CTA Case No. 2725 (Decision)

) ftl!'J'UYU.rC 01"' 'HTl': r llf.lrtU'lT"P �~OURT OF TAX A\ f'l'f;J\lJI ~\..~�..~ ~lxt <C~ , ., PIIIL.lPPI NE 8/\NK OF C.T. A. CASE NO . 2 725 COtviHU NlC/\ 1 ION , P etitio n c l' , - ver s u s - COMMIS SIONER OF I NTERNAL II EVEN UE, 1\ e s ponclcnt.. X- - - - - - - - - - - X D[ C1 S I 0 N d8 te d June 27 , 1 975 , d e n y inf) p ctit ion er ' n pr o t e s t LJ CJ a j n s t t h e 1 9 7 1 <1n d 1 9 7 2 d c I :i c j c n c y ( i. n r� n mc t o x <1 n d ~'(, t~ t 11 c/ 5 b o 11 k n x i n l-.11 e t. o t o 1 s u m n I e(, 5 7 , 7 9 fl. Lt L( � Th e records s ho w thC~t p e t: i.t:ion e r :i ,; ;1 clnm cst. i.c c o r p or n t ion c n g i1 g e d :i n t 11 e bank i n fJ bu s �i. r1P. s s 1v i t il princip a l off ice lo c<1 t e cl 0t 2lh .Ju a n Lunn, Oin oncJo , Man i 1 a ( P o r � 1 , P e tition for r ev j e \'-1 , r~ cl nr itt. c d :i n paragr a ph i , An s wer , pp . 1 nnrl 11, CTA rec . ) By virtue of a L e tt e r ol Aut:horit y No . 3335 3 NA diJted 1

.. .J DECI SI ON - CTA CASE NO. 2725 2 Hay 18 , 1 973 a nn Jun e 5 , 1 972 , Rev e nu e Fxr1mi r1 e r Antonio A~uilor of the Fin~n ci ng, ller1l Es tr1t n n nd Tr e1 n s fer Taxe s Audit Di visio n, w;.1s e1uthori ze d by r c s p u n cl c n t C o 111111 i s ~; i o n c r o f T n l: c r n <l 1 I( c v c n u c L n exa min e p e titioner ' s bo o k s o f ncco unt s a nd ot h e r accn untinq re cor ci s coveri ng the year 1 972 a nd al l u n v c r i f -i_ e d p r i_ n r y c <Jr s � (Ex ll . l, p. 2 , Vo l. 1, OlR re c .; see 8 l s o [x h . 1 3 , p. 87, Vol . l, r311\ re co rd s . ) Exa min e r A~uilnr after hi s inv es tiqotion pr cpnre d a r e p o r t d a t e d J u n e 1 8 , 1 9 7 3 8 cl d r e sse d t c1 t h e r c s p o n cl e n t Co 111m i s s i o n e r f i n cl i n q p e t i t i o n e r 1 i a b 1 e f o r c1 c f i c i e n c y income ta x in the n mount s of e 277 ,0 ~7 . G2 a nd e 258 ,7 9 1 . 16 for th e y~ars 1 971 a nd 1 972 , rcsprctive 1 y . (Ex h . 0, p. 69 , VoJ. 1, f3lR r ec . ) L i k e vi j s c , o n t h e s a me cJ a t e J u r1f! 1 3 , 1 9 7 ~ , s a i d e x 8 111 i n e r s u b rn i 1-. t e d a noth er report to th e respo nd e nt Comrnissio n e 1� fi ndinq p e t i t i o n e r 1 i a b 1 e f o r d e f i c i e n c y 5 ~~ b 8 n k t 8 x :1 11 cl s u r c h 8 r q e i n t h e n 111 o u n t;; o r e 54 , 9 fl L~ � 1 5 n n cl e ') fl , 4 0 fJ � 8 0 r�or th e sa me ye8rs 1 97 1 a nd 1972 respective l y , a nd r c c�- omm e ncl e d th a t an 8 Ssess rn e nt be i ss u e d to t h e peti- tion e r to e nfor ce th e co ll ectio n of sai d de fi c ien cy t axes in qu es t io n. (Ex h. 1 3 , p . 87 , Vol. l, BIR rec . ) 2

DE C I S IO N - C TA CASE NO. 2725 3 exn mi n e r, re s pondent Co mmi ss ion e r iss u !: d n n n sscss - ment dated Jun e 25 , 1 973 (Ex h. 14, pp . 93 - 96 , Vol . I , [l ll\ rec . ) , demnndinq p<1ym e nt from Lh e prl~ it ion cr t. h e s a i d d e f i c i e n c y i n c o me t n x a n d t h e 5 ?~ b ::~ n k t. n x c o v e r - i ng t h e ye<1rs 1 97 1 <1 ncl .1972 comp u ted ns follovJ s : Year lncom e Tax Bn nk Tnx r ota1 1971 1' 282 , 765 . 77 e'54 , 984 .1 5 e 337 ,7 49 . 92 1972 26 1, 639 . 72 _5~08. 80 _)20 , 048 . 52 e l 13 , 392 . 95 TotnJ e s44 , 4 D5 . 49 ~ 657 , 798 . 44 ( s e e o 1 s o P <t r � 2 , I' e t i h o n r o r r e v �j c vi , n d mj Ll. r cl i_ n ll ;no q r ;1ph J , An s ltH~ r , p p . 1 n n cl 1 J , C1 A r!: r . ) l' e [_jtio n er , Lll ro u q h it. s n urlitnr , prol. c s tPd th e s nj_d assess rn e nl in n J e l-_ t e r cl~ll- c cl Auqll s L 1 3 , 1 973 , v n n ( [X 11 � 1 5 ' p p � ]() 0- l 0 4 ' 0 l . l ' T r c (' . ; s p c I' rl r . 3 ' l' e til.ion, r1rlmitlrd i n par ~t<Jrnpll 1 , /\ n swrr pp . ] n n e! ll, C TA rec . ) As to th e rl e fj c j e n ry in cn mP tnx , p c t. j t i o n !: r con t c n d ~:; Lh n t t h c d is n l l ow <till'!: 1,1 n ~; rlu c l~ n t h e fL~ c t that sa iu amo unt s r e pr ese nt�. i 11 terest pnicJ to vario u s d e po s itor s whose b a nk d e po sits were i n vested in th e purcha se of gov e rnm e nt bonds or sec ur ities , 3

I DEC I S I UN - CTA CA S E NO. 2 725 4 t h [) :i n c om e o f vi h i c h i s t a x - e x e mp t , n n d t h e e x n mi n c r s mu s t hav e r e lied on a rulinfJ to th e e ff ec t th n t- b n nk d e po s it s u se d to pur c h as e ta x -free qov e rnm e nt bond con s titute s lonn s p ny nbl e hy th e bnnk s to j Lr; cl r. po- s i tor s and ther e for e th e int e r 8s t p<Jid on s u r: h d e po- s it s i s not d e du c tibl e . fl e tition e r s uhmjt s thnt th e int e r es t on b ~1nk r! [) po ~:; it s u se d L. o ptrr c h<t r;c qn v r~ rnnw nl: b o n d s o r sec ll r i t i e s , th e i n c n 111 c o f "' h i c h i s t :1x - c x e mp t c on s titut es nJlow~1bJ e d e du c tion. indcbt c cin [)SS l' C[)r CS[) Jll c rJ b y dr~ pn s il S iII nur b ;JJJ k j S not of r1 kind of incl c bt e rln ess c nnl c mrl:-Jterl und e r Sec tion 3 D( b ) (l ) of th e 1\ evc ntr e Corl e ns "inrl e b h, cln ess i n c u r r e d o r c o n t i n u e cl t. o p u r c h n s [) n n d r ;_n r y o h l i q n t-. i o n s � " As r elJ <Jrd s th e rl e f'i r i e nr y bmd< tn x , r [) l: i Li. o r1 r r r' r1nt c ncJ s th e s ol e r r. n s nn f]i vc n h y th e [)X <lmj r1 P r s i 11 nssr.ss i nq th e 5 ~'a b a nk t n x on t h c i n t e r es t c1 c r j v erI r r o rn t n x - e x e rn p t uov e rnment bond s i s thnl tl1 e exrm ption nppl.i r.s o nl y to i n c o me t a x n n c1 t l1 ;1 t t h i. s i s vi i t�. h o u l 1 c q n l h n ~; 1 ;; � Th c ce rtificat es of th e rJov e rnm e nt b o nd s [H.rr c hn sc d h y l) hilippin e Bnnk of Communi c obon f o r 1<1h:i c h it d e riv e d int e re s t in c ome s how s cl e arly L.h e qrnntinq of th e ta x e xe mption s and e x t e nd s to all forrn s of th e exe mpl: ion s of th e Philippin e Gov e rnment . 4

DECISION - CTA CASE NO . 2".'25 5 P e t i l: ion~ r 1 s pro [�. ~;, l: vi <1 s d ~ c i. d ~ cl h y r c s pond C) 11 t in hi s l e tter dnted ,Jun e 27 , 1 975 , den y inq p e tition er ' s recon s ideration , a ncl r e jt e roted hi s demnnd f"or the p :l y Ill c n t 0 r L h c :-1J 1 c q c d cl c r�j c i. ~ n c y i n c 0 rn c t�.n X ~ I n d IJ Q n k ta xes in th e totnl Amount Oi e6 57 ,798 . 44 which l e tt e r of d e nial wn s nlleqedly received b y p eti Lion er on July 26 , 1 97) . (Cx h. 16, pp . 12 5 -1 27, Vol. I, rl l n r ~c .; see <:~lso , paraqr:ctph 4 , An s we r , pp . 2 ancl 11, C TA r ec . ) In view of" r es pond e nt' s l e tt er of cl c ninl, p c li- tion c r vJCJS co n s tr<Jined to int e rpo se it s nppenl l:o t h is Court on AurJu s t 25 , ] 975 . ( p. 1, CTA r ec , ) On Ortobcr 11, 1975 , r es pondent fil e d it s answer to s nicl p e tition a nd se t up t l1e follow .inrJ s pe c ial Rnd 8ffirrnnl.ive defen ses : 4 � De p o s .i t s in b n n k s , vi h c the r co 111111 e r c j _<J 1 or s nving s b~1nk, in ctlrrc lll . :1ccn unt� o~-- s:lv �inq r,; , li xe cl or l i1n c cl c pn " il. s , CO IJ :; l �il.ul. c 1 o n n s p 8 y n b 1 e h y t h e b :1 n k s t o i t s cl c 1HJ s i t: n r s n 11 cl n r c q n v e r n c d b y l: h c p r o v i s i n n s r' o n c c r n �i rHJ si mple lonn s ; 'J . De po s i. Ls u se d b y p c l..ition cr Lo pur c hn se uovcrnrncnt bond s c on s titute :1n ind e btedn ess or petitioner to .it s d e po si tor s ; 6 . lh e qovernrncnt bond ~-; pur c h :Jsccl by p c titjon e r are dir ec tly payable to p e titioner and not to its depo s itor s ; 5

r DCCJ SION- CTA CASE NO . 2725 6 7. Interest paid by petj. tion~r to it s creditor s for use of fund s inv es ted on tnx -fr ee int e re s t-hearing inve s tm e nt s payabl e t o p e ti- tioner are not deductibl e inter es t e~penses pursuant to the provi s ions of Sec tion 30( b) ( l ) B. In additio n to th e 197 1 and 197 2 deficiency income ta x liabiliti es in qu est ion, petitio ne r is liable to pay l /2% monthl y inter es t thereon , pur s uant to Sec tion 5l ( d) , a s a me n d e d b y Re p u b 1 i c Ac t No � 2 3 4 3 , n n d l � 1 6 ?~ monthly deficjency int e re s t in accordance with the provi s ion s of Section 5 l (e)(2) of Lh e Tax Cod e , as a mend e d by Pr esi d e nti al Decree No . 69 ; 9. Petitioner i s s ubject to th e 5% bank tax provided und er Sec tjon 249 of th e Ta x Code; 10. Th e 5 ~'~ b 8 nk ta x i s b osed o n qro ss re- ceipts from nny s our ce whatever incluclin~J tho se item s treat e d as "gro ss income", as de f ined und e r Se ction 29 of the Tax Code ; 11 . Inter es t s ea rn ed b y petjtion e r on ta x-fr ee int e re s t benrin~ inv es tm e nt s were exc lud ed b y th e petition e r f rom it s ~ro ss r ecei pt s i n c o mp u t i n g t h e 5 ?~ b a n k t o x d u e f o r the year 1971 a nd 1 972 ; 1 2 � Th e 2 5 ?~ s u r c h n r CJ e f o r 1 n t e p n y m~ n t j s in addition t. o the d e f i c i e n c y bank t n x cl u c from th e petitioner pur s uant. to Sec tion 250 o f th e Tax Code ; 1 3 . Th e assessments involv ed her e in we r e i ss u e d in accorda n ce with law and r c ~ulntion on th e matter . (see pp . 11-12, CTA r ec . ) In the meantime , the Deput y Commi ss ioner of Int er nal Revenue , on Octob e r 17, 1979 i ss ued a memorandum add r essed to th e Ch ief , Financing, Real 6

r DE CIS ION - CTA CASE NO . 2 7 25 7 Es tat e & Tra n sfer Ta xes , requesting the l atter thnt respondent ' s assessment issued to the petitioner for deficiency in co me t ax and Bank tax b e recomputed pur s uAnt to th e lat est ruling of the OIII r~dd r essed to th e Bank er ' s Ass o ci ation of the Philippines. (Ex h . 17 , p . 2 , BIR rec ., Vol. Il.) Aft e r a r ec omput ati on of th e s nid de fi r.ie ncy income t ax a nd b a nk tax by Examiner Antonio Ag uil nr , he recommended that the originAl assessme n t for th e d e fi c i e ncy in th e r~ mount s of e 282 , 765 .77 nnd e 26 1, 639 .7 2 for the years 197 1 nnd 1972 be se t as id e , o nd a modified assessment in the a mount s of e 20B , 363 . 6 7 a nd e 222 , 634 . 65 b e issued for the a for esaid years . (Exh. 22 , p . 19, Vol. II , Bill r ec . ) . As r e qards the h a nk tax , said Examiner Antonio Aguil ;:J r in hi s m e rno rr~ ndum rlnt e cl Fe bruary 28 , 1 98 0 r eco mm e nd ed th at the oriqin<ll nssess- me nt of e 54 ,984 . 15 n nd e58,4DR . RO fo r the y~nrs 1 97 1 nnd 197 2 b e set aside , r~ nrl a mo dif ied 0ssessment b e i. ss u erl in th e a mount s of ell , 5 18 . 28 and e 22 , 205 . 23 for th e sa id yea r s 197 1 nnd 1972 . (sec [xll. 26 , p . 31, Vol. II , BIR r e c.) ~ (

( DECI S ION - CTA CA SE NO. 2/ .' 5 8 In the me antime, aft e r th e termination of th e he~ring of the in s tant ca s e in 1983, p e tition e r on Februar y 17, 198 3 fil e d it s c on s olidat e d me rnore1ndum in CTA Ca s e s No s . 2979, 3 059 and 2 72 5 . ( "ee pp. 10 5 - IBn, CTA rec . ) However, on July 17, 1984, a rom- promi s e agr ee ment was r e ach by th e partie s a s r e gard s the s ettlem e nt of th e income tn x a s pe c t of thi s c ns e. ( s ee por. 3, of r es pond e nt me mornndurn fil c cl on April 8, 1986, pp. 229, CTA re c .) He n c P., th e onl y i ss u P. unrP. s olv e d and whi c h i s now pending b e for e thi s Court i s th e 5% bank t~ x n ssess me nt e1gnin s t p e tjtioner. The partie s , however, doe s not qu es tion th e mathemati c al c omputation of the b a nk ta x in qu es tion. Th e only i ss u e po se d be for e thi s Court. f'or r e - s olution i s v-1heth e r or not int e r es t. in c om e d e riv e d b y p e t. jtioncr on Ce ntrn] Bank Ce rtif'icot es o r� lnd c bt.e dn ess f o r t h c: y c: a r s 1 9 7 1 n n d 1 9 7 2 s h n u 1 r I f o r m p r1r t o r _; 1�. s gro ss r e c e i p t for th e p 11 r p o s e.s of th e 5 ?~ b n n k t. ax provid e d for in Sec tion 249 or the TclX Corl e . Th e provi s ion of the l<1v1 rrdied upon by r es - pondent in impo s ing the 5% bank ta x i s Se ction 249 (now Section 206) of the Ta x Cod e , whi c h provide s as follow s : 8

f DECI S ION - CTA CA SE NO. 27 25 9 Se c . 24 9 . lo x on Go nk s - Ther e nh n ll b e c oll ec t e d n tn x of fiv e r c r ce ntum on urn ss r ece ipt de riv e d b y a ll bonk s doing bu s in ess in th e Philippin es from int e r es t s , d isc ount s , di- v id e nd s , c ommi ss ion s , profit s fr om exc h a ng e , roy a lti es , r e nt a l s of prop e rt y , r ea l a nd p e r- s on a l, and nll oth e r it e ms tr en t e d as gro ss in c om e und e r Section tw e nt y -nin e of thi s Cod e . It s hould be not e d th a t a ft e r a r e -in ves tig a ti on b y Exa m.il e r Antonio L.' Aguilar, h e s ubmitt ed a me mo- randum r e po rt d a t e d Fe bru a r y 28, 1980 a ddr esse d t o th e Chi e f, Fina 11r: inl), ll e8 l Es tat e <J nd Tr a n s f e r Tax Divi s ion, r ec omm e ndinl) th e r e du c tion of th e 5% bonk l ox fr o m e 54,904.1 5 to ell, 5l8.28 for th e yea r 19 71, a nd from e 58 , 4 08.80 to e 2 2, 20 5 . 23 for th e yea r 1 9 7 2 , l)iVing th e r e ns on thnt pe titi one r' s gro ss r ece ipt s from i nt e - r es t in c om e d er iv e d by it from ce rtain qo ver nm e nt bond s a r e c on ce de dly e ith e r exe mpt fr om tn xa t ion or exe mpt from all ln xes . ( [ xh. 26 , p n r. 3 , p. 31, Bill r ec ., Vol. ll ) How e v e r, th ose i nt e r es t in co me from Ce ntr a l Bonk Cer tifi c at es o f Ind e bt e dn ess (CBC I ' s) ar e exc ludible for purpo ses of sa id 5% b a nk t nx . Th e pe rtin e nt portion of the ass umption c lau se of th e sa id Centr a l Ba nk Certificate of Ind e bt e dne ss i s h e r e b y quot e d a s follow s : "A ss umption of t ax liabil i ty . The b<Jnk ass um e paym e nt of th e corr es ponding t ax on int e r es t e orn e d a nd pr e mium, if an y , 9

DE CI S IO N - CTA CA SE NO . 27 25 10 p a id to h old er o f th is ce rt i fi ca t e '' (Ex h . D- 2 , p . 9 8 , BI~ r ec ., Vol . 11 , see a l s o pp . 23 2 - 23 3 , CTA r ec . ) . Pe tition e r c ont e nd s th a t in as mu c h as th e ass umpti o n o f t a x l ia bilit y c l a u se i n th e a b ove -quot e d Ce ntr a l Ba nk Ce rtifi c at e o f Ind e b~ e dn ess , in not qu a lif yi ng or limiting th e t ax ass um e d to in c om e t ax o nl y , s u c h pr o v is ion s houl d nppl y l i t e r a ll y t o in c lud e th e 5% b a nk t ax in qu es tion . As ea rl y as 1 9 71, th e Gover n o r o f th e Ce n t r a l Ba nk, Gre go r io Li caros , h a d a lr ea d y iss u e d a Ce nt ra l Ba nk ruling to th e e ff ec t th a t onl y th e i n c om e t a x li a bilit y of th e hol de r i s c o vere d , a nd t h e Bu rea u of I nt e rn a l ~ e v e nu e h as und ers t oo d th e Ce ntr a l Ba n k ' s ass umpti o n of t ax li a bilit y c l a u se t o re f er to i n co me ta x aspec t s ol e ly . For rea d y r e f ere n ce , we h e r e b y qu o t e t h e ~ai d ruling as foll ows : Nove mb e r 11, 1 9 71 Th e Act in g Pr es i d~ nt Ba nk e r s Ass o c i a tion of t he Philippine s Ma nil a Si r Thi s i s in r e pl y to your l e tt e r o f Oc tob e r 20 , 1971 r e l a t i v e to th e qu es ti o n r a i s ed by Prud e nti a l Ba nk & Tru s t Comp a ny 1u

.- DECISION - CTA CASE NO . 2 7 25 11 as to whether or not th e 5% ta x (u nd e r Sec tion 249 of the National Internal Revenue Code) co rr espo nding to the int e re s t ear ned by a bank on it s CBCI ' s i s included in the ass umpti o n of tax li abi lity on the p a rt of th e Central Bank . I wi s h to advise that the qu ery i s a nswera bl e in the ne gativ e . In reply o f the Dir ect or, Sec ur ities Market De partment of this Bank, to th e ~l a 1m l1l e d 5y Prud e nt1al Ba nk on May 4 , 1971 ex a n na ur e of the a ov e me n lone a ss 11mpt io n of t ax liability of the Central Bank , a nd a lr ea dy c l a rified th a t only the incom e ta x liability of th e hold er is covered . Th e Bureau of Int e rn a l Revenue und erstood the Ce ntr a l Bank" s ass umption of li abi lit y to refer s olely to th e income ta x a nd th e comp ut atio n of wh a t th e Ce ntr al Bank remit s periodically to th e Bureau wns b ase d o n th e b es t esti mate o f the income taxes whi c h th e hold ers would have paid on th e inter est ear ning s . A c lo se r ea ding of the pertinent c l a use in th e ce rtificat e to th e effect that the bank ass um es payment of th e cor r es- ponding ta x on int e r~ s t ea rn e d a nd pr e mium, i f a ny , p aid to. th e hold er o f thi s cer tifi ca t e l ea ds to th e in esca pable co nc lu s ion th at t here is only on e typ e of tax which i s a ss u med by the Central Bank in favor of the hold e r. Thi s ta x ca n onl ,. b e the incom e ta x , si n ce hold e r s i n g e n e r a 1 , 8 r e n o t s u b j e c t t o t h e 5 ?~ t n x o n th e gro ss incom e o f bank s und e r Sec tion 249 of the National Internal Re venu e Co d e . Please be guided 8ccordi ng l y . Very truly your s , (SG D. ) G. S . LI CAR OS Governor" ( Und er lining s uppli e d. ) 11

DCC I SID N - CTA CAS[ NO . 27 25 .1 2 So metim e on H;:n c h 11, 1 9. 7 6 the Our e<"~u of lnL r'rnnl Re v e n u e h o s r e i t e r n t c d t h e Ce n t n ll [3 R n k r ll l i n ll i� o t 11 e e ff ect that the Cent red. Dank Certi fi c;:d~ e of lncl cbLc dn css <He not Gmo rHJ tho se qo ve rnm e nt bond s <1nd sec ur it i es e n- jo y in~ exe mption from ta x ntion . Th e s nid Lluren u of Int er nnl Revenu e Ruling i s h ereby quoted n s follow s : Hnrch 11, 1976 Banker s Associn tion nf' t h e f' ll ilipri n cs Philirpin e 8nnki r1g Cor rore1tion RuiJding Bonifn c io Driv e , t1 n n i 1 8 Ge ntl e me n: [ h ave the h onor to inf'nrm y ou th ~1t ~hi s flff"i cc IHl S r u l c d t h a t ' F0 r r p Ll I' 0 ~� c ~� 0 f c 0 Ill p ll l: i rHJ t h (' ') 0~ b <l ll k Ll '< ' i nt e r es t s fr om qo vcr nrn c nt bond s or ser. uri Lir:s , ~tl lli r l 1 by s p ec ific provi s ion or� lnw, nre " e xe mpt. frorn l� rl '< n l� ion " or " e xe mpt From nl.l Lrncs " do not fnem p <H I- or ll w qro s~; receipt s on 1'1hi c h sni rl t. n x i s irnpo sc cl, f o r� Ln ir1 c ltrrl c s u c h t 8 X - f r e (' in t c r c s t. in c 0 me n s p :1 r L Dr l. h c h 8 s j ~; 0 r the hank tG x would , in e ffe c t , nullif y t.IH' t8 x cx r: rnpt.i.on s p cc if icn ll y rrovid e cl For in th e l n l''� l t s h o uld b e not e d , hovJ everL~�J t. Ce ntrc1l B ~ rli< Ce r- t i f ico t e s of l n deb t e d n ess ( C 1:3C 1 ) <1 r e __r:: o t -~~..Q~L-.!.:.!2_~~ SJ o v e r n me n t b o n d s n n d s e c u r i t i e s eDi.g_y i n ~ c x e mr.l i. o_r~E_~ tn x o_tion ; for o ltho~h the purchn sers U~er eo f n ~nnt rna d e to pay in c orn e t D x on int er e s t s co rn c cl b y t__l_l__~ 111 r r o rn suid certificates , sui u inter es t s or e n ot ncturdll~ f r e e , <1 s t h e Ce n t r n 1 Ba n k o s s u rn e s p 8 yme n t o f t h r _ i nc' u me t<Jx clue t h ereo n. S u c h bei n q the cnse , i r1L e r es l s c<:1rn e d by bank s from Central Bn nk Certi fi cate s of Ind e bt e dn ess r o r m p a r t o F t h c i r g r o s s r e c e i p t s o n wh i c h t h e 5 ?~ b 8 n k tax s hall b e comp u ted . Very trul y yours , (SGD . ) [FREN I. PL/\N/\ Ac tinq Commissio n e r of lnl er nnl 11 e v c nu e TAN-1 456 -[lLI0- 3 (cited und e r the 2 nd p a r ., E.x l1. 26 ; Un clerli ninr s uppli e d . ) 12

r DECI S ION - CTA CA SE NO . 27 25 13 Pe tition e r r e li e d e ntir e l y on th e asn umpt i on t ax li a bility c lou se of th e Ce ntr a l Bank Cnrt iri co t c of Ind e bt e dne ss which s tat e that. "the be1nk Clss um es paym e nt of th e corr es pondin~ ta x on int e r ns t e nrn e d and pr e mium, if any, paid to th e hold e r o r th e ce r- tifi ca t e ." It i s to be not e d that thi s ass umpti on ta x li a bilit y cl a use doe s not ex pli c itl y , e quiv oca ll y and e x pr ess ly provid e the kind of int e re s t or pr e mium to b e included a s e x empt in the payment or th e tA x . No t h i n q i s me n t i o n e d t o t h e e f f e c t t h a t t h e 5?~ b a n k ta x in que s tion i s includ e d in th e exe mpti o n, oth e r- wi se , it wo uld h a v e s o s t a t e d in a fo res r~icJ assu mption ta x liability c l a u se as a n exe mption in th e pa yme nt of the s am e . 0 n t h e c o n t r a r y , Ce n t r a 1 BA 11 k CJ s vi e 1 1 a s the Bur e au of Int e rn a l Re v e nu e ha s ex p ress l y me n- tion e d in it s r es p ec tiv e rulinq s that Ce n t rCJl n o nk Ce rtifi c at e of Ind e bt e dn ess or e not amon~ tho se governm e nt bond s and sec uriti es e njo yinq nxe mpti o n from t sx stion. A "Certificate of Ind e bt e dn ess " i s d e fin e d ets 8 s hort-t e rm negotiable promi s sor y not e i ss u e d by a gov e rnm e nt or corporation as evid e nc e of a rl oat inq 13

,- DECI S ION - CTA CASE NO . 2725 14 indebtedness . " ( p . 266 , Th ird New Int e rnntional Dictionary , 1 976 [ rl . ) A c J ose scr utin y of soid cer - tifi ca t e of ind e bt e dn ess (Ex h . "D- 2", p . 98 , Vol. I, BI~ rec . ) will c l ea rl y s how that the Central Bonk h as unil a t era l oblig a tion to c ompl y wi th the ro ndit io n s os provid e d for in sa id cer tifi ca t e . It is not , th e r ef ore, o bil atera l co ntr act as arg ued by the petit ion er nnd the cite d provi s ion s or the instant case . De f'init e ly , th e ir1terpretation of sai d ass umption of tax li nhi lit y c l a u se i s withit t the discretion of th e CR n trn l Ba n k s in ce it is th e nqency of governm e nt that issue t he bond in qu est i o n . To ho l d t he petitio n er not liabl e to the 5% b a nk tax me r e ly on th e b asis of its interpretotion on th e a for esai d c l a use , which i s not ex press l y nnd c J cnr l y provid e d for by l a w i s not f ovore d in this juri sd i c tion . Se ttl e d i s th e rul e th a t t ax s t at ut es mu s t-. be st ri ct l y co nstr u e d aqainst th e one c lniming th e exe mption beca use th e law does not look with f a vor on t ax exe mption s and t h at h e wh o would seek to b e thus privil ege d mu s t ju s - tify it by word s too p]ain to b e mi s tak e n a nd too ca te - gorical to b e mi s i n terpreted. (Co mmi ss i o n e r o f Int e rnol

DECI S ION - CTA CA SE NO . 27 25 15 Re venu e v s . J . P . Ki e n e r Co ., Ltd . G. R. No. L- 24754 , July 18 , 1975 , 65 SC RA 142 ., see <~lso Union G<1rrn e nt , Inc ., vs . Court of Tn x Appeal s , G. ll . No . 1680 9 January 31, 1 982 , 4 SC RA 304 ; Commissioner of Intnrnal ll eve nue v s . Guerero , L-2094 2 , Se ptember 22 , 1967, 21 SC IIA 180 , Re public Flour Mill s In c . v s . Commissioner of Jnt er n a l Rev e nu e , G. R. No . 25602 , Fe bruary 18, 1970, 31 SC RA 520 . ) . Thus , it wa s h e ld th a t exemption from tn x<~tio n are highly di s favor e d in l aw ; and h e who c laim s an exe mption mu s t be abl e to ju s tif y hi s c laim b y th e c l ea re s t grant of org a nic or s tatut e law . An exe mption from the common burd e n cannot be per mitt e d to exis t upon v a rJUe impli c~1tio n . (C oll ec tor of Int e rnnl llcvenue v s � M<1 n i 1 a Jock ey C1 u b , Inc � C . R. No � L- B7 55 , 1�1nrc h 2 3 , 1956; 98 Phil . 670 ; see also Hou se vs. Po sA d as , 53 Phil . , 338 As i a ti c Pet rol e um Co . vs . Llan es , 49 Phil., 466 . ) In th e in s tant case , ther e ex i s t n o s hn v1ing that t h e a s s u mp t i o n t a x 1 i a b i 1 i t y c 1 n u s e e x p r e s s 1 y e x e n1 p t p e tition e r fro n� th e 1 i a b i 1 it y o f the 5 ?6 b a nk ta x in que s tion . IN VIEW OF THE FOREGOING, p e titioner i s her e by ordered to pay the amount of ell , 5 18 . 28 and e22 , 205 . 23 10

.. DECISION ,... CTA CASE NO . 2725 16 o s d e f i c i e n c y 5 ~'" b o n k t n x f o r y e o r s 1 9 7 1 a n d 1 9 7 2 , r e s - p e c t i v e 1 y , i n c 1 u s i v e o f t h e 2 5 ?~ s u r c h a r g e n s p r o v i d e d i n Sectio n s 249 a n d 250 ( now sectio n s 260 a nd 262) of the Tax Code . With costs aqai n st petitioner . SO ORDERED . Quezo n City , Metro Ma nil a , January 6 , 1988 . \liE CONC UR : '-"L~,...-//'""....._ C. ROAOUlN 1 Associate Judqe I I ~~~ Associate Judge CER T IF ICAT ION I hereby certify that this decision \>/<IS reached o ft er due co n s ult atio n amo ng the members of the Court of Tax Appeals in accordance wit h Sectio n 13 , Article VIII of the Constitution . Presidi g Judge Court of Tax Appeals 16