MANDANAS V.
EXECUTIVE SECRETARY, GR
199802, JULY 3, 2018)
FACTS:
The fiscal autonomy guaranteed to local
governments under Section 6, Article X of
the 1987 Constitution means the power to
create their own sources of revenue in
addition to their equitable share in the
"national taxes" released by the National
Government, as well as the power to
allocate their resources in accordance with
their own priorities.
Pursuant to this Constitutional dictum,
Congress enacted Republic Act No. 7160,
otherwise known as the Local Government
Code (LGC). Sec. 284 of the LGC provides
that LGUs shall have an allotment
equivalent to 40% of the the national
internal revenue taxes.
The share of the LGUs, known as the
Internal Revenue Allotment (IRA), has
been regularly released to the LGUs.
According to the implementing rules and
regulations of the LGC, the IRA is
determined on the basis of the actual
collections of the National Internal
Revenue Taxes (NIRTs) as certified by the
Bureau of Internal Revenue (BIR).
ISSUE:
Two petitions were filed to challenge the
base figure for the computation of the IRA.
In G.R. No. 199802, Cong. Hermilando
Mandanas, et al., alleged that the NIRTs
certified by the BIR excluded the NIRTs
collected by the Bureau of Customs,
specifically excise taxes, value added taxes
(VATs), and documentary stamp taxes
(DSTs). Such exclusion resulted in LGUs
being deprived of ₱60,750,000,000.00 for
FY 2012. Further, the petitioners argued
that since this mistake in computation was
happening since 1992, then the National
Government has effectively deprived LGUs
of ₱438,103,906,675.73 in their IRA.
Meanwhile, in G.R. No. 208488, Cong.
Enrique Garcia, Jr. sought the issuance of
the writ of mandamus to compel
respondents to compute the just share of
the LGUs on the basis of all national taxes.
He argued that the insertion by Congress
of the words "internal revenue" in the
phrase "national taxes" found in Section
284 of the LGC caused the diminution of
the base for determining the just share of
the LGUs, and should be declared
unconstitutional.
Whether or not Section 284 of the LGC is
unconstitutional for being repugnant to
Section 6, Article X of the 1987
Constitution. -- YES.
HELD:
Section 6 of the Constitution mentions
"national taxes" as the source of the just
share of the LGUs while Section 284 of the
LGC ordains that the share of the LGUs be
taken from "national internal revenue
taxes" instead. Congress thereby infringed
the constitutional provision.
Although the power of Congress to make
laws is plenary in nature, congressional
lawmaking remains subject to the
limitations stated in the 1987 Constitution.
The phrase "national internal revenue
taxes" in Section 284 is undoubtedly more
restrictive than the term "national taxes"
written in Section 6 of the Constitution. As
such, Congress has actually departed from
the letter of the 1987 Constitution stating
that national taxes should be the base
from which the just share of the LGU
comes. Such departure is
impermissible.  Verba legis non est
recedendum (from the words of a statute
there should be no departure).
Equally impermissible is that Congress has
also thereby curtailed the guarantee of
fiscal autonomy in favor of the LGUs under
the 1987 Constitution.
What the phrase "national internal
revenue taxes" as used in Section 284 of
the LGC included are all the taxes
enumerated in Section 21 of the National
Internal Revenue Code (NIRC), as
amended by R.A. No. 8424, namely:
income tax, estate and donor's taxes, VAT,
other percentage taxes, excise taxes,
documentary stamp taxes, and such other
taxes as may be imposed and collected by
the BIR.
In view of the foregoing enumeration of
what are the national internal revenue
taxes, Section 284 of the LGC has
effectively deprived the LGUs from
deriving their just share from other
national taxes, like the customs duties.
Moving forward, the BIR and the BOC are
directed certify all national tax collections.
This ruling, also known as the "Mandanas
Ruling," is to be applied prospectively.
TAN V. DEL ROSARIO, GR 109289
(OCTOBER 3, 1994)
Petitioners posit RA 7496, also
commonly known as the Simplified Net
Income Taxation Scheme (SNIT), amending
certain provisions of the National Internal
Revenue Code, as violative of the
constitutional requirement that taxation
shall be "uniform and equitable”. The law
would now attempt to tax single
proprietorships and professionals
differently from the manner it imposes the
tax on corporations and partnerships.
Petitioner gives a fairly extensive
discussion on the merits of the law,
illustrating in the process, what he
believes to be an imbalance between tax
liabilities of those covered by the
amendatory law and those who are not.
FACTS:
These two consolidated special
civil actions for prohibition challenge, in
G.R. No. 109289, the constitutionality of
Republic Act No. 7496, also commonly
known as the Simplified Net
Income Taxation Scheme ("SNIT"),
amending certain provisions of the
National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6,
Revenue Regulations No. 293,
promulgated by public respondents
pursuant to said law.
Petitioners claim to be taxpayers
adversely affected by the continued
implementation of the amendatory
legislation.
In G.R. No. 109289, it is asserted
that the enactment of Republic Act No.
7496 violates the following provisions of
the Constitution:
"Article VI, Section 26(1) - Every
bill passed by the Congress shall embrace
only one subject which shall be expressed
in the title thereof."
"Article VI, Section 28(1) - The rule
of taxation shall be uniform and equitable.
The Congress shall evolve a progressive
system of taxation."
"Article III, Section 1 - No person
shall be deprived of x x x property without
due process of law, nor shall any person
be denied the equal protection of the
laws."
In G.R. No. 109446, petitioners,
assailing Section 6 of Revenue Regulations
No. 2-93, argue that public respondents    
have exceeded their rule-making authority
in applying SNIT to general professional
partnerships.
ISSUES/HELD:
1.  Whether or not the tax law is
unconstitutional for violating due process.
(NO).
     The due process clause may correctly
be invoked only when there is a clear
contravention of inherent or constitutional
limitations in the exercise of the tax
power. No such transgression is so evident
in herein case.
     Uniformity of taxation, like the concept
of equal protection, merely requires that
all subjects or objects of taxation, similarly
situated, are to be treated alike both in
privileges and liabilities. Uniformity does
not violate classification as long as: (1) the
standards that are used therefor are
substantial and not arbitrary, (2) the
categorization is germane to achieve the
legislative purpose, (3) the law applies, all
things being equal, to both present and
future conditions, and (4) the classification
applies equally well to all those belonging
to the same class.
       What is apparent from the amendatory
law is the legislative intent to increasingly
shift the income tax system towards the
schedular approach in the income taxation
of individual taxpayers and to maintain, by
and large, the present global treatment on
taxable corporations. The Court does not
view this classification to be arbitrary and
inappropriate.
2: Whether or not public respondents
exceeded their authority in
promulgating the Revenue
Regulations. (NO).
      There is no evident intention of the
law, either before or after the amendatory
legislation, to place in an unequal footing
or in significant variance the income tax
treatment of professionals who practice
their respective professions individually
and of those who do it through a general
professional partnership.
 
 
ACCORDINGLY, the Court RESOLVES
1.  To REVERSE and SET ASIDE the assailed
Resolutions dated June 26, 2014 and
November 27, 2014 of the Court of
Appeals in CA-G.R. CV No. 102266;
2. To DENY the Petition for Review dated
February 17,2015 in G.R. No. 215801 and
the Special Civil Action for Certiorari dated
February 12, 2015 in G.R. No. 218924; and,
3. To AFFIRM the Resolution dated
September 5, 2013 and Order dated
December 18, 2013 of the Regional Trial
Court, Branch 146, Makati City in Special
Civil Action No. 12-1236.
SO ORDERED.
FISHER V. TRINIDAD, GR L-17518, OCT. 20,
1922
Facts:
Philippine American Drug Company was a
corporation duly organized and existing
under the laws of the Philippine Islands,
doing business in the City of Manila. Fisher
was a stockholder in said corporation. Said
corporation, as result of the business for
that year, declared a "stock dividend" and
that the proportionate share of said stock
divided of Fisher was P24,800. Said the
stock dividend for that amount was issued
to Fisher. For this reason, Trinidad
demanded payment of income tax for the
stock dividend received by Fisher. Fisher
paid under protest the sum of P889.91 as
income tax on said stock dividend. Fisher
filed an action for the recovery of P889.91.
Trinidad demurred to the petition upon
the ground that it did not state facts
sufficient to constitute cause of action.
The demurrer was sustained and Fisher
appealed.
Issue:
Whether or not the stock dividend was an
income and therefore taxable.
Held:
No. Generally speaking, stock dividends
represent undistributed increase in the
capital of corporations or firms, joint stock
companies, etc., etc., for a particular
period. The inventory of the property of
the corporation for particular period
shows an increase in its capital, so that the
stock theretofore issued does not show
the real value of the stockholder's interest,
and additional stock is issued showing the
increase in the actual capital, or property,
or assets of the corporation. In the case of
Gray vs. Darlington (82 U.S., 653), the US
Supreme Court held that mere advance in
value does not constitute the "income"
specified in the revenue law as "income"
of the owner for the year in which the sale
of the property was made. Such advance
constitutes and can be treated merely as
an increase of capital. In the case of
Towne vs. Eisner, income was defined in
an income tax law to mean cash or its
equivalent, unless it is otherwise specified.
It does not mean unrealized increments in
the value of the property. A stock dividend
really takes nothing from the property of
the corporation, and adds nothing to the
interests of the shareholders. Its property
is not diminished and their interest are not
increased. The proportional interest of
each shareholder remains the same. In
short, the corporation is no poorer and the
stockholder is no richer then they were
before. In the case of Doyle vs. Mitchell
Bros. Co. (247 U.S., 179), Mr. Justice
Pitney, said that the term "income" in its
natural and obvious sense, imports
something distinct from principal or
capital and conveying the idea of gain or
increase arising from corporate activity. In
the case of Eisner vs. Macomber (252 U.S.,
189), income was defined as the gain
derived from capital, from labor, or from
both combined, provided it be understood
to include profit gained through a sale or
conversion of capital assets. When a
corporation or company issues "stock
dividends" it shows that the company's
accumulated profits have been capitalized,
instead of distributed to the stockholders
or retained as surplus available for
distribution, in money or in kind, should
opportunity offer. The essential and
controlling fact is that the stockholder has
received nothing out of the company's
assets for his separate use and benefit; on
the contrary, every dollar of his original
investment, together with whatever
accretions and accumulations resulting
from employment of his money and that
of the other stockholders in the business
of the company, still remains the property
of the company, and subject to business
risks which may result in wiping out of the
entire investment. The stockholder by
virtue of the stock dividend has in fact
received nothing that answers the
definition of an "income." The stockholder
who receives a stock dividend has received
nothing but a representation of his
increased interest in the capital of the
corporation. There has been no separation
or segregation of his interest. All the
property or capital of the corporation still
belongs to the corporation. There has
been no separation of the interest of the
stockholder from the general capital of the
corporation. The stockholder, by virtue of
the stock dividend, has no separate or
individual control over the interest
represented thereby, further than he had
before the stock dividend was issued. He
cannot use it for the reason that it is still
the property of the corporation and not
the property of the individual holder of
stock dividend. A certificate of stock
represented by the stock dividend is
simply a statement of his proportional
interest or participation in the capital of
the corporation. The receipt of a stock
dividend in no way increases the money
received of a stockholder nor his cash
account at the close of the year. It simply
shows that there has been an increase in
the amount of the capital of the
corporation during the particular period,
which may be due to an increased
business or to a natural increase of the
value of the capital due to business,
economic, or other reasons. We believe
that the Legislature, when it provided for
an "income tax," intended to tax only the
"income" of corporations, firms or
individuals, as that term is generally used
in its common acceptation; that is that the
income means money received, coming to
a person or corporation for services,
interest, or profit from investments. We
do not believe that the Legislature
intended that a mere increase in the value
of the capital or assets of a corporation,
firm, or individual, should be taxed as
"income." A stock dividend, still being the
property of the corporation and not the
stockholder, may be reached by an
execution against the corporation, and
sold as a part of the property of the
corporation. In such a case, if all the
property of the corporation is sold, then
the stockholder certainly could not be
charged with having received an income
by virtue of the issuance of the stock
dividend. Until the dividend is declared
and paid, the corporate profits still belong
to the corporation, not to the
stockholders, and are liable for corporate
indebtedness. The rule is well established
that cash dividend, whether large or small,
are regarded as "income" and all stock
dividends, as capital or assets If the
ownership of the property represented by
a stock dividend is still in the corporation
and not in the holder of such stock, then it
is difficult to understand how it can be
regarded as income to the stockholder and
not as a part of the capital or assets of the
corporation. If the holder of the stock
dividend is required to pay an income tax
on the same, the result would be that he
has paid a tax upon an income which he
never received. Such a conclusion is
absolutely contradictory to the idea of an
income. As stock dividends are not
"income," the same cannot be considered
taxes under that provision of Act No. 2833.
For all of the foregoing reasons, SC held
that the judgment of the lower court
should be REVOKED.
MADRIGAL VS RAFFERTY GR L-12287
FACTS:
Vicente Madrigal and Susana Paterno
were legally married prior to January 1,
1914. The marriage was contracted under
the provisions of conjugal partnerships. On
1915, Madrigal filed a sworn declaration
showing his total net income for the year
1914 the sum of P296,302.73.
Subsequently, Madrigal submitted the
claim that it did not represent his income
for the year 1914 but instead the income
of the conjugal partnership existing
between him and his wife Susana.
Petitioner averred that in computing and
assessing the additional income tax
provided by the Act of Congress of
October 1913, the income declared by
Vicente Madrigal should be divided into
two equal parts, one-half to be considered
the income of Vicente Madrigal and the
other half the income of Susana.
The question had been submitted to the
Attorney-General who in an opinion held
in favor of petitioner Madrigal. The
revenue officers being still unsatisfied, the
correspondence together with this opinion
was forwarded to US for a decision by the
US Treasury Department. The US
Commissioner of Internal
Revenue reversed the opinion of the
Attorney-General, and thus decided
against the claim of Madrigal.
Then, after payment under protest, an
action was filed by Vicente and Susana in
the CFI Manila against the Collector of
Internal Revenue and the Deputy Collector
for the recovery of the sum of
P3,786.08, alleged to have been
wrongfully and illegally assessed and
collected from the plaintiff, Madrigal,
under the provisions of Income Tax Law.
The burden of the complaint was that if
the income tax for the year 1914 had been
correctly and lawfully computed there
would have been due and payable by each
of the plaintiffs the sum
of P2,921.09, which taken together
amounts to a total of P5,842.18 instead of
P9,668.21, with the result that plaintiff
Madrigal has paid ' as income tax for the
year 1914, P3,786.08, in excess of the sum
lawfully due and payable.
Respondent’s Initial Contention:
The income of Vicente Madrigal and his
wife Susana Paterno for the year 1914 was
made up of three items:
(1)    P362,407.67,
the profits made by
Vicente Madrigal in his coal
and shipping business;
(2)    P4,086.50,
the profits made by
Susana Paterno in
her embroidery business;
(3)    P16,687.80,
the profits made by
Vicente Madrigal in
a pawnshop company.
The sum of these three items is
P383,181.97, the gross income of Vicente
Madrigal and Susana Paterno for the year
1914. General deductions were claimed
and allowed in the sum of P86,879.24. The
resulting net income was P296,302.73. For
the purpose of assessing the normal tax of
one per cent on the net income there
were allowed as specific deductions the
following: (1) P16,687.80, the tax upon
which was to be paid at source, and (2)
P8,000, the specific exemption granted to
Vicente Madrigal and Susana Paterno,
husband and wife. The remainder,
P271,614.93 was the sum upon which the
normal tax of one percent was
assessed. The normal tax thus arrived at
was P2,716.15.
CFI- In favor of respondent commissioners.
Petitioner-plaintiff: Additional income tax,
is that it should be divided into two equal
parts, because of the conjugal partnership
existing between them
Respondent-defendant:
(NOTE) The appellees contend that the
taxes imposed by the Income Tax Law are
as the name implies taxes upon income
and not upon capital and property; that
the fact that Madrigal was a married man,
and his marriage contracted under the
provisions governing the conjugal
partnership, has no bearing on income
considered as income, and that
the distinction must be
drawn between the ordinary form of
commercial partnership and the conjugal
partnership of spouses resulting from the
relation of marriage.
 
ISSUE: 
WON the assessment on the income tax of
Madrigal was proper.
RULING:                     
YES.
The Income Tax Law of the US, extended
to the Philippines, is the result of an effect
on the part of legislators to put into
statutory form this canon of taxation and
of social reform. The aim has been to
mitigate the evils arising from inequalities
of wealth by a progressive scheme of
taxation, which places the burden on
those best able to pay. To carry out this
idea, public considerations have
demanded an exemption roughly
equivalent to the minimum of subsistence.
With these exceptions, the income tax is
supposed to reach the earnings of the
entire non-governmental property of the
country.
(INCOME vs CAPITAL) Income as against
capital or property is to be the test. The
essential difference between capital and
income is that CAPITAL BEING A FUND;
INCOME IS A FLOW. A fund of property
existing at an instant of time is called
capital. A flow of services rendered by that
capital, through payment of money or
other benefit rendered by a fund of capital
is called income. Capital is wealth, while
income is the service of wealth. "The fact
is that property is a tree, income is the
fruit; labor is a tree, income the fruit;
capital is a tree, income the fruit."
A regulation of the United States Treasury
Department relative to returns by the
husband and wife not living apart,
contains the following:
The husband, as the head and
legal representative of the
household and general custodian
of its income, should make and
render the return of the aggregate
income of himself and wife, and
for the purpose of levying the
income tax it is assumed that he
can ascertain the total amount of
said income.
(Gist- They are jointly and
separately liable for such return
and for the payment of the tax.
Connected. Attaching each other’s
income tax return whenever they
have separate returns)
Then, we turn for a moment to consider
the provisions of the Civil Code dealing
with the conjugal partnership. "Prior to
the liquidation, the interest of the wife,
and in case of her death, of her heirs, is
an interest inchoate, a mere expectancy,
which constitutes neither a legal nor an
equitable estate, and does not ripen into
title until there appears that there are
assets in the community as a result of the
liquidation and settlement."
Susana Paterno, wife, has an INCHOATE
RIGHT in the property of her husband
Madrigal during the life of the conjugal
partnership. She has an interest in the
ultimate property rights and in the
ultimate ownership of property acquired
as income after such income has become
capital. Susana has no absolute right to
one-half the income of the conjugal
partnership. Not being seized of a
separate estate,
(NOTE) Susana cannot make a separate
return in order to receive the benefit of
the exemption which would arise by
reason of the additional tax. As she has no
estate and income, actually and legally
vested in her and entirely distinct from her
husband's property, the income cannot
properly be considered the separate
income of the wife for the purposes of the
additional tax.
Moreover, the Income Tax Law does not
look on the spouses as individual partners
in an ordinary partnership. The husband
and wife are only entitled to the
exemption of P8,000, specifically granted
by the law.
(NOTE) The higher schedules of the
additional tax directed at the incomes of
the wealthy may not be partially defeated
by reliance on provisions in our Civil Code
dealing with the conjugal partnership and
having no application to the Income Tax
Law. The aims and purposes of the Income
Tax Law must be given effect.
The Income Tax Law was drafted by the
Congress of the United States and has
been by the Congress extended to the
Philippine Islands. Being thus a law of
American origin and being peculiarly
intricate in its provisions, the authoritative
decision of the official who is charged with
enforcing it has peculiar force for the
Philippines. It has come to be a well-
settled rule that great weight should be
given to the construction placed upon a
revenue law, whose meaning is doubtful,
by the department charged with its
execution.
We conclude that the judgment should be
as it is hereby AFFIRMED with costs
against appellants. So ordered.
ASSOCIATION OF NON-PROFIT CLUBS, INC.
V. BIR, GR 228539, JUNE 26, 2019
FACTS:
 August 3, 2012: Bureau of Internal
Revenue (BIR) issued issued
Revenue Memorandum Circular
(RMC) No. 35-2012 entitled
“"Clarifying the Taxability of Clubs
Organized and Operated
Exclusively for Pleasure,
Recreation, and Other Non-Profit
Purposes” which was addressed to
all revenue officials, employees,
and others concerned for their
guidance regarding the income tax
and Valued Added Tax (VAT)
liability of the said recreational
clubs.
 Quimosing), Chief of Staff and
 RMC No. 35-2012 states that
"clubs which are organized and
operated exclusively for pleasure,
recreation, and other non-profit
purposes are subject to income
tax under the National Internal
Revenue Code of 1997, as
amended (1997 NIRC)."  In
justifying the interpration, the BIR
raised the doctrine of casus
omissus pro omisso habendus est,
a person, object, or thing omitted
from an enumeration must be
held to have been omitted
intentionally. The provision in the
1977 Tax Code which granted
income tax exemption to such
recreational clubs was omitted in
the 1997 NIRC, as amended and 
Section 105, Chapter I, Title IV of
the 1997 NIRC, which states that
even a nonstock, nonprofit private
organization or government entity
is liable to pay VAT on the sale of
goods or services.

 October 25, 2012: During the
meeting of ANPC and other club
member representatives with
Atty. Elenita Quimosing (Atty.
Operations Group of the BIR, Atty.
Quimosing suggested the
attendees to submit a position
paper to the BIR regarding their
concerts about the Circular.  
  
 September Since the BIR has not
action upon NPC’s request on its
position paper for the non-
application of RMC No. 35-2012,
ANPC, filed before the RTC a
petition for declaratory relief to
declare RMC no. 35-2012 invalid,
unjust, oppressive, confiscatory,
and in violation of the due process
 clause of the Constitution for it is
beyond the BIR’s rule-making
authority.
 
 RTC: Denied the petition for
declaratory relief and upheld RMC
No. 35-2012
 prohibition which are concurrently
 ANPC filed a petition for review
on certiorari raising pure
questions of law
ISSUES:
1.    W/N the doctrine of hierarchy of
courts should apply and the matter should
be first elevated the matter to the
Secretary of Finance for review pursuant
to Section 4, Title I of the 1997 NIRC.
2.    W/N RMC No. 35-2012 is
constitutional.
HELD:
Partly meritorious.
1.    NO.  The petition for review on
certiorari, filed pursuant to Section 2 (c),
Rule 41 in relation to Rule 45 of the Rules
of Court, is the sole remedy to appeal a
decision of the RTC in cases involving pure
questions of law
The doctrine of hierarchy of courts
is violated only when relief may be
had through multiple fora having
concurrent jurisdiction over the
case, such as in petitions for
certiorari, mandamus, and
cognizable either by the Regional
Trial Courts, the Court of Appeals,
or the Supreme Court.
 replenishment of the funds for the
 Uy v. Contreras: This Court, the
Court of Appeals, and the Regional
Trial Courts have concurrent
original jurisdiction to issue writs
of certiorari, prohibition,
mandamus, quo
warranto,  and habeas corpus,
such concurrence does not accord
litigants unrestrained freedom of
choice of the court to which
application therefor may be
directed. There is a hierarchy of
courts determinative of the venue
of appeals which should also serve
as a general determinant of the
proper forum for the application
for the extraordinary writs.

2.    Yes.
 RMC No. 35-2012 erroneously
foisted a sweeping interpretation
that membership fees and
assessment dues are sources of
income of recreational clubs from
which income tax liability may
accrue.  As correctly argued by
ANPC, membership fees,
assessment dues, and other fees
of similar nature only constitute
contributions to and/or
maintenance and operations of
the facilities offered by
recreational clubs to their
exclusive members.  They
represent funds "held in trust" by
these clubs to defray their
operating and general costs and
hence, only constitute infusion of
capital.

 Well-enshrined principle in our
jurisdiction that the State cannot
impose a tax on capital as it
constitutes an unconstitutional
confiscation of property.  An
income tax is arbitrary and
 confiscatory if it taxes capital From February 21 to December 31, 1970 Respondent Commissioner filed
because capital is not income. at the conversion rate of P6.25 to U.S. his Answer to petitioners' petition for
$1.00 review in C.T.A. Case No. 2511 on July 31,
1973, while his Answer in C.T.A. Case No.
CONWI V. COMMISSIONER, 213 SCRA 83 Petitioners in C.T.A. Case No. 2594 2594 was filed on August 7, 1974.
likewise used the above conversion rate in
converting their dollar income for 1971 to Upon joint motion of the parties
Philippine peso. However, on February 8, on the ground that these two cases
Petitioners are Filipino citizens and
1973 and October 8, 1973, petitioners in involve common question of law and facts,
employees of Procter and Gamble,
said cases filed with the office of the that respondent Court of Tax Appeals
Philippine Manufacturing Corporation,
respondent Commissioner, amended heard the cases jointly. In its decision
with offices at Sarmiento Building, Ayala
income tax returns for the above- dated September 26, 1977, the
Avenue, Makati, Rizal. Said corporation is
mentioned years, this time using the par respondent Court of Tax Appeals held that
a subsidiary of Procter & Gamble, a
value of the peso as prescribed in Section the proper conversion rate for the
foreign corporation based in Cincinnati,
48 of Republic Act No. 265 in relation to purpose of reporting and paying the
Ohio, U.S.A. During the years 1970 and
Section 6 of Commonwealth Act No. 265 in Philippine income tax on the dollar
1971 petitioners were assigned, for certain
relation to Section 6 of Commonwealth earnings of petitioners are the rates
periods, to other subsidiaries of Procter &
Act No. 699 as the basis for converting prescribed under Revenue Memorandum
Gamble, outside of the Philippines, during
their respective dollar income into Circulars Nos. 7-71 and 41-71. Accordingly,
which petitioners were paid U.S. dollars as
Philippine pesos for purposes of the claim for refund and/or tax credit of
compensation for services in their foreign
computing and paying the corresponding petitioners in the above-entitled cases was
assignments. (Paragraphs III, Petitions for
income tax due from them. The aforesaid denied and the petitions for review
Review, C.T.A. Cases Nos. 2511 and 2594,
computation as shown in the amended dismissed, with costs against petitioners.
Exhs. D, D-1 to D-19). When petitioners in
income tax returns resulted in the alleged Hence, this petition for review
C.T.A. Case No. 2511 filed their income tax
overpayments, refund and/or tax credit. on certiorari. 2
returns for the year 1970, they computed
Accordingly, claims for refund of said over-
the tax due by applying the dollar-to-peso
payments were filed with respondent Petitioners claim that public respondent
conversion on the basis of the floating rate
Commissioner. Without awaiting the Court of Tax Appeals erred in holding:
ordained under B.I.R. Ruling No. 70-027
resolution of the Commissioner of the
dated May 14, 1970, as follows:
Internal Revenue on their claims, 1. That petitioners' dollar earnings are
petitioners filed their petitioner for review receipts derived from foreign exchange
From January 1 to February 20, 1970 at
in the above-mentioned cases. transactions.
the conversion rate of P3.90 to U.S. $1.00;
2. That the proper rate of conversion of
petitioners' dollar earnings for tax
purposes in the prevailing free market rate
of exchange and not the par value of the
peso; and
3. That the use of the par value of the
peso to convert petitioners' dollar
earnings for tax purposes into Philippine
pesos is "unrealistic" and, therefore, the
prevailing free market rate should be the
rate used.
Respondent Commissioner of Internal
Revenue, on the other hand, refutes
petitioners' claims as follows:
At the outset, it is submitted that
the subject matter of these two cases are
Philippine income tax for the calendar
years 1970 (CTA Case No. 2511) and 1971
(CTA Case No. 2594) and, therefore,
should be governed by the provisions of
the National Internal Revenue Code and
its implementing rules and regulations,
and not by the provisions of Central Bank
Circular No. 42 dated May 21, 1953, as
contended by petitioners.
Section 21 of the National Internal
Revenue Code, before its amendment by
Presidential Decrees Nos. 69 and 323
which took effect on January 1, 1973 and
January 1, 1974, respectively, imposed a
tax upon the taxable net income received
during each taxable year from all sources
by a citizen of the Philippines, whether
residing here or abroad.
Petitioners are citizens of the
Philippines temporarily residing abroad by
virtue of their employment. Thus, in their
tax returns for the period involved herein,
they gave their legal residence/address as
c/o Procter & Gamble PMC, Ayala Ave.,
Makati, Rizal (Annexes "A" to "A-8" and
Annexes "C" to "C-8", Petition for Review,
CTA Nos. 2511 and 2594).
Petitioners being subject to
Philippine income tax, their dollar earnings
should be converted into Philippine pesos
in computing the income tax due
therefrom, in accordance with the
provisions of Revenue Memorandum
Circular No. 7-71 dated February 11, 1971
for 1970 income and Revenue
Memorandum Circular No. 41-71 dated
December 21, 1971 for 1971 income,
which reiterated BIR Ruling No. 70-027
dated May 4, 1970, to wit:
For internal revenue tax purposes, the free
marker rate of conversion (Revenue
Circulars Nos. 7-71 and 41-71) should be
applied in order to determine the true and
correct value in Philippine pesos of the
income of petitioners. 3
After a careful examination of the records,
the laws involved and the jurisprudence
on the matter, We are inclined to agree
with respondents Court of Tax Appeals
and Commissioner of Internal Revenue
and thus vote to deny the petition.
This basically an income tax case. For the
proper resolution of these cases income
may be defined as an amount of money
coming to a person or corporation within a
specified time, whether as payment for
services, interest or profit from
investment. Unless otherwise specified, it
means cash or its equivalent. 4 Income can
also be though of as flow of the fruits of
one's labor. 5
Petitioners are correct as to their claim
that their dollar earnings are not receipts
derived from foreign exchange
transactions. For a foreign exchange
transaction is simply that — a transaction
in foreign exchange, foreign exchange
being "the conversion of an amount of
money or currency of one country into an
equivalent amount of money or currency
of another." 6 When petitioners were
assigned to the foreign subsidiaries of
Procter & Gamble, they were earning in
their assigned nation's currency and were
ALSO spending in said currency. There was
no conversion, therefore, from one
currency to another.
Public respondent Court of Tax Appeals
did err when it concluded that the dollar
incomes of petitioner fell under Section
2(f)(g) and (m) of C.B. Circular No. 42. 7
The issue now is, what exchange rate
should be used to determine the peso
equivalent of the foreign earnings of
petitioners for income tax purposes.
Petitioners claim that since the dollar
earnings do not fall within the
classification of foreign exchange
transactions, there occurred no actual
inward remittances, and, therefore, they
are not included in the coverage of Central
Bank Circular No. 289 which provides for
the specific instances when the par value
of the peso shall not  be the conversion
rate used. They conclude that their
earnings should be converted for income
tax purposes using the par value of the
Philippine peso.
Respondent Commissioner argues that CB
Circular No. 289 speaks of receipts for
export products, receipts of sale of foreign
exchange or foreign borrowings and
investments but not income tax. He also
claims that he had to use the prevailing
free market rate of exchange in these
cases because of the need to ascertain the
true and correct amount of income in
Philippine peso of dollar earners for
Philippine income tax purposes.
A careful reading of said CB Circular No.
289 8 shows that the subject matters
involved therein are export products,
invisibles, receipts of foreign exchange,
foreign exchange payments, new foreign
borrowing and
investments — nothing by way of income
tax payments. Thus, petitioners are in
error by concluding that since C.B. Circular
No. 289 does not apply to them, the par
value of the peso should be the guiding
rate used for income tax purposes.
The dollar earnings of petitioners are the
fruits of their labors in the foreign
subsidiaries of Procter & Gamble. It was a
definite amount of money which came to
them within a specified period of time of
two yeas as payment for their services.
Section 21 of the National Internal
Revenue Code, amended up to August 4,
1969, states as follows:
Sec. 21. Rates of tax on citizens or
residents. —  A tax is hereby imposed upon
the taxable net income received during
each taxable year from all sources by
every individual, whether a citizen of the
Philippines residing therein or abroad or
an alien residing in the Philippines,
determined in accordance with the
following schedule:
x x x           x x x          x x x
And in the implementation for the proper
enforcement of the National Internal
Revenue Code, Section 338 thereof
empowers the Secretary of Finance to
"promulgate all needful rules and
regulations" to effectively enforce its
provisions. 9
Pursuant to this authority, Revenue
Memorandum Circular Nos. 7-71 10 and 41-
71 11 were issued to prescribed a uniform
rate of exchange from US dollars to
Philippine pesos for INTERNAL REVENUE
TAX PURPOSES for the years 1970 and
1971, respectively. Said revenue circulars
were a valid exercise of the authority
given to the Secretary of Finance by the
Legislature which enacted the Internal
Revenue Code. And these are presumed to
be a valid interpretation of said code until
revoked by the Secretary of Finance
himself. 12
Petitioners argue that since there were no
remittances and acceptances of their
salaries and wages in US dollars into the
Philippines, they are exempt from the
coverage of such circulars. Petitioners
forget that they are citizens of the
Philippines, and their income, within or
without, and in these cases wholly
without, are subject to income tax. Sec.
21, NIRC, as amended, does not brook any
exemption.
Since petitioners have already paid their
1970 and 1971 income taxes under the
uniform rate of exchange prescribed
under the aforestated Revenue
Memorandum Circulars, there is no reason
for respondent Commissioner to refund
any taxes to petitioner as said Revenue
Memorandum Circulars, being of long
standing and not contrary to law, are
valid. 13
Although it has become a worn-out cliche,
the fact still remains that "taxes are the
lifeblood of the government" and one of
the duties of a Filipino citizen is to pay his
income tax.
WHEREFORE, the petitioners are denied
for lack of merit. The dismissal by the
respondent Court of Tax Appeals of
petitioners' claims for tax refunds for the
income tax period for 1970 and 1971 is
AFFIRMED. Costs against petitioners.
SO ORDERED.
LIMPAN INVESTMENT CORPORATION V.
COMMISSIONER, 17 SCRA 703
LIMPAN INVESTMENT
CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
ET AL., respondents.
Vicente L. San Luis for petitioner.
Office of the Solicitor General A. A. Alafriz,
Assistant Solicitor General F. B. Rosete,
Solicitor A. B. Afurong and Atty. V. G.
Saldajeno for respondents.
REYES, J.B.L., J.:
Appeal interposed by petitioner Limpan
Investment Corporation against a decision
of the Court of Tax Appeals, in its CTA Case
No. 699, holding and ordering it
(petitioner) to pay respondent
Commissioner of Internal Revenue the
sums of P7,338.00 and P30,502.50,
representing deficiency income taxes, plus
50% surcharge and 1% monthly interest
from June 30, 1959 to the date of
payment, with cost.
The facts of this case are:
Petitioner, a domestic corporation duly
registered since June 21, 1955, is engaged
in the business of leasing real properties. It
commenced actual business operations on
July 1, 1955. Its principal stockholders are
the spouses Isabelo P. Lim and Purificacion
Ceñiza de Lim, who own and control
ninety-nine per cent (99%) of its total
paid-up capital. Its president and chairman
of the board is the same Isabelo P.
Lim.1äwphï1.ñët
Its real properties consist of several lots
and buildings, mostly situated in Manila
and in Pasay City, all of which were
acquired from said Isabelo P. Lim and his
mother, Vicente Pantangco Vda. de Lim.
Petitioner corporation duly filed its 1956
and 1957 income tax returns, reporting
therein net incomes of P3,287.81 and
P11,098.36, respectively, for which it paid
the corresponding taxes therefor in the
sums of P657.00 and P2,220.00.
Sometime in 1958 and 1959, the
examiners of the Bureau of Internal
Revenue conducted an investigation of
petitioner's 1956 and 1957 income tax
returns and, in the course thereof, they
discovered and ascertained that petitioner
had underdeclared its rental incomes by
P20,199.00 and P81,690.00 during these
taxable years and had claimed excessive
depreciation of its buildings in the sums of
P4,260.00 and P16,336.00 covering the
same period. On the basis of these
findings, respondent Commissioner of
Internal Revenue issued its letter-
assessment and demand for payment of
deficiency income tax and surcharge DUE Revenue to reconsider the above
against petitioner corporation, computed assessment but the latter denied said
as follows: 90-AR-C-1196-58/57 request and reiterated its original
Net income per assessment and demand, plus 5%
P11,098.00 surcharge and the 1% monthly interest
90-AR-C-348-58/56 audited return
from June 30, 1959 to the date of
Net income per Add: Unallowable payment; hence, the corporation filed its
P 3,287.81
audited return deductions: petition for review before the Tax Appeals
court, questioning the correctness and
Add: Unallowable Undeclared Rental
validity of the above assessment of
deductions: Receipt (Sched. A)
respondent Commissioner of Internal
. . . . . . . .
Undeclared Rental Revenue. It disclaimed having received or
P81,690.00
Receipt collected the amount of P20,199.00, as
Excess unreported rental income for 1956, or any
(Sched. A) . . . . . . .
Depreciation part thereof, reasoning out that 'the
.............
(Sched. B) . . . . . . . P98,028.00 previous owners of the leased building has
P20,199.00
. . . . . . . . (have) to collect part of the total rentals in
Excess 16,338.00 1956 to apply to their payment of rental in
Depreciation the land in the amount of P21,630.00"
Net income per (par. 11, petition). It also denied having
(Sched. B) . . . . . . . P24,459.00 P109,126.00
investigation received or collected the amount of
. . . . . . . . . .
4,260.00 Tax due thereon P22,555.00 P81,690.00, as unreported rental income
for 1957, or any part thereof, explaining
Net income per Less: Amount that part of said amount totalling
P27,746.00 2,220.00
investigation already assessed P31,380.00 was not declared as income in
Tax due thereon P5,549.00 Balance 20,335.00 its 1957 tax return because its president,
Isabelo P. Lim, who collected and received
Less: Amount Add: 50% P13,500.00 from certain tenants, did not
657.00 10,167.50
already assessed Surcharge turn the same over to petitioner
Balance P4,892.00 corporation in said year but did so only in
DEFICIENCY TAX
P30,502.50 1959; that a certain tenant (Go Tong)
DUE
Add: 50% deposited in court his rentals amounting
2,446.00
Surcharge to P10,800.00, over which the corporation
Petitioner corporation requested had no actual or constructive control; and
DEFICIENCY TAX P7,338.00 respondent Commissioner of Internal
that a sub-tenant paid P4,200.00 which
ought not be declared as rental income.
Petitioner likewise alleged in its petition
that the rates of depreciation applied by
respondent Commissioner of its buildings
in the above assessment are unfair and
inaccurate.
Sole witness for petitioner corporation in
the Tax Court was its Secretary-Treasurer,
Vicente G. Solis, who admitted that it had
omitted to report the sum of P12,100.00
as rental income in its 1956 tax return and
also the sum of P29,350.00 as rental
income in its 1957 tax return. However,
with respect to the difference between
this omitted income (P12,100.00) and the
sum (P20,199.00) found by respondent
Commissioner as undeclared in 1956,
petitioner corporation, through the same
witness (Solis), tried to establish that it did
not collect or receive the same because, in
view of the refusal of some tenants to
recognize the new owner, Isabelo P. Lim
and Vicenta Pantangco Vda. de Lim, the
former owners, on one hand, and the
same Isabelo P. Lim, as president of
petitioner corporation, on the other, had
verbally agreed in 1956 to turn over to
petitioner corporation six per cent (6%) of
the value of all its properties, computed at
P21,630.00, in exchange for whatever
rentals the Lims may collect from the
tenants. And, with respect to the
difference between the admittedly
undeclared sum of P29,350.00 and that
found by respondent Commissioner as
unreported rental income, (P81,690.00) in
1957, the same witness Solis also tried to
establish that petitioner corporation did
not receive or collect the same but that its
president, Isabelo P. Lim, collected part
thereof and may have reported the same
in his own personal income tax return;
that same Isabelo P. Lim collected
P13,500.00, which he turned over to
petitioner in 1959 only; that a certain
tenant (Go Tong deposited in court his
rentals (P10,800.00), over which the
corporation had no actual or constructive
control and which were withdrawn only in
1958; and that a sub-tenant paid
P4,200.00 which ought not be declared as
rental income in 1957.
With regard to the depreciation which
respondent disallowed and deducted from
the returns filed by petitioner, the same
witness tried to establish that some of its
buildings are old and out of style; hence,
they are entitled to higher rates of
depreciation than those adopted by
respondent in his assessment.
Isabelo P. Lim was not presented as
witness to corroborate the above
testimony of Vicente G. Solis.
On the other hand, Plaridel M. Mingoa,
one of the BIR examiners who personally
conducted the investigation of the 1956
and 1957 income tax returns of petitioner
corporation, testified for the respondent
that he personally interviewed the tenants
of petitioner and found that these tenants
had been regularly paying their rentals to
the collectors of either petitioner or its
president, Isabelo P. Lim, but these
payments were not declared in the
corresponding returns; and that in
applying rates of depreciation to
petitioner's buildings, he adopted Bulletin
"F" of the U.S. Federal Internal Revenue
Service.
On the basis of the evidence, the Tax
Court upheld respondent Commissioner's
assessment and demand for deficiency
income tax which, as above stated in the
beginning of this opinion, petitioner has
appealed to this Court.
Petitioner corporation pursues, the same
theory advocated in the court below and
assigns the following alleged errors of the
trial court in its brief, to wit:
I. The respondent Court erred in
holding that the petitioner had an
unreported rental income of
P20,199.00 for the year 1956.
 II. The respondent Court erred in
holding that the petitioner had an
unreported rental income of
P81,690.00 for the year 1957.
III. The respondent Court erred in
holding that the depreciation in
the amount of P20,598.00 claimed
by petitioner for the years 1956
and 1957 was excessive.
and prays that the appealed decision be
reversed.
This appeal is manifestly unmeritorious.
Petitioner having admitted, through its
own witness (Vicente G. Solis), that it had
undeclared more than one-half (1/2) of
the amount (P12,100.00 out of
P20,199.00) found by the BIR examiners as
unreported rental income for the year
1956 and more than one-third (1/3) of the
amount (P29,350.00 out of P81,690.00)
ascertained by the same examiners as
unreported rental income for the year
1957, contrary to its original claim to the
revenue authorities, it was incumbent
upon it to establish the remainder of its
pretensions by clear and convincing
evidence, that in the case is lacking.
With respect to the balance, which
petitioner denied having unreported in the
disputed tax returns, the excuse that
Isabelo P. Lim and Vicenta Pantangco Vda.
de Lim retained ownership of the lands
and only later transferred or disposed of
the ownership of the buildings existing
thereon to petitioner corporation, so as to
justify the alleged verbal agreement
whereby they would turn over to
petitioner corporation six percent (6%) of
the value of its properties to be applied to
the rentals of the land and in exchange for
whatever rentals they may collect from
the tenants who refused to recognize the
new owner or vendee of the buildings, is
not only unusual but uncorroborated by
the alleged transferors, or by any
document or unbiased evidence. Hence,
the first assigned error is without merit.
As to the second assigned error,
petitioner's denial and explanation of the
non-receipt of the remaining unreported
income for 1957 is not substantiated by
satisfactory corroboration. As above
noted, Isabelo P. Lim was not presented as
witness to confirm accountant Solis nor
was his 1957 personal income tax return
submitted in court to establish that the
rental income which he allegedly collected
and received in 1957 were reported
therein.
The withdrawal in 1958 of the deposits in
court pertaining to the 1957 rental income
is no sufficient justification for the non-
declaration of said income in 1957, since
the deposit was resorted to due to the
refusal of petitioner to accept the same,
and was not the fault of its tenants; hence,
petitioner is deemed to have
constructively received such rentals in
1957. The payment by the sub-tenant in
1957 should have been reported as rental
income in said year, since it is income just
the same regardless of its source.
On the third assigned error, suffice it to
state that this Court has already held that
"depreciation is a question of fact and is
not measured by theoretical yardstick, but
should be determined by a consideration
of actual facts", and the findings of the Tax
Court in this respect should not be
disturbed when not shown to be arbitrary
or in abuse of discretion (Commissioner of
Internal Revenue vs. Priscila Estate, Inc., et
al., L-18282, May 29, 1964), and petitioner
has not shown any arbitrariness or abuse
of discretion in the part of the Tax Court in
finding that petitioner claimed excessive
depreciation in its returns. It appearing
that the Tax Court applied rates of
depreciation in accordance with Bulletin
"F" of the U.S. Federal Internal Revenue
Service, which this Court pronounced as
having strong persuasive effect in this
jurisdiction, for having been the result of
scientific studies and observation for a
long period in the United States, after
whose Income Tax Law ours is patterned
(M. Zamora vs. Collector of internal
Revenue & Collector of Internal Revenue
vs. M. Zamora; E. Zamora vs. Collector of
Internal Revenue and Collector of Internal
Revenue vs. E. Zamora, Nos. L-15280, L-
15290, L-15289 and L-15281, May 31,
1963), the foregoing error is devoid of
merit.
Wherefore, the appealed decision should
be, as it is hereby, affirmed. With costs
against petitioner-appellant, Limpan
Investment Corporation.
CIR V. ISABELA CULTURAL CORPORATION,
GR 172231, FEBRUARY 12, 2007
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 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 1986 20 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.
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.
CIR V. CITYTRUST INVESTMENT PHILS.,
G.R. NO. 139786, 2006
Does the twenty percent (20%) final
withholding tax (FWT) on a bank's passive
income1  form part of the taxable gross
receipts for the purpose of computing the
five percent (5%) gross receipts tax (GRT)?
This is the central issue in the present two
(2) consolidated petitions for review.
In G.R. No. 139786, petitioner
Commissioner of Internal Revenue
(Commissioner) assails the Court of
Appeals Decision dated August 17, 1999 in
CA-G.R. SP No. 527072 affirming the Court
of Tax Appeals (CTA) Decision 3 ordering
the refund or issuance of tax credit
certificate in favor of respondent Citytrust
Investment Philippines., Inc. (Citytrust).
In G.R. No. 140857, petitioner Asianbank
Corporation (Asianbank) challenges the
Court of Appeals Decision dated
November 22, 1999 in CA-G.R. SP No.
512484 reversing the CTA
Decision5 ordering a tax refund in its
(Asianbank's) favor.
A brief review of the taxation laws
provides an adequate backdrop for our
subsequent narration of facts.
Under Section 27(D), formerly Section
24(e)(1) of the National Internal Revenue
Code of 1997 (Tax Code), the earnings of
banks from passive income are subject to
a 20% FWT,6 thus:
(D) Rates of Tax on Certain Passive
Incomes –
(1) Interest from Deposits and
Yield or any other Monetary
Benefit from Deposit Substitutes
and from Trust Funds and Similar
 Arrangements, and Royalties. – Long-term maturity – Meanwhile, on January 30, 1996, the CTA,
A final tax at the rate of twenty in Asian seven
      (1) Over four (4) years but not exceeding Bank Corporation
(7) years v.
percent (20%) is hereby imposed Commissioner of Internal Revenue7 (ASIAN
      (2) Over seven (7) years
upon the amount of interest on BANK case), ruled that the basis in
currency bank deposit and yield or (b) On dividends computing the 5% GRT is the gross
any other monetary benefit from (c) On royalties, rentals of property, receipts
real orminus
personal,
the 20%
profitsFWT.
fromInexchange
other
deposit substitutes and from trust and all other items treated as grosswords,
incomethe 20%Section
under FWT on 32 aofbank's passive
this Code
funds and similar arrangements income does not form part of the taxable
received by domestic corporation Provided, however, That in case gross receipts.
and royalties, derived from the maturity period referred to in
sources within the Philippines: x x paragraph (a) is shortened thru On July 19, 1996, Citytrust, inspired by the
x pretermination, then the maturity above-mentioned CTA ruling, filed with
period shall be reckoned to end as the Commissioner a written claim for the
Apart from the 20% FWT, banks are also of the date of pretermination for tax refund or credit in the amount of
subject to the 5% GRT on their gross purposes of classifying the P326,007.01. It alleged that its reported
receipts, which includes their passive transaction as short, medium or total gross receipts included the 20% FWT
income. Section 121 (formerly Section long-term and the correct rate of on its passive income amounting to
119) of the Tax Code reads: tax shall be applied accordingly. P32,600,701.25. Thus, it sought to be
reimbursed of the 5% GRT it paid on the
SEC. 121. Tax on banks and Non- Nothing in this Code shall preclude portion of 20% FWT or the amount of
bank financial intermediaries. – the Commissioner from imposing P326,007.01.
There shall be collected a tax the same tax herein provided on
on gross receipts derived from persons performing similar On the same date, Citytrust filed a petition
sources within the Philippines by banking activities. for review with the CTA, which eventually
all banks and non-bank financial granted its claim.8
intermediaries in accordance with I - G.R. No. 139786
the following schedule: On appeal by the Commissioner, the Court
Citytrust, respondent, is a domestic of Appeals affirmed the CTA Decision,
(a) On interest, commissions and discounts
corporation fromengaged
lending activities as well as incomeciting as main bases Commissioner of
in quasi-banking
from financial leasing, on the basisactivities.
of remaining maturities of instruments
In 1994, Citytrust reported the from whichInternal Revenue v. Tours Specialist
such receipts are derived: amount of P110,788,542.30 as its total Inc.9 and Commissioner of Internal
10
Short-term maturity (not in excessgross
of tworeceipts and paid the amount of
[2] years) Revenue v. Manila Jockey Club,  holding
that monies or receipts that do not
Medium-term maturity (over twoP5,539,427.11 corresponding
[2] years but not to [4]
exceeding four its 5%
years) GRT.
redound to the benefit of the taxpayer are
not part of its gross receipts, thus:
Patently, as expostulated by our
Supreme Court, monies or
receipts that do not redound to
the benefit of the taxpayer are
not part of its gross receipts for
the purpose of computing its
taxable gross receipts. In Manila
Jockey Club, a portion of the
wager fund and the ten-peso
contribution, although actually
received by the Club, was not
considered as part of its gross
receipts for the purpose of
imposing the amusement tax.
Similarly, in Tours Specialists, the
room or hotel charges actually
received by them from the foreign
travel agency was, likewise, not
included in its gross receipts for
the imposition of the 3%
contractor's tax. In both cases, the
fees, bets or hotel charges, as the
case may be, were actually
received and held in trust by the
taxpayers. On the other hand, the
20% final tax on the Respondent's
passive income was already
deducted and withheld by various
withholding agents. Hence, the
actual or the exact amount
received by the Respondent, as
its passive income in the year
1994, was less the 20% final tax
already withheld by various
withholding agents. The various
withholding agents at source
were required under section 50
(a), of the National Internal
Revenue Code of 1986, to
withhold the 20% final tax on
certain passive income x x x.
Moreover, under Section 51 (g) of
the said Code, all taxes withheld
pursuant to the provisions of this
Code and its implementing
regulations are considered trust
funds and shall be maintained in
a separate account and not
commingled with any other funds
of the withholding agent.
Accordingly, the 20% final tax
withheld against the
Respondent's passive income was
already remitted to the Bureau of
Internal Revenue, for the
corresponding year that the same
was actually withheld and
considered final withholding
taxes under Section 50 of the
same Code. Indubitably, to
include the same to the
Respondent's gross receipts for
the year 1994 would be to tax
twice the passive income derived
by Respondent for the said year,
which would constitute double
taxation anathema to our
taxation laws.
II - G.R. No. 140857
Asianbank, petitioner, is a domestic
corporation also engaged in banking
business. For the taxable quarters ending
June 30, 1994 to June 30, 1996, Asianbank
filed and remitted to the Bureau of
Internal Revenue (BIR) the 5% GRT on its
total gross receipts.
On the strength of the January 30, 1996
CTA Decision in the ASIAN BANK case,
Asianbank filed with the Commissioner a
claim for refund of the overpaid GRT
amounting to P2,022,485.78.
To toll the running of the two-year
prescriptive period for filing of claims,
Asianbank also filed a petition for review
with the CTA.
On February 3, 1999, the CTA allowed
refund in the reduced amount of
P1,345,743.01,11 the amount proven by
Asianbank. Unsatisfied, the Commissioner
filed with the Court of Appeals a petition
for review.
On November 22, 1999, the Court of
Appeals reversed the CTA Decision and
ruled in favor of the Commissioner, thus:
It is true that Revenue Regulation
No. 12-80 provides that the gross
receipts tax on banks and other
financial institutions should be
based on all items of income
actually received. Actual receipt
here is used in opposition to mere
accrual. Accrued income refers to
income already earned but not yet
received. (Rep. v. Lim Tian Teng
Sons & Co., 16 SCRA 584).
But receipt may be actual or
constructive. Article 531 of the
Civil Code provides that
possession is acquired by the
material occupation of a thing or
the exercise of a right, or by the
fact that it is subject to the action
of one will, or by the proper acts
and legal formalities established
for acquiring such right. Moreover,
taxation income may be received
by the taxpayer himself or by
someone authorized to receive it
for him (Art. 532, Civil Code). The
20% final tax withheld from
interest income of banks and
other similar institutions is not
income that they have not
received; it is simply withheld
from them and paid to the
government, for their benefit.
Thus, the 20% income tax
withheld from the interest
income is, in fact, money of the
taxpayer bank but paid by the
payor to the government in
satisfaction of the bank's
obligation to pay the tax on
interest earned. It is the bank's
obligation to pay the tax. Hence,
the withholding of the said tax
and its payment to the
government is for its benefit.
xxx
The case of Collector of Internal
Revenue vs. Manila Jockey Club is
inapplicable. In that case, a
percentage of the gross receipts to
be collected by the Manila Jockey
Club was earmarked by law to be
turned over to the Board on Races
and distributed as prizes among
owners of winning horses and
authorized bonus for jockeys. The
Manila Jockey Club itself derives
no benefit at all from earmarked
percentage. That is why it cannot
be considered as part of its gross
receipts.
WHEREFORE, the C.T.A's judgment
herein appealed from is
hereby REVERSED, and judgment
is hereby
rendered DISMISSING the
respondent's Petition for Review
in C.T.A Case No. 5412.
SO ORDERED.
Hence, the present consolidated petitions.
The Commissioner's arguments in the two
(2) petitions may be synthesized as
follows:
first, there is no law which
excludes the 20% FWT from the
taxable gross receipts for the
purpose of computing the 5% GRT;
second, the imposition of the 20%
FWT on the bank's passive income
and the 5% GRT on its taxable
gross receipts, which include the
bank's passive income, does not
constitute double taxation;
third, the ruling by this Court
in Manila Jockey Club,12 cited in
the ASIAN BANK case, is not
applicable; and
 fourth, in the computation of the
5% GRT, the passive income need
not be actually received in order
to form part of the taxable gross
receipts.
In its Resolution13 dated January 17, 2000,
this Court adopted as Citytrust's Comment
on the instant petition for review its
Memorandum submitted to the CTA and
its Comment submitted to the Court of
Appeals. Citytrust contends therein
that: first, Section 4(e) of Revenue
Regulations No. 12-80 dated November 7,
1980 provides that the rates of taxes on
the gross receipts of financial institutions
shall be based only on all items of
income actually received; and, second,
this Court's ruling in Manila Jockey
Club14 is applicable. Asianbank echoes
similar arguments.
We rule in favor of the Commissioner.
The issue of whether the 20% FWT on a
bank's interest income forms part of the
taxable gross receipts for the purpose of
computing the 5% GRT is no longer novel.
This has been previously resolved by this
Court in a catena of cases, such as China
Banking Corporation v. Court of
Appeals,15 Commissioner of Internal
Revenue v. Solidbank
Corporation,16 Commissioner of Internal
Revenue v. Bank of Commerce,17 and the
latest, Commissioner of Internal Revenue
v. Bank of the Philippine Islands.18
The above cases are unanimous in defining
"gross receipts" as "the entire receipts
without any deduction." We quote the
Court's enlightening ratiocination in Bank
of the Philippines Islands,19 thus:
The Tax Code does not provide a definition
of the term "gross receipts". Accordingly,
the term is properly understood in its plain
and ordinary meaning and must be taken
to comprise of the entire receipts without
any deduction. We, thus, made the
following disquisition in Bank of
Commerce:
The word "gross" must be used in its
plain and ordinary meaning. It is defined
as "whole, entire, total, without
deduction." A common definition is
"without deduction." "Gross" is also
defined as "taking in the whole; having
no deduction or abatement; whole, total
as opposed to a sum consisting of
separate or specified parts." Gross is the
antithesis of net. Indeed, in China Banking
Corporation v. Court of Appeals, the Court
defined the term in this wise:
As commonly understood, the term "gross
receipts" means the entire receipts
without any deduction. Deducting any
amount from the gross receipts changes
the result, and the meaning, to net
receipts. Any deduction from gross
receipts is inconsistent with a law that
mandates a tax on gross receipts, unless
the law itself makes an exception. As
explained by the Supreme Court of
Pennsylvania in Commonwealth of
Pennsylvania v. Koppers Company, Inc. –
Highly refined and technical tax concepts
have been developed by the accountant
and legal technician primarily because of
the impact of federal income tax
legislation. However, this is no way should
affect or control the normal usage of
words in the construction of our statutes;
and we see nothing that would require us
not to include the proceeds here in
question in the gross receipts allocation
unless statutorily such inclusion is
prohibited. Under the ordinary basic
methods of handling accounts, the term
gross receipts, in the absence of any
statutory definition of the term, must be
taken to include the whole total gross
receipts without any deductions, x x x.
[Citations omitted] (Emphasis supplied)"
Likewise, in Laclede Gas Co. v. City of St.
Louis, the Supreme Court of Missouri held:
The word "gross" appearing in the term
"gross receipts," as used in the ordinance,
must have been and was there used as the
direct antithesis of the word "net." In its
usual and ordinary meaning, "gross
receipts" of a business is the whole and
entire amount of the receipts without
deduction, x x x. On the ordinary, "net
receipts" usually are the receipts which
remain after deductions are made from
the gross amount thereof of the expenses
and cost of doing business, including fixed
charges and depreciation. Gross receipts
become net receipts after certain proper
deductions are made from the gross. And
in the use of the words "gross receipts,"
the instant ordinance, or course,
precluded plaintiff from first deducting its
costs and expenses of doing business, etc.,
in arriving at the higher base figure upon
which it must pay the 5% tax under this
ordinance. (Emphasis supplied)
xxxxxx
Additionally, we held in Solidbank, to wit:
[W]e note that US cases have persuasive
effect in our jurisdiction because
Philippine income tax law is patterned
after its US counterpart.
[G]ross receipts with respect to any period
means the sum of: (a) The total amount
received or accrued during such period
from the sale, exchange, or other
disposition of x x x other 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, or property held
by the taxpayer primarily for sale to
customers in the ordinary course of its
trade or business, and (b) The gross
income, attributable to a trade or
business, regularly carried on by the
taxpayer, received or accrued during such
period x x x.
x x x [B]y gross earnings from operations x
x x was intended all operations x x x
including incidental, subordinate, and
subsidiary operations, as well as principal
operations.
When we speak of the "gross earnings" of
a person or corporation, we mean the
entire earnings or receipts of such person
or corporation from the business or
operation to which we refer.
From these cases, "gross receipts" refer to
the total, as opposed to the net income.
These are therefore the total receipts
before any deduction for the expenses of
management. Webster's New
International Dictionary, in fact,
defines gross as "whole or entire."
In China Banking Corporation,20 this Court
further explained that the legislative
intent to apply the term in its plain and
ordinary meaning may be surmised from a
historical perspective of the levy on gross
receipts. From the time the GRT on banks
was first imposed in 1946 under Republic
Act No. 3921 and throughout its successive
re-enactments,22 the legislature has not
established a definition of the term "gross
receipts." Under Revenue Regulations No.
12-80 and No. 17-84, as well as several
numbered rulings, the BIR has consistently
ruled that the term "gross receipts" does
not admit of any deduction. This
interpretation has remained unchanged
throughout the various re-enactments of
the present Section 121 of the Tax Code.
On the presumption that the legislature is
familiar with the contemporaneous
interpretation of a statute given by the
administrative agency tasked to enforce
the statute, the reasonable conclusion is
that the legislature has adopted the BIR's
interpretation. In other words, the
subsequent re-enactments of the present
Section 121, without changes in the term
interpreted by the BIR, confirm that its
interpretation carries out the legislative
purpose.
Now, bereft of any laudable statutory
basis, Citytrust and Asianbank simply
anchor their argument on Section 4(e) of
Revenue Regulations No. 12-80 stating actually received shall be included in the Internal Revenue Code, as
that "the rates of taxes to be imposed on tax base of such financial institutions." amended.
the gross receipts of such financial
institutions shall be based on all items of And second, Revenue Regulations No. 12- (b) Only interest paid or
income  actually received." They contend 80, issued on November 7, 1980, had been accrued on bank deposits,
that since the 20% FWT is withheld at superseded by Revenue Regulations No. or yield from deposit
source and is paid directly to the 17-84 issued on October 12, 1984. Section substitutes declared for
government by the entities from which the 4(e) of Revenue Regulations No. 12-80 purposes of imposing the
banks derived the income, the same provides that only items of withholding taxes in
cannot be considered actually received, income actually received shall be included accordance with these
hence, must be excluded from the taxable in the tax base for computing the GRT. On regulations shall be
gross receipts. the other hand, Section 7(c) of Revenue allowed as interest
Regulations No. 17-84 includes all interest expense deductible for
The argument is bereft of merit. income in computing the GRT, thus: purposes of computing
taxable net income of the
First, Section 4(e) merely recognizes that SECTION 7. Nature and Treatment payor.
income may be taxable either at the time of Interest on Deposits and Yield
of its actual receipt or its accrual, on Deposit Substitutes. – (c) If the recipient of the
depending on the accounting method of above-mentioned items
the taxpayer. It does not really exclude (a) The interest earned on of income are financial
accrued interest income from the taxable Philippine Currency bank institutions, the same
gross receipts but merely postpones its deposits and yield from shall be included as part
inclusion until actual payment of the deposit substitutes of the tax base upon
interest to the lending bank. Thus, while it subjected to the which the gross receipt
is true that Section 4(e) states that "the withholding taxes in tax is imposed.
rates of taxes to be imposed on the gross accordance with these
receipts of such financial institutions shall regulations need not be Revenue Regulations No. 17-84
be based on all items of income actually included in the gross categorically states that if the recipient of
received," it goes on to distinguish actual income in computing the the above-mentioned items of income are
receipt from accrual, i.e., that "mere depositor's/investor's financial institutions, the same shall be
accrual shall not be considered, but once income tax liability in included as part of the tax base upon
payment is received in such accrual or in accordance with the which the gross receipt tax is
case of prepayment, then the amount provision of Section 29 (b), imposed. There is, therefore, an implied
(c) and (d) of the National repeal of Section 4(e). There exists a
disparity between Section 4(e) which
imposes the GRT only on all items
of income actually received (as opposed
to their mere accrual) and Section 7(c)
which includes all interest
income (whether actual or accrued) in
computing the GRT. As held by this Court
in Commissioner of Internal Revenue v.
Solidbank Corporation,23 "the exception
having been eliminated, the clear intent
is that the later R.R. No. 17-84 includes
the exception within the scope of the
general rule." Clearly, then, the current
Revenue Regulations require interest
income, whether actually received or
merely accrued, to form part of the bank's
taxable gross receipts.2
Moreover, this Court, in Bank of
Commerce,25 settled the matter by holding
that "actual receipt may either be physical
receipt or constructive receipt," thus:
Actual receipt of interest income
is not limited to physical receipt.
Actual receipt may either be
physical receipt or constructive
receipt. When the depositary
bank withholds the final tax to
pay the tax liability of the lending
bank, there is prior to the
withholding a constructive receipt
by the lending bank of the
amount withheld. From the
amount constructively received by
the lending bank, the depositary
bank deducts the final withholding
tax and remits it to the
government for the account of the
lending bank. Thus, the interest
income actually received by the
lending bank, both physically and
constructively, is the net interest
plus the amount withheld as final
tax.
The concept of a withholding tax
on income obviously and
necessarily implies that the
amount of the tax withheld comes
from the income earned by the
taxpayer. Since the amount of the
tax withheld constitute income
earned by the taxpayer, then that
amount manifestly forms part of
the taxpayer's gross receipts.
Because the amount withheld
belongs to the taxpayer, he can
transfer its ownership to the
government in payment of his tax
liability. The amount withheld
indubitably comes from the
income of the taxpayer, and thus
forms part of his gross receipts.
Corollarily, the Commissioner contends
that the imposition of the 20% FWT and
5% GRT does not constitute double
taxation.
We agree.
Double taxation means taxing for the
same tax period the same thing or activity
twice, when it should be taxed but once,
for the same purpose and with the same
kind of character of tax.26 This is not the
situation in the case at bar. The GRT is a
percentage tax under Title V of the Tax
Code ([Section 121], Other Percentage
Taxes), while the FWT is an income tax
under Title II of the Code (Tax on Income).
The two concepts are different from each
other. In Solidbank Corporation,27 this
Court defined that a percentage tax is a
national tax measured by a certain
percentage of the gross selling price or
gross value in money of goods sold,
bartered or imported; or of the gross
receipts or earnings derived by any person
engaged in the sale of services. It is not
subject to withholding. An income tax, on
the other hand, is a national tax imposed
on the net or the gross income realized in
a taxable year. It is subject to withholding.
Thus, there can be no double taxation
here as the Tax Code imposes two
different kinds of taxes.
Now, both Asianbank and Citytrust rely
on Manila Jockey Club28 in support of their
positions. We are not convinced. In said
case, Manila Jockey Club paid amusement
tax on its commission in the total amount
of bets called wager funds from the period
November 1946 to October 1950. But such
payment did not include the 5 ½ % of the
funds which went to the Board on Races
and to the owners of horses and jockeys.
We ruled that the gross receipts of the
Manila Jockey Club should not include the
5 ½% because although delivered to the
Club, such money has been especially
earmarked by law or regulation for other
persons.
The Manila Jockey Club29 does not apply to
the cases at bar because what happened
there is earmarking and not withholding.
Earmarking is not the same as
withholding. Amounts earmarked do not
form part of gross receipts because these
are by law or regulation reserved for some
person other than the taxpayer, although
delivered or received. On the contrary,
amounts withheld form part of gross
receipts because these are in constructive
possession and not subject to any
reservation, the withholding agent being
merely a conduit in the collection
process.30 The distinction was explained
in Solidbank, thus:
"The Manila Jockey Club had to
deliver to the Board on Races,
horse owners and jockeys
amounts that never became the
property of the race track (Manila
Jockey Club merely held that these
amounts were held in trust and
did not form part of gross
receipts). Unlike these amounts,
the interest income that had
been withheld for the
government became property of
the financial institutions upon
constructive possession thereof.
Possession was indeed acquired,
since it was ratified by the
financial institutions in whose
name the act of possession had
been executed. The money
indeed belonged to the
taxpayers; merely holding it in
trust was not enough (A trustee
does not own money received in
trust.) It is a basic concept in
taxation that such money does not
constitute taxable income to the
trustee [China Banking Corp. v.
Court of Appeals, supra, p. 27]).
The government subsequently
becomes the owner of the money
when the financial institutions
pay the FWT to extinguish their
obligation to the government. As
this Court has held before, this is
the consideration for the transfer
of ownership of the FWT from
these institutions to the
government (Ibid., p. 26). It is
ownership that determines
whether interest income forms
part of taxable gross receipts
(Ibid., p. 27). Being originally
owned by these financial
institutions as part of their
interest income, the FWT should
form part of their taxable gross
receipts.
In fine, let it be stressed that tax
exemptions are highly disfavored. It is a
governing principle in taxation that tax
exemptions are to be construed
in strictissimi juris against the taxpayer
and liberally in favor of the taxing
authority and should be granted only by
clear and unmistakable terms.
WHEREFORE, in G.R. No. 139786,
we GRANT the petition of the
Commissioner of Internal Revenue
and REVERSE the Decision of the Court of
Appeals dated August 17, 1999 in CA-G.R.
SP No. 52707.
In G.R. No. 140857, we DENY the petition
of Asianbank Corporation and AFFIRM in
toto the Decision of the Court of Appeals
in CA-G.R. SP No. 51248. Costs against
petitioner.
SO ORDERED.
CIR V. JAVIER, 199 SCRA 824
Central in this controversy is the issue as
to whether or not a taxpayer who merely
states as a footnote in his income tax
return that a sum of money that he
erroneously received and already spent is
the subject of a pending litigation and
there did not declare it as income is liable
to pay the 50% penalty for filing a
fraudulent return.
This question is the subject of the petition
for review before the Court of the portion
of the Decision1 dated July 27, 1983 of the
Court of Tax Appeals (CTA) in C.T.A. Case
No. 3393, entitled, "Melchor J. Javier, Jr.
vs. Ruben B. Ancheta, in his capacity as
Commissioner of Internal Revenue," which
orders the deletion of the 50% surcharge
from Javier's deficiency income tax
assessment on his income for 1977.
The respondent CTA in a Resolution 2 dated
May 25, 1987, denied the Commissioner's
Motion for Reconsideration3 and Motion
for New Trial4 on the deletion of the 50%
surcharge assessment or imposition.
The pertinent facts as are accurately
stated in the petition of private
respondent Javier in the CTA and
incorporated in the assailed decision now
under review, read as follows:
x x x           x x x          x x x
2. That on or about June 3, 1977,
Victoria L. Javier, the wife of the
petitioner (private respondent
herein), received from the
Prudential Bank and Trust
Company in Pasay City the amount
of US$999,973.70 remitted by her
sister, Mrs. Dolores Ventosa,
through some banks in the United
States, among which is Mellon
Bank, N.A.
3. That on or about June 29, 1977,
Mellon Bank, N.A. filed a
complaint with the Court of First
Instance of Rizal (now Regional
Trial Court), (docketed as Civil
Case No. 26899), against the
petitioner (private respondent
herein), his wife and other
defendants, claiming that its
remittance of US$1,000,000.00
was a clerical error and should
have been US$1,000.00 only, and
praying that the excess amount of
US$999,000.00 be returned on the
ground that the defendants are
trustees of an implied trust for the
benefit of Mellon Bank with the
clear, immediate, and continuing
duty to return the said amount
from the moment it was received.
4. That on or about November 5,
1977, the City Fiscal of Pasay City
filed an Information with the then
Circuit Criminal Court (docketed as
CCC-VII-3369-P.C.) charging the
petitioner (private respondent
herein) and his wife with the crime
of estafa, alleging that they
misappropriated, misapplied, and
converted to their own personal
use and benefit the amount of
US$999,000.00 which they
received under an implied trust for
the benefit of Mellon Bank and as
a result of the mistake in the
remittance by the latter.
5. That on March 15, 1978, the
petitioner (private respondent
herein) filed his Income Tax
Return for the taxable year 1977
showing a gross income of
P53,053.38 and a net income of
P48,053.88 and stating in the
footnote of the return that
"Taxpayer was recipient of some
money received from abroad
which he presumed to be a gift
but turned out to be an error and
is now subject of litigation."
6. That on or before December 15,
1980, the petitioner (private
respondent herein) received a
letter from the acting
Commissioner of Internal Revenue
dated November 14, 1980,
together with income assessment
notices for the years 1976 and
1977, demanding that petitioner
(private respondent herein) pay
on or before December 15, 1980
the amount of P1,615.96 and
P9,287,297.51 as deficiency
assessments for the years 1976
and 1977 respectively. . . .
7. That on December 15, 1980, the
petitioner (private respondent
herein) wrote the Bureau of
Internal Revenue that he was
paying the deficiency income
assessment for the year 1976 but
denying that he had any
undeclared income for the year
1977 and requested that the
assessment for 1977 be made to
await final court decision on the
case filed against him for filing an
allegedly fraudulent return. . . .
8. That on November 11, 1981,
the petitioner (private respondent
herein) received from Acting
Commissioner of Internal Revenue
Romulo Villa a letter dated
October 8, 1981 stating in reply to
his December 15, 1980 letter-
protest that "the amount of
Mellon Bank's erroneous
remittance which you were able to
dispose, is definitely taxable." . . .5
The Commissioner also imposed a 50%
fraud penalty against Javier.
Disagreeing, Javier filed an appeal 6 before
the respondent Court of Tax Appeals on
December 10, 1981.
The respondent CTA, after the proper
proceedings, rendered the challenged
decision. We quote the concluding
portion:
We note that in the deficiency
income tax assessment under
consideration, respondent
(petitioner here) further
requested petitioner (private
respondent here) to pay 50%
surcharge as provided for in
Section 72 of the Tax Code, in
addition to the deficiency income
tax of P4,888,615.00 and interest
due thereon. Since petitioner
(private respondent) filed his
income tax return for taxable year
1977, the 50% surcharge was
imposed, in all probability, by
respondent (petitioner) because
he considered the return filed
false or fraudulent. This additional
requirement, to our mind, is much
less called for because petitioner
(private respondent), as stated
earlier, reflected in as 1977 return
as footnote that "Taxpayer was
recipient of some money received
from abroad which he presumed
to be gift but turned out to be an
error and is now subject of
litigation."
From this, it can hardly be said
that there was actual and
intentional fraud, consisting of
deception willfully and
deliberately done or resorted to
by petitioner (private respondent)
in order to induce the
Government to give up some legal
right, or the latter, due to a false
return, was placed at a
disadvantage so as to prevent its
lawful agents from proper
assessment of tax liabilities. (Aznar
vs. Court of Tax Appeals, L-20569,
August 23, 1974, 56 (sic) SCRA
 519), because petitioner literally
"laid his cards on the table" for
respondent to examine. Error or
mistake of fact or law is not fraud.
(Insular Lumber vs. Collector, L-
7100, April 28, 1956.). Besides,
Section 29 is not too plain and
simple to understand. Since the
question involved in this case is of
first impression in this jurisdiction,
under the circumstances, the 50%
surcharge imposed in the
deficiency assessment should be
deleted.7
The Commissioner of Internal Revenue,
not satisfied with the respondent CTA's
ruling, elevated the matter to us, by the
present petition, raising the main issue as
to:
WHETHER OR NOT PRIVATE RESPONDENT
IS LIABLE FOR THE 50% FRAUD PENALTY?8
On the other hand, Javier candidly stated
in his Memorandum,9 that he "did not
appeal the decision which held him liable
for the basic deficiency income tax
(excluding the 50% surcharge for fraud)."
However, he submitted in the
same memorandum "that the issue may
be raised in the case not for the purpose
of correcting or setting aside the decision
which held him liable for deficiency
income tax, but only to show that there is
no basis for the imposition of the
surcharge." This subsequent disavowal
therefore renders moot and academic the
posturings articulated in as Comment 10 on
the non-taxability of the amount he
erroneously received and the bulk of
which he had already disbursed. In any
event, an appeal at that time (of the filing
of the Comments) would have been
already too late to be seasonable. The
petitioner, through the office of the
Solicitor General, stresses that:
x x x           x x x          x x x
The record however is not
ambivalent, as the record clearly
shows that private respondent is
self-convinced, and so acted, that
he is the beneficial owner, and of
which reason is liable to tax. Put
another way, the studied
insinuation that private
respondent may not be the
beneficial owner of the money or
income flowing to him as
enhanced by the studied claim
that the amount is "subject of
litigation" is belied by the record
and clearly exposed as a
fraudulent ploy, as witness what
transpired upon receipt of the
amount.
Here, it will be noted that the
excess in the amount erroneously
remitted by MELLON BANK for the
amount of private respondent's
wife was $999,000.00 after
opening a dollar account with
Prudential Bank in the amount of
$999,993.70, private respondent
and his wife, with haste and
dispatch, within a span of eleven
(11) electric days, specifically from
June 3 to June 14, 1977, effected a
total massive withdrawal from the
said dollar account in the sum of
$975,000.00 or P7,020,000.00. . . .
11
In reply, the private respondent argues:
x x x           x x x          x x x
The petitioner contends that the
private respondent committed
fraud by not declaring the
"mistaken remittance" in his
income tax return and by merely
making a footnote thereon which
read: "Taxpayer was the recipient
of some money from abroad
which he presumed to be a gift
but turned out to be an error and
is now subject of litigation." It is
respectfully submitted that the
said return was not fraudulent.
The footnote was practically an
invitation to the petitioner to
make an investigation, and to
make the proper assessment.
The rule in fraud cases is that the
proof "must be clear and
convincing" (Griffiths v. Comm., 50
F [2d] 782), that is, it must be
stronger than the "mere
preponderance of evidence"
which would be sufficient to
sustain a judgment on the issue of
correctness of the deficiency itself
apart from the fraud penalty.
(Frank A. Neddas, 40 BTA 672).
The following circumstances
attendant to the case at bar show
that in filing the questioned
return, the private respondent
was guided, not by that "willful
and deliberate intent to prevent
the Government from making a
proper assessment" which
constitute fraud, but by an honest
doubt as to whether or not the
"mistaken remittance" was subject
to tax.
First, this Honorable Court will
take judicial notice of the fact that
so-called "million dollar case" was
given very, very wide publicity by
media; and only one who is not in
his right mind would have
entertained the idea that the BIR
would not make an assessment if
the amount in question was
indeed subject to the income tax.
Second, as the respondent Court
ruled, "the question involved in
this case is of first impression in
this jurisdiction" (See p. 15 of
Annex "A" of the Petition). Even in
the United States, the authorities
are not unanimous in holding that
similar receipts are subject to the
income tax. It should be noted
that the decision in the Rutkin
case is a five-to-four decision; and
in the very case before this
Honorable Court, one out of three
Judges of the respondent Court
was of the opinion that the
amount in question is not taxable.
Thus, even without the footnote,
the failure to declare the
"mistaken remittance" is not
fraudulent.
Third, when the private
respondent filed his income tax
return on March 15, 1978 he was
being sued by the Mellon Bank for
the return of the money, and was
being prosecuted by the
Government for estafa committed
allegedly by his failure to return
the money and by converting it to
his personal benefit. The basic tax
amounted to P4,899,377.00
(See p. 6 of the Petition) and could
not have been paid without using
part of the mistaken remittance.
Thus, it was not unreasonable for
the private respondent to simply
state in his income tax return that
the amount received was still
under litigation. If he had paid the
tax, would that not constitute
estafa for using the funds for his
own personal benefit? and would
the Government refund it to him if
the courts ordered him to refund
the money to the Mellon Bank?12
x x x           x x x          x x x
Under the then Section 72 of the Tax Code
(now Section 248 of the 1988 National
Internal Revenue Code), a taxpayer who
files a false return is liable to pay the fraud
penalty of 50% of the tax due from him or
of the deficiency tax in case payment has
been made on the basis of the return filed
before the discovery of the falsity or fraud.
We are persuaded considerably by the
private respondent's contention that there
is no fraud in the filing of the return and
agree fully with the Court of Tax Appeals'
interpretation of Javier's notation on his
income tax return filed on March 15, 1978
thus: "Taxpayer was the recipient of some
money from abroad which he presumed to
be a gift but turned out to be an error and
is now subject of litigation that it was an
"error or mistake of fact or law" not
constituting fraud, that such notation was
practically an invitation for investigation
and that Javier had literally "laid his cards
on the table."13
14
In Aznar v. Court of Tax Appeals,  fraud in
relation to the filing of income tax return
was discussed in this manner:
. . . The fraud contemplated by law
is actual and not constructive. It
must be intentional fraud,
consisting of deception willfully
and deliberately done or resorted
to in order to induce another to
give up some legal right.
Negligence, whether slight or
gross, is not equivalent to the
fraud with intent to evade the tax
contemplated by law. It must
amount to intentional wrong-
doing with the sole object of
avoiding the tax. It necessarily
follows that a mere mistake
cannot be considered as
fraudulent intent, and if both
petitioner and respondent
Commissioner of Internal Revenue
committed mistakes in making
entries in the returns and in the
assessment, respectively, under
the inventory method of
determining tax liability, it would
be unfair to treat the mistakes of
the petitioner as tainted with
fraud and those of the respondent
as made in good faith.
Fraud is never imputed and the courts
never sustain findings of fraud upon
circumstances which, at most, create only
suspicion and the mere understatement of
a tax is not itself proof of fraud for the
purpose of tax evasion.15
A "fraudulent return" is always an
attempt to evade a tax, but a
merely "false return" may not be,
Rick v. U.S., App. D.C., 161 F. 2d
897, 898.16
In the case at bar, there was no actual and
intentional fraud through willful and
deliberate misleading of the government
agency concerned, the Bureau of Internal
Revenue, headed by the herein petitioner.
The government was not induced to give
up some legal right and place itself at a
disadvantage so as to prevent its lawful
agents from proper assessment of tax
liabilities because Javier did not conceal
anything. Error or mistake of law is not
fraud. The petitioner's zealousness to
collect taxes from the unearned windfall
to Javier is highly
commendable.1âwphi1 Unfortunately, the
imposition of the fraud penalty in this case
is not justified by the extant facts. Javier
may be guilty of swindling charges,
perhaps even for greed by spending most
of the money he received, but the records
lack a clear showing of fraud committed
because he did not conceal the fact that
he had received an amount of money
although it was a "subject of litigation." As
ruled by respondent Court of Tax Appeals,
the 50% surcharge imposed as fraud
penalty by the petitioner against the
private respondent in the deficiency
assessment should be deleted.
WHEREFORE, the petition is DENIED and
the decision appealed from the Court of
Tax Appeals is AFFIRMED. No costs.
SO ORDERED.
ERICSSON TELECOMMUNICATIONS V. CITY
OF PASIG, G.R. NO. 176667, 2007
FACTS: 
Ericsson Telecommunications, Inc.
(petitioner), a corporation with principal
office in Pasig City, is engaged in the
design, engineering, and marketing of
telecommunication facilities/system. In an
Assessment Notice dated October 25,
2000 issued by the City Treasurer of Pasig
City, petitioner was assessed a business
tax deficiency for the years 1998 and 1999
amounting to P9,466,885.00 and
P4,993,682.00, respectively, based on its
gross revenues as reported in its audited
financial statements for the years 1997
and 1998. Petitioner filed a Protest dated
December 21, 2000, claiming that the
computation of the local business tax
should be based on gross receipts and not
on gross revenue.
The City of Pasig (respondent) issued
another Notice of Assessment to
petitioner on November 19, 2001, this
time based on business tax deficiencies for
the years 2000 and 2001, amounting to
P4,665,775.51 and P4,710,242.93,
respectively, based on its gross revenues
for the years 1999 and 2000. Again,
petitioner filed a Protest on January 21,
2002, reiterating its position that the local
business tax should be based on gross
receipts and not gross revenue.
Respondent denied petitioner’s protest
and gave the latter 30 days within which
to appeal the denial. This prompted
petitioner to file a petition for review with
the Regional Trial Court (RTC) of Pasig,
Branch 168, praying for the annulment
and cancellation of petitioner’s deficiency
local business taxes totaling
P17,262,205.66.
Respondent and its City Treasurer filed a
motion to dismiss on the grounds that the
court had no jurisdiction over the subject
matter and that petitioner had no legal
capacity to sue. The RTC denied the
motion in an Order dated December 3,
2002 due to respondents’ failure to
include a notice of hearing. Thereafter, the
RTC declared respondents in default and
allowed petitioner to present evidence ex-
parte.
ISSUE: 
WON THE BASIS IS THE GROSS RECEIPTS
AND NOT THE GROSS REVENUE.
HELD:
YES. The law is clear. Gross
receipts include money or its equivalent
actually or constructively received in
consideration of services rendered or
articles sold, exchanged or leased,
whether actual or constructive. Revenue
Regulations No. 16-2005 dated September
1, 2005 defined and gave examples of
“constructive receipt”, to wit: STaIHc
SEC. 4. 108-4. Definition of Gross Receipts.
— . . . 
“Constructive receipt” occurs when the
money consideration or its equivalent is
placed at the control of the person who
rendered the service without restrictions
by the payor. The following are examples
of constructive receipts:
(1) deposit in banks which are made
available to the seller of services without
restrictions; 
(2) issuance by the debtor of a notice to
offset any debt or obligation and
acceptance thereof by the seller as
payment for services rendered; and
(3) transfer of the amounts retained by
the payor to the account of the contractor.
There is, therefore, constructive receipt,
when the consideration for the articles
sold, exchanged or leased, or the services
rendered has already been placed under
the control of the person who sold the
goods or rendered the services without
any restriction by the payor.
In contrast, gross revenue covers money
or its equivalent actually or constructively
received, including the value of services
rendered or articles sold, exchanged or
leased, the payment of which is yet to be
received. This is in consonance with the
International Financial Reporting
Standards, which defines revenue as the
gross inflow of economic benefits (cash,
receivables, and other assets) arising from
the ordinary operating activities of an
enterprise (such as sales of goods, sales of
services, interest, royalties, and
dividends), which is measured at the fair
value of the consideration received or
receivable.
As aptly stated by the RTC:
“[R]evenue from services rendered is
recognized when services have been
performed and are billable.” It is
“recorded at the amount received or
expected to be received.” (Section E [17]
of the Statements of Financial Accounting
Standards No. 1).
In petitioner’s case, its audited financial
statements reflect income or revenue
which accrued to it during the taxable
period although not yet actually or
constructively received or paid. This is
because petitioner uses the accrual
method of accounting, where income is
reportable when all the events have
occurred that fix the taxpayer’s right to
receive the income, and the amount can
be determined with reasonable accuracy;
the right to receive income, and not the
actual receipt, determines when to include
the amount in gross income.
The imposition of local business tax based
on petitioner’s gross revenue will
inevitably result in the constitutionally
proscribed double taxation — taxing of the
same person twice by the same
jurisdiction for the same thing —
inasmuch as petitioner’s revenue or
income for a taxable year will definitely
include its gross receipts already reported
during the previous year and for which
local business tax has already been paid.
Thus, respondent committed a palpable
error when it assessed petitioner’s local
business tax based on its gross revenue as
reported in its audited financial
statements, as Section 143 of the Local
Government Code and Section 22 (e) of
the Pasig Revenue Code clearly provide
that the tax should be computed based
on gross receipts.
ISSUE:
What is the extent of the Power of Local
Taxation?
 
RULING:
The power to tax is primarily vested in the
Congress; however, it may be exercised by
local legislative bodies pursuant to direct
authority conferred by Section 5, Article X
of the Constitution. Under the latter, the
exercise of the power may be subject to
such guidelines and limitations as
Congress may provide. Respondent
assessed deficiency local business taxes on
petitioner based on the latter’s gross
revenue as reported in its financial
statements, arguing that gross receipts is
synonymous with gross earnings/revenue,
which, in turn,  includes uncollected
earnings.  Petitioner, however, contends
that only the portion of the revenues
which were actually and constructively
received should be considered in
determining its tax base.
Thus, respondent committed a palpable
error when it assessed petitioner’s local
business tax based on its gross revenue as
reported in its audited financial
statements, as Section 143 of the Local
Government Code and Section 22(e) of the
Pasig Revenue Code clearly provide that
the tax should be computed based
on gross receipts.
CIR V. PHILIPPINE AIRLINES, GR 160528,
OCTOBER 9, 2006
Subject Matter:
Withholding Taxes
Summary:
PAL requested for refund of an amount
representing the total amount of 20% final
withholding tax withheld from PAL by
various agent banks. CIR failed to act on
PAL’s request for refund, thus a petition
was filed before the CTA. CTA ruled that
PAL was not entitled to the refund
because Sect. 131 of PD No. 1590, PAL’s
franchise, allegedly gave CIR the option to
pay either its corporate income tax under
the provisions of the NIRC or a franchise
tax of two percent of its gross revenues.
Payment of either tax would be in lieu of
all “other taxes.” Since it chose to pay its
corporate income tax, payment of the final
withholding tax is deemed part of this
liability and therefore not refundable.
Reversing CTA, CA held that PAL was
bound to pay only the corporate income
tax or the franchise tax as sec. 13 of PD
No. 1590 exempts respondent from paying
all other taxes, duties, royalties and other
fees of any kind. Respondent chose to pay
its basic corporate income tax, which
resulted in a zero tax liability. This zero tax
liability should neither be taken against
respondent nor deprive it of the
exemption granted by the law. Having
chosen to pay its corporate income tax
liability, respondent should now be
exempt from paying all other taxes
including the final withholding tax. WON
the Court of Appeals erred on a question
of law ruling that the ‘in lieu of all other
taxes’ provision in Section 13 of PD No.
1590 applies even if there were in fact no
taxes paid under any of subsections (A)
and (B) of the said decree. (NO) According
to SC, CA was not wrong in ruling that the
‘in lieu of all other taxes’ provision in
Section 13 of PD No. 1590 applies even if
there were in fact no taxes paid under any
of subsections (A) and (B) of the said
decree. Thus, PAL is entitled to refund.
PAL’s request for a refund in the present
case pertains to the passive income on
bank deposits, which is subject to the
specific final tax of 20 percent. Doctrines:
The definition of gross income is broad
enough to include all passive incomes
subject to specific rates or final taxes.
However, since these passive incomes are
already subject to different rates and
taxed finally at source, they are no longer
included in the computation of gross
income, which determines taxable income.
Under the Tax Code, “taxable income”
does not include passive income subjected
to final withholding taxes. Clearly, then,
the “basic corporate income tax”
identified in Section 13 (a) of the franchise
relates to the general rate of 35% as
stipulated in Section 27 of the Tax Code.
The final 20% taxes disputed in the
present case are not covered under
Section 13 (a) of PAL’s franchise; thus, a
refund is in order.
Before us is a Petition for Review [1] under
Rule 45 of the Rules of Court, challenging
the September 30, 2003 Decision [2] of the
Court of Appeals (CA) in CA-GR SP No.
67970.  The CA reversed the June 13, 2001
Decision[3] and the November 13, 2001
Resolution[4] of the Court of Tax Appeals
(CTA) in CTA Case No. 5824.  The assailed
CA Decision disposed as follows:
"WHEREFORE, the petition is GRANTED,
and [the] Commissioner of Internal
Revenue is hereby directed to refund to
the [respondent] the amount of
P731,190.45 representing the 20% final
withholding tax collected and deducted by
depository banks on the petitioner's
interest income or, in the alternative, to
allow the [respondent] a tax credit for the
same amount."[5]
The Facts
The CA narrates the facts thus:
"[Respondent] Philippine Airlines, Inc.
(PAL) is a domestic corporation organized
in accordance with the laws of the
Republic of the Philippines, while
[Petitioner] Commissioner of Internal
Revenue (CIR) is in-charge of the
assessment and collection of the 20% final
tax on interest on Philippine currency bank
deposits and yield or any other monetary
benefit from deposit substitutes and from
trust funds and similar arrangements,
imposed on domestic corporation under
Sec. 24 (e) (1) [now Sec. 27 (D) (1)] of the
National Internal Revenue Code (NIRC).  As stated earlier, the Court of Appeals
"On November 5, 1997, [respondent's]
AVP-Revenue Operations and Tax Services
Officer, Atty. Edgardo P. Curbita, filed with
the Office of the then Commissioner of
Internal Revenue, Mdm. Liwayway
Vinzons-Chato, a written request for
refund of the amount of P2,241,527.22
which represents the total amount of 20%
final withholding tax withheld from the
[respondent] by various withholding agent
banks, and which amount includes the
20% final withholding tax withheld by the
United Coconut Planters Bank (UCPB) and
Rizal Commercial Banking Corporation
(RCBC) for the period starting March 1995
through February 1997.
"On December 4, 1997, the [respondent's]
AVP-Revenue Operations and Tax Services
Officer again filed with [petitioner] CIR
another written request for refund of the
amount of P1,048,047.23, representing
the total amount of 20% final withholding
tax withheld by various depository banks
of the [respondent] which amount
includes the 20% withholding tax withheld
by the Philippine National Bank (PNB),
Equitable Banking Corporation (EBC), and
the Jade Progressive Savings & Mortgage
Bank (JPSMB) for the period starting
March 1995 through November 1997.
"The amounts, subject of this petition, and
which represent the 20% final withholding
tax allegedly erroneously withheld and
remitted to the BIR by the aforesaid banks
may be summarized as follows:
"[Petitioner] CIR failed to act on the
[respondent's] request for refund; thus, a
petition was filed before the CTA on April
23, 1999."[6]
Ruling of the Court of Tax Appeals
The CTA ruled that Respondent PAL was
not entitled to the refund.  Section 13 of
Presidential Decree No. 1590, PAL's
franchise,[7] allegedly gave respondent the
option to pay either its corporate income
tax under the provisions of the NIRC or a
franchise tax of two percent of its gross
revenues.  Payment of either tax would be
in lieu of all "other taxes."  Had
respondent paid the two percent franchise
tax, then the final withholding taxes would
have been considered as "other taxes." 
Since it chose to pay its corporate income
tax, payment of the final withholding tax is
deemed part of this liability and therefore
not refundable.[8]
Ruling of the Court of Appeals
reversed the Decision of the CTA.  The CA
held that PAL was bound to pay only the
corporate income tax or the franchise tax. 
Section 13 of Presidential Decree No. 1590
exempts respondent from paying all other
taxes, duties, royalties and other fees of
any kind.[9]  Respondent chose to pay its
basic corporate income tax, which, after
considering the factors allowed by law,
resulted in a zero tax liability. [10]  This zero
tax liability should neither be taken against
respondent nor deprive it of the
exemption granted by the law.[11]  Having
chosen to pay its corporate income tax
liability, respondent should now be
exempt from paying all other taxes
including the final withholding tax.
[12]
Hence, this Petition.
The Issue
The sole issue raised by petitioner is stated
in this wise:
"The Court of Appeals erred on a question
of law ruling that the 'in lieu of all other
taxes' provision in Section 13 of PD No.
1590 applies even if there were in fact no
taxes paid under any of subsections (A)
and (B) of the said decree."[13]
The Court's Ruling
The Petition has no merit.
Sole Issue:
Tax Liability of PAL
The resolution of the instant case hinges
on the interpretation of Section 13 of
PAL's franchise, which states in part:
"SEC. 13.    In consideration of the
franchise and rights hereby granted, the
grantee shall pay to the Philippine
Government during the life of this
franchise whichever of subsections (a) and
(b) hereunder will result in a lower tax:
The basic corporate income tax based
on the grantee's annual net taxable
'(a) income computed in accordance with
the provisions of the National Internal
Revenue Code; or
A franchise tax of two percent (2%) of
the gross revenues derived by the
grantee from all sources, without
distinction as to transport or non-
'(b transport operations; provided, that
) with respect to international air-
transport service, only the gross
passenger, mail, and freight revenues
from its outgoing flights shall be
subject to this tax.'
"The tax paid by the grantee under either
of the above alternatives shall be in lieu of
all other taxes, duties, royalties,
registration, license, and other fees and
charges of any kind, nature, or description,
imposed, levied, established, assessed, or
collected by any municipal, city, provincial,
or national authority or government
agency, now or in the future, x  x  x."[14]
Two points are evident from this
provision.  First, as consideration for the
franchise, PAL is liable to pay either a) its
basic corporate income tax based on its
net taxable income, as computed under
the National Internal Revenue Code; or b)
a franchise tax of two percent based on its
gross revenues, whichever is
lower.  Second, the tax paid is "in lieu of all
other taxes" imposed by all government
entities in the country.
Interpretation of PAL's Franchise
According to the CA and PAL, the "other
taxes in lieu of all other taxes" proviso
includes final withholding taxes.[15]  When
respondent availed itself of the basic
corporate income tax as its chosen tax
liability, it became exempt from final
withholding taxes.
On the other hand, the CTA held that the
"in lieu of all other taxes" proviso implied
the existence of something for which a
substitution would be made.[16]  Final
withholding taxes come under basic
corporate income tax liability; hence,
payment of the latter cannot mean an
exemption from the former.  To be
exempt from final withholding taxes, PAL
should have paid the franchise tax of two
percent, which would have been in lieu of
all other taxes including the final
withholding tax.
The CIR argues that the "in lieu of all other
taxes" proviso is a mere incentive that
applies only when PAL actually pays
something; that is, either the basic
corporate income tax or the franchise tax.
[17]
  Because of the zero tax liability of
respondent under the basic corporate
income tax system, it was not eligible for
exemption from other taxes. [18]
Construing Subsection (a)
of Section 13 of PD 1590
Vis-à-vis the Corporate Income Tax
PAL availed itself of PD 1590, Section 13,
Subsection (a), the crux of which hinged
on the terms "basic corporate income tax"
and "annual net taxable income."  The
applicable laws (PAL's franchise and the
Tax Code) do not define the terms "basic
corporate income tax."[19]  On the other
hand, "annual net taxable income" is
computed in accordance with the
provisions of the National Internal
Revenue Code.
The statutory basis for the income tax on
corporations is found in Sections 27 to 30
of the National Internal Revenue Code of
1997 under Chapter IV: "Tax on
Corporations."  Section 27 enumerates the
rate of income tax on domestic
corporations; Section 28, the rates for
foreign corporations; Section 29, the taxes
on improperly accumulated earnings; and
Section 30, the corporations exempt from
tax.
Being a domestic corporation, PAL is
subject to Section 27, which reads as
follows:
"Section 27.  Rates of Income Tax on
Domestic Corporations.
"(A) In General. Except as otherwise
provided in this Code, an income tax of
thirty-five percent (35%) is hereby
imposed upon the taxable income derived
during each taxable year from all sources
within and without the Philippines by
every corporation, x  x  x, organized in, or
existing under the laws of the Philippines
x  x  x."[20]
The NIRC also imposes final taxes on
certain passive incomes, as follows: 1) 20
percent on the interests on currency bank
deposits, other monetary benefits from
deposit substitutes, trust funds and
similar arrangements, and royalties
derived from sources within the
Philippines;[21] 2) 5 percent and 10 percent
on the net capital gains realized from the
sale of shares of stock in a domestic
corporation not traded in the stock
exchange;[22] 3) 10 percent on income
derived by a depositary bank under the
expanded foreign currency deposit
system;[23] and 4) 6 percent on the gain
presumed to be realized on the sale or
disposition of lands and buildings treated
as capital assets.[24]  These final taxes are
withheld at source.[25]
A corporate income tax liability, therefore,
has two components: the general rate of
35 percent, which is not disputed; and the
specific final rates for certain passive
incomes.  PAL's request for a refund in the
present case pertains to the passive
income on bank deposits, which is subject
to the specific final tax of 20 percent. [26]
Computation of Taxable
Income Under the Tax Code
Note that the tax liability of PAL under the
option it chose (Item "a" of Section 13 of
PD 1590) is to be "computed in accordance
with the provisions of the National
Internal Revenue Code," as follows:
"(a) The basic corporate income tax based
on the grantee's annual net taxable
income computed in accordance with the
provisions of the National Internal
Revenue Code[.]"
Taxable income means the pertinent items
of gross income specified in the Tax Code,
less the deductions and/or personal and
additional exemptions, if any, authorized
for these types of income.[27]  Under
Section 32 of the Tax Code, gross
income means income derived from
whatever source, including compensation
for services; the conduct of trade or
business or the exercise of a profession;
dealings in property; interests; rents;
royalties; dividends; annuities; prizes and
winnings; pensions; and a partner's
distributive share in the net income of a
general professional partnership.  Section
34 enumerates the allowable deductions;
Section 35, personal and additional
exemptions.
The definition of gross income is broad
enough to include all passive incomes
subject to specific rates or final taxes.  other taxes" proviso is a mere incentive
However, since these passive incomes are
already subject to different rates and
taxed finally at source, they are no longer
included in the computation of gross
income, which determines taxable income.
Basic Corporate Income Tax Based
on Annual Net Taxable Income
To repeat, the pertinent provision in the
case at bar reads: "basic corporate income
tax based on the grantee's annual net
taxable income computed in accordance
with the provisions of the National
Internal Revenue Code."  The Court has
already illustrated that, under the Tax
Code, "taxable income" does not include
passive income subjected to final
withholding taxes.  Clearly, then, the
"basic corporate income tax" identified in
Section 13 (a) of the franchise relates to
the general rate of 35 percent as
stipulated in Section 27 of the Tax Code.  negative amount and thus translate into a
The final 20 percent taxes disputed in the
present case are not covered under
Section 13 (a) of PAL's franchise; thus, a
refund is in order.
"Substitution Theory"
of the CIR Untenable
A careful reading of Section 13 rebuts the
argument of the CIR that the "in lieu of all
that applies only when PAL actually pays
something.  It is clear that PD 1590
intended to give respondent the option to
avail itself of Subsection (a) or (b) as
consideration for its franchise.  Either
option excludes the payment of other
taxes and dues imposed or collected by
the national or the local government.  PAL
has the option to choose the alternative
that results in lower taxes.  It is not the
fact of tax payment that exempts it, but
the exercise of its option.
Under Subsection (a), the basis for the tax
rate is respondent's annual net taxable
income, which (as earlier discussed) is
computed by subtracting allowable
deductions and exemptions from gross
income.  By basing the tax rate on the
annual net taxable income, PD 1590
necessarily recognized the situation in
which taxable income may result in a
zero tax liability.
Notably, PAL was owned and operated by
the government at the time the franchise
was last amended.[28]  It can reasonably be
contemplated that PD 1590 sought to
assist the finances of the government
corporation in the form of lower taxes. 
When respondent operates at a loss (as in
the instant case), no taxes are due; in this
instance, it has a lower tax liability than
that provided by Subsection (b).
The fallacy of the CIR's argument is
evident from the fact that the payment of
a measly sum of one peso would suffice to
exempt PAL from other taxes, whereas a
zero liability arising from its losses would
not.  There is no substantial distinction
between a zero tax and a one-peso tax
liability.
The Court is bound to effectuate the
lawmakers' intent, which is the controlling
factor in interpreting a statute. [29] 
Significantly, this Court has held that the
soul of the law is intent:
"The intent of a statute is the law.  If a
statute is valid it is to have effect
according to the purpose and intent of the
lawmaker.  The intent is the vital part, the
essence of the law, and the primary rule of
construction is to ascertain and give effect
to the intent.  The intention of the
legislature in enacting a law is the law
itself, and must be enforced when
ascertained, although it may not be
consistent with the strict letter of the
statute.  Courts will not follow the letter of
a statute when it leads away from the true
intent and purpose of the legislature and
to conclusions inconsistent with the
general purpose of the act.  Intent is the
spirit which gives life to a legislative
enactment.  In construing statutes the
proper course is to start out and follow
the true intent of the legislature and to
adopt that sense which harmonizes best
with the context and promotes in the
fullest manner the apparent policy and
objects of the legislature."[30]
While the Court recognizes the general
rule that the grant of tax exemptions is
strictly construed against the taxpayer and
in favor of the taxing power, [31]  Section 13
of the franchise of respondent leaves no
room for interpretation.  Its franchise
exempts it from paying any tax other than
the option it chooses: either the "basic
corporate income tax" or the two percent
gross revenue tax.
Determining whether this tax exemption is
wise or advantageous is outside the realm
of judicial power.  This matter is addressed
to the sound discretion of the lawmaking
department of government.
WHEREFORE, the Petition is DENIED.  No
pronouncement as to costs.
SO ORDERED.
CALASANZ V. CIR, 144 SCRA 664, 1986
Appeal taken by Spouses Tomas and
Ursula Calasanz from the decision of the
Court of Tax Appeals in CTA No. 1275
dated June 7, 1966, holding them liable for
the payment of P3,561.24 as deficiency
income tax and interest for the calendar
year 1957 and P150.00 as real estate
dealer's fixed tax.
 
Petitioner Ursula Calasanz inherited from
her father Mariano de Torres an
agricultural land located in Cainta, Rizal,
containing a total area of 1,678,000
square meters. In order to liquidate her
inheritance, Ursula Calasanz had the land
surveyed and subdivided into lots.
Improvements, such as good roads,
concrete gutters, drainage and lighting
system, were introduced to make the lots
saleable. Soon after, the lots were sold to
the public at a profit.
In their joint income tax return for the
year 1957 filed with the Bureau of Internal
Revenue on March 31, 1958, petitioners
disclosed a profit of P31,060.06 realized
from the sale of the subdivided lots, and
reported fifty per centum thereof or
P15,530.03 as taxable capital gains.
Upon an audit and review of the return
thus filed, the Revenue Examiner adjudged
petitioners engaged in business as real
estate dealers, as defined in Section 194
[s] 1 of the National Internal Revenue
Code, required them to pay the real estate
dealer's tax 2 and assessed a deficiency
income tax on profits derived from the
sale of the lots based on the rates for
ordinary income.
On September 29, 1962, petitioners
received from respondent Commissioner
of Internal Revenue:
 a. Demand No. 90-B-
032293-57 in the amount
of P160.00 representing
real estate dealer's fixed
tax of P150.00 and P10.00
compromise penalty for
late payment; and
b. Assessment No. 90-5-
35699 in the amount of
P3,561.24 as deficiency
income tax on ordinary
gain of P3,018.00 plus
interest of P 543.24.
On October 17, 1962, petitioners filed with
the Court of Tax Appeals a petition for
review contesting the aforementioned
assessments.
On June 7, 1966, the Tax Court upheld the
respondent Commissioner except for that
portion of the assessment regarding the
compromise penalty of P10.00 for the
reason that in this jurisdiction, the same
cannot be collected in the absence of a
valid and binding compromise agreement.
Hence, the present appeal.
The issues for consideration are:
a. Whether or not
petitioners are real estate
dealers liable for real
estate dealer's fixed tax;
and
b. Whether the gains
realized from the sale of
the lots are taxable in full
as ordinary income or
capital gains taxable at
capital gain rates.
The issues are closely interrelated and will
be taken jointly.
Petitioners assail their liabilities as "real
estate dealers" and seek to bring the
profits from the sale of the lots under
Section 34 [b] [2] 3 of the Tax Code.
The theory advanced by the petitioners is
that inherited land is a capital asset within
the meaning of Section 34[a] [1] of the Tax
Code and that an heir who liquidated his
inheritance cannot be said to have
engaged in the real estate business and
may not be denied the preferential tax
treatment given to gains from sale of
capital assets, merely because he disposed
of it in the only possible and advantageous
way.
Petitioners averred that the tract of land
subject of the controversy was sold
because of their intention to effect a
liquidation. They claimed that it was
parcelled out into smaller lots because its
size proved difficult, if not impossible, of
disposition in one single transaction. They
pointed out that once subdivided,
certainly, the lots cannot be sold in one
isolated transaction. Petitioners, however,
admitted that roads and other
improvements were introduced to
facilitate its sale. 4
On the other hand, respondent
Commissioner maintained that the
imposition of the taxes in question is in
accordance with law since petitioners are
deemed to be in the real estate business
for having been involved in a series of real
estate transactions pursued for profit.
Respondent argued that property acquired
by inheritance may be converted from an
investment property to a business
property if, as in the present case, it was
subdivided, improved, and subsequently
sold and the number, continuity and
frequency of the sales were such as to
constitute "doing business." Respondent
likewise contended that inherited
property is by itself neutral and the fact
that the ultimate purpose is to liquidate is
of no moment for the important inquiry is
what the taxpayer did with the property.
Respondent concluded that since the lots
are ordinary assets, the profits realized
therefrom are ordinary gains, hence
taxable in full.
We agree with the respondent.
The assets of a taxpayer are classified for
income tax purposes into ordinary assets
and capital assets. Section 34[a] [1] of the
National Internal Revenue Code broadly
defines capital assets as follows:
[1] Capital assets.-The
term 'capital assets'
means property held by
the taxpayer [whether or
not connected with his
trade or business], but
does not include, stock in
trade of the taxpayer or
other 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, or property held by
the taxpayer primarily for
sale to customers in the
ordinary course of his
trade or business, or
property used in the trade
or business of a character
which is subject to the
allowance for depreciation
provided in subsection [f]
of section thirty; or real
property used in the trade
or business of the
taxpayer.
The statutory definition of capital assets is
negative in nature. 5 If the asset is not
among the exceptions, it is a capital asset;
conversely, assets falling within the
exceptions are ordinary assets. And
necessarily, any gain resulting from the
sale or exchange of an asset is a capital
gain or an ordinary gain depending on the
kind of asset involved in the transaction.
However, there is no rigid rule or fixed
formula by which it can be determined
with finality whether property sold by a
taxpayer was held primarily for sale to
customers in the ordinary course of his
trade or business or whether it was sold as
a capital asset. 6 Although several factors
or indices 7 have been recognized as
helpful guides in making a determination,
none of these is decisive; neither is the
presence nor the absence of these factors
conclusive. Each case must in the last
analysis rest upon its own peculiar facts
and circumstances. 8
Also a property initially classified as a
capital asset may thereafter be treated as
an ordinary asset if a combination of the
factors indubitably tend to show that the
activity was in furtherance of or in the
course of the taxpayer's trade or business.
Thus, a sale of inherited real property
usually gives capital gain or loss even
though the property has to be subdivided
or improved or both to make it salable.
However, if the inherited property is
substantially improved or very actively
sold or both it may be treated as held
primarily for sale to customers in the
ordinary course of the heir's business. 9
Upon an examination of the facts on
record, We are convinced that the
activities of petitioners are
indistinguishable from those invariably
employed by one engaged in the business
of selling real estate.
One strong factor against petitioners'
contention is the business element of
development which is very much in
evidence. Petitioners did not sell the land
in the condition in which they acquired it.
While the land was originally devoted to
rice and fruit trees, 10 it was subdivided
into small lots and in the process
converted into a residential subdivision
and given the name Don Mariano
Subdivision. Extensive improvements like
the laying out of streets, construction of
concrete gutters and installation of lighting
system and drainage facilities, among
others, were undertaken to enhance the
value of the lots and make them more
attractive to prospective buyers. The
audited financial statements 11 submitted
together with the tax return in question
disclosed that a considerable amount was
expended to cover the cost of
improvements. As a matter of fact, the
estimated improvements of the lots sold
reached P170,028.60 whereas the cost of
the land is only P 4,742.66. There is
authority that a property ceases to be a
capital asset if the amount expended to
improve it is double its original cost, for
the extensive improvement indicates that
the seller held the property primarily for
sale to customers in the ordinary course of
his business. 12
Another distinctive feature of the real
estate business discernible from the
records is the existence of contracts
receivables, which stood at P395,693.35 as
of the year ended December 31, 1957. The
sizable amount of receivables in
comparison with the sales volume of
P446,407.00 during the same period
signifies that the lots were sold on
installment basis and suggests the
number, continuity and frequency of the
sales. Also of significance is the
circumstance that the lots were
advertised 13 for sale to the public and that
sales and collection commissions were
paid out during the period in question.
Petitioners, likewise, urge that the lots
were sold solely for the purpose of
liquidation.
In Ehrman vs. Commissioner,14 the
American court in clear and categorical
terms rejected the liquidation test in
determining whether or not a taxpayer is
carrying on a trade or business The court
observed that the fact that property is sold
for purposes of liquidation does not
foreclose a determination that a "trade or
business" is being conducted by the seller.
The court enunciated further:
We fail to see that the
reasons behind a person's
entering into a business-
whether it is to make
money or whether it is to
liquidate-should be
determinative of the
question of whether or
not the gains resulting
from the sales are
ordinary gains or capital
gains. The sole question is-
were the taxpayers in the
business of subdividing
real estate? If they were,
then it seems indisputable
that the property sold falls
within the exception in
the definition of capital
assets . . . that is, that it
constituted 'property held
by the taxpayer primarily
for sale to customers in
the ordinary course of his
trade or business.
Additionally, in Home Co., Inc. vs.
Commissioner, 15 the court articulated on
the matter in this wise:
One may, of course,
liquidate a capital asset.
To do so, it is necessary to
sell. The sale may be
conducted in the most
advantageous manner to
the seller and he will not
lose the benefits of the
capital gain provision of
the statute unless he
enters the real estate
business and carries on
the sale in the manner in
which such a business is
ordinarily conducted. In
that event, the liquidation
constitutes a business and
a sale in the ordinary
course of such a business
and the preferred tax
status is lost.
In view of the foregoing, We hold that in
the course of selling the subdivided lots,
petitioners engaged in the real estate
business and accordingly, the gains from
the sale of the lots are ordinary income
taxable in full.
WHEREFORE, the decision of the Court of
Tax Appeals is affirmed. No costs.
TUASON V. LINGAD, 58 SCRA 170, JULY 31,
1974
DOCTRINE:
Captial Assets; definition: The term
"capital assets" includes all the properties
of a taxpayer whether or not connected
with his trade or business, except: (1)
stock in trade or other property included
in the taxpayer's inventory; (2) property
primarily for sale to customers in the
ordinary course of his trade or business;
(3) property used in the trade or business
of the taxpayer and subject to
depreciation allowance; and (4) real
property used in trade or business. If the
taxpayer sells or exchanges any of the
properties above-enumerated, any gain or
loss relative thereto is an ordinary gain or
an ordinary loss; the gain or loss from the
sale or exchange of all other properties of
the taxpayer is a capital gain or a capital
loss.
In the case at bar, Taxpayer operated a
substantial rental business of several
properties, not only those subject in this
case, such that the Taxpayer had to a real
estate dealer's tax. Taxpayer's sales of the
several lots forming part of his rental
business cannot be characterized as other
than sales of non-capital assets.
FACTS:
The mother of Taxpayer (Petitioner
Antonio Tuason) owned a 7 hectare parcel
of land located in the City of Manila. She
subdivided the land into twenty-nine (29)
lots. Possession of the land was eventually
inherited by Taxpayer in 1948.
Taxpayer instructed his attorney-in-fact to
sell the lots. Twenty-eight (28) out of the
twenty-nine parcels were all sold easily.
The attorney-in-fact was not able to sell
the twenty-ninth lot (hereinafter Lot 29)
immediately because it was located at a
low elevation.
In 1952, Lot 29 was filled, subdivided and
gravel roads were constructed. The small
lots were then sold over the years on a
uniform 10-year annual amortization
basis. The attorney-in-fact, did not employ
any broker nor did he put up
advertisements in the matter of the sale
thereof.
In 1953 and 1954 the Taxpayer reported
his income from the sale of the small lots
(P102,050.79 and P103,468.56,
respectively) as long-term capital
gains. The CIR upheld Taxpayer's
treatment of this tax.
In his 1957 tax return the Taxpayer as
before treated his income from the sale
of the small lots (P119,072.18) as capital
gains. This treatment was initially
approved by the CIR, but by 1963, the CIR
reversed itself and considered the
Taxpayer's profits from the sales of the
lots as ordinary gainsc
The CIR assesed a deficiency of P31,095.36
from the Taxpayer.
Contention of Taxpayer: As he was
engaged in the business of leasing the lots
he inherited from his mother as well other
real properties, his subsequent sales of the
mentioned lots cannot be recognized as
sales of capital assets but of “real property
used in trade or business of the taxpayer.”
ISSUE/S:
Whether or not the properties in question
which the Taxpayer had inherited and
subsequently sold in small lots to other
persons should be regarded as capital
assets.
HELD:
No. It is Ordinary Income
As thus defined by law, CAPITAL ASSETS
include all properties of a taxpayer
whether or not connected with his trade
or business, except:
1. stock in trade or other property
included in the taxpayer's inventory;
2. property primarily for sale to
customers in the ordinary course of his
trade or business;
3. property used in the trade or
business of the taxpayer and subject to
depreciation allowance; and
4. real property used in trade or
business.
If the taxpayer sells or exchanges any of
the properties above, any gain or loss
relative thereto is an ordinary gain or an
ordinary loss; the loss or gain from the
sale or exchange of all other properties of
the taxpayer is a capital gain or a capital
loss.
Under Section 34(b)(2) of the old Tax
Code, if a gain is realized by a taxpayer
(other than a corporation) from the sale or
exchange of capital assets held for more
than 12 months, only 50% of the net
capital gain shall be taken into account in
computing the net income.
The Tax Code's provisions on so-called
long-term capital gains constitutes a
statute of partial exemption. In view of the
familiar and settled rule that tax
exemptions are construed in strictissimi
juris against the taxpayer and liberally in
favor of the taxing authority, it is the
taxpayer's burden to bring himself clearly
and squarely within the terms of a tax-
exempting statutory provision, otherwise,
all fair doubts will be resolved against him.
In the case at bar, after a thoroughgoing
study of all the circumstances, this Court is
of the view and so holds that Petitioner-
Taxpayer's thesis is bereft of merit. Under
the circumstances, Taxpayer's sales of the
several lots forming part of his rental
business cannot be characterized as other
than sales of non-capital assets. the sales
concluded on installment basis of the
subdivided lots do not deserve a different
characterization for tax purposes.
This Court finds no error in the holding
that the income of the Taxpayer from the
sales of the lots in question should be
considered as ordinary income.
PHILIPPINE Long Distance Telephone
Company, Inc. v. City of Davao, GR
143867, March 25, 2003
FACTS: PLDT paid a franchise tax equal to
three percent (3%) of its gross receipts.
The franchise tax was paid “in lieu of all
taxes on this franchise or earnings
thereof” pursuant to RA 7082. The
exemption from “all taxes on this franchise
or earnings thereof” was subsequently
withdrawn by RA 7160 (LGC), which at the
same time gave local government units
the power to tax businesses enjoying a
franchise on the basis of income received
or earned by them within their territorial
jurisdiction. The LGC took effect on
January 1, 1992. The City of Davao
enacted Ordinance No. 519, Series of
1992, which in pertinent part provides:
Notwithstanding any exemption granted
by law or other special laws, there is
hereby imposed a tax on businesses
enjoying a franchise, a rate of seventy-five
percent (75%) of one percent (1%) of the
gross annual receipts for the preceding
calendar year based on the income
receipts realized within the territorial
jurisdiction of Davao City. Subsequently,
Congress granted in favor of Globe
Mackay Cable and Radio Corporation
(Globe) and Smart Information
Technologies, Inc. (Smart) franchises
which contained “in lieu of all taxes”
provisos. In 1995, it enacted RA 7925, or
the Public Telecommunication Policy of
the Philippines, Sec. 23 of which provides
that any advantage, favor, privilege,
exemption, or immunity granted under
existing franchises, or may hereafter be
granted, shall ipso facto become part of
previously granted telecommunications
franchises and shall be accorded
immediately and unconditionally to the
grantees of such franchises. The law took
effect on March 16, 1995. In January 1999,
when PLDT applied for a mayor’s permit to
operate its Davao Metro exchange, it was
required to pay the local franchise tax
which then had amounted to
P3,681,985.72. PLDT challenged the power
of the city government to collect the local
franchise tax and demanded a refund of
what had been paid as a local franchise tax
for the year 1997 and for the first to the
third quarters of 1998. ISSUE: Whether or
not by virtue of RA 7925, Sec. 23, PLDT is
again entitled to the exemption from
payment of the local franchise tax in view
of the grant of tax exemption to Globe and
Smart. HELD: Petitioner contends that
because their existing franchises contain
“in lieu of all taxes” clauses, the same
grant of tax exemption must be deemed
to have become ipso facto part of its
previously granted telecommunications
franchise. But the rule is that tax
exemptions should be granted only by a
clear and unequivocal provision of law
“expressed in a language too plain to be
mistaken” and assuming for the nonce
that the charters of Globe and of Smart
grant tax exemptions, then this runabout
way of granting tax exemption to PLDT is
not a direct, “clear and unequivocal” way
of communicating the legislative intent.
Nor does the term “exemption” in Sec. 23
of RA 7925 mean tax exemption. The term
refers to exemption from regulations and
requirements imposed by the National
Telecommunications Commission (NTC).
For instance, RA 7925, Sec. 17 provides:
The Commission shall exempt any specific
telecommunications service from its rate
or tariff regulations if the service has
sufficient competition to ensure fair and
reasonable rates of tariffs. Another
exemption granted by the law in line with
its policy of deregulation is the exemption
from the requirement of securing permits
from the NTC every time a service and sells transportation tickets
telecommunications company imports
equipment. Tax exemptions should be
granted only by clear and unequivocal
provision of law on the basis of language
too plain to be mistaken.
CIR V BRITISH OVERSEAS AIRWAYS
CORPORATION, 149 SCRA 395, APRIL 30,
1987
Petitioner Commissioner of Internal
Revenue (CIR) seeks a review on certiorari
of the joint Decision of the Court of Tax
Appeals (CTA) in CTA Cases Nos. 2373 and
2561, dated 26 January 1983, which set
aside petitioner's assessment of deficiency
income taxes against respondent British
Overseas Airways Corporation (BOAC) for
the fiscal years 1959 to 1967, 1968-69 to
1970-71, respectively, as well as its
Resolution of 18 November, 1983 denying
reconsideration.
BOAC is a 100% British Government-
owned corporation organized and existing
under the laws of the United Kingdom It is
engaged in the international airline
business and is a member-signatory of the
Interline Air Transport Association (IATA).
As such it operates air transportation
over the routes of the other airline
members. During the periods covered by
the disputed assessments, it is admitted
that BOAC had no landing rights for traffic
purposes in the Philippines, and was not
granted a Certificate of public convenience
and necessity to operate in the Philippines
by the Civil Aeronautics Board (CAB),
except for a nine-month period, partly in
1961 and partly in 1962, when it was
granted a temporary landing permit by the
CAB. Consequently, it did not carry
passengers and/or cargo to or from the
Philippines, although during the period
covered by the assessments, it maintained
a general sales agent in the Philippines —
Wamer Barnes and Company, Ltd., and
later Qantas Airways — which was
responsible for selling BOAC tickets
covering passengers and cargoes. 1
G.R. No. 65773  (CTA Case No. 2373, the
First Case)
On 7 May 1968, petitioner Commissioner
of Internal Revenue (CIR, for brevity)
assessed BOAC the aggregate amount of
P2,498,358.56 for deficiency income taxes
covering the years 1959 to 1963. This was
protested by BOAC. Subsequent
investigation resulted in the issuance of a
new assessment, dated 16 January 1970
for the years 1959 to 1967 in the amount
of P858,307.79. BOAC paid this new
assessment under protest.
On 7 October 1970, BOAC filed a claim for
refund of the amount of P858,307.79,
which claim was denied by the CIR on 16
February 1972. But before said denial,
BOAC had already filed a petition for
review with the Tax Court on 27 January
1972, assailing the assessment and praying
for the refund of the amount paid.
G.R. No. 65774  (CTA Case No. 2561, the
Second Case)
On 17 November 1971, BOAC was
assessed deficiency income taxes,
interests, and penalty for the fiscal years
1968-1969 to 1970-1971 in the aggregate
amount of P549,327.43, and the additional
amounts of P1,000.00 and P1,800.00 as
compromise penalties for violation of
Section 46 (requiring the filing of
corporation returns) penalized under
Section 74 of the National Internal
Revenue Code (NIRC).
On 25 November 1971, BOAC requested
that the assessment be countermanded
and set aside. In a letter, dated 16
February 1972, however, the CIR not only
denied the BOAC request for refund in the
First Case but also re-issued in the Second
Case the deficiency income tax assessment
for P534,132.08 for the years 1969 to
1970-71 plus P1,000.00 as compromise
penalty under Section 74 of the Tax Code.
BOAC's request for reconsideration was
denied by the CIR on 24 August 1973. This
prompted BOAC to file the Second Case
before the Tax Court praying that it be
absolved of liability for deficiency income
tax for the years 1969 to 1971.
This case was subsequently tried jointly
with the First Case.
On 26 January 1983, the Tax Court
rendered the assailed joint Decision
reversing the CIR. The Tax Court held that
the proceeds of sales of BOAC passage
tickets in the Philippines by Warner Barnes
and Company, Ltd., and later by Qantas
Airways, during the period in question, do
not constitute BOAC income from
Philippine sources "since no service of
carriage of passengers or freight was
performed by BOAC within the
Philippines" and, therefore, said income is
not subject to Philippine income tax. The
CTA position was that income from
transportation is income from services so
that the place where services are rendered
determines the source. Thus, in the
dispositive portion of its Decision, the Tax
Court ordered petitioner to credit BOAC
with the sum of P858,307.79, and to
cancel the deficiency income tax
assessments against BOAC in the amount
of P534,132.08 for the fiscal years 1968-69
to 1970-71.
Hence, this Petition for Review on
certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of
the CIR, has aptly defined the issues, thus:
1. Whether or not the
revenue derived by
private respondent British
Overseas Airways
Corporation (BOAC) from
sales of tickets in the
Philippines for air
transportation, while
having no landing rights
here, constitute income of
BOAC from Philippine
sources, and, accordingly,
taxable.
2. Whether or not during
the fiscal years in question
BOAC s a resident foreign
corporation doing
business in the Philippines
or has an office or place of
business in the
Philippines.
3. In the alternative that
private respondent may
not be considered a
resident foreign
corporation but a non-
resident foreign
corporation, then it is
liable to Philippine income
tax at the rate of thirty-
five per cent (35%) of its
gross income received
from all sources within the
Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident
foreign corporation
engaged in trade or
business within the
Philippines or having an
office or place of business
therein.
(i) The term "non-resident
foreign corporation"
applies to a foreign
corporation not engaged
in trade or business within
the Philippines and not
having any office or place
of business therein
It is our considered opinion that BOAC is a
resident foreign corporation. There is no
specific criterion as to what constitutes
"doing" or "engaging in" or "transacting"
business. Each case must be judged in the
light of its peculiar environmental
circumstances. The term implies a
continuity of commercial dealings and
arrangements, and contemplates, to that
extent, the performance of acts or works
or the exercise of some of the functions
normally incident to, and in progressive
prosecution of commercial gain or for the
purpose and object of the business
organization. 2 "In order that a foreign
corporation may be regarded as doing
business within a State, there must be
continuity of conduct and intention to
establish a continuous business, such as
the appointment of a local agent, and not
one of a temporary character. 3
BOAC, during the periods covered by the
subject - assessments, maintained a
general sales agent in the Philippines, That
general sales agent, from 1959 to 1971,
"was engaged in (1) selling and issuing
tickets; (2) breaking down the whole trip
into series of trips — each trip in the series
corresponding to a different airline
company; (3) receiving the fare from the
whole trip; and (4) consequently allocating
to the various airline companies on the
basis of their participation in the services
rendered through the mode of interline
settlement as prescribed by Article VI of
the Resolution No. 850 of the IATA
Agreement." 4 Those activities were in
exercise of the functions which are
normally incident to, and are in
progressive pursuit of, the purpose and
object of its organization as an
international air carrier. In fact, the regular
sale of tickets, its main activity, is the very
lifeblood of the airline business, the
generation of sales being the paramount
objective. There should be no doubt then
that BOAC was "engaged in" business in
the Philippines through a local agent
during the period covered by the
assessments. Accordingly, it is a resident
foreign corporation subject to tax upon its
total net income received in the preceding
taxable year from all sources within the
Philippines. 5
Sec. 24. Rates of tax on
corporations. — ...
(b) Tax on foreign
corporations. — ...
(2) Resident corporations.
— A corporation
organized, authorized, or
existing under the laws of
any foreign country,
except a foreign fife
insurance company,
engaged in trade or
business within the
Philippines, shall be
taxable as provided in
subsection (a) of this
section upon the total net
income received in the
preceding taxable year
from all sources within the
Philippines. (Emphasis
supplied)
Next, we address ourselves to the issue of
whether or not the revenue from sales of
tickets by BOAC in the Philippines
constitutes income from Philippine
sources and, accordingly, taxable under
our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes
gains, profits, and income
derived from salaries,
wages or compensation
for personal service of
whatever kind and in
whatever form paid, or
from profession,
vocations,
trades, business,
commerce,  sales, or
dealings in property,
whether real or personal,
growing out of the
ownership or use of or
interest in such property;
also from interests, rents,
dividends, securities, or
the transactions of any
business carried on for
gain or profile,  or gains,
profits, and income
derived from any source
whatever (Sec. 29[3];
Emphasis supplied)
The definition is broad and comprehensive
to include proceeds from sales of
transport documents. "The words 'income
from any source whatever' disclose a
legislative policy to include all income not
expressly exempted within the class of
taxable income under our laws." Income
means "cash received or its equivalent"; it
is the amount of money coming to a
person within a specific time ...; it means
something distinct from principal or
capital. For, while capital is a fund, income
is a flow. As used in our income tax law,
"income" refers to the flow of wealth. 6
The records show that the Philippine gross
income of BOAC for the fiscal years 1968-
69 to 1970-71 amounted to P10,428,368 .
00. 7
Did such "flow of wealth" come from
"sources within the Philippines",
The source of an income is the property,
activity or service that produced the
income. 8 For the source of income to be
considered as coming from the
Philippines, it is sufficient that the income
is derived from activity within the
Philippines. In BOAC's case, the sale of
tickets in the Philippines is the activity that
produces the income. The tickets
exchanged hands here and payments for
fares were also made here in Philippine
currency. The site of the source of
payments is the Philippines. The flow of
wealth proceeded from, and occurred
within, Philippine territory, enjoying the
protection accorded by the Philippine
government. In consideration of such
protection, the flow of wealth should
share the burden of supporting the
government.
A transportation ticket is not a mere piece
of paper. When issued by a common
carrier, it constitutes the contract
between the ticket-holder and the carrier.
It gives rise to the obligation of the
purchaser of the ticket to pay the fare and
the corresponding obligation of the carrier
to transport the passenger upon the terms
and conditions set forth thereon. The
ordinary ticket issued to members of the
traveling public in general embraces
within its terms all the elements to
constitute it a valid contract, binding upon
the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which
enumerates items of gross income from
sources within the Philippines, namely: (1)
interest, (21) dividends, (3) service, (4)
rentals and royalties, (5) sale of real
property, and (6) sale of personal
property, does not mention income from
the sale of tickets for international
transportation. However, that does not
render it less an income from sources
within the Philippines. Section 37, by its
language, does not intend the
enumeration to be exclusive. It merely
directs that the types of income listed
therein be treated as income from sources
within the Philippines. A cursory reading
of the section will show that it does not
state that it is an all-inclusive
enumeration, and that no other kind of
income may be so considered. " 10
BOAC, however, would impress upon this
Court that income derived from
transportation is income for services, with
the result that the place where the
services are rendered determines the
source; and since BOAC's service of
transportation is performed outside the
Philippines, the income derived is from
sources without the Philippines and,
therefore, not taxable under our income
tax laws. The Tax Court upholds that stand
in the joint Decision under review.
The absence of flight operations to and
from the Philippines is not determinative
of the source of income or the site of
income taxation. Admittedly, BOAC was an
off-line international airline at the time
pertinent to this case. The test of taxability
is the "source"; and the source of an
income is that activity ... which produced
the income. 11 Unquestionably, the
passage documentations in these cases
were sold in the Philippines and the
revenue therefrom was derived from a
activity regularly pursued within the
Philippines. business a And even if the
BOAC tickets sold covered the "transport
of passengers and cargo to and from
foreign cities", 12 it cannot alter the fact
that income from the sale of tickets was
derived from the Philippines. The word
"source" conveys one essential idea, that
of origin, and the origin of the income
herein is the Philippines. 13
It should be pointed out, however, that
the assessments upheld herein apply only
to the fiscal years covered by the
questioned deficiency income tax
assessments in these cases, or, from 1959
to 1967, 1968-69 to 1970-71. For,
pursuant to Presidential Decree No. 69,
promulgated on 24 November, 1972,
international carriers are now taxed as
follows:
 ... Provided, however,
That international carriers
shall pay a tax of 2-½ per
cent on their cross
Philippine billings. (Sec.
24[b] [21, Tax Code).
Presidential Decree No. 1355,
promulgated on 21 April, 1978, provided a
statutory definition of the term "gross
Philippine billings," thus:
... "Gross Philippine
billings" includes gross
revenue realized from
uplifts anywhere in the
world by any international
carrier doing business in
the Philippines of passage
documents sold therein,
whether for passenger,
excess baggage or mail
provided the cargo or mail
originates from the
Philippines. ...
The foregoing provision ensures that
international airlines are taxed on their
income from Philippine sources. The 2-½ %
tax on gross Philippine billings is an
income tax. If it had been intended as an
excise or percentage tax it would have
been place under Title V of the Tax Code
covering Taxes on Business.
Lastly, we find as untenable the BOAC Overseas Airways Corporation (BOAC), is
argument that the dismissal for lack of hereby ordered to pay the amount of
merit by this Court of the appeal in JAL vs. P534,132.08 as deficiency income tax for
Commissioner of Internal Revenue (G.R. the fiscal years 1968-69 to 1970-71 plus
No. L-30041) on February 3, 1969, is res 5% surcharge, and 1% monthly interest
judicata to the present case. The ruling by from April 16, 1972 for a period not to
the Tax Court in that case was to the effect exceed three (3) years in accordance with
that the mere sale of tickets, the Tax Code. The BOAC claim for refund
unaccompanied by the physical act of in the amount of P858,307.79 is hereby
carriage of transportation, does not denied. Without costs.
render the taxpayer therein subject to the
common carrier's tax. As elucidated by the SO ORDERED.
Tax Court, however, the common carrier's
tax is an excise tax, being a tax on the Paras, Gancayco, 
activity of transporting, conveying or
removing passengers and cargo from one
place to another. It purports to tax the
business of transportation. 14 Being an
excise tax, the same can be levied by the
State only when the acts, privileges or
businesses are done or performed within
the jurisdiction of the Philippines. The
subject matter of the case under
consideration is income tax, a direct tax on
the income of persons and other entities
"of whatever kind and in whatever form
derived from any source." Since the two
cases treat of a different subject matter,
the decision in one cannot be res
judicata  to the other.
WHEREFORE, the appealed joint Decision
of the Court of Tax Appeals is hereby SET
ASIDE. Private respondent, the British