Asian Seas Resources & Realty Corporation

January 17, 2007 BIR RULING [DA-020-07] 27; 196; DA-012-04; DA-280-03; DA-210-01 Asian Seas Resources & Realty Corporation 800 E. delos Santos Avenue, Quezon City Attention: Mr. Ricardo S. Roqueza Treasurer Gentlemen : This refers to your letter dated December 18, 2006 requesting a ruling on the tax consequence of the reconveyance of a real property as a result of the rescission of the contract of sale. It is represented that on July 10, 1995, ASIAN SEAS RESOURCES & REALTY CORPORATION (ASSERRCO for brevity) executed a Deed of Absolute Sale in favor of the Cebu Doctors Hospital, Inc. & Cebu Doctors College, Inc. (the "Vendees") for and in consideration in the amount of P30,000,000.00, whereby ASSERRCO transferred and conveyed to the latter the real property covered by TCT No. 34916 located in Mandaue City. Title of said property was transferred in the name of Cebu Doctors Hospital, Inc. & Cebu Doctors College, Inc. under TCT No. 50084. On October 10, 1995, however, the Vendees and ASSERRCO mutually and voluntarily agreed that the above Deed of Absolute Sale be rescinded for the reason that the above subject property was no longer viable for school site purposes. ASSERRCO is willing to return the total consideration of the sale without interest whatsoever. By virtue of the above Deed of Rescission of Contract and by the return of the total consideration by ASSERRCO to the Vendees, all rights and interest pertaining to ASSERRCO over the subject property were restored, as if there was no conveyance of realty that took place. Based on the foregoing, you are requesting a ruling that the reconveyance of the subject property in favor of ASSERRCO is exempt from the capital gains tax/corporate income tax/withholding tax/ and documentary stamp tax for the reason that the said reconveyance, effected through the execution of the Deed of Rescission, was executed without any monetary consideration and done only for the purpose of restoring the rights and interests of ASSERRCO as the original owner of the subject property. In reply, please be informed that rescission of a contract does not give rise to a taxable event for two reasons: (a) the result of rescission is that it is as if there was no sale, transfer or exchange, and hence, no income is realized; and (b) the return of the object of the rescinded contract is not for monetary consideration and is merely an acknowledgment or confirmation of the title and ownership of the original owner of the property. (BIR Ruling DA-280-2003 dated August 25, 2003) Thus, the subsequent return of the above subject property by the Cebu Doctors Hospital, Inc. & Cebu Doctors College, Inc., the vendees, to ASSERRCO, the original owner-vendor, is a necessary consequence of a rescission of the contract. Accordingly, the subsequent return of the subject property to ASSERRCO is not subject to the regular income tax imposed under Section 27 (A) and consequently, to the creditable withholding tax prescribed by Revenue Regulations No. 2-98, as amended, implementing Section 57 (B) of the Tax Code of 1997, as amended. The said transaction is likewise not subject to the capital gains imposed under Section 27 (D) and to the documentary stamp tax imposed under Section 196 of the Tax Code since it is a mere reconveyance of the object of the rescinded contract and is not for monetary consideration. (BIR Ruling Nos. DA-012-2004 dated January 12, 2004 and DA-210-2001 dated October 19, 2001) However, the notarial acknowledgment to the said Deed of Rescission is subject to the documentary stamp tax of P15.00 only pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. 027-93 dated January 15, 1993) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service