CTA Case No. 4408 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS ~~,,:rgzoN CITY PHILIPPIN� REFINING COMPANY, Petitioner, - versus - C.T.A. CASE NO. 4408 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - X ~ � .j, ' . ' t. DE c I s I 0 N Petitioner, a corporation duly organized and existing under the laws of the Philippines, where it is engaged in business, was assessed by the res~ondent Co~missioner of Internal Revenue for alleged deficiency income tax for the year 1985, in the sum of Pl,892,584.00, computed as follows: Def~ciency Income Tax Ret income per investigation Pl97 ,502,568.00 Add: Disallowances Bad Debts p 713,070.93 Interest Erpense ...~t.�..?.�.tl.~?-.:.~.J. ____} ,379,616. ~-~ Ret Taxable Incoae W.~!~82 1 1~4_, 0~ Tat due thereon p 70,298.764.00 �~� Less: Tax paid _.JWiJ.~~-:..0~ Deficiency ioco1e tar p 1,182,865.00 Add: � 20\ interest (60\ aax.) ..._.?2.!.t.!!J_~Q Total A1ount Due &Collectible :p:=:=1::,:8=9::2:�5c=84.0=0 13

DECISlvN - C.T.A. CASE NO. 4408 .- 2 - The assessment w ~s time 1 y pr otest ed by the Petitioner on April 26, 1989 on the ground that the bases of the assessment, nam el y: "interest" and "bad de.'nt s" were both alloHable and legal de{tuctions. However, instead of acting on the said protest herein Respondent issued a Warrant of Garnishment and served said warrant against .Petitioner's bank deposits with the City Trust Buendia Branch, Makati, Metro Manila, on November 15, 1989. The issuance of said warrant was considered by the Petitioner as a denial of its protest appealable to this Court following th~ doctrine enunciated in Algue vs. Commissioner, CTA Case No. 1620, January 16, 1968. Hence, this Petition for Review. The only dispute or issue involved in this case is whether or not the disallowance by the Re sponde nt of the following deductions are legal and justified: a) Interest Expense P2,666,545.19 b) Bad Debts 713,070.93 ,, Petitioner contended that the foregoing were legitimate expenses incurred in the furtherance of the business operations, hence, allowable as deductible items under Section 29 of the Tax Code. The Respondent, h owever , disagreed.

DECif' . , - C.T.A. CASE NO. 4408 - 3- Out of the total interest of P52,517,118.00 claimed by the Pe ti tioner iii its 1985 income tax return, the investigating examiner disallowed P2,666,545.19 "for being unsupported". ' In the hearing of January 27, 1992, the examiner, on direct examination testified as follows: "ATTY. DAVID Q. A protest was filed by petitioner in this case requesting a re- investigation of the assessment. Was this request referred to you for re-investigation" A. Yes. Q. What happened to th at re-i nve sti- gation you conducted? Was there a re-investigation conducted? A. Yes, I conducted a re-investigation. Actually the original assessment for this case was P22 million. Now they submitted a protest letter, the BIR referred it back to me for re-investigation. Then I studied back t6e case, then I a ll owe d, most of the assessment was allowed. Only on the assessment for bad debt s a nd interest expense was upheld because I think the other assessments will not hold. Q. Why? A. Actually I have not seen the books so ... Q. Did you ask Ms. Masaganda, the accountant, to produce those documents regarding the 15 ,' .�.s""'.. ...., ') ;' ,.~ ._. j

DECISION - C.T.A. CASE NO. 4408 - 4- dis cre p ~ n c ies of d e bt:=: and int erest ~xpen se ? A. I ask e d them bu t they e x p l ain e d why i t was li k e t h at , th~n I un de r s t ood th a t they we r e corr ect th e n I . .. Q. Wh a t d o you me a n th e y we re c orre ct , tho se intere s t e xp e n se? A . No, I mean the o th e i asses sm e nts . Q. Did y o u as k them a g a in to produce those documents to p ro ve that ... A. Yas , f or tho se interest expense and bad de b t s . Q. They we r e n o t a ble t o pro du ce th ose d oc u me n t s? ll.. Yes. Q. Did y o u s ubmit a rep o rt o n that ? A. Ye s ." ( Se e T .S . N., pp . 12 - 14 ) Thu s , th e P e t i ti o n er , acc ordin g t o t he Re s po n de nt, is n o~v "esto pp e d from ra i si ng n e w ma t ters which wa s n p t tou c h e d up o n /d i scussed i n the dmini s tr a tive l e vel" (ll.g u in aldo I ndu s tries Co rp. vs . Comm is sion e r o f Internal Revenue, G.R.L. - 2 9 7 9 0, Fe b r u a ry 25, 1 982 ) , by b e l a t e dly presenting in ev i d enc e for th e fi r st time befor e this Cou r t a n Al p ha Li s t (Exh. "B"), purpo r t e dly showing that Pe titi o ne r paid a dditi o n a l in te r es ts to c r edi t o r s t o t a lling P2,666, 5 45.19 wh ic h wa s not consi d e e d by the e a miners rl r ing thP i r i n vestjga ti on . 1

DECISION - C.T.A. CASE NO. 4408 - 5- Such co nt e n tio n failed to convin~e t hi s Court. On the c ont r a ry, We gave credence to the testim o ny of Mrs. Guia D. Hasaganda , the Fin anc ial Accou ntant of h ere in Petition er , during the hearing of this case on October 19, 1990, thus: "ATTY. LOBRIN: Q. Now, let 's come t o the proof of interest that wa s paid by your corp oration in 198 5. Did you su bmit with the in c ome tax return filed for the year 1985 the 1701B co ntain in g a list of creditors to whom interests were paid in 19 85? A. Yes, sir. This is attached to th e inc ome t ax return we filed in 1985. BIR Form 1701B re fer s to income p a yments not subjected to withholding tax. Q. Will y o u be ab l e to locate from here? A. Yes, this one. !\TTY. LOBRIN: We would like to make it of record that thi s bunch of p apers which I am now handling is the docket or of fi cia l record of the Bureau of Internal Revenue on this case, def i cien c y income t ax f or the year 1985. And on page 195 of this docket appear s the BIR Form 1701B submitted for the Calendar Year 1985 whi c h I respectfully request to be marked as Exhibit "A". JUDGE ROAQUIN: lfark it. 1'7

DEC I SION - C.T.A. CASE NO. 4 4 08 - 6- (T he deputy c lerk so mark s .) Q. I am shoHing to you, t1s . 'fiS <tganda, this docum ent marked ~s Exhj it "A" which is png~ lqS of t.hA OIR record . What relation has this documen t , Exhibit "A", with t h e do cumen t which you said y ou attached to the income tax re tu rn of the corporation f o r 198 5 i ndicating creditors , the i r addresses and the amounts of in t e rest paid to the m by the petitioner? A. ~h at is the same doc ume nt He attached to the i nco me tax re t urn we filed wit h thP Bur eau of Intern a l P.ev,..nut: as re'q-'uired by the law. ( See T.S. N. , pp. 5-6) XXX Q . No w, t h e total of this as nppParl ng in Exhibit "A"' is P49,972 , 321.90. This figure I have just read f or P49 million .) plus represents the to tal nf inte r Ps t paid by your corpor .1 i o n ns appear ing in this list marked as Exhibit "A" . A. Yes , sir . Q. Are these the o nly int~rests y nur corporation p aid on loans and obligations incur r e d in con n ec ti o n wi t h the b usiness of the corporat ion? l\ . No . Q. Th ere are so me more not listed in Exhibit " A". A . Yes. 10

DECISION - C.T.A. CASE NO. 4408 -- 7 - Q. Did y ou report to the 13ttrf"!<:lt t nf Interna l Revenue t h ose int eres ts which you s i. d cn�p not yet listed in Exhibit "A" ? !\. Ye s , sir. We submitted a sP par at~ a lph a list to th e Bureau of Internal Revenue because t h ese are the interests paid by th e co mpany which were s ubject~d to withholdi ng tax. Q . Now , let us g et thi s clear. In Exhibit "A" I is itemized interest p aid by y our c orporat i o n, �' Philippine Refining Company, t o numerous banks a nd l ending ins tituti ons. In a ddi tion to the intere sts r ef le cte d in Exhib it "A" y o u said you r c)mpa ny pa id inter es t also on some oth er obligations. Do y o u h a ve document to prove th is other interest not in cluded in Exhibit "A''? !\. Yes , sir . I have h ere t he annu:-11 re t.u rn of final in come tax Hithheld su bmi tted to the BIR on J an uary 3 1, 1986 a s required. Toget her v ith this is th e Alp ha list of all incomP p a ytl)ent s subjected to final Hit hh o lrli ng tax during t h e y ea r 1 98 5, p ar t of tvhich is the inter est port. ion. ( See T. S .N., pp. 8-9) X X X" Hence, the contention of the Respondent that the interest expense of P2 , 666 , 545 .1 9 s h ould be di sa llowe d for being unsupported , was belied by the fact that t he Alpha List which co nt a ined all income pRymelts subjected to final withholding t ax during 19

DECISION - C.T.A. CASE NO. 4408 - 8- .) the ye a r 198!i, part of uh ich Hns the interest } 1 , J 9.8 � (E xhibit "8"). From the t e s tim on y o f th e same 1vi t n e s s of the Petitione r, this Court takes cog n izan ce of the followin g established fa cts : 1. That the tot a l in ter est ded u~ ~d as expense in the in come tax return of PRC fo 1985, amo unted t o P52 , 517,l17 . 97 ; 2 . Th a t of the sai d amount: of P5 2 , 51 7,117. ?7 , t.he investigating E�.aminer a llovted only F49, 97 2,321 . 90, wh ic h is the tota l of the int erest lis ted in BIR For m 1701 - B, marke d "A" ; 3 . Th at the Investigating Examiner di ~_;C\ ll o\;~ed the differe n ce bet. Heen the above t\..ro figures (P5 2 , 517,117 .97 and P49, 9 72,321.90}, or a diff r:>re nce of r;; , 666,5 45. 19 ; nnd treated this ! difference as "lll'lsupp ort~d " Rnd di sa llov1ed i t and mn de it a b as is for the d eficiency income tax in questio n; 4. That the Investig a t i ng Exami ner did not � take up and did not co nsider as part of dedu c tible interest the additional intere st li s ted n t he seco nd doc um ent , th e Alpha Li st , marked as Ex hibi t "B " ; 2

DECISION - C.T.A. CASE NO . 4408 - 9- 5. T h ;=, t t ll e j n t ~ 1'1:' ;� t 1 i r� t P d in the Alpha. List Hould "' ipe out iscrepan c y of P 2 , 666 , 545 . 19; .;mel t h ere could be n o more i.nt.erest disallowance to serve as basi s for de ficiency in come t ax assessment ; and 6. The Investig a ting Examiner , admitted all the fore going except the interest stated in t he Alph a List (Exh . "B") . Why, the n , did the i nvesti g at ing e xaminer not conside r as deducti bl e expe ns e the inter est listed in th e Alpha List? To this question , this Court d iscred its the co nfu si ng and in co h ere nt ansHer of the inv estigat ing exam in er , Hr. Edgardo Ra quid. First , he testifi ed that h e did not see the.... /\.l.ph a L:i_,s _t. , but o n f u rther questioning by the cou nsel of the F e t i t i on e r , he a d mi .t..t:.!...<1. t h a t he sa H an d e x am i n e d 0 n cro ss�- exa mi n a t i o n i n the h ea ring o f Janu ar y 27 , 1 992 , l1r. Raquid t estified as follows: ATTY. LOBRIN: Q. x x x. But what I a m after is, a nother li sti ng included in the alpha list whic h BIR re gulations require t o be submitted within one mont h foll o wing the end of the y ear . You did not SPe th at a l pha Jist containing an n hPr s ep ar1!� P listing of intPrPst? 2 .i

DE CISION - C.T.A. CASE NO . 4408 - 10 - A. But I Gsk t. hi s from th e ... JUDGE ROAQUIN: No, answer direct l y the question. Q. Did . Y?.~ ... s.e~ . this ? l\. ~<?. .~. sir . Q. And t!1e.:r::. e..~ .c:> re yo~......~. t..~. . .....~..<?. ."l:......<::...<?.~. ~. ~ de r .~~ .~. l1...J?. c.t. Y~. ~.l:1."1:..............".l. l?..............l?..".l. l::.:t............9 .~ ...........tl) e A.~."l:. .~.r.:.e.. ~. t:........ l?..<=.t.XITI.e.n.:t.... ........ ~.'~E. :!:: .I1.9..............t:.l?.~ .~.h.C>.l e.. . y e..~ r.:.? A. No. (See T.S.N., pp 20 -22 ) XXX Q. Th e Alph a List is the de ' ice that the BIR rule s a nd regulation s provide so that the BIR ma y kn ow right awRy what are thos A items sub j ect to withholding ta x that are p ai d by th e t axpayor , and that is ca ll ed the l\lpha List? A. Yes . Q. And . you , � did ..11ot .s .e.e that a lp.l!?. li st .:!: .n. :.Yo .tt r . i.J:1Y .~.? .t.Jg Cl.t:. i on? l\. Y...e.?...~ ... r ..~. ?..~.....i."l:..� It's here . This is the Alpha Li st . I saw it." {See T.S.N., p . 29) We consider the conflicting de cla r ations of witnes s Raquid as un reliable. As ruled by the Supreme Court in the case of Mondrag on vs. Cour t of App ea ls, 61 SCRA 511 (1 974), "involving a wit n ess in coJ' tr a di ction~ during cross-exa min ation is one 0 f. the re rngni7Pd mo des o f imp eAc h ment wh i c h 22

DECISION - C.T.A. CASE NO. 4408 - 11 - renders the evicl~:~nce from his ] ips 1�0rt.hless for b oth parties . Neither one of his contra1ic ory can be relied upon". Suc h contradictory d~clar at ion s fortified Our belief that the witn ess of the petitioner was the one telling the truth, not only because of such contradictory declarations by witness of respondent but, more so be cause of the presence of the Alp ha List. NOH I we come to the dist::ussi on I)[ ba-1 r1nbts. The allege d b ad debts are : Ham~ of Debtor h 0unt of R~>son f.or adjudgi~g Debt the ~ccount 1s Bad Debts TRADE DSRTCRS : R~~oblas Store p 11,961.00 Th~ star~ was totally burned by fire th~t hit Urdan eta ~h�ppir~ ~oFpl~x in T�rnas Stor~ 16,842 . 79 N~vesber J0g1; debtor h s n1 visibl! assets (~~g~no, Rizal) 13,833.62 a~d C0 l o~~i cn is Vfti f@ J ~tn ; Ar F CS S Th! own!rs wer~ rurder!1; ~� ~h ao c e of coll~cti0 O~tst1ndi ng accounts since 1�32 / 198 3; dis1llJWPd 2% dis~o~~t and dare>ged stocks d~do:te~ in ai~~n~e R~PCRS under nev manage~~nt; no chance to collect; C~ Variety St re 10 ,895.82 Store was hit by fire in Alabang; Potron i la Catap ./ custo~e r cannot be located; (Pet ~ in i Grocer7 ) 29 , 0~8.30 I / Writ of execution c~n.no t be . pl~ment~d as cu stom~r transferred residence and whereabouts remain unknown; U'Pen H~rt Int~rprise 10 ,4 87 .08 Balance of an acco un : ; nw ner of store c3n no long~r b~ loca ed; 2~

., DECISION - C .T. A. CASE NO . 4408 - 12 - E ~tr'r ';nir.:o s;s ( E st~~ r Star~) Z~I,J75.51 ( Cust0P!l inr~l~!O~ !n1 n:w rc~id ing abrca~ p~r cr�~it ln1.stigati~n , sh�rif f's return, p0stm,r �s return and sales report ; 11or 'l' l 0H a 34 ,272.82 W ~it 0f �"�~utioo "~nr-at be (El 3n Gen. Hdsg.) no l!vbb le plem�~ted as custor~r has assets; � .U~ ~.rJ.6.6 ..~-7 SUNDRY DBfORS Ab oitiz Shi pping p 89,483.40 30l dis:o~rt gi7en on hijacked Corp . shipnent of F29?,278 .00 ; J. P1i z Tr1~king 69,640.34 30i di sco unt 00 hi j!cr.e1 rhip ent of F22 2,114.P; 11 , m.oo B a l~ne e 0f e�~"~nt of ~ s�p!rated � ploy�e vho i~ r�w in<o]1!Dt ; Lu� 1t~ ~Ia. Haria (Dano City) 13 ,772.00 Val ue of ~t '"k short>?'S due to Cr Jig, H~styn Pty. robberylbolp-up in July 1985 ; Ltd. 23 , 72 8.0 0 S~ or ~hipre�n' of tall ow; ~laim WfiS d~cl i ne1 by the insurers; .J C. I toh 19, 272.22 Sh0rt shi p. �nr 1f pah ~ � l; cla: against suppl i!r fil!d in 19 82 but re~ained una~kn0'1l�dged; 77 , G90.QO C� t of r�rr "~ ~ssiog a r~ j er t� e shipment; �lai~ fil!d in 1�82 w~s do �l in~d by S'Jpplier; Enri ched Food Corp. 24,158 . 00 Value of rejected shipment of dried red on i on s; claim unacknow ledged by sup pli er despite many follow-u ps. ~}3.!. 1 ~9.}:..96. TQ TAL P7q ,07Q .9 3 ����� ...... (See ~n~�~ "A' , pp . 9-11 , CTA re c.) Out of th e s i xteen {16) .accoun ts alJ Pqed as b ad debts , We find t hat o nl y thr ee (3 ) account.s of t� h, rorthlef'f;nPSS of 2 /~1

DECISION - C.T.A. CASE NO. 4408 - 13 - the acco unts, li0n<:" Here p ropr>rly ~~r j tt, en of f as bad debts, name ly: 1. Petro nt la Catap F 29 ,0 98.3 0 (P et Hint Grocery) 2. Esth er Guinto 25 4, 375.5 4 (Esth er Sari-sari Store ) 3. Hanuel Orea 3 4,2 72.82 (Elman Gen. Mdsg. T ,0 T A L .!...>......}..._..!........?.........l........?.......~........?..........~.......?.......�....... Our statute permits the de du ct ion of debts "actually ascertained to be worthless within the taxable ye ar ", to prevent arbitrary action b y the taxpayer to unduly avoi d tax li abi li ty. The requireme nt o f ascertainm0nt of vl or t h l e s s ness requires proof of two f a cts: (1) th a t the tax p ayer did in fact ascertai n the debt to he worthless in the year for which the deduction YTas sought ; and ( 2) that , in d o in g so, he a~tPd in good faith . Good faith on thr:! part of the tcl'��payer is not. enoug h. He mu st s h o11 also the1t he had re aso nably investigated the relevant facts and had drawn a reasonable inference from the informati on thus obtained by him. (Collector VS. Goodri ch "' Interna tional Rubber Co., 21 SCRA 1 336 , December 26 , 1967). The creditor must be able to demonst rate that the debt is not o nly uncollectible but also appears un co lle c tible at any time in the 25

DECISION - C.T.A. CASE NO . 4408 - 14 - fu t.u re . So, where the recover y is merel y d oubtf ul, deductio n will not b e all owed. Th ~ following ste ps s h o uld be followed: 1. sending of statements of accou nts; 2 . sending of c ollecti on letter s ; 3 . giving th e account to a lawyer for colle c tion; and 4. filing a collection case in court. Al l of the foregoing requireme nts have been satisfied . In fact, the writ of executions issued r1.ga in st the above-ment ' oned acc0 nnt s have been returned s in ce they cannot be im p lem ented eit her b-?r� ause the owner h as a l rPElrly t _ransferred residence and his \'1he r e a bout~ s unkn o Hn or he is insolvent. vri th regar d to the other accounts, n a me l y : 1. Rem o bl as Store p 11, 96 1. 00 .) 2. Tom as Store 16 ,8 42.79 3 . AFPCE S 13 ,833.6 2 4 . CH Varie ty store 10 ,895. 82 5. U'R en Hart Enterpr i se 10 ,487.0 8 6 . A' boitiz Shipping Corp. 8 9,483.40 7. J. Ruiz Trucking 6 9 ,64 0.3 4 8 . Rena to Alejan dro 13 , 550 . 0 0 9. Cra tg , lf ost yn Pty. Ltd. 23 ,7 38.00 10. c. Ito h 19,272.22 11. Crocklaa n B.V. 77 , 690.00 2G

\ DECISION - C.T. A. CAS E NO. 4408 - 15 - 12. Enr ich~ct rood Ct o p. 24,[ ') !\.()0 13. Lucit o Sta. Haria 1.3 , 772.00 T0 T AL p 3 ~ ~ t? 2 4 . 2 .?.. \�1e f j n c1 t h at sa i d a c co unt s have not s at i s f i e d the requirements of the "v-1orthle ssness of a debt". Mere testimony of the Finan cial Accou ntant of the Petitioner explaini ng the worthle s snes s of said deb ts is seen by this Court as not hing mo re tha n a self-serving exercise which lacks probative va lue. ThPrr' 11as n o iota of documen J try evi d e n ce (e.g . , collP~tio n lett ers sent , report from i n vestiga ting fi Plclmen , l etter of referral to t heir lPgal de p artment, poli ce report/affidavit that the owne rs wer~ bank rup t due t o f ire th . t engu lf e ct their s to r e s o r t h a t t: he o ~-me r h a s be P. n mu r c1 e r e d , e t c . ) , t: o give supp ort to the t e stimony of an employee of th e Petitioner. !1erP allegations cann o t 1 rove the \�Iorthlessness of !s uch debts in JQ8 5 . He n ce , th e c l aim for dedu ctio n of the s e thirteen (13) debts s hould be rej ected . In view of t he fo regoi ng, peti joner's . d efic iency inc o me t ax fo r the y ear 19 85 is co mputed a s follows : P1 9 7 , 50 2,56 8.00 Ne in come ~ er return .. ........ . ~ .~.?.�3 ?.~ . ~ .?.?.. Add : (disall owed Bad De bt) Net taxab le jncomP per d ecision Pl97 , 897 1 892.27

DECISION - C.T.A . CASE NO. 4408 - 16 - In come tax rluP therPon P G9,764.2G2 .29 Less: T 8 X rt l r r rt (l y p rt i rl 6 9 I !1 s ,B 9 9..�.. .9..0.. Defir:ien c y inr:nmP. trtX per doo.cis'nn 1\rlcl: 201; int erest ( 60% m~x. ) p 1118,363 . 29 Total amo unt due and collec tibl e .... 8 9 , 0 1 7 . .9..?. p 23 7 , } .B. ~. .:. .?. .?. WHEREFORE, the findings of respondent Commissioner of Internal Revenue is hereby modified . Petitioner is ordered to pay respondent .the amount of two hundred thirty seven thousand three hundred eighty one pesos and 26/100 (P237,381.26), as deficiency income tax for the year 1985, plus surcharge and interest incident to delinquency, pursuant to the provisions of Sec. 248 and 249 of the app licable Internal Revenue Code, as amended. SO ORDERED. Quezon Cit,y, Hetro Ha nila, Febru a ry 3, 1993. I 'I ~~ p~. ~ / � . RAMON 0. DE'ifty Associate Judg \'IE CONCUR: Q~Q~ ~ ERNESTO D. ACOSTA Presiding Judge / I GRUBA 20

DECISION - C.T.A. CASE 0 . 4408 - 17 - CER.'TIFICA'TIO I hereby certify that th is deci sion was r eached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. <e...,.~Q_.. ~ ..- ERNESTO D. ACOSTA Presiding Judge Court of Ta x Appeals J 23