CTA Case No. 4496 (Decision)

REPUB0IC OF TH E PHILIPPINES COURT OF TAX APPEALS Quezon City CHARlERED BANK <now n a me d as C. T. A. CASE NO. 4496 Stand ar d Chartered Bani<), Promulgated: Petit1onE~r, DEC 23 1994 - versus �- THE COMMISSIONER OF INTERNAL REVENU E , Respondent. - )( - - - D ~- c I �. I QN This is a petition for review of the final decision of respondent Commissioner of Internal Revenue denying the protest of Petitioner against assessments involving the amounts of 1=>5, 45 5 , 407. ~=-- and P7, 494,518. ~=:'~=:'. as deficiency income and documentary stamp taxe s , respectively, for the year 1984. Petitioner is a foreign bank organized and existing under the laws of England and is licensed to engage in the banking business in the Philippines <E><h. E > � On November 27, 1984 the name of Petitioner bank was changed to Standard Char tered Bank <E><h. F). '.

DECISION- eTA CASE NO. 4496 - 2- On January 29, 1988, respondent through the Assistant Commissioner for Collection, issued a demand letter with the corresponding assessment not ice, dated January 29, 1988, against petitioner demanding payment in the total amount of P13,950,025. 15 representing deficiency income and documentary stamp ta><es for the year 1984, including increments hereon, details of which are shown unde r <Anne>< "A"> : Net i n co me per return ......... . p 70 ,787 , 23 1. 00 11' 8 59 , 10 8. 38 Add: Unallowable deduction: Disa llow ed portion corresponding to non-taxable revenues ..... Net income per investigation 82, 5'+5, 339. 38 Income tax due thereon ......... . =============== Less: Income tax already paid .... . 28 ,91 5 , 2 19.00 24 ' 755, 531. 00 Deficie n cy income tax 4,150,588.00 Add: 201- int. fr. 4-/15/85 2 , 314 ,719. 15 to 1/29/88 .............�... TOTAL AMOUNT DUE & COLLECTIBLE p 5,455,407 .15 == ============= Total Pro misso ry Not es i s sued p 2 , 3 05 , 9 44,038.11 Tax due thereon <P0.55/P2 00) 7 ,4 9'+, 3 18. 00 Add: Compro mise penalty 3 00.00 TOTAL AMOUNT DUE & COLLECTIBLE p 7,494, 5 18.00 ~ = == = === ==== = ===== Petitioner, through its auditor s , Syc i p, Gorr es & Velayo Co. <SGV>, protested the 1984

DECISION- eTA CASE NO. 4496 - 3- deficiency income tax and documentary stamp tax assessments of respondent in its letter, dated February 9, 1988 <Exh. "A"). This was followed by a more detailed supplementary letter, dated Apri 1 5, 1988, by the manager of SGV's Tax Division, for and in behalf of petitioner, reiterating its protest against the findings of the examiners of respondent Bureau <Exh. "B"). In a letter, dated June 7, 1990, respondent denied with finality the protest of the petitioner. Hence, the present appeal <Exh. "G"). In its petition for review, the position taken by petitioner is the fact that under Section 30 (now Section 29) of the National Internal Re �v en ue Code <NI RC>, deductions of business expenses regardless of whether or not such expenses are allocable to income are allowed. All that is required for a business expense to be deductible is for it t 0 satisfy three requirements: a) The expense mu st be"both o r dina r y and nece ss ary; b ) The expen s e mu s t be p a id o r incu rr ed within t he ta x able y ea r ; and c ) The expense mu st be paid or incu rr ed in car rying on a t r ade o r busine s s.

DECISION- eTA CASE NO. 4496 With reference to the deficiency documentary stamp tax assessment, the same revolves on the taxability of non - negotiable promissory notes issued before October 15, 1984. Petitioner is availing of a BIR- Bankers Association of the Philippines <BAP> Compromise Agreement, dated March 14, 1988, covering this particular issue <Exh. "C">. It further added that while the scope of the BIR-BAP Compromise Agreement covers only issuances made by the petitioner from January 1, 1984 up to October 15, 1984, it had affixed and paid the documentary stamp tax from non-negotiable promissory notes issued after October 15, 1984 up to December 31, 1984. In her Answer with Counterclaim, respondent made a general and blanket denial of petitioner's allegations in its petition for lack of legal and factual basis, and as part of her special affirmative defenses stated that: petitioner has no cause of action against respondent; the petition does not allege facts showing petitioner's legal capacity to sue; the expenses amounting to P11,859, 108.38 claimed by petitioner as deductions from its taxable income for 1984 ~o-Jere d i s a l l o w e d by respondent because said expenses correspond to non-taxable income;

DECISION- eTA CASE NO. 4496 - 5- petit i c1ner has not shown that its income constituted the carrying on of a or business so as to \1-.larrant the deductibility of the said expenses incurred in the realization of in~ome; the deficiency documentary stamp tax assessed on p e t i t i o n e r ' s pl~ omissot" Y notes issued is in ac�cordance with Section 223 lnow Section 174) of the National Inter�nal Revenue Code <NIRC>; and t hey�e exists a presumption in favor of correctness of tax assessments. In su ppo r t of its petition, petitioner offered and introduced the following documentary evidence: a) Exh. A Protest letter dated February 9, 1988, protesting the 1984 Deficiency 1ncome Tax and DST Assessments levied by the BIR for being devoid of legal and factual basis; b) Exh. A - .1 portion of E><h. A - indlcatiPg date of receipt of the Bureau of Inte r nal Revenue showing that its p rotest was filed within the 3Q - day re glement ary period to protest assessment; c) Ex h. 8 - supplementary lett. c>r, dated RpriJ 6~ 1988, addl-es sed to the B~.~~ � eau of !nternal Revenue which refutes i.n detai 1 the va lid ity of the assessments; d) Ex h. B- 1 po,~t ion of Exh. B indicating date of t'ece i pt of the supple menta ry e) Exh. C lndividu.::\1 Bank Agreement, dated Mar- ch 14, 1388, s h o wing the execution of a comp t�omi se agt-eement of Pet i. t i or!er' s DST assessment relating to non - negotiable

DECISION -� CTn CRSE NO. 4496 - 6- prom issory notes is sue d prior to October 1 5 , 1984 (from January 1, 1975 to Octob2~~ fl Exh. D - CBP Co nfirmation Re ceipt No. 8 - lL1457379 d<'lted r1a y 3 1, 1988 a s pt~ oof of payment of the compromise a moun t of documentary stamp tax assessment fo r the y e a l" s 1 9 7 G t o 1 9 8 4 ; g) E >< h � D - 1 - p o ,.. t i o n o f E >< h � D >:e flecting the amount of P1,9 3 4, 794 . 22 in p a yment of it s co mpromise se ttlement; h ) Ex h. E - License to transact bu s iness in the Philip p ines issued by th e theP E~ecutive Bu r eau of the Government showing that Petit i one Y� is a foy� e i gr. c orpol~ ation li ce n s ed to engage in the b a nking bu s iness in the PhilipplPes; i) E><h. F �- SEC cer�tificat;e of fil1ng of c hange of n3me af a foreign corporation s howing that p et1ti one r has chan g ed it s b us in ess n am e f r' o m " T h e Chart e ,~ e d 8 an ~~ " t u j) E><h . G - BIR lctte;~ dated June 7 , 1990 addressed to SG\l & Co. wh:;.ch denjed Petitioner's prote s t against the 1984 assessments; k} E H h � G-- 1 P o r' t i o n o f [: >< h � G i n d i c at j_ n g the date "August 3 1, 1990" as the daLe of t'�eceipt by SSV & Co. of the BI~ ' 5 final decisinn on the protest ; 1 > E. >< h. H Co,~ p o r at i on l r; Ann u a. 1 I nco me T a>< R e t urn fo r t h e y ea r end e d Dec e mbe r� 3 1 , 1984 indicating that Petition~r duly filed j t s Income Tax Return for the calenda �.~ yeal ~ 198t�; m) E><h. H - 1 -� po��tion of EHhibit H s howing the date '' Ap r-�i J l=i , 1985" to show that petitioner~ s!?asonabl. y filet1 lt.S Annual Income Ta~ neturn for 1984 and the same wa s t ' e c e i v e d b 'I t h e B I R o n e v E: n d a t e ;

DECISION- CTA CASE NO. 4496 - 7- nl Exh. H- 2 - portion of Exhibit H showing the amount of P70,787,231.00 which was the total amount subject to tax for the calendar year 1984; 0) Ex h. H- 3 - portion of Exhibit H showing the amount of P24,755,531.00 as the tax due; pl Exh. H- 4 - portion of Exhibit H showing the amount of P11, 494,153.74 as the total amount of tax paid for the calendar year 1984 after crediting the quarterly payments and withholding tax; ql Exh. H- 5 - portion of Exh. H showing the earnings for calendar year 1984 including the breakdown and composition of the income ear ned by Petitioner for calendar year 1984; rl Exh. I - CB Confirmation Receipt No. 8- 0 7 10 0 0 4 d at e d Apt' i 1 15, 19 8 5 t o s h ow payment of the total amount of taxes paid for calendar year 1984; s) Exh. J pat'�t of Exh. H showing the scheduled dedu c tions claimed by Petitioner for calendar year 1984 to prove the deductions claimed by Petitioner for income tax purposes; tl Exh. J - 1 - portion of exhibit J showing the amount of P20,439,402.00 to prove the total taxes, licenses and fees claimed as deductions for calendar year 1984; u) Exh. J - 2 - portion of Exh. J showing the amount of P2,555,855.00 to prove the total depreciation expense claimed as deduction for calendar year 1984; v) Exh. J - 3 - pot" t'i on of Ex h. J showing the amount of p 3,728,548.00 to prove the Petitioner's share in the London Head Office expenses claimed as deductions for calendar year 9184. w) Exh. K pay�t of Exh. H showing the Schedule of Taxes and Licenses for calendar year 1984 to prove the breakdown

DECISION- eTA CASE NO. 4496 - 8- and composition of the total taxes, licenses and fees claimed as deductions for calendar year 1984; x) Ex h. L pat~ t of Ex h. H showing the Schedule of Depreciation for the calendar year 1984 to prove the breakdown and computation of the tot a 1 depreciation expense claimed as deduction for calendar year 1984; y) Exh. 1'1 pat~ t of Exh. H showing the computations of Petitioner ' s share in the London Head Office expenses for calendar year 1984 to prove the formula applied and the amount arrived at in said computations of Petitioner's share in said expenses for calendar year 1984; z) Exh. N- National acknowledgement of the statement of computations of Petitioner's share in the London Head Office expe nses for calendar year 1984 to prove the authentication of the statement as prepared and submitted by the independent Auditor of Standard Chartered Bank Head Office; aa) Ex h. N-1 Exh. N showing the computation of shares in London Head Office Expenses for calendar year 1984 and the conversion rate applied. bb) E><h. 0 Comp r omise Agreement between Chartered Bank and the Bureau of Internal Revenue on s~ttlement of deficiency income tax liabilities as proof of said agreement arising from or attributable to disallowance of interest pertaining to obligations con s idered by the BIR as incu r red or continued to pur chase or carry securities the income of which is exempt from income tax. Respondent failed to comment on petitioner's Formal Offer of Evidence. Consequently, the

.. DECISION- eTA CASE NO. 4496 - 9- Court admitted all of Petitioner's documentary evidence <Ex h i bit s A t o 0, i n c lu s ive>. Respondent likewise did not present any evidence in support of her case. Respondent's counsel merely manifested that cons~. dering that the issue involved in the case is a "question or 1 aw" he submitted his case on the basis or the records and pleadings. Respondent did submit a memorandum. Petitioner likewise filed a memorandum and a supplemental memorandum in support of its case. To be resolved by us is the validity of respondent's deficiency income tax assessment as well as the deficiency documentary stamp tax assessment for the year 1984. For the taxable year 1984, petitioner reported in its annual income tax return a gross income in the amount or P248, 104, 840 . ~--=~� It likewise reported as total expenses in the operation or its bus i ness the amount of P177,317,609. ?~ resulting in the taxable income of P70 ' 787 ' 231. oo . Arter taking into account and domestic tax credits, the - ��--�� quarterly payments income tax paid by petitioner was in the amount of P11, 495, 153. :::::.~ .

DECISION- CTA CASE NO. 4496 - 10- As regards the total deductions amounting to P177 ' 317 ' 509. 00 Petitioner presented its other -�-����-�- ' financial accounting records and documentary evidence to prove that the same were business expenses incurred and directly attributable to the generation of its total taxable income. This is in consonance with Section 30 <now Section 29) of the National Internal Revenue Code which provides thus: "Deductions from Gross Income. In computing taxable income subject to tax under Section 2 4 xxx, there shall be allowed as deductions the items specified in paragraph (a) to Ci> of this section. X )( Ca> Expenses. - (1) Business Expenses. - <A> In general. All ordinary and necessary expenses paid or incurred during the taxable year in ~-~-!:'_.r=.y_i_.D..!I. on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; travelling expenses while away from home i n pur~uit of a trade, profession or business; rentals or other payments required to be made as condition to the continued use or possession, for the purpose of the trade, profession or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. X )( (b) Interest. (1) In general. - The amount of interest paid or accrued within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business, except on indebtedness incurred

DECISION- CTA CASE NO. 4496 - 11 - or continued to purchase or carry obligation the interest upon which is exempt from taxation as income under this Title. xxx" The aforesaid section of the Tax Code allow the deductions of business expenses provided the following requirements have been complied with, to wit: 1. The expense must be both ordinary and necessary; 2. They must be paid or incurred during the taxable year; 3. They must be paid or incurred in carrying on the trade or business of the taxpayer; and 4. They must be supported by records or pertinent papers. No distinction is made as to the nature of the income, whether taxable or non - taxable, to which the business expense may be charged to be deductible for income tax purposes. Section 29 of the NIRC therefor allows deduction of business expenses regardless of wheth~r or not such expenses are allocable to income. "Where the law pr~~ided no qualification for the granting of the privilege, the court is not at liberty to supply any" <Republic Flour Mills vs. Commissioner of Internal Revenue, 31 SCRA 520).

DECISION- eTA CASE NO. 4496 - 12- This particular provision of the Tax Code has been interpreted ahd passed upon by the Supreme Court in two cases, namely: Zamora vs Collector, L-15280, May 13, 1953 and reiterated in Atlas Consolidated Mining and Development ,Corporation vs. Commissioner of Internal Revenue, L-26911, January 27, 1981, 78 O.G. 393, wherein the Court ruled that: "The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction from gross income for purposes of the income tax in Section 29 (a) <11> of the National Internal Revenue Code which allows a deduction of all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. x x x " The documentary evidence and testimonial evidence submitted by petitioner amply indicate that all expenses cl~imed and declared by i t were incurred in the pursuit of its business. As part of its evidence, petitioner likewise averted to the SIR-Bankers Association of the Philippines <BAP> Compromise Agreement, dated March 14, 1988, with reference to the taxability of non-negotiable promissory notes issued before October 15, 1984. And, as a consequence of this

D E C I S I O N -- CTR CASE NO. 4496 -� l3� � avai]m~nt of th2 Compromise Agreement with the B3nkers Association ot� the Philippines of which p �? t i t i o n e r� i s a member cf good standing, the corr�t-:sponding payments l'llel~e made by the petitioner. It is e:lso of recor�d that-� petitioner� h~d arfiHe d <'.lPd pai. d the documental"~y ste-mp tax from non - negotiabl~ promissory notes issued a f t e r 0 c t o b "-' �, � 1 5 , l 9 8 L� t..1 p t o D P c e m be r 3 1 ~ 1 9 6 4 � This is case, disputed by the petit i on�t" , and it was inc umbent upon respondent to pr�ove the 1 egal and factual basis of her assessment:. Tl1e issue in the case is not merely "legal" as erroneously manif est ed hy respondent. It cannot JUst rely on the presumption that said t a>~ assessment j _s val id and correct. That p~ ~ esumpt ion i s disputabl~ and in fac -t has been timely and effectively contested by petit i onet�. The as~ .essment must be based on actual facts to s t and t h e t e s t o f j u u i c i a J s c rut i n y <Co l 1 e C' t o l~ o f Internal Re v enue v s. Ben i payo, SCRA 182). Petitioner has in fact presented substantial evidence that .. its entire ded�...1ct i OTIS claimed amounting to P1 77 ' 317 ' 509. c���:��-�o��- in the and as a generation of .its taxa.ble income ronsequetlce of its business operations. It can be stated that the burden of proof has now

DECISION- eTA CASE NO. 4496 - 14- shifted to the respondent to prove that her contested assessment was based on facts as well as the legal basis upon which such facts may be anchored. We need not cite rulings of the Supreme Court that has laid down the principle that "he who alleges as fact has the burden of proving it. " But sad to state, respondent Bureau failed to present any evidence to buttress her disputed tax assessment against the respondent. She merely made the representation of submitting her case for decision based on the pleadings and the records of the Bureau in this case. Not an i at a or evidence was presented to give the Court the opportunity to examine and evaluate the "rormula" or theory of respondent as to manner by which she arrived at the deficiency tax assessments, notwithstanding the financial records and other evidence submitted by the petitioner of which the corresponding taxes were duly paid. Not even the Revenue Examiner assigned to this case who presumably examined and audited the books or account and other financial records of the petitioner was presented to testify on his examination of the accounts and the report rendered as a result thereor. Without any evidence to look into, the Court is at a loss

DECISION- eTA CASE NO. 4496 - 15- as to how and in what manner it could evaluate the disputed assessment. It cannot be expected to just delve into the records of the Bureau and searc h for the factual and legal basis of its assessment. The procedural rule dictate that "evidence not formally offered cannot be considered by the Court unless it has been duly identified by testimony duly recorded and second, it has itself been incorporated in the records of the cases" <Tabuena vs. Court of Appeals, 195 SCRA 567>. In fairness to the taxpayer, the failure of counsel for respondent to pinpoint or present the pertinent evidence on which he relies does not sit well with this Court. We must also stress that the Court of Tax Appeals is a court of record, with different procedures and rules than an administrative body. Although it is denominated "Court of Tax Appeals," nevertheless the required procedure is unlike that of the Court of Appeals or the Supreme Court. Like the Court of First Instance (now RTC> whose jurisdiction over tax and custom cases has been acquired by this Court, it is required to conduct a formal trial where the parties must present their evidence accordingly if they desire the

DECISION- eTA CASE NO. 4496 - 16- Court to take such evidence into consideration in the decision of the case. This court cannot just decide cases based on the evidence presented before the Bureau of Customs and the Bureau of Internal Revenue, or the latter's Appellate Division as the case may be, without a formal presentation of such evidence. Wh i 1 e it is true that Section VIII of Republic Act 1125 expressly provides that our proceedings need not be governed strictly by technical rules of evidence, we must on the other hand set a definite rule that only evidence formally presented will be considered in the decision of the case. It is not expected to go out of its way and dig into the records of the government agencies whose decisions it reviews to supply deficiency of the eviqence of parties. That would expose us, much as we may desire to do in good faith, to the charge of trying to' favor one side or the other (see Celestino Co. and Co. vs Collector of Internal Revenue, CTA Case No. 195, October 14, 1955, G. R. L-8505). Admittedly, respondent submitted a memorandum to expound its thesis. But a memorandum is not evidence. It is merely a guide to assist the Court to clarify matters already presented before

DECISION- eTA CASE NO. 4496 - 17- it. It cannot substitute for something that is not there. Petitioner has amply and substantially presented evidence to support its claim that it has paid correctly the corresponding taxes pertaining to its income, that the deductions pertaining to its expenses in the course of its business operations was necessary and correct and the documentary stamp tax pertaining to the period prior to October 21, 1984 was based on a compromise agreement. Such evidence was not controverted by r espondent. We therefore find for petitioner. WHEREFORE, y�e s pendent' s 1984 deficiency income tax and documentary stamp tax assessments levied against petitioner is hereby cancelled and set aside. SO ORDERED. PAW ~ I RAMON 0. DE~~ Associate .Judg

DECISION- eTA CASE NO. 4496 - 18- WE CONCUR: ~ ~RNE~ STOoD. ,AC~ OSTA ~ Pre s iding Judge ~L GRUBA Associ I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII, of the Constitution. ~--..c:v e~ C:~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals