CTA Case No. 2977 (Decision)

. G~ PU BLlC.. 0!' iiirr rtlJl.fPPI'-' ' ' . '!9QRl' OF TAX. Af'PE..~)...S �u&:t~t~.e m'n BANCOt�1 GROUP INCORPORATED, Petitionerg " - versus C.T.A. CASE NO. 2977 COV~ISSIONER OF INTERNAL REVENUE, � Respondent. X- - - - - - ... - - .... X DEC I S I 0 N In the case at bar the point urged upon our consideration is whether or not petitioner 1 s lending transactions are acts constitutive of a "lending investor" which includes all persons who make the practice of lending money for themselves or others at interest (Section l87{u), Tax Cmde of 1977) 0 Thus, aside from the annual fixed tax that it must pay (Section 192{3) (dd), ibid. ) is also obliged to pay a percentage tax equivalent to three per centum on gross income (Section 209, ibido) Petitioner corporation dul y orga ni zed and engaged in various.business activities, among others , provides general as well as special management services in s uch areds, viz. : cash, credit, tax, fi xed asset anc reserve, primarily to its own subsidiaries or group of companies; declared for

DECISION CTA CASE NO. 2977 - 2- tax purposes covering the period from the first quarter of 1976 to the first quarter. o .f 1978,. in- elusive, the total amount of P8#1036 158.00 as gross interest income derived from its relending operations1 and, paid the three (3%) per centum percentage tax amounting to P243,059o49 pursuant to Section 209 of the Tax Code, as amended by P.D. 11 58-A; like- wise the amount of P500 0 00 for each year of the period covered or a total of Pl#5oo.oo as fixed taxes under Section 192(3) (dd), same Code. In a letter dated July 50 1978 to th~ respondent Commissioner of Internal Revenue, petitioner sought the refund or credit of the said amounts or a total of t-244,559 0 49 as erroneously paid or illegaliy__/ collected percentage and privilege taxes. Pending any administrative resolution but in order to suspend /. the running of the two-year prescriptive period for /~ such claims petitioner filed this action on October 11, 1978o Petitioner pre s ents the propositions as reasons of the appeal that to be categorized as a "lending investor" under the Revenue Code, the lending of money must be at interestq ioe., profit or gain, and the attendant habituality in the lending acti- vity. Petitioner however alleges that far from 51 (

DECISION CTA CASE NO . 2977 - 3- realizing profit or gain i t incur ~ed losses as a consequence o f the minimal rates of i nterest charged. Moreqver, the beneficiaries of the relent funds were confined to its own subsidiaries and group of companies to the exclusion of the general public, as such, cannot be deemed in the business much le s s habitual in the practice of lending money as legally contemplated. Taking cue from the Asturias Sugar Central case, petitioner invokes the ruling: ~Note that one of the requisites before a person can be classified and taxed as a lending investor is that � the lending of money must be with in- tere~t. And to our mind, the word "interest" . means profit or g ain, for 1 just like any other kind of business, the busine ss of a lending i nvestor must be conducted for profit or gain in order to be taxable. "In the instant case.., when the , petitioner advanced funds or supplied rice to its employees, it did so merely to comply with one of the terms of its collective bargaining -agree- ment and did not charge nor collect any interest on said loans to its employees. With regard to the advances of money ~ hich the petitioner gave to its planters, the interest charged was just sufficient to pay the interest that petitionef itself paid to the bank for the f unds so advanced. In effect, the petit i o~er�s credit is with the bank, and i t was� the latter that actually collected the interest from the planters than the petiti oner." (CTA Case No. 983, F~bruary 14, 1963). 51 -

DECISION CTA CAS E NOe 2977 Respondent Commissioner of I nternal Revenue d emu rs and maintains th~t petitioner 's " incurred losses from its relending activities does not take it out of the purview of Section 209 of the Tax Code , which i mpo s es an excise tax, a tax la id upon the privilege o f engaging in the busines s of l ending money. Payment of the tax is invari abl y made a condition to t he exercise of a privilege in the case of petitioner, the privilege to engage in business as a lending investor . Thus, its payment is not made / to rel a te to p r ofitsi rather~ i t is made t o dep end on actual receipts without deductions o f expenses I \ / (18-A Words and Phrases 617 ). 11 And further, peti- tioner's borrow i ng of funds f rom banks and re l~ding the same at minimal r ates of inte r est just suff icient to cover the cost of borrowi ng, i nfers habituality, which, "in the practice o f commerce presupposes the r epetition and continuation of c ommercia l acts, in such manne r that they are to each other by reason of the comme rcial purpo se or end which they tend to have. " (Siao Tiao Hong Vo Commiss io ner of Internal Reve nue, CTA Case No . 1 755, March 1 3 1 1970). We f ind nothin g ambiguous nor obsc ure in the language of Section 1 87 (u~ taken in relation to 1 ' ~r'J . �'-

DECISIO N CTA CASE NO. 2977 - 5- Section 2090 both of the Tax Code0 insofar as the same is brought to bear upon the circumstances of petitioner in the case at bar. The provision itself furnishes the best means of its own exposition that a "lending investor'1 is on~ who in his behalf 0 or on behalf of another lends money at interest (Sec . l87(tl) 0 upon which tacked an imposition of a "a tax equivalent to three per centum on its gross income" (Seco 209). Understood to m8an what it plainly expressed� it a compelling indication that gain or loss is not necessarily decisive but t~ drawing of interest and requiring it to be paid for the use I or forbearance of money that sufficeo The tax im- position is essentially addressed and directly"brought to bear upon the gross inc ome~ As to whether the cost of borrowing would have ratchetted upward and the corres~onding interest on relending the same kept distressingly strained to the minimum thereby in- curring loss0 is a business decision competently left to rest upon petitioner's own vigilance and indulge nce. All that we need to state is that loss in no wise lessens nor muffles petitioner's tax obligation. Neither a general economic adversity0 however disastrous in coqsequence 0 be a warrant for j udicia l abrogation or a leverage t~ dilute 51 ~

'I DECISION CTA CAS E NO. 2977 enforcement of the tax statute, so expl icit i n terms and so searching i n extento This Court will no t deem itseaf authorize d to depart fr om t he plain meaning o f the language whic h is free from ambiguity . The apparent quibble on the much ado-ed gain or profit can hardly be a reassuring prospect that can easily be rec o nciled with the statutory int e ndmento But be that as it may6 it is by no means self-evident that the petitioner corporation expects actual and potential benefits and advantages over t he years from its s ubsidiar ies which i t holds investmen~ and control 0 Thus, I "It is of ten neces sary to distinguish between a loss deduction for a p ayment made, and the c apitalizati an of such pa y ment wh~re there is a resulti ng benefit which is to continue for several years. The l os s pro- vis ion will not apply, for example, to ex- penditures made to i ncrease and mai ntain the earning power of the taxpayer, it being expected that the taxpayer wou ld enjoy the fruits of such expenditures .over a peri od of years." (First National Bank of St. Louis, 3 BTA 807, cited in Mertens Law of Federal Income Taxation Vol. v, 6628.39) Connected with the que s tion j ust di s cussed, petitioner urges that it could not have " loaned money f or profit or g ~in e q uiv a l e nt to t he i n t erPst provided by law nor had done this habitually in the years i n question. " Thu!? 11 with the exception of its own subsidiaries or group of companies 51 -

DECISION CTA CASE NO. 2977 - 7- petitioner holds itself out that it had not gone public in its relending activities as weuld portray habituality since "before a person may be considered a lending investor under the Tax Code0 it is necessary that he dedicates himself habitually to the office or profession of lending at interesto" (BIR ruling dated Decemb~r 4g 1975)G We do not in the case at bar rea ch the same conclusion. As plainly manifestedq petitioner cor- poration1 consistent with the corporate purpose, borrows and raises money, negotiates or o~herwise obtains funds or any kind of financial assistance for its clientsw In the particular sphere of activity0 even as a conduit or intermediary, peti- tioner did borrow funds from banks and relent the same to its clientele of a group of companies of some thir �ty-seven (Exhso "J-1" and "N-1") including thirteen subsidiaries (Exho "Z") "Jnd in the process grossed an interest income of ?81 l03 0 l58o00 for the three-year period in questio~ upon which based the payment of P243 0 059o49 representing the percentage tax prescribed in Section 2090 suprao This could well characterize and be determinative of the nature, extent and scale of the b usiness conrlucted by petitioner as regarrl.s the lendi. i: , J dC ti vi ty . 51 2

DECISION CTA CASE NO ., 2977 - 8- Nevertheless~ petitioner would have the sprouting impression t hut by confining the lendi~g to the domain of subsidiaries or group of companies ~ the scheme is witho ut or beyo nd pale of the 11 practice of lending money for themselves or others at interest ... (Sec. l87(u) ~ supra)o Not so 0 Ludicrous a nd ex- p edient piffle indeed if the kind of undertaking cannot validly be infused c o gnizance within the legal contemplati o n which read~ by itself unless pe t itioner is unwilling to take the responsibilities or simply unable to discern what they are. We think the la ~ is , broad enough to cover the I unde rtaking with s ubsidi~ries. These corporations in petitioner's holding company system are stirl sepa rate concerns, the assetsg incomes and obli- gatio ns are legally independen t differing not much from the mold of other cor?orate entities. Peti - tio n e r 1 s relending activities with its own ~ubsi- diaries have l ost none of the animating essence cha- racterizing the "practice of lending money at intere:;t ... ~ No more should it matter therefore whether the beneficiaries of the loans and/or advances are its own private preserve of sutsidiaries or other entities . The law does not disti~guish nor qualifYo 51. G

I I I I I ; DECISIOl'l CTA CASE NO. 297 7 i I i We see no reason in the present situation to yraft further di~tinction into ito It may be necessary to repeat what so plainly npply to the case at bar0 that0 "From the above transactions 0 it is apparent that petitioner be continuously and habitually engaged in the b usines s of lending money with interest to several entities and persons. These le~ding tran- sactions were not isolated but they re- present a series of loans showing habitualityo 1 Habituality 1 in the practice of commerce presupposes the repetition and continuation of commercial acts0 in such manner that they are to each other by reason of the commercial purpose or end which they tend to have." (Siao Tiao Hong v. Commiss~oner of Internal Revenue 0 CTA Case No. 1755 0 March 13, 1970) The cited ruling in the Asturias case 0 supra~ relied upon by petitioner0 is neither a controlling nor an illuminating precedento As advancing funds or supplying rice to one�s employees in compliance with �a collective bargaining agreement does not make the employer a lending investor, there being no interest collected (Nollcdo 1 s Commenta ries and Jurisprudence on the Tax Code Po 1050) 0 nor does it constitute the 11 practice of lending money"'o Such might as well be a maudlin rendition of a denouement which neither imparts plauslbility ~or serves m~~h o f a justification for potitioner' s cc;u:; e" 51 7

DECISION - CTA CASE NO. 2977 - 10 - WHEREFORE~ finding the petition to be without merit, the same is dismissed and the refund/credit of .the amounts 3ought is hereby denied, with costs 0 SO ORDERE:Do Quezon City~ Metro 1'1anilu 11 December 15 11 1982o Associate Judge WE CONCUR: ~~~ Presidi Judge Jr-:1 0 I