CTA Case No. 4373 (Decision)

REPUBL IC OF TfiE PHIL I PPINES COURT OF Tf1X f1PPEALS QUEZON CITY I<.'ATUPARAN REALTY CORPORATION.� Petitioner , - vers us - C.T.A. CASE NO. 4373 THE COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - --X D E C:: I S I CJ N So ught to be reviewed by appeal in this case is the decision of respondent Commissioner of Internal Revenue, dated Hay 10. 1989, holding petitioner liable for deficien c y income tax and exp a nde d withholding tax for the y ear 1982 in the sums of P413,127 . 78 and P853.36, respectively. B rie fly, the followint; are the facts: For the year ende d December 31, 1982, p e titi o n e r, a domestic c orpor ation, filed its annual (corporate) income tax r eturn reporting therei n a gross income of P2,3091 100.001 and a net tax due of P39.� 316.00.� which (latter amount) was arrived at after its total claimed deductions had 1 Sr1 id gross income. as shown in schedule 4 of pe titioner's inco11e tax return (Ex h. "D", pp. 121-122, CTA r e c.) .� r e fers to "ler1ses ,;md ren ts� and, as testified to by pe titioner's treasurer (witness), consisted entirely of r ental inco11e. (TSN, Aug. 14, 1990 hear-ing, pp. 69- 70, CTA rec.)

DECISION CT/1 CI1SE NO. 4373 -2- been subtracted from its gross in c ome and its total quarterly payment s a nd w~thholdi ng t a x on rental had b een taken in to account. (Se e Exh. "D", pp. 121 - 122, CTA rec. & p. 22, BIR rec.). On Harch 22, 1988, based upon an investigation/audit report of a r eve nue examiner r ecomme nding that petitioner ' s claimed deduction of interest expense l paid to IBH, Philippines, Inc. (IBH for short) in the sum of P366,000.00 be disallm-Jed on the ground that petitioner and IBH are r e lated taxpayers (p. 67, BIR rec.), respondent issued against petitioner � an assessment for def.iciency income tax in the sum of P413, 127.78 and deficiency expanded withholding tax in the amount of P8,771.2B for the year 1982, computed as follows: Ne t Income per- investigation p 935,044.00 Add: Disallowance Interest expense paid to IBM Phils. not deductible (Int. between related taxpayer) ............ ~.9-~..1..9.9.9..~9.9. Net Income per review P1,301,044.00 .J Tax due thereon 575,469.80 Less: Tax paid ,_,__,;s17... ,2.~.9...~9.9. Deficiency Income tax p 258,204.88 20% interest from 4-16- 81 to 4 - 15- 88 ...............! ~.1. .~.9..~?...~. m::J.. Total Amount Due and Collectible p 413,127.78 ============== .'

DECISION CT~ CI)SE NO. 4373 - 3- Appraisa l fees paid to Asian nppriasal, In c. p 4,378.00 57. ther-eo f 218.90 Cash dividends paid p 41,500.00 __.1~.JJ.. :?9. ! .9..Q Total P4,368.90 1,092.15 257. surch arge 3,160 .15 147. interest fr o m 2 - 1- 88 ,___ _.. !-~<?. . ~. QQ. to 4 - 1 --88 E~:,t-?,ll:.!.,,~,~9, Compromise pena lty Total a mount Due a nd Collectible (Pp. 68, 69, 70, 71, 72 & 73, BIR r ec. ) In a Jette r date d l)pri l 26, 1988, petitioner protested, with extensive arguments, the assessment for deficiency income tax and expanded withholding tax for lack of factual and legal basis. (Pp. 79- 84 BIR rec. ; also p a r. 13, Petition, p. 4, CTA rec.) In a l et ter/reply dated f1ay 10, 1989, respondent denied petitioner 's protest against the deficie ncy income tax assessment, contending that petitioner and IBH are related taxpayers as d e fined in Section 30(b}(3) [the n Section 31(b)(3)] of the Tax Code, and that peti t i oner was a pers onal l1ol ding company. However, as regards the deficiency expanded withholding tax, respondent reduce d the amount to only P85:J.:J6 11 computed as , follows: .J 57. basic tax -------------- P218.90 257. surcharge -------------- 54.72 147. interest from 529.74 2 - 1- 83 to 3 - 1- 89 --------- 50.00 Compromise ----------------- ------- P853.361 I II ,. (See pp. 111- 112 , BIR rec.)

DECISION CT~ C~SE NO. 4373 - 4- Consequently, on June 28, 1989, petitioner filed its appeal with this Court. Th e ISSUES for resolution are as follows : 1. Whe ther or not petitioner's d e duction of the amount of P366,000.00 representing interest expense paid to IBM Phi lippines, In c . should be allowed; and 2. Whether or not petitioner .is liable for defici e n cy e.'<panded withholding tax on the a ppraisal fe es paid to ~si an {)ppraisal, Inc . .in the amount of P853.36 � .l . 11s r e gards the f i r s t .issue, respondent maintains that, .in computing net income, no d e duction shall be allowed in regard to interest payments made between related corporations pursuant to Sec tion 30(b)(3),= then Section 31 (b)(3), of the N at ional Int ernal R e venue Code. He contends that IBM Philippines, Inc. owned, directly or ind.i rec tly, 997. of the shares of stock of petitioner Katuparan Realty Corporation. Hence, IBM Philippines Inc. and Katupara n are related corporations which would qualify the later as a personal holding company. In support of his position, responde nt cites the "certification" of =sec tion 30 (b)(J) of the National Internal Revenue Code ci l ed by respondent is the later provision.. For the year involved (1982), it should be the previous law, Sec. Jl(b)(J) of Tax Code, as amended � .I

DECISION CTA C~SE NO. 4373 - 5- the assistant corporate secretary of petitioner (herein below quoted) and avers tha t the rule of attribution will not apply to "IBf1 Philippines Plan Trust Fund" because it is not a regular corporation regi s tered with the Securities and Exchange Commi ssi on but ju s t a mere Trust Fund ~ccount. "The following were the s tockholders of record s tanding on the books of said c orporation as of December 31, 1982, with their respective holdings: NQ.~. __qf g_:L..?.bii.r g_~ �_b~.r..g.~. !~~-lJ._g_(L. ~.D.fl. QY.!.�.!..!'!r.l~_!JJ.g_ I BM Phi 1s . , Inc � 11,243 29% IBM Phils., Retirement 3,750 10% Plan Trust Fund, c/o Far East Bank & Trust Co., Account No. 41 - 13- 00083- 3 IBM Phils., Retirement 22,500 60% Plan Trust Fund, c/o Far East Bank & Trust Co. Account No. 41- 13- 00087- 5 Mr. Roberto R. Romulo 1 NIL At ty. Ricardo J. Romulo 1 NIL Mr. Cecilia C. Amoranto 1 NIL Atty. Corazon Buenconsejo 1 NIL Mr- . Virgi 1 io L Pen a - �--���-���--�! . ___ Nib. ~L!._1-~~ =1= 00= % (Pp. 38-39, BIR rec.; see also Exh. "F", 135 .J CTA rec.; also TSN, Oct. 5, 1990, pp. 7 - 8.) Further, respondent claims that the interest payment to I B/1 Phi 1 i ppines does not qua 1i fy as a business expense because the same was incurred by � �I

) DECISION CT~ C~SE NO. 4373 -6- virtue of a promissory note assumed by petitioner and not on account of a loan transaction executed between petitioner and IBM Philippines Inc:. Con verse1 y, petitioner claims that IBM Phi l .ippines, Inc:. and Katuparan Realty Corporation are not related taxpayers as defined in Section 31(b)(3), now Section 30(b)(3), of the National Interni'll Revenue Code because not more than fifty (50) percent of the outstanding stock of each was owned, directly or indirectly, by or for the same individual. (In other words, no individual owned more than 507. of the stock� of each of IBM and Ka tuparan). It maintains that only 297. of its outstanding capital stock was owned by IBM Philippines, Inc:. The (other) 707. owned by "IBM Philippines Retirement Plan Trust Fund" cannot be attributed to IBM Philippines itself since, allegedly, all the benefits under the retirement plan are payable to IBM employees, and that IBM does not derive any benefit from the fund nor does it y- control over the same since it is exec:~se managed by an independent trustee, the Far East Bank ~nd Trust Company. Likewise, petitioner claims that it cannot be, considered as a personal holding company as defined ) in Section 64 of the National Internal Revenue Code I II because it does not meet the gross income 45

DECISION CT~ C~SE NO. 4373 - 7- requirement and stock ownership req u irement under subparagraph (a)(l) and (2) thereof ~ both of which requirement must be satisfied with respect to each taxable year. Citing Section 65 of the Tax Code which defines what constitutes "personal holding company income", in relation to said Section 6.1/(a)(l) of the same code, petitioner argues that . it does not satisfy the gross income requirement of a personal holding company because its gross income consisted entirely of income from rent which, under Sc.>ction 65(g) of the Tax Code, cannot be considered as p ersonal holding company income inasmuch as it constitutes more than 50X of its gross income for the taxable year. Moreover-, contrary to respondent � s postulation, petitioner asserts t/1at said interest expense is an ordinary' and necess ary expense incurred in the pursuit of its rea�l estate business . We agree with petitioner. The 1aw in focus refers to Section 31 (b) ( 3), now Sec. 30(b)(3), of the National Internal Revenue Code and Section 64 (now repealed), in relation to Section 65(g), of the same code which pertinently provide as follows: Section 31 . J .t..~.f.l.\.?.______'l9..t . ... c:!~.9-l.:!~tJJ?..L~.= (a) General Rule.- In computing- net� income no deduction shall in any case be allowed in respect of- 40

DECISION CT~ CASE NO. 4373 - B- XXX XXX XXX (b) Losses from sales or exchanges of property. In computing net income no deduction shall in any case be allowed in respect of losses from sale or exchanges of property directly or indirectly - XXX XXX XXX ( 3) Except in the case of dis tributions in liquidation, between two corporation s !!'.9...'.::.~---����.t...b.<:i..[L....:t!.:f..J..x_. _. l?_~.r::_____r:;~n.t.Y.~. .! .f.!.... Y.fi!1~.~-�����.9...:f....J :..bg.._...9.~.t..?...t..<:l..D..~J.._r.J.9 ..... ?. .t.9.r:;.~- ....Q.:f...... ~.~~D. P.f ......~.b..! _r:;_b........! .?........9..~.!}.~q-������~-!..r.::g__r:;J.:..!..Y- ..-9...r.::.__.! .Q.9..!.J::.~.~-!:J..Y..~. I::JY.: ..... 9..r.::.._.:f_g_r.:......t..D..~. . _?..~.'!!!!......!: r.:l.!!!. Y.:J.d.~~J...t.. i f either one of such c orporations, with respect to the taxable year of the corporation preceding the date of the sale or exchange was under the l aw applicable to s u c h taxable year, a pers onal holding c ompan y or a foreign pers ona l holding c ompany; (Under 1 in ing sup�p 1 ied. ) Sec � 6 'l � . P..~.t!nJ t..! .PD... __p_f........ P.g ..r.::.?._C?..r.:\..<:1...!.. h9.Lf:J..! .r.:t9..........1,;Q!J.IJ!~D.Y..~- (a) General Rule. For the purposes of this Title, the term "personal holding company" means any corporation, as defined in Section 20 if <1 > !?.r:9.?.2.......J.D. ~.9..~-~---����r.:.gql,;!.:i.,r,::g.m_~D...t...~-=-��� .B.:t. J !=.!<:i.?.J.:.._~.J._g_b..t.Y.._._ ...P..~.r.:......-...~g_Q..!::Y..~. . -.....Q.f_. . . . _i.J:..?___g_r.:.Q.?..?. .!n !;Q_~g____:f..Qr::_.......... .t..~..~..~.I::JJ.g..~---Y~.~r::. .._....! .s ____p~ rs_o~.~..! b.PJ.~.!.D.9............!D�9.m.~.. -~?._.~.~!..:i.-_r.:l..g~ __:i.:n...J:?~.~-!:!.9.n.. . ~.~ -~- but if the corporation is a personal holding company with respect to any t a x a b 1 e year _l?._gg__:i.J.!f.":l.:tf.":l.9...._.. __ �l_fJ;~.L.........P..!!t�~!'!l..I::J.~.r: n. t.b.!.r.:..t.Y.- f..!..r.::.?...t...... .....-... . !ng.tgg_r.L........_....b.~r.::t.~..r.::.~~---�-�~-m! .t...tl..:i.:.r_t.Y. -~!_g_fJ_t...............t..bgiJ..,_.......f.9..r.____~~-�.tl.........?..l.!~.?..gg_~gn.t t.~. ~~. I::JJ.g________y_g_~.r.:. r..______t .bg__........m.!.f.!.!_~~!!L........P..~.L!;.~J:.l.t.!'l..9g ?..b~..!.l........~.~...... ?..~.Y.:.~n.t.Y____pg_r______.c;g_o..t..!:!IJ!...�....!D___!. ! .~.l.!...._...9._f ~..!.9..b..t.Y.., and i t shall continue to be considered as a perso~al holding company until in a taxable year, during the whole of the last half of which, the stock ownership required by paragraph (2) does not exist, or unti 1 the expiration of three consecutive taxable years in each of which less than seventy per centum of the grdss income is personal holding company income; and ,. ' II �- .I

DECISION CTn CnSE NO. 4373 - 9- (2) Stock ownership requirement. At any time during the last half of the taxable year more than fifty per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. Section 6 5 � P-g_r.::.�.QD.il.J......J:l.o l..~!. f.l_g_,__<;Q!!l:: p~r.~Y .......J.n.c,:;.Q!!,l~ - For the purpos es of this title, the term "personal holding company income" means the portion of the gross income which consists of: XXX XXX XXX XXX ( g ) Rents � 8.~D..t..�..JI__l,!.f.l.1.~.ss ,__C:.:.Q.f.l_S i s .t :: .!D.9._:f..! .:f..t..Y........Pg.r.:......!;_~n.t.l::l_!!l.._!lf_ .!!!.Q.'.'.'"..!L..9.f . __t.tt~-..g .r.::.q�.� !n�.9..'!I~-~ For the purposes of this sub- section, the term "rents" means compensation however designated, for the use of, or right to use property, and the interest on debts owed to the corporation, to the ex~nt such debts represent the price for which real property held primarily for sale to customers in the ordinary course of its trade or business was sold or exchanged by the corporation, but does not include amounts . constituting personal holding company income under sub- section (f). (Underlining supplied) Explicitly, Section 31 (b) (3) of the Tax Code requires that in order for two corporations to be considered related taxpayers, more than fifty (50) percent of the outstanding stock of each must be . owned, directly or indirectly, by or for the same individual. In the case at bar, it has been sufficiently established that for the taxable year in question, IBM Philippines Inc. owned only 297. of the outstanding capital stock of petitioner Katuparan Realty Corporation. The "IBM Retirement ,' �- .I

D EC ISION CT/1 C/1SE NO. 4373 - 10 Plan Trust Fund" owned 707. of Katuparan 's capital stock, while the directors owned 17.. (See E><h. "F", supra; also TSN, Oct. 5, 1990 hearing, pp. 7 - 8). However, the o w n eys h . of 707. of petitioner ' s ~p outstanding capital stock by the "IBM Retirement Plan Trust Fund" does not make IBM Philippines Inc. the owner/holder of such 707. stocks of Katuparan. (!1s petitioner claims, such 707. stockholding of the , IBM Retirement Plan Trust Fund cannot be attributed to IBM Philippines.) The reason is that all the benefits under the plan are payable exclusively to the employees of IBM and that qsM does not exercise c ontrol over the retirement trust fund since the same is managed by an independent trustee, Far East Bank and Trust Company. This was ' testified to by petitioner's treasurer, Mr. Cecilia C. Amaranta, during the hearing. (See ' TSN, Aug. 14, 1990, pp. 30- 31; TSN, Sept. 12, 1990, pp. 7 - 8 and pp. 15- 16). Neither may petitianl!'r be considered a personal holding company under Section . 64 at the . Tax Code cited herefare. A corporation will be considered a personal holding company only if it meets the To meet ... t h e _gr,asE__j{1�f!mf!! !'.:..�'.Q.Y..f:..r.:g.t!!l!?.fl..t..L either at the fallowing percentages of the gros s income of the corporation far the taxable year, viz:

DECISION CTn CnSE NO. 4373 - 11 (a) Eighty percent (80%) or more; or (b) Seventy (70%) or more if the corporation had been � classified as a personal holding company for any taxable year beginning after December 31, 1938. must be "personal holding company income" as II defined under Section 65 of ~e- the Tax Code. And a "personal hal ding company income", as defined in Section 65, subparagraph (g), means portion of the gross income which consists of xxx "Rents, unless constituting fifty per centum or more of the gross income. " Sect i on 6 5 � p_~D?._!?.!Lrll.L.J:lo !~.J r).9__t;.Q.~.::::: p_~QY_......:!.!l~. Q~g For the- puq}oses of this title, the term "personal holding company income" means the por_tion of the gross income which consists of: XXX XXX XXX XXX (g) Rents. R.gn.t..?.. L _ ..'=!.r_:t.! ..~.?..?......J;.Q!J.?...!.?..!;:::::. .:i.:.IJg__..f.:i.:.f.tY........P.~.r.:::......�t;!.D._t..'=!.m _...Q.L ... mg__r..:_~---�9.:f......t.t:!!!_ 9!:Q.?._!?. !.r.::t~.Pm.g...~.. xxx." (Underlining supplied, supra.) Verily, in the case at bar, it is not disputed that the gross income of petitioner for the year in , question consisted en..tirely of rental income and, therefore, is much more than tN'e limit required by law (which should be less than 507. of gross income) to qualify as personal holding company income. The treasurer of petit,- n,.,Pr t E' s( "fied on the nature and '� 50

-- DECISION CTil CllSE NO. 4373 - 12 extent of petitioner's income for the year involved during the hearing on llugust 4, 1990, thus: (DIRECT EXAMINATION) Q. During the year in question, 1982, as Treasurer of Katuparan Realty, were there any other income received by Katuparan Realty aside from rental payments made by IBM Philippines.? A. No, its only the rental income from ,, IBM Philippines that has been received by Katuparan. XXX XXX XXX Q. Mr. Witness, on Section B of page 1 of this document, under the column income, the figure stated is P2,309,100.00 across the word Schedule 4; and on page 2 of the same documents, schedule 4 refers to income from leases and rents, particularly stated here the income from IBM Phi 1 ippines, Incorparated. For- the record, Mr, Witness, will you confirm to this Honorable Court, that aside from the income stated here in the form of rental income' there is no other income derived by petitioner Katuparan Realty Corporation for the year ending December 31, 1982? A. I confirmed that there is no other income by Katuparan for the year 1982 except from IBM Philippines (See T .S.N. hearing of August 14, 1990, pages 69 to 70, C.T.A. hearing of August 14, 1990, pages 69 to 70, C.T.A. records; Likewise see Exhibit "D" page 121, C.T.A. rec.) ti Thus, indeed, petitioner has not meet the gross income requirement under Section 64(a)(1) in relation to Section 65(g) of the National Internal, ,

DECISION CT~ C~SE NO. 4373 - 13 Revenue Code, and therefore cannot be considered a personal holding company. Lik.ewise, petitioner does not meet the .~J.P..�! .) under Section 64(a) (2) of the Tax Code because of the requirement that more than 507. of its outstanding capital stock. must be owned by not more than five (5) individuals. ~s stated earlier, IBM 1 Philippines Inc. owned only 297. of the stock. of petitioner (Katuparan), while the 707. is owned by the "IBf1 Retirement Plan Trust Fund". The latter stock. ownership, however, i s �'to be attributed only to the IBM employees who are the beneficiaries of the Trust Fund and not to IBM Philippines. Under Section 224 ef Income Tax Revenue Regulations No. 2, implementing Section 66(a) of the Tax Code, "in determining the ownership' of stock. for any of the purposes set forth in the preceding section (referring to stock. ownership determination for persona l holding company purposes), stock. owned, . directly or indirectly, by or for a corporation, partner hip, estate, or trust shall be considered as being owned proportionately by its shareholders, 11 In '� other words, the partners or beneficiaries." 707. stock. ownership of IBM Retirement Trust Fund is, in effect, proportionately owned by the benefi c iaries of the Fund. A fortiori, under this 52

DECISION CT~ C~SE NO. 4373 - 14 concept, no five (5) individuals own more than 50% of the capital stock of petitioner. Besides the foregoing findings that the interest expense in question does not fall within the prohibited and disallowable deduction under Section 31(b)(3), now Section 30(b)(3), of the Tax Code, said expense, more importantly, constitutes , an ordinary and necessary expense incurred by' ' petitioner in carrying on its trade or business, , and thus is deductible under Section JO(a)(l), now Section 29(a) ( 1) (b)(l) of the Tax Code. Undisputably, petitioner is engaged in real estate business, and the liability for payment of interest in this case aro~e from an indebtedness incurred by it in the acquisition of the property from which it derived the rental income subject to tax. ~gain, as testified by i t s trea'surer, petitioner became the debtor of IBI1 Philippines for the payment of interest when it assumed the obligation on a promissory note of Lexicon Realty Corporation in, favor of IBI1 Phi 1 ipppines, Inc. ( Exh. "C" & "C- 1", p. 120, CTA rec.) after the purchase of the (real) ,. property from Lexicon by petitioner. (See Exh. "A", Deed of Assignment, p. 103, CTA rec.; and Exh. "B", Deed of Sale with Assumption of Mortgage and . . Assumption of Contract of Lease) are the , Hereunder ''

DECISION / CTA CASE NO. 4373 15 - pertinent portions of the testimony of petitioner's witness (treasurer) on the matter: (ON DIRECT EXAMINATION) XXX XXX XXX a. How did IBM Philippines at that time divest itself of the land and building it owned? A. Because of the urgency of the situation at that time, IBM Philippines sold the land and " building to Lexi~on Corporation which in turn sold the land and I �- building to Katuparan Realty Corporation. XXX XXX XXX a. Can you tell the �Honorable Court briefly the terms and conditions by which that transfer from Lexicon Corporation to Katuparan Realty Corporation was effected? A. Documents were executed.' These are the Deed of Sale and Deed of Assignment between Lexicon and Katuparan. XXX XXX XXX a. Mr. Witness , I refer you back to Exhibit "A" for the, petitioner, the Deed of Assignment. � Particularly, I refer you to the last paragraph on page 1 of the same document, the recitals regarding the Deed of Assignment. The last paragraph which states and I quote: Whereas, Assignee executed on Sept~mber 20, 1972 a promissory note '�in the amount of P3,081,752.54 in favor of IBM Philippines, Incorporated (IBM). XXX XXX XXX ' ., ,. �.I �

DECISION CTA CASE NO. 4373 - 16 _:_ Q. Can you describe to the Honorable Court what the promis sory note mentioned here is all about? 1"\. The pr�omissory note covers the balan c e of the principal due to IBM Philippines when the land and building was sold. a. When the Deed of Assignment and the Deed o �f Sale earlier marked as Exhibits "A" and "B" for the petitioner were executed, what happened to the obligation covered by this promissory note? II .J A. Katuparan assumed the obligation as part of the promissory note or transfer of the Deed of Assignment. a. So after the execution of the Deed of Ass ignment and the Deed of Sale, you now became the � person obligated under that promissory note? A. Katuparan is the person obligated on that note. XXX XXX XXX (TSN, August 14, 1990, pp. 9 - 20) Surely, contrary to ' respondent ' s postulation, the fact that the subject .interest expense was .incurred by reason of a promissory note assumed by petitioner and not because of a loan transaction between .it and IBM Ph.i l.ipp.ines, does not render sa.id expense unrelated to petitioner's business and thus not deductible. f l,I.n real estate business, the . act of securing loans , such . assumption of as obligations, assignments of rights, etc. (direct or .indirect) is ordinary and normal. In fact, tran s a c tions of such nature are even necessary,

DECISION CTA C11SE NO. 4373 - 17 :.... appropriate and helpful in order that one � s real estate busines s may expand and became mare prafi table. 2. With respect to the second and last issue, i.e., the legality of the deficiency expanded withholding tax, it appears that no dispute ensues between the parties on the fact tha,t, the 57. withholding tax (of P218. 90) is due on the appraisal fee (of P4,378.00) paid to Asian Appraisal, Inc. The controversy lies in the computation of the interest on deficiency and the impos ition of the compromise penalty. As computed by respondent, the deficiency expanded withholding tax liability of petitioner is P853.36, to wit: 5% basic tax -------------- P218.90 25% surcharge -------------- 54.72 14% interes t from 529.74 2 - 1- 83 to 3 - 1- 89 --------- 50.00 Compromise P853.36 ,. ' ======= Total On the ather hand, petitioner claims that the applicable expanded withholding tax has already been paid under Confirmation Receipt No. 814445087 t 1� and Payment Order No. C2,880924;� both dated April 18, 1988, in the amount of P437.80. (Par. 13, Petition, p. 4, CTA rec. and Annexes "C" and "D", Petition, p. 10, CTA rec.) Although bath in its

- ---� DECIStON CT~ Cf-lSE NO. 4373 - 18 petition for review and memorandum, petitioner does not explain or elaborate on how and why its liability for expanded withholding tax is only P437.80, it, however, appears in a document filed by petitioner with the Bureau of Internal Revenue=s (whi ch now forms part of the BIR records) that petitioner, through counsel, presented the following computation of its tax liability with �supporting reason that under the law then applicable, the interest on deficiency should be ~t . t.t!r. I?~..... ..L:J..). . . . . Y....Ei!..~.C?, and that the compromise penalty should not be imposed: 5'l. basic tax P218.90 25'l. surcharge 54.73 20'l. interest 164.17 (maximum of 3 years) Total tax due P437.80 ------- This Court believes that the c orrect deficiency expanded withholding tax is the amount of P437.80 which petitioner has determined and not the sum of P853. 00 as computed and assessed by respondent. Firstly, the interest on deficiency for the tax year in question ( 1982) is 207. per 'l'i' the maximum annum but not to exceed 1in any case period of three (3) years. This is clear from the =sLetter to the Com�issioner of Internal Revenue dated June 21, 1989, pp. 149 to 157, BIR record. �.I

. -- DECISION CTil CllSE NO. 4373 - 19 _; provisions of Section 51 (d) of the 1977 Tax Code, as amended by P.D. No. 1705, which state: . Sec � 51 � P.~.YJ'.'~nt...-....~D.9.......... ~?..?..~-?..?..m..~n_t.. _ Q.f. !~!..~Q..f!'_l ~---.t..~. ~. � - X X X � <d > I .f. l t~c~.?..t............._9.Q___g.!!_f.!_c.;.!~n..~y- . Interest upon the amount determined as a deficiency shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Commissione r and shall be collected as a part of the tax at .t...o.~.-.L~.t..g. . . 9.!.. . . !:~~-D..!.Y. .. .J!er.::: !;!?...D.. t.~.f.!'I. . . .Pgr.:.......~.DD..Y..!.'! from the date prescribed ,, for the payment of tax, (or, if the tax i s paid in installment from the date prescribed for the payment of the first installment) to the date the deficiency i s assessed ; P..r.:.9.Y...!..Q.!?.~...J.......~D..~.t... . .. ...!.hg....__I'..'J..~.~..,i_. m~m . ~.m9..~n t.._ t.h.~..t.. . . . .m.~.Y..........!:J.g.........c.;QJ_!_~~-t..~~-~?...-....!..n..t.~.r..~.?..t.. 9.!1__.t._hgo__g_~.:t!.!:..:!.!:.'!'D.!:..Y........?. D.~.J.J,........! .rL. D.Q.......!;.~.?..~.......~~..!:.g.go_~ .t..b.~.....~.!!l.9~..D..t._....!:..9!.'" r _g>,?..P9n.9 .!D.9 ......J:.R__.~.........P..~.r .t9.g_....9 ..f . .t.. tt.r.:.go~............_. Y . ~A.!:.?., the present provisions regarding prescription to the contrary notwithstanding. (Underlining supplied.) The interest, therefore, cannot be that (Hi thout 1 imi ta t .ion) imposed by respondent. Secondly, the compromise penalty cannot be imposed inasmuch as petitioner has not agreed thereto. ll compromise implies agreement and the other party cannot impose it upon the other who disagrees with or rejects it. (See Commissioner of Internal Revenue vs. Abad, G.R. L - 19627, June 27, 1968, 23 SCRA 1132) Indeed, that thJT1correct deficiency expanded I withl1olding tax (in the 1 amount of P437.BO) has a 1ready bee,., paid in this case, is the 1ogi cal conclusion. lls will be noted, respondent . has not SG

DECISION CT~ CllSE NO. 4373 - 20 impugned the authenticity, materiality and probative value of the documents of payment cited by petitioner, namely: Confirmation Recei pt No. B14445087 and Payment Order No. C2880924 dated ~pril 18, 1988 for said amount. ( Anne)(es "C" & "D", Petition, s upra; also p. 128, BIR rec.) In fact, s ayi ng that "the issue in thi s case is purely 1 e g a l ", respondent � s counsel did not submit� evide nce anymore but simply submitted this c ase for deci s ion on the basis of the pleadings and records. (Seep. 164, CTA r e c.) ~CCORDINGLY, petitioner ' �5 appeal is su s tained and r espondent ' s decision date d Nay 10, 1989 holding petitioner liable for deficiency income tax -.. in the tota-l sum of P413, 127. 78 and deficiency of expa nded withholding tax P853.36 for the tax year i n question (1982), is reversed and is hereby order ed cancelled. SO ORDERED. Que zon City, 11e tro f1anila, February 14, 1993. , ce.~~~ ERNESTO D. ~COST~ Presiding Judge 11 1 ,. 5S �. I

DECISION CT~ C~SE NO. 4373 - 21 "- WE CONCUR: { GRUB~ Judge ,0.PD~JE~ ~s so ciate Judge I! CERTIFICATION I hereby certi f'y that this decision was reache d after due consultation between the members of' tl1e Court of' Tax Appeals in acc ordance with Section 13, Article VIII of' the Constitution. ~~Q~~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals ' tt I ,. ... I '' 6J I �. I