BIR Ruling

September 16, 1969 The President Banco Filipino Savings and Mortgage Bank Plaza Sta. Cruz Manila S i r : This refers to your letter dated September 12, 1969 requesting information as to whether or not interest paid to your depositors corresponding to the deposits you invested in government bonds is deductible from your gross income. LexLib In reply, I have the honor to inform you that, in accordance with Section 30(b)(1) of the Tax Code, interest paid within the taxable year on indebtedness is deductible from gross income. However, interest on indebtedness incurred or continued to purchase or carry obligations the interest upon which is exempt from income tax is not deductible. In the light of the provision of law mentioned above, the issue boils down to the determination of the question of whether or not the deposits you invested in government bonds are indebtedness incurred or continued by you for such purpose. "Deposit" means to place or entrust for safekeeping; to put (money) in a bank, as for safekeeping, or to earn interest. (Webster's Dictionary, College Edition) "Debt" means something owed by one person to another. ( IBID .) "Indebted" means in debt or under legal obligation to repay something received. ( Ibid .) The definitions show clear differences between a deposit and an indebtedness,. While a deposit may give rise to an obligation to repay, nevertheless, this Office believes that it is not the indebtedness contemplated by Section 30(b)(1) of the Tax Code. Besides, the receipt of deposits and the investment thereof by banks comprise the banking business itself, for which reason, a bank cannot be considered to have solicited deposits as an indebtedness for the purpose of investing in tax-free bonds. The investment is tax-free bonds may be considered as a mere incident of the bank's investment operations. In view of the foregoing, it is the opinion of this Office as it hereby holds that the interest you paid on deposits which you invested in government bonds is deductible from your gross income. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue