First Nationwide Assurance Corp. v. Commissioner of Internal Revenue

FOURTH DIVISION [CA-G.R. No. SP 76318. October 9, 2006.] FIRST NATIONWIDE ASSURANCE CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N BARRIOS , J p : The First Nationwide Assurance Corporation (or First Assurance for brevity) filed this petition for review seeking to annul and set aside the decision of the Court of Tax Appeals (or CTA) dated October 3, 2002 denying its claim for tax refund/credit, and its subsequent Resolution dated March 13, 2003 denying the motion for its reconsideration. In the years 1996, 1998 and 1999, First Assurance purchased treasury notes issued by the Bureau of Treasury which amounted to P14,800,000,00. The Bureau of Treasury then paid the interest for the said treasury notes for the periods covering March 26, 1999 to November 29, 1999 after deducting a withholding tax of 20% of the interest income or the amount of P477,150.00. Believing that the said amount should not have been withheld, First Assurance on March 19, 2001 wrote to the Bureau of Internal Revenue (or BIR) for the issuance of a tax refund/credit. As there has been no response on this claim, First Assurance filed a Petition for Review before the CTA racing to toll the running of the 2-year prescriptive period. First Assurance claimed that the amount withheld from it was erroneous. It laid as its basis the provision of the National Internal Revenue Code which reads: Sec. 32 (B) Exclusions from Gross Income The following shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (7) (g) Gains from the sale of Bonds, Debentures or other Certificate of Indebtedness. Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five years. Aside from relying on the aforestated provision, First Assurance also made reference to BIR Ruling 166-99 dated October 25, 1999 providing that the interest income , yield or gain derived from bonds, debentures or certificates of indebtedness which are ordinarily subject to 20% final tax under Section 27(D) (1) of the National Internal Revenue Code, should be excluded from the gross income if the bonds, debentures or the certificates of indebtedness have maturities of more than five (5) years . According to First Assurance, the taxes withheld by the Bureau of Treasury and remitted to the BIR for the period covering March 26, 1999 to November 29, 1999 should be refunded or credited to it because the interest arose from treasury notes which have a maturity of more than five (5) years, and therefore this interest income is exempt from the 20% withholding tax on deposits and deposit substitutes. It argued that the word " gains " as mentioned in the aforestated provision of the National Internal Revenue Code, includes the interest income from the Fixed Rate Treasury Notes. The CTA however found the contention of First Assurance without merit. In its assailed decision, it ruled that: . . . only the gain from sale (as distinguished from interest) of bonds, debentures or other certificate of indebtedness with maturity of more than five years shall be exempt from income tax. Since the present appeal involves claim for refund of 20% final withholding tax on interest income earned from long-term investment in Fixed Rate Treasury Notes, the same has no basis in law. (pp. 37-38, rollo ) In then concluded that: WHEREFORE, in the light of the foregoing, the instant Petition for Review is hereby DENIED for lack of merit. ( Ibid ) First Assurance then sought this recourse, raising the issues of: WHETHER OR NOT THE COURT OF TAX APPEALS ERRED IN RULING THAT THE TERM "GAIN" AS USED IN SECTION 32 (B) (7) (g) OF THE TAX CODE DOES NOT INCLUDE INTEREST. (p. 9, rollo ) The Court of Tax Appeals did not err: At the risk of being repetitious, for emphasis We cite again the provision of the Internal Revenue Code which was the basis of First Assurance in its claim for the exemption. It reads: Sec. 32(B) Exclusions from Gross Income. The following shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (7) (g) Gains from the sale of Bonds, Debentures or other Certificate of Indebtedness Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five years. (emphasis supplied) The said provision is in clear and unequivocal terms. The " gain " it refers to should come from the " sale or exchange " of bonds, debentures or other certificate of indebtedness, but does not include the " interest " of bonds. Noteworthy are the discussions made by the CTA in arriving at its decision when it made reference to another but kindred case it decided ( Nippon Life Insurance Company of the Philippines, Inc. vs . Commissioner of Internal Revenue , CTA Case No. 6142, February 4, 2002). It state that: . . . this court had the occasion to make a notable distinction between the concept of gains which, in general, is synonymous to income and the gains from the sale of bonds, debentures and other certificates of indebtedness, thus: "We take a view that "gains" as the term is used therein in Section 32 (b) (7) (g) of the Tax Code cannot include interest since it clearly refers to gains from the sale of bonds, debentures and other certificates of indebtedness. Initially, it must be pointed out that whereas the term "gains" includes "interest" as a general rule, this rule cannot be applied to Section 32 (B) (7) (g) of the 1997 Tax Code which particularly refers to " Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness " in its title and "gains realized from the sale or exchange or retirement of bonds, debentures and other certificate of indebtedness with a maturity of more than five (5) years" in its body. Stated otherwise, section 32 (B)(7)(g) of the Tax Code specifically refers to gains from the sale of bonds, debentures and other certificates of indebtedness as contradistinguished from the term "gains" in its general sense, which is synonymous to income. In this regard, Section 32 (A) of the 1997 Tax Code defines "gross income" as follows: SEC. 32. Gross Income. (A) General Definition. Except when otherwise provided in this Title, gross income means all income derived from whatever source including (but not limited to) the following items: (1) Compensation for services in whatever from paid, including, but not limited to fees, salaries, wages, commissions and similar items; (2) Gross income derived from the conduct of trade or business or the exercise of profession; (3) Gains derived from dealings in property ; (4) Interests ; (5) Rents xxx xxx xxx From the afore-quoted Section 32 (A) of the Tax Code, it is clear that there is a distinction between "gains derived from dealings in property" and "interests", which are separately classified as items of gross income. "Gains realized from the sale or exchange or retirement of bonds, debentures and other certificate of indebtedness" would fall under the category of "gains derived from dealings in property". On the other hand, "interests" would include interest from bonds, debentures and other certificate of indebtedness. Gains realized from the sale or exchanged or retirement of bonds, debentures and other certificate of indebtedness fall under separate and distinct income categories." (pp. 29-30, rollo ) Then quoting yet another decision it previously rendered, the CTA went on to cite that: . . . . Like the Nippon Life case , we emphasized that under Sections 24, 25, 27 and 28 of the Tax Code, in relation to Sections 31 and 32 of the Tax Code, there is no sweeping exemption from income tax of interest from bonds, debentures or other certificates on indebtedness with a maturity of more than five (5) years, thus: xxx xxx xxx We believe that if Congress intended to exempt interest from bonds, debentures and other certificates of indebtedness under section 32 (B)(7)(g) of the Tax Code, it would have done so in clear and specific terms. That fact that it used the term "Gains from sale" in the aforementioned section, knowing fully well of the reference to interest under Sections 24, 25 27 and 28 of the Tax Code shows that it did not intend to exempt such interest under the aforementioned 32 (B)(7)(g) of the Tax Code. (p. 36, rollo ) In fine, it is settled that tax exemptions should be strictly construed against those claiming to be qualified thereto (Commissioner of Customs vs. Court of Tax Appeals, 328 SCRA 822). First Assurance failed to convince that its claim falls within the allowed exemptions. WHEREFORE, the petition is DENIED and the appealed decision is AFFIRMED. SO ORDERED. Guarina III and Tagle, JJ., concur.