of stoc8
-ccordingly, deficiency assessments were imposed
against the private respondents M$ denied #2-
reversed and held that there was a valid merger !t
declared that no ta,a*le gain was derived *y
petitioners from the e,change of their old stoc8s solely
for stoc8s of the 6ew #orporation *ecause it was
pursuant to a plan of reorgani7ation 2hus, such
e,change is e,empt from #<2
I0013MR1LI&%:
5J6 the #2- erred in finding that no ta,a*le gain was
derived *y the private respondents from the
+uestioned transactionH 6.
2here was a valid merger although the actual transfer
of the properties su*ject of the 1eed of -ssignment
was not made on the date of the merger !n the nature
of things, this was not possi*le .*viously, it was
necessary for the .ld #orporation to surrender its net
assets first to the 6ew #orporation *efore the latter
could issue its own stoc8 to the shareholders of the
.ld #orporation *ecause the 6ew #orporation had to
increase its capitali7ation for this purpose 2his
re+uired the adoption of the resolution for the
registration of such issuance with the S@# and its
approval -ll these too8 place after the date of the
merger *ut they were deemed part and parcel of, and
indispensa*le to the validity and enforcea*ility of, the
1eed of -ssignment
2here is no impediment to the e,change of property
for stoc8 *etween the two corporations *eing
considered to have *een effected on the date of the
merger 2hat, in fact, was the intention, and the reason
why the 1eed of -ssignment was made retroactive
which provided in effect that all transactions set forth in
the merger agreement shall *e deemed to *e ta8ing
place simultaneously when the 1eed of -ssignment
*ecame operative
2he *asic consideration, of course, is the purpose of
the merger, as this would determine whether the
e,change of properties involved therein shall *e
su*ject or not to the capital gains ta, 2he criterion laid
down *y the law is that the merger; must *e
underta8en for a bona fi!e *usiness purpose and not
solely for the purpose of escaping the *urden of
ta,ation;
Bere, the purpose of the merger was to continue the
*usiness of the .ld #orporation, whose corporate life
was a*out to e,pire, through the 6ew #orporation to
which all the assets and o*ligations of the former had
*een transferred 5hat argues strongly, indeed, for the
6ew #orporation is that it was not dissolved after the
merger agreement .n the contrary, it continued to
operate the places of amusement originally owned *y
the .ld #orporation and continues to do so today after
ta8ing over the *usiness of the .ld #orporation %)
years ago
5hat is also worth noting is that, as in the case of the
.ld #orporation when it was dissolved, there has *een
no distri*ution of the assets of the 6ew #orporation
since then and up to now, as far as the record
discloses 2o date, the private respondents have not
derived any *enefit from the merger of the .ld
#orporation and the 6ew #orporation almost '
decades earlier that will ma8e them su*ject to the
capital gains ta, under Section '" 2hey are no more
lia*le now than they were when the merger too8 effect,
as the merger, *eing genuine, e,empted them under
the law from such ta,
Ay this decision, the government is, of course, not left
entirely without recourse, at least in the future 2he
fact is that the merger had merely deferred the claim
for ta,es, which may *e asserted *y the government
later, when gains are reali7ed and *enefits are
distri*uted among the stoc8holders as a result of the
merger !n other words, the corresponding ta,es are
not forever foreclosed or forfeited *ut may at the
proper time and without prejudice to the government
still *e imposed
%R3%.RG v H3L$3RI&%
0actsC
Petitioner was the owner of all the stoc8 of
>nited Mortgage #orporation=>M#? 2hat corporation
held among its assets 1,((( shares of the Monitor
Securities #orporation=MS#? Petitioner wanted these
shares transferred to her at a profit and with the
minimum income ta, lia*ility !n order to achieve this
purpose, Petitioner made it appear that she was
ma8ing a Rreorgani7ationS =in conforme with $evenue
-ct of 19%:
"
? >nder this law, a Rreorgani7ationS would
effect a direct transfer of a corporationFs share *y way
of dividend at a lower ta,a*le transaction
!n order to have an appearance of a
Rreorgani7ationS, she=Petitioner? organi7ed -verill
#orporation =-#? 2hree ='? days later, >M#
transferred the 1,((( shares of MS# to -# 2hen
these shares were all transferred to Petitioner
Su*se+uently, -# was dissolved with no other
transaction *eing made other the transfer of the
shares Petitioner then sold the shares and declared a
lower ta,a*le lia*ility 2he Aoard contended that the
so/called Rreorgani7ationS should *e considered
ineffective since it was just a scheme to have a lower
ta, lia*ility
!SS>@C
5hether the Rreorgani7ationS is valid which
would result to a lower ta, lia*ility
B@31C
6. !t is contended that since every element
re+uired *y the foregoing su*division =A? =refer to
footnote? is to *e found in what was done, a statutory
reorgani7ation was effected, and that the motive of the
ta,payer there*y to escape payment of a ta, will not
alter the result or ma8e unlawful what the statute
allows
2he #ourt said, although the legal right of a
ta,payer to decrease the amount of what otherwise
would *e his ta,es, or altogether avoid them, *y
means which the law permits, cannot *e dou*ted, the
;uestion for determination is whether what was
done" apart from the ta9 motive" was the thing
which the statute intended.
5hen su*division =A? spea8s of a transfer of
assets *y one corporation to another, it means a
transfer made ;in pursuance of a plan of
reorgani7ation of corporate *usiness, and not a
transfer of assets *y one corporation to another in
pursuance of a plan having no relation to the *usiness
of either, as plainly is the case here
1 3Sec. 112. (g Distribution of Stock on Reorganization. 'f
there is distributed! in "ursuance of a "lan of
reorgani+ation! to a shareholder in a cor"oration a "arty to
the reorgani+ation! stoc/ or securities in such cor"oration or
in another cor"oration a "arty to the reorgani+ation! without
the surrender by such shareholder of stoc/ or securities in
such a cor"oration! no gain to the distributee from the
recei"t of such stoc/ of securities shall be recogni+ed. . . .3
3(i Definition of Reorganization. -- 9s used in this section . .
.3
3(1 The term 2reorgani+ation2 means . . . (B) a transfer by
a corporation of all or a part of its assets to another
corporation if immediately after the transfer the
transferor or its stockholders or both are in control
of the corporation to which the assets are
transferred. . . ."
Simply an operation having no *usiness or
corporate purpose // a mere device which put on the
form of a corporate reorgani7ation as a disguise for
concealing its real character, and the sole o*ject and
accomplishment of which was the consummation of a
preconceived plan, not to reorgani7e a *usiness or any
part of a *usiness, *ut to transfer a parcel of corporate
shares to the petitioner 2he rule which e,cludes from
consideration the motive of ta, avoidance is not
pertinent to the situation, *ecause the transaction,
upon its face, lies outside the plain intent of the
statute =8asi wala nga talagang *usiness purpose *ut
to circumvent the law?
T. 0IT10 .F TFTI.&
.ross income from sources within the Phils
CIR v CT &5 0MITHIFR3&CH .$3R030
6acts8
Smith Eline I 0rench .verseas #ompany is a
multinational firm domiciled in Philadelphia, licensed to
do *usiness in the Philippines !t is engaged in the
importation, manufacture, and sale of pharmaceutical
drugs and chemicals
!n 19)1, it declared a net ta,a*le income of P14 M
and paid P"118 as ta, due !t claimed its share of the
head office overhead e,penses =P"(18? as deduction
from gross income !n its amended return, it claimed
that there was an overpayment of ta, =P'%48? arising
from under/deduction of the overhead e,pense 2his
was certified *y international independent auditors, the
allocation of the overhead e,pense made on the *asis
of the percentage of gross income in the Philippines to
gross income of the corporation as a whole
!n 19)4, without waiting for the action of the #!$,
Smith filed a petition for review with the #2- #2-
ordered #!$ to refund the overpayment or grant Smith
a ta, credit #!$ appealed to the S#
Issue8 5hether Smith is entitled to a refund U G@S
)atioC
2he governing law is found in Sec ') =*?
&
$evenue
$egulation 6o % of the 1.0 contains a similar
provision, with the additional line that Rthe rata*le part
is *ased upon the ratio of gross income from sources
within the Philippines to the total gross incomeS =Sec
1&(? Bence, where an e,pense is clearly related to
the production of Philippine/derived income or to
Philippine operations, that e,pense can *e deducted
from the gross income ac+uired in the Philippines
without resorting to apportionment
Bowever, the overhead e,penses incurred *y the
parent company in connection with finance,
administration, and research I development, all of
which directly *enefit its *ranches all over the world,
fall under a different category 2hese are items which
cannot *e definitely allocated or identified with the
operations of the Philippine *ranch Smith can claim
as its deducti*le share a rata*le part of such e,penses
*ased upon the ration of the local *ranchFs gross
income to the total gross income of the corporation
worldwide
CI)Is Contention
2he #!$ does not dispute the right of Smith to avail of
Sec ') =*? of the 2a, #ode and Sec 1&( of the $$
Aut he maintains that such right is not a*solute and
that there e,ists a contract =service agreement? which
6 Net income from sources in the Philippines. –
From the items of gross income specified in
subsection (a) of this section there shall be
deducted expenses, losses, and other deductions
properly apportioned or allocated thereto and a
ratable part of any expenses, losses, or other
deductions hich cannot definitely be allocated to
some item or class of gross income. !he
remainder, if any, shall be included in full as net
income from sources ithin the Philippines.
Smith has entered into with its home office, prescri*ing
the amount that a *ranch can deduct as its share of
the main officeFs overhead e,penses Since the share
of the Philippine *ranch has *een fi,ed, Smith cannot
claim more than the said amount
#mithIs Contention
Smith, on the other hand, su*mits that the contract
*etween itself and its home office cannot amend ta,
laws and regulations 2he matter of allocated
e,penses deducti*le under the law cannot *e the
su*ject of an agreement *etween private parties nor
can the #!$ ac+uiesce in such an agreement
S# ruled for Smith Eline and said that its amended
return conforms with the law and regulations
2HIL %1R&TG C. v CIR
FactsC 2he Philippine <uaranty #o, !nc, a domestic
insurance company, entered into reinsurance
contracts, on various dates, with foreign insurance
companies not doing *usiness in the Philippines
2he reinsurance contracts made the commencement
of the reinsurers9 lia*ility simultaneous with that of
Philippine <uaranty #o, !nc under the original
insurance Philippine <uaranty #o, !nc was re+uired
to 8eep a register in Manila where the ris8s ceded to
the foreign reinsurers where entered, and entry therein
was *inding upon the reinsurers - proportionate
amount of ta,es on insurance premiums not recovered
from the original assured were to *e paid for *y the
foreign reinsurers 2he foreign reinsurers further
agreed, in consideration for managing or administering
their affairs in the Philippines, to compensate the
Philippine <uaranty #o, !nc, in an amount e+ual to
"P of the reinsurance premiums #onflicts andJor
differences *etween the parties under the reinsurance
contracts were to *e ar*itrated in Manila Philippine
<uaranty #o, !nc and Swiss $einsurance #ompany
stipulated that their contract shall *e construed *y the
laws of the Philippines
Pursuant to the aforesaid reinsurance contracts,
Philippine <uaranty #o, !nc ceded premiuns to the
foreign reinsurers Said premiums were e,cluded *y
Philippine <uaranty #o, !nc from its gross income
when it file its income ta, returns for 19"' and 19"4
0urthermore, it did not withhold or pay ta, on them
#onse+uently, the #ommissioner of !nternal $evenue
assessed against Philippine <uaranty #o, !nc
withholding ta, on the ceded reinsurance premiums
IssueC 5hether the reinsurance premiums ceded to
foreign reinsurers not doing *usiness in the Philippines
are su*ject to withholding ta,H
HeldC 2he reinsurance premiums are su*ject to
withholding ta, 2he reinsurance contracts, however,
show that the transactions or activities that constituted
the underta8ing to reinsure Philippine <uaranty #o,
!nc against loses arising from the original insurances
in the Philippines were performed in the Philippines
2he lia*ility of the foreign reinsurers commenced
simultaneously with the lia*ility of Philippine <uaranty
#o, !nc under the original insurances Philippine
<uaranty #o, !nc 8ept in Manila a register of the ris8s
ceded to the foreign reinsurers @ntries made in such
register *ound the foreign resinsurers, locali7ing in the
Philippines the actual cession of the ris8s and
premiums and assumption of the reinsurance
underta8ing *y the foreign reinsurers 2a,es on
premiums imposed *y Section %"9 of the 2a, #ode for
the privilege of doing insurance *usiness in the
Philippines were paya*le *y the foreign reinsurers
when the same were not recovera*le from the original
assured 2he foreign reinsurers paid Philippine
<uaranty #o, !nc an amount e+uivalent to "P of the
ceded premiums, in consideration for administration
and management *y the latter of the affairs of the
former in the Philippines in regard to their reinsurance
activities here 1isputes and differences *etween the
parties were su*ject to ar*itration in the #ity of Manila
-ll the reinsurance contracts, e,cept that with Swiss
$einsurance #ompany, were signed *y Philippine
<uaranty #o, !nc in the Philippines and later signed
*y the foreign reinsurers a*road -lthough the contract
*etween Philippine <uaranty #o, !nc and Swiss
$einsurance #ompany was signed *y *oth parties in
Swit7erland, the same specifically provided that its
provision shall *e construed according to the laws of
the Philippines, there*y manifesting a clear intention of
the parties to su*ject themselves to Philippine law
Section %4 of the 2a, #ode su*jects foreign
corporations to ta, on their income from sources within
the Philippines 2he word ;sources; has *een
interpreted as the activity, property or service giving
rise to the income
1
2he reinsurance premiums were
income created from the underta8ing of the foreign
reinsurance companies to reinsure Philippine
<uaranty #o, !nc, against lia*ility for loss under
original insurances Such underta8ing, as e,plained
a*ove, too8 place in the Philippines 2hese insurance
premiums, therefore, came from sources within the
Philippines and, hence, are su*ject to corporate
income ta,
2he foreign insurers9 place of business should not *e
confused with their place of activity $usiness should
not *e continuity and progression of transactions while
activity may consist of only a single transaction -n
activity may occur outside the place of *usiness
Section %4 of the 2a, #ode does not re+uire a foreign
corporation to engage in *usiness in the Philippines in
su*jecting its income to ta, !t suffices that the activity
creating the income is performed or done in the
Philippines 5hat is controlling, therefore, is not the
place of business *ut the place of actiity that created
an income
H.E53& I C. v CIR
2HILI22I&3 M3RIC& LIF3 I&01R&C3 C. v
CT
Howden $s CIR
=ta,ation from Sources in the Philippines?
FCT0:
#ommonwealth !nsurance #o =#!#?, a domestic
corporation, entered into reinsurance contracts with '%
Aritish companies not engaged in *usiness in
thePhilippines represented *y herein Plaintiff #!#
remitted to Plaintiff reinsurance premiums and, on
*ehalf of Plaintiff, paid income ta, on the premiums
Plaintiff filed a claim for a refund of the paid ta,, stating
that it was e,empted from withholding ta, reinsurance
premiums received from domestic insurance
companies *y foreign insurance companies not
authori7ed to do *usiness in the Philippines Plaintiffs
stated that since Sec "' and "4 were su*stantially re/
enactedS *y $- 1(&", 1%91 and %'4',
said rulings should *e given the force of law under the
principle of legislative approval *y re/enactment
I0013:
5J6 the ta, should *e withheld
H3L5:
6o 2he principle of legislative enactment states that
where a statute is suscepti*le of the meaning placed
upon it *y a ruling of the government agency charged
with its enforcement and the legislature thereafter re/
enacts the provisions without su*stantial changes,
such action is confirmatory to an e,tent that the ruling
carries out the legislative purpose 2his principle is not
applica*le for heaforementioned sections were never
re/enacted .nly the ta, rate was amended 2he
administrative rulings invo8ed *y the #!$ were only
contained in unpu*lished letters !t cannot *e assumed
that the legislature 8new of these rulings 0inally, the
premiums remitted were to indemnify #!# against
lia*ility This tooJ place within the
2hilippines" thus su-8ect to income ta9
C.&0.LI5T35 MI&30" I&C." petitioner,
vs
C.1RT .F TF 223L0 and C.MMI00I.&3R
.F I&T3R&L R3$3&13" respondents
%.R. &os. L:'AA@> I L:'AA@? ugust )*" '*,?
C.MMI00I.&3R .F I&T3R&L
R3$3&13" petitioner,
vs
C.&0.LI5T35 MI&30" I&C." respondent
7ffice of the #olicitor .eneral for Commissioner of
Internal )eenue.
TaCa!a- Carreon K TaCa!a for Consoli!ate! ?ines-
Inc.

MULI&TL" /.J.:p
2hese are appeals from the amended decision of the
#ourt of 2a, -ppeals dated -ugust ), 19&1, in #2-
#ases 6o "&" and "):, *oth entitled ;#onsolidated
Mines, !nc vs #ommissioner of !nternal $evenue,;
ordering the #onsolidated Mines, !nc, hereinafter
referred to as the #ompany, to pay the #ommissioner
of !nternal $evenue the amounts of P)9,:1%9',
P"1,"%:%4 and P)1,'9%:% as deficiency income
ta,es for the years 19"', 19"4 and 19"&, respectively,
or the total sum of P%(%,)''99, plus "P surcharge
and 1P monthly interest from the date of finality of the
decision
2he #ompany, a domestic corporation engaged in
mining, had filed its income ta, returns for 19"1, 19"%,
19"' and 19"& !n 19") e,aminers of the Aureau of
!nternal $evenue investigated the income ta, returns
filed *y the #ompany *ecause on -ugust 1(, 19"4, its
auditor, 0elipe .llada claimed the refund of the sum of
P1(),4)%(( representing alleged overpayments of
income ta,es for the year 19"1 -fter the investigation
the e,aminers reported that =-? for the years 19"1 to
19"4 =1? the #ompany had not accrued as an e,pense
the share in the company profits of Aenguet
#onsolidated Mines as operator of the #ompany9s
mines, although for income ta, purposes the #ompany
had reported income and e,penses on the accrual
*asis4 =%? depletion and depreciation e,penses had
*een overcharged4 and ='? the claims for audit and
legal fees and miscellaneous e,penses for 19"' and
19"4 had not *een properly su*stantiated4 and that =A?
for the year 19"& =1? the #ompany had overstated its
claim for depletion4 and =%? certain claims for
miscellaneous e,penses were not duly supported *y
evidence
!n view of said reports the #ommissioner of !nternal
$evenue sent the #ompany a letter of demand
re+uiring it to pay certain deficiency income ta,es for
the years 19"1 to 19"4, inclusive, and for the year
19"& 1eficiency income ta, assessment notices for
said years were also sent to the #ompany 2he
#ompany re+uested a reconsideration of the
assessment, *ut the #ommissioner refused to
reconsider, hence the #ompany appealed to the #ourt
of 2a, -ppeals 2he assessments for 19"1 to 19"4
were contested in #2- #ase 6o "&", while that for
19"& was contested in #2- #ase 6o "): >pon
agreement of the parties the two cases were heard
and decided jointly
.n May &, 19&1 the 2a, #ourt rendered judgment
ordering the #ompany to pay the amounts of
P1(),:4&"&, P1'4,(''(1 and P)1,'9%:% as
deficiency income ta,es for the years 19"', 19"4 and
19"&, respectively 2he 2a, #ourt nullified the
assessments for the years 19"1 and 19"% on the
ground that they were issued *eyond the five/year
period prescri*ed *y Section ''1 of the 6ational
!nternal $evenue #ode
Bowever, on -ugust ), 19&1, upon motion of the
#ompany, the 2a, #ourt reconsidered its decision and
further reduced the deficiency income ta, lia*ilities of
the #ompany to P)9,:1%9', P"1,"%:%4 and
P)1,':%:% for the years 19"', 19"4 and 19"&,
respectively !n this amended decision the 2a, #ourt
su*scri*ed to the theory of the #ompany that Aenguet
#onsolidated Mining #ompany, hereafter referred to
as Aenguet, had no right to share in ;-ccounts
$eceiva*le,; hence one/half thereof may not *e
accrued as an e,pense of the #ompany for a given
year
Aoth the #ompany and the #ommissioner appealed to
this #ourt 2he #ompany +uestions the rate of mine
depletion adopted *y the #ourt of 2a, -ppeals and the
disallowance of depreciation charges and certain
miscellaneous e,penses =<$ 6os
3/1::4' I 3/1::44? 2he #ommissioner, on the other
hand, +uestions what he characteri7es as the ;hy*rid;
or ;mi,ed; method of accounting utili7ed *y the
#ompany, and approved *y the 2a, #ourt, in treating
the share of Aenguet in the net profits from the
operation of the mines in connection with its income
ta, returns =<$ 6os 3/1::"' I
3/1::"4?
5ith respect to methods of accounting, the 2a, #ode
statesC
Sec ': <eneral $ules 2he net
income shall *e computed upon the
*asis of the ta,payer9s annual
accounting period =fiscal year or
calendar year, as the case may *e? in
accordance with the method of
accounting regularly employed in
8eeping the *oo8s of such ta,payer
*ut if no such method of accounting
has *een so employed or if the
method employed does not clearly
reflect the income the computation
shall *e made in accordance with
such methods as in the opinion of the
#ommissioner of !nternal $evenue
does clearly reflect the income
Sec '9 Period in which items of
gross income included K 2he amount
of all items of gross income shall *e
included in the gross income for the
ta,a*le year in which received *y the
ta,payer, unless, under the methods
of accounting permitted under section
':, any such amounts are to *e
properly accounted for as of a different
period
Sec 4( Period for which deductions
and credits ta8en K 2he deductions
provided for in this 2itle shall *e ta8en
for the ta,a*le year in which ;paid or
accrued; or ;paid or incurred;
dependent upon the method of
accounting upon the *asis of which
the net income is computed, unless in
order to clearly reflect the income the
deductions should *e ta8en as of a
different period
!t is said that accounting methods for ta,
purposes
'
comprise a set of rules for determining
when and how to report income and deductions 2he
>S !nternal $evenue #ode
)
allows each ta,payer to
adopt the accounting method most suita*le to his
*usiness, and re+uires only that ta,a*le income
generally *e *ased on the method of accounting
regularly employed in 8eeping the ta,payer9s *oo8s,
provided that the method clearly reflects income
>
2he #ompany used the accrual method of accounting
in computing its income .ne of its e,penses is the
amount/paid to Aenguet as mine operator, which
amount is computed as "(P of ;net income; 2he
#ompany deducts as an e,pense "(P of cash
receipts minus dis*ursements, *ut does not deduct at
the end of each calendar year what the #ommissioner
alleges is ;"(P of the share of Aenguet; in the
;accounts receiva*le; Bowever, it deducts Aenguet9s
"(P if and when the ;accounts receiva*le; are actually
paid !t would seem, therefore, that the #ompany has
*een deducting a portion of this e,pense =Aenguet9s
share as mine operator? on the ;cash I carry; *asis
2he +uestion is whether or not the accounting system
used *y the #ompany justifies such a treatment of this
item4 and if not, whether said method used *y the
#ompany, and characteri7ed *y the #ommissioner as
a ;hy*rid method,; may *e allowed under the
afore+uoted provisions of our ta, code
?
0or a proper understanding of the situation the
following facts are statedC 2he #ompany has certain
mining claims located in Masinloc, _am*ales Aecause
it wanted to relieve itself of the wor8 and e,pense
necessary for developing the claims, the #ompany, on
July 9, 19'4, entered into an agreement =@,hi*it 3?
with Aenguet, a domestic anonymous partnership
engaged in the production and mar8eting of chromite,
where*y the latter undertoo8 to ;e,plore, develop,
mine, concentrate and mar8et; the pay ore in said
mining claims
2he pertinent provisions of their agreement, as
amended *y the supplemental agreements of
Septem*er 14, 19'9 =@,hi*it 3/1? and .cto*er %, 1941
=@,hi*it 3/%?, are as followsC
!V Aenguet further agrees to provide
such funds from its own resources as
are in its judgment necessary for the
e,ploration and development of said
claims and properties, for the
purchase and construction of said
concentrator plant and for the
installation of the proper transportation
facilities as provided in paragraphs !, !!
and !!! hereof until such time as the
said properties are on a profit
producing *asis and agrees thereafter
to e,pand additional funds from its
own resources, if the income from the
said claims is insufficient therefor, in
the e,ploration and development of
said properties or in the enlargement
or e,tension of said concentration and
transportation facilities if in its
judgment good mining practice
re+uires such additional e,penditures
Such e,penditures from its own
resources prior to the time the said
properties are put on a profit
producing *asis shall *e reim*ursed
as provided in paragraph V!!! hereof
@,penditures from its own resources
thereafter shall *e charged against the
su*se+uent gross income of the
properties as provided in paragraph L
hereof
V!! -s soon as practica*le after the
close of each month Aenguet shall
furnish #onsolidated with a statement
showing its e,penditures made and
ore settlements received under this
agreement for the preceding month
which statement shall *eta8en as
accepted *y #onsolidated unless
e,ception is ta8en thereto or to any
item thereof within ten days in writing
in which case the dispute shall *e
settled *y agreement or *y ar*itration
as provided in paragraph LL!! hereof
V!!! 5hile Aenguet is *eing
reim*ursed for all its e,penditures,
advances and dis*ursements
hereunder as evidenced *y said
statements of accounts, the net profits
resulting from the operation of the
aforesaid claims or properties shall *e
divided ninety per cent =9(P? to
Aenguet and ten per cent =1(P? to
#onsolidated Such division of net
profits shall *e *ased on the receipts,
and e,penditures during each
calendar year, and shall continue until
such time as the ninety per cent =9(P?
of the net profits pertaining to Aenguet
hereunder shall e+ual the amount of
such e,penditures, advances and
dis*ursements 2he net profits shall
*e computed as provided in
Paragraph L hereof
L -fter Aenguet has *een fully
reim*ursed for its e,penditures,
advances and dis*ursements as
aforesaid the net profits from the
operation shall *e divided *etween
Aenguet and #onsolidated share and
share ali8e, it *eing understood
however, that the net profits as the
term is used in this agreement shall
*e computed *y deducting from gross
income all operating e,penses and all
dis*ursements of any nature
whatsoever as may *e made in order
to carry out the terms of this
agreement
L!!! !t is understood that Aenguet
shall receive no compensation for
services rendered as manager or
technical consultants in connection
with the carrying out of this
agreement !t may, however, charge
against the operation actual additional
e,penses incurred in its Manila .ffice
in connection with the carrying out of
the terms of this agreement including
traveling e,penses of consulting staff
to the mines Such e,penses,
however, shall not e,ceed the sum of
.ne 2housand Pesos =P1,(((((? per
month .therwise, the sole
compensation of Aenguet shall *e its
proportion of the net profits of the
operation as herein a*ove set forth
L!V -ll payments due #onsolidated
*y Aenguet under the terms of this
agreement with respect to
e,penditures made and ore
settlements received during the
preceding calendar month, shall *e
paya*le on or *efore the twentieth day
of each month
2here is no +uestion with respect to the 9(P/1(P
sharing of profits while Aenguet was *eing reim*ursed
the e,penses dis*ursed during the period it was trying
to put the mines on a profit/producing *asis
@
!t
appears that *y 19"' Aenguet had completely
recouped said advances, *ecause they were then
dividing the profits share and share ali8e
-s heretofore stated the +uestion isC >nder the
arrangement *etween the #ompany and Aenguet,
when did Aenguet9s "(P share in the ;-ccounts
$eceiva*le
accrueH
+
2he following ta*le =summary, @,hi*it -, of e,aminer9s
report of January %:, 19&), @,h :? prepared for the
#ommissioner graphically illustrates the effect of the
inclusion of one/half of ;-ccounts $eceiva*le; as
e,pense in the computation of the net income of the
#ompanyC
S>MM-$GC 19"1 19"% 19"'
.riginal share of
Aenguet
1,'1',&4(%& ',"%1,)"1,94 %,'4(,&%4"9
-dditional share
of $ec9*les
':',:%9:) &)),"(4)& ")),'94&&
2otal share of
Aenguet
1,&9),4)(1' 4,199,%"&)( %,91:,((9%"
3essC $eceipts
due from prior
year operation
%&9,&19(( ':',:%9:) &)),"(4)&
Share of
Aenguet as
adjusted =-cc9rd?
1,4%),:"11' ',:1",4%&:' %,%4(,"(449
3essC
Participation of
Aenguet already
deducted
1,'1',&4(%& ',"%1,)"194 %,'4(,&%4"9
-dditional
@,pense
=!ncome?
114,%1(:) %9',&)4:9 =1((,1%(1(?
!n the aforesaid ta*le ;-dditional share on $ec9*les; is
one/half of ;2otal $ec9*les minus ;2otal Paya*les; !t
indicates, from the #ommissioner9s viewpoint, that
there were years when the #ompany had *een
overstating its income =19"1 and 19"%? and there were
years when it had *een understating its income =19"'
and 19"4?
,
2he #ommissioner is not interested in the
ta,es for 19"1 and 19"% =which had prescri*ed
anyway? when the #ompany had overstated its
income, *ut in those for 19"' and 19"4, in each of
which years the amount of the ;-ccounts $eceiva*le;
was less than that of the previous year, and the
#ompany, therefore, appears to have deducted, as
e,pense, compensation to Aenguet *igger =than what
the #ommissioner claims is due? *y one/half of the
difference *etween the year9s ;-ccounts $eceiva*le;
and the previous year9s ;-ccounts $eceiva*le,; thus
apparently understating its income to that e,tent
-ccording to the agreement *etween the #ompany
and Aenguet the net profits ;shall *e computed *y
deducting from gross income all operating e,penses
and all e,penses of any nature whatsoever;
Periodically, Aenguet was to furnish the #ompany with
the statement of accounts for a given month ;as soon
as practica*le after the close; of that month 2he
#ompany had ten days from receipt of the statement
to register its o*jections thereto 2hereafter, the
statement was considered *inding on the #ompany
-nd all payments due the #ompany ;with respect to
the e,penditures made and ore settlements received
during the calendar month shall *e paya*le on or
*efore the twentieth of each month;
2he agreement does not say that Aenguet was to
share in ;-ccounts $eceiva*le; Aut may this *e
implied from the terms of the agreementH 2he
statement of accounts =par V!!!? and the payment part
=L!V? that Aenguet
A
must ma8e are *oth with respect
to ;e,penditures made and ore settlements received;
;@,penditures; are payments of money
*
2his is the
meaning intended *y the parties, considering the
provision that Aenguet agreed to ;provide such funds
from its own resources, etc;4 and that ;such
e,penditures from its own resources; were to *e
reim*ursed first as provided in par V!!!, and later as
provided in par L ;Settlement; does not necessarily
mean payment or satisfaction, though it may mean
that4 it fre+uently means adjustment or
arrangement
'(
2he term ;settlement; may *e used in
the sense of ;payment,; or it may *e used in the sense
of ;adjustment; or ;ascertainment,; or it may *e used
in the sense of ;adjustment; or ;ascertainment of a
*alance *etween contending parties,; depending upon
the circumstances under which, and the connection in
which, use of the term is made
''
!n the term ;ore
settlements received,; the word ;settlement; was not
used in the concept of ;adjustment,; ;arrangement; or
;ascertainment of a *alance *etween contending
parties,; since all these are ;made,; not ;received;
;Payment,; then, is the more appropriate e+uivalent of,
and interchangea*le with, the term ;Settlement;
Bence, ;ore settlements received; means ;ore
payments received,; which e,cludes ;-ccounts
$eceiva*le; 2hus, *oth par V!!! and par L!V refer to
;payment,; either received or paid *y Aenguet
-ccording to par L, the "(/"( sharing should *e on
;net profits4; and ;net profits; shall *e computed ;*y
deducting from gross income all operating e,penses
and all dis*ursements of any nature whatsoever as
may *e made in order to carry out the terms of the
agreement; 2he term ;gross profit; was not defined !n
the accrual method of accounting ;gross income;
would include *oth ;cash receipts; and ;-ccounts
$eceiva*le; Aut the term ;gross income; does not
carry a definite and infle,i*le meaning under all
circumstances, and should *e defined in such a way
as to ascertain the sense in which the parties have
used it in contracting
')
-ccording to par V!!!
'>
the
;division of net profits shall *e *ased on the receipts
and e,penditures; 2he term ;e,penditures; we have
already analy7ed -s used, receipts; means ;money
received;
'?
2he same par V!!! uses the term
;e,penditures, advances and dis*ursements;
;1is*ursements; means ;payment,;
'@
while the word
;advances; when used in a contract ordinarily means
money furnished with an e,pectation that it shall *e
returned
'+
!t is thus clear from par V!!! that in the
computation of ;net profits; =to *e divided on the 9(P/
1(P sharing arrangement? only ;cash payments;
received and ;cash dis*ursements; made *y Aenguet
were to *e considered .n the presumption that the
parties were consistent in the use of the term, the
same meaning must *e given to ;net profits; as used
in par L, and ;gross income,; accordingly, must *e
e+uated with ;cash receipts; 2he language used *y
the parties show their intention to compute Aenguet9s
"(P share on the e,cess of actual receipts over
dis*ursements, without considering ;-ccounts
$eceiva*le; and ;-ccounts Paya*le; as factors in the
computation Aenguet then did not have a right to
share in ;-ccounts $eceiva*le,; and, correspondingly,
the #ompany did not have the lia*ility to pay Aenguet
any part of that item -nd a deduction cannot *e
accrued until an actual lia*ility is incurred, even if
payment has not *een made
',
Bere we have to distinguish *etween =1? the metho!
of accountin" used *y the Company in determining
its net income for tax purposes4 and =%? the metho! of
computation agreed upon *etween the Company an!
$en"uet in determining the amount of
compensation that was to *e paid *y the former to the
latter 2he parties, *eing free to do so, had contracted
that in the method of computing compensation the
*asis were ;cash receipts; and ;cash payments; .nce
determined in accordance with the stipulated *ases
and procedure, then the amount due Aenguet for each
month accrue! at the end of that month, whether the
#ompany had made payment or not =see par L!V of
the agreement? 2o ma8e the #ompany deduct as an
e,pense one/half of the ;-ccounts $eceiva*le; would,
in effect, *e e+uivalent to giving Aenguet a right which
it did not have under the contract, and to su*stitute for
the parties9 choice a mode of computation of
compensation not contemplated *y them
'A
Since Aenguet had no right to one/half of the
;-ccounts $eceiva*le,; the #ompany was correct in
not accruing said one/half as a deduction 2he
#ompany was not using a hy*rid method of
accounting, *ut was consistent in its use of the accrual
method of accounting 2he first issue raised *y the
#ompany is with respect to the rate of mine depletion
used *y the #ourt of 2a, -ppeals 2he 2a, #ode
provides that in computing net income there shall *e
allowed as deduction, in the case of mines, a
reasona*le allowance for depletion thereof not to
e,ceed the mar8et value in the mine of the product
thereof which has *een mined and sold during the
year for which the return is made MSec '(=g? =1?
=A?N
'*
2he formula
)(
for computing the rate of depletion isC
#ost of Mine Property
////////////////////// [ $ate of 1epletion Per >nit
@stimated ore 1eposit of Product Mined and sold
2he #ommissioner and the #ompany do not agree as
to the figures corresponding to either factor that affects
the rate of depletion per unit 2he figures according to
the #ommissioner areC
P%,&4&,:):44 =mine cost? P("91:9 =rate of
///////////////////////// [ depletion per ton?
4,4)1,:9% tons =estimated ore deposit?
while the #ompany insists they areC
P4,%':,9)4") =mine cost? P1(19) =rate of
///////////////////////// / [ depletion per ton?
4,1"&,::: tons =estimated
ore deposit?
2hey agree, however, that the ;cost of the mine
property; consists of =1? mine cost4 and =%? e,penses
of development *efore production -s to mine cost, the
parties are practically in agreement K the
#ommissioner says it is P%,"1",((( =the #ompany
puts it at P%,"((,(((? -s to e,penses of development
*efore production the #ommissioner and the #ompany
widely differ 2he #ompany claims it is P1,)':,9)4"&,
while the #ommissioner says it is only P1'1,:):44
2he #ompany argues that the #ommissioner9s figure
is ;a patently insignificant and inade+uate figure when
one considers the tens of millions of pesos of revenue
and production that petitioner9s chromite mine fields
have finally produced;
-s an income ta, concept, depletion is wholly a
creation of the statute
)'
K ;solely a matter of
legislative grace;
))
Bence, the ta,payer has the
*urden of justifying the allowance of any deduction
claimed
)>
-s in connection with all other ta,
controversies, the *urden of proof to show that a
disallowance of depletion *y the #ommissioner is
incorrect or that an allowance made is inade+uate is
upon the ta,payer, and this is true with respect to the
value of the property constituting the *asis of the
deduction
)?
2his *urden/of/proof rule has *een
fre+uently applied and a value claimed has *een
disallowed for lac8 of evidence
)@
-s proof that the amount spent for developing the
mines was P1,)':,9)4"&, the #ompany relies on the
testimony of @ligio S <arcia and on @,hi*its 1, '1 and
':
@,hi*it ! is the #ompany9s report to its stoc8holders for
the year 194) !t contains the #ompany9s *alance
sheet as of 1ecem*er '1, 194& =@,hi*it !/1? -mong
the assets listed is ;Mines, !mprovement I 1ev; in the
amount of P4,%':,9)4"), which, according to the
#ompany, consisted of P%,"((,(((, purchase price of
the mine, and P1,)':,9)4"&, cost of developing it
2he #ompany also points to the statement therein that
;Aenguet invested appro,imately P%,"((,((( to put
the property in operation, the greater part of such
investment *eing devoted to the construction of a %"/
8ilometer road and the installation of port facilities;
2his amount of P%,"((,((( was only an estimate 2he
#ompany has not e,plained in detail in what this
amount or the lesser amount of P1,)':,9)4"&
consisted 6or has it e,plained how that *igger
amount *ecame P1,)':,9)4"& in the *alance sheet
for 1ecem*er '1, 194&
-ccording to the #ompany the total sum of
P4,%':,9)4") as ;Mines, !mprovement I 1ev; was
ta8en from its pre/war *alance sheet of 1ecem*er '1,
194( -s proof of this it cites the sworn certification
=@,hi*it ':? e,ecuted on .cto*er %", 194& *y $P
0lood, in his capacity as treasurer of the #ompany,
and attached to other papers of the #ompany filed with
the Securities and @,change #ommission in
compliance with the provisions of $epu*lic -ct 6o &%
=-n -ct to re+uire the presentation of proof of
ownership of securities and the reconstruction of
corporate and partnership records, and for other
purposes? !n said certification there are statements to
the effect that ;the Statement of -ssets I 3ia*ilities of
#onsolidated Mines, !ncorporated, su*mitted to the
Securities I @,change #ommission as a re+uirement
for the reconstitution of the records of the said
corporation, is as of Septem*er 4, 194&4; and that ;the
figure P4,%':,9)4") representing the value of Mines,
!mprovements and 1evelopments appearing therein,
was ta8en from the Aalance Sheet as of 1ecem*er '1,
194(, which is the only availa*le source of information
of the #orporation regarding the a*ove and
conse+uently the undersigned considers the stated
figure to *e only an estimate of the value of those
items at the present time ;2his figure, the #ompany
claims, is *ased on entries made in the ordinary and
regular course of its *usiness dating as far *ac8 as
*efore the war 2he #ompany places reliance on Sec
'9, $ule 1'(, $evised $ules of #ourt =formerly Sec
'4, $ule 1%'?, which provides that entries made at, or
near the time of the transactions to which they refer, *y
a person deceased, outside of the Philippines or
una*le to testify, who was in a position to 8now the
facts therein stated, may *e received as prima
facie evidence, if such person made the entries in his
professional capacity or in the performance of duty
and in the ordinary or regular course of *usiness or
duty;
6ote that @,hi*it ': is not the ;entries,; covered *y the
rule 2he #ompany, however, urges, unreasona*ly, we
thin8, that it should *e afforded the same pro*ative
value since it is *ased on such ;entries; meaning the
*alance sheet of 1ecem*er '1, 194(, which was not
presented in evidence @ven with the presentation of
said *alance sheet the #ompany would still have had
to prove =1? that the person who made the entry did so
in his professional capacity or in the performance of a
duty4 =%? that the entry was made in the ordinary
course of *usiness or duty4 ='? that the entry was
made at or near the time of the transaction to which it
related4 =4? that the one who made it was in a position
to 8now the facts stated in the entry4 and ="? that he is
dead, outside the Philippines or una*le to testify
)+
- *alance sheet may not *e considered as ;entries
made in the ordinary course of *usiness,; which,
according to MoranC
means that the entries have *een
made regularly, as is usual, in the
management of the trade or *usiness
!t is essential, therefore, that there *e
regularity in the entries 2he entry
which is *eing introduced in evidence
should appear to *e part of a group of
regular entries 2he regularity of the
entries may*e proved *y the form in
which they appear in the
corresponding boo'
),
- balance sheet, as that word is uniformly used *y
*oo88eepers and *usinessmen, is a paper which
shows ;a summation or general *alance of all
accounts,; *ut not the particular items going to ma8e
up the several accounts4 and it is therefore essentially
different from a paper em*racing ;a full and complete
statement of all the dis*ursements and receipts,
showing from what sources such receipts were
derived, and for what and to whom such
dis*ursements or payments were made, and for what
o*ject or purpose the same were made4; *ut such
matters may find an appropriate place in an itemi7ed
account
)A
6either can it *e said that a *alance sheet
complies with the third re+uisite, since the entries
therein were not made at or near the time of the
transactions to which they related
!n order to render admissi*le *oo8s of
account it must appear that they are
*oo8s of original entry, that the entries
were made in the ordinary course of
*usiness, contemporaneously with the
facts recorded, and *y one who had
8nowledge of the facts San 0rancisco
2eaming #o v <ray =19(9? 11 #- '14,
1(4 P 999 See Arown v Aall =19'%?
1%' #- )":, 1% P%d %:, to the effect
that the *oo8s must *e 8ept in the
regular course of *usiness
)*
- ;ledger; is a *oo8 of accounts in
which are collected and arranged,
each under its appropriate head, the
various transactions scattered
throughout the journal or day*oo8,
land is not a ;*oo8 of original entries,;
within the rule ma8ing such *oo8s
competent evidence 6irst %at.
$uil!in" Co. . Van!erber", 119 P
%%4, %%)4 %9 .8l ":'
>(
#ode !owa, 6o '&":, providing that
;*oo8s of account; are receiva*le in
evidence, etc, means a *oo8
containing charges, and showing a
continuous dealing with persons
generally - *oo8, to *e admissi*le,
must *e 8ept as an account *oo8, and
the charges made in the usual course
of *usiness Security #o v <ray*eal,
"% 65 49), :" !owa "4', '9 -m St
$ep '11
>'
Aoo8s of account may therefore *e admissi*le under
the rule !n ta, cases, however, this #ourt appears not
to place too high a pro*ative value on them,
considering the statement in the case of #ollector
of Internal )eenue . )eyes
>)
that ;*oo8s of account
do not prove per se that they are veracious4 in fact
they may *e more consistent than truthful; !ndeed,
*oo8s of account may *e used to carry out a plan of
ta, evasion
>>
-t most, therefore, the presentation of the *alance
sheet of 1ecem*er '1, 194( would only prove that the
figure P4,%':,9)4") appears therein as
corresponding to mine cost Aut the #ompany would
still need to present proof to justify its adoption of that
figure !t had *urden of esta*lishing the components of
the amount of P1,)':,9)4")C what were the particular
e,penses made and the corresponding amount of
each, so that it may *e determined whether the
e,penses were actually made and whether the items
are properly part of cost of mine development, or are
actually deprecia*le items
!n this connection we ta8e up @,hi*it '1 of the
#ommissioner 2his is the memorandum of A!$
@,aminer #esar P -guirre to the #hief of the
!nvestigating 1ivision of the Aureau of !nternal
$evenue -ccording to this report ;the counsel of the
ta,payer alleges that the cost of Masinloc Mine
properties and improvement is P4,%':,9)4"& instead
of P%,&4&,:)944 as ta8en up in this report,; and that
the e,penses as of 1941 were as followsC
-ssets su*ject toC
1941
1 1epletion P%,&4&,:):44
% 1( years depreciation 1,1::,9:))&
' ' years depreciation ):,%:')"
4 %( years depreciation 9,14'&'
" 1(P amorti7ation 1)1,9:"((
3essC #ost #hromite 0ield P4,(:",%))":
@,penses *y operator %,"1",((((( P1,")(,%))":
2he e,aminer concluded that ;in the light of the figures
listed a*ove, the counsel for the ta,payer fairly stated
the amount dis*ursed *y the operator until the mine
property was put to production in 19'9; 2he #ompany
capitali7es on this conclusion, completely disregarding
the e,aminer9s other statements, as followsC
2he counsel, however, is not aware of
the fact that the e,penses made *y
the operator are those which are
deprecia*le and^or amorti7a*le
instead of depleta*le e,penditures
2he first post/war Aalance Sheet
=1%J'1J4&? of the ta,payer shows that
its Mines, !mprovement I 1ev is
P4,'%:,9)4") #onsidering the
e,penditures incurred *y Aenguet
#onsolidated as of 1941
=P1,")(,%))":?4 the reha*ilitation
e,penses in 194& =P%11,%%')%?4 and
the cost of the Masinloc #hromite
0ield, the totalcost would only *e
P4,%9&,"(1'( .f the total
e,penditure of P1,")(,%))": as of
1941, P1,4':,':91%4 were spent on
deprecia*le andJor amorti7a*le
e,penses and P1'1,:):44 were
made for the direct improvement of
the mine property
!n as much as the e,penditure of the
operator as of 1941 and the cost of
the mine property were ta8en up in the
account Mines, !mprovement I
$eha*ilitation in 194&, all its assets
that were rightfully su*ject to depletion
was P%,&4&,:):44
Aecause of the a*ove +ualification a large part of the
amount spent *y the operator
>?
may not *e allowed
for purpose of depletion deduction,
>@
depletion *eing
different from depreciation
>+
2he #ompany9s *alance sheet for 1ecem*er '1, 194)
lists the ;mine cost; of P%,"((,((( as ;development
cost; and the amount of P1,)':,9)4') as ;suspense
account =mining properties su*ject to war losses?; 2he
#ompany claims that its accountant, Mr #alpo, made
these errors, *ecause he was then new at the jo*
<ranting that was what had happened, it does not
affect the fact that the, evidence on hand is insufficient
to prove the cost of development alleged *y the
#ompany
6or can we rely on the statements of @ligio S <arcia,
who was the #ompany9s treasurer and assistant
secretary at the time he testified on -ugust 14, 19"9
Be admitted that he did not 8now how the figure
P4,%':,9)4") was arrived at, e,plainingC ;! only 8now
that it is the figure appearing on the *alance sheet as
of 1ecem*er '1, 194& as certified *y the #ompany9s
auditors4 and this we made as the *asis of the
valuation of the depleta*le value of the mines; =p 94,
tsn?
5e, therefore, have to rely on the #ommissioner9s
assertion that the ;development cost; was
P1'1,:):44, *ro8en down as followsC assessment,
P'4,(9%1%4 development, P&1,4:4&'4 e,ploration,
P1',9&&&%4 and diamond drilling, P%%,''"()
2he +uestion as to which figure should properly
correspond to ;mine cost; is one of fact
>,
2he findings
of fact of the 2a, #ourt, where reasona*ly supported
*y evidence, are conclusive upon the Supreme
#ourt
>A
-s regards the estimated ore deposit of the
#ompany9s mines, the #ompany9s figure is ;4,1"&,:::
tons,; while that of the #ommissioner is the larger
figure ;4,4)1,:9% tons; 2he difference of '1",((4 tons
was due to the fact that the #ommissioner too8 into
account all the ore that could pro*a*ly *e removed
and mar8eted *y the #ompany, utili7ing the total
tonnage shipped *efore and after the war =9'',1:(
tons? and the total reserve of shipping material pegged
at ',":',)1% tons .n the other hand the #ompany9s
estimate was arrived at *y ta8ing into consideration
only the +uantity shipped from soli! ore namely,
)'',1:( tons =deducting from the total tonnage
shipped *efore and after the war an estimated float of
%((,((( tons?, and then adding the total recovera*le
ore which was assessed at ',4%',)(: tons
2he a*ove/stated figures were o*tained from the
report
>*
of geologist Paul - Schaeffer, who had *een
earlier commissioned *y the #ompany to conduct a
study of the metallurgical possi*ilities of the
#ompany9s mines !n order to have a fair
understanding of how the contending parties arrived at
their respective figures, 5e +uote a pertinent portion
of the geologist9s reportC
?illin" Data
.re mined *efore the war ''&,:"( tons
.re mined after the war 1,))9,'"( tons
2otal %,11&,%(( tons
, .re shipped *efore the war ''),&11 tons
,, .re shipped after the war "9","&9 tons
2otal 9'',1:( tons
3ess an estimated float of %((,((( tons
2otal shipped from solid ore )'',1:( tons
Proportion shipped )'',1:(
//////// [ ///////////
mined %,11&,%((
or appro,imately '"P of mine ore is shipped
Dumps
Material on dumps now total ':','4& tons >sing the
a*ove tonnage for ore shipped from mining =e,cluding
float? there should have *een a total of 1,':',(%( tons
of waste produced of which almost 1,(((,(( tons has
*een removed from the mining area of the hill !
*elieve that half still remains as alluviuma long the
three principal intermittent cree8s which head in the
mining area, and the remaining half million has
washed into the river .f course this is pure
speculation
, K much was float material, pro*a*ly a*out one half,
leaving a*out 1)(((( tons mined from the hill
,, K some float included
,,, ,,, ,,,
7re )esere
2he - and A ore is considered sufficiently developed
*y drilling and tunnels to constitute the ore reserve #
ore must *e chec8ed *y drilling
Tons
- ),)%9,:((
A 1,):(,"((
2otal 9,"1(,'((
# %,%1%,((
<rand 2otal 11,)%%,'((
2herefore, the total ore reserve may *e considered to
*e 9,"1(,'(( tons Aased on past e,perience '"P is
shipping ore
5ith the present mill there is considera*ly more
recovery 2he ore is mined selectively =*etween di8es?
2he results are a*out as followsC
.f 1,"(( tons mined, "(( tons are sorted and shipped
direct, the remaining 1,((( tons going to the mill from
which %"( tons ore recovered for shipment 2hus "(P
of the selectively mined ore is recovered
2hus for the reserve tonnageC
2otal reserve
9,"1(,'((
3ess %(P di8e material
1,9(%,(&(
),&(:,%4(
3ess 1(P low grade ore
)&(,:%4
&,:4),41&
,
"( [
2otal recovera*le ore
',4%',)(: tons
!t is pro*a*le that '(P of the dump
material could *e recovered *y milling
So adding to the a*ove 11",((4 ore
recovera*le from the dumps, we get a
total reserve of shipping material of
',"':,)1% tons 5ith the sin8 float
section added to the mill this should
*e increased *y perhaps %(P
.n the *asis of the a*ove report the #ompany faults
the 2a, #ourt is sustaining the #ommissioner9s
estimate of the ore deposit 5hile the figures
corresponding to the total gross tonnage shipped
*efore and after the war have not *een assailed as
erroneous, the #ompany maintains that the estimated
float 4( of %((,((( tons as reported in the geologist9s
study should have *een deducted therefrom, such that
the com*ined total of the ore shipped should have
*een placed at a net of )'',1:( tons instead of
9'',1:( tons 2he other figure the #ompany assails as
having *een improperly included *y the #ommissioner
in his statement of ore reserve refers to the
;$ecovera*le ore from dump material K 11",((4
tons; 2he #ompany9s argument in this regard runs
thusC
2his apparently was included *y
respondent *y virtue of the geologist9s
report that ;it is pro*a*le that '(P of
the dump material should *e
recovered *y milling; -ctually,
however, such recovery from dump or
waste material is pro*lematical and is
merely a contingency, and hence, the
item of 11",((4 tons should not *e
included in the statement of the ore
reserves 2a8ing out these two items
improperly and erroneously included
in respondent #ommissioner of
!nternal $evenue9s e,aminer9s report,
to wit, float or waste material of
%((,(&( tons and supposedly
recovera*le ore from dump materials
of 11",((4 tons, totaling '1",((4 tons,
from the total figure of 4,4)1,:9% tons
given *y him, the figure of 4,1"&:::
tons results as the proper statement of
the total estimated ore as correctly
used *y petitioner in its statement of
ore reserves for purposes of
depletion
?'
5e agree with the #ompany9s o*servation on this
point 2he geological report appears clear enoughC the
estimated float of %((,((( tons consisting of pieces of
ore that had *ro8en loose and *ecome detached *y
erosion from their original position could hardly *e
viewed as still forming part of the total estimated ore
deposit Baving already *een *ro8en up into numerous
small pieces and practically rendered useless for
mining purposes, the same could not apprecia*ly
increase the ore potentials of the #ompany9s mines
-s to the 11",((4 tons which geologist Paul -
Schaeffer *elieved could still *e recovered *y milling
from the material on dumps, there are no sufficient
data on which to affirm or deny the accuracy of the
said figure !t may, however, *e ta8en as correct,
considering that it came from the #ompany9s own
commissioned geologist and that *y the #ompany9s
own admission
?)
*y 19") it had mined and sold much
more than its original estimated ore deposit of
4,1"&,::: tons 5e thin8 that 4,%)1,:9% tons
?>
would
*e a fair estimate of the ore deposit in the #ompany9s
mines
2he correct figures therefore areC
P%,"1",((((( =mine cost proper? a
P1'1,:):44 =development cost?
4,%)1,:9% =estimated ore deposit?
or
P%,&4&,:):44 =mine cost? [ P(&19&
=rate of depletion
4,%)1,:9% =estimated ore per ton?
deposit?
!n its second assigned error, the #ompany +uestions
the disallowance *y the 2a, #ourt of the depreciation
charges claimed *y the #ompany as deductions from
its gross income
??
2he items thus disallowed consist
mainly of depreciation e,penses for the years 19"'
and 19"4 allegedly sustained as a result of the
deterioration of some of the #ompany9s incomplete
constructions
2he initial memorandum
?@
of the A!$ e,aminer
assigned to verify the income ta, lia*ilities of the
#ompany pursuant to the latter9s claim of having
overpaid its income ta,es states the *asic reason why
the #ompany9s claimed depreciation should *e
disallowed or re/adjusted, thusC since ;, up to its
completion =the incomplete asset? has not *een and is
not capa*le of use in the operation, the depreciation
claimed could not, in fairness to the <overnment and
the ta,payer, *e considered as proper deduction for
income ta, purposes as the said asset is still under
construction; Vis/a/Vis the #ommissioner9s consistent
position in this regard the company simply repeatedly
re+uested for time
?+
K in view of the alleged
voluminous wor8ing sheets that had to *e re/evaluated
and recomputed to justify its claimed depreciation
items within which to su*mit a separate memorandum
in itemi7ed form detailing the #ompany9s o*jections to
the items of depreciation adjustments or disallowances
for the years involved Strangely enough, despite the
period granted, the record is *are that the #ompany
ever su*mitted its itemi7ed o*jection as proposed
!nasmuch as the ta,payer has the *urden of justifying
the deductions claimed for depreciation, the
#ompany9s failure to discharge the *urden prevents
this #ourt, from distur*ing the #ommissioner9s
computation 0or ta,ation purposes the phrase ;out of
its not *eing used,; with reference to depreciation
allowa*le on assets which are idle or the use of which
is temporarily suspended, should *e understood to
refer only to property that has once *een used in the
trade or *usiness, not to property that has never *een
actually devoted to the ta,payer9s *usiness,
particularly incomplete assets that have yet to *e
used
2he #ompany9s third assigned error assails the #ourt
of 2a, -ppeals in not allowing the deduction from its
gross income of certain miscellaneous *usiness
e,penditures in the course of its operation for the
years 19"4 and 19"& 0or 19"4 the deduction claimed
amounted to P':,(:1%(, of which the #ourt allowed
P%",&(((( and disallowed P1',4:1%(,
?,
;for lac8 of
any supporting paper or evidence; 0or the year 19"&
the claim amounted to P%(,("((( of which the #ourt
allowed P%,4&(((, representing the one/month salary
#hristmas *onus given to some of the employees, and
upheld the disallowance of P1),"9((( on the ground
that the #ompany ;failed to prove su*stantially that
said e,penses were actually incurred and are legally
deducti*le e,penses;
$egarding the disallowed amount of P1',4:1%( the
year 19"4, the #ompany su*mits that it consisted of
e,penses supported *y ;vouchers and cancelled
chec8s evidencing payments of these amounts,; and
were necessary and ordinary e,penses of *usiness for
that year .n the disallowance *y the 2a, #ourt of the
sum of P1),"9((( out of a total deduction for
miscellaneous e,penses for 19"& among to
P%(,("(((, the #ompany advances the same
argument, namely, that the amount consisted of
normal and regular e,penses for that year as
evidenced *y vouchers and cancelled chec8s
2hese vouchers and cancelled chec8s of the
#ompany, however, only show that the amounts
claimed had indeed *een spent, and confirm the fact
of dis*ursement, *ut do not necessarily prove that the
e,penses for which they we9re dis*ursed are
deducti*le items !n the case of #ollector of !nternal
$evenue vs <oodrich !nternational $u**er #o
?A
this
#ourt rejected the ta,payer9s similar claim for
deduction of alleged representation e,penses, *ased
upon receipts issued not *y the entities to which the
alleged e,penses *ut *y the officers of ta,payer
corporation who allegedly paid them !t was there
statedC
!f the e,penses had really *een
incurred, receipts or chits would have
*een issued *y the entities to which
the payments have *een made, and it
would have *een easy for <oodrich or
its officers to produce such receipts
2hese receipts issued *y said officers
merely attest to their claim that they
had incurred and paid said e,penses
2hey do not esta*lish payment of said
alleged e,penses to the entities in
which the same are said to have *een
incurred
!n the case *efore >s, e,cept for the #ompany9s own
vouchers and cancelled chec8s, together with the
#ompany treasurer9s lone and uncorro*orated
testimony regarding the purpose of said
dis*ursements, there is no other supporting evidence
to show that the e,penses were legally deducti*le
items 5e therefore affirm the 2a, #ourt9s
disallowance of the same
!n resume, this #ourt findsC
=1? that the #ompany was not using a ;hy*rid; method
of accounting in the preparation of its income ta,
returns, *ut was consistent in its use of the accrual
method of accounting4
=%? that the rate of depletion per ton of the ore deposit
mined and sold *y the #ompany is P(&19& per
ton
?*
not P("91:9 as contended *y the
#ommissioner nor P1(19) as claimed *y the
#ompany4
='? that the disallowance *y the 2a, #ourt of the
depreciation charges claimed *y the #ompany is
correct in view of the latter9s failure to itemi7e andJor
su*stantiate with definite proof that the
#ommissioner9s own method of determining
depreciation is unreasona*le or inaccurate4
=4? that for lac8 of supporting evidence to show that
the #ompany9s claimed e,penses were legally
deducti*le items, the 2a, #ourt9s disallowance of the
same is affirmed
-s recomputed then, the deficiency income ta,es due
from the #ompany are as followsC
19"'
6et income as per audited return bbbbbbbbbbbbbbbbb
P",19',)1&:9
>nallowa*le deductions I additional income
1epletion overcharged bbbbbbbbbbbbbbbbbbbbbbbbb
P1):,4))(4 1epreciation adjustment
bbbbbbbbbbbbbbbbbbbbbbbb 9',:&%9&
2otal adjustments bbbbbbbbbbbbbbbbbbbbbbbbbbbbb
%)%,'4(((
6et income as per investigation
bbbbbbbbbbbbbbbbbbb ",4&&,("&:9
!ncome ta, due
thereon
@(
bbbbbbbbbbbbbbbbbbbbbbb 1,"%%,49"9%
3ess amount already assessed
bbbbbbbbbbbbbbbbbbbb 1,44&,%41(( 1@0!#!@6#G
2-L 1>@ bbbbbbbbbbbbbbbbbbbbbb )&,%"49%
19"4
6et income as per audited return bbbbbbbbbbbbbbbbb
P','%(,'()&: >nallowa*le deductions I additional
income
1epletion overcharged bbbbbbbbbbbbbbbbbbbbbbbbb
P14),:9")% 1epreciation adjustment
bbbbbbbbbbbbbbbbbbbbbbbb 11,:):1%
Miscellaneous e,penses
bbbbbbbbbbbbbbbbbbbbbbbb 1',4:1%(
2otal adjustments bbbbbbbbbbbbbbbbbbbbbbbbbbbbb
1)',%""(4
6et income as per investigation
bbbbbbbbbbbbbbbbbbb ',49',"&%)%
!ncome ta, due thereon
bbbbbbbbbbbbbbbbbbbbbbbbb 9)(,19)"&
3ess amount already assessed
bbbbbbbbbbbbbbbbbbbb 9%1,&:&(( 1@0!#!@6#G
2-L 1>@ bbbbbbbbbbbbbbbbbbbbbb 4:,"11"&
19"&
6et income as per audited return bbbbbbbbbbbbbbbbb
P11,"(4,4:'9) >nallowa*le deductions I additional
income
1epletion overcharged bbbbbbbbbbbbbbbbbbbbbbbbb
P%%1,%)%9: Miscellaneous e,penses
bbbbbbbbbbbbbbbbbbbbbbbb 1),"9(((
2otal adjustments bbbbbbbbbbbbbbbbbbbbbbbbbbbbb
%':,:&%9:
6et income as per investigation bbbbbbbbbbbbbbbbbb
11,)4','4&9"
!ncome ta, due thereon bbbbbbbbbbbbbbbbbbbbbbbb
',%:(,1')14
3ess amount already assessed
bbbbbbbbbbbbbbbbbbb ',%1',%"&(( 1@0!#!@6#G
2-L 1>@ bbbbbbbbbbbbbbbbbbbbbb &&,::114
2.2-3 1@0!#!@6#G 2-L@S 1>@ bbbbbbbbbbbbb
191,&4)&%
5B@$@0.$@, the appealed decision is here*y
modified *y ordering #onsolidated Mines, !nc to pay
the #ommissioner of !nternal $evenue the amounts of
P)&,%"49%, P4:,"11"& and P&&,::114 as deficiency
income ta,es for the years 19"', 19"4 and 19"&,
respectively, or the total sum of P191,&4)&% under the
terms specified *y the 2a, #ourt, without
pronouncement as to costs
Castro- ?a'asiar- ,s"uerra an! ?uCo( Palma- DD.-
concur.
Teehan'ee- D.- too' no part.

!I!I&. $. !/0" #R." petitioner,
vs
C.1RT .F 223L0" 41ILI&. T. LRI&"
R.5.LF. T16.& &5 2R.C.2I.
TL.&" respondents
41I01M!I&%" J.:
0or review is the 1ecision of the #ourt of -ppeals in
#-/#$ #V 6o 1)%"1 promulgated on 6ovem*er %9,
1991 !t affirmed in toto the judgment of the $egional
2rial #ourt =$2#?, Aranch '9, Manila, in #ivil #ase 6o
:%/1%1() Said judgment disposed as followsC
0.$ -33 2B@ 0.$@<.!6<
#.6S!1@$-2!.6S, this #ourt here*y
renders judgment 1!SM!SS!6< the complaint
against all the defendants and ordering
plaintiff Mherein petitionerN to pay defendant
3arin the amount of P%((,((((( =2wo
Bundred 2housand Pesos? as actual and
compensatory damages4 P%((,((((( as
moral damages4 and P"(,((((( as
e,emplary damages and attorneys fees of
P1((,(((((
1
2he facts, which we find supported *y the records,
have *een summari7ed *y the #ourt of -ppeals as
followsC
.n 0e*ruary %(, 19)&, petitioner, Ai*iano V AaOas Jr
sold to -yala !nvestment #orporation =-G-3-?,
1%:,%&" s+uare meters of land located at Aayanan,
Muntinlupa, for two million, three hundred eight
thousand, seven hundred seventy =P%,'(:,))(((?
pesos 2he 1eed of Sale provided that upon the
signing of the contract -G-3- shall pay four hundred
si,ty/one thousand, seven hundred fifty/four
=P4&1,)"4((? pesos 2he *alance of one million, eight
hundred forty/seven thousand and si,teen
=P1,:4),(1&((? pesos was to *e paid in four e+ual
consecutive annual installments, with twelve =1%P?
percent interest per annum on the outstanding
*alance -G-3- issued one promissory note covering
four e+ual annual installments @ach periodic payment
of P4&1,)"4(( pesos shall *e paya*le starting on
0e*ruary %(, 19)), and every year thereafter, or until
0e*ruary %(, 19:(
2he same day, petitioner discounted the promissory
note with -G-3-, for its face value of P1,:4),(1&((,
evidenced *y a 1eed of -ssignment signed *y the
petitioner and -G-3- -G-3- issued nine =9? chec8s to
petitioner, all dated 0e*ruary %(, 19)&, drawn against
Aan8 of the Philippine !slands with the uniform amount
of two hundred five thousand, two hundred twenty/four
=P%(",%%4((? pesos
!n his 19)& !ncome 2a, $eturn, petitioner reported the
P4&1,)"4 initial payment as income from disposition of
capital asset
%
Selling Price of 3and P%,'(:,))(((
3ess !nitial Payment 4&1,)"4((
'
>nreali7ed <ain P1,:4),(1&((
19)& 1eclaration of !ncome on 1isposition of
#apital -sset su*ject to 2a,C
!nitial Payment P4&1,)"4((
3essC #ost of land and
other incidental @,penses
= )&,"4)9(?
!ncome P':",%(&1(
!ncome su*ject to ta,
=P':",%(& 1( , "(P?
P19%,&('&"
!n the succeeding years, until 19)9, petitioner reported
a uniform income of two hundred thirty thousand, eight
hundred seventy/seven =P%'(,:))((? pesos
4
as gain
from sale of capital asset !n his 19:( income ta,
amnesty return, petitioner also reported the same
amount of P%'(,:))(( as the reali7ed gain on
disposition of capital asset for the year
.n -pril 11, 19):, then $evenue 1irector Mauro
#alaguio authori7ed ta, e,aminers, $odolfo 2ua7on
and Procopio 2alon to e,amine the *oo8s and records
of petitioner for the year 19)& 2hey discovered that
petitioner had no outstanding receiva*le from the 19)&
land sale to -G-3- and concluded that the sale was
cash and the entire profit should have *een ta,a*le in
19)& since the income was wholly derived in 19)&
2ua7on and 2alon filed their audit report and declared
a discrepancy of two million, ninety/five thousand, nine
hundred fifteen =P%,(9",91"((? pesos in petitioner9s
19)& net income 2hey recommended deficiency ta,
assessment for two million, four hundred seventy/three
thousand, si, hundred seventy/three =P%,4)',&)'((?
pesos
Meantime, -+uilino 3arin succeeded #alaguio as
$egional 1irector of Manila $egion !V/- -fter
reviewing the e,aminers9 report, 3arin directed the
revision of the audit report, with instruction to consider
the land as capital asset 2he ta, due was only fifty
="(P? percent of the total gain from sale of the
property held *y the ta,payer *eyond twelve months
pursuant to Section '4
"
of the 19)) 6ational !nternal
$evenue #ode =6!$#? 2he deficiency ta, assessment
was reduced to nine hundred thirty si, thousand, five
hundred ninety/eight pesos and fifty centavos
=P9'&,"9:"(?, inclusive of surcharges and penalties
for the year 19)&
.n June %), 19:(, respondent 3arin sent a letter to
petitioner informing of the income ta, deficiency that
must *e settled him immediately
.n Septem*er %&, 19:(, petitioner ac8nowledged
receipt of the letter *ut insisted that the sale of his land
to -G-3- was on installment
.n June :, 19:1, the matter was endorsed to the
-cting #hief of the 3egal Aranch of the 6ational .ffice
of the A!$ 2he #hief of the 2a, 0raud >nit
recommended the prosecution of a criminal case for
conspiring to file false and fraudulent returns, in
violation of Section "1 of the 2a, #ode against
petitioner and his accountants, -ndres P -lejandre
and #onrado AaOas
.n June 1), 19:1, 3arin filed a criminal complaint for
ta, evasion against the petitioner
.n July 1, 19:1, news items appeared in the now
defunct @vening @,press with the headlineC ;A!$
#harges $ealtor; and another in the defunct @vening
Post with a news itemC ;A!$ raps $ealtor, %
accountants; -nother news item also appeared in the
July %, 19:1, issue of the Aulletin 2oday entitledC ;'/
face P1/M ta, evasion raps; -ll news items
mentioned petitioner9s false income ta, return
concerning the sale of land to -G-3-
.n July %, 19:1, petitioner filed an -mnesty 2a,
$eturn under P1 1)4( and paid the amount of forty/
one thousand, seven hundred twenty/nine pesos and
eighty/one centavos =P41,)%9:1? .n 6ovem*er %,
19:1, petitioner again filed an -mnesty 2a, $eturn
under P1 1:4( and paid an additional amount of one
thousand, five hundred twenty/five pesos and si,ty/two
centavos =P1,"%"&%? !n *oth, petitioner did not
recogni7e that his sale of land to -G-3- was on cash
*asis
$eacting to the complaint for ta, evasion and the news
reports, petitioner filed with the $2# of Manila an
action
&
for damages against respondents 3arin, 2ua7on
and 2alon for e,tortion and malicious pu*lication of the
A!$9s ta, audit report Be claimed that the filing of
criminal complaints against him for violation of ta, laws
were improper *ecause he had already availed of two
ta, amnesty decrees, Presidential 1ecree 6os 1)4(
and 1:4(
2he trial court decided in favor of the respondents and
awarded 3arin damages, as already stated Petitioner
seasona*ly appealed to the #ourt of -ppeals !n its
decision of 6ovem*er %9, 1991, the respondent court
affirmed the trial court9s decision, thusC
2he finding of the court a quo that plaintiff/
appellant9s actions against defendant/appellee
3arin were unwarranted and *aseless and as
a result thereof, defendant/appellee 3arin was
su*jected to unnecessary an,iety and
humiliation is therefore supported *y the
evidence on record1âwphi1.nêt
1efendant/appellee 3arin acted only in
pursuance of the authority granted to him !n
fact, the criminal charges filed against him in
the 2anod*ayan and in the #ity 0iscal9s .ffice
were all dismissed
5B@$@0.$@, the appealed judgment is
here*y -00!$M@1 in toto
)
Bence this petition, wherein petitioner raises *efore us
the following +ueriesC
! 5B@2B@$ 2B@ #.>$2 .0 -PP@-3S
@$$@1 !6 !2S !62@$P$@2-2!.6 .0
P@$2!6@62 2-L 3-5S, 2B>S !2 0-!3@1 2.
-PP$@#!-2@ 2B@ #.$$@#26@SS -61
-##>$-#G .0 P@2!2!.6@$9S $@2>$6 .0
2B@ !6#.M@ 1@$!V@1 0$.M 2B@ S-3@
.0 2B@ 3-61 2. -G-3-
!! 5B@2B@$ 2B@ [email protected]@62 #.>$2
@$$@1 !6 6.2 0!61!6< 2B-2 2B@$@ 5-S
-6 -33@<@1 -22@MP2 2. @L2.$2
MM.6@G 0$.MN P@2!2!.6@$ AG P$!V-2@
[email protected]@62S
!!! 5B@2B@$ 2B@ [email protected]@62 #.>$2
@$$@1 !6 !2S !62@$P$@2-2!.6 .0
P$@S!1@62!-3 1@#$@@ 6.S 1)4( -61
1:4(, -M.6< .2B@$S, P@2!2!.6@$9S
!MM>6!2G 0$.M #$!M!6-3
P$.S@#>2!.6
!V 5B@2B@$ 2B@ [email protected]@62 #.>$2
@$$@1 !6 !2S !62@$P$@2-2!.6 .0 5@33/
@S2-A3!SB@1 1.#2$!6@S .0 2B!S
B.6.$-A3@ #.>$2 -S $@<-$1S 2B@
-5-$1 .0 -#2>-3, M.$-3 -61
@L@MP3-$G 1-M-<@S !6 0-V.$ .0
[email protected]@62 3-$!6
!n essence, petitioner as8s the #ourt to
resolve seriatim the following issuesC
1 5hether respondent court erred in ruling
that there was no e,tortion attempt *y A!$
officials4
% 5hether respondent court erred in holding
that P1 1)4( and 1:4( granting ta,
amnesties did not grant immunity from ta,
suits4
' 5hether respondent court erred in finding
that petitioner9s income from the sale of land in
19)& should *e declared as a cash transaction
in his ta, return for the same year =*ecause
the *uyer discounted the promissory note
issued to the seller on future installment
payments of the sale, on the same day of the
sale?4
4 5hether respondent court erred and
committed grave a*use of discretion in
awarding damages to respondent 3arin
2he first issue, on whether the #ourt of -ppeals erred
in finding that there was no e,tortion, involves a
determination of fact 2he #ourt of -ppeals o*served,
2he only evidence to esta*lish the alleged
e,tortion attempt *y defendants/appellees is
the plaintiff/appellant9s self serving
declarations
-s found *y the court a quo, ;said attempt was
8nown to plaintiff/appellant9s son/in/law and
counsel on record, yet, said counsel did not
ta8e the witness stand to corro*orate the
testimony of plaintiff;
:
-s repeatedly held, findings of fact *y the #ourt of
-ppeals especially if they affirm factual findings of the
trial court will not *e distur*ed *y this #ourt, unless
these findings are not supported *y
evidence
9
Similarly, neither should we distur* a
finding of the trial court and appellate court that an
allegation is not supported *y evidence on record
2hus, we agree with the conclusion of respondent
court that herein private respondents, on the *asis of
evidence, could not *e held lia*le for e,tortion
.n the second issue of whether P1 6os 1)4( and
1:4( which granted ta, amnesties also granted
immunity from criminal prosecution against ta,
offenses, the pertinent sections of these laws stateC
P1 6o 1)4( #.61.6!6<
P@6-32!@S 0.$ #@$2-!6
V!.3-2!.6S .0 2B@ !6#.M@ 2-L
3-5 >P.6 V.3>62-$G
1!S#3.S>$@ .0 >61@#3-$@1
!6#.M@ 0.$ !6#.M@ 2-L
P>$P.S@S -61 $@Q>!$!6<
P@$!.1!# S>AM!SS!.6 .0 6@2
5.$2B S2-2@M@62
, , , , , , , , ,
Sec 1 Voluntary Disclosure of Correct
Taxable Income K -ny individual who, for any
or all of the ta,a*le years 19)4 to 19)9, had
failed to file a return is here*y, allowed to file a
return for each of the aforesaid ta,a*le years
and accurately declare therein the true and
correct income, deductions and e,emptions
and pay the income ta, due per return
3i8ewise, any individual who filed a false or
fraudulent return for any ta,a*le year in the
period mentioned a*ove may amend his return
and pay the correct amount of ta, due after
deducting the ta,es already paid, if any, in the
original declaration =emphasis ours?
, , , , , , , , ,
Sec " Immunity from Penalties K -ny
individual who voluntarily files a return under
this 1ecree and pays the income ta, due
thereon shall *e immune from the penalties,
civil or criminal, under the 6ational !nternal
$evenue #ode arising from failure to pay the
correct income ta, with respect to the ta,a*le
years from which an amended return was filed
or for which an original return was filed in
cases where no return has *een filed for any
of the ta,a*le years 19)4 to
19)9C Proi!e!, howeer, 2hat these
immunities shall not apply in cases where the
amount of net ta,a*le income declared under
this 1ecree is understated to the e,tent of
%"P or more of the correct net ta,a*le
income =emphasis ours?
P1 6. 1:4( K <$-62!6< - 2-L
-M6@S2G .6 >62-L@1 !6#.M@
-61J.$ 5@-32B @-$6@1 .$
-#Q>!$@1 1>$!6< 2B@ 2-L-A3@
G@-$S 19)4 2. 19:( -61
$@Q>!$!6< 2B@ 0!3!6< .0 2B@
S2-2@M@62 .0 -SS@2S,
3!-A!3!2!@S, -61 6@2 5.$2B
Sec 1 Coera"e K !n case of voluntary
disclosure of previously unta,ed income
andJor wealth such as earnings, receipts, gifts,
*e+uests or any other ac+uisition from any
source whatsoever, reali7ed here or a*road,
*y any individual ta,payer, which are ta,a*le
under the 6ational !nternal $evenue #ode, as
amended, the assessment and collection of all
internal revenue ta,es, including the
increments or penalties on account of non/
payment, as well as all civil, criminal or
administrative lia*ilities arising from or incident
thereto under the 6ational !nternal $evenue
#ode, are here*y condoned provided that the
individual ta,payer shall pay =emphasis
ours?
Sec % Con!itions for Immunity K 2he
immunity granted under Section one of this
1ecree shall apply only under the following
conditionsC
a? Such previously unta,ed income
andJor wealth must have *een earned
or reali7ed in any of the years 19)4 to
19:(4
*? 2he ta,payer must file an amnesty
return on or *efore 6ovem*er '(,
19:1, and fully pay the ta, due
thereon4
c? 2he amnesty ta, paid *y the
ta,payer under this 1ecree shall not
*e less than P1,((((( per ta,a*le
year4 and
d? 2he ta,payer must file a statement
of assets, lia*ilities and net worth as
of 1ecem*er '1, 19:(, as re+uired
under Section & hereof =emphasis
ours?
!t will *e recalled that petitioner entered into a deed of
sale purportedly on installment .n the same day, he
discounted the promissory note covering the future
installments 2he discounting seems +uestiona*le
*ecause ordinarily, when a *ill is discounted, the
lender =e.". *an8s, financial institution? charges or
deducts a certain percentage from the principal value
as its compensation Bere, the discounting was done
*y the *uyer .n July %, 19:1, two wee8s after the
filing of the ta, evasion complaint against him *y
respondent 3arin on June 1), 19:1, petitioner availed
of the ta, amnesty under P1 6o 1)4( Bis amended
ta, return for the years 19)4 / 19)9 was filed with the
A!$ office of Valen7uela, Aulacan, instead of Manila
where the petitioner9s principal office was located Be
again availed of the ta, amnesty under P1 6o 1:4(
Bis disclosure, however, did not include the income
from his sale of land to -G-3- on cash *asis !nstead
he insisted that such sale was on installment Be did
not amend his income ta, return Be did not pay the
ta, which was considera*ly increased *y the income
derived from the discounting Be did not meet the twin
re+uirements of P1 1)4( and 1:4(, declaration of his
unta,ed income and full payment of ta, due thereon
#learly, the petitioner is not entitled to the *enefits of
P1 6os 1)4( and 1:4( 2he mere filing of ta,
amnesty return under P1 1)4( and 1:4( does
not ipso facto shield him from immunity against
prosecution 2a, amnesty is a general pardon to
ta,payers who want to start a clean ta, slate !t also
gives the government a chance to collect uncollected
ta, from ta, evaders without having to go through the
tedious process of a ta, case 2o avail of a ta,
amnesty granted *y the government, and to *e
immune from suit on its delin+uencies, the ta, payer
must have voluntarily disclosed his previously unta,ed
income and must have paid the corresponding ta, on
such previously unta,ed income
1(
!t also *ears noting that a ta, amnesty, much li8e a ta,
e,emption, is never favored nor presumed in law and if
granted *y statute, the terms of the amnesty li8e that
of a ta, e,emption must *e construed strictly against
the ta,payer and li*erally in favor of the ta,ing
authority
11
Bence, on this matter, it is our view that
petitioner9s claim of immunity from prosecution under
the shield of availing ta, amnesty is untena*le
.n the third issue, petitioner asserts that his sale of
the land to -G-3- was not on cash *asis *ut on
installment as clearly specified in the 1eed of Sale
which statesC
2hat for and in consideration of the sum of
25. M!33!.6 2B$@@ B>61$@1 @!<B2
2B.>S-61 S@V@6 B>61$@1 S@V@62G
=P%,'(:,))(((? [email protected] Philippine #urrency,
to *e paid as followsC
1 P4&1,)"4((, upon the signing of
the 1eed of Sale4 and,
% 2he *alance of P1,:4),(1&((, to
*e paid in four =4? e+ual, consecutive,
annual installments with interest
thereon at the rate of twelve percent
=1%P? per annum, *eginning on
0e*ruary %(, 19)&, said installments
to *e evidenced *y four =4? negotia*le
promissory notes
1%
Petitioner resorts to Section 4' of the 6!$# and Sec
1)" of $evenue $egulation 6o % to support his claim
Sec 4' of the 19)) 6!$# states,
!nstallment *asis K =a? 1ealers in personal
property K
=*? #ales of realty an! casual sales of
personalty K !n the case =1? of a casual sale
or other casual disposition of personal
property =other than property of a 8ind which
would properly *e included in the inventory of
the ta,payer if on hand at the close of the
ta,a*le year?, for a price e,ceeding one
thousand pesos, or =%? of a sale or other
disposition of real property if in either case the
initial payments do not e,ceed twenty/
five percentum of the selling price, the income
may, under regulations prescri*ed *y the
Minister of 0inance, *e returned on the *asis
and in the manner a*ove prescri*ed in this
section -s used in this section the term ;initial
payment; means the payments received in
cash or property other than evidences of
inde*tedness of the purchaser during the
ta,a*le period in which the sale or other
disposition is made =emphasis ours?
$evenue $egulation 6o %, Section 1)" provides,
#ale of real property inolin" !eferre!
payments K >nder section 4' deferred/
payment sales of real property include =1?
agreements of purchase and sale which
contemplate that a conveyance is not to *e
made at the outset, *ut only after all or a
su*stantial portion of the selling price has
*een paid, and =*? sales in which there is an
immediate transfer of title, the vendor *eing
protected *y a mortgage or other lien as to
deferred payments Such sales either under
=a? or =*?, fall into two classes when
considered with respect to the terms of sale,
as followsC
=1? Sales of property on the
installment plan, that is, sales in which
the payments received in cash or
property other than evidences of
inde*tedness of the purchaser during
the ta,a*le year in which the sale is
made do not e,ceed %" per cent of
the selling price4
=%? 1eferred/payment sales not on the
installment plan, that is sales in which
the payments received in cash or
property other than evidences of
inde*tedness of the purchaser during
the ta,a*le year in which the sale is
made e,ceed %" per cent of the
selling price4
!n the sale of mortgaged property the amount
of the mortgage, whether the property is
merely ta8en su*ject to the mortgage or
whether the mortgage is assumed *y the
purchaser, shall *e included as a part of the
;selling price; *ut the amount of the mortgage,
to the e,tent it does not e,ceed the *asis to
the vendor of the property sold, shall not *e
considered as a part of the ;initial payments;
or of the ;total contract price,; as those terms
are used in section 4' of the #ode, in sections
1)4 and 1)& of these regulations, and in this
section 2he term ;initial payments; does not
include amounts received *y the vendor in the
year of sale from the disposition to a third
person of notes given *y the vendee as part of
the purchase price which are due and paya*le
in su*se+uent years #ommissions and other
selling e,penses paid or incurred *y the
vendor are not to *e deducted or ta8en into
account in determining the amount of the
;initial payments,; the ;total contract price,; or
the ;selling price; 2he term ;initial payments;
contemplates at least one other payment in
addition to the initial payment !f the entire
purchase price is to *e paid in a lump sum in a
later year, there *eing no payment during the
year, the income may not *e returned on the
installment *asis !ncome may not *e returned
on the installment *asis where no payment in
cash or property, other than evidences of
inde*tedness of the purchaser, is received
during the first year, the purchaser having
promised to ma8e two or more payments, in
later years
Petitioner asserts that Sec 4' allows him to return as
income in the ta,a*le years involved, the respective
installments as provided *y the deed of sale *etween
him and -G-3- #onse+uently, he religiously reported
his yearly income from sale of capital asset, su*ject to
ta,, as followsC
Gear 19)) ="(P of P4&1,)"4? P%'(,:))((
19): %'(,:))((
19)9 %'(,:))((
19:( %'(,:))((
Petitioner says that his ta, declarations are accepta*le
modes of payment under Section 1)" of the $evenue
$egulations =$$? 6o % 2he term ;initial payment;, he
argues, does not include amounts received *y the
vendor which are part of the complete purchase price,
still due and paya*le in su*se+uent years 2hus, the
proceeds of the promissory notes, not yet due which
he discounted to -G-3- should not *e included as
income reali7ed in 19)& Petitioner states that the
original agreement in the 1eed of Sale should not *e
affected *y the su*se+uent discounting of the *ill
.n the other hand, respondents assert that ta,ation is
a matter of su*stance and not of form $eturns are
scrutini7ed to determine if transactions are what they
are and not declared to evade ta,es #onsidering the
progressive nature of our income ta,ation, when
income is spread over several installment payments
through the years, the ta,a*le income goes down and
the ta, due correspondingly decreases 5hen
payment is in lump sum the ta, for the year
proportionately increases >ltimately, a declaration that
a sale is on installment diminishes government ta,es
for the year of initial installment as against a
declaration of cash sale where ta,es to the
government is larger
-s a general rule, the whole profit accruing from a sale
of property is ta,a*le as income in the year the sale is
made Aut, if not all of the sale price is received during
such year, and a statute provides that income shall *e
ta,a*le in the year in which it is ;received,; the profit
from an installment sale is to *e apportioned *etween
or among the years in which such installments are
paid and received
1'
Sec 4' and Sec 1)" says that among the entities
who may use the a*ove/mentioned installment method
is a seller of real property who disposes his property
on installment, provided that the initial payment does
not e,ceed %"P of the selling price 2hey also state
what may *e regarded as installment payment and
what constitutes initial payment !nitial payment means
the payment received in cash or property e,cluding
evidences of inde*tedness due and paya*le in
su*se+uent years, li8e promissory notes or mortgages,
given of the purchaser during the ta,a*le year of sale
!nitial payment does not include amounts received *y
the vendor in the year of sale from the disposition to a
third person of notes given *y the vendee as part of
the purchase price which are due and paya*le in
su*se+uent years
14
Such disposition or discounting of
receiva*le is material only as to the computation of the
initial payment !f the initial payment is within %"P of
total contract price, e,clusive of the proceeds of
discounted notes, the sale +ualifies as an installment
sale, otherwise it is a deferred sale
1"
-lthough the proceed of a discounted promissory note
is not considered part of the initial payment, it is still
ta,a*le income for the year it was converted into cash
2he su*se+uent payments or li+uidation of certificates
of inde*tedness is reported using the installment
method in computing the proportionate income
1&
to *e
returned, during the respective year it was reali7ed
6on/dealer sales of real or personal property may *e
reported as income under the installment method
provided that the o*ligation is still outstanding at the
close of that year !f the seller disposes the entire
installment o*ligation *y discounting the *ill or the
promissory note, he necessarily must report the
*alance of the income from the discounting not only
income from the initial installment payment
5here an installment o*ligation is discounted at a
*an8 or finance company, a ta,a*le disposition results,
even if the seller guarantees its payment, continues to
collect on the installment o*ligation, or handles
repossession of merchandise in case of default
1)
2his
rule prevails in the >nited States
1:
Since our income
ta, laws are of -merican origin,
19
interpretations *y
-merican courts an our parallel ta, laws have
persuasive effect on the interpretation of these
laws
%(
2hus, *y analogy, all the more would a ta,a*le
disposition result when the discounting of the
promissory note is done *y the seller himself #learly,
the inde*tedness of the *uyer is discharged, while the
seller ac+uires money for the settlement of his
receiva*les 3ogically then, the income should *e
reported at the time of the actual gain 0or income ta,
purposes, income is an actual gain or an actual
increase of wealth
%1
-lthough the proceeds of a
discounted promissory note is not considered initial
payment, still it must *e included as ta,a*le income on
the year it was converted to cash 5hen petitioner had
the promissory notes covering the succeeding
installment payments of the land issued *y -G-3-,
discounted *y -G-3- itself, on the same day of the
sale, he lost entitlement to report the sale as a sale on
installment since, a ta,a*le disposition resulted and
petitioner was re+uired *y law to report in his returns
the income derived from the discounting 5hat
petitioner did is tantamount to an attempt to
circumvent the rule on payment of income ta,es
gained from the sale of the land to -G-3- for the year
19)&
3astly, petitioner +uestions the damages awarded to
respondent 3arin
-ny person who see8s to *e awarded actual or
compensatory damages due to acts of another has the
*urden of proving said damages as well as the amount
thereof
%%
3arin says the e,tortion cases filed against
him hampered his immediate promotion, caused him
strong an,iety and social humiliation 2he trial court
awarded him two hundred thousand =P%((,(((,((?
pesos as actual damages Bowever, the appellate
court stated that, despite pendency of this case, 3arin
was given a promotion at the A!$ Said respondent
courtC
5e find nothing on record, aside from
defendant/appellee 3arin9s statements =2S6,
pp &/), 11 1ecem*er 19:"?, to show that he
suffered loss of seniority that allegedly *arred
his promotion !n fact, he was promoted to his
present position despite the pendency of the
instant case =2S6, pp '"/'9, (4 6ovem*er
19:"?
%'
Moreover, the records of the case contain no
statement whatsoever of the amount of the actual
damages sustained *y the respondents -ctual
damages cannot *e allowed unless supported *y
evidence on the record
%4
2he court cannot rely on
speculation, conjectures or guesswor8 as to the fact
and amount of damages
%"
2o justify a grant of actual
or compensatory damages, it is necessary to prove
with a reasona*le degree of certainty, the actual
amount of loss
%&
Since we have no *asis with which to
assess, with certainty, the actual or compensatory
damages counter/claimed *y respondent 3arin, the
award of such damages should *e deleted
Moral damages may *e recovered in cases involving
acts referred to in -rticle %1
%)
of the #ivil #ode
%:
-s a
rule, a pu*lic official may not recover damages for
charges of falsehood related to his official conduct
unless he proves that the statement was made with
actual malice !n $abst, et al s %ational Intelli"ence
$oar!, et al, 1'% S#$- '1&, ''( =19:4?, we
reiterated the test for actual malice as set forth in the
landmar8 -merican case of %ew &or' Times
s #ullian,
%9
which we have long adopted, in
defamation and li*el cases, i(C
with 8nowledge that it was false or with
rec8less disregard of whether it was false or
not
5e appreciate petitioner9s claim that he filed his 19)&
return in good faith and that he had honestly *elieved
that the law allowed him to declare the sale of the
land, in installment 5e can further grant that the
pertinent ta, laws needed construction, as we have
earlier done 2hat petitioner was offended *y the
headlines alluding to him as ta, evader is also fully
understanda*le -ll these, however, do not justify what
amounted to a *aseless prosecution of respondent
3arin Petitioner presented no evidence to prove 3arin
e,torted money from him Be even admitted that he
never met nor tal8ed to respondent 3arin 5hen the
ta, investigation against the petitioner started, 3arin
was not yet the $egional 1irector of A!$ $egion !V/-,
Manila .n respondent 3arin9s instruction, petitioner9s
ta, assessment was considered one involving a sale
of capital asset, the income from which was su*jected
to only fifty percent ="(P? assessment, thus reducing
the original ta, assessment *y half 2hese
circumstances may *e ta8en to show that 3arin9s
involvement in e,tortion was not indu*ita*le Get,
petitioner went on to file the e,tortion cases against
3arin in different fora 2his is where actual malice
could attach on petitioner9s part Significantly, the trial
court did not err in dismissing petitioner9s complaints, a
ruling affirmed *y the #ourt of -ppeals
Eeeping all these in mind, we are constrained to agree
that there is sufficient *asis for the award of moral and
e,emplary damages in favor of respondent 3arin 2he
appellate court *elieved respondent 3arin when he
said he suffered an,iety and humiliation *ecause of
the unfounded charges against him Petitioner9s
actions against 3arin were found ;unwarranted and
*aseless,; and the criminal charges filed against him
in the 2anod*ayan and #ity 0iscal9s .ffice were all
dismissed
'(
Bence, there is ade+uate support for
respondent court9s conclusion that moral damages
have *een proved
6ow, however, what would *e a fair amount to *e paid
as compensation for moral damages also re+uires
determination @ach case must *e governed *y its own
peculiar circumstances
'1
.n this score, Del )osario
sCourt of *ppeals,
'%
cites several cases where no
actual damages were adjudicated, and where moral
and e,emplary damages were reduced for *eing ;too
e,cessive,; thusC
!n the case of P%$ C.*., M%"& S#$- '(9
=199&?N, this #ourt +uoted with approval the
following o*servation from )CPI
)o!ri"ue(, i(C
77 77 6evertheless, we find the award
of P1((,((((( as moral damages in
favor of respondent $odrigue7
e,cessive and unconsciona*le !n the
case of Pru!encia!o *lliance
Transport #ystem,Inc =14: S#$- 44(
M19:)N? we saidC M!Nt is undisputed
that the trial courts are given
discretion to determine the amount of
moral damages =-lcantara v Surro, 9'
Phil 4)%? and that the #ourt of
-ppeals can only modify or change
the amount awarded when they are
palpa*ly and scandalously e,cessive
;so as to indicate that it was the result
of passion, prejudice or corruption on
the part of the trial court; =<ellada v
5arner Aarnes I #o, !nc, ") .< M4N
)'4), )'":4 Sadie v Aacharach
Motors #o, !nc, ") .< M4N &'& and
-done v Aacharach Motor #o, !nc,
") .< &"&? Aut in more recent
cases where the awards of moral and
e,emplary damages are far too
e,cessive compared to the actual
loses sustained *y the aggrieved
party, this #ourt ruled that they should
*e reduced to more reasona*le
amounts =@mphasis ours?
!n other words, the moral damages
awarded must *e commensurate with
the loss or injury suffered
!n the same case =P6A v #-?, this #ourt
found the amount of e,emplary damages
re+uired to *e paid =P1,(((,(((,((? ;too
e,cessive; and reduced it to an ;e+uita*le
level; =P%",(((((?
!t will *e noted that in a*ove cases, the parties who
were awarded moral damages were not pu*lic
officials #onsidering that here, the award is in favor of
a government official in connection with his official
function, it is with caution that we affirm granting moral
damages, for it might open the floodgates for
government officials counter/claiming damages in suits
filed against them in connection with their functions
Moreover, we must *e careful lest the amounts
awarded ma8e citi7ens hesitate to e,pose corruption
in the government, for fear of lawsuits from vindictive
government officials 2hus, conforma*ly with our
declaration that moral damages are not intended to
enrich anyone,
''
we here*y reduce the moral damages
award in this case from two hundred thousand
=P%((,(((((? pesos to seventy five thousand
=P)",(((((? pesos, while the e,emplary damage is
set at P%",((((( only
2he law allows the award of attorney9s fees when
e,emplary damages are awarded, and when the party
to a suit was compelled to incur e,penses to protect
his interest
'4
2hough government officers are usually
represented *y the Solicitor <eneral in cases
connected with the performance of official functions,
considering the nature of the charges, herein
respondent 3arin was compelled to hire a private
lawyer for the conduct of his defense as well as the
successful pursuit of his counterclaims !n our view,
given the circumstances of this case, there is ample
ground to award in his favor P"(,(((,(( as reasona*le
attorney9s fees
5B@$@0.$@, the assailed decision of the #ourt of
-ppeals dated 6ovem*er %9, 1991, is here*y
-00!$M@1 with M.1!0!#-2!.6 so that the award of
actual damages are deleted4 and that petitioner is
here*y .$1@$@1 to pay to respondent 3arin moral
damages in the amount of P)",(((((, e,emplary
damages in the amount of P%",(((((, and attorney9s
fees in the amount of P"(,((((( only1âwphi1.nêt
6o pronouncement as to costs
S. .$1@$@1
$ellosillo- ?en!o(a- $uena an! De 3eon- Dr.-
DD.- concur
!2I:FMILG 0$I&%0 !&U" Inc.+ petitioner+ vs.
C.1RT .F 223L0" C.1RT .F TF 223L0
and the C.MMI00I.&3R .F I&T3R&L
R3$3&13"respondents.
5 3 C I 0 I . &
2&%&I!&" J.:
!f the State e,pects its ta,payers to o*serve fairness
and honesty in paying their ta,es, so must it apply the
same standard against itself in refunding e,cess
payments 5hen it is undisputed that a ta,payer is
entitled to a refund, the State should not invo8e
technicalities to 8eep money not *elonging to it 6o
one, not even the State, should enrich oneself at the
e,pense of another

The Case
Aefore us is a Petition for $eview assailing the March
'1, 199" 1ecision of the #ourt of -ppeals
M1N
=#-? in
#-/<$ SP 6o '4%4(, which affirmed the 1ecem*er
%4, 199' 1ecision
M%N
of the #ourt of 2a, -ppeals =#2-?
2he #- disposed as followsC
;5B@$@0.$@, foregoing premises
considered, the petition is here*y
1!SM!SS@1 for lac8 of merit;
M'N
.n the other hand, the dispositive portion of the #2-
1ecision affirmed *y the #- reads as followsC
;5B@$@0.$@, in Mview ofN all the
foregoing, PetitionerFs claim for refund
is here*y 1@6!@1 and this Petition for
$eview is 1!SM!SS@1 for lac8 of
merit;
M4N
-lso assailed is the 6ovem*er :, 199" #-
$esolution
M"N
denying reconsideration

The Facts
2he facts of this case were summari7ed *y the #- in
this wiseC
;2his case involves a claim for ta,
refund in the amount of P11%,491((
representing petitionerFs ta, withheld
for the year 19:9
!n its #orporate -nnual !ncome 2a,
$eturn for the year 19:9, the following
items are reflectedC
!ncomeP1,(1),9'1,
:'1((
1eductionsP1,(%&,%1:,
)91((
6et !ncome =3oss?
=P:,%:&,9&(((?
2a,a*le !ncome
=3oss?P:,%:&,9&(((
3essC
19:: 2a,
#reditP1:",
((1((
19:9 2a,
#reditP 11%,
491((
2.2-3
-M.>62P%9),49%((
$@0>61-A3@
;!t appears from the foregoing 19:9
!ncome 2a, $eturn that petitioner had
a total refunda*le amount of P%9),49%
inclusive of the P11%,491(( *eing
claimed as ta, refund in the present
case Bowever, petitioner declared in
the same 19:9 !ncome 2a, $eturn
that the said total refunda*le amount
of P%9),49%(( will *e applied as ta,
credit to the succeeding ta,a*le year
;.n .cto*er 11, 199(, petitioner filed
a written claim for refund in the
amount of P11%,491(( with the
respondent #ommissioner of !nternal
$evenue alleging that it did not apply
the 19:9 refunda*le amount of
P%9),49%(( =including P11%,491((?
to its 199( -nnual !ncome 2a, $eturn
or other ta, lia*ilities due to the
alleged *usiness losses it incurred for
the same year
;5ithout waiting for respondent
#ommissioner of !nternal $evenue to
act on the claim for refund, petitioner
filed a petition for review with
respondent #ourt of 2a, -ppeals,
see8ing the refund of the amount
of P11%,491((
;2he respondent #ourt of 2a, -ppeals
dismissed petitionerFs petition on the
ground that petitioner failed to present
as evidence its #orporate -nnual
!ncome 2a, $eturn for 199( to
esta*lish the fact that petitioner had
not yet credited the amount of
P%9),49%(( =inclusive of the amount
P11%,491(( which is the su*ject of
the present controversy? to its 199(
income ta, lia*ility
;Petitioner filed a motion for
reconsideration, however, the same
was denied *y respondent court in its
$esolution dated May &, 1994;
M&N
-s earlier noted, the #- affirmed the #2- Bence, this
Petition
M)N

Ruling of the Court of ppeals
!n affirming the #2-, the #ourt of -ppeals ruled as
followsC
;!t is incum*ent upon the petitioner to
show proof that it has not credited to
its 199( -nnual income 2a, $eturn,
the amount of P%9),49%(( =including
P11%,491((?, so as to refute its
previous declaration in the 19:9
!ncome 2a, $eturn that the said
amount will *e applied as a ta, credit
in the succeeding year of 199(
Baving failed to su*mit such
re+uirement, there is no *asis to grant
the claim for refund , , ,
;2a, refunds are in the nature of ta,
e,emptions -s such, they are
regarded as in derogation of
sovereign authority and to *e
construed strictissimi 2uris against the
person or entity claiming the
e,emption !n other words, the *urden
of proof rests upon the ta,payer to
esta*lish *y sufficient and competent
evidence its entitlement to the claim
for refund;
M:N

Issue
!n their Memorandum, respondents identify the issue
in this wiseC
;2he sole issue to *e resolved is
whether or not petitioner is entitled to
the refund of P11%,491((,
representing e,cess credita*le
withholding ta, paid for the ta,a*le
year 19:9;
M9N

The CourtNs Ruling
2he Petition is meritorious

Main Issue: Petitioner Entitled to Refnd
!t is undisputed that petitioner had e,cess withholding
ta,es for the year 19:9 and was thus entitled to a
refund amounting to P11%,491 Pursuant to Section
&9
M1(N
of the 19:& 2a, #ode which states that a
corporation entitled to a refund may opt either =1? to
o*tain such refund or =%? to credit said amount for the
succeeding ta,a*le year, petitioner indicated in its
19:9 !ncome 2a, $eturn that it would apply the said
amount as a ta, credit for the succeeding ta,a*le year,
199( Su*se+uently, petitioner informed the Aureau of
!nternal $evenue =A!$? that it would claim the amount
as a ta, refund, instead of applying it as a ta, credit
5hen no action from the A!$ was forthcoming,
petitioner filed its claim with the #ourt of 2a, -ppeals
2he #2- and the #-, however, denied the claim for
ta, refund Since petitioner declared in its 19:9
!ncome 2a, $eturn that it would apply the e,cess
withholding ta, as a ta, credit for the following year,
the 2a, #ourt held that petitioner was presumed to
have done so 2he #2- and the #- ruled that
petitioner failed to overcome this presumption *ecause
it did not present its 199( $eturn, which would have
shown that the amount in dispute was not applied as a
ta, credit Bence, the #- concluded that petitioner was
not entitled to a ta, refund
5e disagree with the #ourt of -ppeals -s a rule, the
factual findings of the appellate court are *inding on
this #ourt 2his rule, however, does not apply
where, inter alia- the judgment is premised on a
misapprehension of facts, or when the appellate court
failed to notice certain relevant facts which if
considered would justify a different conclusion
M11N
2his
case is one such e,ception
!n the first place, petitioner presented evidence to
prove its claim that it did not apply the amount as a ta,
credit 1uring the trial *efore the #2-, Ms Golanda
@smundo, the manager of petitionerFs accounting
department, testified to this fact !t li8ewise presented
its claim for refund and a certification issued *y Mr <il
3ope7, petitionerFs vice/president, stating that the
amount of P11%,491 ;has not *een andJor will not *e
automatically creditedJoffset against any succeeding
+uartersF income ta, lia*ilities for the rest of the
calendar year ending 1ecem*er '1, 199(; -lso
presented were the +uarterly returns for the first two
+uarters of 199(
2he Aureau of !nternal $evenue, for its part, failed to
controvert petitionerFs claim !n fact, it presented no
evidence at all Aecause it ought to 8now the ta,
records of all ta,payers, the #!$ could have easily
disproved petitionerFs claim 2o repeat, it did not do so
More important, a copy of the 0inal -djustment $eturn
for 199( was attached to petitionerFs Motion for
$econsideration filed *efore the #2-
M1%N
- final
adjustment return shows whether a corporation
incurred a loss or gained a profit during the ta,a*le
year !n this case, that $eturn clearly showed that
petitioner incurred P"%,4:(,1)' as net loss in 199(
#learly, it could not have applied the amount in dispute
as a ta, credit
-gain, the A!$ did not controvert the veracity of the
said return !t did not even file an opposition to
petitionerFs Motion and the 199( 0inal -djustment
$eturn attached thereto !n denying the Motion for
$econsideration, however, the #2- ignored the said
$eturn !n the same vein, the #- did not pass upon
that significant document
2rue, strict procedural rules generally frown upon the
su*mission of the $eturn after the trial 2he law
creating the #ourt of 2a, -ppeals, however,
specifically provides that proceedings *efore it ;shall
not *e governed strictly *y the technical rules of
evidence;
M1'N
2he paramount consideration remains
the ascertainment of truth Verily, the +uest for orderly
presentation of issues is not an a*solute !t should not
*ar courts from considering undisputed facts to arrive
at a just determination of a controversy
!n the present case, the $eturn attached to the Motion
for $econsideration clearly showed that petitioner
suffered a net loss in 199( #ontrary to the holding of
the #- and the #2-, petitioner could not have applied
the amount as a ta, credit !n failing to consider the
said $eturn, as well as the other documentary
evidence presented during the trial, the appellate court
committed a reversi*le error
!t should *e stressed that the rationale of the rules of
procedure is to secure a just determination of every
action 2hey are tools designed to facilitate the
attainment of justice
M14N
Aut there can *e no just
determination of the present action if we ignore, on
grounds of strict technicality, the $eturn su*mitted
*efore the #2- and even *efore this #ourt
M1"N
2o
repeat, the undisputed fact is that petitioner suffered a
net loss in 199(4 accordingly, it incurred no ta, lia*ility
to which the ta, credit could *e applied #onse+uently,
there is no reason for the A!$ and this #ourt to
withhold the ta, refund which rightfully *elongs to the
petitioner
Pu*lic respondents maintain that what was attached to
petitionerFs Motion for $econsideration was not the
final adjustment $eturn, *ut petitionerFs first two
+uarterly returns for 199(
M1&N
2his allegation is wrong
-n e,amination of the records shows that the 199(
0inal -djustment $eturn was attached to the Motion
for $econsideration .n the other hand, the two
+uarterly returns for 199( mentioned *y respondent
were in fact attached to the Petition for $eview filed
*efore the #2- !ndeed, to re*ut respondentsF specific
contention, petitioner su*mitted *efore us its
Surrejoinder, to which was attached the Motion for
$econsideration and @,hi*it ;-; thereof, the 0inal
-djustment $eturn for 199(
M1)N
/!A /ase No. (394
Petitioner also calls the attention of this #ourt, as it
had done *efore the #2-, to a 1ecision rendered *y
the 2a, #ourt in #2- #ase 6o 4:9), involving its
claim for refund for the year 199( !n that case, the 2a,
#ourt held that ;petitioner suffered a net loss for the
ta,a*le year 199( , , ,;
M1:N
$espondent, however,
urges this #ourt not to ta8e judicial notice of the said
case
M19N
-s a rule, ;courts are not authori7ed to ta8e judicial
notice of the contents of the records of other cases,
even when such cases have *een tried or are pending
in the same court, and notwithstanding the fact that
*oth cases may have *een heard or are actually
pending *efore the same judge;
M%(N
Ae that as it may, Section %, $ule 1%9 provides that
courts may ta8e judicial notice of matters ought to *e
8nown to judges *ecause of their judicial functions !n
this case, the #ourt notes that a copy of the 1ecision
in #2- #ase 6o 4:9) was attached to the Petition for
$eview filed *efore this #ourt Significantly,
respondents do not claim at all that the said 1ecision
was fraudulent or none,istent !ndeed, they do not
even dispute the contents of the said 1ecision,
claiming merely that the #ourt cannot ta8e judicial
notice thereof
2o our mind, respondentsF reasoning underscores the
wea8ness of their case 0or if they had really *elieved
that petitioner is not entitled to a ta, refund, they could
have easily proved that it did not suffer any loss in
199( !ndeed, it is noteworthy that respondents
opted not to assail the fact appearing therein // that
petitioner suffered a net loss in 199( U in the same
way that it refuse! to controvert the same
fact esta*lished *y petitionerFs other documentary
e,hi*its
!n any event, the 1ecision in #2- #ase 6o 4:9) is
not the sole *asis of petitionerFs case !t is merely one
more *it of information showing the star8 truthC
petitioner did not use its 19:9 refund to pay its ta,es
for 199(
0inally, respondents argue that ta, refunds are in the
nature of ta, e,emptions and are to *e
construed strictissimi 2uris against the claimant >nder
the facts of this case, we hold that petitioner has
esta*lished its claim Petitioner may have failed to
strictly comply with the rules of procedure4 it may have
even *een negligent 2hese circumstances, however,
should not compel the #ourt to disregard this cold,
undisputed factC that petitioner suffered a net loss in
199(, and that it could not have applied the amount
claimed as ta, credits
Su*stantial justice, e+uity and fair play are on the side
of petitioner 2echnicalities and legalisms, however
e,alted, should not *e misused *y the government to
8eep money not *elonging to it and there*y enrich
itself at the e,pense of its law/a*iding citi7ens !f the
State e,pects its ta,payers to o*serve fairness and
honesty in paying their ta,es, so must it apply the
same standard against itself in refunding e,cess
payments of such ta,es !ndeed, the State must lead
*y its own e,ample of honor, dignity and uprightness
EH3R3F.R3, the Petition is here*y .)*%T,D and
the assailed 1ecision and $esolution of the #ourt of
-ppeals ),V,)#,D and #,T *#ID, 2he
#ommissioner of !nternal $evenue is ordered to
refund to petitioner the amount of P11%,491 as e,cess
credita*le ta,es paid in 19:9 6o costs
0. .R53R35.
?elo- /Chairman0- Purisima- and .on(a"a>)eyes-
DD.- concur
Vitu"- D.- a*road, on official *usiness
HILM 003T %.R. &os.
'@++>,M'+)((?
M&%3M3&T" I&C."
2etitioner" 2resent:


2
a
n
g
a
ni
-
a
n"
J.
+

Chairman"
0andoval:
%utierreO
: versus : Corona"
Carpio
Morales" and

%arcia" JJ


C.MMI00I.&3R .F 2romulgated:
I&T3R&L R3$3&13"
Respondent. 5ecem-er
'?" )((@
9 :: :: :: :: :: :: :: :: :: :: :: :: :: :: :: :: :: :: :: :: :: :: :: :: ::
:: :: :: 9


53CI0I.&


2&%&I!&" J.:


nder Section )& of the 6ational !nternal $evenue
#ode, a ta,a*le corporation with e,cess +uarterly
income ta, payments may apply for either a
ta,refun! or a ta, cre!it, *ut not *oth 2he choice of
one precludes the other 0ailure to indicate a choice,
however, will not *ar a valid re+uest for a refund,
should this option *e chosen *y the ta,payer later on
>
The Case

Aefore us are two consolidated Petitions for
$eview
M1N
under $ule 4" of the $ules of #ourt, see8ing
to review and reverse the 1ecem*er 19, %((%
1ecision
M%N
of the #ourt of -ppeals =#-? in #-/<$ SP
6o &919) and its January '(, %((4 1ecision
M'N
in #-/
<$ SP 6o )(::%

2he dispositive portion of the assailed
1ecem*er 19, %((% 1ecision, on the one hand, reads
as followsC

REH3R3F.R3, the petition is
here*y 5ENIE5 2he assailed
decision and resolution of the #ourt of
2a, -ppeals are A##IR6E5S
M4N




2hat of the assailed January '(, %((4 1ecision,
on the other hand, was similarly worded, e,cept that it
referred to the May %, %((% 1ecision of the #ourt of
2a, -ppeals =#2-?
M"N
!%e #acts

!n <$ 6o 1"&&'), the #- adopted the #2-Fs
narration of the facts as followsC

RPetitioner, formerly Philam
0und Management, !nc, is a domestic
corporation duly organi7ed and
e,isting under the laws of the
$epu*lic of the Philippines !t acts as
the investment manager of *oth
Philippine 0und, !nc =P0!? and Philam
Aond 0und, !nc =PA0!?, which are
open/end investment companiesM,N in
the sale of their shares of stoc8s and
in the investment of the proceeds of
these sales into a diversified portfolio
of de*t and e+uity securities Aeing
an investment manager, MpNetitioner
provides management and technical
services to P0! and PA0! Petitioner
is, li8ewise, P0!Fs and PA0!Fs principal
distri*utor which ta8es charge of the
sales of said companiesF shares to
prospective investors Pursuant to the
separate MmNanagement and
MdNistri*ution agreements *etween the
MpNetitioner and P0! and PA0!, *oth
P0! and PA0! MagreeN to pay the
MpNetitioner, *y way of compensation
for the latterFs services and facilities, a
monthly management fee from which
P0! and PA0! withhold the amount
e+uivalent to MaN five percent ="P?
credita*le ta,M,N pursuant to the
@,panded 5ithholding 2a,
$egulations

R.n -pril ', 199:, MpNetitioner
filed its MaNnnual McNorporate MiNncome
MtNa, MrNeturn for the ta,a*le year 199)
representing a net loss
of P%,&:9,%4%(( #onse+uently, it
failed to utili7e the credita*le ta,
withheld in the amount of 0ive
Bundred 2wenty/2wo 2housand
6inety/2wo Pesos =P"%%,(9%((?
representing MtheN ta, withheld *y
MpNetitionerFs withholding agents, P0!
and PA0!M,N on professional fees

R2he credita*le ta, withheld *y
P0! and PA0! in the amount
of P"%%,(9%(( is *ro8en down as
followsC


P0! P49&,)(%("

PA0! %",':9&&b

2otal P"%%,(91)1

R.n Septem*er 11, 199:,
MpNetitioner filed an administrative
claim for refund with the MAureau of
!nternal $evenue =A!$?N // -ppellate
1ivision in the amount ofP"%%,(9%((
representing unutili7ed e,cess ta,
credits for calendar year 199)
2hereafter, on July %:, 1999, a written
re+uest was filed with the same
division for the early resolution of
MpNetitionerFs claim for refund

R$espondent did not act on
MpNetitionerFs claim for refundM4N hence,
a Petition for $eview was filed with
this #ourt
M&N
on 6ovem*er %9, 1999 to
toll the running of the two/year
prescriptive periodS
M)N



.n .cto*er 9, %((1, the #2- rendered a
1ecision denying petitionerFs Petition for $eview !ts
Motion for $econsideration was li8ewise denied in a
$esolution dated January %9, %((%

!n <$ 6o 1&%((4, the antecedents are narrated
*y the #- in this wiseC

R.n -pril 1', 1999, MpetitionerN
filed its -nnual !ncome 2a, $eturn
with the MA!$N for the ta,a*le year
199: declaring a net loss
of P1,"(4,9"1(( 2hus, there was no
ta, due against MpetitionerN for the
ta,a*le year 199: 3i8ewise,
MpetitionerN had an unapplied
credita*le withholding ta, in the
amount of P4"9,)"&(), which
amount had *een previously withheld
in that year *y petitionerFs withholding
agentsM,N namely , , , MP0!N, , , ,
MPA0!N, and Philam Strategic <rowth
0und, !nc =PS<0!?

R!n the ne,t succeeding year,
MpetitionerN had a ta, due in the
amount of P:(,(4%((, and a
credita*le withholding ta, in the
amount of P91",99"(( MPetitionerN
li8ewise declared in its 1999 ta, return
the amount of P4"9,)"&(), which
represents its prior e,cess credit for
ta,a*le year 199:

R2hereafter, on 6ovem*er 14,
%(((, MpetitionerN filed with the
$evenue 1istrict .ffice 6o "(,
$evenue $egion 6o :, a written
administrative claim for refund with
respect to the unapplied credita*le
withholding ta, of P4"9,)"&()
-ccording to Mpetitioner,N the amount
of P:(,(4%((, representing the ta,
due for the ta,a*le year 1999 has
*een credited from its P91",99"((
credita*le withholding ta, for ta,a*le
year 1999, thus leaving its 199:
credita*le withholding ta, in the
amount of P4"9,)"&() still unapplied

R2he claim for refund yielded
no action on the part of the A!$
MPetitionerN then filed a Petition for
$eview *efore the #2- on 1ecem*er
%&, %(((, asserting that it is entitled
MtoN the refund Mof P4"9,)"&(),N since
said amount has not *een applied
against its ta, lia*ilities in the ta,a*le
year 199:

R.n May %, %((%, the #2-
rendered MaN , , , decision denying
MpetitionerFsN Petition for $eview , ,
,S
M:N



Ruling of the Court of ppeals

2he #- denied the claim of petitioner for a
refund of the latterFs e,cess credita*le ta,es withheld
for the years 199) and 199:, despite compliance with
the *asic re+uirements of $evenue $egulations =$$?
6o 1%/94 2he appellate court pointed out that, in the
respective !ncome 2a, $eturns =!2$s? for *oth years,
petitioner did not indicate its option to have the
amounts either refunded or carried over and applied to
the succeeding year !t was held that to re+uest for
either a refund or a credit of income ta, paid, a
corporation must signify its intention *y mar8ing the
corresponding option *o, on its annual corporate
adjustment return

2he #- further held in <$ 6o 1"&&') that the
failure to present the 199: !2$ was fatal to the claim
for a refund, *ecause there was no way to verify if the
ta, credit for 199) could not have *een applied against
the 199: ta, lia*ilities of petitioner

!n <$ 6o 1&%((4, however, the su*se+uent
acts of petitioner demonstrated its option to carry over
its ta, credit for 199:, even if it again failed to tic8 the
appropriate *o, for that option in its 199: !2$ >nder
$$ 1%/94, its failure to indicate that option resulted in
the automatic carry/over of any e,cess ta, credit for
the prior year 2he appellate court said that the
government would not *e unjustly enriched *y denying
a refund, *ecause there would *e no forfeiture of the
amount in its favor 2he amount claimed as a refund
would remain in the account of the ta,payer until
utili7ed in succeeding ta,a*le years

Bence, these Petitions
M9N
!%e Isses

Petitioner raises two issues in <$ 6o 1"&&')
for the #ourtFs considerationC
R-

R5hether or not the failure of the
MpNetitioner to indicate in its MaNnnual
MiNncome MtNa, MrNeturn the option to
refund its credita*le withholding ta, is
fatal to its claim for refund

RA

R5hether or not the presentation in
evidence of the MpNetitionerFs MaNnnual
MiNncome MtNa, MrNeturn for the
succeeding calendar year is a legal
re+uisite in a claim for refund of
unapplied credita*le withholding
ta,S
M1(N


!n <$ 6o 1&%((4, petitioner raises one
+uestion onlyC

R5hether or not the petitioner is
entitled to the refund of its unutili7ed
credita*le withholding ta, in the
ta,a*le year 199: in the amount
of P4"9,)"&()S
M11N



!n *oth cases, a simple issue needs to *e
resolvedC whether petitioner is entitled to
a refund of its credita*le ta,es withheld
for ta,a*le years 199) and 199:

The CourtNs Ruling

2he Petition in <$ 6o 1"&&') is meritorious,
*ut that in <$ 6o 1&%((4 is not

Main Issue:
Entitlement to Refnd

2he provision on the final adjustment return
=0-$? was originally found in Section &9 of
Presidential 1ecree =P1? 6o 11":, otherwise 8nown
as the R6ational !nternal $evenue #ode of 19))S
M1%N

.n -ugust 1, 19:(, this provision was restated as
Section :&
M1'N
in P1 1)("
M14N

.n 6ovem*er ", 19:", all prior amendments
and those introduced *y P1 1994
M1"N
were
codified
M1&N
into the 6ational !nternal $evenue #ode
=6!$#? of 19:", as a result of which Section :& was
renum*ered
M1)N
as Section )9
M1:N
.n July '1, 19:&, Section %4 of @,ecutive .rder
=@.? 6o ') changed all Rnet incomeS phrases
appearing in 2itle !! of the 6!$# of 19)) to Rta,a*le
incomeS Section )9 of the 6!$# of 19:",
M19N
however,
was not amended

.n July %", 19:), @.
%)'
M%(N
renum*ered
M%1N
Section :& of the 6!$#
M%%N
as
Section )&,
M%'N
which was also rearranged
M%4N
to fall
under #hapter 1( of 2itle !! of the 6!$# Section )9,
which had earlier *een renum*ered *y P1 1994,
remained unchanged

2hus, Section &9 of the 6!$# of 19)) was
renum*ered as Section :& under P1 1)("4 later, as
Section )9 under P1 19944
M%"N
then, as Section )& under
@. %)'
M%&N
0inally, after *eing renum*ered and reduced
to the chaff of a grain, Section &9 was repealed *y @.
')
Su*se+uently, Section &9 reappeared in the
6!$# =or 2a, #ode? of 199) as Section )&, which
readsC

RSection )& 6inal *!2ustment
)eturn. // @very corporation lia*le to
ta, under Section %4 shall file a final
adjustment return covering the total
net income
M%)N
for the preceding
calendar or fiscal year !f the sum of
the +uarterly ta, payments made
during the said ta,a*le year is not
e+ual to the total ta, due on the entire
ta,a*le net income
M%:N
of that year the
corporation shall eitherC

R=a? Pay the e,cess
ta, still due4 or
R=*? Ae refunded the
e,cess amount
paid, as the
case may *e

R!n case the corporation is
entitled to a refund of the e,cess
estimated +uarterly income ta,es
paid, the refunda*le amount shown on
its final adjustment return may *e
credited against the estimated
+uarterly income ta, lia*ilities for the
ta,a*le +uarters of the succeeding
ta,a*le yearS


GR No. 1577.4

2his section applies to the first case *efore the
#ourt 1ifferently num*ered in 19)) *ut similarly
worded %( years later =199)?, Section )& offers two
options to a ta,a*le corporation whose total +uarterly
income ta, payments in a given ta,a*le year e,ceeds
its
total income ta, due 2hese options are =1? filing for
a tax refun! or =%? availing of a tax cre!it

2he first option is relatively simple -ny ta, on
income that is paid in e,cess of the amount due the
government may *e refunded, provided that a
ta,payer properly applies for the refund

2he second option wor8s *y applying the
refunda*le amount, as shown on the 0-$ of a given
ta,a*le year, against the estimated +uarterly income
ta, lia*ilities of the succeeding ta,a*le year

2hese two options under Section )& are
alternative in nature
M%9N
2he choice of one precludes
the other !ndeed, in Philippine $an' of
Communications . Commissioner of Internal
)eenue,
M'(N
the #ourt ruled that a corporation must
signify its intention // whether to re+uest a tax
refun! or claim a tax cre!it // *y mar8ing the
corresponding option *o, provided in the 0-$
M'1N

5hile a ta,payer is re+uired to mar8 its choice in the
form provided *y the A!$, this re+uirement is only for
the purpose of facilitating ta, collection
.ne cannot get a tax refun! and a tax cre!it at
the same time for the same e,cess income ta,es
paid 0ailure to signify oneFs intention in the 0-$ does
not mean outright *arring of a valid re+uest for a
refund, should one still choose this option later on -
ta, credit should *e construed merely as an alternative
remedy to a ta, refund under Section )&, su*ject to
prior verification and approval *y respondent
M'%N

2he reason for re+uiring that a choice *e made
in the 0-$ upon its filing is to ease ta, administration,
M''N
particularly the self/assessment and collection
aspects - ta,payer that ma8es a choice e,presses
certainty or preference and thus demonstrates clear
diligence #onversely, a ta,payer that ma8es no
choice e,presses uncertainty or lac8 of preference and
hence shows simple negligence or plain oversight

!n the present case, respondent denied the
claim of petitioner for a refund of e,cess ta,es
withheld in 199), *ecause the latter
=1? had not indicated in its !2$ for that year whether it
was opting for a credit or a refund4 and =%? had not
su*mitted as evidence its 199: !2$, which could have
*een the *asis for determining whether its claimed
199) ta, credit had not *een applied against its 199:
ta, lia*ilities

$e+uiring that the !2$ or the 0-$ of
the succee!in" year *e presented to the A!$ in
re+uesting a tax refun! has no *asis in law and
jurisprudence

6irst, Section )& of the 2a, #ode does not
mandate it 2he law merely re+uires the filing of the
0-$ for the prece!in" // not the succeeding // ta,a*le
year !ndeed, any refunda*le amount indicated in the
0-$ of the preceding ta,a*le year may *e credited
against the estimated income ta, lia*ilities for the
ta,a*le +uarters of the succeeding ta,a*le year
Bowever, nowhere is there even a tinge of a hint in
any of the provisions of the 2a, #ode that the 0-$ of
the ta,a*le year following the period to which the tax
cre!its are originally *eing applied should also *e
presented to the A!$

#econ!, Section "
M'4N
of $$ 1%/94, amending
Section 1(=a? of $$ &/:", merely provides that claims
for the refund of income ta,es deducted and withheld
from income payments shall *e given due course only
=1? when it is shown on the !2$ that the income
payment received is *eing declared part of the
ta,payerFs gross income4 and =%? when the fact of
withholding is esta*lished *y a copy of the withholding
ta, statement, duly issued *y the payor to the payee,
showing the amount paid and the income ta, withheld
from that amount
M'"N

>ndisputedly, the records do not show that the
income payments received *y petitioner have not *een
declared as part of its gross income, or that the fact of
withholding has not *een esta*lished -ccording to
the #2-, RMpNetitioner su*stantially complied with the ,
, , re+uirementsS of $$ 1%/94 RMtNhat the fact of
withholding is esta*lished *y a copy of a statement
duly issued *y the payor =withholding agent? to the
payee, showing the amount paid and the amount of
ta, withheld therefrom4 and , , , MtNhat the income
upon which the ta,es were withheld were included in
the return of the recipientS
M'&N

2he esta*lished procedure is that a ta,payer
that wants a cash refund shall ma8e a written re+uest
for it, and the !2$ showing the e,cess e,panded
withholding ta, credits shall then *e e,amined *y the
A!$ 0or the grant of refund, $$s 1%/94 and &/:"
state that all
pertinent accounting records should *e su*mitted *y
the ta,payer 2hese records, however, actually refer
only to =1? the withholding ta, statements4 =%? the !2$
of the present +uarter to which the e,cess withholding
ta, credits are *eing applied4 and ='? the !2$ of the
+uarter for the previous ta,a*le year in which the
e,cess credits arose
M')N
2o stress, these regulations
implementing the law do not re+uire the proffer of the
0-$ for the ta,a*le year following the period to which
the tax cre!its are *eing applied

Thir!, there is no automatic grant of a tax
refun! -s a matter of procedure, the A!$ should *e
given the opportunity Rto investigate and confirm the
veracityS
M':N
of a ta,payerFs claim, *efore it grants the
refund @,ercising the option for a ta, refund or a ta,
credit does not ipso facto confer upon a ta,payer the
right to an immediate availment of the choice made
6either does it impose a duty on the government to
allow ta, collection to *e at the sole control of a
ta,payer
M'9N

6ourth, the A!$ ought to have on file its own
copies of petitionerFs 0-$ for the succeeding year, on
the *asis of which it could re*ut the assertion that
there was a su*se+uent credit of the e,cess income
ta, payments for the previous year !ts failure to
present this vital document to support its contention
against the grant of a tax refun! to petitioner is
certainly fatal

6ifth, the #2- should have ta8en judicial
notice
M4(N
of the fact of filing and the pendency of
petitionerFs su*se+uent claim for a refund of e,cess
credita*le ta,es withheld for 199: 2he e,istence of
the claim ought to *e 8nown *y reason of its judicial
functions 0urthermore, it is decisive to and will easily
resolve the material issue in this case !f only judicial
notice were ta8en earlier, the fact that there was no
carry/over of the e,cess credita*le ta,es withheld for
199) would have already *een crystal clear

#ixth, the 2a, #ode allows the refund of ta,es to
a ta,payer that claims it in writing within two years
after payment of the ta,es erroneously received *y the
A!$
M41N
1espite the failure of petitioner
to ma8e the appropriate mar8ing in the A!$ form, the
filing of its written claim effectively serves as an
e,pression of its choice to re+uest a tax refun!,
instead of atax cre!it 2o assert that any future claim
for a ta, refund will *e instantly hindered *y a failure to
signify oneFs intention in the 0-$ is to render nugatory
the clear provision that allows for a two/year
prescriptive period

!n fact, in $PI>6amily #ain"s $an' . C*,
M4%N
this
#ourt even ordered the refund of a ta,payerFs e,cess
credita*le ta,es, despite the e,press declaration in the
0-$ to apply the e,cess to the succeeding year
M4'N

5hen circumstances show that a choice of ta, credit
has *een made, it should *e respected Aut when
indu*ita*le circumstances clearly show that another
choice // a ta, refund // is in order, it should *e
granted R2echnicalities and legalisms, however
e,alted, should not *e misused *y the government to
8eep money not *elonging to it and there*y enrich
itself at the e,pense of its law/a*iding citi7ensS
M44N

!n the present case, although petitioner did not
mar8 the refund *o, in its 199) 0-$, neither did it
perform any act indicating that it chose a ta, credit
.n the contrary, it filed on Septem*er 11, 199:, an
administrative claim for the refund of its e,cess ta,es
withheld in 199) !n none of its +uarterly returns for
199: did it apply the e,cess credita*le ta,es >nder
these circumstances, petitioner is entitled to a tax
refun! of its 199) e,cess ta, credits in the amount
of P"%%,(9%

GR No. 17'88(

-s to the second case, Section )& also applies
-mended *y $epu*lic -ct =$-? 6o :4%4, otherwise
8nown as the R2a, $eform -ct of 199),S it now statesC

RS@# )& 6inal *!2ustment
)eturn. // @very corporation lia*le to
ta, under Section %) shall file a final
adjustment return covering the total
ta,a*le income for the preceding
calendar or fiscal year !f the sum of
the +uarterly ta, payments made
during the said ta,a*le year is not
e+ual to the total ta, due on the entire
ta,a*le income of that year, the
corporation shall eitherC

=-? Pay the *alance
of ta, still due4
or
=A? #arry over the
e,cess credit4
or
=#? Ae credited or
refunded with
the e,cess
amount paid,
as the case
may *e

R!n case the corporation is
entitled to a ta, credit or refund of the
e,cess estimated +uarterly income
ta,es paid, the e,cess amount shown
on its final adjustment return may *e
carried over and credited against the
estimated +uarterly income ta,
lia*ilities for the ta,a*le +uarters of
the succeeding ta,a*le years .nce
the option to carry/over and apply the
e,cess +uarterly income ta, against
income ta, due for the ta,a*le
+uarters of the succeeding ta,a*le
years has *een made, such option
shall *e considered irrevoca*le for
that ta,a*le period and no application
for cash refund or issuance of a ta,
credit certificate shall *e allowed
thereforS


2he carry/over option under Section )& is
permissive - corporation that is entitled to a tax
refun! or a tax cre!it for e,cess payment of +uarterly
income ta,es may carry over and credit the e,cess
income ta,es paid in a given ta,a*le year against the
estimated income ta, lia*ilities of the succeeding
+uarters .nce chosen, the carry/over option shall *e
considered irrevoca*le
M4"N
for that ta,a*le period, and
no application for a tax refun! or issuance of a tax
cre!it certificateshall then *e allowed

-ccording to petitioner, it neither chose nor
mar8ed the carry/over option *o, in its 199: 0-$
M4&N

-s this option was not chosen, it seems that there is
nothing that can *e considered irrevoca*le !n other
words, petitioner argues that it is still entitled to a
refund of its 199: e,cess income ta, payments
2his argument does not hold water 2he
su*se+uent acts of petitioner reveal that it
has effectiely chosen the carry/over option

6irst, the fact that it filled out the portion RPrior
GearFs @,cess #reditsS in its 1999 0-$ means that it
categorically availed itself of the carry/over option !n
fact, the line that precedes that phrase in the A!$ form
clearly states R3essC 2a, #reditsJPaymentsS 2he
contention that it merely filled out that portion *ecause
it was a re+uirement // and that to have done
otherwise would have *een tantamount to falsifying
the 0-$ // is a long shot

2he 0-$ is the most relia*le firsthand evidence
of corporate acts pertaining to income ta,es !n it are
found the itemi7ation and summary of additions to and
deductions from income ta,es due 2hese entries are
not without rhyme or reason 2hey are re+uired,
*ecause they facilitate the ta, administration process

0ailure to indicate the amount of Rprior yearFs
e,cess creditsS does not mean falsification *y a
ta,payer of its current yearFs 0-$ .n the contrary, if
an application for a tax refun! has *een // or will *e //
filed, then that portion of the A!$ form should
necessarily *e *lan8, even if the 0-$ of the previous
ta,a*le year already shows an overpayment in ta,es

#econ!, the resulting redundancy in the claim of
petitioner for a refun! of its 199: e,cess ta, credits on
6ovem*er 14, %(((
M4)N
cannot *e countenanced !t
cannot *e allowed to avail itself of a tax refun! and
a tax cre!it at the same time for the same e,cess
income ta,es paid Aesides, disallowing it from getting
a tax refun! of those e,cess ta, credits will not
enervate the two/year prescriptive period under the
2a, #ode 2hat period will apply if the carry/over
option has not *een chosen

Aesides, Rta, refunds , , , are construed strictly
against the ta,payerS
M4:N
Petitioner has failed to meet
the *urden of proof re+uired in order to esta*lish the
factual *asis of its claim for a tax refun!

Thir!, the Rfirst/in first/outS =0!0.? principle
enunciated *y the #2-
M49N
does not apply
M"(N
Money is
fungi*le property
M"1N
2he amount to *e applied against
the P:(,(4% income ta, due in the 199: 0-$
M"%N
of
petitioner may *e ta8en from its e,cess credits in 199)
or from those withheld in 199: or from *oth
5hichever of these the amount will *e ta8en from will
not ma8e a difference

@ven if the 0!0. principle were to *e applied,
the ta, credits would have to *e in consonance with
the usual and normal course of events !n fact, the
0-$ is cumulative in nature
M"'N
0ollowing a natural
se+uence, the prior yearFs e,cess ta, credits will have
to *e reduced first to answer for any current ta,
lia*ilities *efore the current yearFs withheld amounts
can *e applied .therwise, there will *e no sense in
re+uiring a ta,payer to fill out the line items in the 0-$
to segregate its sources of ta, credits

5hether the 0!0. principle is applied or not,
Section )& remains clear and une+uivocal .nce the
carry/over option is ta8en, actually or constructively, it
*ecomes irreocable Petitioner has chosen that
option for its 199: credita*le withholding ta,es 2hus,
it is no longer entitled to a tax refun! of P4"9,)"&(),
which corresponds to its 199: e,cess ta, credit
6onetheless, the amount will not *e forfeited in the
governmentFs favor, *ecause it may *e claimed *y
petitioner as ta, credits in the succeeding ta,a*le
years

5B@$@0.$@, the Petition in <$ 6o 1"&&')
is GRAN!E5 and the assailed 1ecem*er 19, %((%
1ecision RE9ER&E5 and &E! A&I5E 6o
pronouncement as to costs

2he Petition in <$ 6o 1&%((4 is,
however, 5ENIE5 and the assailed January '(, %((4
1ecision A##IR6E5 #osts against petitioner

S. .$1@$@1

C.MMI00I.&3R .F
I&T3R&L R3$3&13"
Petitioner,




/ ersus /




!&U .F TH3
2HILI22I&3I0L&50"
$esponden
t
%.R. &o. ',A?*(

PresentC

G6-$@S/
S-62!-<., D.-
#hairperson,
#B!#./6-_-$!.,
V@3-S#., J$,
6-#B>$-, and
P@$-32-- DD.

PromulgatedC


July ), %((9
,/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
/ / / / / / / / / / / / /,


D , C I # I 7 %


#B!#./6-_-$!., DC


2his is a Petition for $eview assailing the
1ecision
M1N
dated %9 -pril %((" and the $esolution
dated %( -pril %(() of the #ourt of -ppeals in #-/<$
SP 6o ))&"", which annulled and set aside the
1ecision dated 1% March %((' of the #ourt of 2a,
-ppeals =#2-? in #2- #ase 6o &%)&, wherein the
#2- held that respondent Aan8 of the Philippine
!slands =AP!? already e,ercised the irrevoca*le option
to carry over its e,cess ta, credits for the year 199: to
the succeeding years 1999 and %((( and was,
therefore, no longer entitled to claim the refund or
issuance of a ta, credit certificate for the amount
thereof

.n 1" -pril 1999, AP! filed with the Aureau of
!nternal $evenue =A!$? its final adjusted #orporate
-nnual !ncome 2a, $eturn =!2$? for the ta,a*le year
ending on >' 5ecem-er '**A, showing a ta,a*le
income of P1,))',%'&,)4"(( and a total ta, due
of 2+()"*(("?*>.((

0or the same ta,a*le year 199:, AP! already
made income ta, payments for the first three +uarters,
which amounted to 2@+>"@?,"?,(.?+
M%N
2he *an8 also
received income in 199: from various third persons,
which, were already su*jected to e,panded
withholding ta,es amounting to 2,"+A@"AA,.*( AP!
additionally ac+uired foreign ta, credit when it paid
the >nited States government ta,es in the amount of
]1"1,4&)((, or the e+uivalent of 2+"'*("('?.?+, on
the operations of formerFs 6ew Gor8 Aranch 0inally,
respondent AP! had carried over e,cess ta, credit
from the prior year, 199), amounting
to 2@*"?)?"))).((

#rediting the aforementioned amounts against
the total ta, due from it at the end of 199:, AP!
computed an overpayment to the A!$ of income ta,es
in the amount of2>>"*?,"'('.(( 2he computation of
AP! is reproduced *elowC

2otal !ncome 2a,es
1ue P&(%,9((
,49'((
3essC 2a, #reditsC
Prior yearFs ta,
credits P"9,4%4,%%%((
Quarterly
payments "&',"4),4)(4&
#redita*le ta,es
withheld ),&:",::)9(
0oreign ta,
credit &,19(,(14(( &'&
,:4),"94((
////////////////
/// ///////////////////
6et 2a, Paya*leJ
=$efunda*le? P='',9
4),1(1((?


AP! opted to carry over its 199: e,cess ta,
credit, in the amount of P'',94),1(1((, to the
succeeding ta,a*le year ending >' 5ecem-er '***
M'N
0or 1999, however, respondent AP! ended up with
=1? a net loss in the amount of 2+'@",?)"'().((4 =%? its
still unapplied e,cess ta, credit carried over from
199:, in the amount of 2>>"*?,"'('.((Tand ='? more
e,cess ta, credit, ac+uired in 1999, in the sum
of 2')"*,@",@(.(( So in 1999, the total e,cess ta,
credits of AP! increased to 2?+"*))"A@'.((, which it
once more opted to carry over to the following ta,a*le
year

0or the ta,a*le year ending >' 5ecem-er
)(((, respondent AP! declared in its #orporate -nnual
!2$C =1? Oero ta,a*le income4 =%? e,cess ta, credit
carried over from 199: and 1999, amounting
to 2?+"*))"A@'.((4 and ='? even more e,cess ta,
credit, gained in %(((, in the amount
of 2)@")(,"*>*.(( 2his time, AP! failed to indicate in
its !2$ its choice of whether to carry over its e,cess
ta, credits or to claim the refund of or issuance of a ta,
credit certificate for the amounts thereof

.n ' -pril %((1, AP! filed with petitioner
#ommissioner of !nternal $evenue =#!$? an
administrative claim for refund in the amount
of 2>>"*?,"'('.((, representing its e,cess credita*le
income ta, for 199:

2he #!$ failed to act on the claim for ta,
refund of AP! Bence, AP! filed a Petition for $eview
*efore the #2-, doc8eted as #2- #ase 6o &%)&

2he #2- promulgated its 1ecision in #2-
#ase 6o &%)& on 1% March %((', ruling therein that
since AP! had opted to carry over its 199: e,cess ta,
credit to 1999 and %(((, it was *arred from filing a
claim for the refund of the same

2he #2- relied on the irreocability rule laid
down in Section )& of the 6ational !nternal $evenue
#ode =6!$#? of 199), which states that once the
ta,payer opts to carry over and apply its e,cess
income ta, to succeeding ta,a*le years, its option
shall *e irrevoca*le for that ta,a*le period and no
application for ta, refund or issuance of a ta, credit
shall *e allowed for the same

2he #2- 1ecision adjudgedC

- close scrutiny of the 199:
income ta, return of MAP!N reveals that
it opted to carry over its e,cess ta,
credits, the amount su*ject of this
claim, to the succeeding ta,a*le year
*y placing an R,S mar8 on the
corresponding *o, of said return
=@,hi*its -/% I '/a? 0or the year
1999, MAP!N again manifested its
intention to carry over to the
succeeding ta,a*le period the su*ject
claim together with the current e,cess
ta, credits =@,hi*it J? Still una*le to
apply its prior yearFs e,cess credits in
1999 as it ended up in a net loss
position, petitioner again carried over
the said e,cess credits in the year
%((( =@,hi*it E?

2he court already
categorically ruled in a num*er of
cases that once the option to carry/
over and apply the e,cess +uarterly
income ta, against the income ta, due
for the ta,a*le +uarters of the
succeeding ta,a*le years has *een
made, such option shall *e considered
irrevoca*le and no application for
cash refund or issuance of a ta, credit
certificate shall *e allowed therefore
=Pilipinas 2ransport !ndustries vs
#ommissioner of !nternal $evenue,
#2- #ase 6o &()', dated March 1,
%((%4 Pilipinas Bino, !nc vs
#ommissioner of !nternal $evenue,
#2- #ase 6o &()4, dated -pril 19,
%((%4 Philam -sset Management, !nc
vs #ommissioner of !nternal
$evenue, #2- #ase 6o &%1(, dated
May %, %((%4 2he Philippine Aan8ing
#orporation =now 8nown as <lo*al
Ausiness Aan8, !nc? vs
#ommissioner of !nternal $evenue,
#2- $esolution, #2- #ase 6o &%:(,
-ugust 1&, %((1 Since MAP!N already
e,ercised the irrevoca*le option to
carry over its e,cess ta, credits for the
year 199: to the succeeding years
1999 and %(((, it is, therefore, no
longer entitled to claim for a refund or
issuance of a ta, credit certificate
M4N

!n the end, the #2- decreedC

!6 V!@5 .0 -33 2B@
0.$@<.!6<, the instant petition for
review is here*y 1@6!@1 for lac8 of
merit
M"N


AP! filed a Motion for $econsideration of the
foregoing 1ecision, *ut the #2- denied the same in a
$esolution dated ' June %(('

AP! filed an appeal with the #ourt of -ppeals,
doc8eted as #-/<$ SP 6o ))&"" .n %9 -pril
%((", the #ourt of -ppeals rendered its 1ecision,
reversing that of the #2- and holding that AP! was
entitled to a refund of the e,cess income ta, it paid for
199:

2he #ourt of -ppeals conceded that AP!
indeed opted to carry over its e,cess ta, credit in 199:
to 1999 *y placing an R,S mar8 on the corresponding
*o, of its 199: !2$ 6onetheless, there was no actual
carrying over of the e,cess ta, credit, given that AP!
suffered a net loss in 1999, and was not lia*le for any
income ta, for said ta,a*le period, against which the
199: e,cess ta, credit could have *een applied

2he #ourt of -ppeals added that even if
Section )& was to *e construed strictly and literally,
the irreocability rule would still not *ar AP! from
see8ing a ta, refund of its 199: e,cess ta, credit
despite previously opting to carry over the same 2he
phrase Rfor that ta,a*le periodS +ualified the
irrevoca*ility of the option of A!$ to carry over its 199:
e,cess ta, credit to only the 1999 ta,a*le period4 such
that, when the 1999 ta,a*le period e,pired, the
irrevoca*ility of the option of AP! to carry over its
e,cess ta, credit from 199: also e,pired

2he #ourt of -ppeals further reasoned that the
government would *e unjustly enriched should the
appellate court hold that the irreocability rule *arred
the claim for refund of a ta,payer, who previously
opted to carry/over its e,cess ta, credit, *ut was not
a*le to use the same *ecause it suffered a net loss in
the succeeding year

0inally, the appellate court cited $PI>6amily
#ain"s $an'- Inc. . Court of *ppeals
M&N
wherein this
#ourt held that if a ta,payer suffered a net loss in a
year, thus, incurring no ta, lia*ility to which the ta,
credit from the previous year could *e applied, there
was no reason for the A!$ to withhold the ta, refund
which rightfully *elonged to the ta,payer
M)N

!n a $esolution dated %( -pril %((), the #ourt
of -ppeals denied the Motion for $econsideration of
the #!$
M:N

Bence, the #!$ filed the instant Petition for
$eview, alleging thatC

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2he #ourt finds merit in the instant Petition

2he #ourt of -ppeals erred in relying on $PI>
6amily, missing significant details that rendered said
case inapplica*le to the one at *ar

!n $PI>6amily, therein petitioner AP!/0amily
declared in its #orporate -nnual !2$ for 19:9 e,cess
ta, credits of P1:",((1(( from 19:: and P11%,491((
from 19:9, totaling P%9),49%(( AP!/0amily clearly
indicated in the same !2$ that it was carrying over
said e,cess ta, credits to the following year Aut on 11
.cto*er 199(, AP!/0amily filed a claim for refund of
its P11%,491(( ta, credit from 19:9 5hen no action
from the A!$ was forthcoming, AP!/0amily filed its
claim with the #2- 2he #2- denied the claim for
refund of AP!/0amily on the ground that, since the
*an8 declared in its 19:9 !2$ that it would carry over
its ta, credits to the following year, it should *e
presumed to have done so !n its Motion for
$econsideration filed with the #2-, AP!/0amily
su*mitted its final adjusted !2$ for 19:9 showing that
it incurred P"%,4:(,1)'(( net loss in 199( Still, the
#2- denied the Motion for $econsideration of AP!/
0amily 2he #ourt of -ppeals li8ewise denied the
appeal of AP!/0amily and merely affirmed the
judgment of the #2- 2he #ourt, however, reversed
the #2- and the #ourt of -ppeals

2his #ourt decided to grant the claim for
refund of AP!/0amily after finding that the *an8 had
presented sufficient evidence to prove that it incurred
a net loss in 199( and, thus, had no ta, lia*ility to
which its ta, credit from 19:9 could *e applied 2he
#ourt stressed in $PI 6amily that Rthe undisputed fact
is that MAP!/0amilyN suffered a net loss in 199(4
accordingly, it incurred no ta, lia*ility to which the ta,
credit could *e applied #onse+uently, there is no
reason for the A!$ and this #ourt to withhold the ta,
refund which rightfully *elongs to the MAP!/0amilyNS !t
was on the *asis of this fact that the #ourt granted the
appeal of AP!/0amily, *rushing aside all procedural
and technical o*jections to the same through the
following pronouncementsC

0inally, respondents argue
that ta, refunds are in the nature of
ta, e,emptions and are to *e
construed strictissimi 2uris against the
claimant >nder the facts of this case,
we hold that MAP!/0amilyN has
esta*lished its claim MAP!/0amilyN
may have failed to strictly comply with
the rules of procedure4 it may have
even *een negligent 2hese
circumstances, however, should not
compel the #ourt to disregard this
cold, undisputed factC that petitioner
suffered a net loss in 199(, and that it
could not have applied the amount
claimed as ta, credits

Su*stantial justice, e+uity and
fair play are on the side of MAP!/
0amilyN 2echnicalities and legalisms,
however e,alted, should not *e
misused *y the government to 8eep
money not *elonging to it and there*y
enrich itself at the e,pense of its law/
a*iding citi7ens !f the State e,pects
its ta,payers to o*serve fairness and
honesty in paying their ta,es, so must
it apply the same standard against
itself in refunding e,cess payments of
such ta,es !ndeed, the State must
lead *y its own e,ample of honor,
dignity and uprightness
M9N

!t is necessary for this #ourt, however, to
emphasi7e that $PI>6amily involved ta, credit
ac+uired *y the *an8 in 19:9, which it initially opted to
carry over to 199( 2he prevailing ta, law then was
the &IRC of '*A@, Section )9
M1(N
of which providedC

Sec )9 6inal *!2ustment
)eturn. / @very corporation lia*le to ta,
under Section %4 shall file a final
adjustment return covering the total net
income for the preceding calendar or
fiscal year !f the sum of the +uarterly
ta, payments made during the said
ta,a*le year is not e+ual to the total ta,
due on the entire ta,a*le net income of
that year the corporation shall eitherC

=a? Pay the e,cess ta, still
due4 or

=*? Ae refunded the
e,cess amount paid, as the case may
*e

!n case the corporation is
entitled to a refund of the e,cess
estimated +uarterly income ta,es/paid,
the refunda*le amount shown on its
final adjustment return may
*e credited against the estimated
+uarterly income ta, lia*ilities for the
ta,a*le +uarters of the succeeding
ta,a*le year =@mphases ours?


Ay virtue of the afore/+uoted provision, the
ta,payer with e,cess income ta, was given the option
to either =1? refund the amount4 or =%? credit the same
to its ta, lia*ility for succeeding ta,a*le periods

Section )9 of the 6!$# of 19:" was
reproduced as Section )& of the &IRC of '**,,
M11N
with
the addition of one important sentence, which laid
down the irrevoca-ilit" rleC

Section )& 6inal *!2ustment
)eturn / @very corporation lia*le to
ta, under Section %4 shall file a final
adjustment return covering the total
net income for the preceding calendar
or fiscal year !f the sum of the
+uarterly ta, payments made during
the said ta,a*le year is not e+ual to
the total ta, due on the entire ta,a*le
net income of that year the
corporation shall eitherC

=a? Pay the e,cess ta, still
due4 or

=*? Ae refunded the e,cess
amount paid, as the case may *e

!n case the corporation is
entitled to a refund of the e,cess
estimated +uarterly income ta,es
paid, the refunda*le amount shown on
its final adjustment return may
*e credited against the estimated
+uarterly income ta, lia*ilities for the
ta,a*le +uarters of the succeeding
ta,a*le years .nce the option to
carry:over and apply the e9cess
;uarterly income ta9 against
income ta9 due for the ta9a-le
;uarters of the succeeding ta9a-le
years has -een made" such option
shall -e considered irrevoca-le for
that ta9a-le period and no
application for ta9 refund or
issuance of a ta9 credit certificate
shall -e allowed
therefor. =@mphases ours?


5hen $PI>6amily was decided *y this #ourt, it
did not yet have the irreocability rule to
consider Bence, $PI>6amily cannot *e cited as a
precedent for this case

2he factual *ac8ground of Philam *sset
?ana"ement- Inc. . Commissioner of Internal
)eenue,
M1%N
cited *y the #!$, is closer to the instant
Petition Aoth involve ta, credits ac+uired and claims
for refund filed more than a decade after those in $PI>
6amily, to which Section )& of the 6!$# of 199)
already apply

2he #ourt, in Philam, recogni7ed the two
options offered *y Section )& of the 6!$# of 199) to a
ta,a*le corporation whose total +uarterly income ta,
payments in a given ta,a*le year e,ceeds its total
income ta, due 2hese options areC =1? filing for a tax
refun! or =%? availing of a tax cre!it 2he #ourt further
e,plainedC

2he first option is relatively
simple -ny ta, on income that is paid
in e,cess of the amount due the
government may *e refunded, provided
that a ta,payer properly applies for the
refund

2he second option wor8s *y
applying the refunda*le amount, as
shown on the M0inal -djustment $eturn
=0-$?N of a given ta,a*le year, against
the estimated +uarterly income ta,
lia*ilities of the succeeding ta,a*le
year

These two options under
0ection ,+ are alternative in nature.
The choice of one precludes the
other. !ndeed, in Philippine $an' of
Communications . Commissioner of
Internal )eenue, the #ourt ruled that
a corporation must signify its intention
// whether to re+uest a ta, refund or
claim a ta, credit // *y mar8ing the
corresponding option *o, provided in
the 0-$ 5hile a ta,payer is re+uired
to mar8 its choice in the form provided
*y the A!$, this re+uirement is only for
the purpose of facilitating ta, collection

.ne cannot get a ta, refund
and a ta, credit at the same time for
the same e,cess income ta,es paid
M1'N

, , ,


2he #ourt categorically declared
in Philam thatC R0ection ,+ remains clear and
une;uivocal. .nce the carry:over option is
taJen" actually or constructively" it -ecomes
irrevoca-le.S !t mentioned no e,ception or
+ualification to the irreocability rule

Bence, the controlling factor for the operation
of the irreocability rule is that the ta,payer chose an
option4 and once it had already done so, it could no
longer ma8e another one #onse+uently, after the
ta,payer opts to carry/over its e,cess ta, credit to the
following ta,a*le period, the +uestion of whether or not
it actually gets to apply said ta, credit is
irrelevant Section )& of the 6!$# of 199) is e,plicit in
stating that once the option to carry over has *een
made, Rno application for ta, refund or issuance of a
ta, credit certificate shall *e allowed thereforS

2he last sentence of Section )& of the 6!$# of
199) readsC R.nce the option to carry/over and apply
the e,cess +uarterly income ta, against income ta,
due for the ta,a*le +uarters of the succeeding ta,a*le
years has *een made, such option shall -e
considered irrevoca-le for that ta9a-le period and
no application for ta, refund or issuance of a ta, credit
certificate shall *e allowed thereforS 2he phrase Rfor
that ta,a*le periodS merely identifies the e,cess
income ta,, su*ject of the option, *y referring to the
ta,a*le period when it was ac+uired *y the
ta,payer !n the present case, the e,cess income ta,
credit, which AP! opted to carry over, was ac+uired *y
the said *an8 during the ta,a*le year 199: 2he
option of AP! to carry over its 199: e,cess income ta,
credit is irrevoca*le4 it cannot later on opt to apply for a
refund of the very same 199: e,cess income ta,
credit

2he #ourt of -ppeals mista8enly understood
the phrase Rfor that ta,a*le periodS as a prescriptive
period for the irreocability rule 2his would mean that
since the ta, credit in this case was ac+uired in 199:,
and AP! opted to carry it over to 1999, then the
irrevoca*ility of the option to carry over e,pired *y the
end of 1999, leaving AP! free to again ta8e another
option as regards its 199: e,cess income ta,
credit 2his construal effectively renders nugatory
the irreocability rule 2he evident intent of the
legislature, in adding the last sentence to Section )& of
the 6!$# of 199), is to 8eep the ta,payer from flip/
flopping on its options, and avoid confusion and
complication as regards said ta,payerFs e,cess ta,
credit 2he interpretation of the #ourt of -ppeals only
delays the flip/flopping to the end of each succeeding
ta,a*le period

2he #ourt similarly disagrees in the
declaration of the #ourt of -ppeals that to deny the
claim for refund of AP!, *ecause of the irreocability
rule, would *e tantamount to unjust enrichment on the
part of the government 2he #ourt addressed the very
same argument in Philam, where it elucidated that
there would *e no unjust enrichment in the event of
denial of the claim for refund under such
circumstances, *ecause there would *e no forfeiture of
any amount in favor of the government 2he amount
*eing claimed as a refund would remain in the account
of the ta,payer until utili7ed in succeeding ta,a*le
years,
M14N
as provided in Section )& of the 6!$# of
199) !t is worthy to note that unli8e the option for
refund of e,cess income ta,, which prescri*es after
two years from the filing of the 0-$, there is no
prescriptive period for the carrying over of the
same 2herefore, the e,cess income ta, credit of AP!,
which it ac+uired in 199: and opted to carry over, may
*e repeatedly carried over to succeeding ta,a*le
years, i.e., to 1999, %(((, %((1, and so on and so
forth, until actually applied or credited to a ta, lia*ility
of AP!

0inally, while the #ourt, in Philam, was firm in
its position that the choice of option as regards the
e,cess income ta, shall *e irrevoca*le, it was less
rigid in the determination of which option the ta,payer
actually chose !t did not limit itself to the indication *y
the ta,payer of its option in the !2$

2hus, failure of the ta,payer to ma8e an
appropriate mar8ing of its option in the !2$ does not
automatically mean that the ta,payer has opted for a
ta, credit 2he #ourt ratiocinated in <$ 6o
1"&&')
M1"N
of PhilamC

.ne cannot get a ta, refund
and a ta, credit at the same time for
the same e,cess income ta,es
paid Failure to signify oneNs
intention in the FR does not mean
outright -arring of a valid re;uest
for a refund" should one still
choose this option later on. - ta,
credit should *e construed merely as
an alternative remedy to a ta, refund
under Section )&, su*ject to prior
verification and approval *y
respondent

The reason for re;uiring
that a choice -e made in the FR
upon its filing is to ease ta9
administration, particularly the self/
assessment and collection aspects -
ta,payer that ma8es a choice
e,presses certainty or preference and
thus demonstrates clear diligence
#onversely, a ta,payer that ma8es no
choice e,presses uncertainty or lac8
of preference and hence shows
simple negligence or plain oversight

, , , ,

, , , 1espite the failure of
MPhilamN to ma8e the appropriate
mar8ing in the A!$ form, the filing of
its written claim effectively serves
as an e9pression of its choice to
re;uest a ta9 refund, instead of a ta,
credit 2o assert that any future claim
for a ta, refund will *e instantly
hindered *y a failure to signify oneFs
intention in the 0-$ is to render
nugatory the clear provision that
allows for a two/year prescriptive
period
M1&N
=@mphases ours?


Philam reveals a meticulous consideration *y
the #ourt of the evidence su*mitted *y the parties and
the circumstances surrounding the ta,payerFs option
to carry over or claim for refund 5hen circumstances
show that a choice has *een made *y the ta,payer to
carry over the e,cess income ta, as credit, it should
*e respected4 *ut when indu*ita*le circumstances
clearly show that another choice U a ta, refund U is in
order, it should *e granted R2echnicalities and
legalisms, however e,alted, should not *e misused *y
the government to 8eep money not *elonging to it and
there*y enrich itself at the e,pense of its law/a*iding
citi7ensS

2herefore, as to which option the ta,payer
chose is generally a matter of evidence !t is
a,iomatic that a claimant has the *urden of proof to
esta*lish the factual *asis of his or her claim for ta,
credit or refund 2a, refunds, li8e ta, e,emptions, are
construed strictly against the ta,payer
M1)N

!n the Petition at *ar, AP! was una*le to
discharge the *urden of proof necessary for the grant
of a refund AP! e,pressly indicated in its !2$ for 199:
that it was carrying over, instead of refunding, the
e,cess income ta, it paid during the said ta,a*le
year AP! consistently reported the said amount in its
!2$s for 1999 and %((( as credit to *e applied to any
ta, lia*ility the *an8 may incur4 only, no such
opportunity arose *ecause it suffered a net loss in
1999 and incurred 7ero ta, lia*ility in %((( !n <$
6o 1&%((4 ofPhilam, the #ourt foundC

0irst, the fact that it filled out
the portion RPrior GearFs @,cess
#reditsS in its 1999 0-$ means that it
categorically availed itself of the carry/
over option !n fact, the line that
precedes that phrase in the A!$ form
clearly states R3essC 2a,
#reditsJPaymentsS 2he contention
that it merely filled out that portion
*ecause it was a re+uirement U and
that to have done otherwise would
have *een tantamount to falsifying the
0-$ U is a long shot

2he 0-$ is the most relia*le
firsthand evidence of corporate acts
pertaining to income ta,es !n it are
found the itemi7ation and summary of
additions to and deductions from
income ta,es due 2hese entries are
not without rhyme or reason 2hey
are re+uired, *ecause they facilitate
the ta, administration process
M1:N


AP! itself never denied that its original
intention was to carry over the e,cess income ta,
credit it ac+uired in 199:, and only chose to refund the
said amount when it was una*le to apply the same to
any ta, lia*ility in the succeeding ta,a*le
years 2here can *e no dou*t that AP! opted to carry
over its e,cess income ta, credit from 199:4 it only
su*se+uently changed its mind U which it was *arred
from doing *y the irreocability rule

2he choice *y AP! of the option to carry over
its 199: e,cess income ta, credit to succeeding
ta,a*le years, which it e,plicitly indicated in its 199:
!2$, is irrevoca*le, regardless of whether it was a*le
to actually apply the said amount to a ta, lia*ility 2he
reiteration *y AP! of the carry over option in its !2$ for
1999 was already a superfluity, as far as its 199:
e,cess income ta, credit was concerned, given the
irrevoca*ility of the initial choice made *y the *an8 to
carry over the said amount 0or the same reason, the
failure of AP! to indicate any option in its !2$ for %(((
was already immaterial to its 199: e,cess income ta,
credit

EH3R3F.R3, the instant Petition for $eview
of the #ommissioner for !nternal $evenue
is %R&T35 2he 1ecision dated %9 -pril %((" and
the $esolution dated %( -pril %(() of the #ourt of
-ppeals in #-/<$ SP 6o ))&""
are R3$3R035 and 03T 0I53 2he 1ecision
dated 1% March %((' of the #ourt of 2a, -ppeals in
#2- #ase 6o &%)&, denying the claim of respondent
Aan8 of the Philippine !slands for the refund of its 199:
e,cess income ta, credits, is R3I&0TT35 6o costs


S. .R53R35.
@!<B2B 1!V!S!.6
M#-/<$ SP 6. ':'(4 -pril 14, %(((N
!&U .F TH3 2HILI22I&3 I0L&50" petitioner"
vs. C.MMI00I.&3R .F I&T3R&L R3$3&13"
respondent.
5 3 C I 0 I . &
-Q>!6., J pC
2he original ponente in this appealed case was Justice
Jainal 1 $asul who recently retired from this #ourt
2he undersigned was designated as such only on
March &, %(((
2his is an appeal *y petition for review of the decision
dated July 19, 1994 of the #ourt of 2a, -ppeals in
#2- #ase 6o 4%14 rejecting petitioner Aan8 of the
Philippine !slands9 =AP!? claim for refund of credita*le
income ta, withheld for 19:", *ecause it was time
*arred cdtai
2he facts are undisputed
Ay virtue of the -rticles of Merger approved *y the
Securities and @,change #ommission on July 1, 19:"
=@,hi*it 1? petitioner AP! *ecame the successor/in/
interest of the 0amily Aan8 and 2rust #ompany
=0A2#? whose corporate e,istence ended on June '(,
199"
0rom January 1 to June '(, 19:", 0A2# earned
incomes consisting of rentals from its leased
properties and interest from treasury notes purchased
from the #entral Aan8 Pursuant to the @,panded
5ithholding 2a, $egulations, the lessees of 0A2#
withheld " percent or P 11:,&(91) on said rentals
while the #entral Aan8 withheld 1" percent or
"",4"&&( on the interest on the treasury notes 2hese
withheld income ta,es in the total amount of P
1)4,(&")) =@,hi*it @? were remitted to the Aureau of
!nternal $evenue Moreover, the 0A2# had a prior
years9 e,cess credit of P %,14&,()%"), 2his e,cess
credit plus the withheld income ta,es amounted to
P%,'%(,1':'4
.n -pril 1(, 19:&, the 0A2# filed its final income ta,
return =@,hi*it -? with the A!$ showing a net loss of
P&4,"(%,9'"(( and a refunda*le amount of
P1)4,(&")) representing the credita*le income ta,
withheld at source from January 1 to June '(, 19:"
.n .cto*er ), 19:&, petitioner AP! as successor/in/
interest of 0A2# filed a letter claim dated .cto*er 1(,
19:& =@,hi*it A? with the A!$ as8ing for refund of
P%,'%(,1':'4 2he A!$ however refunded to
petitioner AP! only the amount of P%,14&,()%") =prior
years9 e,cess credits?
Since the A!$ refused to refund the withheld income
ta,es on rentals and interests in the amount of
P1)4,(&")), petitioner AP! filed on 1ecem*er %9,
19:) a petition for review with the #ourt of 2a,
-ppeals see8ing a reversal of A!$9s resolution -fter
due proceedings, the #ourt of 2a, -ppeals rendered
on July 19, 1994 a decision dismissing the petition for
review on the ground that the claim for ta, refund had
already prescri*ed - motion for reconsideration was
filed *ut it was denied
Bence, this petition for review
2he simple issue in this case is a legal oneC .n
.cto*er ), 19:&, had petitioner AP!9s claim for refund
of the withheld income ta,es in the amount of
P1)4,(&")) already prescri*edH 2he A!$ and #2-
said, yes, *ut petitioner AP! says, no 2o resolve this
issue, it is necessary to determine the deadline for the
filing *y the 0A2# of its final adjustment return
#iting Sec ): of the 2a, #ode and Sec )44 of the
!ncome 2a, $esolution, the #2- held that said return
should have *een filed within '( days from S@#9s
approval of the -rticles of Merger on July 1, 19:"
Petitioner AP! disagrees and, invo8ing Sec 4& =a? and
Sec )( =A? of the 2a, #ode, contends that said return
should have *een filed on the 1"th day of the 4th
month following the close of 0A2#9s ta,a*le year
!t should *e noted that this case was decided under
the 2a, #ode which has already *een amended and
modified *y $- :4%4 otherwise 8nown as the
#omprehensive 2a, $eform Program which *ecame
effective on January 1, 199: 5ith the parties invo8ing
different provisions of law and regulations, there is a
need to reproduce them for a *etter understanding and
resolution of issues
Sec ):, 2a, #ode K
;Sec ): $eturn of corporation contemplating
dissolution K @very corporation shall, within thirty
days after the adoption *y the corporation of a
resolution or plan for the dissolution of the corporation
or for the li+uidation of the whole or any part of its
capital stoc8, render a correct return to the #ollector of
!nternal $evenue, verified under oath, setting forth the
terms of such resolution or plan and such other
information as the Minister of 0inance shall *y
regulations, prescri*e;
Sec %44, !ncome 2a, $egulations K
;Sec %44 $eturn of corporation contemplating
dissolution or retiring from *usiness K -ll
corporations, partnership, joint accounts and
associations, contemplating dissolution, shall within '(
days after the approval of such resolution authori7ing
their dissolution, and within the same period after their
retirement from *usiness, file their income ta, return
covering the profit earned or *usiness done *y them
from the *eginning of the year up to the date of such
dissolution or retirement and pay the corresponding
income ta, due thereon upon demand *y the
#ommissioner of !nternal $evenue ;
Sec 4%=which later on *ecame Sec 41 of 2a, #ode
;Sec 4% 0inal or adjustment returns for a
period of less than twelve months K =a? $eturn for
short period resulting from change of accounting
period K !f a ta,payer, other than an individual, with
the approval of the #ommissioner of !nternal $evenue,
changes the *asis of computing net income from fiscal
year to calendar year, a separate final or adjustment
return shall *e made for the period *etween the close
of the last fiscal year for which return was made and
the following 1ecem*er '1 !f the change is from
calendar year to fiscal year, a separate final or
adjustment return shall *e made for the period
*etween the close of the last calendar year for which
return was made and the date designated as the close
of the fiscal year !f the change is from one fiscal year
to another fiscal year, a separate final or adjustment
return shall *e made for the period *etween the close
of the former fiscal year and the date designated as
the close of the new fiscal year
=*? !ncome computed on *asis of short period K
5here a separate final or adjustment return is made
under su*section =a? on account of a change in the
accounting period, and in all other cases where a
separate final or adjustment return is re+uired or
permitted *y regulations prescri*ed *y the Secretary of
0inance, to *e made for a fractional part of a year,
then the income shall *e computed on the *asis of the
period for which separate final or adjustment return is
made
Sec 4& =a?, 2a, #ode,
;Sec 4& #orporation returns K =a?
$e+uirements K @very corporation, su*ject to the ta,
herein imposed, e,cept foreign corporations not
engaged in trade or *usiness in the Philippines shall
render, in duplicate, a true and accurate +uarterly
income ta, return and final or adjustment return in
accordance with the provisions of #hapter !L of this
2itle 2he return shall *e filed *y the president, vice/
president or other principal officer, and shall *e sworn
to *y such officer and *y the treasurer or assistant
treasurer;
Sec )( =*?, 2a, #ode K
;=*? 2ime of filing the income ta, return K 2he
corporate +uarterly declaration shall *e filed within =&(?
days following the close of each of the first three
+uarter of the ta,a*le year 2he final adjustment return
shall *e filed on or *efore the 1"th day of -pril or on or
*efore the 1"th day of the fourth month following the
close of the fiscal year, as the case may *e;
>pon deep reflection, this #ourt shares the opinion of
the A!$ and the #2- Sec ): of the 2a, #ode and
Sec %44 of the $evenue $egulations 6o % re+uired
0A2# as a dissolving corporation to file its income ta,
return within '( days after the cessation of its *usiness
or '( days after the approval of the merger on July 1,
19:" or up to July '1, 19:"
>nder Sec %9% of the 2a, #ode, an action to claim for
refund of an e,cessively collected ta, starts to run
from the day in which a corporate ta,payer is re+uired
*y law to file its final income ta, return -ccordingly,
petitioner AP! should have filed the action for the
refund of the e,cessively collected income ta, return
within two =%? years from July '1, 19:" which was July
'1, 19:) >nfortunately, petitioner filed said action only
on 1ecem*er %9, 19:)/which was late *y 1"1 days
Said action was, therefore, clearly time/*arred
Petitioner contends that Sec ):, supra re+uired not a
income ta, or final adjustment return *ut an
information return !t su*mits that/
;2o understand what Sec )( really re+uires, a review
of its origin, its amendment *y @,ecutive .rder 6o
1(%& of Mr Marcos, and its further amendment *y P1
6o 1994 =:1 .< ""%) I "")&? which transposed it
as Sec 4& =c? of the 2a, #ode, and its re/enactment in
@,ecutive .rder 6o ') of Pres -+uino as sec 4&=c?
*ut without the second paragraph introduced *y
@,ecutive .rder 6o 1(%&, would *e very enlightening
=1? 2he original sec ):
Sec ): of the 19'9 6ational !nternal $evenue #ode
was found in #hapter !L =-dministrative Provisions? of
2itle !! =!ncome 2a,?, together with other sections
re+uiring the filing of information returns 2hese other
information returns wereC return of corporations on
dividends paid =sec )"? return on payments of P1,(((
or more =sec ))?, return or *ro8ers =sec )9? and
return on foreign corporations =sec :(?
.n the other hand, the re+uirement to file income ta,
return, imposed on individuals, corporations,
partnerships, receivers and trustees, and the manner
the income ta, would *e assessed and paid on such
returns was found in #h V!
2hus the re+uirement of an information return was
very different from the re+uirement of an income ta,
returns, which later would *e called, in the case of
corporations, as the 9final adjustment return9;
2his #ourt does not agree 2he holding of the #2- on
this point is what, in the opinion of this #ourt, is the
correct interpretation of the law 2his #ourt +uotes with
approval said holdingC
;Sec 4& #orporation returns K =a?
$e+uirement K every corporation, su*ject to the ta,
herein imposed, e,cept foreign corporation not
engaged in trade or *usiness in the Philippines shall
render, in duplicate, a true and accurate +uarterly
income ta, return and final and adjustment return in
accordance with the provisions of #hapter L of this
title, the return shall *e filled *y the President, vice/
president, or other principal officer, and shall *e sworn
to *y such officer and *y the treasurer or assistant
treasurer;
;.n the other hand, #hapter L of 2itle !! =!ncome 2a,?
refers to the Quarterly #orporate !ncome 2a,
Payments, Petitioner tried to mislead us *y saying that
what is re+uired is only an information return 2he
amendment merely added a sanction on the part of the
officers of the corporation in case of failure to provide
such information return and to secure the necessary
ta, clearance,
;- closer loo8 of Section 4&=a? and #hapter L of 2itle !!
showed that it *oth made specific mention of ;income
ta, return; and ;income ta, payments;, respectively,
6ormally, an ongoing corporation files a Quarterly
#orporate !ncome 2a, $eturn 2he final adjustment
return therefore aptly refers to the 0inal -djustment
!ncome 2a, $eturn -ll references pointed to *y
petitioner have some relations to income ta, payments
and the filing of an accurate !ncome 2a, $eturn 5e
cannot deviate from the fact that indeed 9correct return9
means 9correct income ta, return9, the 0inal
-djustment !ncome 2a, $eturn
;Moreover, this #ourt gives more weight to Section
%44 of $ev $egs 6o % when it stated 9income ta,
return9 -s a rule, all regulations promulgated *y the
Secretary of 0inance for the effective enforcement of
the provisions of the 6ational !nternal $evenue #ode
are presumed valid unless they are unreasona*le and
contrary to law or the #onstitution =see -rt ), 6ew
#ivil #ode?,
;2he construction given to a statute *y an
administrative agency charged with the interpretation
and application of that statute is entitled to great
respect and should *e accorded great weight *y the
courts, unless such construction is clearly shown to *e
in sharp conflict with the governing statute or the
#onstitution or other laws 2he rationale for this rule
relates not only to the emergence of the multifarious
needs of a modern or moderni7ing society and the
esta*lishment of diverse administrative agencies for
addressing and satisfying those needs4 it also relates
to accumulation or e,perience and growth of
speciali7ed capa*ilities *y the administrative agency
charged with implementing a particular statute, =6estle
Philippines, !nc vs #ourt of -ppeals, <$ 6o :&)':,
6ovem*er 1', 1991, %(' S#$- "(4?;
!n view of the foregoing, this court, finds no reversi*le
error in the appealed decision
5B@$@0.$@, for lac8 of merit, the petition is
1!SM!SS@1 and the appealed decision is -00!$M@1
#ost against the petitioner
S. .$1@$@1
<uerrero and <o7o/1adole, JJ, concur
CITI!&U" &. ." petitioner+ vs. C.1RT .F
223L0 and C.MMI00I.&3R .F
I&T3R&L R3$3&13" respondents.
5 3 C I 0 I . &
2&%&I!&" J.:
2he law re+uires a lessee to withhold and remit to
the Aureau of !nternal $evenue =A!$? five percent
="P? of the rental due the lessor, *y way of advance
payment of the latterFs income ta, lia*ility !s the
lessor entitled to a refund of such withheld amount
after it is determined that the lessor was not, in fact,
lia*le for any income ta, at all *ecause its annual
operation resulted in a net loss as shown in its income
ta, return filed at the end of the ta,a*le yearH
2his is the +uestion raised in this petition for
review on certiorari of the #ourt of
-ppeals
M1N
1ecision
M%N
promulgated on May %), 199%
and $esolution
M'N
promulgated on .cto*er ", 199% in
#-/<$ 6o SP/%&""", reversing the decision of the
#ourt of 2a, -ppeals which allowed the ta, refund
The Facts
2he facts, as found *y $espondent #ourt, are
undisputed
M4N
R0rom the pleadings and supporting papers
on hand, it can *e gathered that #iti*an8 6-
Philippine Aranch =#!2!A-6E? is a foreign
corporation doing *usiness in the
Philippines !n 19)9 and 19:(, its tenants
withheld and paid to the Aureau of !nternal
$evenue the following ta,es on rents due to
#iti*an8, pursuant to Section 1=c? of the
@,panded 5ithholding 2a, $egulations =A!$
$evenue $egulations 6o 1'/):, as
amended?, to witC
19)9
0irst +uarter P &(,&9(9)
Second
+uarter &9,:9)(
:
2hird
+uarter
&9,1&(:9
0ourth
+uarter
)(,1&("&
P%)(,1&("&
19:(
0irst +uarter P ):,')(%%
Second
+uarter &9,(49
')
2hird
+uarter
)9,1'9&(
0ourth
+uarter
)%,%)(1(
P%9:,:%9%9
.n -pril 1", 19:(, #iti*an8 filed its corporate
income ta, returns for the year ended
1ecem*er '1, 19)9 =@,h R@C?, showing a net
loss of P)4,:"4,91&(( and its ta, credits
totalled P&,%"),):(((, even without
including the amounts withheld on rental
income under the @,panded 5ithholding 2a,
System, the same not having *een utili7ed or
applied for the reason that the yearFs
operation resulted in a loss =@,h R@/1 I @/
%S? 2he ta,es thus withheld *y the tenants
from rentals paid to #iti*an8 in 19)9 were not
included as ta, credits although a rental
income amounting to P),)9&,:11(( was
included in its income declared for the year
ended 1ecem*er '1, 19)9 =@,hs R@/'S I R@/
4S?
0or the year ended 1ecem*er '1, 19:(,
#iti*an8Fs corporate income ta, returns =@,h
R@#S?, filed on -pril 1", 19:1, showed a net
loss of P)),()1,)9((( for income ta,
purposes !ts availa*le ta, credit =refunda*le?
at the end of 19:( amounting
to P11,"'%,:""(( =@,h RA#/1S I RA#/%S?
was not utili7ed or applied 2he said
availa*le ta, credits did not include the
amounts withheld *y #iti*an8Fs tenants from
rental payments in 19:( *ut the rental
payments for that year were declared as part
of its gross income included in its annual
income ta, returns =@,h RA#/'S?
.n .cto*er '1, 19:1, #iti*an8 su*mitted its claim for
refund of the aforesaid amounts of P%)(,1&("&
and P%9:,:%9, respectively, or a total of P"&:,9:9:"4
and on .cto*er 1%, 19:1 filed a petition for review with
the #ourt of 2a, -ppeals concerning su*ject claim for
ta, refund, doc8eted as #2- #ase 6o ''):
M"N
.n -ugust '(, 19:1, the #ourt of 2a,
-ppeals adjudged #iti*an8Fs entitlement to
the ta, refund sought for, representing the
"P ta, withheld and paid on #iti*an8Fs rental
income for 19)9 and 19:( ,,,,S
!n its decision
M&N
granting a refund to petitioner,
M)N
the #ourt of 2a, -ppeals rejected $espondent
#ommissionerFs argument that the claim was not
seasona*ly filedC
R5B@$@0.$@, respondent is here*y
ordered to grant the refund of the amount
sought *y the petitioner 6o costsS
6ot satisfied, the #ommissioner appealed to the
#ourt of -ppeals !n due course, $espondent #ourt
issued the assailed 1ecision and $esolution, ruling
that the five percent ta, withheld *y tenants from the
rental income of #iti*an8 for the years 19)9 and 19:(
was in accordance with Section 1=c? of the @,panded
5ithholding 2a, $egulations =A!$ $evenue $egulation
6o 1'/):, as amended? and did not involve illegally or
erroneously collected ta,es 2he dispositive portion of
the 1ecision readsC
M:N
R5B@$@0.$@, the appealed judgment of
-ugust '(, 1991, adjudging #iti*an8, 6-,
Philippine Aranch, entitled to a ta,
refundJcredit in the amount of P"&9,9:9:",
representing the "P withheld ta, on
#iti*an8Fs rental income for the ta,a*le years
19)9 and 19:( is here*y $@V@$S@1 6o
pronouncement as to costsS
$espondent #ourt denied the motion for
reconsideration of the petitioner/*an8 in the assailed
$esolution, the dispositive portion of which readsC
M9N
R5B@$@0.$@, for want of merit, the motion
for reconsideration, dated June 19, 199%, of
respondent #iti*an8, 6- is here*y 1@6!@1
S. .$1@$@1S
Bence, this petition under $ule 4" of the $ules of
#ourt
The Issues
2he appellate court ruled that it was not enough
for petitioner to show its lac8 of income ta, lia*ility
against which the five percent withholding ta, could *e
credited Petitioner should have also shown that the
withholding ta, was illegally or erroneously collected
and remitted *y the tenants .n the other hand,
petitioner counters that $espondent #ourt failed to
grasp Rtwo fundamental concepts in the present
income ta, system, namelyC =1? the yearly computation
of the corporate income ta, and =%? the nature of the
credita*le withholding ta,S
!n the main, petitioner thus raises the following
issuesC =1? 0or credita*le withholding ta, to *e
refunda*le, when should the illegality or error in its
assessment or collection *e rec8onedC at the time of
withholding or at the end of the ta,a*le yearH =%?
5here the income ta, returns show that no income ta,
is paya*le to the government, is
a credita*le withholding ta,, as contradistinguished
from a final ta,, refunda*le =or credita*le? at the end of
the ta,a*le yearH
The CourtNs Ruling
2he petition is meritorious
First Issue: 5etermination of t%e Ille$alit" or Error
in Assessment or /ollection
2a, refunds are allowed under Section %'( of the
6ational !nternal $evenue #odeC
RS@# %'( )ecoery of tax erroneously or
ille"ally collecte!. U 6o suit or proceeding
shall *e maintained in any court for the
recovery of any national internal revenue ta,
hereafter alleged to have *een erroneously or
illegally assessed or collected, or of any
penalty claimed to have *een collected
without authority or of any sum alleged to
have *een e,cessive or in any manner
wrongfully collected, until a claim for refund
or credit has *een duly filed with the
#ommissioner4 *ut such suit or proceeding
may *e maintained, whether or not such ta,,
penalty, or sum has *een paid under protest
or duress
!n any case, no such suit or proceeding shall
*e *egun after the e,piration of two years
from the date of payment of the ta, or penalty
regardless of any supervening cause that
may arise after paymentC Proi!e!-
howeer- 2hat the #ommissioner may, even
without a written claim therefor, refund or
credit any ta,, where on the face of the return
upon which payment was made, such
payment appears clearly to have *een
erroneously paidS
Petitioner maintains that it is entitled to a refund of the
five percent credita*le withholding ta, in 19)9 and
19:(, since its operations resulted in a net loss and
thus did not have any income ta, lia*ility for such
years $espondent #ourt refused to allow the claim
for refund for the reason that the ta,es were Rnot
illegally or erroneously collectedCS
M1(N
;!t is decisively clear that the instant claim for
ta, refund under scrutiny does not involve
illegally or erroneously collected ta,es !t
involves the "P ta, withheld *y tenants from
the rental income of #iti*an8 for the years
19)9 and 19:(, in accordance with Section
1=c? of the @,panded 5ithholding 2a,
$egulations =A!$ $evenue $egulation 6o
1'/): as amended? , , ,
!t is thus evident that the tenants or lessee of
#iti*an8 were re+uired *y law to withhold and
pay to A!$ "P of their rental and, therefore,
such withholding ta,es were not illegally or
erroneously collected !t was the *urden of
#iti*an8 to prove that the ta,es it as8ed to *e
refunded were illegally or erroneously
collected4 an onus pro*andi #iti*an8 utterly
failed to discharge;
5e disagree with the #ourt of -ppeals !n
several cases, we have already ruled that income
ta,es remitted partially on a periodic or +uarterly *asis
should *e credited or refunded to the ta,payer on the
*asis of the ta,payerFs final adjusted returns, not on
such periodic or +uarterly *asis
M11N
0or instance, in the
recent case of Commissioner of Internal )eenue s.
Philippine *merican 3ife Insurance Co.-
M1%N
the #ourt
heldC
R, , , 5hen applied to ta,payers filing
income ta, returns on a +uarterly *asis, the
date of payment mentioned in Section %9%
=now Section %'(? must *e deemed to *e
+ualified *y Sections &: and &9 of the
present 2a, #ode , , ,
!t may *e o*served that although +uarterly
ta,es due are re+uired to *e paid within &(
days from the close of each +uarter, the fact
that the amount shall *e deducted from the
ta, due for the succeeding +uarter shows that
until a final adjustment return shall have *een
filed, the ta,es paid in the preceding +uarters
are merely partial ta,es due from a
corporation 6either amount can serve as
the final figure to +uantify what is due the
government nor what should *e refunded to
the corporation
2his interpretation may *e gleaned from the
last paragraph of Section &9 of the 2a, #ode
which provides that the refunda*le amount, in
case a refund is due a corporation, is that
amount which is shown on its final
adjustment return and not on its +uarterly
returns
,,,
,,, ,
,,
#learly the prescriptive period of two years
should commence to run only from the time
that the refund is ascertained, which can only
*e determined after a final adjustment return
is accomplished Private respondent *eing a
corporation, Section %9% =now Section %'(?
cannot serve as the sole *asis for
determining the two/year prescriptive period
for refunds , , , ,S
!n the present case, there is no +uestion that the
ta,es were withheld in accordance with Section 1=c?,
$ev $eg 6o 1'/): !n that sense, it can *e said that
they were withheld legally *y the tenants Bowever,
the annual income ta, returns of petitioner/*an8 for ta,
years 19)9 and 19:( undisputedly reflected the net
losses it suffered 2he +uestion arisesC whether the
ta,es withheld remained legal and correct at the end of
each ta,a*le year 5e hold in the negative
2he withholding ta, system was devised for two
main reasonsC first, to provide the ta,payer a
convenient manner to meet his pro*a*le income ta,
lia*ility4 and secon!, to ensure the collection of the
income ta, which could otherwise *e lost or
su*stantially reduced through failure to file the
corresponding returns
M1'N
2o these, a third reason may
*e addedC to improve the governmentFs cash
flow >nder Section "' a/f of the ta, code which was
in effect at the time this case ripened, withholding of
ta, at source was mandated in cases ofC =a? ta, free
covenant *onds, =*? payments of interest, dividends,
rents, royalties, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other
fi,ed or determina*le annual, periodical, or casual
gains, profits and income, and capital gains of non/
resident aliens and foreign corporations4 =c? dividends
from a domestic corporation and royalties received *y
resident individuals and corporation4 =d? certain
dividends4 =e? interest on *an8 deposit4 and =f? other
items of income paya*le to resident individuals or
corporations Section "'/f was amended *y
Presidential 1ecree 6o 1'"1, delegating to the
Secretary of 0inance the power to re+uire the
withholding of a ta,, as followsC
RSection 1 Section "'=f? of the 6ational
!nternal $evenue #ode of 199) is here*y
amended to read as followsC
\=f? 2he Secretary of 0inance may,
upon recommendation of the
#ommissioner of !nternal
$evenue, re+uire also the
withholding of a ta, on the same
items of income paya*le to
persons =natural or juridical?
residing in the Philippines *y the
same persons mentioned in
paragraph =*? =1? of this Section at
the rate of not less than %/1J%P
*ut not more than '"P thereof
which shall *e credited against the
income ta, lia*ility of the ta,payer
for the ta,a*le yearFS
Pursuant to said P1 6o 1'"1 and in accordance
with Section 4 in relation to Section '%&
M14N
of the
6ational !nternal $evenue #ode, the #ommissioner
promulgated on Septem*er ), 19):, $evenue
$egulations 6o 1'/): to implement the withholding of
credita*le income ta,es from certain types of
income $ev $eg 6o 1'/): re+uires that a certain
percentage of income *e deducted and withheld *y a
payor, who is constituted as the withholding agent, and
paid to the revenue district officer or A!$ collection
agent Section 1 of this revenue regulation providesC
RSection 1 Income payments sub2ect to
withhol!in" tax an! rates prescribe! therein.
> @,cept as herein otherwise provided, there
shall *e withheld a credita*le income ta, at
the rates herein specified for each class of
payee from the following items of income
payments to persons residing in the
PhilippinesC
=a? , , , , , , , , ,
=*? , , , , , , , , ,
=c? )entals. : 5hen the gross rental or other
payment re+uired to *e made as a
condition to the continued use or
possession of property, whether real or
personal, to which the payor or o*ligor
has not ta8en or is not ta8ing title or in
which he has no e+uity, e,ceeds five
hundred pesos =P"((((? U five per
centum ="P?
,,,
,,, ,
,,S
>nder this system, income is viewed as a
flow
M1"N
and is measured over a period of time 8nown
as an Raccounting periodS -n accounting period
covers twelve months, su*divided into four e+ual
segments 8nown as R+uartersS !ncome reali7ed within
the ta,payerFs annual accounting period =fiscal or
calendar year? *ecomes the *asis for the computation
of the gross income and the ta, lia*ility
M1&N
2he same *asic principles apply under the
prevailing ta, laws >nder the present ta, code, the
types of income su*ject to withholding ta, in Section
"', now Section "(, is simplified into three categoriesC
=a? withholding of final ta, on certain incomes4 =*?
withholding of credita*le ta, at source4 and =c? ta, free
covenant *onds
-ccordingly, the withheld amounts e+uivalent to
five percent of the gross rental are remitted to the A!$
and are considered credita*le withholding ta,es under
Section "'/f, i.e., credita*le against income ta, lia*ility
for that year 2he ta,es withheld, as ruled in .ibbs s.
Commissioner of Internal )eenue-
M1)N
are in the nature
of payment *y a ta,payer in order to e,tinguish his
possi*le ta, o*ligation 2hey are installments on the
annual ta, which may *e due at the end of the ta,a*le
year
M1:N
!n this case, petitionerFs lessees withheld and
remitted to the A!$ the amounts now claimed as ta,
refunds 2hat they were withheld and remitted
pursuant to $ev $eg 6o 1'/): does not derogate
from the fact that they were merely partial payments of
pro*a*le ta,es 3i8e the corporate +uarterly income
ta,, credita*le withholding ta,es are su*ject to
adjustment upon determination of the correct income
ta, lia*ility after the filing of the corporate income ta,
return, as at the end of the ta,a*le year 2his final
determination of the corporate income ta, lia*ility is
provided in Section &9, 6!$#C
RS@# &9 0inal -djustment $eturn / @very
corporation lia*le to ta, under Section %4
shall file a final adjustment return covering
the total ta,a*le income for the preceding
calendar or fiscal year !f the sum of the
+uarterly ta, payments made during the said
ta,a*le year is not e+ual to the total ta, due
on the entire ta,a*le net income of that year
the corporation shall eitherC
=a? Pay the e,cess ta, still due4 or
=*? Ae refunded the e,cess amount paid, as the case
may *e
!n case the corporation is entitled to a refund
of the e,cess estimated +uarterly income
ta,es paid, the refunda*le amount shown on
its final adjustment return may *e credited
against the estimated +uarterly income ta,
lia*ilities for the ta,a*le +uarters of the
succeeding ta,a*le yearS
2he ta,es thus withheld and remitted
are provisional in nature
M19N
5e repeatC five per cent of
the rental income withheld and remitted to the A!$
pursuant to $ev $eg 6o 1'/): is, unli8e the
withholding of final ta,es on passive incomes, a
credita*le withholding ta,4 that is, credita*le against
income ta, lia*ility if any, for that ta,a*le year
!n Commissioner of Internal )eenue s. T?S
#ales- Inc.-
M%(N
this #ourt ruled that the payments of
+uarterly income ta,es =per Section &:, 6!$#? should
*e considered mere installments on the annual ta,
due 2hese +uarterly ta, payments, which are
computed *ased on the cumulative figures of gross
receipts and deductions in order to arrive at a net
ta,a*le income, should *e treated as advances or
portions of the annual income ta, due, to *e adjusted
at the end of the calendar or fiscal year 2he same
holds true in the case of the withholding of credita*le
ta, at source 5ithholding ta,es are RdepositsS which
are su*ject to adjustments at the proper time when the
complete ta, lia*ility is determined
!n this case, the payments of the withholding
ta,es for 19)9 and 19:( were credita*le to the income
ta, lia*ility, if any, of petitioner/*an8, determined after
the filing of the corporate income ta, returns on -pril
1", 19:( and -pril 1", 19:1 -s petitioner posted net
losses in its 19)9 and 19:( returns, it was not lia*le
for any income ta,es #onse+uently and clearly, the
ta,es withheld during the course of the ta,a*le year,
while collected legally under the aforesaid revenue
regulation, *ecame untena*le and too8 on the nature
of erroneously collected ta,es at the end of the ta,a*le
year
0econd Issue: ,ns of 5isptin$ a /laim for
Refnd
!n general, there is no disagreement that a
claimant has the *urden of proof to esta*lish the
factual *asis of his or her claim for ta, credit or refund
M%1N
2a, refunds, li8e ta, e,emptions, are construed
strictly against the ta,payer 2he mechanics of a ta,
refund is provided in $ev $eg 6o 1'/):C
RSection : Claims for tax cre!it or refun!. U
#laims for ta, credit or refund of income ta,
deducted and withheld on income payments
shall *e given due course only when it is
shown on the return that the income payment
received was declared as part of the gross
income and the fact of withholding is
esta*lished *y a copy of the statement, duly
issued *y the payor to the payee =A!$ 0orm
6o 1)4'/-? showing the amount paid and
the amount of ta, withheld therefromS
- refund claimant is re+uired to prove the
inclusion of the income payments which were the
*asis of the withholding ta,es and the fact of
withholding Bowever, detailed proof of the
truthfulness of each and every item in the income ta,
return is not re+uired 2hat function is lodged in the
commissioner of internal revenue *y the 6!$# which
re+uires the commissioner to assess internal revenue
ta,es within three years after the last day prescri*ed
*y law for the filing of the return
M%%N
!n #an Carlos
?illin" Co.- Inc. s. Commissioner of Internal
)eenue-
M%'N
the #ourt held that the internal revenue
*ranch of government must investigate and confirm
the claims for ta, refund or credit *efore ta,payers
may avail themselves of this option 2he grant of a
refund is founded on the assumption that the ta, return
is valid4 that is, the facts stated therein are true and
correct
M%4N
!n fact, even without petitionerFs ta, claim,
the commissioner can proceed to e,amine the *oo8s,
records of the petitioner/*an8, or any data which may
*e relevant or material in accordance with Section 1&
of the present 6!$#
!n the case in hand, $espondent #ommissioner
e,amined petitionerFs income ta, returns and
presuma*ly found no false declaration in them,
*ecause he did not allege any such false declaration
*efore $espondent #ourt and the #ourt of 2a,
-ppeals =#2-? !n the #2-, $espondent
#ommissionerFs refusal to refund was *ased on the
argument that the claim filed on .cto*er '1, 19:1 was
time/*arred !t *ears stressing that this issue was not
raised in the appeal *efore us 2he issue of
operational losses was not raised until the appeal
*efore $espondent #ourt was filed on 0e*ruary ",
199% Ay such time, at least a decade had already
passed since the pertinent *oo8s and accounting
records of petitioner/*an8 were closed Section %'" of
the 2a, #ode re+uires the preservation of the *oo8s of
account and records only Rfor a period *eginning from
the last entry in each *oo8 until the last day prescri*ed
*y Section %('S Section %(' provides that internal
revenue ta,es shall *e assessed within three years
after the last day prescri*ed *y law for the filing of the
return, and no proceeding in #ourt without an
assessment for the collection of such ta,es shall *egin
after the e,piration of such period 2o e,pect
petitioner to have its *oo8s and records on hand
during the appeal was o*viously unreasona*le and
violative of Section %'" in relation to Section %(' of
the 2a, #ode
!n addition, the 2a, #ode has placed several
safety measures to prevent falsification of income ta,
returns which the #ourt recogni7ed in Commissioner
s. T?S #ales- Inc.8
M%"N
R0urthermore, Section '%1 =now Section %'%?
of the 6ational !nternal $evenue #ode
re+uires that the *oo8s of accounts of
companies or persons with gross +uarterly
sales or earnings e,ceeding 2wenty 0ive
2housand Pesos =P%",(((((? *e audited
and e,amined yearly *y an independent
#ertified Pu*lic -ccountant and their income
ta, returns *e accompanied *y certified
*alance sheets, profit and loss statements,
schedules listing income producing properties
and the corresponding incomes therefrom
and other related statements
!t is generally recogni7ed that *efore an
accountant can ma8e a certification on the
financial statements or render an auditorFs
opinion, an audit of the *oo8s of accounts
has to *e conducted in accordance with
generally accepted auditing standards
Since the audit, as re+uired *y Section '%1
=now Section %'%? of the 2a, #ode is to *e
conducted yearly, then it is the 0inal
-djustment $eturn, where the figures of the
gross receipts and deductions have *een
audited and adjusted, that is truly reflective of
the results of the operations of a *usiness
enterprise 2hus, it is only when the
-djustment $eturn covering the whole year is
filed that the ta,payer would 8now whether a
ta, is still due or a refund can *e claimed
*ased on the adjusted and audited figuresS
2herefore, the alleged irregularity in the declared
operational losses is a matter which must *e proven
*y competent evidence !n resisting the claims of
petitioner, $espondent #ommissioner set up the
defense of the legality of the collection of the
credita*le withholding ta, as well as prescription,
instead of presenting an assessment of the proper ta,
lia*ility of the petitioner 2his fact leads us to the
conclusion that the income ta, returns were accepted
as accurate and regular *y the A!$
-fter this case was filed, the #ommissioner
clarified on June %), 1994, the onus proban!i of a
ta,payer claiming refund of overpaid withholding
ta,es, inter alia- in $evenue $egulation 6o 1%/94,
Section 1(C
RSection 1( #laim for 2a, #redit or $efund//
=a? #laims for 2a, #redit or $efund of
income ta, deducted and withheld on
income payments shall *e given due
course only when it is shown on the
return that the income payment
received has *een declared as part of
the gross income and the fact of
withholding is esta*lished *y a copy of
the 5ithholding 2a, Statement duly
issued *y the payor to the payee
showing the amount paid and the
amount of ta, withheld therefrom
=*? @,cess #redits// - ta,payerFs e,cess
e,panded withholding ta, credits for
the ta,a*le +uarterJta,a*le year shall
automatically *e allowed as a credit for
purposes of filing his income ta, return
for the ta,a*le +uarterJta,a*le year
immediately succeeding the ta,a*le
+uarterJta,a*le year in which the
aforesaid e,cess credit arose,
provided, however, he su*mits with his
income ta, return a copy of his income
ta, return for the aforesaid previous
ta,a*le period showing the amount of
his aforementioned e,cess withholding
ta, credits
!f the ta,payer, in lieu of the aforesaid
automatic application of his e,cess
credit, wants a cash refund or a ta,
credit certificate for use in payment of
his other national internal ta, lia*ilities,
he shall ma8e a written re+uest
therefor >pon filing of his re+uest, the
ta,payerFs income ta, return showing
the e,cess e,panded withholding ta,
credits shall *e e,amined 2he e,cess
e,panded withholding ta,, if any, shall
*e determined and refundedJcredited to
the ta,payer/applicant 2he
refundJcredit shall *e made within a
period of si,ty =&(? days from date of
the ta,payerFs re+uest provided,
however, that the ta,payer/applicant
su*mitted for audit all his pertinent
accounting records and that the
aforesaid records esta*lished the
veracity of his claim for a refundJcredit
of his e,cess e,panded withholding ta,
creditsS
Prior to $ev $eg 1%/94, the re+uisites for a
refund wereC =1? the income ta, return for the previous
year must show that income payment =rental in this
case? was reported as part of the gross income4 and
=%? the withholding ta, statement of the withholding ta,
agent must show that payment of the credita*le
withholding ta, was made Bowever, even without this
regulation, the commissioner may inspect the *oo8s of
the ta,payer and reassess a ta,payer for deficiency
ta, payments under Sections ), 6!$# 5e stress that
what was re+uired under $ev $eg 1%/94 was only a
su*mission of records *ut the verification of the ta,
return remained the function of the commissioner
5orth emphasi7ing are these uncontested factsC
=1? the amounts withheld were actually remitted to the
A!$ and =%? the final adjusted returns U which the A!$
did not +uestion U showed that, for 19)9 and 19:(, no
income ta,es from petitioner were due Bence, under
the principle of solutio in!ebiti provided in -rt %1"4,
#ivil #ode,
M%&N
the A!$ received something when Rthere
MwasN no right to demand it,S and thus Rthe o*ligation to
return arisesS
M%)N
Beavily militating against $espondent
#ommissioner is the ancient principle that no one, not
even the state, shall enrich oneself at the e,pense of
another !ndeed, simple justice re+uires the speedy
refund of the wrongly held ta,es
EH3R3F.R3, the assailed 1ecision is
here*y ),V,)#,D and the decision of the #ourt of
2a, -ppeals is ),I%#T*T,D 6o costs
0. .R53R35.
The !ii!en!s receie! from a !omestic corporation is
liable to a 1@L withhol!in" tax- proi!e! that the
country in which the forei"n corporation is !omicile!
shall allow a tax cre!it /equialent to 4=L which is the
!ifference between the <@L tax !ue on re"ular
corporations an! the 1@L tax !ue on !ii!en!s0
a"ainst the taxes !ue to hae been pai! in the
Philippines.
0actsC
5ander is a domestic corporation which is a wholly/
owned su*sidiary of <laro S- 3td,a Swiss
corporation not engaged in tradeJ*usiness in the
Philippines !n two instances, 5ander filed its
withholding ta, return and remitted to <laro =the parent
company? dividends =P%%%,((( in the first instance
and P'"",%(( in the second?, on which '"P ta, was
withheld and paid to the A!$
5ander now files a claim for refund of the withheld ta,
contending that it is lia*le only to 1"P withholding ta,
pursuant to Section %4 A1 of the 2a, #ode 2he A!$
did not act upon the claim filed *y 5ander so the
corporation filed a petition to the #ourt of 2a, -ppeals
=#2-? 2he #2- held that the corporation is entitled to
1"P withholding ta, rate on dividends remitted to
<laro, a non/resident foreign corporation
!ssueC 5hether or not 5ander is entitled to the 1"P
withholding ta, rate
BeldC
Ges -ccording to Sec %4A1 of the 2a, #ode, the
dividends received from a domestic corporation is
lia*le to a 1"P withholding ta,, provided that the
country in which the foreign corporation is domiciled
shall allow a ta, credit =e+uivalent to %(P which is the
difference *etween the '"P ta, due on regular
corporations and the 1"P ta, due on dividends?
against the ta,es due to have *een paid in the
Philippines
!n the case, Swit7erland did not impose any ta, on the
dividends received *y <laro thus it should *e
considered as a full satisfaction of the given condition
2o deny respondent the privilege to withhold 1"P
would run counter to the spirit and intent of the law and
will adversely affect the foreign corporationsF interest
and discourage them from investing capital in our
country
C.MMI00I.&3R .F I&T3R&L
R3$3&13" petitioner,
vs
2R.CT3R I %M!L3 2HILI22I&3
M&1FCT1RI&% C.R2.RTI.& I TH3 C.1RT
.F TF 223L0"respondents

2R0" J.:
2his is a petition for review on certiorari filed *y the
herein petitioner, #ommissioner of !nternal $evenue,
see8ing the reversal of the decision of the #ourt of 2a,
-ppeals dated January '1, 19:4 in #2- #ase 6o
%::' entitled ;Procter and <am*le Philippine
Manufacturing #orporation vs Aureau of !nternal
$evenue,; which declared petitioner therein, Procter
and <am*le Philippine Manufacturing #orporation to
*e entitled to the sought refund or ta, credit in the
amount of P4,:'%,9:9(( representing the alleged
overpaid withholding ta, at source and ordering
payment thereof
2he antecedent facts that precipitated the instant
petition are as followsC
Private respondent, Procter and <am*le Philippine
Manufacturing #orporation =hereinafter referred to as
PM#/Phil?, a corporation duly organi7ed and e,isting
under and *y virtue of the Philippine laws, is engaged
in *usiness in the Philippines and is a wholly owned
su*sidiary of Procter and <am*le, >S- herein
referred to as PM#/>S-?, a non/resident foreign
corporation in the Philippines, not engaged in trade
and *usiness therein -s such PM#/>S- is the sole
shareholder or stoc8holder of PM# Phil, as PM#/
>S- owns wholly or *y 1((P the voting stoc8 of
PM# Phil and is entitled to receive income from PM#/
Phil in the form of dividends, if not rents or royalties
!n addition, PM#/Phil has a legal personality separate
and distinct from PM#/>S- =$ollo, pp 1%%/1%'?
0or the ta,a*le year ending June '(, 19)4 PM#/Phil
reali7ed a ta,a*le net income of P"&,"((,''%(( and
accordingly paid the corresponding income ta, thereon
e+uivalent to P%"P/'"P or P19,)&",11&(( as
provided for under Section %4=a? of the Philippine 2a,
#ode, the pertinent portion of which readsC
S@# %4 $ates of ta, on corporation
K a? 2a, on domestic corporations K
- ta, is here*y imposed upon the
ta,a*le net income received during
each ta,a*le year from all sources *y
every corporation organi7ed in, or
geting under the laws of the
Philippines, and partnerships, no
matter how created or organi7ed, *ut
not including general professional
partnerships, in accordance with the
followingC
2wenty/five per cent upon the amount
*y which the ta,a*le net income does
not e,ceed one hundred thousand
pesos4 and
2hirty/five per cent upon the amount
*y which the ta,a*le net income
e,ceeds one hundred thousand
pesos
-fter ta,ation its net profit was P'&,)'",%1&(( .ut of
said amount it declared a dividend in favor of its sole
corporate stoc8holder and parent corporation PM#/
>S- in the total sum of P1),)(),4&((( which latter
amount was su*jected to Philippine ta,ation of '"P or
P&,19),&11%' as provided for in Section %4=*? of the
Philippine 2a, #ode which reads in fullC
S@#2!.6 1 2he first paragraph of
su*section =*? of Section %4 of the
6ational Aureau !nternal $evenue
#ode, as amended, is here*y further
amended to read as followsC
=*? 2a, on foreign
corporations K 41?
6on/resident
corporation K -
foreign corporation
not engaged in trade
or *usiness in the
Philippines, including
a foreign life
insurance company
not engaged in the life
insurance *usiness in
the Philippines, shall
pay a ta, e+ual to
'"P of the gross
income received
during its ta,a*le year
from all sources within
the Philippines, as
interest =e,cept
interest on foreign
loans which shall *e
su*ject to 1"P ta,?,
dividends, rents,
royalties, salaries,
wages, premiums,
annuities,
compensations,
remunerations for
technical services or
otherwise,
emoluments or other
fi,ed or determina*le,
annual, periodical or
casual gains, profits,
and income, and
capital gainsC
Provided, however,
2hat premiums shall
not include re/
insurance premium
Provided, further, 2hat
cinematograpy film
owners, lessors, or
distri*utors, shall pay
a ta, of 1"P on their
gross income from
sources within the
PhilippinesC Provided,
still further 2hat on
dividends received
from a domestic
corporation ha*le to
ta, under this
#hapter, the ta, shall
*e 1"P of the
dividends received,
which shall *e
collected and paid as
provided in Section
"'=d? of this #ode,
su*ject to the
condition that the
country in which the
non/resident foreign
corporation is
domiciled shall allow
a credit against the
ta, due from the non/
resident foreign
corporation, ta,es
deemed to have *een
paid in the Philippines
e+uivalent to %(P
which represents the
difference *etween
the regular ta, ='"P?
on corporations and
the ta, =1"P? on
dividends as provided
in this sectionC
Provided, finally 2hat
regional or area
head+uarters
esta*lished in the
Philippines *y
multinational
corporations and
which head+uarters
do not earn or derive
income from the
Philippines and which
act as supervisory,
communications and
coordinating centers
for their affiliates,
su*sidiaries or
*ranches in the -sia/
Pacific $egion shall
not *e su*ject to ta,
0or the ta,a*le year ending June '(, 19)" PM#/Phil
reali7ed a ta,a*le net income of P:,)'",1%"(( which
was su*jected to Philippine ta,ation at the rate of
%"P/'"P or P%,9"%,1"9((, thereafter leaving a net
profit of P",):%,9&&(( -s in the %nd +uarter of 19)",
PM#/Phil again declared a dividend in favor of PM#/
>S- at the ta, rate of '"P or P&,4"),4:"((
!n July, 19)) PM#/Phil, invo8ing the ta,/sparing credit
provision in Section %4=*? as afore+uoted, as the
withholding agent of the Philippine government, with
respect to the dividend ta,es paid *y PM#/>S-,
filed a claim with the herein petitioner, #ommissioner
of !nternal $evenue, for the refund of the %(
percentage/point portion of the '" percentage/point
whole ta, paid, arising allegedly from the alleged
;overpaid withholding ta, at source or overpaid
withholding ta, in the amount of P4,:'%,9:9((,;
computed as followsC
1ividend
!ncome
2a,
withheld
PM#/>S- at source
at
'"P
P1),)(),4&( P&,19&,&11
&,4"),4:" %,%&(,119
P%4,1&4,94& P:,4"),)'1
2here *eing no immediate action *y the A!$ on PM#/
Phils9 letter/claim the latter sought the intervention of
the #2- when on July 1', 19)) it filed with herein
respondent court a petition for review doc8eted as #2-
6o %::' entitled ;Procter and <am*le Philippine
Manufacturing #orporation vs 2he #ommissioner of
!nternal $evenue,; praying that it *e declared entitled
to the refund or ta, credit claimed and ordering
respondent therein to refund to it the amount of
P4,:'%,9:9((, or to issue ta, credit in its favor in lieu
of ta, refund =$ollo, p 41?
.n the other hand therein respondent, #ommissioner
of +++!nterlaal $evenue, in his answer, prayed for the
dismissal of said Petition and for the denial of the
claim for refund =$ollo, p 4:?
.n January '1, 19)4 the #ourt of 2a, -ppeals in its
decision =$ollo, p &'? ruled in favor of the herein
petitioner, the dispositive portion of the same reading
as followsC
-ccordingly, petitioner is entitled to the
sought refund or ta, credit of the
amount representing the overpaid
withholding ta, at source and the
payment therefor *y the respondent
here*y ordered 6o costs
S. .$1@$@1
Bence this petition
2he Second 1ivision of the #ourt without giving due
course to said petition resolved to re+uire the
respondents to comment =$ollo, p )4? Said comment
was filed on 6ovem*er :, 19:4 =$ollo, pp :'/9(?
2hereupon this #ourt *y resolution dated 1ecem*er
1), 19:4 resolved to give due course to the petition
and to consider respondents9 comulent on the petition
as -nswer =$ollo, p 9'?
Petitioner was re+uired to file *rief on January %1,
19:" =$ollo, p 9&? Petitioner filed his *rief on May 1',
19:" =$ollo, p 1()?, while private respondent PM#
Phil filed its *rief on -ugust %%, 19:"
Petitioner raised the following assignments of errorsC
!
2B@ #.>$2 .0 2-L -PP@-3S @$$@1 !6 B.31!6<
5!2B.>2 -6G A-S!S !6 0-#2 -61 !6 3-5, 2B-2
2B@ B@$@!6 [email protected]@62 P$.#2@$ I <-MA3@
PB!3!PP!6@ M-6>0-#2>$!6< #.$P.$-2!.6
=PM#/PB!3 0.$ SB.$2?!S @62!23@1 2. 2B@
S.><B2 $@0>61 .$ 2-L #$@1!2 .0
P4,:'%,9:9((, $@P$@S@62!6< -33@<@13G 2B@
1!V!1@1 2-L .V@$ 5!2BB@31 AG PM#/PB!3
>P.6 $@M!22-6#@ .0 1!V!1@61 !6#.M@ !6 2B@
2.2-3 S>M .0 P%4,1&4,94&(( 2. P$.#2@$ I
<-MA3@, >S- =PM#/>S- 0.$ SB.$2?
!!
2B@ #.>$2 .0 2-L -PP@-3S @$$@1 !6
B.31!6<, 5!2B.>2 -6G A-S!S !6 0-#2 -61 !6
3-5, 2B-2 PM#/>S-, - 6.6/$@S!1@62 0.$@!<6
#.$P.$-2!.6 >61@$ S@#2!.6 %4=*? =1? .0 2B@
PB!3!PP!6@ 2-L #.1@ -61 - 1.M@S2!#
#.$P.$-2!.6 1.M!#!3@1 !6 2B@ >6!2@1
S2-2@S, !S @62!23@1 >61@$ 2B@ >S 2-L #.1@
-<-!6S2 !2S >S 0@1@$-3 2-L@S 2. - >6!2@1
S2-2@S 0.$@!<6 2-L #$@1!2 @Q>!V-3@62 2. -2
3@-S2 2B@ %( P@$#@62-<@/P.!62 P.$2!.6 =.0
2B@ '" P@$#@62 1!V!1@61 2-L? SP-$@1 .$
5-!V@1 .$ .2B@$5!S@ #.6S!1@$@1 .$
1@@M@1 P-!1 AG 2B@ PB!3!PP!6@ <.V@$6M@62
2he sole issue in this case is whether or not private
respondent is entitled to the preferential 1"P ta, rate
on dividends declared and remitted to its parent
corporation
0rom this issue two +uestions are posed *y the
petitioner #ommissioner of !nternal $evenue, and they
are =1? 5hether or not PM#/Phil is the proper party to
claim the refund and =%? 5hether or not the > S
allows as ta, credit the ;deemed paid; %(P Philippine
2a, on such dividendsH
2he petitioner maintains that it is the PM#/>S-, the
ta, payer and not PM#/Phil the remitter or payor of
the dividend income, and a mere withholding agent for
and in *ehalf of the Philippine <overnment, which
should *e legally entitled to receive the refund if any
=$ollo, p 1%9?
!t will *e o*served at the outset that petitioner raised
this issue for the first time in the Supreme #ourt Be
did not raise it at the administrative level, nor at the
#ourt of 2a, -ppeals -s clearly ruled *y >s ;2o allow
a litigant to assume a different posture when he comes
*efore the court and challenges the position he had
accepted at the administrative level,; would *e to
sanction a procedure where*y the #ourt/which is
supposed to review administrative determinations
would not review, *ut determine and decide for the first
time, a +uestion not raised at the administrative
forum; 2hus it is well settled that under the same
underlying principle of prior e,haustion of
administrative remedies, on the judicial level, issues
not raised in the lower court cannot generally *e raised
for the first time on appeal =Pampanga Sugar 1ev
#o, !nc v #!$, 114 S#$- )%" M19:%N4 <arcia v #-,
1(% S#$- "9) M19:1N4 Matialon7o v Servidad, 1()
S#$- )%& M19:1N?,
6onetheless it is a,iomatic that the State can never *e
in estoppel, and this is particularly true in matters
involving ta,ation 2he errors of certain administrative
officers should never *e allowed to jeopardi7e the
government9s financial position
2he su*mission of the #ommissioner of !nternal
$evenue that PM#/Phil is *ut a withholding agent of
the government and therefore cannot claim
reim*ursement of the alleged over paid ta,es, is
completely meritorious 2he real party in interest *eing
the mother corporation in the >nited States, it follows
that -merican entity is the real party in interest, and
should have *een the claimant in this case
#losely intertwined with the first assignment of error is
the issue of whether or not PM#/>S- K a non/
resident foreign corporation under Section %4=*?=1? of
the 2a, #ode =the su*sidiary of an -merican? a
domestic corporation domiciled in the >nited States, is
entitled under the >S 2a, #ode to a >nited States
0oreign 2a, #redit e+uivalent to at least the %(
percentage paid portion =of the '"P dividend ta,?
spared or waived as otherwise considered or deemed
paid *y the government 2he law pertinent to the issue
is Section 9(% of the >S !nternal $evenue #ode, as
amended *y Pu*lic 3aw :)/:'4, the law governing ta,
credits granted to >S corporations on dividends
received from foreign corporations, which to the e,tent
applica*le readsC
S@# 9(% / #$@1!2 0.$
#.$P.$-2@ S2.#EB.31@$S !6
0.$@!<6 #.$P.$-2!.6
=a? Treatment of Taxes Pai! by
6orei"n Corporation / 0or purposes of
this su*ject, a domestic corporation
which owns at least 1( percent of the
voting stoc8 of a foreign corporation
from which it receives dividends in any
ta,a*le year shall/
=1? to the e,tent such
dividends are paid *y
such foreign
corporation out of
accumulated profits
Mas defined in
su*section =c? =1? =a?N
of a year for which
such foreign
corporation is not a
less developed
country corporation,
*e deemed to have
paid the same
proportion of any
income, war profits, or
e,cess profits ta,es
paid or deemed to *e
paid *y such foreign
corporation to any
foreign country or to
any possession of the
>nited States on or
with respect to such
accumulated profits,
which the amount of
such dividends
=determined without
regard to Section ):?
*ears to the amount
of such accumulated
profits in e,cess of
such income, war
profits, and e,cess
profits ta,es =other
than those deemed
paid?4 and
=%? to the e,tent such
dividends are paid *y
such foreign
corporation out of
accumulated profits
Mas defined in
su*section =c? =1? =*?N
of a year for which
such foreign
corporation is a less/
developed country
corporation, *e
deemed to have paid
the same proportion
of any income, war
profits, or e,cess
profits ta,es paid or
deemed to *e paid *y
such foreign
corporation to any
foreign country or to
any possession of the
>nited States on or
with respect to such
accumulated profits,
which the amount of
such dividends *ears
to the amount of such
accumulated profits
,,, ,,, ,,,
=c? -pplica*le $ules
=1? *ccumulate! profits !efine! / 0or
purpose of this section, the term
9accumulated profits9 means with
respect to any foreign corporation
=-? for purposes of
su*sections =a? =1?
and =*? =1?, the
amount of its gains,
profits, or income
computed without
reduction *y the
amount of the income,
war profits, and
e,cess profits ta,es
imposed on or with
respect to such profits
or income *y any
foreign country 4
and
=A? for purposes of
su*sections =a? =%?
and =*? =%?, the
amount of its gains,
profits, or income in
e,cess of the income,
was profits, and
e,cess profits ta,es
imposed on or with
respect to such profits
or income
2he Secretary or his delegate shall
have full power to determine from the
accumulated profits of what year or
years such dividends were paid,
treating dividends paid in the first %(
days of any year as having *een paid
from the accumulated profits of the
preceding year or years =unless to his
satisfaction shows otherwise?, and in
other respects treating dividends as
having *een paid from the most
recently accumulated gains, profits, or
earnings =$ollo, pp ""/"&?
2o .ur mind there is nothing in the aforecited provision
that would justify ta, return of the disputed 1"P to the
private respondent 0urthermore, as a*ly argued *y
the petitioner, the private respondent failed to meet
certain conditions necessary in order that the
dividends received *y the non/resident parent
company in the >nited States may *e su*ject to the
preferential 1"P ta, instead of '"P -mong other
things, the private respondent failedC =1? to show the
actual amount credited *y the >S government
against the income ta, due from PM#/>S- on the
dividends received from private respondent4 =%? to
present the income ta, return of its mother company
for 19)" when the dividends were received4 and ='? to
su*mit any duly authenticated document showing that
the >S government credited the %(P ta, deemed
paid in the Philippines
P$@M!S@S #.6S!1@$@1, the petition is <$-62@1
and the decision appealed from, is $@V@$S@1 and
S@2 -S!1@
S. .$1@$@1
&ap /Chairman0- ?elencio>:errera- Pa!illa an!
#armiento- DD.- concur.
<%.R. &os. ''A?*A I ')?>,,. .cto-er ')" '***=
FILI2I&0 0G&TH3TIC FI!3R
C.R2.RTI.&" petitioner vs. C.1RT .F
223L0" C.1RT .F TF 223L0 and
C.MMI00I.&3R .F I&T3R&L
R3$3&13" respondents.
5 3 C I 0 I . &
21RI0IM" J.:
Aefore the #ourt are two consolidated Petitions
for $eview on Certiorari under $ule 4" of the $evised
$ules of #ourt see8ing to set aside the 1ecisions of
the #ourt of -ppeals in #-/<$ SP 6os '%9%%
M1N
and
'%(%%
M%N
!n %.R. &o. ''A?*A, the #ourt of -ppeals culled
the antecedent facts that matter as followsC
R2he *asic operative facts are not in dispute, to
witC 0ilipinas Synthetic 0i*er #orporation T, a
domestic corporation received on 1ecem*er %), 19)9
a letter of demand from the #ommissioner of
!nternal $evenue assessing it for deficiency
withholding ta, at source in the total amount
of P:%9,)4:)), inclusive of interest and compromise
penalties" for the period from the fourth ;uarter of
'*,? to the fourth ;uarter of '*,@ 2he *ul8 of the
deficiency withholding ta, assessment, however,
consisted of interest and compromise penalties for
alleged late payment of withholding ta,es due on
interest loans, royalties and guarantee fees paid *y the
petitioner to non/resident corporations 2he
assessment was seasona*ly protested *y the
petitioner through its auditor, S<V and
#ompany $espondent denied the protest in a letter
dated 14 May 19:" on the following groundC R0or
Philippine internal revenue ta, purposes, the lia*ility to
withhold and pay income ta, withheld at source from
certain payments due to a foreign corporation is at the
time of accrual and not at the time of actual payment
or remittance thereofS, citing A!$ $uling 6o )1/(('
and A!$ $uling 6o %4/)1/(('/1"4/:4 dated 1%
Septem*er 19:4 as well as the decision of the #ourt of
2a, -ppeals in #2- #ase 6o ''() entitled
R#onstruction $esources of -sia, !nc, versus
#ommissioner of !nternal $evenueS 2he
aforementioned case held that Rthe lia*ility of the
ta,payer to withhold and pay the income ta, withheld
at source from certain payments due to a non/resident
foreign corporation attaches at the time of accrual
payment or remittance thereofS and Rthe withholding
agentJcorporation is o*liged to remit the ta, to the
government since it already and properly *elongs to
the government Since the ta,payer failed to pay the
withholding ta, on interest, royalties, and guarantee
fee at the time of their accrual and in the *oo8s of the
corporation the aforesaid assessment is therefore
legal and properS
.n June %:, 19:", petitioner *rought a Petition
for $eview
M'N
*efore the #ourt of 2a, -ppeals, doc8eted
as #2- #ase 6o '9"1 .n June 1", 199', the said
court came out with its 1ecision, ruling thusC
R!6 V!@5 .0 2B@ 0.$@<.!6<, judgment is here*y
rendered ordering petitioner to pay respondent the
amount of P'(&,1&"'" as deficiency withholding ta,
at source for the fourth +uarter of 19)4 to the third
+uarter of 19)" plus 1(P surcharge and 14P annual
interest from 6ovem*er %9, 19)9 to July '1, 19:(,
plus %(P interest from -ugust 1, 19:( until fully paid
*ut not to e,ceed that which corresponds to a period
of three ='? years pursuant to P1 6o 1)("
S. .$1@$@1S
5ith the denial of its motion for reconsideration,
petitioner appealed the #2- disposition to the #ourt of
-ppeals, which affirmed in toto the appealed decision
1issatisfied therewith, petitioner found its way to
this #ourt ia the present Petition4 contending thatC
R2B@ #- @$$@1 !6 B.31!6< 2B-2 0!3SG6FS
3!-A!3!2G 2. 5!2BB.31 2B@ !6#.M@ 2-L 0.$
!62@$@S2, $.G-32!@S -61 1!V!1@61S, 5B!#B
5@$@ P-G-A3@ 2. 6.6/$@S!1@62 0.$@!<6
#.$P.$-2!.6S, -22-#B@1 >P.6 RS@22!6</>PS
.$ -##$>-3 .0 2B@S@ -M.>62S $-2B@$ 2B-6
5B@6 S-!1 -M.>62S A@#.M@ 1>@ -61
1@M-61-A3@ >61@$ 2B@ -PP3!#-A3@
#.62$-#2SS
!n %.R. &o. ')?>,,, what is *eing +uestioned *y
petitioner is the assessed deficiency withholding ta, at
source for the period from the fourth ;uarter of
'*,@ to the fourth ;uarter of '*,+ amounting to
P')9,)((&:
2he pivot of in+uiry here is / whether the lia*ility
to withhold ta, at source on income payments to non/
resident foreign corporations arises upon remittance of
the amounts due to the foreign creditors or upon
accrual thereof
!t is petitionerFs su*mission that the withholding
ta,es on the said interest income and royalties were
paid to the government when the su*ject interest and
royalties were actually remitted a*road Stated
otherwise, whatever amount has accrued in the *oo8s,
the withholding ta, due thereon is ultimately paid to
the government upon remittance a*road of the amount
accrued
Section "' of the 6ational !nternal $evenue
#ode, in force at that time =19)"?, readsC
R5ithholding 2a, at source
, , ,
=*? 6on/resident aliens and foreign corporations
/ @very individual, corporation, partnership, or
association, in whatever capacity acting, including a
lessee or mortgagor of real or personal property,
trustee acting in any trust capacity, e,ecutor,
administrator, receiver, conservator, fiduciary,
employer, and every officer or employee of the
<overnment of the $epu*lic of the Philippines having
the control, receipt, custody, disposal, or payment of
interest, dividends, rents, royalties, salaries, wages,
premiums, annuities, compensation, remunerations,
emoluments, or other fi,ed or determina*le annual,
periodical, or casual gains, profits, and income, and
capital gains, of any non/resident alien not engaged in
trade or *usiness within the Philippines, shall =e,cept
in the case provided in su*/section =a? =1? of this
Section? deduct and withhold from the annual,
periodical, or casual gains, profits, and income, and
capital gains, a ta, e+ual to '( per cent thereof
, , ,
=%? 6on/resident foreign corporations / !n the case of
foreign corporations su*ject to ta, under this 2itle, not
engaged in trade or *usiness within the Philippines,
there shall *e deducted and withheld at the source in
the same manner and upon the same items as is
provided in su*section =*? =1? of this section, as well as
on remunerations for technical services or otherwise, a
ta, e+ual to thirty/five ='"? per cent thereof 2his ta,
shall *e returned and paid in and su*ject to the same
conditions as provided in Section "4S
.n the other hand, Section "4 of the same law,
providesC
R$eturns and payments of ta,es withheld at source /
=a? Quarterly return and payment of ta,es withheld /
2a,es deducted and withheld under Section "' shall
*e covered *y a return and paid to the #ommissioner
of !nternal $evenue or his collection agent in the
province, city, or municipality where the withholding
agent has his legal residence or principal place of
*usiness, or where the withholding agent is a
corporation, where the principal office is located 2he
ta,es deducted and withheld *y the withholding agent
shall *e held as a special fund in trust for the
<overnment until paid to the collecting officers 2he
#ommissioner of !nternal $evenue may, with the
approval of the Secretary of 0inance, re+uire these
withholding agents to pay or deposit the ta,es
deducted and withheld at more fre+uent intervals when
necessary to protect the interest of the
<overnment 2he return shall *e filed and the
payment made within %" days from the close of each
calendar +uarter S
2he aforecited provisions of law are silent as to
when does the duty to withhold the ta,es arise -nd to
determine the same, an in+uiry as to the nature
of accrual method of accounting" the procedure
used *y the herein petitioner, and to the mo!us
ien!i of withholding ta9 at source come to the
fore
2he method of withholding ta9 at source is a
procedure of collecting income ta, sanctioned *y the
6ational !nternal $evenue #ode Section "' =c? of
which, providesC
R$eturn and Payment / @very person re+uired to
deduct and withhold any ta, under this section shall
ma8e return thereof, for the payment of the ta,,
shall pay the amount withheld to the officer of the
<overnment of the Philippines authori7ed to receive
it @very such person is made personally lia*le for
such ta,, and is indemnified against the claims and
demands of any person for the amount of any
payments made in accordance with the provision of
this sectionS
!n the aforecited provision of law, the withholding
agent is e,plicitly made personally lia*le for the
income ta, withheld under Section "4 !n 2hil.
%uaranty Co." Inc. vs. Commissioner of Internal
Revenue,
M4N
the #ourt, has ratiocinatedC
R2he law sets no condition for the personal lia*ility of
the withholding agent to attach 2he reason is to
compel the withholding agent to withhold the ta, under
all circumstances !n effect, the responsi*ility for the
collection of the ta, as well as the payment thereof is
concentrated upon the person over whom the
<overnment has jurisdiction 2hus, the withholding
agent is constituted the agent *oth the government
and the ta,payer 5ith respect to the collection andJor
withholding of the ta,, he is the <overnmentFs
agent !n regard to the filing of the necessary income
ta, return and the payment of the ta, to the
<overnment, he is the agent of the ta,payer 2he
withholding agent, therefore, is no ordinary
government agent especially *ecause under Section
"' =c? he is held personally lia*le for the ta, he is duty
*ound to withhold4 whereas, the #ommissioner of
!nternal $evenue and his deputies are not made lia*le
to lawS
.n the other hand, Runder the accrual *asis
method of accounting, income is reporta*le when all
the events have occurred that fi, the ta,payerFs right to
receive the income, and the amount can *e
determined with reasona*le accuracy 2hus, it is the
ri"ht to receie income, and not the actual
receipt, that !etermines when to inclu!e the amount
in "ross incomeS
M"N
<leana*le from this notion are the
following re+uisites of accrual method of accounting, to
witC R=1? that the right to receive the amount must *e
valid, unconditional and enforcea*le, i.e.- not
contingent upon future time4 =%? the amount must *e
reasona*ly suscepti*le of accurate estimate4 and ='?
there must *e a reasona*le e,pectation that the
amount will *e paid in due courseS
M&N
!n the case at *ar, after a careful e,amination of
pertinent records, the #ourt concurred in the finding *y
the #ourt of -ppeals in #- <$ SP 6o '%9%% \that
there was a definite lia*ility, a clear and imminent
certainty that at the maturity of the loan contracts, the
foreign corporation was going to earn income in an
ascertained amount, so much so that petitioner
already deducted as *usiness e,pense the said
amount as interests due to the foreign
corporation 2his is allowed under the law, petitioner
having adopted the \accrual methodF of accounting in
reporting its incomesS
-ll things studiedly considered, the #ourt is of the
opinion, and holds, that the #ourt of -ppeals erred not
in ruling thatC
R, , , Petitioner cannot now claim that there is no duty
to withhold and remit income ta,es as yet *ecause the
loan contract was not yet due and
demanda*le Baving Rwritten/offS the amounts as
*usiness e,pense in its *oo8s, it had ta8en advantage
of the *enefit provided in the law allowing for
deductions from gross income Moreover, it had
represented to the A!$ that the amounts so deducted
were incurred as a *usiness e,pense in the form of
interest and royalties paid to the foreign
corporations !t is estopped from claiming otherwise
nowS
M)N
EH3R3F.R3, the decisions of the #ourt of
-ppeals in #- <$ SP 6os '%9%% and '%(%% are
here*y -00!$M@1 in toto 6o pronouncement as to
costs
0. .R53R35.

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