TAXREV CASES
that 'the activity or labor — and the sale from which the
G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY, petitioner,
vs.COMMISSIONER OF INTERNAL REVENUE, respondent.
CRUZ, J.:
We are asked to reverse the decision of the Court of Tax Appeals
on the ground that it is erroneous. We have carefully studied it
and find it is not; on the contrary, it is supported by law and
doctrine. So finding, we affirm.
Reduced to simplest terms, the background facts are as follows.
The national Development Company entered into contracts in
Tokyo with several Japanese shipbuilding companies for the
construction of twelve ocean-going vessels. 1 The purchase price
was to come from the proceeds of bonds issued by the Central
Bank. 2 Initial payments were made in cash and through
irrevocable letters of credit. 3 Fourteen promissory notes were
signed for the balance by the NDC and, as required by the
shipbuilders, guaranteed by the Republic of the Philippines. 4
Pursuant thereto, the remaining payments and the interests
thereon were remitted in due time by the NDC to Tokyo. The
vessels were eventually completed and delivered to the NDC in
Tokyo. 5
The NDC remitted to the shipbuilders in Tokyo the total amount
of US$4,066,580.70 as interest on the balance of the purchase
price. No tax was withheld. The Commissioner then held the NDC
liable on such tax in the total sum of P5,115,234.74. Negotiations
followed but failed. The BIR thereupon served on the NDC a
warrant of distraint and levy to enforce collection of the claimed
amount. 6 The NDC went to the Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of
the tax deficiency in the sum of P900.00, representing the
compromise penalty. 7 The NDC then came to this Court in a
petition for certiorari.
The petition must fail for the following reasons.
The Japanese shipbuilders were liable to tax on the interest
remitted to them under Section 37 of the Tax Code, thus:
SEC. 37. Income from sources within the Philippines. — (a) Gross
income from sources within the Philippines. — The following
items of gross income shall be treated as gross income from
sources within the Philippines:
(1) Interest. — Interest derived from sources within the
Philippines, and interest on bonds, notes, or other interest-
bearing obligations of residents, corporate or otherwise;
xxx xxx xxx
The petitioner argues that the Japanese shipbuilders were not
subject to tax under the above provision because all the related
activities — the signing of the contract, the construction of the
vessels, the payment of the stipulated price, and their delivery to
the NDC — were done in Tokyo. 8 The law, however, does not
speak of activity but of "source," which in this case is the NDC.
This is a domestic and resident corporation with principal offices
in Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the
Government's right to levy and collect income tax on interest
received by foreign corporations not engaged in trade or
business within the Philippines is not planted upon the condition
(interest) income flowed had its situs' in the Philippines. The law
specifies: 'Interest derived from sources within the Philippines,
and interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise.' Nothing there
speaks of the 'act or activity' of non-resident corporations in the
Philippines, or place where the contract is signed. The residence
of the obligor who pays the interest rather than the physical
location of the securities, bonds or notes or the place of
payment, is the determining factor of the source of interest
income. (Mertens, Law of Federal Income Taxation, Vol. 8, p. 128,
citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19
BTA 480; Estate of L.E. Mckinnon, 6 BTA 412; Standard Marine
Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.)
Accordingly, if the obligor is a resident of the Philippines the
interest payment paid by him can have no other source than
within the Philippines. The interest is paid not by the bond, note
or other interest-bearing obligations, but by the obligor. (See
mertens, Id., Vol. 8, p. 124.)
Here in the case at bar, petitioner National Development
Company, a corporation duly organized and existing under the
laws of the Republic of the Philippines, with address and principal
office at Calle Pureza, Sta. Mesa, Manila, Philippines
unconditionally promised to pay the Japanese shipbuilders, as
obligor in fourteen (14) promissory notes for each vessel, the
balance of the contract price of the twelve (12) ocean-going
vessels purchased and acquired by it from the Japanese
corporations, including the interest on the principal sum at the
rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-
13", pp. 100-113, CTA Records; par. 11, Partial Stipulation of Facts.)
And pursuant to the terms and conditions of these promisory
notes, which are duly signed by its Vice Chairman and General
Manager, petitioner remitted to the Japanese shipbuilders in
Japan during the years 1960, 1961, and 1962 the sum of
$830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as
interest on the unpaid balance of the purchase price of the
aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation of Facts.)
The law is clear. Our plain duty is to apply it as written. The
residence of the obligor which paid the interest under
consideration, petitioner herein, is Calle Pureza, Sta. Mesa,
Manila, Philippines; and as a corporation duly organized and
existing under the laws of the Philippines, it is a domestic
corporation, resident of the Philippines. (Sec. 84(c), National
Internal Revenue Code.) The interest paid by petitioner, which is
admittedly a resident of the Philippines, is on the promissory
notes issued by it. Clearly, therefore, the interest remitted to the
Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the
unpaid balance of the purchase price of the vessels acquired by
petitioner is interest derived from sources within the Philippines
subject to income tax under the then Section 24(b)(1) of the
National Internal Revenue Code. 9
There is no basis for saying that the interest payments were
obligations of the Republic of the Philippines and that the
promissory notes of the NDC were government securities
exempt from taxation under Section 29(b)[4] of the Tax Code,
reading as follows:
SEC. 29. Gross Income. — xxxx xxx xxx xxx
(b) Exclusion from gross income. — The following items shall not
be included in gross income and shall be exempt from taxation
under this Title:
xxx xxx xxx
(4) Interest on Government Securities. — Interest upon the
obligations of the Government of the Republic of the Philippines
or any political subdivision thereof, but in the case of such
obligations issued after approval of this Code, only to the extent
provided in the act authorizing the issue thereof. (As amended by
Section 6, R.A. No. 82; emphasis supplied)
The law invoked by the petitioner as authorizing the issuance of
securities is R.A. No. 1407, which in fact is silent on this matter.
C.A. No. 182 as amended by C.A. No. 311 does carry such
authorization but, like R.A. No. 1407, does not exempt from taxes
the interests on such securities.
It is also incorrect to suggest that the Republic of the Philippines
could not collect taxes on the interest remitted because of the
undertaking signed by the Secretary of Finance in each of the
promissory notes that:
Upon authority of the President of the Republic of the
Philippines, the undersigned, for value received, hereby
absolutely and unconditionally guarantee (sic), on behalf of the
Republic of the Philippines, the due and punctual payment of
both principal and interest of the above note.10
There is nothing in the above undertaking exempting the
interests from taxes. Petitioner has not established a clear waiver
therein of the right to tax interests. Tax exemptions cannot be
merely implied but must be categorically and unmistakably
expressed. 11 Any doubt concerning this question must be
resolved in favor of the taxing power. 12
Nowhere in the said undertaking do we find any inhibition against
the collection of the disputed taxes. In fact, such undertaking
was made by the government in consonance with and certainly
not against the following provisions of the Tax Code:
Sec. 53(b). Nonresident aliens. — All persons, corporations and
general co-partnership (companies colectivas), in whatever
capacity acting, including lessees or mortgagors of real or
personal capacity, executors, administrators, receivers,
conservators, fiduciaries, employers, and all officers and
employees of the Government of the Philippines having control,
receipt, custody; disposal or payment of interest, dividends,
rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable
annual or categorical gains, profits and income of any
nonresident alien individual, not engaged in trade or business
within the Philippines and not having any office or place of
business therein, shall (except in the cases provided for in
subsection (a) of this section) deduct and withhold from such
annual or periodical gains, profits and income a tax to twenty
(now 30%) per centum thereof: ...
Sec. 54. Payment of corporation income tax at source. — In the
case of foreign corporations subject to taxation under this Title
not engaged in trade or business within the Philippines and not
having any office or place of business therein, there shall be
deducted and withheld at the source in the same manner and
upon the same items as is provided in section fifty-three a tax
equal to thirty (now 35%) per centum thereof, and such tax shall
be returned and paid in the same manner and subject to the
same conditions as provided in that section:....
Manifestly, the said undertaking of the Republic of the
Philippines merely guaranteed the obligations of the NDC but
without diminution of its taxing power under existing laws.
In suggesting that the NDC is merely an administrator of the
funds of the Republic of the Philippines, the petitioner closes its
eyes to the nature of this entity as a corporation. As such, it is
governed in its proprietary activities not only by its charter but
also by the Corporation Code and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being
taxed. The tax was due on the interests earned by the Japanese
shipbuilders. It was the income of these companies and not the
Republic of the Philippines that was subject to the tax the NDC
did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the
NDC is a penalty for its failure to withhold the same from the
Japanese shipbuilders. Such liability is imposed by Section 53(c)
of the Tax Code, thus:
Section 53(c). Return and Payment. — Every person required to
deduct and withhold any tax under this section shall make return
thereof, in duplicate, on or before the fifteenth day of April of
each year, and, on or before the time fixed by law for the
payment of the tax, shall pay the amount withheld to the officer
of the Government of the Philippines authorized to receive it.
Every such person is made personally liable for such tax, and is
indemnified against the claims and demands of any person for
the amount of any payments made in accordance with the
provisions of this section. (As amended by Section 9, R.A. No.
2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal
Revenue and the Court of Tax Appeals, 13 the Court quoted with
approval the following regulation of the BIR on the
responsibilities of withholding agents:
In case of doubt, a withholding agent may always protect himself
by withholding the tax due, and promptly causing a query to be
addressed to the Commissioner of Internal Revenue for the
determination whether or not the income paid to an individual is
not subject to withholding. In case the Commissioner of Internal
Revenue decides that the income paid to an individual is not
subject to withholding, the withholding agent may thereupon
remit the amount of a tax withheld. (2nd par., Sec. 200, Income
Tax Regulations).
"Strict observance of said steps is required of a withholding
agent before he could be released from liability," so said Justice
Jose P. Bengson, who wrote the decision. "Generally, the law
frowns upon exemption from taxation; hence, an exempting
provision should be construed strictissimi juris." 14
The petitioner was remiss in the discharge of its obligation as the
withholding agent of the government an so should be held liable
for its omission.
WHEREFORE, the appealed decision is AFFIRMED, without any
pronouncement as to costs. It is so ordered.
-----------
DIGEST
NDC vs. CIR
The NDC entered into contract in Tokyo with several Japanese
shipbuilding companies for the construction of its 12 ocean-going
vessels. The purchase price was to come from the proceeds of
bonds issued by the Central Bank. Initial payments were made in
cash and through irrevocable letter of credit. Fourteen (14)
promissory notes were signed for the balance by the NDC
guaranteed by Republic of the Philippines.
Pursuant thereto, the remaining payments and the interest
thereon were remitted in due time by the NDC to Tokyo. The
NDC remitted to the ship builders in Tokyo the total amount of
US$4,066,580 as interest on the balance of the purchase price.
No tax was withheld.
The Commissioner then held the NDC liable on such tax in the
total sum of PhP5,115,234.74. The BIR thereupon served on the
NDC a warrant of distraint and levy to enforcce collection of the
claimed amount.
Petitioner argues that the Japanese ship builders were not
subject to tax under the sec. 37 of the Tax Code because all the
related activities- the signing of the contract, the construction of
the vessels, the payment of the stipulated price, and their
delivery to the NDC - were done in Tokyo.
ISSUE: WON the Tokyo shipbuilders are subject to tax?
HELD:
The law specifies: interest derived from sources within the
Philippines, and interest on bonds, notes, or other interest-
bearing obligation of resident, corporate or otherwise. Nothing
there speak of the 'acts or activity' of non-residential corporation
in the Philippines, or place where the contract is signed.
The residence of the obligor who pays the interest rather than
the physical location of the securities, bonds or notes or the place
of payment, is the determining factor of the source of interest
income. Accordingly, if the obligor is a resident of the Philippines
the interest payment paid by him can have no other source than
within the Philippines. The interest is paid not by the bond note
or other interest-bearing obligations, but by the obligor.
------------
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF
TAX APPEALS, respondents.
Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for
respondent British Airways.
MELENCIO-HERRERA, J.:
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 service and sells transportation tickets 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 argument that the
dismissal for lack of merit by this Court of the appeal in JAL vs.
Commissioner of Internal Revenue (G.R. No. L-30041) on February
3, 1969, is res judicata to the present case. The ruling by the Tax
Court in that case was to the effect that the mere sale of tickets,
unaccompanied by the physical act of carriage of transportation,
does not render the taxpayer therein subject to the common
carrier's tax. As elucidated by the Tax Court, however, the
common carrier's tax is an excise tax, being a tax on the 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
Overseas Airways Corporation (BOAC), is hereby ordered to pay
the amount of P534,132.08 as deficiency income tax for the fiscal
years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly
interest from April 16, 1972 for a period not to exceed three (3)
years in accordance with the Tax Code. The BOAC claim for
refund in the amount of P858,307.79 is hereby denied. Without
costs.
SO ORDERED.
----------
DIGEST
FACTS:
British overseas airways corp. (BOAC) a wholly owned British
Corporation, is engaged in international airlines business. From
1959to 1972, it has no loading rights for traffic purposes in the
Philippines but maintained a general sales agent in the Philippines
which was responsible for selling, BOAC tickets covering
passengers and cargoes the CIR assessed deficiency income taxes
against.
ISSUE:Is BOAC liable to pay taxes?
RULING:
Yes. The source of income is the property, activity of service that
produces the income. For the source of income to be considered
coming from the Philippines, it is sufficient that the income is
derived from the activity coming from the Philippines. The tax
code provides that for revenue to be taxable, it must constitute
income from Philippine sources. In this case, the sale of tickets is
the source of income. The situs of the source of payments is the
Philippines.
------
G.R. No. L-26284 October 8, 1986
TOMAS CALASANZ, ET AL., petitioners,
vs.THE COMMISSIONER OF INTERNAL REVENUE and the COURT
OF TAX APPEALS, respondents.
San Juan, Africa, Gonzales & San Agustin Law Office for
petitioners.
FERNAN, J.:
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.
SO ORDERED.
------
DIGEST
Facts:
Ursula Calasanz inherited from her father an agricultural land.
Improvements were introduced to make such land saleable and
later in it was sold to the public at a profit. The Revenue examiner
adjudged Ursula and her spouse as engaged in business as real
estate dealers and required them to pay the real estate dealer’s
tax.
Issue:
Whether or not the gains realized from the sale of the lots are
taxable in full as ordinary income or capital gains taxable at
capital gain rates
Ruling:
They are taxable as ordinary income. The activities of Calasanz
are indistinguishable from those invariably employed by one
engaged in the business of selling real estate. One strong factor
is the business element of development which is very much in
evidence. They did not sell the land in the condition in which they
acquired it. Inherited land which an heir subdivides and makes
improvements several times higher than the original cost of the
land is not a capital asset but an ordinary asses. Thus, in the
course of selling the subdivided lots, they engaged in the real
estate business and accordingly the gains from the sale of the
lots are ordinary income taxable in full.
---------
G.R. No. 125508 July 19, 2000 - CHINA BANKING CORP. v. COURT
OF APPEALS, ET AL.:PHILIPPINE SUPREME COURT DECISIONSEN
BANC
[G.R. No. 125508. July 19, 2000.]
CHINA BANKING CORPORATION, Petitioner, v. COURT OF
APPEALS, COMMISSIONER OF INTERNAL REVENUE and COURT
OF TAX APPEALS, Respondents.
DECISION
VITUG, J.:
The Commissioner of Internal Revenue denied the deduction
from gross income of "securities becoming worthless" claimed
by China Banking Corporation ("CBC"). The Commissioner’s
disallowance was sustained by the Court of Tax Appeals ("CTA").
When the ruling was appealed to the Court of Appeals ("CA"),
the appellate court upheld the CTA. The case is now before us on
a Petition for Review on Certiorari.chanrob1es virtua1 1aw 1ibrary
Sometime in 1980, petitioner China Banking Corporation made a
53% equity investment in the First CBC Capital (Asia) Ltd., a
Hongkong subsidiary engaged in financing and investment with
"deposit-taking" function. The investment amounted to
P16,227,851.80, consisting of 106,000 shares with a par value of
P100 per share.
In the course of the regular examination of the financial books
and investment portfolios of petitioner conducted by Bangko
Sentral in 1986, it was shown that First CBC Capital (Asia), Ltd.,
has become insolvent. With the approval of Bangko Sentral,
petitioner wrote-off as being worthless its investment in First CBC
Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as
a bad debt or as an ordinary loss deductible from its gross
income.
Respondent Commissioner of Internal Revenue disallowed the
deduction and assessed petitioner for income tax deficiency in
the amount of P8,533,328.04, inclusive of surcharge, interest and
compromise penalty. The disallowance of the deduction was
made on the ground that the investment should not be classified
as being "worthless" and that, although the Hongkong Banking
Commissioner had revoked the license of First CBC Capital as a
"deposit-taking" company, the latter could still exercise,
however, its financing and investment activities. Assuming that
the securities had indeed become worthless, respondent
Commissioner of Internal Revenue held the view that they should
then be classified as "capital loss," and not as a bad debt expense
there being no indebtedness to speak of between petitioner and
its subsidiary.chanrob1es virtua1 1aw 1ibrary
Petitioner contested the ruling of respondent Commissioner
before the CTA. The tax court sustained the Commissioner,
holding that the securities had not indeed become worthless and
ordered petitioner to pay its deficiency income tax for 1987 of
P8,533,328.04 plus 20% interest per annum until fully paid. When
the decision was appealed to the Court of Appeals, the latter
upheld the CTA. In its instant petition for review on certiorari,
petitioner bank assails the CA decision.
The petition must fail.
The claim of petitioner that the shares of stock in question have
become worthless is based on a Profit and Loss Account for the
Year-End 31 December 1987, and the recommendation of Bangko
Sentral that the equity investment be written-off due to the
insolvency of the subsidiary. While the matter may not be
indubitable (considering that certain classes of intangibles, like
franchises and goodwill, are not always given corresponding
values in financial statements 1), there may really be no need,
however, to go at length into this issue since, even to assume the
worthlessness of the shares, the deductibility thereof would still
be nil in this particular case. At all events, the Court is not
prepared to hold that both the tax court and the appellate court
are utterly devoid of substantial basis for their own factual
findings.
Subject to certain exceptions, such as the compensation income
of individuals and passive income subject to final tax, as well as
income of non-resident aliens and foreign corporations not
engaged in trade or business in the Philippines, the tax on income
is imposed on the net income allowing certain specified
deductions from gross income to be claimed by the taxpayer.
Among the deductible items allowed by the National Internal
Revenue Code ("NIRC") are bad debts and losses. 2
An equity investment is a capital, not ordinary, asset of the
investor the sale or exchange of which results in either a capital
gain or a capital loss. The gain or the loss is ordinary when the
property sold or exchanged is not a capital asset. 3 A capital asset
is defined negatively in Section 33(1) of the NIRC;
"(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 twenty-nine; or real property used in the trade or
business of the taxpayer."
Thus, shares of stock, like the other securities defined in Section
20(t) 4 of the NIRC, would be ordinary assets only to a dealer in
securities or a person engaged in the purchase and sale of, or an
active trader (for his own account) in, securities. Section 20(u) of
the NIRC defines a dealer in securities thus:
"(u) The term ‘dealer in securities’ means a merchant of stocks or
securities, whether an individual, partnership or corporation, with
an established place of business, regularly engaged in the
purchase of securities and their resale to customers; that is, one
who as a merchant buys securities and sells them to customers
with a view to the gains and profits that may be derived
therefrom."cralaw virtua1aw library
In the hands, however, of another who holds the shares of stock
by way of an investment, the shares to him would be capital
assets. When the shares held by such investor become worthless,
the loss is deemed to be a loss from the sale or exchange of
capital assets. Section 29(d)(4)(B) of the NIRC
states:jgc:chanrobles.com.ph
"(B) Securities becoming worthless. — If securities as defined in
Section 20 become worthless during the taxable year and are
capital assets, the loss resulting therefrom shall, for the purposes
of this Title, be considered as a loss from the sale or exchange, on
the last day of such taxable year, of capital assets."
The above provision conveys that the loss sustained by the
holder of the securities, which are capital assets (to him), is to be
treated as a capital loss as if incurred from a sale or exchange
transaction. A capital gain or a capital loss normally requires the
concurrence of two conditions for it to result: (1) There is a sale
or exchange; and (2) the thing sold or exchanged is a capital
asset. When securities become worthless, there is strictly no sale
or exchange but the law deems the loss anyway to be "a loss
from the sale or exchange of capital assets." 5 A similar kind of
treatment is given by the NIRC on the retirement of certificates
of indebtedness with interest coupons or in registered form,
short sales and options to buy or sell property where no sale or
exchange strictly exists. 6 In these cases, the NIRC dispenses, in
effect, with the standard requirement of a sale or exchange for
the application of the capital gain and loss provisions of the code.
Capital losses are allowed to be deducted only to the extent of
capital gains, i.e., gains derived from the sale or exchange of
capital assets, and not from any other income of the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee
corporation, is a subsidiary corporation of petitioner bank whose
shares in said investee corporation are not intended for purchase
or sale but as an investment. Unquestionably then, any loss
therefrom would be a capital loss, not an ordinary loss, to the
investor.
Section 29(d)(4)(A), of the NIRC
expresses:jgc:chanrobles.com.ph
"(A) Limitations. — Losses from sales or exchanges of capital
assets shall be allowed only to the extent provided in Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in
the aforesaid Section 29(d)(4)(A),
"SECTION 33. Capital gains and losses. —
"x x x
"(c) Limitation on capital losses. — Losses from sales or
exchange of capital assets shall be allowed only to the extent of
the gains from such sales or exchanges. If a bank or trust
company incorporated under the laws of the Philippines, a
substantial part of whose business is the receipt of deposits, sells
any bond, debenture, note, or certificate or other evidence of
indebtedness issued by any corporation (including one issued by
a government or political subdivision thereof), with interest
coupons or in registered form, any loss resulting from such sale
shall not be subject to the foregoing limitation and shall not be
included in determining the applicability of such limitation to
other losses."
The exclusionary clause found in the foregoing text of the law
does not include all forms of securities but specifically covers only
bonds, debentures, notes, certificates or other evidence of
indebtedness, with interest coupons or in registered form, which
are the instruments of credit normally dealt with in the usual
lending operations of a financial institution. Equity holdings
cannot come close to being within the purview of "evidence of
indebtedness" under the second sentence of the aforequoted
paragraph. Verily, it is for a like thesis that the loss of petitioner
bank in its equity investment in the Hongkong subsidiary cannot
also be deductible as a bad debt. The shares of stock in question
do not constitute a loan extended by it to its subsidiary (First CBC
Capital) or a debt subject to obligatory repayment by the latter,
essential elements to constitute a bad debt, but a long term
investment made by CBC.
One other item. Section 34(c)(1) of the NIRC states that the
entire amount of the gain or loss upon the sale or exchange of
property, as the case may be, shall be recognized.
"SECTION 34. Determination of amount of and recognition of
gain or loss. —
"(a) Computation of gain or loss. — The gain from the sale or
other disposition of property shall be the excess of the amount
realized therefrom over the basis or adjusted basis for
determining gain and the loss shall be the excess of the basis or
adjusted basis for determining loss over the amount realized. The
amount realized from the sale or other disposition of property
shall be the sum of money received plus the fair market value of
the property (other than money) received. (As amended by E.O.
No. 37)
"(b) Basis for determining gain or loss from sale or disposition of
property. — The basis of property shall be — (1) The cost thereof
in the cases of property acquired on or before March 1, 1913, if
such property was acquired by purchase; or
"(2) The fair market price or value as of the date of acquisition if
the same was acquired by inheritance; or
"(3) If the property was acquired by gift the basis shall be the
same as if it would be in the hands of the donor or the last
preceding owner by whom it was not acquired by gift, except
that if such basis is greater than the fair market value of the
property at the time of the gift, then for the purpose of
determining loss the basis shall be such fair market value; or
"(4) If the property, other than capital asset referred to in
Section 21 (e), was acquired for less than an adequate
consideration in money or money’s worth, the basis of such
property is (i) the amount paid by the transferee for the property
or (ii) the transferor’s adjusted basis at the time of the transfer
whichever is greater.
"(5) The basis as defined in paragraph (c) (5) of this section if the
property was acquired in a transaction where gain or loss is not
recognized under paragraph (c) (2) of this section. (As amended
by E.O. No. 37)
"(c) Exchange of property.
"(1) General rule. — Except as herein provided, upon the sale or
exchange of property, the entire amount of the gain or loss, as
the case may be, shall be recognized.
"(2) Exception. — No gain or loss shall be recognized if in
pursuance of a plan of merger or consolidation (a) a corporation
which is a party to a merger or consolidation exchanges property
solely for stock in a corporation which is, a party to the merger or
consolidation, (b) a shareholder exchanges stock in a corporation
which is a party to the merger or consolidation solely for the
stock in another corporation also a party to the merger or
consolidation, or (c) a security holder of a corporation which is a
party to the merger or consolidation exchanges his securities in
such corporation solely for stock or securities in another
corporation, a party to the merger or consolidation.
"No gain or loss shall also be recognized if property is transferred
to a corporation by a person in exchange for stock in such
corporation of which as a result of such exchange said person,
alone or together with others, not exceeding four persons, gains
control of said corporation: Provided, That stocks issued for
services shall not be considered as issued in return of property."
The above law should be taken within context on the general
subject of the determination and recognition of gain or loss; it is
not preclusive of, let alone renders completely inconsequential,
the more specific provisions of the code. Thus, pursuant to the
same section of the law, no such recognition shall be made if the
sale or exchange is made in pursuance of a plan of corporate
merger or consolidation or, if as a result of an exchange of
property for stocks, the exchanger, alone or together with others
not exceeding four, gains control of the corporation. 7 Then, too,
how the resulting gain might be taxed, or whether or not the loss
would be deductible and how, are matters properly dealt with
elsewhere in various other sections of the NIRC. 8 At all events, it
may not be amiss to once again stress that the basic rule is still
that any capital loss can be deducted only from capital gains
under Section 33(c) of the NIRC.
In sum —
(a) The equity investment in shares of stock held by CBC of
approximately 53% in its Hongkong subsidiary, the First CBC
Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not
an ordinary, asset. 9
(b) Assuming that the equity investment of CBC has indeed
become "worthless," the loss sustained is a capital, not an
ordinary, loss. 10
(c) The capital loss sustained by CBC can only be deducted from
capital gains if any derived by it during the same taxable year that
the securities have become "worthless." 11
WHEREFORE, the Petition is DENIED. The decision of the Court of
Appeals disallowing the claimed deduction of P16,227,851.80 is
AFFIRMED.
SO ORDERED.
------
DIGEST
Banking Corp. v. CA
G.R. No. 125508 July 19, 2000
VITUG, J.
Lessons Applicable: Capital asset, capital loss, inventory depends
on the nature of the business
Laws Applicable:
FACTS:
Petitioner China Bank made a 53% equity investment in First CBC
Capital (Asia) Ltd., a Hongkong Subsidiary of P 16,227, 851.80
1906: with the approval of the Bangko Sentral, it wrote of as
worthless investment for being insolvent in its 1987 Income Tax
Return treated as bad debts o ordinary loss deductible.
CIR contends it should be capital loss.
CTA and CA on Petition for Review on Certiorari: upheld CIR
contention
ISSUE: W/N Capital loss (NOT Ordinary Loss)
HELD: Yes. Petition is DENIED
 Equity investment is a capital asset resulting in a
capital gain or a capital loss. A capital asset is defined
negatively in Section 33(1) of the NIRC
 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 twenty-nine; or
 real property used in the trade or business of the
taxpayer
 Thus, shares of stock; like the other securities defined
in Section 20(t)[4] of the NIRC, would be ordinary
assets only to a dealer in securities or a person
engaged in the purchase and sale of, or an active
trader (for his own account) in, securities.
 Section 20(u) of the NIRC defines a dealer in securities
thus" (u) The term 'dealer in securities' means a
merchant of stocks or securities, whether an
individual, partnership or corporation, with an
established place of business, regularly engaged in the
purchase of securities and their resale to customers;
that is, one who as a merchant buys securities and sells
them to customers with a view to the gains and profits
that may be derived therefrom."
 In the hands, however, of another who holds the
shares of stock by way of an investment, the shares to
him would be capital assets. When the shares held by
such investor become worthless, the loss is deemed to
be a loss from the sale or exchange of capital assets.
 Loss sustained by the holder of the securities, which
are capital assets (to him), is to be treated as a capital
loss as if incurred from a sale or exchange transaction.
A capital gain or a capital loss normally requires the
concurrence of two conditions for it to result: (1) There
is a sale or exchange; and (2) the thing sold or
exchanged is a capital asset. When securities become
worthless, there is strictly no sale or exchange but the
law deems the loss anyway to be "a loss from the sale
or exchange of capital assets
 Capital losses are allowed to be deducted only to the
extent of capital gains, i.e., gains derived from the sale
or exchange of capital assets, and not from any other
income of the taxpayer.