G.R. No. 183408
Taxable Income
COMMISSIONER OF INTERNAL
REVENUE, Petitioner
vs.
LANCASTER PHILIPPINES, INC., Respondent
DECISION
MARTIRES, J.:
This is a Petition for Review
on Certiorari1 under Rule 45 of the Rules of
Court seeking to reverse and set aside the 30
April 2008 Decision2 and 24 June 2008
Resolution3 of the Court of Tax
Appeals (CTA) En Banc in CTA EB No. 352.
The assailed decision and resolution affirmed
the 12 September 2007 Decision4 and 12
December 2007 Resolution5of the CTA First
Division (CTA Division) in CTA Case No. 6753.
THE FACTS
The facts6 are undisputed.
Petitioner Commissioner of Internal
Revenue (CIR) is authorized by law, among
others, to investigate or examine and, if
necessary, issue assessments for deficiency
taxes.
On the other hand, respondent Lancaster
Philippines, Inc. (Lancaster) is a domestic
corporation established in 1963 and is
engaged in the production, processing, and
marketing of tobacco.
In 1999, the Bureau of Internal
Revenue (BIR) issued Letter of
Authority (LOA) No. 00012289 authorizing its
revenue officers to examine Lancaster's books
of accounts and other accounting records for
all internal revenue taxes due from taxable
year 1998 to an unspecified date. The LOA
reads:
SEPT. 30 1999
LETTER OF AUTHORITY
pg. 1
LANCASTER PHILS. INC.
TOTAL
11th Flr. Metro Bank Plaza -0- ₱6,466,065.5
per ITR DEFlCIENCY
Makati City 0
INCOME TAX
SIRJMADAM/GENTLEMEN: Add:
Adjustments- 11,496,770.1 DETAILS OF DISCREPANCIES
The bearer(s) hereof RO’s Irene Goze & Assessment No. LTAID II-98-00007
Disallowed 8
Rosario Padilla to be Supervise by GH
purchases
Catalina_Leny Barrion of the Special Team A. INCOME TAX (₱3,880,159.94) - Taxpayer's
created pursuant to RSO 770-99 is/are fiscal year covers April 1998 to March 1999.
authorized to examine your books of accounts Adjusted Verification of the books of accounts and
and other accounting records for a11 internal Taxable ₱11,496,770. pertinent documents disclosed that there was
revenue taxes for the period from example Income per 18 an overstatement of purchases for the year.
year, 1998 to ______, 19___. He is/[t]hey are Investigation Purchase Invoice Vouchers (PIVs) for February
provided with the necessary identification and March 1998 purchases amounting to
card(s) which shall be presented to you upon ₱ll,496,770.18 were included as part of
INCOME TAX DUE-Basic
request. purchases for taxable year 1998 in violation of
Section 45 of the National Internal Revenue
It is requested that all facilities be extended to Code in relation to Section 43 of the same and
April 1 -
the Revenue Officer(s) in order to expedite the Revenue Regulations No. 2 which states that
December
examination. the Crop-Basis method of reporting income
31, 1998
may be used by a farmer engaged in producing
You will be duly informed of the results of the (9/12x
crops which take more than one (1) year from
examination upon approval of the report ₱l1,496,770.
the time of planting to the time of gathering
submitted by the aforementioned Revenue 18 x 34%) ₱2,913,676.4
and disposing of crop, in such a case, the
Officer(s).7
entire cost of producing the crop must be
taken as deduction in the year in which the
After the conduct of an examination pursuant January 1 -
gross income from the crop is realized and
to the LOA, the BIR issued a Preliminary March 31,
that the taxable income should be computed
Assessment Notice (PAN)8which cited 1999
upon the basis of the taxpayer's annual
Lancaster for: (3/12x
accounting period, (fiscal or calendar year, as
₱l1,496,770.
1) overstatement of its purchases for the fiscal 18 x 33%) 948,483.54 the case may be) in accordance with the
year April 1998 to March1999; and 2) method of accounting regularly employed in
noncompliance with the generally accepted keeping with the books of the taxpayer.
Income tax still
accountingprinciple of proper matching of cost ₱3,880,159.9 Furthermore, it did not comply with the
due per
and revenue.9 More concretely, the BIR 4 generally accepted principle of proper
investigation
disallowed the purchases of tobacco from matching of cost and revenue.10
farmers covered by Purchase Invoice Vouchers
(PIVs) for the months of February and March Lancaster replied11 to the PAN contending,
Interest
1998 as deductions against income for among other things, that for the past decades,
(6/15/99 to 2,560,905.56
the fiscal year April 1998 to March 1999. The it has used an entire 'tobacco-cropping
10115/02) .66
computation of Lancaster's tax deficiency, with season' to determine its total purchases
the details of discrepancies, is reproduced covering a one-year period from 1 October up
below: Compromise to 30 September of the followingyear (as
25,000
Penalty against its fiscal year which is from 1 April up
to 31 March of the followingyear);that it has
INCOME TAX:
been adopting the 6~month timing difference
to conform to the matching concept (of cost
and revenue); and that this has long been
installed as part of the company's system and
consistently applied in its accounting books.12
Invoking the same provisions of the law cited
in the assessment, i.e., Sections 4313 and
4514 of the National Internal Revenue
Code (NJRC), in conjunction with Section
4515 of Revenue Regulation No. 2, as amended,
Lancaster argued that the February and March
1998 purchases should not have been
disallowed. It maintained that the situation of
farmers engaged in producing tobacco, like
Lancaster, is unique in that the
costs, i.e., purchases, are taken as of a
different period and posted in the year in
which the gross income from the crop is
realized. Lancaster concluded that it correctly
posted the subject purchases in the fiscal year
ending March 1999 as it was only in this year
that the gross income from the crop was
realized.
Subsequently on 6 November 2002, Lancaster
received from the BIR a final assessment
notice (FAN),16 captioned Formal Letter of
Demand andAudit Result/Assessment .Notice
LTAID II IT-98-00007, dated 11 October2002,
which assessed Lancaster's deficiency income
tax amounting to Pl l,496,770.18, as a
consequence of the disallowance of purchases
claimed for the taxable year ending199931.
March 1999.
Lancaster duly protested17 the FAN. There
being no action taken by the Commissioner on
its protest, Lancaster filed on 21 August 2003 a
petition for review18 before the CTA Division.
The Proceedings before the CTA
In its petition before the CTA Division,
Lancaster essentially reiterated its arguments
in the protest against the assessment,
maintaining that the tobacco purchases in
February and March 1998 are deductible in its
fiscal year ending 31 March 1999.
The issues19 raised by the parties for the
resolution of the CTA Division were:
I Section 7 of Republic Act No. 1125 (R.A. No.
WHETHER OR NOT PETITIONER COMPLIED
WITH THE GENERALLY ACCEPTED
pg. 2
ACCOUNTING PRINCIPLE OF PROPER
MATCHING OF COST AND REVENUE;
II
WHETHER OR NOT THE DEFICIENCY TAX
ASSESSMENT AGAINST PETITIONER FOR THE
TAXABLE YEAR 1998 IN THE AGGREGATE
AMOUNT OF ₱6,466,065.50 SHOULD BE
CANCEILED AND WITHDRAWN BY
RESPONDENT.
After trial, the CTA Division granted the
petition of Lancaster, disposing as follows;
IN VIEW OF THE FOREGOING, the subject
Petition for Review is hereby GRANTED.
Accordingly, respondent is ORDERED to
CANCEL and WITHDRAW the deficiency
income tax assessment issued against
petitioner under Formal l;etter of Demand and
Audit Result/Assessment Notice No. L TAID II
IT-98-00007 dated October 11, 2002, in the
amount of ₱6,466,065.50, covering the fiscal
year from April l, 1998 to March 31, 1999.20
The CIR move21 but failed to obtain
reconsideration of the CTA Division ruling.22
Aggrieved, the CIR sought recourse23 from the
CTA En Banc to seek a reversal of the decision
and the resolution of the CTA Division.
However, the CTA En Banc found no reversible
error in the CTA Division's ruling, thus, it
affirmed the cancellation of the assessment
against Lancaster. The dispositive portion of
the decision of the CTA En Banc states:
WHEREFORE, premises considered, the
present Petition for Review is hereby DENIED
DUE COURSE, and, accordingly DISMISSED for
lack of merit.24
The CTA En Banc likewise denied25 the motion
for reconsideration from its Decision.
Hence, this petition.
The CIR assigns the following errors as
committed by the CTA En Banc:
I.
THE COURT OF TAX APPEALS EN BANC ERRED
IN HOLDING THAT PETITIONER'S REVENUE
OFFICERS EXCEEDED THEIR AUTHORITY TO
INVESTIGATE THE PERJOD NOT COVERED BY
THEIR LETTER OF AUTHORITY.
II.
THE COURT OF TAX APPEALS EN BANC ERRED
IN ORDERING PETITIONER TO CANCEL AND
WITHDRAW THE DEFICIENCY ASSESSMENT
ISSUED AGAINST RESPONDENT.26
THE COURT'S RULING
We deny the petition.
The CTA En Banc did not err when it ruled
that the BIR revenue officers had
exceeded their authority.
To support its first assignment of error, the CIR
argues that the revenue officers did not
exceed their authority when, upon
examination (of the Lancaster's books of
accounts and other accounting records), they
verified that Lancaster made purchases for
February and March of 1998, which purchases
were not declared in the latter's fiscal year
from 1 April 1997 to 31 March 1998.
Additionally, the CIR posits that Lancaster did
not raise the issue on the scope of authority of
the revenue examiners at any stage of the
proceedings before the CTA and,
consequently, the CTA had no jurisdiction to
rule on said issue.
On both counts, the CIR is mistaken.
A. The Jurisdiction of the CTA
Preliminarily, we shall take up the CTA's
jurisdiction to rule on the issue of the scope of
authority of the revenue officers to conduct
the examination of Lancaster's books of
accounts and accounting records.
The law vesting unto the CTA its jurisdiction is
1125),27 which in part provides:
Section 7. Jurisdiction. - The Court of Tax
Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein
provided:
(1) Decisions of the Collector of Internal
Revenue in cases involving disputed
assessments, refunds of internal revenue
taxes, fees or other charges, penalties
imposed in relation thereto, or other
matters arising under the National Internal
Revenue Code or other law or part of law
administered by the Bureau of Internal
Revenue; x x x. (emphasis supplied)
Under the aforecited provision, the jurisdiction
of the CTA is not limited only to cases which
involve decisions or inactions of the CIR on
matters relating to assessments or :refunds
but also includes other cases arising from the
NIRC o:r related laws administered by the
BIR. 28 Thus, for instance, we had once held
that the question of whether or not to impose
a deficiency tax assessment comes within the
purview of the words "othermatters arising
under the National Internal Revenue
Code."[[29]
The jurisdiction of the CTA on such other
matters arising under theNIRC was retained
under the amendments introduced by R.A No.
9282.30Under R.A. No. 9282, Section 7 now
reads:
Sec. 7. Jurisdiction. - The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by
appeal, as herein provided:
1. Decisions of the Commissioner of Internal
Revenue in cases involving disputed
assessments, refunds of internal revenue
taxes, fees or other charges, penalties in
relation thereto, or other mattersarising under
the National Internal Revenue or other laws
administered by the Bureau of Internal
Revenue;
2. Inaction by the Commissioner of Internal
Revenue in cases involving disputed
assessments, refunds of internal revenue
taxes, fees or other charges, penalties in
relation thereto, or other matters arising
under the National Internal Revenue Code or
other laws administered by the Bureau of
Internal Revenue, where the National Internal
Revenue Code provides a specific period of
action. in which case the inaction shall be
deemed a denial; x x x." (emphasis supplied)
Is the question on the authority of revenue
officers to examine the books and records of
any person cognizable by the CTA?
It must be stressed that the assessment of
inten1al revenue taxes is one of the duties of
the BIR. Section 2 of the NIRC states:
Sec. 2. Powers and Duties oftheBureau of
Internal Revenue. - The Bureau of Internal
Revenue shall be under the supervision and
control of the Department of Fin[:l.11ce and
its powers: and duties shall comprehend
the assessment and collection of all national
internal revenue taxes, fees, andcharges, and
the enforcement of all forfeitures, penalties,
and fines connected therewith, including the
execution of judgments in all cases decided in
its favor by the Court of Tax Appeals and the
ordinary courts.
The Bureau shall give effect to and administer
the supervisory and police powers conferred
to it by this Code or other laws. (emphasis
supplied)
In connection therewith, the CIR may
authorize the examination of any taxpayer and
correspondingly make an assessment
whenever necessary.31 Thus, to give more
teeth to such power of the CIR, to make an
assessment, the NIRC authorizes the CIR to
examine any book, paper, record, or data of
any person.32 The powers granted by law to
the CIR are intended, among other things, to
determine the liability of any person for any
national internal revenue tax.
It is pursuant to such pertinent provisions of
the NIRC conferring the powers to the CIR that
the petitioner (CIR) had, in this case,
authorized its revenue officers to conduct an
pg. 3
examination of the books of account and
accounting records of Lancaster, and
eventually issue a deficiency assessment
against it.
From the foregoing, it is clear that the issue on
whether the revenue officers who had
conducted the examination on Lancaster
exceeded their authority pursuant to LOA No.
00012289 may be considered as covered by
the terms "other matters" under Section 7 of
R.A. No. 1125 or its amendment, R.A. No.
9282. The authority to make an examination
or assessment, being a matter provided for by
the NIRC, is well within the exclusive and
appellate jurisdiction of the CTA.
On whether the CTA can resolve an issue
which was not raised by the parties, we rule in
the affirmative.
Under Section 1, Rule 14 of A.M. No. 05-11-07-
CTA, or the Revised Rules of the Court of Tax
Appeals,33 the CT A is not bound by the issues
specifically raised by the parties but may also
rule upon related issues necessary to achieve
an orderly disposition of the case. The text of
the provision reads:
SECTION 1. Rendition of judgment. - x xx
In deciding the case, the Court may not limit
itself to the issues stipulated by the parties but
may also rule upon related issues necessary to
achieve an orderly disposition of the case.
The above section is clearly worded. On the
basis thereof, the CTA Division was, therefore,
well within its authority to consider in its
decision the question on the scope of
authority of the revenue officers who were
named in the LOA even though the parties had
not raised the same in their pleadings or
memoranda. The CTA En Banc was likewise
correct in sustaining the CTA Division's view
concerning such matter.
B. The Scope of the Authority
of the Examining Officers
In the assailed decision of the CTA Division, the
trial court observed that LOA No. 00012289
authorized the BIR officers to examine the
books of account of Lancaster for the taxable
year 1998 only or, since Lancaster adopted a
fiscal year (FY), for the
period 1April1997 to 31March1998. However,
the deficiency income tax assessment which
the BIR eventually issued against Lancaster
was based on the disallowance of expenses
reported in FY 1999, or for the period 1 April
1998 to 31March1999. The CTA concluded
that the revenue examiners had exceeded
their authority when they issued the
assessment against Lancaster and,
consequently, declared such assessment to be
without force and effect.
We agree.
The audit process normally commences with
the issuance by the CIR of a Letter of
Authority. The LOA gives notice to the
taxpayer that it is under investigation for
possible deficiency tax assessment; at the
same time it authorizes or empowers a
designated revenue officer to examine, verify,
and scrutinize a taxpayer's books and records,
in relation to internal revenue tax liabilities for
a particular period.34
In this case, a perusal of LOA No. 00012289
indeed shows that the period of examination
is the taxable year 1998. For better clarity, the
pertinent portion of the LOA is again
reproduced, thus:
The bearer(s) hereof x x x is/are authorized to
examine your books of accounts and other
accounting records for all internal revenue
taxes for the period from taxable year, 1998 to
__, 19_. x x x." (emphasis supplied)
Even though the date after the words "taxable
year 1998 to" is unstated, it is not at all
difficult to discern that the period of
examination is the whole taxable year 1998.
This means that the examination of Lancaster
must cover the FY period from 1April1997 to
31March1998. It could not have contemplated
a longer period. The examination for the full
taxable year 1998 only is consistent with the
guideline in Revenue Memorandum Order
(RMO) No. 43-90, dated 20 September 1990,
that the LOA shall cover a taxable period not
exceeding one taxable year.35 In other words,
absent any other valid cause, the LOA issued in
this case is valid in all respects.
Nonetheless, a valid LOA does not necessarily
clothe validity to an assessment issued on it,
as when the revenue officers designated in the
LOA act in excess or outside of the authority
granted them under said LOA. Recently in CIR
v. De La Salle University, Inc.36 we accorded
validity to the LOA authorizing the
examination of DLSU for "Fiscal Year
Ending 2003and Unverified Prior Years" and
correspondingly held the assessment
fortaxable year 2003 as valid because this
taxable period is specified in the LOA.
However, we declared void the assessments
for taxable years 2001 and 2002 for having
been unspecified on separate LOAs as required
under RMO No. 43-90.
Likewise, in the earlier case of CIR v. Sony,
Phils., Inc.,37 we affirmed the cancellation of a
deficiency VAT assessment because, while the
LOA covered "the period 1997and unverified
prior years, " the said deficiency was arrived at
based on the records of a later year,
from January to March 1998, or using the
fiscal year which ended on 31March1998. We
explainedthat the CIR knew which period
should be covered by the investigation and
that if the CIR wanted or intended the
investigation to include the year 1998, it
would have done so by including it in the LOA
or by issuing another LOA.38
The present case is no different from Sony in
that the subject LOA specified that the
examination should be for the taxable year
1998 only but the subsequent assessment
issued against Lancaster involved disallowed
expenses covering the next fiscal year, or the
period ending 31 March 1999. This much is
clear from the notice of assessment, the
relevant portion of which we again restate as
follows:
1âwphi1
 The taxable year covered by the assessment argues that its purchases in February and While taxable income is based on the method
INCOME TAX:
being outside of the period specified in the March 1998 were properly posted in FY 1999, of accounting used by the taxpayer, it will
LOA in this case, the assessment issued against or the year in which its gross income from the almost always differ from accounting income.
Taxable Income Lancaster is, therefore, void. crop was realized. Lancaster concludes that by This is so because of a fundamental difference
-0-
per ITR doing so, it had complied with the matching in the ends the two concepts serve.
This point alone would have sufficed to concept that was also relied upon by the BIR in Accounting attempts to match cost against
invalidate the subject deficiency income tax its assessment. revenue. Tax law is aimed at collecting
Add: Adjustments- assessment, thus, obviating any further revenue. It is quick to treat an item as income,
11,496,
Disallowed necessity to resolve the issue on whether The issue essentially boils down to the proper slow to recognize deductions or losses. Thus,
770.18
purchases Lancaster erroneously claimed the February timing when Lancaster should recognize its the tax law will not recognize deductions for
and March 1998 expenses as deductions purchases in computing its taxable contingent future losses except in very limited
against income for FY 1999. income. Such issue directly correlates to the situations. Good accounting, on the other
Adjusted
₱l fact that Lancaster's 'crop year ' does not hand, requires their recognition. Once this
Taxable Income But, as the CTA did, we shall discuss the issue
1,496,770. exactly coincide with its fiscal year for tax fundamental difference in approach is
per on the disallowance for the proper guidance
18 purposes. accepted, income tax accounting methods can
Investigation not only of the parties, but the bench and the
be understood more easily.43 (emphasis
bar as well. Noticeably, the records of this case are rife
supplied)
with terms and concepts in accounting. As a
INCOME TAX DUE-Basic II. science, accounting 40pervades many aspects While there may be differences between tax
of financial planning, forecasting, and decision and accounting,44 it cannot be said that the
The CTA En Banc correctly sustained the
April 1 - making in business. Its reach, however, has two mutually exclude each other. As already
order cancelling and withdrawing
December 31, also permeated tax practice. made clear, tax laws borrowed concepts that
the deficiency tax assessment.
1998 had origins from accounting. In truth, tax
(9/12xPl1,496,7 ₱2,913,67 To put it into perspective, although the
To recall, the assessment against Lancaster for cannot do away with accounting. It relies upon
70.18 x 34%) 6.4 foundations of accounting were built
deficiency income tax stemmed from the approved accounting methods and practices to
principally to analyze finances and assist
disallowance of its February and March 1998 effectively carry out its objective of collecting
businesses, many of its principles have since
purchases which Lancaster posted in its fiscal the proper amount of taxes from the
January 1- been adopted for purposes of taxation.41 In
year ending on 31 March 1999 (FY taxpayers. Thus, an important mechanism
March 31, 1999 our jurisdiction, the concepts in business
1999) instead of the fiscal year ending on established in many tax systems is the
(3/12xPl1,496,7 948,483.5 accounting, including certain generally
31March1998 (FY 1998). requirement for taxpayers to make a return of
70.18 x 33%) 4 accepted accounting principles (GAAP),
their true income.45 Maintaining accounting
On the one hand, the BIR insists that the embedded in the NIRC comprise the rules on
books and records, among other important
purchases in question should have been tax accounting.
Income tax still considerations, would in turn assist the
₱3,880,15 reported in FY 1998 in order to conform to the
due per To be clear, the principles under financial or taxpayers in complying with their obligation to
9.94 generally accepted accounting principle of
investigation business accounting, in theory and application, file their income tax returns. At the same time,
proper matching of cost and revenue. Thus, such books and records provide vital
are not necessarily interchangeable with those
when information and possible bases for the
Interest (6/15/99 2,560,905. in tax accounting. Thus, although closely
related, tax and business accounting had government, after appropriate audit, to make
to 10/15/02) .66 56 Lancaster reported the said purchases in FY
invariably produced concepts that at some an assessment for deficiency tax whenever so
1999, this resulted in overstatement of
point diverge in understanding or usage. For warranted under the circumstances.
expenses warranting their disallowance and,
Compromise by consequence, resulting in the deficiency in instance, two of such important concepts are
25,000 The NIRC, just like the tax laws in other
Penalty the payment of its income tax for FY 1999. taxable income and business income (or
jurisdictions, recognizes the important facility
accounting income). Much of the difference
provided by generally accepted accounting
Upon the other hand, Lancaster justifies the can be attributed to the distinct purposes or
TOTAL ₱6,466,06 principles and methods to the primary aim of
inclusion of the February and March 1998 objectives that the concepts of tax and
DEFICIENCY 5.50 tax laws to collect the correct amount of taxes.
purchases in its FY 1999 considering that they business accounting are aimed at. Chief Justice
INCOME TAX The NIRC even devoted a whole chapter on
coincided with its crop year covering the Querube Makalintal made an apt observation
(emphasis accounting periods and methods of
period of October 1997 to September 1998. on the nature of such difference.
supplied) accounting, some relevant provisions of which
Consistent with Revenue Audit In Consolidated Mines, Inc. v. CTA,42he noted:
we cite here for more emphasis:
Memorandum (RAM) No. 2-95,39 Lancaster
pg. 4
CHAPTER VIII
ACCOUNTING PERIODS AND METHODS OF
ACCOUNTING
Sec. 43. General Rule. - The taxable income
shall be computed upon the basis of the
taxpayer's annual accounting period (fiscal
year or calendar year, as the case may be) in
accordance with the method of accounting
regularly employed in keeping the books of
such taxpayer; but if no such method of
accounting has been so employed, or if the
method employed does not clearly reflect the
income, the computation shall be made in
accordance with such method as in the
opinion of the Commissioner clearly reflects
the income.
If the taxpayer's annual accounting period is
other than a fiscal year, as defined in Section
22(Q), or if the taxpayer has no annual
accounting period, or does not keep books, or
if the taxpayer is an individual, the taxable
income shall be computed on the basis of the
calendar year.
Sec. 44. Period in which Items of Gross
Income Included. - The amount of all items of
gross income shall be included in the gross
income for the taxable year in which received
by the taxpayer, unless, under methods of
accounting permitted under Section 43, any
such amounts are to be properly accounted
for as of a different period.
In the case of the death of a taxpayer, there
shall be included in computing taxable income
for the taxable period in which falls the date of
his death, amounts accrued up to the date of
his death if not otherwise properly includible
in respect of such period or a prior period.
Sec. 45. Period/or which Deductions and
Credits Taken. - The deductions provided for
in this Title shall be taken for the taxable year
in which 'paid or accrued' or 'paid or
incurred,' dependent upon the method of
accounting upon the basis of which the net
income is computed, unless in order to clearly
reflect the income, the deductions should be
pg. 5
taken as of a different period. In the case of
the death of a taxpayer, there shall be allowed
as deductions for the taxable period in which
falls the date of his death, amounts accrued up
to the date of his death if not otherwise
properly allowable in respect of such period or
a prior period.
Sec. 46. Change of Accounting Period. - If a
taxpayer, other than an individual, changes his
accounting period from fiscal year to calendar
year, from calendar year to fiscal year, or from
one fiscal year to another, the net income
shall, with the approval of the Commissioner,
be computed on the basis of such new
accounting period, subject to the provisions of
Section 47.
xxxx
Sec. 48. Accounting for Long-term Contracts. -
Income from long-term contracts shall be
repo1ied for tax purposes in the manner as
provided in this Section.
As used herein, the term 'long-term
contracts' means building, installation or
construction contracts covering a period in
excess of one (1) year.
Persons whose gross income is derived in
whole or in part from such contracts shall
report such income upon the basis of
percentage of completion.1âwphi1
The return should be accompanied by a return
certificate of architects or engineers showing
the percentage of completion during the
taxable year of the entire work performed
under contract.
There should be deducted from such gross
income all expenditures made during the
taxable year on account of the contract,
account being taken of the material and
supplies on hand at the beginning and end of
the taxable period for use in connection with
the work under the contract but not yet so
applied.
If upon completion of a contract, it is found
that the taxable net income arising thereunder
has not been clearly reflected for any year or
years, the Commissioner may permit or
require an amended return.
Sec. 49. Installment Basis. -
(A) Sales of Dealers in Personal Property. -
Under rules and regulations prescribed by the
Secretary of Finance, upon recommendation
of the Commissioner, a person who regularly
sells or otherwise disposes of personal
property on the installment plan may return as
income therefrom in any taxable year that
proportion of the installment payments
actually received in that year, which the gross
profit realized or to be realized when payment
is completed, bears to the total contract price.
(B) Sales of Realty and Casual Sales of
Personality. - In the case (1) of a casual sale or
other casual disposition of personal property
(other than property of a kind which would
properly be included in the inventory of the
taxpayer if on hand at the close of the taxable
year), for a price exceeding One thousand
pesos (₱1,000), or (2) of a sale or other
disposition of real prope1iy, if in either case
the initial payments do not exceed twenty-five
percent (25%) of the selling price, the income
may, under the rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be
returned on the basis and in the manner
above prescribed in this Section.
As used in this Section, the term 'initial
payments' means the payments received in
cash or property other than evidences of
indebtedness of the purchaser during the
taxable period in which the sale or other
disposition is made.
(C) Sales of Real Property Considered as Capital
Asset by Individuals. - An individual who sells
or disposes of real property, considered as
capital asset, and is otherwise qualified to
report the gain therefrom under Subsection
(B) may pay the capital gains tax in
installments under rules and regulations to be
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. -
If a taxpayer entitled to the benefits of
Subsection (A) elects for any taxable year to
report his taxable income on the installment
basis, then in computing his income for the
year of change or any subsequent year,
amounts actually received during any such
year on account of sales or other dispositions
of property made in any prior year shall not be
excluded." (emphasis in the original)
We now proceed to the matter respecting the
accounting method employed by Lancaster.
An accounting method is a "set of rules for
determining when and how to report income
and deductions."46 The provisions under
Chapter VIII, Title II of the NIRC cited above
enumerate the methods of accounting that
the law expressly recognizes, to wit:
(1) Cash basis method;47
(2) Accrual method;48
(3) Installment method;49
(4) Percentage of completion method;50 and
(5) Other accounting methods.
Any of the foregoing methods may be
employed by any taxpayer so long as it reflects
its income properly and such method is used
regularly. The peculiarities of the business or
occupation engaged in by a taxpayer would
largely determine how it would report
incomes and expenses in its accounting books
or records. The NIRC does not prescribe a
uniform, or even specific, method of
accounting.
Too, other methods approved by the CIR, even
when not expressly mentioned in the NIRC,
may be adopted if such method would enable
the taxpayer to properly reflect its income.
Section 43 of the NIRC authorizes the CIR to
allow the use of a method of accounting that
in its opinion would clearly reflect the income
of the taxpayer. An example of such method
not expressly mentioned in the NIRC, but duly
approved by the CIR, is the 'crop method of
accounting' authorized under RAM No. 2-95.
The pertinent provision reads:
II. Accounting Methods
xxxx
F. Crop Year Basis is a method applicable only
to farmers engaged in the production of crops
which take more than a year from the time of
planting to the process of gathering and
disposal. Expenses paid or incurred are
deductible in the year the gross income from
the sale of the crops are realized.
The crop method recognizes that the
harvesting and selling of crops do not fall
within the same year that they are planted or
grown. This method is especially relevant to
farmers, or those engaged in the business of
producing crops who, pursuant to RAM No. 2-
95, would then be able to compute their
taxable income on the basis of their crop year.
On when to recognize expenses as deductions
against income, the governing rule is found in
the second sentence of Subsection F cited
above. The rule enjoins the recognition of the
expense (or the deduction of the cost) of crop
production in the year that the crops are
sold (when income is realized).
In the present case, we find it wholly
justifiable for Lancaster, as a business engaged
in the production and marketing of tobacco, to
adopt the crop method of accounting. A
taxpayer is authorized to employ what it finds
suitable for its purpose so long as it
consistently does so, and in this case,
Lancaster does appear to have utilized the
method regularly for many decades already.
Considering that the crop year of Lancaster
starts from October up to September of the
following year, it follows that all of its
expenses in the crop production made within
the crop year starting from October 1997 to
September 1998, including the February and
March 1998 purchases covered by purchase
invoice vouchers, are rightfully deductible for
income tax purposes in the year when the
gross income from the crops are realized.
Pertinently, nothing from the pleadings or
pg. 6
memoranda of the parties, or even from their
testimonies before the CT A, would support a
finding that the gross income from the crops
(to which the subject expenses refer) was
actually realized by the end of March 1998, or
the closing of Lancaster's fiscal year for 1998.
Instead, the records show that the February
and March 1998 purchases were recorded by
Lancaster as advances and later taken up
as purchases by the close of the crop year in
September 1998, or as stated very clearly
above, within the fiscal year 1999.51On this
point, we quote with approval the ruling of the
CT A En Banc, thus:
Considering that [Lancaster] is engaged in the
production oftobacco, it applied the crop year
basis in determining its total purchases for
each fiscal year. Thus, [Lancaster's] total cost
for the production of its crops, which includes
its purchases, must be taken as a deduction in
the year in which the gross income is realized.
Thus, We agree with the following
ratiocination of the First Division:
Evident from the foregoing, the crop year basis
is one unusual method of accounting wherein
the entire cost of producing the crops
(including purchases) must be taken as a
deduction in the year in which the gross
income from the crop is realized. Since the
petitioner's crop year starts in October and
ends in September of the following year, the
same does not coincide with petitioner's fiscal
year which starts in April and ends in March of
the following year. However, the law and
regulations consider this peculiar situation and
allow the costs to be taken up at the time the
gross income from the crop is realized, as in
the instant case.
[Lancaster's] fiscal period is from April 1, 1998
to March 31, 1999. On the other hand, its crop
year is from October 1, 1997 to September 1,
1998. Accordingly, in applying the crop year
method, all the purchases made by the
respondent for October 1, 1997 to September
1, 1998 should be deducted from the fiscal
year ending March 31, 1999, since it is the
time when the gross income from the crops is
realized.52
The matching principle
Both petitioner CIR and respondent Lancaster,
it must be noted, rely upon the concept of
matching cost against revenue to buttress
their respective theories. Also, both parties
cite RAM 2-95 in referencing the crop method
of accounting.
We are tasked to determine which view is
legally sound.
In essence, the matching concept, which is one
of the generally accepted accounting
principles, directs that the expenses are to be
reported in the same period that related
revenues are earned. It attempts to match
revenue with expenses that helped earn it.
The CIR posits that Lancaster should not have
recognized in FY 1999 the purchases for
February and March 1998.53 Apparent from
the reasoning of the CIR is that such expenses
ought to have been deducted in FY 1998,
when they were supposed to be paid or
incurred by Lancaster. In other words, the CIR
is of the view that the subject purchases
match with revenues in 1998, not in 1999
A reading of RAM No. 2-95, however, clearly
evinces that it conforms with the concept that
the expenses paid or incurred be deducted in
the year in which gross income from the sale
of the crops is realized. Put in another way, the
expenses are matched with the related
incomes which are eventually earned. Nothing
from the provision is it strictly required that
for the expense to be deductible, the income
to which such expense is related to be realized
in the same year that it is paid or incurred. As
noted by the CTA,54 the crop method is an
unusual method of accounting, unlike other
recognized accounting methods that, by
mandate of Sec. 45 of the NIRC, strictly require
expenses be taken in the same taxable year
when the income is 'paid or incurred, '
or 'paid or accrued, ' depending upon the
method of accounting employed by the
taxpayer.
Even if we were to accept the notion that
applying the 1998 purchases as deductions in
the fiscal year 1998 conforms with the
generally accepted principle of matching cost
against revenue, the same would still not lend
any comfort to the CIR. Revenue
Memorandum Circular (RMC) No. 22-04,
entitled "Supplement to Revenue
Memorandum Circular No. 44-2002 on
Accounting Methods to be Used by Taxpayers
for Internal Revenue Tax Purposes"55dated 12
April 2004, commands that where there is
conflict between the provisions of the Tax
Code (NIRC), including its implementing rules
and regulations, on accounting methods and
the generally accepted accounting principles,
the former shall prevail. The relevant portion
of RMC 22-04 reads:
II. Provisions of the Tax Code Shall Prevail.
All returns required to be filed by the Tax Code
shall be prepared always in conformity with
the provisions of the Tax Code, and the rules
and regulations implementing said Tax Code.
Taxability of income and deductibility of
expenses shall be determined strictly in
accordance with the provisions of the Tax
Code and the rules and regulations issued
implementing said Tax Code. In case of
difference between the provisions of the Tax
Code and the rules and regulations
implementing the Tax Code, on one hand, and
the general(v accepted accounting principles
(GAAP) and the generally accepted accounting
standards (GAAS), on the other hand, the
provisions of the Tax Code and the rules and
regulations issued implementing said Tax Code
shall prevail. (italics supplied)
RAM No. 2-95 is clear-cut on the rule on when
to recognize deductions for taxpayers using
the crop method of accounting. The rule
prevails over any GAAP, including the
matching concept as applied in financial or
business accounting.
In sum, and considering the foregoing
premises, we find no cogent reason to
overturn the assailed decision and resolution
of the CT A. As the CTA decreed, Assessment
Notice LTAID II IT-98-00007, dated 11 October
2002, in the amount of ₱6,466,065.50 for
deficiency income tax should be cancelled and
set aside. The assessment is void for being
issued without valid authority. Furthermore,
there is no legal justification for the
disallowance of Lancaster's expenses for the
purchase of tobacco in February and March
1998.
WHEREFORE, the petition is DENIED. The
assailed 30 April 2008 Decision and 24 June
2008 Resolution of the Court of Tax Appeals En
Banc are AFFIRMED. No cost
SO ORDERED.
G.R. No. 206526 January 28, 2015
WINEBRENNER & IÑIGO INSURANCE
BROKERS, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL
REVENUE, Respondent.
DECISION
MENDOZA, J.:
In this petition for review under Rule 45 of the
Rules of Court and Rule 16 of the Revised
Rules of the Court of Tax Appeals,
Winebrenner & Ifiigo Insurance Brokers, Inc.
(petitioner) seeks the review of the March 22,
2013 Decision1of the Court of Tax Appeals En
Banc (CTA-En Banc). In the said decision, the
CTA-En Banc affirmed the denial of petitioner's
judicial claim for refund or issuance of tax
credit certificate for excess and unutilized
creditable withholding tax (CWT) for the 1st to
4th quarter of calendar year (CJ} 2003
amounting to ₱4,073,954.00. In denying the
refund, the CTA-En Banc held that petitioner
failed to prove that the excess CWT for CY
pg. 7
2003 was not carried over to the succeeding
quarters of the subject taxable year. Under the
1997 National Internal Revenue Code (NJRC), a
taxpayer must not have exercised the option
to carryover the excess CWT for a particular
taxable year in order to qualify for refund.
The Factual Antecedents
On April 15, 2004, petitioner filed itsAnnual
Income Tax Return for CY 2003.
About two years thereafter or on April 7, 2006,
petitioner applied for the administrative tax
credit/refund claiming entitlement to the
refund of its excess or unutilized CWT for CY
2003, by filing BIR Form No. 1914 with the
Revenue District Office No. 50 of the Bureau of
Internal Revenue (BIR).
There being no action taken on the said claim,
a petition for review was filed by petitioner
before the CTA on April 11, 2006. The case was
docketed as CTA Case No. 7440 and was
raffled to the Special First Division (CTA
Division).
On April 13, 2010, CTA Division partially
granted petitioner’s claim for refund of excess
and unutilized CWT for CY 2003 in the reduced
amount of ₱2,737,903.34 in its April 13, 2010
Decision2 (original decision). The dispositive
portion of the decision reads:
In view of the foregoing, the Petition for
Review is hereby PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED to
REFUND or ISSUE A TAX CREDIT CERTIFICATE in
favor of the petitioner in the reduced amount
of ₱2,737,903.34 representing its
excess/unutilized creditable withholding taxes
for the year 2003.
SO ORDERED.3
Petitioner filed a Motion for Partial
Reconsideration with Leave to Submit
Supplemental Evidence. It prayed that an
amended decision be issued granting the
entirety of its claim for refund, or in the
alternative, that it be allowed to submit and
offer relevant documents as supplemental
evidence.
Respondent Commissioner of Internal
Revenue (CIR) also moved for reconsideration,
praying for the denial of the entire amount of
refund because petitioner failed to present the
quarterly Income Tax Returns (ITRs) for CY
2004. To the CIR, the presentation of the 2004
quarterly ITRs was indispensable in proving
petitioner’s entitlement to the claimed
amount because it would prove that no carry-
over of unutilized and excess CWT for the four
(4) quarters of CY 2003 to the succeeding four
(4) quarters of CY 2004 was made. In the
absence of said ITRs, no refund could be
granted. In the CIR’s view, this was in
accordance with the irrevocability rule under
Section 76 of the NIRC which reads:
SEC. 76. Final Adjustment Return. – Every
corporation liable to tax under Section 27 shall
file an adjustment return covering the total
taxable income for the preceding calendar or
fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is
not equal to the total tax due on the entire
taxable income of that year, the corporation
shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credits; or
(C) Be credited or refunded with the excess
amount paid, as the case may be.
In case the corporation is entitled to a tax
credit or refund of the excess estimated
quarterly income taxes paid, the excess
amount shown on its final adjustment return
may be carried over and credited against the
estimated quarterly income tax liabilities for
the taxable quarters of the succeeding taxable
years. Once the option to carry-over and apply
the excess quarterly income tax against
income tax due for the taxable quarters of the
succeeding taxable years has been made, such
option shall be considered irrevocable for that
taxable period and no application for cash
refund or issuance of a tax credit certificate
shall be allowed therefor.
On July 27, 2011, the CTA-Division reversed
itself. In an Amended Decision,4 it denied the
entire claim of petitioner. It reasoned out that
petitioner should have presented as evidence
its first, second and third quarterly ITRs for the
year 2004 to prove that the unutilized CWT
being claimed had not been carried over to the
succeeding quarters. Thus:
WHEREFORE,in view of the foregoing,
petitioner’s Motion for Partial Reconsideration
is hereby DENIED while respondent’s Motion
for Reconsideration is hereby GRANTED.
Accordingly, the Decision dated April 13, 2010
granting petitioner’s claim in the reduced
amount of ₱2,737,903.34 is hereby REVERSED
AND SET ASIDE. Consequently, the instant
Petition for Review is hereby DENIEDdue to
insufficiency of evidence.
SO ORDERED.5
Aggrieved, petitioner elevated the case to the
CTA En Bancpraying for the reversal of the
Amended Decision of the CTA Division.
In its March 22, 2013 Decision,6 the CTA-En
Bancaffirmed the Amended Decision of the
CTA-Division. It stated that before a cash
refund or an issuance of tax credit certificate
for unutilized excess tax credits could be
granted, it was essential for petitioner to
establish and prove, by presenting the
quarterly ITRs of the succeeding years, that
the excess CWT was not carried over to the
succeeding taxable quarters considering that
the option to carry over in the succeeding
taxable quarters could not be modified in the
final adjustment returns (FAR).Because
petitioner did not present the first, second and
third quarterly ITRsfor CY 2004, despite having
offered and submitted the Annual ITR/FAR for
the same year, the CTA-En Banc stated that
the petitioner failed to discharge its burden,
hence, no refund could be granted. In
justifying its conclusions, the CTA-En Banccited
its own case of Millennium Business Services,
Inc.v. Commissioner of Internal Revenue
(Millennium)7 wherein it held as follows:
Since the burden of proof is upon the claimant
to show that the amount claimed was not
utilized or carried over to the succeeding
taxable quarters, the presentation of the
succeeding quarterly income tax return and
final adjustment return is indispensable to
prove that it did not carry over or utilized the
claimed excess creditable withholding taxes.
Absent thereof, there will be no basis for a
taxpayer’s claim for refund since there will be
no evidence that the taxpayer did not carry
over or utilize the claimed excess creditable
withholding taxes to the succeeding taxable
quarters.
Significantly, a taxpayer may amend its
quarterly income tax return or annual income
tax return or Final Adjustment Return, which
in any case may modify the previous intention
to carry-over, apply as tax credit certificate or
refund, as the case may be. But the option to
carry over in the succeeding taxable quarters
under the irrevocability rule cannot be
modified in its final adjustment return.
The presentation of the final adjustment
return does not shift the burden of proof that
the excess creditable withholding tax was not
utilized or carried overto the first three (3)
taxable quarters. It remains with the taxpayer
claimant. It goes without saying that final
adjustment returns of the preceding and the
succeeding taxable years are not sufficient to
prove that the amount claimed was utilized or
carried over to the first three (3) taxable
quarters.
The importance of the presentation of the
succeeding quarterly income tax return and
the annual income tax return of the
subsequent taxable year need not be overly
emphasized. All corporations subject to
income tax, are required to file quarterly
income tax returns, on a cumulative basis for
the preceding quarters, upon which payment
of their income tax has been made. In addition
to the quarterly income tax returns,
corporations are required to file a final or
pg. 8
adjustment return on or before the fifteenth
day of April. The quarterly income tax return,
like the final adjustment return, is the most
reliable firsthand evidence of corporate acts
pertaining to income taxes, as it includes the
itemization and summary of additions to and
deductions from the income tax due. These
entries are not without rhyme or reason. They
are required, because they facilitate the tax
administration process, and guide this Court to
the veracity of a petitioner’s claim for refund
without which petitioner could not prove with
certainty that the claimed amount was not
utilized or carried over to the succeeding
quarters or the option to carry over and apply
the excess was effectively chosen despite the
intent to claim a refund.
In the same vein, if the government wants to
disprove that the excess creditable
withholding tax was not utilized or carried
over to the succeeding taxable quarters, the
presentation of the succeeding quarterly
income tax return and the annual income tax
return of the subsequent taxable year
indicating utilization or carrying over are [sic]
indispensible. However, the claimant must
first establish its claim for refund, such that it
did not utilize or carry over or that it opted to
utilize and carry over to the 1 st, 2nd, 3rd
quarters and final adjustment return of the
succeeding taxable year.
Concomitantly, the presentation of the
quarterly income tax return and the annual
income tax return to prove the fact that excess
creditable withholding tax was not utilized or
carried over or opted to be utilized and carried
over to the 1st, 2nd, 3rd quarters and final
adjustment return of the succeeding taxable
quarter is not only for convenience to facilitate
the tax administration process but it is part of
the requisites to establish the claim for refund.
Section 76 of the NIRC of 1997 provides that if
the taxpayer claimant carries over and applies
the excess quarterly income tax against the
income tax due for the taxable quarters of the
succeeding taxable years, the same is
irrevocable and no application for cash refund
or issuance of a tax credit certificate shall be down in Philam, State Landand PERF Realty
allowed.8 cases wherein the submission of quarterly ITRs
in a case for tax refund was held by this Court
Hence, this petition. as not mandatory.
Noteworthy is the fact that the CTA-En In its Comment,15 the CIR counters that even if
Bancruling was met with two dissents from the taxpayer signifies the option for either tax
Associate Justices Juanito C. Castañeda (Justice refund or carry-over as tax credit, this does
Castañeda) and Esperanza R. Fabon-Victorino not ipso facto confer the right to avail of the
(Justice Fabon-Victorino). option immediately. There is a need, according
to the CIR, for an investigation to ascertain the
In his Dissenting Opinion9 which was
correctness of the corporate returns and the
concurred in by Justice FabonVictorino, Justice
amount sought to be credited; and part of
Castañeda expressed the view that the CTA-En
which is to look into the quarterly returns so
Banc should have reinstated the CTA-Division’s
that it may be determined whether or not
original decision because in the cases of
excess and unutilized CWT was carried over
Philam Asset Management Inc. v.
into the succeeding quarters of the next
Commissioner of Internal Revenue
taxable year. Because the pertinent quarterly
(Philam);10 State Land Investment Corporation
ITRs were not presented, the CIR submits that
v. Commissioner of Internal Revenue (State
the petitioner failed to prove its right to a tax
Land);11 Commissioner of Internal Revenue v.
refund.
PERF Realty Corporation (PERF Realty);12 and
Commissioner of Internal Revenue v. Mirant Issue
(Philippines) Operations, Corporation
(Mirant),13this Court already ruled that The sole issue here is whether the submission
requiring the ITR or the FAR for the succeeding and presentation of the quarterly ITRs of the
year in a claim for refund had no basis in law succeeding quarters of a taxable year is
and jurisprudence. According to him, the indispensable in a claim for refund.
submission of the FAR of the succeeding
The Court’s Ruling
taxable year was not required under the law to
prove the claimant’s entitlement to excess or
The Court recognizes, as it always has, that the
unutilized CWT, and by following logic, the
burden of proof to establish entitlement to
submission of quarterly income tax returns for
refund is on the claimant taxpayer.16 Being in
the subsequent taxable period was likewise
the nature of a claim for exemption,17 refund
unnecessary. He found no justifiable reason
is construed in strictissimi juris against the
not to follow the existing rulings of this Court.
entity claiming the refund and in favor of the
Petitioner’s reasoning in this petition echoes
taxing power.18 This is the reason why a
the dissenting opinion of Justice Castaneda. It
claimant must positively show compliance
further submits that despite the non-
with the statutory requirements provided for
presentation of the quarterly ITRs, it has
under the NIRC in order to successfully pursue
sufficiently shown that the excess CWT for CY
one’s claim. As implemented by the applicable
2003 was not carried over or applied to
rules and regulations and as interpreted in a
itsincome tax liabilities for CY 2004, as shown
vast array of decisions, a taxpayer who seeks a
in the Annual ITR for 2004 it submitted. Thus,
refund of excess and unutilized CWT must:
petitioner insists that its refund should have
been granted. Petitioner further avers, in its
1) File the claim with the CIR within the two
Reply,14 that even if Millennium Business case
year period from the date of payment of the
was applicable, such must be given
tax;
prospective effect considering that this case
was litigated on the basis of the doctrines laid
2) Show on the return that the income
received was declared as part of the gross
income; and
3) Establish the fact of withholding by a copy
of a statement duly issued by the payor to the
payee showing the amount paid and the
amount of tax withheld.19
The original decision of the CTA-Division made
plain that the petitioner complied with the
above requisites in so far as the reduced
amount of ₱2,737,903.34 was concerned. In
the amended decision, however, it was
pointed out that because petitioner failed to
present the quarterly ITRs of the subsequent
year, there was an impossibility of determining
compliance with the irrevocability rule under
Section 76 of the NIRC as in those documents
could be found evidence of whether the
excess CWT was applied to its income tax
liabilities in the quarters of 2004. The
irrevocability rule under Section 76 of the NIRC
means that once an option, either for refund
or issuance of tax credit certificate or carry-
over of CWT has been exercised, the same can
no longer be modified for the succeeding
taxable years.20 For said reason, the CTA-En
Banc affirmed the conclusion in the amended
decision that because of the said impossibility,
the claim for refund was not substantiated.
The CIR agrees with the disposition of the CTA-
En Banc, stressing that the petitioner failed to
carry out the burden of showing that no
carryover was made when it did not present
the quarterly ITRs for CY 2004.
Petitioner disagrees, as the dissents did, that
the non-submission of quarterly ITRs is fatal to
its claim.
Hence, the issue on the indispensability of
quarterly ITRs of the succeeding taxable year
in a claim for refund.
The Court finds for the petitioner.
There is no question that those who claim
must not only prove its entitlement to the
excess credits, but likewise must prove that no
pg. 9
carry-over has been made in cases where
refund is sought.
In this case, the fact of havingcarried over
petitioner’s 2003 excess credits to succeeding
taxable year isin issue. According to the CTA-
En Bancand the CIR, the only evidence that can
sufficiently show that carrying over has been
made is to present the quarterly ITRs. Some
members of this Court adhere to the same
view.
The Court however cannot.
Proving that no carry-over has been made
does not absolutely require the presentation
of the quarterly ITRs.
In Philam, the petitioner therein sought for
recognition of its right to the claimed refund of
unutilized CWT. The CIR opposed the claim, on
the grounds similar to the caseat hand, that no
proof was provided showing the non-carry
over of excess CWT to the subsequent
quarters of the subject year. In a categorical
manner, the Court ruled that the presentation
of the quarterly ITRs was not necessary.
Therein, it was written:
Requiring that the ITR or the FAR of the
succeeding year be presented to the BIR in
requesting a tax refund has no basis in law and
jurisprudence.
First, Section 76 of the Tax Code does not
mandate it. The law merely requires the filing
of the FAR for the preceding – not the
succeeding – taxable year. Indeed, any
refundable amount indicated in the FAR of the
preceding taxable year may be credited
against the estimated income tax liabilities for
the taxable quarters of the succeeding taxable
year. However, nowhere is there even a tinge
of a hint in any provisions of the [NIRC] that
the FAR of the taxable year following the
period to which the tax credits are originally
being applied should also be presented to the
BIR.
Second, Section 5 of RR 12-94, amending
Section 10(a) of RR 6-85, merely provides that
claims for refund of income taxes deducted
and withheld from income payments shall be
given due course only (1) when it is shown on
the ITR that the income payment received is
being declared part of the taxpayer’s gross
income; and (2) when the fact of withholding
is established by a copy of the withholding tax
statement, duly issued by the payor to the
payee, showing the amount paid and the
income tax withheld from that amount.
It has been submitted that Philam cannot be
cited as a precedent to hold that the
presentation of the quarterly income tax
return is not indispensable as it appears that
the quarterly returns for the succeeding year
were presented when the petitioner therein
filed an administrative claim for the refund of
its excess taxes withheld in 1997.
It appears however that there is
misunderstanding in the ruling of the Court in
Philam. That factual distinction does not
negate the proposition that subsequent
quarterly ITRs are not indispensable. The logic
in not requiring quarterly ITRs of the
succeeding taxable years to be presented
remains true to this day. What Section 76
requires, just like in all civil cases, is to prove
the prima facie entitlement to a claim,
including the fact of not having carried over
the excess credits to the subsequent quarters
or taxable year. It does not say that to prove
such a fact, succeeding quarterly ITRs are
absolutely needed.
This simply underscores the rulethat any
document, other than quarterly ITRs may be
used to establish that indeed the non-carry
over clause has been complied with, provided
that such is competent, relevant and part of
the records. The Court is thusnot prepared to
make a pronouncement as to the
indispensability of the quarterly ITRs in a claim
for refund for no court can limit a party to the
means of proving a fact for as long as they are
consistent with the rules of evidence and fair
play. The means of ascertainment of a fact is
best left to the party that alleges the same.
The Court’s power is limited only to the
appreciation of that means pursuant to the
prevailing rules of evidence. To stress, what
the NIRC merely requires is to sufficiently
prove the existence of the non-carry over of
excess CWT in a claim for refund.
The implementing rules similarly support this
conclusion, particularly Section 2.58.3 of
Revenue Regulation No. 2-98 thereof. There, it
provides as follows:
SECTION 2.58.3. Claim for Tax Credit or
Refund.
(A) The amount of creditable tax withheld shall
be allowed as a tax credit against the income
tax liability of the payee in the quarter of the
taxable year in which income was earned or
received.
(B) Claims for tax credit or refund of any
creditable income tax which was deducted and
withheld on income payments shall be given
due course only when it is shown that the
income payment has been declared as part of
the gross income and the fact of withholding is
established bya copy of the withholding tax
statement duly issued by the payer to the
payee showing the amount paid and the
amount of tax withheld therefrom.
xxx xxx xxx
Evident from the above is the absence of any
categorical pronouncement of requiring the
presentation of the succeeding quarterly ITRs
in order to prove the fact of non-carrying over.
To say the least, the Court rules that as to the
means of proving it, Ithas no power to unduly
restrict it.
In this case, it confounds the Court why the
CTA did not recognize and discuss in detail the
sufficiency of the annual ITR for 2004,21 which
was submitted by the petitioner. The CTA in
fact said:
In the present case, while petitioner did offer
its Annual ITR/Final Adjustment Return for
taxable year 2004, it appears that petitioner
miserably failed to submit and offer as part of
its evidence the first, second, and third
Quarterly ITRs for the year 2004.
Consequently, petitioner was not able to
prove that it did not exercise its option to
carry-over its excess CWT.22
Petitioner claims that the requirement of
proof showing the non-carry over has been
established in said document.
Indeed, an annual ITR contains the total
taxable income earned for the four (4)
quarters of a taxable year, as well as
deductions and tax credits previously reported
or carried over in the quarterly income tax
returns for the subject period. A quick look
atthe Annual ITR reveals this fact:
Aggregate Income Tax Due
Less Tax Credits/Payments
Prior Year’s excess Credits – Taxes withheld
Tax Payment (s) for the Previous Quarter (s) of
the same taxable year other than MCIT
xxx xxx xxx
Creditable Tax Withheld for the Previous
Quarter (s)
Creditable Tax Withheld Per BIR Form No.
2307 for this Quarter
xxx xxx x x x23
It goes without saying that the annual ITR
(including any other proof that may be
sufficient to the Court)can sufficiently reveal
whether carry over has been made in
subsequent quarters even if the petitioner has
chosen the option of tax credit or refund inthe
immediately 2003 annual ITR. Section 76 of
the NIRC requires a corporation to file a Final
Adjustment Return (or Annual ITR) covering
the total taxable income for the preceding
calendar or fiscal year. The total taxable
income contains the combined income for the
four quarters of the taxable year, as well as
the deductions and excess tax credits carried
over in the quarterly income tax returns for
the same period.
pg. 10
If the excess tax credits of the preceding year
were deducted, whether in whole or in part,
from the estimated income tax liabilities of
any of the taxable quarters of the succeeding
taxable year, the total amount of the tax
credits deducted for the entire taxable year
should appear in the Annual ITR under the
item "Prior Year’s Excess Credits." Otherwise,
or if the tax credits were carried over to the
succeeding quarters and the corporation did
not report it in the annual ITR, there would be
a discrepancy in the amounts of combined
income and tax credits carried over for all
quarters and the corporation would end up
shouldering a bigger tax payable. It must be
remembered that taxes computed in the
quarterly returns are mere estimates. It is the
annual ITR which shows the aggregate
amounts of income, deductions, and credits
for all quarters of the taxable year. It is the
final adjustment return which shows whether
a corporation incurred a loss or gained a profit
during the taxable quarter.24 Thus, the
presentation of the annual ITR would suffice in
proving that prior year’s excess credits were
not utilized for the taxable year in order to
make a final determination of the total tax
due.
In this case, petitioner reported an
overpayment in the amount of ₱7,194,213.00
in its annual ITR for the year ended December
2003:
Annual ITR 2003
Income Tax Due 1,259,259.00
Less: Prior Year’s Excess (4,379,518.00)
Credits (2002 Annual ITR)
Creditable Tax Withheld for (4,073,954.00)
the 4th Quarter
Tax Payable / (7,194,213.00)
(Overpayment)
For the overpayment, petitioner chose the
option "To be issued a Tax Credit Certificate."
In its Annual ITR for the year ended December
2004, petitioner did not report the Creditable
Tax Withheld for the 4th quarter of 2003 in
the amount of ₱4,073,954.00 as prior year’s
excess credits. As shown in the 2004 ITR:
Annual ITR 2004
Income Tax Due 1,321,409.00
Less: Prior Year’s Excess - enough and deny a claim even if the minimum
Credits
Creditable Tax Withheld for (3,689,419.00)
the 4th
Quarter
Tax Payable / (2,368,010.00)
(Overpayment)
Verily, the absence of any amount written in
the Prior Year excess Credit – Tax Withheld
portion of petitioner’s 2004 annual ITR clearly
shows that no prior excess credits were
carried over in the first four quarters of 2004.
And since petitioner was able to sufficiently
prove that excess tax credits in 2003 were not
carried over to taxable year 2004 by leaving
the item "Prior Year’s Excess Credits" as blank
in its 2004 annual ITR, then petitioner is
entitled to a refund. Unfortunately, the CTA, in
denying entirely the claim, merely relied on
the absence of the quarterly ITRs despite
being able to verify the truthfulness of the
declaration that no carry over was indeed
effected by simply looking at the 2004 annual
ITR.
At this point, worth mentioning is the fact that
subsequent cases affirm the proposition as
correctly pointed out by petitioner. State Land,
PERF and Mirantreiterated the rule that the
presentation of the quarterly ITRs of the
subsequent year is not mandatory on the part
of the claimant to prove its claims.
There are some who challenges the
applicability of PERF in the case at bar. It is
said that PERFis not in point because the
Annual ITR for the succeeding year had
actually been attached to PERF’s motion for
reconsideration with the CTA and had formed
part of the records of the case. Clearly, if the
Annual ITR has been recognized by this Court
in PERF, why then would the submitted 2004
Annual ITR in this case be insufficient despite
the absence of the quarterly ITRs? Why then
would this Court require more than what is
burden has been overcome? At best, the
existence of quarterly ITRs would have the
effect of strengthening a proven fact. And as
such, may only be considered corroborative
evidence, obviously not indispensable in
character. PERF simply affirms that quarterly
ITRs are not indispensable, provided that there
is sufficient proof that carrying over excess
CWT was not effected.
Stateland and Mirantare equally challenged. In
all these cases however, the factual
distinctions only serve to bolster the
proposition that succeeding quarterly ITRs are
not indispensable. Implicit from all these cases
is the Court’s recognition that proving carry-
over is an evidentiary matter and that the
submission of quarterly ITRs is but a means to
prove the fact of one’s entitlement to a refund
and not a condition sine qua non for the
success of refund. True, it would have been
better, easier and more efficient for the CTA
and the CIR to have as basis the quarterly ITRs,
but it is not the only way considering further
that in this case, the Annual ITR for 2004 is
sufficient. Courts are here to painstakingly
weigh evidence so that justice and equity in
the end will prevail.
It must be emphasized that once the
requirements laid down by the NIRC have
been met, a claimant should be considered
successful in discharging its burden of proving
its right to refund. Thereafter, the burden of
going forward with the evidence, as distinct
from the general burden of proof, shifts to the
opposing party,25 that is, the CIR. It is then the
turn of the CIR to disprove the claim by
presenting contrary evidence which could
include the pertinent ITRs easily obtainable
from its own files.
All along, the CIR espouses the viewthat it
must be given ample opportunity to
investigate the veracity of the claims. Thus,
the Court asks: In the process of investigation
at the administrative level to determine the
right of the petitioner to the claimed amount,
did the CIR, with all its resources even attempt
to verify the quarterly ITRsit had in its files?
Certainly, it did not as the application was met
by the inaction of the CIR. And if desirous in its
effort to clearly verify petitioner’s claim, it
should have had the time, resources and the
liberty to do so. Yet, nothing was produced
during trial to destroy the prima facie right of
the petitioner by counterchecking the claims
with the quarterly ITRs the CIR has on its file.
To the Court, it seems that the CIR languished
on its duties to ascertain the veracity of the
claims and just hoped that the burden would
fall on the petitioner’s head once the issue
reaches the courts.
This mindset ignores the rule that the CIR has
the equally important responsibility of
contradicting petitioner’s claim by presenting
proof readily on hand once the burden of
evidence shifts to its side. Claims for refund
are civil in nature and as such, petitioner, as
claimant, though having a heavy burden of
showing entitlement, need only prove
preponderance of evidence in order to recover
excess credit in cold cash. To review,
"[P]reponderance of evidence is [defined as]
the weight, credit, and value of the aggregate
evidence on either sideand is usually
considered to be synonymous with the term
‘greater weight of the evidence’ or ‘greater
weight of the credible evidence.’ It is evidence
which is more convincing to the court
asworthy of belief than that which is offered in
opposition thereto.26
The CIR must then be reminded that in Philam,
the CIR’s "failure to present[the quarterly ITRs
and AFR] to support its contention against the
grant of a tax refund to [a claimant] is certainly
fatal." PERF reinforces this with a sweeping
pg. 11
statement holding that the verification process
is not incumbent on PERF[or any claimant for
that matter]; [but] is the duty of the CIR to
verify whether xxx excess incometaxes [have
been carried over].
And should there be a possibility that a
claimant may have violated the irrevocability
rule and thereafter claim twice from its
credits, no one is to be blamed but the CIR for
not discharging its burden of evidence to
destroy a claimant’s right to a refund. At any
rate, a claimant who defrauds the government
cannot escape liability be it criminal or civil in
nature.
Verily, with the petitioner having complied
with the requirements for refund, and without
the CIR showing contrary evidence other than
its bare assertion of the absence of the
quarterly ITRs, copies of which are easily
verifiable by its very own records, the burden
of proof of establishing the propriety of the
claim for refund has been sufficiently
discharged. Hence, the grant of refund is
proper.
The Court does not, and cannot, however,
grant the entire claimed amount as it finds no
error in the original decision of the CTA
Division granting refund to the reduced
amount of ₱2,737,903.34. This finding of fact
is given respect, if not finality, as the
CTA,27 which by the very nature of its functions
of dedicating itself exclusively to the
consideration of the tax problems has
necessarily developed an expertise on the
subject.28 It being the case, the Court partly
grants this petition to the extent of reinstating
the April 23, 2010 original decision of the CTA
Division.
The Court reminds the CIR that substantial
justice, equity and fair play take precedence
over technicalities and legalisms.1âwphi1 The
government must keep in mind that it has no
right to keep the rponey not belonging to it,
thereby enriching itself at the expense of the
law-abiding citizen29 or entities who have
complied with the requirements of the law in
order to forward the claim for refund. Under
the principle of solution ihdebiti provided in
Article 2154 of the Civil Code, the CIR must
return anythihg it has received.30
Finally, even assuming that the Court reverses
itself and pronounces the indispensability of
presenting the quarterly ITRs to prove
entitlement to the claimed refund, petitioner
should not be Brejudiced for relying on Philam.
The CTA En Banc merely based its
pronouncement on a case that does not enjoy
the benefit of stare decis et non quieta
movere which means "to adhere to
precedents, and not to unsettle things which
are established."31 As between a CTA En Banc
Decision (Millennium) and this Court's
Decision (Philam), it is elementary that the
latter should prevail.
WHEREFORE, the Court partly grants the
petition. The March 22, 2013 Decision of the
Court of Tax Appeals En Banc is REVERSED. The
April 13, 2010 Decision of the Court of Tax
Appeals Special First Division is REINSTATED.
Respondent Commissioner of Internal
Revenue is ordered to REFUND to petitioner
the amount of ₱2,737,903.34 as excess
creditable withholding tax paid for taxable
year 2003.
SO ORDERED.
G.R. No. 188016 January 14, 2015
REPUBLIC OF THE PHILIPPINES, represented
by the COMMISSIONER OF INTERNAL
REVENUE, Petitioner,
vs.
TEAM (PHILS.) ENERGY CORPORATION
(formerly MIRANT (PHILS.) ENERGY
CORPORATION), Respondent.
DECISION
BERSAMIN, J.:
The Republic of the Philippines, represented
by the Commissioner of Internal Revenue,
appeals the decision promulgated on April 15,
2009,1 whereby the Court of Tax Appeals En
Banc (CTA En Banc) upheld the decision of the
CTA in Division rendered on May 15, 2008
ordering the Commissioner of Internal
Revenue to refund or to issue a tax credit
certificate in favor of the respondent in the
modified amount of ₱16,366,412.59
representing the respondent's excess and
unutilized creditable withholding taxes for
calendar years 2002 and 2003. Antecedents
Respondent Mirant (Philippines) Energy
Corporation, a domestic corporation, is
primarily engaged in the business of
developing, designing, constructing, erecting,
assembling, commissioning, owning,
operating, maintaining, rehabilitating, and
managing gas turbine and other power
generating plants and related facilities for
conversion into electricity, coal, distillate and
other fuel provided by and under contract
with the Government, or any subdivision,
instrumentality or agency thereof, or any
government-owned or controlled corporations
or any entity engaged in the development,
supply or distribution of energy.2 On August
16, 2001, the respondent filed with the
Securities and Exchange Commission (SEC) its
Amended Articles of Incorporation stating its
intent to change its corporate name from
Mirant (Philippines) Mobile Corporation to
Mirant (Philippines) Energy Corporation; and
to include the business of supplying and
delivering electricity and providing services
necessary in connection with the supply or
delivery of electricity. The SEC approved the
amendment on October 22, 2001.3
The respondent filed its annual income tax
return (ITR) for calendar years 2002 and 2003
on April 15, 2003 and April 15, 2004,
respectively, reflecting overpaid income taxes
or excess creditable withholding taxes in the
amounts of ₱6,232,003.00 and ₱10,134,410.00
for taxable years 2002 and 2003,
respectively.4 It indicated in the ITRs its option
for the refund of the tax overpayments for
calendar years 2002 and 2003.5
On March 22, 2005, the respondent filed an
administrative claim for refund or issuance of
tax credit certificate with the Bureau of
Internal Revenue (BIR) in the total amount of
₱16,366,413.00, representing the overpaid
income tax or the excess creditable
withholding tax of the respondent for calendar
years 2002 and 2003.6
Due to the inaction of the BIR and in order to
toll the running of the two-year prescriptive
period for claiming a refund under Section 229
of the National Internal Revenue Code (NIRC)
of 1997, the respondent filed a petition for
review in the Court of Tax Appeals (CTA) on
April 14, 2005.7 In the answer, the petitioner
interposed the following special and
affirmative defenses, to wit:
xxxx
3. He reiterates and repleads the preceding
paragraphs of this answer as part of his Special
and Affirmative Defenses;
4. Petitioner’s claim for refund is still subject
to the administrative routinary
investigation/examination by the respondent's
Bureau;
5. Taxes paid and collected are presumed to
have been made in accordance with law and
implementing regulations, hence, not
refundable.
6. Petitioner's claim for refund/issuance of tax
credit in the amount of ₱16,366,413.00, as
alleged overpaid income taxes or excess
creditable withholding taxes for taxable year
ended December 31, 2002 and December 31,
2003 were not fully substantiated by proper
documentary evidence.
7. Petitioner failed to prove that the amount
of ₱16,366,413.00as alleged overpaid income
taxes or excess creditable withholding taxes
for taxable year ended December 31, 2002 and
December 31, 2003 were included as part of
its gross income for the said taxable years
2002 and 2003, and did not carry-over to the
succeeding taxable quarter/year the subject of
pg. 12
its claim, and the same were not utilized in
payment of its income tax liability for the
succeeding taxable quarter/year.
8. The filing of the instant petition for review
with this Honorable Court was premature
since respondent was not given an ample
opportunity to examine its claim for refund;
9. Assuming but without admitting that
petitioner is entitled to tax refund, it is
incumbent upon the latter to show that it
complied with the provisions of Sections 204in
relation to Section 230 (now 229)of the Tax
Code. Otherwise, its failure to prove the same
is fatal to its claim for refund.
10. Claims for refund are construed strictly
against the claimant for the same partake the
nature of exemption from taxation
(Commissioner of Internal Revenue v.
Ledesma, 31 SCRA 95) and as such, they are
looked upon with disfavor (Western Minolco
Corp. v. Commissioner of Internal Revenue,
124 SCRA 121).8
On May 15, 2008, the CTA in Division rendered
its decision in favor of the respondent,
disposing thusly:
WHEREFORE, the instant "Petition for Review"
is hereby GRANTED. Accordingly, respondent
is hereby ORDERED TO REFUND or TO ISSUE A
TAX CREDIT CERTIFICATE in favor of petitioner
in the modified amount of SIXTEEN MILLION
THREE HUNDRED SIXTY-SIX THOUSAND FOUR
HUNDRED TWELVE AND 59/100
(₱16,366,412.59), representing petitioner's
excess and unutilized creditable withholding
taxes for calendar years 2002 and 2003. SO
ORDERED.9
The CTA in Division found that the respondent
had signified in its ITRs for the same years its
intent to have its excess creditable tax
withheld for calendar years 2002 and 2003 be
refunded; that the respondent’s
administrative and judicial claims for refund
had been timely filed within the two-year
prescriptive period under Section 204 (C) in
relation to Section 229 of the NIRC; that the
fact of withholding had been established by
the respondent because it had submitted its
certificate of creditable tax withheld at source
showing that the aggregate amount of
₱17,168,749.60 constituted the CWT withheld
by the respondent onits services to Republic
Cement Corporation, Mirant (Philippines)
Industrial Power Corporation and Solid
Development Corporation for taxable years
2002 and 2003; and that the income from
which the CWT had been withheld was duly
declared as part of the respondent’s income in
itsannual ITRs for 2002 and 2003.
The petitioner then filed a motion for
reconsideration, but the CTA in Division denied
the motion on September 5, 2008.
The petitioner brought a petition for review
before the CTA En Banc raising two issues,
namely:
I.
THE SECOND DIVISION OF THISHONORABLE
COURT ERRED IN HOLDING THAT
RESPONDENT IS ENTITLED TO ITS CLAIMED
REFUND OF EXCESS ANDUNUTILIZED
CREDITABLE WITHHOLDING TAXES FOR
CALENDAR YEARS 2002 AND 2003, SINCE
THERE WAS A VIOLATION ON THE PART OF
THE RESPONDENT TO FULLY COMPLYWITH
THE REQUIREMENTS UNDER SECTION 76 OF
THE 1997 TAX CODE.
II.
THE SECOND DIVISION OF THIS HONORABLE
COURT ERRED IN NOT APPLYING THE RULE
THAT TAX REFUNDS BEING IN THE NATURE OF
TAX EXEMPTION ARE CONSTRUED
STRICTISSIMI JURIS AGAINST THE PERSON OR
ENTITY CLAIMING THE EXEMPTION.10
On April 15, 2009, however, the CTA En Banc
rendered its assailed judgment, disposing thus:
WHEREFORE, the instant petition is hereby
DISMISSED. Accordingly, the assailed Decision
and Resolution are hereby AFFIRMED.
SO ORDERED.11
The CTA En Banc held that the defenses raised
by the petitioner were general and standard
arguments to oppose any claim for refund by a
taxpayer; that the trial proper was conducted
in the CTA in Division, during which the
respondent presented evidence of its
entitlement to the refund and in negation of
the defenses of the petitioner; and that the
petitioner raised the issue on the non-
presentment of the respondent’s quarterly
returns for 2002 and 2003 only in the petition
for review, which was not allowed, stating
thusly:
This cannot be allowed. Petitioner had the
opportunity to raise this issue either during
the trial or at the latest, in his Motion for
Reconsideration of the assailed Decision of the
Court in Division but he cited only the
following grounds in his motion: x x x
xxxx
In its assailed Resolution, the Court in Division
reiterated its finding that respondent had
complied with the substantiation
requirements for its entitlement to refund. It
also ruled that the alleged under-declaration
of respondent cannot be determined by the
Court since it is the duty of the BIR to
investigate and confirm the truthfulness of
each and every item in the ITR. It finally
declared that respondent, by presenting
copies of CWT certificates of unutilized CWT,
sufficiently complied with the requirements of
the fact of withholding.
Thus, petitioner's averment that Section 76 of
the NIRC speaks of quarterly income tax
payments which consequently requires the
offer in evidence of quarterly income tax
returns is raised for the first time on appeal
with the Court En Banc. It is a well-settled rule
that points of law, theories, issues and
arguments not adequately brought to the
attention of the lower court need not be
considered by the reviewing court as they
cannot be raised for the first time on appeal. x
xx
xxxx
In the present case, petitioner could have
simply exercised his power to examine and
verify respondent's claim for refund by
presenting the latter's quarterly income tax
returns. The BIR ought to have on file the
originals or copies of respondent's quarterly
income tax returns for the subject years, on
the basis of which it could rebut respondent's
claim that it did not carry-over its unutilized
and excess creditable withholding taxes for
taxable years 2002 and 2003 to the succeeding
taxable quarters of taxable years 2003 and
2004. Petitioner's failure to present these vital
documents before the Court in Division to
support his contention against the grant of a
tax refund to respondent, is fatal.
At any rate, Section 76 of the 1997 NIRC
speaks only of the filing of the Final Adjusted
Return and as held by the Supreme Court, the
Annual ITR or "(t)he Final Adjustment Return is
the most reliable first hand evidence of
corporate acts pertaining to income taxes. In it
are found the itemization and summary of
additions to and deductions from income
taxes due. These entries are not without
rhyme or reason. They are required, because
they facilitate the tax administration process."
And in this case, respondent offered in
evidence its Annual ITRs for calendar years
2002, 2003, and 2004.12
As to whether the respondent proved its
entitlement to the refund, the CTA En Banc
declared:
However, petitioner's entitlement torefund is
still subject to the satisfaction of the
requirements laid down by the NIRC of 1997,
as amended, namely:
1. That the claim for refund was filed within
the two-year reglamentary period pursuant to
Section 230 of the Tax Code, as amended;
2. That the fact of withholding isestablished by
a copy of the statement duly issued by the
payor to the payee showing the amount paid
and the amount withheld therefrom; and
pg. 13
3. That the income upon which the taxes were
withheld is included as part of the gross
income declared in the income tax return of
the recipient.
Petitioner complied with the first requisite.
The subject claim involves calendar years 2002
and 2003. Petitioner filed its Annual Income
Tax Returns on April 15, 2003 and April 15,
2004. Counting from these dates, petitioner
had until April 15, 2005 and April 15, 2006
within which to file its administrative and
judicial claims for refund. Petitioner filed with
the BIR its administrative claim for refund on
March 22, 2005. The instant petition was filed
on April 15,2005. Hence, both the
administrative and judicial claims for refund
weretimely filed within the two-year
prescriptive period.
Anent the second requirement, the Supreme
Court enunciated in the case of Banco Filipino
Savings and Mortgage Bank v. Court of
Appeals, Court of Tax Appeals and
Commissioner of Internal Revenue that the
fact of withholding isestablished by a copy of
the statement duly issued by the payor to the
payee through the Certificates of Creditable
Taxes Withheld at Source. In the present case,
petitioner submitted to this Court as part of its
documentary evidence ten (10) Certificates of
Creditable Taxes Withheld at Source. x x x
xxxx
The aggregate amount of ₱17,168,749.60
constitutes the creditable withholding taxes
withheld from the Certificates of Creditable
Tax Withheld at Source on its services to
Republic Cement Corporation, Mirant
(Philippines) Industrial Power Corporation and
Solid Development Corporation for taxable
years 2002 and 2003.
Regarding the third requisite, the income from
which the creditable taxes were withheld were
duly declaredas part of petitioner's income in
its Annual Income Tax Returns for 2002 and
2003.13 x x x
Aggrieved, the petitioner has brought this
appeal.
Issue
The issue is whether or not the respondent
proved its entitlement to the refund.
The petitioner asserts the necessity of
submission of the quarterly return of the
respondent to prove its entitlement to the
refund pursuant to Sec. 76 of the NIRC
because such quarterly returns would
establish the correctness of the total amount
of payments made and the taxes due as
reported on the adjusted return at the end of
the year. The petitioner insists that the
amount claimed for refund was not carried
over to the succeeding year; that the
submission of the quarterly return would
prevent the possibility of a claimant carrying
over the excess credit and then claiming a
refund for it; that the final adjustment return
was not sufficient to establish the
respondent’s claim for refund because it only
reflected the sum of the payments made and
the taxes due for the year; that the quarterly
return was necessary to prove that the sum, as
stated in the adjusted return, was correct; and
that should the respondent chose to carry
over the previous year’s excess credit, the
quarterly returns would prove that the
carrying-over was properly done during the
succeeding year.
In its comment/opposition, the respondent,
while admitting having the burden of proving
the factual basis for its claim for refund,
contends that it discharged its burden. It
counters that with the presentation of its
annual ITRs for the years 2002, 2003 and 2004,
it already properly established that its excess
creditable withholding taxes for taxable years
2002 and 2003 were not carried over to
succeeding taxable periods.
In its reply, the petitioner states that the issue
on the respondent’s failure to present its
quarterly income tax returns for taxable years
2002 and 2003, even if not raised by the
petitioner at the trial, could be raised before
the CTA En Banc, because it was interposed as
a defense in the answer; and that every issue
raised in an answer may be raised on appeal
even if it was not taken up in the court of
original jurisdiction.
Ruling
The petition is without merit.
Section 76 of the NIRC outlines the
mechanisms and remedies that a corporate
taxpayer may opt to exercise, viz:
Section 76. Final Adjusted Return.- Every
corporation liable to tax under Section 27 shall
file a final adjustment return covering the total
taxable income for the preceding calendar of
fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is
not equal to the total tax due on the entire
taxable income of that year, the corporation
shall either:
(A) Pay the balance of the tax still due; or
(B) Carry over the excess credit; or
(C) Be credited or refunded withthe excess
amount paid, as the case may be.
In case the corporation is entitled to a tax
credit or refund of the excess estimated
quarterly income taxes paid, the excess
amount shown on its final adjustment return
may be carried over and credited against the
estimated quarterly income tax liabilities for
the taxable quarters of the succeeding taxable
years. Once the option to carry over and apply
the excess quarterly income tax against
income tax due for the taxable years of the
succeeding taxable years has been made, such
option shall be considered irrevocable for that
taxable period and no application for cash
refund or issuance of a tax credit certificate
shall be allowed therefor. (emphasis supplied)
The two options are alternative and not
cumulative in nature, that is, the choice of one
precludes the other. The logic behind the rule,
according to Philam Asset Management, Inc. v.
Commissioner of Internal Revenue,14 is to ease
tax administration, particularly the self-
assessment and collection aspects. In Philam
Asset Management, Inc., the Court expounds
on the two alternative options of a corporate
taxpayer on how the choice of one option
precludes the other, viz:
The first option is relatively simple. Any tax on
income that is paid in excess of the amount
due the government may be refunded,
provided that a taxpayer properly applies for
the refund.
The second option works by applying the
refundable amount, as shown on the FAR of a
given taxable year, against the estimated
quarterly income tax liabilities of the
succeeding taxable year.
These two options under Section 76 are
alternative in nature. The choice of one
precludes the other. Indeed, in Philippine Bank
of Communications v. Commissioner of
Internal Revenue, the Court ruled that a
corporation must signify its intention –
whether to request a tax refund or claim a tax
credit– by marking the corresponding option
box provided in the FAR. While a taxpayer is
required to mark its choice in the form
provided by the BIR, this requirement is only
for the purpose of facilitating tax collection.
One cannot get a tax refund and a tax credit at
the same time for the same excess income
taxes paid. x x x (emphasis supplied)
In Commissioner of Internal Revenuev. Bank of
the Philippine Islands,15 the Court, citing the
pronouncement in Philam Asset Management,
Inc., points out that Section 76 of the NIRC of
1997 is clear and unequivocal in providing that
the carry-over option, once actually or
constructively chosen by a corporate taxpayer,
becomes irrevocable. The Court explains:
Hence, the controlling factor for the operation
of the irrevocability ruleis that the taxpayer
chose an option; and once it had already done
so, it could no longer make another one.
Consequently, after the taxpayer opts to carry-
over its excess tax credit to the following
taxable period, the question of whether or not
it actually gets to apply said tax credit is
pg. 14
irrelevant. Section 76 of the NIRC of 1997 is
explicit in stating that once the option to carry
over has been made, "no application for tax
refund or issuance of a tax credit certificate
shall be allowed therefor."
The last sentence of Section 76 of the NIRC of
1997 reads: "Once the option to carry-over
and apply the excess quarterly income tax
against income tax due for the taxable
quarters of the succeeding taxable years has
been made, such option shall be considered
irrevocable for that taxable periodand no
application for tax refund or issuance ofa tax
credit certificate shall be allowed therefor."
The phrase "for that taxable period" merely
identifies the excess income tax, subject of the
option, by referring to the taxable period
when it was acquired by the taxpayer. In the
present case, the excess income tax credit,
which BPI opted to carry over, was acquired by
the said bank during the taxable year 1998.
The option of BPI to carry over its 1998 excess
income tax credit is irrevocable; it cannot later
on opt to apply for a refund of the very same
1998 excess income tax credit.
The Court of Appeals mistakenly understood
the phrase "for that taxable period" as a
prescriptive period for the irrevocability rule.
This would mean that since the tax credit in
this case was acquired in 1998, and BPI opted
to carry it overto 1999, then the irrevocability
of the option to carry over expired by the end
of 1999, leaving BPI free to again take another
option as regards its 1998 excess income tax
credit. This construal effectively renders
nugatory the irrevocability rule. The evident
intent of the legislature, in adding the last
sentence to Section 76 of the NIRC of 1997, is
to keep the taxpayer from flip-flopping on its
options, and avoid confusion and complication
as regards said taxpayer's excess tax credit.
The interpretation of the Court of Appeals only
delays the flip-flopping to the end of each
succeeding taxable period.
The Court similarly disagrees in the declaration
of the Court of Appeals that to deny the claim
for refund of BPI, because of the irrevocability
rule, would be tantamount to unjust
enrichment on the part of the
government.1âwphi1 The Court addressed the
very same argument in Philam, where it
elucidated that there would be no unjust
enrichment in the event of denial of the claim
for refund under such circumstances, because
there would be no forfeiture of any amount in
favor of the government. The amount being
claimed asa refund would remain in the
account of the taxpayer until utilized in
succeeding taxable years, as provided in
Section 76 of the NIRC of 1997. It is worthy to
note that unlike the option for refund of
excess income tax, which prescribes after two
years from the filing of the FAR, there is no
prescriptive period for the carrying over of the
same. Therefore, the excess income tax credit
of BPI, which it acquired in 1998 and opted to
carry over, may be repeatedly carried over to
succeeding taxable years, i.e., to 1999, 2000,
2001, and so on and so forth, until actually
applied or credited to a tax liability of
BPI.16(emphasis ours) In the instant case, the
respondent opted to be refunded or to be
issued a tax credit certificate, not to carry over
the excess withholding tax for taxable year
2002 to the following taxable year. The taking
of the option was duly noted by the CTA En
Banc, citing the decision of the CTA in Division,
as follows:
Under Line 30 of the 2002 Annual ITR,
petitioner marked "x" the box "To be
refunded". In order toprove that petitioner did
not carryover its 2002 excess withholding tax,
petitioner presented its 2003 Annual ITR which
does not have any entry inLine 27A "Prior
Year's Excess Credits." Under Line 31 of the
same2003 Annual ITR, petitioner marked "x"
the box "To be refunded" and petitioner
presented its 2004 Annual ITR, showing no
entry in Line 27A "Prior Year's Excess Credit"
to prove that it did not carry-over its 2003
excess withholding tax.17
Consequently, the only issue that remains is
whether the respondent was entitled to the
refund of excess withholding tax.
The requirements for entitlement of a
corporate taxpayer for a refund or the
issuance of tax credit certificate involving
excess withholding taxes are as follows:
1. That the claim for refund was filed within
the two-year reglementary period pursuant to
Section 22918 of the NIRC;
2. When it is shown on the ITR that the income
payment received is being declared part of the
taxpayer’s gross income; and
3. When the fact of withholding is established
by a copy of the withholding tax statement,
duly issued by the payor to the payee, showing
the amount paidand income tax withheld from
that amount.
We do not expound anymore on the first
requirement because even the petitioner does
not contest that the respondent filed its
administrative and judicial claim for refund
within the statutory period.
With regard to the second requirement, it is
fundamental that the findings of fact by the
CTA in Divisionare not to be disturbed without
any showing of grave abuse of discretion
considering that the members of the Division
are in the best position to analyze the
documents presented by the
parties.19 Consequently, we adopt the findings
of the CTA in Division, which the CTA En Banc
cited, as follows.
The above mentioned declarations are further
supported by the testimonies of Ms. Imelda
Dela Cruz Tagama, petitioner’s Accounting
Manager and Mr. Ruben R. Rubio, the
Independent Certified Public Accountant
(ICPA) duly commissioned by the Court,
proving that the total amount of Creditable
Withholding Tax per petitioner's Annual ITRs
for calendar years ended December 31, 2002
and December 31, 2003 agrees with the total
amount of Creditable Withholding Tax
presented on petitioner’s Schedule of
Creditable Withholding Tax Certificates for the
calendar years ended December 31, 2002 and
December 31, 2003. Moreover, the total
amount of gross sales/revenue reported in the
Annual ITRs for calendar years 2002 and 2003
is equal to the amounts recorded in the
General Ledger Listing of the Creditable
Withholding Tax on the Transfer of Real
Property and Sale of Electricity, 2002
Reconciliation of Revenue per ITR and per
General Ledger. Hence, the third requirement
is satisfied.20
With respect to the third requirement, the
respondent proved that it had met the
requirement by presenting the 10 certificates
of creditable taxes withheld at source. The
petitioner did not challenge the respondent’s
compliance with the requirement.
We are likewise unmoved by the assertion of
the petitioner that the respondent should
have submitted the quarterly returns of the
respondent to show that it did not carry-over
the excess withholding tax to the succeeding
quarter. When the respondent was able to
establish prima facie its right to the refund by
testimonial and object evidence, the petitioner
should have presented rebuttal evidence to
shift the burden of evidence back to the
respondent. Indeed, the petitioner ought to
have its own copies of the respondent’s
quarterly returns on file, on the basis of which
it could rebut the respondent's claim that it
did not carry over its unutilized and excess
creditable withholding taxes for the
immediately succeeding quarters. The BIR's
failure to present such vital document during
the trial in order to bolster the petitioner's
contention against the respondent's claim for
the tax refund was fatal.21
WHEREFORE, we DENY the petition for review
on certiorari, and AFFIRM the decision
promulgated on April 15, 2009.
SO ORDERED.
pg. 15
G.R. No. 172231 February 12, 2007
COMMISSIONER OF INTERNAL
REVENUE, Petitioner,
vs.
ISABELA CULTURAL
CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue
(CIR) assails the September 30, 2005
Decision1 of the Court of Appeals in CA-G.R. SP
No. 78426 affirming the February 26, 2003
Decision2 of the Court of Tax Appeals (CTA) in
CTA Case No. 5211, which cancelled and set
aside the Assessment Notices for deficiency
income tax and expanded withholding tax
issued by the Bureau of Internal Revenue (BIR)
against respondent Isabela Cultural
Corporation (ICC).
The facts show that on February 23, 1990, ICC,
a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680
for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-
1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for
the taxable year 1986.
The deficiency income tax of P333,196.86,
arose from:
(1) The BIR’s disallowance of ICC’s claimed
expense deductions for professional and
security services billed to and paid by ICC in
1986, to wit:
(a) Expenses for the auditing services of SGV &
Co.,3 for the year ending December 31, 1985;4
(b) Expenses for the legal services [inclusive of
retainer fees] of the law firm Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson for
the years 1984 and 1985.5
(c) Expense for security services of El Tigre
Security & Investigation Agency for the
months of April and May 1986.6
(2) The alleged understatement of ICC’s
interest income on the three promissory notes
due from Realty Investment, Inc.
The deficiency expanded withholding tax
of P4,897.79 (inclusive of interest and
surcharge) was allegedly due to the failure of
ICC to withhold 1% expanded withholding tax
on its claimed P244,890.00 deduction for
security services.7
On March 23, 1990, ICC sought a
reconsideration of the subject assessments.
On February 9, 1995, however, it received a
final notice before seizure demanding
payment of the amounts stated in the said
notices. Hence, it brought the case to the CTA
which held that the petition is premature
because the final notice of assessment cannot
be considered as a final decision appealable to
the tax court. This was reversed by the Court
of Appeals holding that a demand letter of the
BIR reiterating the payment of deficiency tax,
amounts to a final decision on the protested
assessment and may therefore be questioned
before the CTA. This conclusion was sustained
by this Court on July 1, 2001, in G.R. No.
135210.8 The case was thus remanded to the
CTA for further proceedings.
On February 26, 2003, the CTA rendered a
decision canceling and setting aside the
assessment notices issued against ICC. It held
that the claimed deductions for professional
and security services were properly claimed by
ICC in 1986 because it was only in the said year
when the bills demanding payment were sent
to ICC. Hence, even if some of these
professional services were rendered to ICC in
1984 or 1985, it could not declare the same as
deduction for the said years as the amount
thereof could not be determined at that time.
The CTA also held that ICC did not understate
its interest income on the subject promissory
notes. It found that it was the BIR which made
an overstatement of said income when it
compounded the interest income receivable
by ICC from the promissory notes of Realty
Investment, Inc., despite the absence of a
stipulation in the contract providing for a
compounded interest; nor of a circumstance,
like delay in payment or breach of contract,
that would justify the application of
compounded interest.
Likewise, the CTA found that ICC in fact
withheld 1% expanded withholding tax on its
claimed deduction for security services as
shown by the various payment orders and
confirmation receipts it presented as evidence.
The dispositive portion of the CTA’s Decision,
reads:
WHEREFORE, in view of all the foregoing,
Assessment Notice No. FAS-1-86-90-000680
for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-
1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for
the taxable year 1986, are hereby CANCELLED
and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the
Court of Appeals, which affirmed the CTA
decision,10 holding that although the
professional services (legal and auditing
services) were rendered to ICC in 1984 and
1985, the cost of the services was not yet
determinable at that time, hence, it could be
considered as deductible expenses only in
1986 when ICC received the billing statements
for said services. It further ruled that ICC did
not understate its interest income from the
promissory notes of Realty Investment, Inc.,
and that ICC properly withheld and remitted
taxes on the payments for security services for
the taxable year 1986.
Hence, petitioner, through the Office of the
Solicitor General, filed the instant petition
contending that since ICC is using the accrual
method of accounting, the expenses for the
professional services that accrued in 1984 and
1985, should have been declared as
deductions from income during the said years
and the failure of ICC to do so bars it from
claiming said expenses as deduction for the
taxable year 1986. As to the alleged deficiency
interest income and failure to withhold
expanded withholding tax assessment,
petitioner invoked the presumption that the
assessment notices issued by the BIR are valid.
The issue for resolution is whether the Court
of Appeals correctly: (1) sustained the
deduction of the expenses for professional and
security services from ICC’s gross income; and
(2) held that ICC did not understate its interest
income from the promissory notes of Realty
Investment, Inc; and that ICC withheld the
required 1% withholding tax from the
deductions for security services.
The requisites for the deductibility of ordinary
and necessary trade, business, or professional
expenses, like expenses paid for legal and
auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been
paid or incurred during the taxable year; (c) it
must have been paid or incurred in carrying on
the trade or business of the taxpayer; and (d)
it must be supported by receipts, records or
other pertinent papers.11
The requisite that it must have been paid or
incurred during the taxable year is further
qualified by Section 45 of the National Internal
Revenue Code (NIRC) which states that: "[t]he
deduction provided for in this Title shall be
taken for the taxable year in which ‘paid or
accrued’ or ‘paid or incurred’, dependent upon
the method of accounting upon the basis of
which the net income is computed x x x".
Accounting methods for tax purposes
comprise a set of rules for determining when
and how to report income and deductions.12 In
the instant case, the accounting method used
by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-
2000, provides that under the accrual method
of accounting, expenses not being claimed as
deductions by a taxpayer in the current year
when they are incurred cannot be claimed as
pg. 16
deduction from income for the succeeding
year. Thus, a taxpayer who is authorized to
deduct certain expenses and other allowable
deductions for the current year but failed to
do so cannot deduct the same for the next
year.13
The accrual method relies upon the taxpayer’s
right to receive amounts or its obligation to
pay them, in opposition to actual receipt or
payment, which characterizes the cash
method of accounting. Amounts of income
accrue where the right to receive them
become fixed, where there is created an
enforceable liability. Similarly, liabilities are
accrued when fixed and determinable in
amount, without regard to indeterminacy
merely of time of payment.14
For a taxpayer using the accrual method, the
determinative question is, when do the facts
present themselves in such a manner that the
taxpayer must recognize income or expense?
The accrual of income and expense is
permitted when the all-events test has been
met. This test requires: (1) fixing of a right to
income or liability to pay; and (2) the
availability of the reasonable accurate
determination of such income or liability.
The all-events test requires the right to income
or liability be fixed, and the amount of such
income or liability be determined with
reasonable accuracy. However, the test does
not demand that the amount of income or
liability be known absolutely, only that a
taxpayer has at his disposal the information
necessary to compute the amount with
reasonable accuracy. The all-events test is
satisfied where computation remains
uncertain, if its basis is unchangeable; the test
is satisfied where a computation may be
unknown, but is not as much as unknowable,
within the taxable year. The amount of
liability does not have to be determined
exactly; it must be determined with
"reasonable accuracy." Accordingly, the term
"reasonable accuracy" implies something less
than an exact or completely accurate
amount.[15]
The propriety of an accrual must be judged by
the facts that a taxpayer knew, or could
reasonably be expected to have known, at
the closing of its books for the taxable
year.[16] Accrual method of accounting
presents largely a question of fact; such that
the taxpayer bears the burden of proof of
establishing the accrual of an item of income
or deduction.17
Corollarily, it is a governing principle in
taxation that tax exemptions must be
construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing
authority; and one who claims an exemption
must be able to justify the same by the
clearest grant of organic or statute law. An
exemption from the common burden cannot
be permitted to exist upon vague implications.
And since a deduction for income tax purposes
partakes of the nature of a tax exemption,
then it must also be strictly construed.18
In the instant case, the expenses for
professional fees consist of expenses for legal
and auditing services. The expenses for legal
services pertain to the 1984 and 1985 legal
and retainer fees of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna &
Bengson, and for reimbursement of the
expenses of said firm in connection with ICC’s
tax problems for the year 1984. As testified by
the Treasurer of ICC, the firm has been its
counsel since the 1960’s.19 From the nature of
the claimed deductions and the span of time
during which the firm was retained, ICC can be
expected to have reasonably known the
retainer fees charged by the firm as well as the
compensation for its legal services. The failure
to determine the exact amount of the expense
during the taxable year when they could have
been claimed as deductions cannot thus be
attributed solely to the delayed billing of these
liabilities by the firm. For one, ICC, in the
exercise of due diligence could have inquired
into the amount of their obligation to the firm,
especially so that it is using the accrual
method of accounting. For another, it could
have reasonably determined the amount of
legal and retainer fees owing to its familiarity
with the rates charged by their long time legal
consultant.
As previously stated, the accrual method
presents largely a question of fact and that the
taxpayer bears the burden of establishing the
accrual of an expense or income. However, ICC
failed to discharge this burden. As to when the
firm’s performance of its services in
connection with the 1984 tax problems were
completed, or whether ICC exercised
reasonable diligence to inquire about the
amount of its liability, or whether it does or
does not possess the information necessary to
compute the amount of said liability
with reasonable accuracy, are questions of fact
which ICC never established. It simply relied on
the defense of delayed billing by the firm and
the company, which under the circumstances,
is not sufficient to exempt it from being
charged with knowledge of the reasonable
amount of the expenses for legal and auditing
services.
In the same vein, the professional fees of SGV
& Co. for auditing the financial statements of
ICC for the year 1985 cannot be validly claimed
as expense deductions in 1986. This is so
because ICC failed to present evidence
showing that even with only "reasonable
accuracy," as the standard to ascertain its
liability to SGV & Co. in the year 1985, it
cannot determine the professional fees which
said company would charge for its services.
ICC thus failed to discharge the burden of
proving that the claimed expense deductions
for the professional services were allowable
deductions for the taxable year 1986. Hence,
per Revenue Audit Memorandum Order No. 1-
2000, they cannot be validly deducted from its
gross income for the said year and were
therefore properly disallowed by the BIR.
As to the expenses for security services, the
records show that these expenses were
incurred by ICC in 198620 and could therefore
be properly claimed as deductions for the said
year.
Anent the purported understatement of
interest income from the promissory notes of
Realty Investment, Inc., we sustain the findings
of the CTA and the Court of Appeals that no
such understatement exists and that only
simple interest computation and not a
compounded one should have been applied by
the BIR. There is indeed no stipulation
between the latter and ICC on the application
of compounded interest.21 Under Article 1959
of the Civil Code, unless there is a stipulation
to the contrary, interest due should not
further earn interest.
Likewise, the findings of the CTA and the Court
of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions
for security services and remitted the same to
the BIR is supported by payment order and
confirmation receipts.22 Hence, the
Assessment Notice for deficiency expanded
withholding tax was properly cancelled and set
aside.
In sum, Assessment Notice No. FAS-1-86-90-
000680 in the amount of P333,196.86 for
deficiency income tax should be cancelled and
set aside but only insofar as the claimed
deductions of ICC for security services. Said
Assessment is valid as to the BIR’s
disallowance of ICC’s expenses for professional
services. The Court of Appeal’s cancellation of
Assessment Notice No. FAS-1-86-90-000681 in
the amount of P4,897.79 for deficiency
expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY
GRANTED. The September 30, 2005 Decision
of the Court of Appeals in CA-G.R. SP No.
78426, is AFFIRMED with the MODIFICATION
that Assessment Notice No. FAS-1-86-90-
000680, which disallowed the expense
deduction of Isabela Cultural Corporation for
professional and security services, is declared
valid only insofar as the expenses for the
professional fees of SGV & Co. and of the law
firm, Bengzon Zarraga Narciso Cudala Pecson
Azcuna & Bengson, are concerned. The
decision is affirmed in all other respects.
pg. 17
The case is remanded to the BIR for the
computation of Isabela Cultural Corporation’s
liability under Assessment Notice No. FAS-1-
86-90-000680.
SO ORDERED.
COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. GENERAL FOODS
(PHILS.), INC., respondent.
DECISION
CORONA, J.:
Petitioner Commissioner of Internal Revenue
(Commissioner) assails the resolution[1] of the
Court of Appeals reversing the decision[2] of
the Court of Tax Appeals which in turn denied
the protest filed by respondent General Foods
(Phils.), Inc., regarding the assessment made
against the latter for deficiency taxes.
The records reveal that, on June 14, 1985,
respondent corporation, which is engaged in
the manufacture of beverages such as Tang,
Calumet and Kool-Aid, filed its income tax
return for the fiscal year ending February 28,
1985. In said tax return, respondent
corporation claimed as deduction, among
other business expenses, the amount
of P9,461,246 for media advertising for Tang.
On May 31, 1988, the Commissioner
disallowed 50% or P4,730,623 of the
deduction claimed by respondent corporation.
Consequently, respondent corporation was
assessed deficiency income taxes in the
amount of P2,635, 141.42. The latter filed a
motion for reconsideration but the same was
denied.
On September 29, 1989, respondent
corporation appealed to the Court of Tax
Appeals but the appeal was dismissed:
With such a gargantuan expense for the
advertisement of a singular product, which
even excludes other advertising and
promotions expenses, we are not prepared to
accept that such amount is reasonable to
stimulate the current sale of merchandise
regardless of Petitioners explanation that such
expense does not connote unreasonableness
considering the grave economic situation
taking place after the Aquino assassination
characterized by capital fight, strong
deterioration of the purchasing power of the
Philippine peso and the slacking demand for
consumer products (Petitioners
Memorandum, CTA Records, p. 273). We are
not convinced with such an explanation. The
staggering expense led us to believe that such
expenditure was incurred to create or
maintain some form of good will for the
taxpayers trade or business or for the industry
or profession of which the taxpayer is a
member. The term good will can hardly be said
to have any precise signification; it is generally
used to denote the benefit arising from
connection and reputation (Words and
Phrases, Vol. 18, p. 556 citing Douhart vs.
Loagan, 86 III. App. 294). As held in the case of
Welch vs. Helvering, efforts to establish
reputation are akin to acquisition of capital
assets and, therefore, expenses related
thereto are not business expenses but capital
expenditures. (Atlas Mining and Development
Corp. vs. Commissioner of Internal Revenue,
supra). For sure such expenditure was meant
not only to generate present sales but more
for future and prospective benefits. Hence,
abnormally large expenditures for advertising
are usually to be spread over the period of
years during which the benefits of the
expenditures are received (Mertens, supra,
citing Colonial Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding
no error in the case appealed from, we hereby
RESOLVE to DISMISS the instant petition for
lack of merit and ORDER the Petitioner to pay
the respondent Commissioner the assessed
amount of P2,635,141.42 representing its
deficiency income tax liability for the fiscal
year ended February 28, 1985.[3]
Aggrieved, respondent corporation filed a
petition for review at the Court of Appeals
which rendered a decision reversing and
setting aside the decision of the Court of Tax
Appeals:
Since it has not been sufficiently established
that the item it claimed as a deduction is
excessive, the same should be allowed.
WHEREFORE, the petition of petitioner
General Foods (Philippines), Inc. is hereby
GRANTED. Accordingly, the Decision, dated 8
February 1994 of respondent Court of Tax
Appeals is REVERSED and SET ASIDE and the
letter, dated 31 May 1988 of respondent
Commissioner of Internal Revenue is
CANCELLED.
SO ORDERED.[4]
Thus, the instant petition, wherein the
Commissioner presents for the Courts
consideration a lone issue: whether or not the
subject media advertising expense for Tang
incurred by respondent corporation was an
ordinary and necessary expense fully
deductible under the National Internal
Revenue Code (NIRC).
It is a governing principle in taxation that tax
exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor
of the taxing authority;[5] and he who claims an
exemption must be able to justify his claim by
the clearest grant of organic or statute law. An
exemption from the common burden cannot
be permitted to exist upon vague
implications.[6]
Deductions for income tax purposes partake of
the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then
deductions must also be strictly construed.
We then proceed to resolve the singular issue
in the case at bar. Was the media advertising
expense for Tang paid or incurred by
respondent corporation for the fiscal year
ending February 28, 1985 necessary and
ordinary, hence, fully deductible under the
NIRC? Or was it a capital expenditure, paid in
order to create goodwill and reputation for
respondent corporation and/or its products,
which should have been amortized over a
reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1)
(A), of the NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or
professional expenses.-
(a) In general.- There shall be allowed as
deduction from gross income all ordinary and
necessary expenses paid or incurred during
the taxable year in carrying on, or which are
directly attributable to, the development,
management, operation and/or conduct of the
trade, business or exercise of a profession.
Simply put, to be deductible from gross
income, the subject advertising expense must
comply with the following requisites: (a) the
expense must be ordinary and necessary; (b) it
must have been paid or incurred during the
taxable year; (c) it must have been paid or
incurred in carrying on the trade or business of
the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.[7]
The parties are in agreement that the subject
advertising expense was paid or incurred
within the corresponding taxable year and was
incurred in carrying on a trade or business.
Hence, it was necessary. However, their views
conflict as to whether or not it was
ordinary. To be deductible, an advertising
expense should not only be necessary but also
ordinary. These two requirements must be
met.
The Commissioner maintains that the subject
advertising expense was not ordinary on the
ground that it failed the two conditions set by
U.S. jurisprudence: first, reasonableness of the
amount incurred and second, the amount
incurred must not be a capital outlay to create
goodwill for the product and/or private
respondents business. Otherwise, the expense
pg. 18
must be considered a capital expenditure to
be spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed
test for determining the reasonableness of an
advertising expense. There being no hard and
fast rule on the matter, the right to a
deduction depends on a number of factors
such as but not limited to: the type and size of
business in which the taxpayer is engaged; the
volume and amount of its net earnings; the
nature of the expenditure itself; the intention
of the taxpayer and the general economic
conditions. It is the interplay of these, among
other factors and properly weighed, that will
yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as
media advertising expense for Tang alone was
almost one-half of its total claim for marketing
expenses. Aside from that, respondent-
corporation also claimed P2,678,328 as other
advertising and promotions expense and
another P1,548,614, for consumer promotion.
Furthermore, the subject P9,461,246
media advertising expense for Tang was
almost double the amount of respondent
corporations P4,640,636 general and
administrative expenses.
We find the subject expense for the
advertisement of a single product to be
inordinately large. Therefore, even if it is
necessary, it cannot be considered an ordinary
expense deductible under then Section 29 (a)
(1) (A) of the NIRC.
Advertising is generally of two kinds: (1)
advertising to stimulate the current sale of
merchandise or use of services and (2)
advertising designed to stimulate
the future sale of merchandise or use of
services. The second type involves
expenditures incurred, in whole or in part, to
create or maintain some form of goodwill for
the taxpayers trade or business or for the
industry or profession of which the taxpayer is
a member. If the expenditures are for the
advertising of the first kind, then, except as to
the question of the reasonableness of amount,
there is no doubt such expenditures are
deductible as business expenses. If, however,
the expenditures are for advertising of the
second kind, then normally they should be
spread out over a reasonable period of time.
We agree with the Court of Tax Appeals that
the subject advertising expense was of the
second kind. Not only was the amount
staggering; the respondent corporation itself
also admitted, in its letter protest[8] to the
Commissioner of Internal Revenues
assessment, that the subject media expense
was incurred in order to protect respondent
corporations brand franchise, a critical point
during the period under review.
The protection of brand franchise is analogous
to the maintenance of goodwill or title to ones
property. This is a capital expenditure which
should be spread out over a reasonable period
of time.[9]
Respondent corporations venture to protect
its brand franchise was tantamount to efforts
to establish a reputation. This was akin to the
acquisition of capital assets and therefore
expenses related thereto were not to be
considered as business expenses but as capital
expenditures.[10]
True, it is the taxpayers prerogative to
determine the amount of advertising expenses
it will incur and where to apply them.[11] Said
prerogative, however, is subject to certain
considerations. The first relates to the extent
to which the expenditures are actually capital
outlays; this necessitates an inquiry into the
nature or purpose of such expenditures.[12] The
second, which must be applied in harmony
with the first, relates to whether the
expenditures are ordinary and necessary.
Concomitantly, for an expense to be
considered ordinary, it must be reasonable in
amount. The Court of Tax Appeals ruled that
respondent corporation failed to meet the two
foregoing limitations.
We find said ruling to be well founded.
Respondent corporation incurred the subject
advertising expense in order to protect its
brand franchise. We consider this as a capital
outlay since it created goodwill for its business
and/or product. The P9,461,246 media
advertising expense for the promotion of a
single product, almost one-half of petitioner
corporations entire claim for marketing
expenses for that year under review, inclusive
of other advertising and promotion expenses
of P2,678,328 and P1,548,614 for
consumer promotion, is doubtlessly
unreasonable.
It has been a long standing policy and practice
of the Court to respect the conclusions of
quasi-judicial agencies such as the Court of Tax
Appeals, a highly specialized body specifically
created for the purpose of reviewing tax cases.
The CTA, by the nature of its functions, is
dedicated exclusively to the study and
consideration of tax problems. It has
necessarily developed an expertise on the
subject. We extend due consideration to its
opinion unless there is an abuse or
improvident exercise of authority.[13] Since
there is none in the case at bar, the Court
adheres to the findings of the CTA.
Accordingly, we find that the Court of Appeals
committed reversible error when it declared
the subject media advertising expense to be
deductible as an ordinary and necessary
expense on the ground that it has not been
established that the item being claimed as
deduction is excessive. It is not incumbent
upon the taxing authority to prove that the
amount of items being claimed is
unreasonable. The burden of proof to
establish the validity of claimed deductions is
on the taxpayer.[14] In the present case, that
burden was not discharged satisfactorily.
WHEREFORE, premises considered, the instant
petition is GRANTED. The assailed decision of
the Court of Appeals is hereby REVERSED and
SET ASIDE. Pursuant to Sections 248 and 249
of the Tax Code, respondent General Foods
(Phils.), Inc. is hereby ordered to pay its
deficiency income tax in the amount deficiency onshore tax for the taxable year 96- 96-
of P2,635,141.42, plus 25% surcharge for late 1996 in the total amount of ₱997,333.89 0174- 0177-
payment and 20% annual interest computed inclusive of surcharges and interest; and (c) 99) 99)
from August 25, 1989, the date of the denial of deficiency withholding tax on compensation
its protest, until the same is fully paid. for the taxable years 1996 and 1997 in the 1997 133,533, 45,730,5 179,263, 1997 92,587,3 6,729,18 40,799,6 140,116,
total amount of ₱564,542.67 inclusive of (ST- 114.54 18.68 633.22 (ST- 81.60 0.18 90.39 252.17
SO ORDERED. interest. The Resolution denied ING Bank’s INC- RT-
Motion for Reconsideration.7 97- 97-
0185- 0181-
While this case was pending before this court,
99) 99)
ING Bank filed a Manifestation and
Motion8 stating that it availed itself of the
government’s tax amnesty program under
G.R. No. 167679 July 22, 2015 Republic Act No. 9480 with respect to its
Deficiency Withholding Tax Deficiency Documentary
deficiency documentary stamp tax and
ING BANK N.V., engaged in banking on Compensation Stamp Tax
deficiency onshore tax liabilities.9 What is at
operations in the Philippines as ING BANK issue now is whether ING Bank is entitled to
N.V. MANILA BRANCH,Petitioner, 1996 1,027,26 602,288. 1,629,55 1996 3,838,75 959,688. 4,798,44
the immunities and privileges under Republic
vs. (ST- 7.20 17 5.37 (ST- 3.06 27 1.33
Act No. 9480,and whether the assessment for
COMMISSIONER OF INTERNAL WC- DST-
deficiency withholding tax on compensation is
REVENUE, Respondent. 96- 96-
proper.
0175- 0178-
DECISION ING Bank, "the Philippine branch of 99) 99
Internationale Nederlanden Bank N.V., a
LEONEN, J.: 1997 2,505,92 968,042. 3,473,96 1997 1,569,99 392,497. 1,962,48
foreign banking corporation incorporated in
the Netherlands[,] is duly authorized by the (ST- 5.25 36 7.61 (ST- 0.18 55 7.73
Qualified taxpayers with pending tax cases
Bangko Sentral ng Pilipinas to operate as a WC- DST-
may still avail themselves of the tax amnesty
branch with full banking authority in the 97- 97-
program under Republic Act No.
Philippines."10 0184- 0181-
9480,1 otherwise known as the 2007 Tax
99) 99)
Amnesty Act. Thus, the provision in BIR
On January 3, 2000, ING Bank received a Final
Revenue Memorandum Circular No. 19-2008
Assessment Notice11 dated December 3, 1997 186,997, 46,749,3 233,746,
excepting "[i]ssues and cases which were ruled
1999.12 The Final Assessment Notice also (ST- 288.84 22.21 611.05
by any court (even without finality) in favor of
contained the Details of Assessment13 and 13 Deficiency Onshore Tax DST-
the BIR prior to amnesty availment of the
Assessment Notices "issued by the 97-
taxpayer" from the benefits of the law is
Enforcement Service of the Bureau of Internal 1996 8,267,43 4,847,20 13,114,6 0180-
illegal, invalid, and null and void.2The duty to
Revenue through its Assistant Commissioner (ST- 7.54 9.95 47.49 99)
withhold the tax on compensation arises upon
Percival T. Salazar[.]"14The Final Assessment OT-
its accrual.
Notice covered the following deficiency tax 96-
This is a Petition for Review3 appealing the assessments for taxable years 1996 and 0176-
April 5, 2005 Decision4 of the Court of Tax 1997:15 99) Compromise Penalty
Appeals En Banc, which in turn affirmed the
August 9, 2004 Decision5 and November 12, Partic Basic Surcharg Interest( 1996 1,000.00 1,000.00
Total( )
2004 Resolution6 of the Court of Tax Appeals ulars Tax( ) e( ) ) (ST-
Second Division. The August 9, 2004 Decision Deficiency Branch Profit CP-
held petitioner ING Bank, N.V. Manila Branch Deficiency Income Tax Remittance Tax 96-
(ING Bank) liable for (a) deficiency 0179-
documentary stamp tax for the taxable years 1996 20,916,7 11,346,6 32,263,4 1996 39,215,7 22,992,2 62,207,9 99)
1996 and 1997 in the total amount of (ST- 85.03 39.55 24.58 (ST- 00.00 18[.]63 18.63
₱238,545,052.38 inclusive of surcharges; (b) INC- RT-

pg. 19
1997 1,000.00 1,000.00 After trial, the Court of Tax Appeals Second Both the Commissioner of Internal Revenue (1) Statement of Assets, Liabilities and Net
(ST- Division rendered its Decision on August 9, and ING Bank filed their respective Motions Worth (SALN) as of December 31, 2005
CP- 2004, with the following disposition: for Reconsideration.21 Both Motions were (original and amended declarations);34
97- denied through the Second Division’s
WHEREFORE, the assessments for 1996 and Resolution dated November 12, 2004, as (2) Tax Amnesty Return For Taxable Year 2005
0186-
1997 deficiency income tax, 1996 and 1997 follows: and Prior Years (BIR Form No. 2116);35 and (3)
99)
deficiency branch profit remittance tax and Tax Amnesty Payment Form (Acceptance of
1997 deficiency documentary stamp tax on WHEREFORE, the respondent’s Motion for Payment Form) for Taxable Year 2005 and
IBCLs exceeding five days are hereby Partial Reconsideration and the petitioner’s Prior Years (BIR Form No. 0617)36showing
CANCELLED and WITHDRAWN. However, the Motion for Reconsideration are hereby payment of the amnesty tax in the amount of
Deficiency Final Tax
assessments for 1996 and 1997 deficiency DENIED for lack of merit. The pronouncement ₱500,000.00.
withholding tax on compensation, 1996 reached in the assailed decision is
1997 53,200.8 20,551.5 73,752.4 ING Bank prayed that this court issue a
deficiency onshore tax and 1996 and 1997 REITERATED.
(ST- 9 8 7 resolution taking note of its availment of the
deficiency documentary stamp tax on special
FT- SO ORDERED.22 tax amnesty, and confirming its entitlement to
savings accounts are hereby UPHELD in the
97- all the immunities and privileges under Section
following amounts:
0183- On December 8, 2004, ING Bank filed its 6 of Republic Act No. 9480, particularly with
99) appeal before the Court of Tax Appeals En respect to the "payment of deficiency
Particulars Basic Tax Surcharge Interest Total
Banc.23 The Court of Tax Appeals En Banc documentary stamp taxes on its special
denied due course to ING Bank’s Petition for savings accounts for the taxable years 1996
Review and dismissed the same for lack of and 1997 and deficiency tax on onshore
TOTA 490,514, 54,830,6 127,307, 672,652, merit in the Decision promulgated on April 5,
Deficiency Withholding Tax interest income derived under the foreign
LS 844.13 88.21 159.31 691.65 2005.24
on Compensation currency deposit system for taxable year
======= ======= ======= =======
1996[.]"37
====== ====== ====== ====== Hence, ING Bank filed its Petition for
1996 (ST-WC-96-0175-99) P 105,939.86 P 61,445.11 P 167,384.97
Review25 before this court. The Commissioner Pursuant to this court’s Resolution38 dated
On February 2, 2000, ING Bank "paid the of Internal Revenue filed its Comment26 on January 23, 2008, the Commissioner of
1997 (ST-WC-97-0184-99) 287,795.44 109,362.26 397,157.70
deficiency assessments for [the] 1996 October 5, 2005 and ING Bank its Reply27 on Internal Revenue filed its Comment39 and ING
compromise penalty, 1997 deficiency December 14, 2005. Pursuant to this court’s Bank, its Reply.40
Deficiency
documentary stampOnshore
tax andTax
1997 deficiency Resolution28 dated January 25, 2006, the
final tax in the respective amounts of Commissioner of Internal Revenue filed its Originally, ING Bank raised the following issues
1996₱1,000.00
₱1,000.00, (ST-OT-96-0176-99)
and ₱75,013.25 [the 544,991.20 P 136,247.80 316,094.89Manifestation997,333.89
and Motion29 on February 14, in its pleadings:
original amount of ₱73,752.47 plus additional 2006, stating that it is adopting its Comment
Deficiency
interest]." 16 Documentary
ING Bank, however, "protested as its Memorandum, and ING Bank filed its First, whether "[t]he Court of Tax Appeals En
[on the Stamp
same day]Tax the remaining ten (10) Memorandum30 on March 9, 2006. Banc erred in concluding that petitioner’s
deficiency tax assessments in the total amount Special Saving Accounts are subject to
1996 (ST-DST-96-0178-99)
of ₱672,576,939.18." 17 3,838,753.06 959,688.27 On December 4,798,441.33
20, 2007, ING Bank filed a documentary stamp tax (DST) as certificates of
Manifestation and Motion31 informing this deposit under Section 180 of the 1977 Tax
ING Bank filed(ST-DST-97-0180-99)
1997 a Petition for Review before the 186,997,288.84 46,749,322.21 court that it 233,746,611.05
had availed itself of the tax Code";41
Court of Tax Appeals on October 26, 2000. This amnesty authorized and granted under
case wasTOdocketed
T A L S as C.T.A. Case No. ₱191,774,768.40 ₱47,845,258.28 Republic Act₱240,106,928.94
P 486,902.26 No. 9480 covering "all national Second, whether "[t]he Court of Tax Appeals
6187.18 The Petition was filed to seek "the internal revenue taxes for the taxable year En Banc erred in holding petitioner liable for
cancellation and withdrawal of the deficiency Accordingly, petitioner is ORDERED to PAY the 2005 and prior years, with or without deficiency onshore tax considering that under
tax assessments for the years 1996 and 1997, respondent the aggregate amount of assessments duly issued therefor, that have the 1977 Tax Code and the pertinent revenue
including the alleged deficiency documentary ₱240,106,928.94, plus 20% delinquency remained unpaid as of December 31, regulations, the obligation to pay the ten
stamp tax on special savings accounts, interest per annum from February 3, 2000 2005[.]"32 ING Bank stated that it filed before percent (10%) final tax on onshore interest
deficiency onshore tax, and deficiency until fully paid, pursuant to Section 249(C) of the Bureau of Internal Revenue its Notice of income rests on the payors-borrowers and not
withholding tax on compensation mentioned the National Internal Revenue Code of 1997. Availment of Tax Amnesty Under Republic Act on petitioner as payee-lender";42 and
above."19 No. 948033 on December 14, 2007, together
SO ORDERED.20 (Emphasis in the original) Third, whether "[t]he Court of Tax Appeals En
with the following documents:
Banc erred in holding petitioner liable for

pg. 20
deficiency withholding tax on compensation
for the accrued bonuses in the taxable years
1996 and 1997 considering that these were
not distributed to petitioner’s officers and
employees during those taxable years, hence,
were not yet subject to withholding tax."43
However, ING Bank availed itself of the tax
amnesty under Republic Act No. 9480, with
respect to its liabilities for deficiency
documentary stamp taxes on its special
savings accounts for the taxable years 1996
and 1997 and deficiency tax on onshore
interest income under the foreign currency
deposit system for taxable year 1996.
Consequently, the issues now for resolution
are:
First, whether petitioner ING Bank may validly
avail itself of the tax amnesty granted by
Republic Act No. 9480; and
Second, whether petitioner ING Bank is liable
for deficiency withholding tax on accrued
bonuses for the taxable years 1996 and 1997.
Tax amnesty availment
Petitioner ING Bank asserts that it is "qualified
to avail of the tax amnesty under Section 5 [of
Republic Act No. 9480] and . . . not disqualified
under Section 8 [of the same
law]."44 Respondent Commissioner of Internal
Revenue, for its part, does not deny the
authenticity of the documents submitted by
petitioner ING Bank or dispute the payment of
the amnesty tax. However, respondent
Commissioner of Internal Revenue claims that
petitioner ING Bank is not qualified to avail
itself of the tax amnesty granted under
Republic Act No. 9480 because both the Court
of Tax Appeals En Banc and Second Division
ruled in its favor that confirmed the liability of
petitioner ING Bank for deficiency
documentary stamp taxes, onshore taxes, and
withholding taxes.45
Respondent Commissioner of Internal
Revenue asserts that BIR Revenue
Memorandum Circular No. 19-2008 specifically
pg. 21
excludes "cases which were ruled by any court
(even without finality) in favor of the BIR prior
to amnesty availment of the taxpayer" from
the coverage of the tax amnesty under
Republic Act No. 9480.46 In any case,
respondent Commissioner of Internal Revenue
argues that petitioner ING Bank’s availment of
the tax amnesty is still subject to its
evaluation,47 that it is "empowered to exercise
[its] sound discretion . . . in the
implementation of a tax amnesty in favor of a
taxpayer,"48 and "petitioner cannot presume
that its application . . . would be
granted[.]"49Accordingly, respondent
Commissioner of Internal Revenue prays that
"petitioner [ING Bank’s] motion be denied for
lack of merit."50
Petitioner ING Bank counters that BIR Revenue
Memorandum Circular No. 19-2008 cannot
override Republic Act No. 9480 and its
Implementing Rules and Regulations, which
only exclude from tax amnesty "tax cases
subject of final and [executory] judgment by
the courts."51 Petitioner ING Bank asserts that
its full compliance with the conditions
prescribed in Republic Act No. 9480 (the
conditions being submission of the requisite
documents and payment of the amnesty tax),
which respondent Commissioner of Internal
Revenue does not dispute, confirms that it is
"qualified to avail itself, and has actually
availed itself, of the tax amnesty."52 It argues
that there is nothing in the law that gives
respondent Commissioner of Internal Revenue
the discretion to rescind or erase the legal
effects of its tax amnesty availment.53 Thus,
the issue is no longer about whether "[it] is
entitled to avail itself of the tax
amnesty[,]"54 but rather whether the effects of
its tax amnesty availment extend to the
assessments of deficiency documentary stamp
taxes on its special savings accounts for 1996
and 1997 and deficiency tax on onshore
interest income for 1996.55
Petitioner ING Bank points out the Court of
Tax Appeals’ ruling in Metropolitan Bank and
Trust Company v. Commissioner of Internal
Revenue,56 to the effect that full compliance
with the requirements of the tax amnesty law
extinguishes the tax deficiencies subject of the
amnesty availment.57 Thus, with its availment
of the tax amnesty and full compliance with all
the conditions prescribed in the statute,
petitioner ING Bank asserts that it is entitled to
all the immunities and privileges under Section
6 of Republic Act No. 9480.58
Withholding tax on compensation
Petitioner ING Bank claims that it is not liable
for withholding taxes on bonuses accruing to
its officers and employees during taxable years
1996 and 1997.59 It maintains its position that
the liability of the employer to withhold the
tax does not arise until such bonus is actually
distributed. It cites Section 72 of the 1977
National Internal Revenue Code, which states
that "[e]very employer making payment of
wages shall deduct and withhold upon such
wages a tax," and BIR Ruling No. 555-88
(November 23, 1988) declaring that "[t]he
withholding tax on the bonuses should be
deducted upon the distribution of the same to
the officers and employees[.]"60 Since the
supposed bonuses were not distributed to the
officers and employees in 1996 and 1997 but
were distributed in the succeeding year when
the amounts of the bonuses were finally
determined, petitioner ING Bank asserts that
its duty as employer to withhold the tax during
these taxable years did not arise.61
Petitioner ING Bank further argues that the
Court of Tax Appeals’ discussion on Section
29(j) of the 1993 National Internal Revenue
Code and Section 3 of Revenue Regulations
No. 8-90 is not applicable because the issue in
this case "is not whether the accrued bonuses
should be allowed as deductions from
petitioner’s taxable income but, rather,
whether the accrued bonuses are subject to
withholding tax on compensation in the
respective years of accrual[.]"62 Respondent
Commissioner of Internal Revenue counters
that petitioner ING Bank’s application of BIR
Ruling No. 555-88 is misplaced because as
found by the Second Division of the Court of
Tax Appeals, the factual milieu is different:63
In that ruling, bonuses are determined and
distributed in the succeeding year "[A]fter [sic]
the audit of each company is completed (on or
before April 15 of the succeeding year)". The
withholding and remittance of income taxes
were also made in the year they were
distributed to the employees. . . .
In petitioner’s case, bonuses were determined
during the year but were distributed in the
succeeding year. No withholding of income tax
was effected but the bonuses were claimed as
an expense for the year. . . .
Since the bonuses were not subjected to
withholding tax during the year they were
claimed as an expense, the same should be
disallowed pursuant to the above-quoted
law.64
Respondent Commissioner of Internal
Revenue contends that petitioner ING Bank’s
act of "claim[ing] [the] subject bonuses as
deductible expenses in its taxable income
although it has not yet withheld and remitted
the [corresponding withholding] tax"65 to the
Bureau of Internal Revenue contravened
Section 29(j) of the 1997 National Internal
Revenue Code, as amended.66 Respondent
Commissioner of Internal Revenue claims that
"subject bonuses should also be disallowed as
deductible expenses of petitioner."67
I
Taxpayers with pending tax cases may avail
themselves of the tax amnesty program under
Republic Act No. 9480.
In CS Garment, Inc. v. Commissioner of
Internal Revenue,68 this court has "definitively
declare[d] . . . the exception ‘[i]ssues and cases
which were ruled by any court (even without
finality) in favor of the BIR prior to amnesty
availment of the taxpayer’ under BIR [Revenue
Memorandum Circular No.] 19-2008 [as]
invalid, [for going] beyond the scope of the
provisions of the 2007 Tax Amnesty
Law."69 Thus:
[N]either the law nor the implementing rules
state that a court ruling that has not attained
finality would preclude the availment of the
benefits of the Tax Amnesty Law. Both R.A.
9480 and DOF Order No. 29-07 are quite
precise in declaring that "[t]ax cases subject of
final and executory judgment by the courts"
are the ones excepted from the benefits of the
law. In fact, we have already pointed out the
erroneous interpretation of the law in
Philippine Banking Corporation (Now: Global
Business Bank, Inc.) v. Commissioner of
Internal Revenue, viz:
The BIR’s inclusion of "issues and cases which
were ruled by any court (even without finality)
in favor of the BIR prior to amnesty availment
of the taxpayer" as one of the exceptions in
RMC 19-2008 is misplaced. RA 9480 is
specifically clear that the exceptions to the tax
amnesty program include "tax cases subject of
final and executory judgment by the courts."
The present case has not become final and
executory when Metrobank availed of the tax
amnesty program.70 (Emphasis in the original,
citation omitted)
Moreover, in the fairly recent case of LG
Electronics Philippines, Inc. v. Commissioner of
Internal Revenue,71 we confirmed that only
cases that involve final and executory
judgments are excluded from the tax amnesty
program as explicitly provided under Section 8
of Republic Act No. 9480.72
Thus, petitioner ING Bank is not disqualified
from availing itself of the tax amnesty under
the law during the pendency of its appeal
before this court.
II
Petitioner ING Bank showed that it complied
with the requirements set forth under
Republic Act No. 9480. Respondent
Commissioner of Internal Revenue never
questioned or rebutted that petitioner ING
Bank fully complied with the requirements for
tax amnesty under the law. Moreover, the
contestability period of one (1) year from the
time of petitioner ING Bank’s availment of the
pg. 22
tax amnesty law on December 14, 2007
lapsed. Correspondingly, it is fully entitled to
the immunities and privileges mentioned
under Section 6 of Republic Act No. 9480. This
is clear from the following provisions:
SEC. 2. Availment of the Amnesty. - Any
person, natural or juridical, who wishes to
avail himself of the tax amnesty authorized
and granted under this Act shall file with the
Bureau of Internal Revenue (BIR) a notice and
Tax Amnesty Return accompanied by a
Statement of Assets, Liabilities and Networth
(SALN) as of December 31, 2005, in such form
asmay be prescribed in the implementing rules
and regulations (IRR) of this Act, and pay the
applicable amnesty tax within six months from
the effectivity of the IRR.
....
SEC. 4. Presumption of Correctness of the
SALN. - The SALN as of December 31, 2005
shall be considered as true and correct except
where the amount of declared networth is
understated to the extent of thirty percent
(30%) or more as may be established in
proceedings initiated by, or at the instance of,
parties other than the BIR or its agents:
Provided, That such proceedings must be
initiated within one year following the date of
the filing of the tax amnesty return and the
SALN. Findings of or admission in
congressional hearings, other administrative
agencies of government, and/or courts shall
be admissible to prove a thirty percent (30%)
under-declaration. . . . .
SEC. 6. Immunities and Privileges. - Those who
availed themselves of the tax amnesty under
Section 5 hereof, and have fully complied with
all its conditions shall be entitled to the
following immunities and privileges:
a. The taxpayer shall be immune from the
payment of taxes, as well as addition thereto,
and the appurtenant civil, criminal or
administrative penalties under the National
Internal Revenue Code of 1997, as amended,
arising from the failure to pay any and all
internal revenue taxes for taxable year 2005
and prior years.
b. The taxpayer’s Tax Amnesty Returns and the
SALN as of December 31, 2005 shall not be
admissible as evidence in all proceedings that
pertain to taxable year 2005 and prior years,
insofar as such proceedings relate to internal
revenue taxes, before judicial, quasi-judicial or
administrative bodies in which he is a
defendant or respondent, and except for the
purpose of ascertaining the networth
beginning January 1, 2006, the same shall not
be examined, inquired or looked into by any
person or government office. However, the
taxpayer may use this as a defense, whenever
appropriate, in cases brought against him.
c. The books of accounts and other records of
the taxpayer for the years covered by the tax
amnesty availed of shall not be examined:
Provided, That the Commissioner of Internal
Revenue may authorize in writing the
examination of the said books of accounts and
other records to verify the validity or
correctness of a claim for any tax refund, tax
credit (other than refund or credit of taxes
withheld on wages), tax incentives, and/or
exemptions under existing laws. (Emphasis
supplied)
Contrary to respondent Commissioner of
Internal Revenue’s stance, Republic Act No.
9480 confers no discretion on respondent
Commissioner of Internal Revenue. The
provisions of the law are plain and simple.
Unlike the power to compromise or abate a
taxpayer’s liability under Section 20473 of the
1997 National Internal Revenue Code that is
within the discretion of respondent
Commissioner of Internal Revenue,74 its
authority under Republic Act No. 9480 is
limited to determining whether (a) the
taxpayer is qualified to avail oneself of the tax
amnesty; (b) all the requirements for
availment under the law were complied with;
and (c) the correct amount of amnesty tax was
paid within the period prescribed by law.
There is nothing in Republic Act No. 9480
which can be construed as authority for
respondent Commissioner of Internal Revenue
to introduce exceptions and/or conditions to
the coverage of the law nor to disregard its
provisions and substitute his own personal
judgment.
Republic Act No. 9480 provides a general grant
of tax amnesty subject only to the cases
specifically excepted by it. A tax amnesty
"partakes of an absolute. . . waiver by the
Government of its right to collect what
otherwise would be due it[.]"75 The effect of a
qualified taxpayer’s submission of the required
documents and the payment of the prescribed
amnesty tax was immunity from payment of
all national internal revenue taxes as well as all
administrative, civil, and criminal liabilities
founded upon or arising from non-payment of
national internal revenue taxes for taxable
year 2005 and prior taxable years.76
Finally, the documentary stamp tax and
onshore income tax are covered by the tax
amnesty program under Republic Act No. 9480
and its Implementing Rules and
Regulations.77 Moreover, as to the deficiency
tax on onshore interest income, it is worthy to
state that petitioner ING Bank was assessed by
respondent Commissioner of Internal
Revenue, not as a withholding agent, but as
one that was directly liable for the tax on
onshore interest income and failed to pay the
same.
Considering petitioner ING Bank’s tax amnesty
availment, there is no more issue regarding its
liability for deficiency documentary stamp
taxes on its special savings accounts for 1996
and 1997 and deficiency tax on onshore
interest income for 1996, including surcharge
and interest. III.
The Court of Tax Appeals En Banc affirmed the
factual finding of the Second Division that
accrued bonuses were recorded in petitioner
ING Bank’s books as expenses for taxable
years 1996 and 1997, although no withholding
of tax was effected:
With the preceding defense notwithstanding,
petitioner now maintained that the portion of
 the disallowedAmount
bonusesis in the
not amountsby
supported of 313,319.09 Basic Withholding Tax Due 935,044.28 ....
₱3,879,407.85liquidation
and ₱9,004,402.63 for
document(s) the
respective years 1996 and 1997, were actually (j) Additional requirement for deductibility of
Thereon P 105,939.86 P 287,795.44certain payments. — Any amount paid or
payments for reimbursements of
TOTAL
representation, travel and entertainment ₱9,228,892.97 ₱4,979,703.39 payable which is otherwise deductible from, or
expenses of its officers. These expenses Interest (Sec. 249) 61,445.11 109,362.26 taken into account in computing gross income
according to petitioner are not considered Based on the above report, only the expenses for which depreciation or amortization may be
compensation of employees and likewise not in the name of petitioner’s employee and allowed under this section, shall be allowed as
subject to withholding tax. those under its name can be given credence. a deduction only if it is shown that the tax
Deficiencyare
Therefore, the following expenses Withholding
valid Tax on required to be deducted and withheld
In order to prove that the discrepancy in the expenses for income tax purposes: therefrom has been paid to the Bureau of
accrued bonuses represents reimbursement of Compensation P 167,384.97 P 397,157.70Internal Revenue in78 accordance with this

expenses, petitioner availed of the services of 1996 1997 section, Sections 5181 and 7482 of this Code.
an independent CPA pursuant to CTA Circular (Emphasis supplied)
No. 1-95, as amended. As a consequence, Mr.
Ruben Rubio wasSupporting document
commissioned is under
by the courtthe ₱1,849,040.70 P 930,307.56 Section 3 of Revenue Regulations No. 8-90
An expense, whether the same is paid or
name of of
to verify the accuracy thepetitioner’s
employee position (now Section 2.58.5 of Revenue Regulations
payable, "shall be allowed as a deduction only
and to check its supporting documents. No. 2-98) provides:
if it is shown that the tax required to be
Supporting document is under the 1,630,292.14 deducted and withheld therefrom [was] paid
7,039,976.36 Section 3. Section 9 of Revenue Regulations
In a report dated January 29, 2002, the
name of the Bank to the Bureau of Internal Revenue[.]"79 No. 6-85 is hereby amended to read as
commissioned independent CPA noted the
following pertinent findings: . . . follows:
Section 29(j) of the 1977 National Internal
TOTAL ₱3,479,332.84 P 7,970,283.92
Revenue Code80 (now Section 34(K) of the Section 9. (a) Requirement for deductibility.
1997 1996 1997 National Internal Revenue Code) Any income payment, which is otherwise
Consequently, petitioner is still liable for the provides: deductible under Sections 29 and 54 of the Tax
amounts of ₱167,384.97 and ₱397,157.70
e P 930,307.56 P 1,849,040.70 Code, as amended, shall be allowed as a
representing deficiency withholding taxes on Section 29. Deductions from gross income. —
deduction from the payor’s gross income only
compensation for the respective years of 1996 In computing taxable income subject to tax
if it is shown that the tax required to be
and 1997, computed as follows: under Sec. 21(a); 24(a), (b) and (c); and 25(a)
withheld has been paid to the Bureau of
er 537,456.37 53,384.80 (1), there shall be allowed as deductions the
Internal Revenue in accordance with Sections
1996 1997 items specified in paragraphs (a) to (i) of this
50, 51, 72, and 74 also of the Tax
section: . . . .
Code.(Emphasis supplied)
....
Under the National Internal Revenue Code,
e Total Disallowed Accrued Bonus
7,039,976.36 1,630,292.14 P 3,879,407.85 P 9,004,402.63
(a) Expenses. — (1) Business expenses. — (A) every form of compensation for personal
In general. — All ordinary and necessary services is subject to income tax and,
Less: Substantiated expenses paid or incurred during the taxable consequently, to withholding tax. The term
year in carrying on any trade or business, "compensation" means all remunerations paid
me 362,919.59 62,615.91 for services performed by an employee for his
e Reimbursement of Expense 3,479,332.84 7,970,283.92including a reasonable allowance for salaries
or other compensation for personal services or her employer, whether paid in cash or in
actually rendered; travelling expenses while kind, unless specifically excluded under
away from home in the pursuit of a trade, Sections 32(B)83 and 78(A)84 of the 1997
d 13,404.00 Unsubstantiated 423,199.07 profession or business, rentals or other National Internal Revenue Code.85 The name
P 400,075.01 P 1,034,119.43
payments required to be made as a condition designated to the remuneration for services is
to the continued use or possession, for the immaterial. Thus, "salaries, wages,
Tax Rate 26.48% 27.83% emoluments and honoraria, bonuses,
purpose of the trade, profession or business,
of property to which the taxpayer has not allowances (such as transportation,
31,510.00 26,126.49 representation, entertainment, and the like),
taken or is not taking title or in which he has
no equity. [taxable] fringe benefits[,] pensions and
retirement pay, and other income of a similar

pg. 23
nature constitute compensation
income"86 that is taxable.
Hence, petitioner ING Bank is liable for the
withholding tax on the bonuses since it
claimed the same as expenses in the year they
were accrued.
Petitioner ING Bank insists, however, that the
bonus accruals in 1996 and 1997 were not yet
subject to withholding tax because these
bonuses were actually distributed only in the
succeeding years of their accrual (i.e., in 1997
and 1998) when the amounts were finally
determined.
Petitioner ING Bank’s contention is untenable.
The tax on compensation income is withheld
at source under the creditable withholding tax
system wherein the tax withheld is intended to
equal or at least approximate the tax due of
the payee on the said income. It was designed
to enable (a) the individual taxpayer to meet
his or her income tax liability on compensation
earned; and (b) the government to collect at
source the appropriate taxes on
compensation.87 Taxes withheld are creditable
in nature.88Thus, the employee is still required
to file an income tax return to report the
income and/or pay the difference between the
tax withheld and the tax due on the
income.89 For over withholding, the employee
is refunded.90Therefore, absolute or exact
accuracy in the determination of the amount
of the compensation income is not a
prerequisite for the employer’s withholding
obligation to arise.
It is true that the law and implementing
regulations require the employer to deduct
and pay the income tax on compensation paid
to its employees, either actually or
constructively.
Section 72 of the 1977 National Internal
Revenue Code, as amended,91 states:
SECTION 72. Income tax collected at source. —
(a) Requirement of withholding. — Every
employer making payment of wages shall
pg. 24
deduct and withhold upon such wages a tax
determined in accordance with regulations to
be prepared and promulgated by the Minister
of Finance. (Emphasis supplied)
Sections 7 and 14 of Revenue Regulations No.
6-82,92 as amended,93 relative to the
withholding of tax on compensation income,
provide:
Section 7. Requirement of withholding.—
Every employer or any person who pays or
controls the payment of compensation to an
employee, whether resident citizen or alien,
non-resident citizen, or nonresident alien
engaged in trade or business in the
Philippines, must withhold from such
compensation paid, an amount computed in
accordance with these regulations.
I. Withholding of tax on compensation paid to
resident employees. – (a)In general, every
employer making payment of compensation
shall deduct and withhold from such
compensation income for the entire calendar
year, a tax determined in accordance with the
prescribed new Withholding Tax Tables
effective January 1, 1992 (ANNEX "A").
....
Section 14. Liability for the Tax.— The
employer is required to collect the tax by
deducting and withholding the amount
thereof from the employee’s compensation as
when paid, either actually or constructively.
An employer is required to deduct and
withhold the tax notwithstanding that the
compensation is paid in something other than
money (for example, compensation paid in
stocks or bonds) and to pay the tax to the
collecting officer. If compensation is paid in
property other than money, the employer
should make necessary arrangements to
ensure that the amount of the tax required to
be withheld is available for payment to the
collecting officer.
Every person required to deduct and withhold
the tax from the compensation of an
employee is liable for the payment of such tax
whether or not collected from the employee.
If, for example, the employer deducts less than
the correct amount of tax, or if he fails to
deduct any part of the tax, he is nevertheless
liable for the correct amount of the tax.
However, if the employer in violation of the
provisions of Chapter XI, Title II of the Tax
Code fails to deduct and withhold and
thereafter the employee pays the tax, it shall
no longer be collected from the employer.
Such payment does not, however, operate to
relieve the employer from liability for
penalties or additions to the tax for failure to
deduct and withhold within the time
prescribed by law or regulations. The
employer will not be relieved of his liability for
payment of the tax required to be withheld
unless he can show that the tax has been paid
by the employee.
The amount of any tax withheld/collected by
the employer is a special fund in trust for the
Government of the Philippines.
When the employer or other person required
to deduct and withhold the tax under this
Chapter XI, Title II of the Tax Code has
withheld and paid such tax to the
Commissioner of Internal Revenue or to any
authorized collecting officer, then such
employer or person shall be relieved of any
liability to any person. (Emphasis supplied)
Constructive payment of compensation is
further defined in Revenue Regulations No. 6-
82:
Section 25. Applicability; constructive receipt
of compensation.
—....
Compensation is constructively paid within the
meaning of these regulations when it is
credited to the account of or set apart for an
employee so that it may be drawn upon by
him at any time although not then actually
reduced to possession. To constitute payment
in such a case, the compensation must be
credited or set apart for the employee without
any substantial limitation or restriction as to
the time or manner of payment or condition
upon which payment is to be made, and must
be made available to him so that it may be
drawn upon at any time, and its payment
brought within his control and disposition.
(Emphasis supplied)
On the other hand, it is also true that under
Section 45 of the 1997 National Internal
Revenue Code (then Section 39 of the 1977
National Internal Revenue Code, as amended),
deductions from gross income are taken for
the taxable year in which "paid or accrued" or
"paid or incurred" is dependent upon the
method of accounting income and expenses
adopted by the taxpayer.
In Commissioner of Internal Revenue v. Isabela
Cultural Corporation,94 this court explained the
accrual method of accounting, as against the
cash method:
Accounting methods for tax purposes
comprise a set of rules for determining when
and how to report income and deductions. . . .
Revenue Audit Memorandum Order No. 1-
2000, provides that under the accrual method
of accounting, expenses not being claimed as
deductions by a taxpayer in the current year
when they are incurred cannot be claimed as
deduction from income for the succeeding
year. Thus, a taxpayer who is authorized to
deduct certain expenses and other allowable
deductions for the current year but failed to
do so cannot deduct the same for the next
year.
The accrual method relies upon the taxpayer’s
right to receive amounts or its obligation to
pay them, in opposition to actual receipt or
payment, which characterizes the cash
method of accounting. Amounts of income
accrue where the right to receive them
become fixed, where there is created an
enforceable liability. Similarly, liabilities are
accrued when fixed and determinable in
amount, without regard to indeterminacy
merely of time of payment.
For a taxpayer using the accrual method, the
determinative question is, when do the facts
present themselves in such a manner that the
taxpayer must recognize income or expense?
The accrual of income and expense is
permitted when the all-events test has been
met. This test requires: (1) fixing of a right to
income or liability to pay; and (2) the
availability of the reasonable accurate
determination of such income or liability.
The all-events test requires the right to income
or liability be fixed, and the amount of such
income or liability be determined with
reasonable accuracy.1âwphi1 However, the
test does not demand that the amount of
income or liability be known absolutely, only
that a taxpayer has at his disposal the
information necessary to compute the amount
with reasonable accuracy. The all-events test is
satisfied where computation remains
uncertain, if its basis is unchangeable; the test
is satisfied where a computation may be
unknown, but is not as much as unknowable,
within the taxable year. The amount of liability
does not have to be determined exactly; it
must be determined with "reasonable
accuracy. "Accordingly, the term "reasonable
accuracy" implies something less than anex act
or completely accurate amount.95 (Emphasis
supplied, citations omitted)
Thus, if the taxpayer is on cash basis, he
expense is deductible in the year it was paid,
regardless of the year it was incurred. If he is
on the accrual method, he can deduct the
expense upon accrual thereof. An item that is
reasonably ascertained as to amount and
acknowledged to be due has "accrued"; actual
payment is not essential to constitute
"expense."
Stated otherwise, an expense is accrued and
deducted for tax purposes when (1) the
obligation to pay is already fixed; (2) the
amount can be determined with reasonable
accuracy; and (3) it is already knowable or the
taxpayer can reasonably be expected to have
known at the closing of its books for the
taxable year.
pg. 25
Section 29(j) of the 1977 National Internal
Revenue Code96 (Section 34(K) of the 1997
National Internal Revenue Code) expressly
requires, as a condition for deductibility of an
expense, that the tax required to be withheld
on the amount paid or payable is shown to
have been remitted to the Bureau of Internal
Revenue by the taxpayer constituted as a
withholding agent of the government.
The provision of Section 72 of the 1977
National Internal Revenue Code (Section 79 of
the 1997 National Internal Revenue Code)
regarding withholding on wages must be read
and construed in harmony with Section 29(j) of
the 1977 National Internal Revenue Code
(Section 34(K) of the 1997 National Internal
Revenue Code) on deductions from gross
income. This is in accordance with the rule on
statutory construction that an interpretation is
to be sought which gives effect to the whole of
the statute, such that every part is made
effective, harmonious, and sensible,97 if
possible, and not defeated nor rendered
insignificant, meaningless, and nugatory.98 If
we go by the theory of petitioner ING Bank,
then the condition imposed by Section 29(j)
would have been rendered nugatory, or we
would in effect have created an exception to
this mandatory requirement when there was
none in the law.
Reading together the two provisions, we hold
that the obligation of the payor/employer to
deduct and withhold the related withholding
tax arises at the time the income was paid or
accrued or recorded as an expense in the
payor’s/employer’s books, whichever comes
first.
Petitioner ING Bank accrued or recorded the
bonuses as deductible expense in its books.
Therefore, its obligation to withhold the
related withholding tax due from the
deductions for accrued bonuses arose at the
time of accrual and not at the time of actual
payment.
In Filipinas Synthetic Fiber Corporation v.
Court of Appeals,99 the issue was raised on
"whether the liability to withhold tax at source
on income payments to non-resident foreign available to petitioner ING Bank's officers and
corporations arises upon remittance of the employees. To avoid any tax issue, petitioner
amounts due to the foreign creditors or upon ING Bank should likewise have recognized the
accrual thereof."100 In resolving this issue, this withholding tax liabilities associated with the
court considered the nature of the accounting bonuses at the time of accrual.
method employed by the withholding agent,
which was the accrual method, wherein it was WHEREFORE, the Petition is PARTLY GRANTED.
the right to receive income, and not the actual The assessments with respect to petitioner
receipt, that determined when to report the ING Bank's liabilities for deficiency
amount as part of the taxpayer’s gross documentary stamp taxes on its special
income.101 It upheld the lower court’s finding savings accounts for the taxable years 1996
that there was already a definite liability on and 1997 and deficiency tax on onshore
the part of petitioner at the maturity of the interest income under the foreign currency
loan contracts.102 Moreover, petitioner already deposit system for taxable year 1996 are
deducted as business expense the said hereby SET ASIDE solely in view of petitioner
amounts as interests due to the foreign ING Bank's availment of the tax amnesty
corporation.103 Consequently, the taxpayer program under Republic Act No. 9480. The
could not claim that there was "no duty to April 5, 2005 Decision of the Court of Tax
withhold and remit income taxes as yet Appeals En Banc, which affirmed the August 9,
because the loan contract was not yet due and 2004 Decision and November 12, 2004
demandable."104 Petitioner, "[h]aving ‘written- Resolution of the Court of Tax Appeals Second
off’ the amounts as business expense in its Division holding petitioner ING Bank liable for
books, . . . had taken advantage of the benefit deficiency withholding tax on compensation
provided in the law allowing for deductions for the taxable years 1996 and 1997 in the
from gross income."105 total amount of ₱564,542.67 inclusive of
interest, is AFFIRMED.
Here, petitioner ING Bank already recognized a
definite liability on its part considering that it SO ORDERED.
had deducted as business expense from its
gross income the accrued bonuses due to its
employees. Underlying its accrual of the bonus
expense was a reasonable expectation or
probability that the bonus would be achieved.
In this sense, there was already a constructive
payment for income tax purposes as these
accrued bonuses were already allotted or
made available to its officers and employees.
We note petitioner ING Bank's earlier claim
before the Court of Tax Appeals that the bonus
accruals in 1996 and 1997 were disbursed in
the following year of accrual, as
reimbursements of representation, travel, and
entertainment expenses incurred by its
employees.106 This shows that the accrued
bonuses in the amounts of ₱400,075.0l (1996)
and Pl,034,119.43 (1997) on which deficiency
withholding taxes of Pl67,384.97 (1996) and
₱397,157.70 (1997) were imposed,
respectively, were already set apart or made