CTA Case No. 4443 (Decision)

'M\ UM~UUL . l~ UY TH~ ~ll1L1~~1~~~ CUUHT UY TAX A~P~AL~ \! ut.: :I.O.N Cl'l"i , l..: 1.'1' Y '.L'H U~i '1' .l NV ~~'l'HI�~ NT Pli .l 1..1 PP .LN Jo:~ .tNt.;. \ 1.o1:mP.r.ly C1t1cor.p .investment. 1:'1liJ1pp.llleS, .lllC.), - versus - C.T.A. Case No. 4443 'l'H~ CUMM.l~SlU.N~M U� .lN'l'~H.NAL H1: V J~.N U ~: , X - - -� Hespond e nt. ------X .L).l!; L � ..L .H J.. V .N r~ itytrust 111 Lll.ln case, petlt.lone r lnve�s tment 1-'llll.tpp.tne s , .l.Hc. cowe�s beror e tl1is court praying ror Lll e IIUllll.lCEtLJ.On or the assess ment covering its d .l 1 eye u u A L i c.; 1 en c y ltH.! om e Lax tor the tax a b 1 e year l ~:Hl L . The tdcts or th.ts case are br.tetly as tallows: H es pot\cleHl~ ~omnns sio ner or internal Hevenu e issued as ses!:>me u t.s aga1 n s t p 1 tiun er dated July 30 , 19S7 wllicll were rece iv ett by the l atter o n August 4, 19H I. '!' he a~s e ss m e nt s were tor d etic iency income tax, det .t cle n cy documentary s t a mp tax, deticiency expanded withh o lding t ax, and det.tciency withholding tax on � intere s t expe nse, all tor th e taxable year 1YH 2 .

- IJt:c.t.::HUN - C.T.A. Case No. 4443 - 2- 111 a let te.r dated Aug us L 1 ~, 1 Y~ I received by respulluent un August 2~ , l~H~ 1, petitioner protested the as s e s s n� P. n t s . Another protest -let ter ot tieptemoer 11, 1 ~ ~ ~ vl as 1 1 1 e d lJ e r o r e t 11 e r e s pond en t on t> e pte mbe r 1 !J , Hespondent, on Harcl1 LU , l~YU issued her tinal de ClSlOil on the matter. ln her decision, the assessments involving deticiency documentary stamp tax and deticiency withholding tax on interest expense were can c e 11 e d w11 i 1 e t 11 e as s e s s men t s regard in g de t i c i en c y l . ll come t: a x a nd de t 1c j_enc y expanded wi tnho 1 ding tax were mod1t1ed as Lollows: �' Ue l1 Cle ncy ineom e t.ax t'424,1.L4.0U A cltl: L U ~; .lnterest p er a nnum ( bU ~.; ma x . ) '1'uta1 amount due and co lle e tlble u etJ.cie n c..:y expanded t' Y ,l 33.b~ wJ. L1111 o 1 <Li n q t a x ~.4::L.:L42 Add: Lb~ ti urch a ge /,/~b.Y4 ~u 1.; interest per a nnum (1 - �~-U3 t o 1 -2 ~ - ~Y ) 1.UUO.UU Compromise penalty Total amount due and collectible l'etttluner, in its bid to lessen its liability, "ottered to sett l e by way ot a cpmpromise the deticiency

- UI!: C.l~ 1UN - C.T.A. Case No. 444 3 - 3- 1n co me t. ax . .l t pro p osed to pay te n ( 1 0 %) p er ce nt ot tn e b a~ i c tax or Lh e a mo un t ot ~4~ 1 4 1 1. 4 0 . '1' h e r e aft e r or o n April L./ I l~~o I p etit ione r paid the a mo unt ot PiO,~b 4 .04 as d e tici e n c y ex p a nd e d with ho l di ng t ax . Wit hou t a wa iting an y reply tr o m the r e s pondent wi t.h r eg ar t h e p o po se d c o mp ro mi se s e ttlement, pet it i o n er o u A r 1 H I , 1~ o i le d b et o r e this court t. ln s i n s ta n t p etitio n to r re view . It is now quest io n i ng h e v a l i dity ot th e P b '78 1 b8:G . 5!:> defic i e ncy i n c o me tax as s ess ment. ,I He to r e t.tn s co u r t tor de ter mi n at i on is t h e i ssue ot wh e t. 11 e r or n o L p e titi o ne i s li a b l e to r the addi ti o n a ! 1.n c om e ta x �res ulting r om the di sa llowan c e ot t:x pen t:es a ll oca b l e to i n co mes ari si n g tr om i n t erest a n d reversa l ot o ve r p ro v1s i on in p r ior years ot al l ow a n ce tor p roba bl e l o sses. , H e ~po n de n t. c l ai ms t h a t p e t i t ioner, having de r ived i ts gross i.n co me bot h t ax a b le and non - taxable i n 1 9 8 2 , de c l ared only in its in co me tax r e turn the income which i s t axa bl e but. n e ve r th e le s s, c l ai med as deduct ions all th e e x p e n s es i t had tor th e taxable year. S he de t er nu n e d th e p o rti o n s ot sa id expenses which corre sp o nd to th e in co me s n o t subject to ordin a rY 42

.I - u~:CJ. ~HUN - C.T.A. Case No. 4443 - 4- income tax and disallowed the same thus resulting to t.he deticiency in c ome tax assessment . .ln disallowing the am o unL ot 1:'1 1211 1'15!:>.!:>!:> as dedu c ti l.>le e x penses 1 � re s pondent computed the ratio ot in c<ome s not s ubJect to ordin a ry income tax as against the t!orpor a t.ton ' s gross income amounting to 1:'4/,tsltll //4.00. ~he totalled the tollowingt .lnte r es �t on s avings a ccount P 60 1 59S.OO lnte r e s t ea rned on government 8331063.00 8631542.00 s ec urities .lnterest earned on tr ust placement 2!:>b,41/.0U Heversal o t overprovision in p r 1 o r y e ars ot all o wan c e tor probable losses '1' o L a 1 P~.Ol3,61/.UO '1' ll e IJ as 1 c de t i c i e" n c y i n c o me tax was arrived at b ased O il t il e co mp uta ion as s hown be lews (B . l.H. .ke cor d s , p . H i':j) J.Jl..G.Q.Jl1.'L.JJQJ:..____�_y j)_]_t;!_<;:;_1;-__j.J}5,;.Q_~g____t:.__.J~. X 'l' o t a l rlxpenses X 'l'ax rat.e <.7ro s s lBCome !:_~_J_(! ).__.j.J..!L-t ] ___,_JUJ_ P3 ~ 1 ~ ' /!:> 1 !:>b6.UO P1 1211 1755.5!:> * X 3!:> % P4/ 1811::1 .1 //4.0U X 1:-' 4~4.114.00 Ue11ciency income tax A ~hould be Pl 1 31::18.!:>/Y.2~ '1' he Court t i n d s t o r t ll e p e t i t ion e r . As prev1ously discussed 1 respondent totalled the incomes not subject to regular income tax and 'd i s a 11 ow e d the expens es al.lo.cated to them. She 4

- u~:c.UilON - c.~.A. case No. 444 - ~- consH!e retl 1uterest incomes as non-taxable incomes unmHldlUl o t tne t ct t11at under ~ection 24 ( cc) ot the 'l'ax Cocle tllen, 1nterest .tncomes wer e subJect to a tina! tax. ~rior to l~~u, the preva ' ling law is ~residential u ecree (~.u. 1 No. l l~b which was promulgated on June 3, 1~11 ma nd ati ng t he withhold � ng ot tax on interest j_n co me on I nk tl e p si s. At t.lHl time , interest income was ill c ludeu ill the computation o.t gross income. ~t e n ~la n a sa � d on the reason tor witn ll u1Lil ny t x u 1nterest. income arising trom ,I DanK tl . po s .L -~~ .. '1' ll e c 1 .r cum s v t c e H t h � t 1 e d to the J Ill p o B l t. l 0 II H t ll t d < 0 II .l 11 t e r e S 'L 0 n d e p 0 S i t s u LHl t 1 t ::; 1 ,. u J e t.l L o 1.11 � prom ttl gat 1 on o t lJ IJ N1.L J.l~\J. u e; p t he a ct that interest :tile rnt~ 18 t:.ax � i) e , ind vid ua l d posi tors :t a lle\1 l) eprn t 10 1, �e , c. n co me tro m t 11 e i r 1> an k d e p >r; � lll � s i 11 I e i r i n c om e Lax r e t u r us . '1' h e con 11 a en t i a 1 nature o t bank deposits has pract. iccdly barred the B.l.H. 11om eltecLive ly entorcing the income tax law on t.he.se Lypes ot taxaJ)le income resulting in revenue losses. ln order to co llect income td x on interest income which was heretofore undeclared, it was det;ided to require banks to wi t llhold tor �the government the tax on lnLerest on d e posit accounts without d i s c 1 o s i n g the name s o t <l e p o s i t o-r s and the anou nts oi their deposits. The contidential n ature o 1: bank deposits is absolute 1 y ma1ntained. " (Nolledo a nd Nolledo, the Nationa l lnternal Hevenue Code, 199::1 lbth and Hevised 8d., p. 430) 4

-- - u~:c1~aot.1 C.T.A. Case t.lo. 4443 - b- un :::>eptember 11, l':HW, P.U. No. 1/39 was enacted changing the nature ot tlle wi t hl\olding tax fro m credita ble to tina! tax. lt provides: " :::iMC. 3. :::>ection ~4 ot the same Code is hereby a mende d by adding a new subsection ( cc) be ween subsect ons (c) and (d) to read as tallows : ( cc J � fl t:e-.:: or cax on 1n t erest from depo:n. ts ~nd y,1.eld l : t � m dapos1 t s ubstl tutes. ln erest on ~hili pine Cur rency bank ciHP.OSl s and yield ro m depo sit substitutes rece ved y u ro es c or r esident foreign corp ratlO II S s h 11 be s ubJ ect to a .t.ill?l tax on the tota l amount the eot as tollows: (a) 1~% or he in �terest on sa vings depo si ts; and (b) ~ U t ot the interest on t ime depos it s and y1e l d rrom deposit sub �titute s whi ch shall be coll c ted a nd aid as pro v ' d d in :::iections 53 and ~ 4 o t 11 i s Code : P 1- o v 1 a e d , '1' h at i t the t�eci p.tent. ot suc h in erest is exempt trom 1ncome t � x tion, n L x s hall b � mpo sed and that, iL 11 � is e nJoying p retere utl 1 jncome � eatment , then the p1: e.tere ntial tax rate � so provide d shall be 1mpo~ ed . " (Uncterscoring s upplied) 'i'lie J: espondent, on November '/, 191:30 issued Hevenue Hegulations No. 12-~0, as amended providing tor the ) t1n a l wLthhol~ing income tax on bank deposits. ~ection 3(a) ot the Hegulations reads as tallows: " ~l:C. 3. lmposlt~on of 'l'ax. 'l'he tollowtng taxes on income shall be imposed: (a) l 'lnal Wl tl1l1ol d 1ng lllcome tax on - ( 1) ln terest on sav1ng depos1 t. In general, the rate ot tinal withholding tax to be imposed on savings deposit maintained with authorized agent bank shall be tifteen (15%) per cent based on adjusted gross interest 45

- Ut�:t ; _l :;J UN - c . '1' � J\ � c a s e No � 4 4 4 3 {- p<tl<J ot acc ur ed. Ho\ve ver, where the rt'G lt ne nt / d e pu sitor .t s enJoyi ng preferential .L '' co lll!~ La x Lrea t me n t 11 n de r ex) s tin q 1 a ws , t he H 1 1. 1111 u 1 cJ 1 n q r.a x t a t e to J) e a p p l 1 -e d s h a 11 be t.lt e l. dX r a 1_e appl .t ea iJl e to sa id class or LdXPi:IV~"J' S or to such Lyp e ot .tnc o me as s h own .til 1 li e cer 1: i J 1 c t . l'l r. pre rerent1al tax 1- n� <-~ L 111 "' 1 t Rn ted by t h c om m1 s s 1 o n e c o t _t_t , Lel.ltUJ Heve nu~. XXX XXX 1 / 1 .111 1. "' r.., s r. on t 1m e �1" p o s .t t or y ~ e .1 d nn U�'l t !11 t H !l/1 ,4 .lt ll tH. l n qene~al, t he 1 .'t l. P. �u t 1 1\d \-1 _. Llll10.ld lll<.1 tc:tx to be Jm posed n I i II I I () 1: (> H l. t I II t Ill fl d e p 0 H l L S by a U t 11 0 r i Z e d c~ qt,_.. ll, l1 �tJtk 8 ;;:. nu y.L ltt on deposit 8 lll) s L l '~ u L~ H 11y "'u t 111 > �z t-~ d � gent: b ank s an <..1 n o 11 - tH 1n k. t 1 n H t'\ r: J "' J i wt. e r HH I l a r 1 e a ::; JHlll be L\ !P tlt .y p~ f! nt. t m ( L ll * ) . H w ve wt e re the rJt:pos i Lcl:/lllVfc' , ' l.ul: l !'l e ntiYJilg pret ere ntial L cl X L r a L 111 e II L Llll de eX .l �'t in g laWs , the Ill. ltll o ld1n q ax raLe to be a pp l.ted shall be tlte <l- X rr I. e d p 1. 1 e bl e to he Sa d claSS ot t.<t XpitVP l o 1� tcJ �ur:H1 t-.yre o show n ltt tltl-! t:e~ � t,t t 1 o te tax L H :! . l . lll U II l . 1 1HH 1B tl th t Commtssio n er ot JJIL ~ t� n;:~l Heven\111, XX X ' X XX xxx" \ : J_ct S S 1 L V 1 II g tnLeresL 1ncomes as non-t.axable 1 n co mf~ ~; .l s a nu s n o me r s J n c e i. n co me a J~ ising t ro m bank ll e p os .L t. s_ , ~r over nm e nt. secue JL lf:~s or �t r u s t pla ce ments are t�' u r t J1 e r mo r e , 1 n ~o m e 1. ro m interest which is ~~o tH> ltl t::: red as passive anti tixe d i n c ome � ca n be realized WlL il u ut. t il e necessity ot incurring expenses. ln ear nln q intetest ineome, t ax payers need not spe nd tor sa lctrit:�s , wa ges, co~11missions, 1 management or

- Ut;L:Ui .lUN - C.T.A. Case No. 4443 - H- protessional tees , rental and other u ti lities, advertising and promotion s , depreciatibn, supplies and the lik.e. Normally, once the money is invested, there is nothing lett tor the taxpayers to do. The invested < mon�ey will surely earn interest income. Consequently, there j_s no logical basis to allocate expense to this kind ' ot Hl come. �' Likewise, reversal ot overprovision in prior years ot al .LoHance tor probable ' losses is merely an accounting entry whith will not result to any tangible " income on tile part ot the petitioner; thus, no expenses can be rightly allocated to it. In peti ti�oner' s tinanc1al statement, it noted that: " Allowan.Q_e__ _!Q.L__ .I:' robaq_le Losses 'I' he Company provides allowance tor doubtful accounts ba s ed on a review by management of the c urrent status ot all the existing r ec eivable" (B.l.l<. l<ecords, p. ~6). 1:' r ov is lon tor probable los se s, unlike bad debts written-ott is not a deductible expense as tar as computing tile taxable income is concerned. Conversely, a reversal entry ( overprovision) cannot be considered as income. '!'he incomes used by the respondent as bases for disallowance of expenses cannot justify her assessment. As explained above, no expenses can be rightly 4

- DECISION - C.T.A. Case No. 4443 - 9- allocated to interest incomes, a nd reversal of overprovision si nc e they can be "e~r~ed" without the necessity of incurring expenses . Hnving thts uled, he other issues r a i sed in this cade h ve become m o an ac ~ demic. WHEREFOR~, in view 11 the foregoing, the assessment isaued by th re pon nt .against the petition er for a leged deficiency inco me tax for t axab l e year 198 2 is h ere by ' CANCELLED. No prono unce ment as to costs; SO ORDERED. Quezon City, Het ro Hanila, J an uary 18, 1994 . .� ~Q~.~ ERNESTO D. ACOSTA Presiding Judge GRUBA Jud ge -~ oP. ~nK� '~f~r RAMON Associate Judge ) 4

- u~cuaoN - C.T.A. Case No. 444~ - 10 - 1 hereby certity tllat the decision was reache d at te r c.lu e c onsul tat i o n a mong the members ot the Court ot Tax App ea ls in acc ord a nce with Section 13 , Article Vlll ot the Constitution. '\. ~ ... t;:;\Q.. ~ 'RNESTO D. ACOSTA ~ residing Judge court of Tax Appeals �' 4