CTA Case No. 5108 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ISHWAR JETHMAL RAMNANI AND C.T.A. CASE NO. 5108 SONYA JETHMAL RAMNANI, Promulgated: Petitioners, SEP 131996 - versus - THE COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION This Is a Petition for review filed on May 12 1 1994 by spouses lshwar Jethmal Ramnani and Sonya Jethmal Ramnan i praying for two kInds of reI i ef 1 thus: a) For the annulment and setting aside of Rulings Issued by the BIR dated August 6 1 1993 1 October 6 1 1993 and March 22 1 1994; and b) For a court declaration stating that the money judgment rendered by the Regional Trial Court of Pasay 1 is not subject to income tax. Petitioner spouses were also parties in a case decided by the Supreme Court on May 7 1 1991 (196 SCRA 731) and which was entitled Choithram Jethmal Ramnani and/or Nirmla v. Ramnani and Moti G. Ramnanl, vs. Court of Appeals, Spouses lshwar Jethmal Ramnani, Sonya Jethmal 1039 j

DECISION - C.T.A. CASE NO. 5108 - 2- Ramnani and Overseas Holding Co., Ltd., G.R. No. 85494; Spouses lshwar ~ethmal Ramnani and Sonya ~ethmal Ramnani vs. The Honorable Court of Appeals, Ortlgas and Co., Ltd. Partnership, and Overseas Holding Co., Ltd., G.R. No. 85496. The Supreme Court in this particular case decided in favor of herein petitioners and against Choithram C. Ramnani, Moti C. Ramnani, Nirmla V. Ramnani and Ortigas and Co. Ltd. Partnership, the dispositive portion of said decision is quoted hereunder, thus: "WHEREFORE, the petition in G.R. No. 85494 is DENIED, wh i I e the petition in G.R. No. 85496 is hereby given due course and GRANTED. The judgment of the Court of Appeals dated October 18 1 1988 is hereby modified as fo I Iows: 1. Dividing equally between respondents spouses lshwar, on the one hand, and petitioner Choithram Ramnani, on the other, (in G.R. No. 85494) the two parcels of land subject of this I itigation, including all the improvements thereon, presently covered by Transfer Certificates of Title Nos. 403150 and 403152 of the Registry of Deeds, as wei I as the rental income of the property from 1967 to the present. 2. Petitioner Choithram Jethmal Ramnani, Nirmla V. Ramnani, Moti C. Ramnani and respondent Ortigas and Company, Limited Partnership (in G.R. No. 85496) are ordered sol idari ly to pay in cash the value of said one-half (~) share in the said land and improvements pertaining to respondents spouses lshwar and Sonya at their fair market value at the time of the satisfaction of this judgment but in no case Iess than their va I ue as 1040

DECISION - C.T.A. CASE NO. 5108 - 3- appraised by the Asian Appraisal, Inc. in its Appraisal Report dated August 1985 <Exhibits T to T-14, inclusive). 3. Petitioners Choithram, Nirmla and Moti Ramnani and respondent Ortigas and Co., Ltd. Partnership shall also be jointly and severally I iable to pay to said respondents spouses lshwar and Sonya Ramnanl one-half (1/2) of the total rental income of said properties and improvements from 1967 up to the date of satisfaction of the judgment to be computed as fo I Iows: a. On Bu I Iding C occupIed by Epple's Creation and Jethmal Industries from 1967 to 1973, inclusive, based on the 1967 to 1973 monthly rentals paid by Epple's Creation; b. Also on Building C above, occupied by Jethmal Industries and Lavine from 1974 to 1978, the rental incomes based on then rates prevai I ing as shown under Exhibit 'P'; and from 1979 to 1981, based on then prevai I ing rates as indicated under Exhibit 'Q'; c. On Bu i Iding A occupied by Transworld Knitting Mi lis from 1972 to 1978, the rent a I incomes based upon then preva iIi ng rates shown under Exhibit 'P', and from 1979 to 1981, based on prevai I ingrates per Exhibit'Q'. d. On the two-Bays Buildings occupied by Sigma-Mariwasa from 1972 to 1978, the rentals based on the Lease Contract, Exhibit 'P', and from 1979 to 1980, the rentals based on the Lease Contract, Exhibit 'Q'. and thereafter commencing 1982, to account for and turn over the rental 1041

DECISION - C.T.A. CASE NO. 5108 - 4- incomes paid or ought to be paid for the use and occupancy of the properties and alI improvements total I ing 10,048 sq. m., based on the rate per square meter preva iIi ng in 1981 as indicated annually cumulative up to 1984. Then, commencing 1985 and up to the satisfacti.on of the judgment, rentals shall be computed at ten percent (10%) annually of the fair market values of the properties as appraised by the Asian Appraisals, Inc. in August 1985. <Exhibits T to T-14, inclusive.) 4. To determine the market value of the properties at the time of the satisfaction of this judgment and the total rental incomes thereof, the trial court is hereby directed to hold a hearing with deliberate dispatch for this purpose only and to have the judgment immediately executed after such determination. 5. Petitioners Choithram, Nirmla and Mot I, a I I surnamed Ramnan i, are a I so joInt I y and severally I iable to pay respondents lshwar and Sonya Ramnani the amount of P500,000.00 as moral damages, P200,000.00 as exemplary damages and attorney's fees equal to 10% of the total award to said respondents spouses. 6. The motion to dissolve the writ of preliminary injunction dated December 10, 1990 filed by petitioners Choithram, Nirmla and Moti, all surnamed Ramnani, is hereby DENIED and the said Injunction Is hereby made permanent. Let a writ of attachment be issued and levied against the properties and improvements subject of this litigation to secure the payment of the above awards to spouses lshwar and Sonya. 7. The mortgage constituted on the subject property dated June 20, 1989 by petitioners Choithram and Nirmla, both surnamed Ramnani in favor of respondent Overseas Holding, Co. Ltd. <I n G.R. No. 85496) for the .1042

DECISION - C.T.A. CASE NO. 5108 - 5- amount of $3M is hereby declared nul I and void. The Register of Deeds of Pasig, Rizal, is directed to cancel the annotation of said mortgage on the titles of the properties in question. 8. Shou Id respondent Ort igas Co. , Ltd. Partnership pay the awards to lshwar and Sonya Ramnan i under this judgment, it sha I I be entitled to reimbursement from petitioners Choithram, Nirmla and Moti, all surnamed Ramnan i. 9. The above awards sha I I bear Iega I rate of interest of six percent (6%) per annum from the time this judgment becomes final unti I they are fully paid by petitioners Choithram Ramnani, Nirmla V. Ramnani, Moti c. Ramnani and Ortigas, Co., Ltd. Partnership. Said petitioners Choithram, et al. and respondent Ortigas shall also pay the costs. SO ORDERED." <Annex "B", Petition for Review, pp. 55-58, CTA record) The Motion for Reconsideration of the aforequoted decision f i I ed by the I os i ng parties, Choithram C. Ramnani, Moti C. Ramnani, Nirmla V. Ramnani and Ortigas and Co. Ltd. Partnership, was subsequently denied by the Supreme Court in the following manner, thus: "CONSIDERING THE FOREGOING, the COURT RESOLVED to DENY the motions for reconsideration filed by the petitioners in G.R. No. 85494 and the respondents in G.R. No. 85496. This denial is FINAL. The partial motion for reconsideration filed by the petitioners in G.R. No. 85494 is GRANTED. The portion of our May 7, 1991 decision dividing the two parcels of land, improvements, and rentals equally between petitioner Choithram J. 1043

DECISION - C.T.A. CASE NO. 5108 -6 Ramnani and respondents Mr. and Mrs. lshwar J. Ramnani is deleted and these properties are declared solely owned by the latter respondents." (Supreme Court Resolution dated Feb. 26, 1992, Annex "C", I bid., pp. 70-71, CTA record.) On September 17, 1992, the Regional Trial Court of Pasay, designated by the Supreme Court to execute the judgment in G.R. Nos. 85494 and 85496, issued an Order of partial writ of execution <Exhibit "H"), containing the following pertinent data, thus: "Wherefore, in consonance with the judgment of the Supreme Court dated May 7, 1991, as amended by its resolution dated February 26, 1992 and as prayed for by plaintiffs, let the corresponding partial writ of execution issue with respect to the following: a> the rent a I income of the properties and improvements from 1967 up to May 31, 1992 in the amount of P24,879,365.00; and b) the 1985 appraised value of the properties in the amount of P22,364,000.00; P500,000.00 moral damages; P200,000.00 exemplary damages and 10% of said amounts as attorney's fees, plus 6% legal Interest on the totality of the amounts from the time the judgment became final unti I fully paid. Pursuant to paragraph 6 of the dispositive portion of the May 7, 1991 Supreme Court decision, let a writ of attachment be issued and levied against the properties and improvements subject of this 'litigation to 1044

DECISION - C.T.A. CASE NO. 5108 - 7- secure the payment of the awards to the spouses lshwar and Sonya, in the aforementioned decision. XXX XXX XXX In the meantime to determine the market value of the properties at the time of the satisfaction of judgment and the total rental the parties are enjoined to appear before this Court for hearing thereon on September 29, 1992 at 8:30 in the morning. SO ORDERED." On July 19, 1993, the parties, pursuant to the Supreme Court case aforecited, entered into a tripartite agreement <Exhibit "1"), setting forth the following terms: "2. To expeditiously terminate said proceedings, the parties <excluding Moti and Nirmla Ramnani) hereby set the money value of the said judgment, including the other monetary awards due Sps. lshwar provisionally at P65 Mi I I ion. The final and total monetary awards to Sps. ls~war could be more than P65 Mi II ion. It could also be less than said amount. Consequently, without waiting for the Court's determination aforesaid, parties agree to suspend hearings on valuation and proceedings In execution of the judgment in G.R. No. 85494 and G.R. No. 85496, under the following terms: The judgment debt provisionally set at P65 Mi II ion shall be paid jointly and severally by defendants Ortigas and Choithram Jethmal Ramnani to plaintiffs Sps. lshwar Jethmal Ramnani and Sonya Jethmal Ramnani, as follows: a. P40 Mi I I ion upon the signing hereof by the parties; 1045

DECISION - C.T.A. CASE NO. 5108 - 8- b. P10 Mi II ion within thirty (30) days from July 5, 1993 or on or before August 4, 1993; c. P15 Mi II ion within sixty (60) days from July 5, 1993 or on or before September 3, 1993. Choithram and/or Harish Ramnani shall issue to plaintiffs postdated checks on the amounts covered by paragraph 2 (b and c above), immediately encashable on due dates." In accordance with par. 2(a) thereof, petitioners received the amount of P40 Mi I I ion from Ortigas & Co. Ltd. I Partnership, Cholthram Jethmal Ramnani (through Harish Ramnani, son of Choithram. In connection with the foregoing agreement, the counse I of Har ish Jethmal Ramnani and Choithram Jethmal Ramnani, as payers of the said money judgment, requested the Commissioner of Internal Revenue for a clarificatory ruling with regard to the tax impl !cations of such an agreement <Exhibit "J"). In a letter dated August 6, 1993 <Exhibit "K") and signed by Commissioner Liwayway Vinzons-Chato, the Bureau of Internal Revenue Issued the following clarification quoted in full: "Dear Atty. Ongkiko, In reply to your letter dated 3 August 1993, please be informed that your clIents, 1046

DECISION - C.T.A. CASE NO. 5108 - 9- Messrs. Harish Ramnani and Ortigas and Co., Ltd. Partnership, as payors of the P65 Mi I I ion, are constituted as the withholding agents of the 30% final income tax provided in Section 22(b), in relation to Sections 50(a) and 51(a) of the Tax Code. The amount to be withheld is Twenty Mi I I ion One Hundred Fifty Thousand (P20,150,000.00) Pesos, broken down as follows: 30% f ina I income tax on P65,000,000.00 - P19,500,000.00 1% documentary stamp tax on P65,000,000.00 650,000.00 Total - P20,150,000.00 Section 22 (b) of the Tax Code is the app I i cab Ie provision of taxing the receipt of the income by non-resident American citizen, such as rents, casual gains, profits, and income. Inasmuch as the compromise settlement arose from a money judgment involving ownership over real property, the income is taxable in the Phi I ippines notwithstanding the fact that the recipients thereof are American citizens, as provided in Article 7(1) of the RP-US Tax Treaty where the location of the real property is the situs of income taxation and not the residence of the alienator. (Underlining ours.) Accordingly, you are hereby requested to advise your clients to pay once only the amounts of P19,500,000.00 and P650,000.00, representing the 30% final income tax and the 1% documentary stamps tax, respectively, to any accredited commercial banks nearest the legal residence or principal place of business of the taxpayers. Insofar as the facts as herein represented, this case sha I I be considered closed upon ful I payment of the aforementioned amounts. Very truly yours: ( Sgd. ) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue" 1047

DECISION - C.T.A. CASE NO. 5108 - 10 - Petitioners herein did not agree with the contents of the aforequoted Ietter issued by the BIR so in a letter, dated September 16, 1993, they requested the respondent to reconsider the opinions embodied in the letter, dated August 6, 1993, maintaining that they are resident aliens contrary to the ruling's declaration that they are non-resident aliens not doing business in the Phi I ippines. Furthermore, petitioners insist that the money judgment rendered in their favor is in the nature of a mere return of capital/investment and hence must not be subject to the income tax. In a Bureau of Internal Revenue Ruling No. 22(b) 000-00-417-93, dated October 20, 1993 <Exhibit "M"), the respondent denied the petitioners' request for reconsideration and reiterated her earlier stance embodied in her letter, dated August 6, 1993 <Exhibit "K"), with certain modifications, the last portions of which are quoted hereunder, thus: "In view thereof, this Office is of the opinion, as It hereby holds that you are a non- resident alien not engaged in trade or business in the Phi I i pp i nes hence the renta I income and interest income awarded to you by the Court are both subject to the 30% final income tax provided for under Section 22(b) of the Tax Code, as amended, in relation to Sections 50(a) and 51(a} of the same Code. We would I ike to 1048

DECISION - C.T.A. CASE NO. 5108 - 11 - reiterate our opinion that Section 22(b) of the Tax Code is the applicable provision of taxing the receipt of Income by a non-resident alien, such as rents, casual gains, profits, and income. Inasmuch as the compromise settlement arose from a money judgment involving ownership over real property, the income is taxable in the Phi I ippines notwithstanding the fact that the recipients thereof are American citizens, as provided in Article 7(1) of the RP-US Tax Treaty where the location of the real property is the situs of income taxation. However, the award of damages, such as moral, exemplary and attorney's fees are not subject to income tax and consequently to the withholding tax, the same being merely reimbursement of your expenses/advances in the course of the hearing of your case. Consequently, Messrs. Harish Ramnani and ORTIGAS, as payers of the P65,000,000.00 money judgment, are constituted as the withholding agents of the 30% final income tax due from you, insofar as the taxable income portion of the aforesaid award is concerned, pursuant to Section 22(b), in relation to Section 50(a) and 51(a) of the Tax Code, as amended. Therefore, the amount to be withheld from the aforesaid taxable income portion of the money judgment is P17,340,000.00 broken down as follows: Total money judgment P65,000,000.00 Less: Exemplary damages p 200,000 Moral damages 500,000 Attorney's fees 6,500,000 7,200,000.00 P57,800,000.00 X � 30 FINAL INCOME TAX P17,340,000.00 This letter modifies our opinion in our letter-reply to Atty. Mario Ongkiko, on the same subject matter, dated August 6, 1993." 1049

DECISION - C.T.A. CASE NO. 5108 - 12 - In an effort to put more teeth to this aforequoted BIA ru I i ng, respondent served a Warrant of Garnishment to the Equitable Banking Corporation, the drawee bank, to distrain and garnish the cheques issued in favor to herein petitioners in the amounts of P10,000,000.00 <EBC Check No. 45035755C, dated August 12, 1993) and P15,000,000.00 <EBC Check No. 45035756C, dated September 12, 1993) to cover the payment of the final income tax of P17,340,000.00 [p. 460, Folder Ill, BIR reo. l. Petitioners then filed a petition for review with this Court assai I ing the BIR Ruling, dated October 20, 1993. Petitioners are asking this Court to set aside the questioned BIR ruling declaring them to be non-resident al lens not doing business in the Philippines and subjecting the money judgment, excluding the award for damages, to the income tax. Respondent advanced the following Special and Affirmative Defenses, in answer to the petition for review, thus: "SPECIAL AND AFFIRMATIVE DEFENSES 6. Petitioners have no cause of action. 7. The rent a I income from the subject properties and the 6% interest per annum on the total sum of the awards fal I within the purview 1050

DECISION - C.T.A. CASE NO. 5108 - 13 - of the phrase "rents, casual gains, profits and income" in Section 22{b) of the Tax Code, as amended, in relation to Sections 50(a) and 51(a) of the same Code. Both are income which are subject to the 30% final income tax in accordance with the Tax Code. 8. Since the compromise agreement arose from a money judgment involving ownership over real property, the income is taxable within the Philippines notwithstanding the fact that the recipients are American citizens, as provided in Article 7(1) of the RP-US Tax Treaty where the location of the real property is the situs of income taxation. 9. In construing tax statutes, exemptions are not favored - they are construed strictissimi juris against the taxpayer. <Republic Flour Mi lis, Inc. vs. Commissioner of Internal Revenue, 31 SCRA 520; Commissioner of Customs vs. Phi I. Acetylene Co., 39 SCRA 968)." The events preceding the fi I ing of the petition for review have so transpired that it now becomes necessary to have a final declaration on the legal soundness of the questioned BIR rul lng. This is a fact acknowledged by the judge of the Regional Trial Court of Pasay when she Issued an order which contained the following statement: "At this stage of the execution of judgment there are still unresolved incidents and/or i'ssues which arose in the course of the implementation of the Tripartite Agreement as fo I Iows: whether or not defendants are in default; whether or not defendants made a valid tender of payment; whether or not defendants fully complied with their obligations under the Tripartite Agreement; whether or not the settlement amount of P65 mi II ion is subject to 1051

DECISION - C.T.A. CASE NO. 5108 - 14 - a 30% final income tax; whether or not the BIR Commissioner's letter of August 6, 1993 constituting Harish Ramnani and Ortigas and Co. Ltd. Partnership as withholding agents is correct considering that plaintiff lshwar Jethmal Ramnani is a permanent resident alien (American), and the judgment rendered by the Supreme Court in favor of plaintiff is a money judgment for actual and compensatory damages and attorney's fees." (p. 235, Folder 1, BIR records) This Court is now faced with the task of determining whether or not the BIR ruling, dated October 20, 1993, conforms with the facts of this case and with the applicable law and jurisprudence. We have two items In issue in this case: (1) whether or not petitioners are resident aliens; and <2> whether or not the money judgment issued in their favor are subject to income tax. We agree with the petitioner that he is a resident alien for income tax purposes. Section 20(f) of the National Internal Revenue Code (NIRC) defines a resident alien as an "individual whose residence is within the Phi I ippines and who is not a citizen thereof". Evidence adduced during the trial convinced this Court that petitioner lshwar Ramnani 's stay in the Phi I ippines can no longer be considered as transient. 1052

DECISION - C.T.A. CASE NO. 5108 - 15 - Section 5 of Revenue Regulations No. 2 delineates the distinction between a person who can be considered a resident and one who is not by the following description: "SEC. 5. Definition. A 'non-resident alien individual' means an individual - <a> Whose residence is not within the Phi I ippines; and <b) Who is �not a citizen of the Phi I ippines. An alien actually present in the Phi I ippines who is not a mere transient or sojourner is a resident of the Phi I ippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he I ives in the Phi I ippines and has no definite Intention as to stay, he is a resident. One who comes to the Phi I ippines for a definite purpose which in its nature may be prompt Iy accomp I i shed is a transient. But if his purpose is of such a nature that an extended stay may be necessar' for its accomplishment, and to that end thr allen makes his home temporarily in the Phi I ippines, :te becomes a resident though it may his intention at all times to rP.+_,n to his domicile abroad when the purpose for whic~ he came has been consumma~~~ or abandoner�." It can be gleaned from the above description that the law on Income Taxation provides a more I iberal interpretation of who may be considered a resident alien. 1053

DECISION - C.T.A. CASE NO. 5108 - 16 - The establishment of a home even temporarily here in the- Phi I ippines for the accomplishment of a purpose even if he has the intention to return to his domicile abroad categorizes an Individual as a resident. There is no doubt that petitioner lshwar Ramnani is an American citizen who frequently comes to the Phi I ippines for the most part of the year to oversee his various investments as shown by his passport entries. The then Commissioner of Immigration even approved the change of his status of admission from temporary visitor to immigrant/resident alien under Section 13(e) of the Phi I ippine Immigration Act <Exhibit "8"). Petitioner has paid his Community Residence Certificates for the years 1987, 1988, 1989, 1990, 1991 1 1992, 1993 and 1994 <Exhibits R, R-1 to R-7, inclusive). The statement of respondent in her Ru I i ng, dated October 20, 1993, that "since you just came to the Phi I ipplnes last September 101 1993 and you are set to leave the country very soon, it Is very clear that you are a non-resident alien not engaged in trade or business In the Phi I ippines" is not supported by evidence and the records of this case. 1054

DECISION - C.T.A. CASE NO. 5108 - 17 - The next question to be determined is whether or not the money judgment rendered in favor of herein petitioners is subject to the income tax. The answer to this issue requires a review of the Supreme Court decision (196 SCRA 731) and the subsequent Supreme Court resolution, which awarded the following to herein petitioners: 1) rental income of subject properties and improvements from 1967 up to the time of the satisfaction of the judgment; 2) payment of the cash value of the subject two parcels of land and their improvements; 3) moral damages of P500,000.00; 4) exemplary damages of P200,000.00; 5) Attorney's fees equal to 10% of the total award; and 6) Lega I interest of 6% per annum from the time this judgment becomes final until they are fully paid. Thereafter the Regional Trial Court (Branch 119) of Pasay City, issued an Order on September 17, 1992 for the partial writ of execution of said judgment, to wit: 1) the rental income of the properties and improvements from 1967 up to May 31, 1992 in the amount of P24,879,265.00; and 2) the 1985 appraised value of the properties in the amount of P22,364,000.00; P500,000.00 moral damages; P200,000.00 1055

DECISION - C.T.A. CASE NO. 5108 - 18 - exemplary damages and 10% of said amounts as attorney's fees, pI us 6% I ega I interest on the totality of the amounts from the time judgment becomes final unti I fully paid. However, on July 19, 1993 a Tripartite Agreement was entered into by the parties to finally settle the award for money judgment at P65 Mi I I ion, under the following terms: "a. P40 Mi I I ion upon the signing hereof by the parties; b. P10 Mill ion within thirty {30) days from July 5, 1993 or on or before August 4, 1993; c. P15 Mi Ilion within sixty (60) days from July 5, 1993 or on or before September ~. 1993." It is clear from the foregoing that only the amount of P24,879,265.00 represents rental income from the lease of the subject properties and improvements of petitioners. As correctly pointed by petitioners' counsel in its letter, dated November 9, 1993, the rental income from 1967 to May 31 1 1992 amounted to P24,879,265.00 only; and the appraised value of the properties and improvements as of 1985 amounted to P22,364,000.00 (Exh. N, p. 326, CTA rec. ). Petitioners admitted the receipt of rental income amounting to P24,879,265.00. Rental income is subject to 5% 1056

DECISION - C.T.A. CASE NO. 5108 - 19 - withholding tax. Thus, the amount of P24,879,265.00, representing rental income, should be subject to the 5% withholding tax pursuant to Section 50(b) of the NIRC, in relation to Section 1(c) of Revenue Regulations No. 6-85, as amended. From the facts presented by the Supreme Court, it has been estab I i shed that in 1966 petitioners have invested US$150,000.00 or about P600,000.00 (US$150,000.00 x P4.00/US$1.00 in 1966) in real estate in the Philippines. Choithram Ramnani, as attorney-in-fact of petitioner lshwar, bought two parcels of land and erected several buildings thereon which earned income through the years by leasing these buildings to various companies. The amount of P600,000.00, representing the capital invested in the rea I estate business in the Phi I ippines in 1966, formed part of the money judgment when the court declared and awarded the appraised value of the properties and improvements as of 1985 in the amount of P22,364,000.00. Thus, the capital investment of P600,000.00 (US$150,000.00) should not therefore form part of the taxable base for income tax purposes since this is not Income but a mere return of capital. 1057

DECISION - C.T.A. CASE NO. 5108 - 20 - The Supreme Court in the leading case of Madrigal vs. Rafferty, (38 Phil. 414), distinguished capital from income in this manner. "The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is cal led capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is cal led income. Capital is wealth, while Income is the service of wealth." We agree with the respondent that the moral and exemplary damages as wei I as the attorney's fees are not subject to income tax. However, respondent failed to recognize that the capital investment of P600,000.00 should I ikewise be excluded from the computation of the gross income for 1993. The 5% withholding tax on the rental income of P24,879,265.00 or the amount of P1,243,963.25 should be withheld by the payors, Harish Ramnani, as assignor of Choithram Ramnani, and Ortigas & Compar�� Ltd., as withholding agents of petitioners purs��~ t to Sec. 1(c) of Rev. Regs. No. 6-85, as amended ry Rev. Regs. No. 8- 90. The rest of the income earned by way of money judgment per agreement of the parties constitutes taxable 1058

DECISION - C.T.A. CASE NO. 5108 - 21 - income to petitioners subject to the income tax under Section 21(f) in the same manner as citizens of the Phi I ippines. As a resident allen, petitioner is also entitled to deductions and personal and additional exemptions. Furthermore, as a resident alien, petitioner is required to file his income tax return declaring therein the income awarded to him by the Court's judgment, amounting to P57,200,000.00 in the year he received such income. The amount of P57,200,000.00 less allowable deductions, either itemized or optional standard deductions (40%), personal and additional exemptions if any, shall be the net taxable income subject to the income tax under Section 21(f) of the NIRC. The income tax due and payable shal I be net of the creditable withholding tax on rental income amounting to P1,243,963.25 and the income tax paid on Apri I 15, 1994 amounting to P3,823,021.22 <Exhs. S, S-1 and S-2). Based on the above discussion and in reference to the amounts awarded to herein petitioner by the Regional Trial Court of Pasay, the income tax I iabi I ity of petitioner is computed hereinbelow as follows: 1059

DECISION - C.T.A. CASE NO. 5108 - 22 - Total Money Judgment (1993) P65,000,000.00 Less: 1 ) capIta I investment P 600,000.00 2) moral damages 500,000.00 3) exemplary damages 200,000.00 4) attorney's fees 6,500,000.00 7,800,000.00 Gross Income P57,200,000.00 Less: 40% Optional 22,880,000.00 Standard Deductions P34,320,000.00 Net Income 18,000.00 Less: Personal Exemptions <RA 7167) P34,302,000.00 Net Taxable Income Income Tax Due P10,247,200.00 Less: Income Tax paid on 4/15/94 3,823,021.22 5% Withholding tax on 1,243,963.25 rentals Income Tax Payable p 5,180,215.53 WHEREFORE, in view of the foregoing, the subject BIR Rulings, dated August 6, 1993, October 6, 1993 and March 22, 1994, are hereby SET ASIDE. Petitioner is considered a resident allen taxable In the same manner as a resident citizen under Section 21(f) of the NIRC. Harish Ramnani, assignor of Choithram Ramnani, and Ortigas & Co. Ltd., Partnership, are hereby ORDERED TO WITHHOLD the amount of P1,243,968.25, representing the 5% withholding tax on the rental income earned from 1967 to May 31, 1992 in the amount of P24,879,365.00. The withholding tax of P1,243,968.25 shal I be creditable from the income tax due and payable by petitioners in the year said Income was 1080

DECISION - C.T.A. CASE NO. 5108 - 23 - received. Petitioner is hereby ORDERED to pay an additional income tax as determine by this Court in the amount of P5,180,215.53 plus interest computed from the promulgation of decision unti I fully paid. SO ORDERED. QvJ.Z;Q, G..~ ERNESTO D. ACOSTA Presiding Judge �~~. ~~ I CONCU~-. RAMON 0. DE A Associate Ju ge CERTIFICATION hereby certify that this decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VI I I of the Constitution. ~Q.,Q.~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 1061