CTA Case No. 3475 (Decision)

--------~- .. .~ "�~--. ..... . C.li!lh.UU.U! OP HIE t"liiLI!"f�&N,-'f rou T OF TAX ..\PP�ALS QU$:0!1 Clt'V COTABATO LIGHT & POWER '' CO., INC. C.T.A. CASE NO. 3475 Petitioner, - versus - COMMISSIONER OF INTERNAL REVENUE, Respond ent. X- - - - - - - - - - - X DECI S I 0 N As manifested by petitioner Cotabato Light & Power Co., Inc., and respondent Commission er of Internal Revenue, this case is submitted to the Court for decision pn one legal issue orily of ~hether or not the e458,861.13 receipts of peti- tioner from January l, 1974 to December 31, 1977 are includible as part of its tax abl e gross receipts, subject to the 2% franchise tax prescFib e d in its fianchise. (p. 96, CTA records.) There is no dispute as to the facts, both parties having submitted this case for decision on the basis of the records and the pleadings. tp. 95, CTA records.) And the records show that: (pp. 96-98, CTA records.) \ 261

DECISION - CTA CASE NO. 3475 - 2- FACTS MUTUALLY ADMITTED For the information and guidance of this Honorable Court, the Petitioner and Respondent have stipulated and consi- dered ihe following facts as establish ed and mutually admitted, hen6e, need not be proved: 1. That Petitioner is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal place of busi- ness at 183 Juan Luna Street, Cebu City, where it may be served with summons and other processes; 2. That Respondent is the adminis- trative head of the Bureau of Internal Revenue with office at the National Office Building, Diliman, Quezon City where he may be served with summons; 3. That Petitioner is holder of a franchise under Commonwealth Act No. 487 dated June 18, 1939 extended for another 25 years by R.A. 3217, approved June 17, 1961 to construct, maintain and operate an electric light, heat and power sys tem for the purpose of generating and distri- buting electric light, heat and power, for sale within the limits of Cotabato City, Cotabato; 4. That Petitioner's franchise is subject to the terms and conditions estab- �lished in Act No. 3636 O~odel Electric Light and Pioneer Franchise Act) dated December 7, 1929 and to the provisions of the Constitution, and Section 10 of said franchise provides that petitioner is subject to 2% franchise tax on gross earnings with an "in lieu of any and all kind of taxes" provision; hence, its tax- able gross receipts is subject only to the said franchise tax rate; \ 26 2

DECISION CTA CASE NO. 3475 5. That Respondent thru examiners of the Commission on Audit examined and verified, for franchise tax purpose, the books and other records of the peti- tioner covering the operation in Cotabato City, from January 1, 1974 to December 31, 1977; 6. That Pet itioner realized tax- able gross rece ipts in the amount of e44,527.02 not e44,068,915.89 as alleged in its return which makes a difference of 8458,861.13, and the same has been noted to be true as alleged by petitioner in its protest that the findings of the COA examiners cannot be disturbed; 7. That as a result of the afore- stated examination an assessment in the amount of 8237,794.96 as deficiency franchise tax for the period from January 1, 1974 to December 31, 1977 inclusive, was issued against the r espondent and the same was timely protested in it s letter dated September 10, and upon denial thereof, the protested assessment was timely brought to this Honorable Court for rev ie w; B. That, as agreed, also mutually, the undeclared gross receipt s for the period covering from Janu ary 1, 1974 to December 31, 1977 amounting to 8458,861.13 were interest and dividend incomes and capital gains realized from money market placement, savings and time deposits, .i n t e r c o r p o r at e d i v i de nd , a n d g a i ns f r. om sale of sh~res of stock s and oth er assets; LEGAL ISSUE TO BE RESOLVED Based on the aforementioned stipul- ations and mutual admissions , the dis- agreement lies onl y on the tax treatment \ 263

- -- - -- - ---�- ���--�- - � DECISION - CTA CASE NO. 3475 - [~ - of the e458,861.13 receipts which re- present the difference between the taxable gross receipts from January 1, 1974-December 31, 1977 per finding of the Respondent thru the Commission on Audit ~nd the gross receipts per Peti- tioner's franchi se tax ret~rn. While petitioner treated said ~458,861.13 as extraneous or miscellaneous incomes and subjected the same to the regular corporate income tax prescribed in Section 24 of the Tax Code, the Res- pondent thru the Commission on Audit treated the same as incomes incidental to and/or necessarily conn ected with the operation of franchise, hence, includible as part of petitione r 's taxable gross re ce ipts, subject to the franchise tax. It is the view of petitioner that interest income derived from savings and time deposits and money market placement, as well as capital gains derived from sale of shares of stocks, are items of income derived from activities not conne c ted with the business covered by its franchise nor incomes or earnings incidental to and necessarily connected with the operation of its franchise. Stat~d otherwise~ these items of income are purely miscellaneous or extraneous incomes, and as such, are not includible as part of the taxable gross ~eceipts for purposes of the franchise tax but includible as part of the gro ss income subject to \ 264 . ,� ~(

DECISION - CTA CASE NO. 3475 - 5- the regular corporate income tax prescribed in Section 24 of the National Internal Revenue Code. \~e disagree. In Philippine Power & De~elopment Co., Inc., vs. Commissioner of Internal Revenue, CTA Case No. 1152, October 31, 1965, this Court ruled: "The interest income on petitioner's savings acco unt is subject to franchise tax for the reason that it represents profit made in the course of regular transactions in connection with peti- tioner's franchise (Philippine Long Distance Telephone Co. vs. Collector, 90 Phil. 674). Similarly, the other contested items, consisting of earning of employees' retirement fund, profits in the sales of fixed assets, interest in the sale of cars, and proceeds of sales of materials and supplies, are earnings or. pr ofits incidental to and necessarily connected with the operation of its franchise, hence, includible in its taxable gross earnings." This ruling was reiterated in Radio Communi- cations of the Philippines, Inc. vs. The Commis- sioner of Internal Revenue, CTA Case No. 2426 , Janupry 25, 1980�, affirmed by the Supreme Court in Radio Communications of the Philippines, Inc. vs. Court of Tax Appeals, G.R. No. 60547, July 11, ~985, when this Court held that interest income on Bancom bills and savings account represents \ 2l)5

DECISION - CTA CASE NO. 3475 - 6- profit made in the course o f business of franchise's holders, like petitioner herein, subject to fran- t. chise tax. Similarly, gain on sale of fixed assets, r~gistration fee of customers' . cable, handling charges on cables originating from various RCPI stations, discount on purchase of fixed assets, sale of scrap and charges for lost equipment received from employees, collection of accounts receivable previously written off, other charges collected, offset of accounts of taxpayers' agents, collection fees on SSS salary and education loans, and commis- sian received from insurance underwriters are not income from other business activities conducted by ~ f r anc hise holder (to establish radio stations for the reception and transmission of wireless messages) but clearly indicate that they are savings and profits necessarily in connection with and approximately resulting from the operation of its franchise busine~s subject to franchise tax. (Radio Communication of the Philippines, Inc. vs . Commissioner of Internal Revenue, supra.) In the light of the above, it is thus clear beyond doubt that the interest incomes derived from \ 2Gb

DECISION - CTA CASE NO. 3475 - 7- savings and time deposits and money market place- ment, as well as capital gains derived from sale of shares of st~ck, in the amount of 8458,861 . 12 involved .. in this case, are subject to f~inchise tax. They )t are earnings and profits incidental to and neces- s~rily connected with the operation of petitioner's franchise, hence, includible in its taxable gross receipts for franchise tax purp oses. In accordance with commonly recognized business practices, the funds placed by petitioner in savings and time deposits and money market placement, as well as the purchase of share s of stock the sale of which resulted in capital gains, could not have come from any other squrce but from its gross receipts from the bu s iness covered by its franchise, and the same had to be invested or deposited because they constituted excess cash requirements. The nature and type of each of the items clearly and plainly indicate that they are Ir . earnings and profits necessarily connected with and I approximately resulting from the operation of peti- tioner 1 s enfranchised business. No evidence was p;esented by petitioner to the contrary. And the l bare statement of petitioner that the items of income \ 26 '7

T -- DECISION CTA CASE NO. 3475 - 8- involved herein are derived from activities not connected with the business covered by its franchise, t' or are extraneous incomes, unaccompanied by adequate evidence, has no weight with th~ Court. It is true that in Manila Electric Company vs. Commissioner of Inte r nal Revenue, CTA Case No. 1737, November 29, 1969, this Court ruled that any extra- neous income derived from business not specified by the franchise is subject to (in c ome) t ax , but the items of income of herein petitioner appear clearly to be earnings and profits neces s arily connected with and resulting from the operation of its enfranchised business. Even more, in arriving f}t the ruling enunciated in !v1anil:_2_ !=lect_Eic_, this Court observed that the items of income involved therein were clearly foreign to the taxpayer's authorized business of generating and distributing electricity for sale and no evidence was presented whicQ would show � that such income came from the operation of its franchise. The Court recogniz es that the b~rden of proof ~s on the taxpayer contesting the validity or correctness of an assessment to prove not only that \ 26d

DECISION - CTA CASE NO. 3475 - 9- the Commissioner of Internal Revenue i s wrong but that he (taxpayer) is right. All presump t ions are r. in favor of , the correctness of the tax assessment. (Inter-provin ci al Autobus Co.~ Inc. vs. Collector of Internal Revenue, L-6741, Jan uary 31 , 1956, L~23676, April 27, 19 67 , 19 SCRA 903.) And if the taxp a yer fails to present evidence or proof in s~pport of his allegations in his petition for review, as in this case, conformably to the doctrine of the presumption in favor of the correctness of the tax assessment (Inter-provincial Autobus Co., Inc. vs. Collector of Internal Revenue, ~~; Collector of Internal Revenue vs. Bohol Land Tran s - portation Co. , L-13099 and L-13463, April 29, 1960, 107 Phil. 965) , the Court of Tax Appeals will me rely sustain the assessment against the taxpayer (Caresosa vs. Bureau of Internal Revenue, CTA Case No. 3713, January 25, 1985, certiorari denied in G.R. No . L-70758 , August 30, 1985). In passing , it should be stated that before t he amendment of Section 24 of the National Internal Revenue Code by Republic Act No. 5431, appr oved on \

DECISION - CTA CASE NO. 3475 - 10 - June 27, 1968, extraneous or miscellaneous incomes of corporate franchise holders, which were exempt from income tax by virtue of their franchise, were not included as part of their t~xable gross receipts for purposes of the franchise tax but were subject to the regular corporate income tax prescribed in Section 24 of the National Internal Revenue Code. With the amendment of Section 24 by Republic Act No. 5431, covered in this case, corpor a te franchise holders which were exempt from income tax by virtue of their franchise, are now subj e ct to income tax. Hence, items of income which are included in the t axable gross r eceipts of corporate franchise holders for purposes of the franchise tax are also subject to the corporate income tax. (See Koronadal Electric Li ght & Power Co., Inc. vs . Commissioner of Internal Revenue , CTA Case No. 2600, June 16, 1979; Radio Communic~tions of the Philippines, Inc. vs. Com- missioner of Internal Revenue, CTA Case No. 2426, Ja n uary 25 , 1980, affirmed by the Supreme Court in .G.R. No. 60547, July 12, 1985.) Having reached the conclusion that the amount of E458,861 . 12 representing interest income realized \

DECISION - CTA CASE NO. 3475 - 11 - from savin g s and time deposits and mon e y market placement, dividends and capital g a ins f r om s al e r, of shares of stock is income incid enta l t o and necessarily connected with the bu s ine s s of pe t itioner covered by its franchise, and thus i ncludible as part of its taxable r eceipts subject to the fran- chise tax prescribed in th e franchise, the assessment involved in this cas e should be su s taine d . Pe ti- tioner Cot abato Lioht & Power Co., Inc., does not question the amount,� ~r computation, of the deficiency franchise tax pay able by it in the assess - ment. As stated above, petitioner submi t t e d this cas~ for decision sole l y on th e que s tion of whether or not the ~458,861.13 receipts in question are includible as part of its taxable gro s s receip t s subject to the franchise tax pres c ribed in its ftanchise. Accordingly, petitioner is ordered to pay respondent Commissioner of I nt e rn a l Re v e nue the amount of 8237,794.96 as deficiency franchise tax for the years 1974 to 1977, plus surcharge and interest incident to delinquency as provided for \ 271 )

.' DECISION - CTA CASE NO. 3475 - 12 - WHEREFORE, the decision appealed from is hereby affirmed at petitioner's costs. SO ORDERED. Quezon City, Metro Manila, � May 20, 1987. d"J~ ~~YV&41_�<A �"fA~~ ' �:._/)-)) AMANTE r;rLLER Presidir.g Judge ~JE CONCUR: AN~~QUIN Judge \