BIR Ruling No. 024-62

January 25, 1962 BIR RULING NO. 024-62 MEMORANDUM FOR The Revenue Operations Head (Assessment) B.I.R., Manila This has reference to the internal revenue case against the REPUBLIC CEMENT CORPORATION, a domestic corporation, engaged in the mining industry and in the manufacturers of cement, for which income tax in the total amount of P1,628,440.11 is sought to be assessed. The case was elevated to the Law Division for the resolution and proper interpretation of the phrase "capital investments", mentioned in section 4 of Republic Act No. 909. The provision of law in question is quoted below as follows: "SEC. 4. New mines, and old mines which resume operation, when certified to as such by the Secretary of Agriculture and Natural Resources upon the recommendation of the Director of Mines, shall be exempt from the payment of income tax during the first three years of actual commercial production: Provided , That, any such mine and/or mines making a complete return of its capital investment at any time within the said period , shall pay income tax from that year ," Emphasis supplied. The facts of the case may be summarized as follows: 1. Sometime on April 29, 1955, the Republic Cement Corporation was organized and registered in the office of the Securities and Exchange Commission with a authorized capital stock in the amount of P10,000,000.00. At the time the corporation started operation on a commercial scale the paid up capital was P5,500,000.00. However, it borrowed from several banks the amount of P6,000,000.00 which was used in the purchase of machineries and their installation at Norzagaray, Bulacan. 2. In 1957 or at about the time it started commercial production of cement it was granted an exemption from the payment of income tax for a period of three years in accordance with section 4 of Republic Act No. 909, by virtue of the directive of the Secretary of Finance dated August 6, 1957. However, the grant of exemption would expire in any taxable year within said period of three years when the corporation shall have a complete return of its capital investment. 3. Since the start of commercial operation in 1957, up to August 31, 1959, the corporation realized profits in the total amount of P8,996,827.26. If, as contended by the investigating examiners, capital investments represents the paid up capital only of the corporation at the start of commercial operations in 1957, there is no question that the REPUBLIC CEMENT CORPORATION will have to pay income tax for the fiscal year ending August 31, 1959, the time it made a full return of the paid capital of P5,500,000.00. On the other hand, if capital investment means the actual amount spent in order that commercial operation can commence, irrespective of the source of the capital invested, as contended by counsel for the taxpayer corporation, it would seen to appear that the corporation has not yet made a complete return on its capital investment, hence, it still enjoys the exemption provided in section 4 of Republic Act No. 909. ISSUES It appears that the issue involved is not only a question proper interpretation of the term "capital investment". The question that should be resolved first is the question of whether or not the corporation which is engaged in the manufacture of cement qualifies under the exemption provision of the law as passed by Congress. OPINION An examination of the "explanatory note" to House Bill No. 3761 which became Republic Act No. 909 revealed that it specifically referred to the gold mining industry. It never mentioned any other kind or class of mine. In the deliberation of the bill by Congress no mention was never made of any other mining concern except the gold mining industry. The amendments to section 242 and 243 of the Tax Code reduced the royalties and ad valorem taxes payable on the output of gold mines to 1-1/2% instead of the graduated scale of from 1-1/2% to a maximum of 10%, depending on the gross value of the output, while section 244, wholly referring to gold, was repealed. With these factual circumstances which attended the law in question in its passage, may we now say with certainty and an assurance of definiteness that the terms "new mines" and "old mines" referred to in section 4 of Republic Act No. 909 was meant to include all classes of mining industries and not the gold mining industry only? This ambiguity in the law was clarified by this paragraph in the explanatory note to the bill: "The gold mining industry occupies a position which is distinctly peculiar and unique in our national economy. Unlike other industries whose products have followed the general pattern of price increases during and since the war years, the official price of gold has remained fixed at P70.00 per fine ounce. While the domestic free-market price of gold is at present very much higher than the official price, thus enabling mining companies to earn reasonable profits if all gold produced by them were disposed through this channel, nonetheless it is not considered a desirable social policy to permit the sale of all gold output in such market for gold sold in this manner represents a substantial loss to the international reserves of the country" The discussion also pointed to gold mining companies as the only beneficiaries even on the exemption from income tax: "Mr. Durano: And does the gentlemen agree that Canada has not adopted any measure as contemplated in the present bill which is now sponsored by the distinguished gentlemen from Pangasinan? "Mr. ALLAS: Canada has gone even further. Canada has eliminated the ad valorem taxes and the royalties. It has adopted the outright cash relief given to gold mining companies, depending upon the amount of their output. In other words, for every ounce of gold produced by a certain company, it is given $3.00 as a subsidy in order to encourage the mining companies to produce more. They are exempted from the payment , of income tax for the period of three years . Then, on the importations made by such mining companies, they are exempted from the payment of any import duties. I can cite three or four instances besides those I have just mentioned." (Excerpts from the Lower House discussions on H. B. No. 3761 R. A. No. 909.) (Emphasis supplied) While these facts, taken singly, do not conclusively show legislative intent in the enactment of the amendments in question, they serve as a basis for determining the intention of Congress in passing the law. They show an evident desire to help the gold mining industry to give it a lift from its precarious existence in our national economy. It has been said that "independent" judicial determination arrived at exclusively from the reading of the words in the statute does not insure accurate interpretation and thus for the court to assert that statute is clear and anambiguous is merely to assert that the statute as read by the court produces a result which is satisfactory to the court. It does not necessarily mean that as read it reflects the legislative intent." (Sutherland Statutory Construction, 3rd edition, Vol. 11, pp. 320-321.) "If legislative intent has meant for the interpretative process it means not a collection of subjective wishers, hopes, and prejudices of individuals, but rather the objective footprints left on the trail of legislative enactment. Legislative intent can't be "DREAM UP". It can be speculated about ; but it can be discovered only by factual inquiry into the history of the enactment of the statute, the background circumstances which brought the problem before the legislature, the legislative committee reports, the statements of the committee chairman, and the course of enactment. To pursue this course means work and hard work, but if it is pursued it is seldom that the pursuit is fruit-less. An honestly conducted inquiry into these considerations will fail but infrequently to disclose to the inquirer the purpose and intent of the legislative and will clarify the applicability of the statute to the question in Litigation." (IBID., p. 322) (Emphasis supplied) It may well be mentioned that it is a principle of construction that "grants of tax exemptions are given a rigid interpretations against the assertions of the tax payer and in favor of the taxing power". (Providence Bank vs. Billings, 29 U.S. 515, 7 L. Ed. 1939). Considering this basis rule of statutory construction, the inevitable answer to the foregoing question is in the negative and the exemption refers only to gold mines. It may also well be mentioned at this juncture, that in the interpretations given to section 4 of Republic Act No. 909 as embodied in General Circular No. V-160, promulgated on July 1, 1953, only the gold mining industry is deemed covered by the exemption. Quoted below is a pertinent portion of General No. V-160: "It is a prerequisite to the grant of exemption from income tax that a gold mining company must first secure a certificate from the Secretary of Agriculture and Natural Resources, upon the recommendation of the Director of Mines, that is duly registered and fully authorized to operate as such; and in the case of an old mine, the certificate must show that it has resumed operation." (See 2nd to last par. of page 2 of Gen. Cir. No. V-160.) (Emphasis supplied) Going into the constitutional aspects of the case, it will be noted that sections 4 and 5 of Republic Act No. 909 are not covered or embraced within the title and explanatory note the bill. In other words they are not "germane" to the subject matter as embraced in the title of the law. Section 21(1) of Article VI of the Philippine Constitution provides: "SEC. 21(1) No bill which may be enacted into law shall embrace more than one subject which shall be expressed in the title of the bill." These provisions of the law are repugnant to the aforequoted provision of our constitution, hence, their inclusion into the law is of doubtful constitutional validity. For this reason alone, it is believed that the constitutional validity or invalidity of the provision of section 4 and 5 of Republic Act No. 909 can be properly threshed out in our courts of law. The next question for resolution is the proper interpretation of the phrase "capital investment" mentioned in section 4 of the law. It has been said that "it is a familiar policy in the construction of terms to them from the context, and to adopt that sense of the words which best harmonizes with the context." (50 Am. Jur. pp. 242-243.) It is also a general rule of statutory construction to construe words of a statute in "their ordinary acceptation and significance and the meaning commonly attributed to them", (IBID., p. 228.) Since the law as enacted failed to place any particular significance to the term "capital investment", we shall here attempt to establish a definition gleaned from certain court decisions and pronouncements: "There is a well-understood distinction between the "capital or property or incorporated companies and their "capital stock." The term "capital" is often used interchangeably with "capital stock", and both are frequently used to designate the property and assets of the corporation, but this use is improper. The "capital stock" of a corporation is the amount subscribed and paid by the shareholders or the security to be paid in and upon which the corporation is to conduct its operations, and the amount of the "capital stock" remains the same, irrespective of gains or losses. The term "capital" is the aggregate of the sums subscribed and paid in or secured to be paid in by shareholders with the addition that all gains and profits realized in the use and investment of these swims or, if losses have been incurred, then, it is the residue after deducting such losses," Person & Riegel Co. v. Lipps, 67 A 1081, 1083, 1084, 219 Pa. 99, citing: Clark & M. Corp. 1140; 2 Beach, Corp. Sec. 466. (WORDS & PHRASES, Vol. 5, p. 707.) "Under section 326(a) of the Revenue Act of 1918 (40 Stat. 1092), which controls the case, "invested capital" does not include "borrowed capital", and section 325(a) provides: "That as used in this title . . . "The term 'borrowed, whether represented by bonds, notes, open accounts, or otherwise." . . .. (Bulger Block Ceal Co. V. U. S., 48 P(2d) 675, 9 AFTER 1167-1173.) "A mining corporation which had borrowed all the money to purchase its property, and for operating expenses, was held to have no "invested capital" within the Act. Paragraph 207, 40 Stat. 306, Empire FALCo. vs. Hays D. C. W. VA 295, F. 704, 707. ". . .. A corporation organized and authorized to issue capital stock in an amount not exceeding $2,000.00 may borrow and employ in its business any sum whatever. The result is that a corporation with a minimum stock subscription may actually employ huge sums of capital in its business. It might well happen that no part of this total employed in business, in excess of the amount of the outstanding capital stock would be 'surplus' in the ordinary acceptation of that term. If this excess were borrowed money, the amount so borrowed would constitute a liability; but the corporation would nevertheless be employing the amount of that liability in business. The money so borrowed, or the property purchased with that money would be assets of the corporation. The corporation would be using, under its franchise, not only the amount of its outstanding capital stock, but all of the money so borrowed. This it has a right to do, and it is that right which the general assembly intended to tax by the enactment of the statute here in question." (Marquette Hotel Investment Co. v. State Tax Commission (1920) 282 Mo. 213, 221 S. W. 721, Annotation: 107 A. R. L. 1305.) "Capital Investment" of a bani is its capital stock, surplus and undivided profits. Until declaration of dividend, undivided profits are to be considered part of "surplus W. O'connor v. Bankers Trust Co., 289 N.Y.S. 252, 276, 159 Misc. 920. (WORDS & PHRASES, p. 91.) It would seen to appear that even the courts are not agreed on a particular definition of the term "invested capital" or "capital investment". In some jurisdictions "borrowed capital" is not considered as included in the term "capital investment" or "invest capital" by specific legislative enactment. The apparent non-agreement by the courts on any particular definition of the term does not mean that no particular definition can adequately be adopted. It simply means that said definitions were arrived at by taking into consideration the meaning "naturally attached to the word or words by their context", thus adopting "that sense of the words which best harmonizes with the context." Under the circumstances, and considering the context of section 4 of the Republic Act No. 909, which grants exemption from income tax to the recovered capital, it is believed that the proper definition and interpretation of the term "capital investment" is the money or funds put in the business by the stockholder, the recovery of which is exempted by the law from income tax to compensate for the risk incident to the investment thereof. The term cannot include the mortgaged indebtedness in this case which draws interest, and is sure of repayment, unlike the investment of the stockholders. As stated earlier, Section 4 of Republic Act No. 909 was interpreted in general Circular No. V-160 as follows: "The three-year period of exemption from the payment of income tax shall be counted from the date of actual commercial production by the gold mine . The exemption shall also expire at any time before the lapse of the three-year period if such mine shall have realized a total net income equal to its paid in capital , in which case it shall be liable to pay the tax on its entire net income for that taxable year . For this purpose, a mine enjoying exemption under Republic Act No. 909 should submit to the Bureau of Internal Revenue, Manila, within sixty (60) days after the close of each calendar or fiscal year, as the case may be, the financial statements required under Republic Act No. 658 as implemented by the Revenue Regulations No. V-20 dated January 2, 1952." (See last par. of Gen. Cir. No. V-160.) (Emphasis supplied). In resume, said Circular provides that: 1. Only gold mines are covered by the three-year exemption from income tax; 2. If the capital investment was recovered in any taxable year, the entire net income of the gold mine in that year should be taxed; and 3. The term "capital investment" means in capital or capital actually paid by the stockholders. cdll Considering that the REPUBLIC CEMENT CORPORATION is not engaged in the gold mining industry and, hence, not covered by the exemption provided for under Republic Act No. 909, the entire net income of the corporation should be taxed. MELECIO R. DOMINGO Commissioner of Internal Revenue