Commissioner of Internal Revenue v. Paper Industries Corporation of the Philippines

[CA-G.R. SP No. 20070. August 31, 1992.] (C.T.A. Case No. 3843) THE COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES and THE COURT OF TAX APPEALS , respondents . [G.R. No. 20095. August 31, 1992.] PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS , respondents . D E C I S I O N JAVELLANA , J p : From the decision dated 15 August 1989 of the Honorable respondent Court of Tax Appeals (lower Court) in CTA Case No. 3843 entitled, "Paper Industries Corporation of the Philippines, Petitioner, versus Commissioner of Internal Revenue, Respondent," both parties filed separate petitions for review to the Honorable Supreme Court. 1 However, both petitions was referred to us by said Court under Its resolutions dated 19 February 1990, 2 and 7 February 1990 3 , and docketed here at as CA-G.R. SP Nos. 20070 and 20095. The undisputed facts are: "Petitioner, Paper Industries Corporation of the Philippines (PICOP for short), is a domestic corporation duly registered with the Board of Investment as a preferred pioneer enterprise for the production/manufacture of integrated pulp and paper mill (Exhs. A, A-1 & A-2). On April 21, 1983, PICOP received from the respondent, Commissioner of Internal Revenue, two demand letters both dated March 31, 1983, one for deficiency transaction tax and documentary/science stamp tax and the other for deficiency income tax for the year 1977, computed as follows: (Exhs. F and G, pp. 23-24 and 171-172, BIR rec.) Transaction Tax Interest Payments on money market borrowings P45,771,849.00 35% Transaction tax due thereon 16,020,147.00 Add : 25% Surcharge 4,005,036.75 T o t a l P20,025,036.75 Add : 14% int. from 1-20-78 to 7-31-80 P7,093,302.57 20% int. from 8-1-80 to 3-31-83 10,675,523.58 17,768,826.15 37,794,009.90 Documentary & Science Stamps Tax Total face value of debentures P100,000,000.00 Documentary Stamps Tax Due (P0.30 x P100,000,000/P200) P150,000.00 Science Stamps Tax Due (P0.30 x P100,000.00/P200) 150,000.00 Total P300,000.00 Add: Compromise for non-affixture 300.00 300,300.00 TOTAL AMOUNT DUE & COLLECTIBLE P38,094,309.90 =========== Deficiency Income Tax for 1977 Net Income per return P258,266.00 Add: Unallowable deductions 1) Disallowed deductions availed of under R.A. 5186 P44,332,980.00 2) Capitalized interest expenses on funds used for acquisition of machinery & other equipment 42,840,131.00 3) Unexplained financial guarantee expenses 1,237,421.00 4) Understatement of sales 2,391,644.00 5) Overstatement of cost of sales 604,018.00 91,406,194.00 Net income per investigation P91,664,360.00 Income tax due thereon 34,734,599.00 Less: Tax already assessed per return 80,358.00 Deficiency P34,654,201.00 Add: 14% int. fr. 4-15-78 to 7-31-81 P11,128,503.56 20% int. from 8-1-80 to 4-15-81 4,886,242.34 16,014,745.90 TOTAL AMOUNT DUE & COLLECTIBLE P50,668,946.90 =========== Petitioner protested, on April 26, 1983, the 35% transaction tax and the documentary & science stamp tax assessments (Exh. F-1), and on May 12,1983, the deficiency income tax assessment (Exh. G-1). However, these protests were not formally acted upon by the respondent. On September 26, 1984, respondent issued warrants of distraint of personal property and levy on real property, in effect, denying petitioner's protest (Exhs. H and H-1, pp. 206 and 208, BIR rec.)." (pp. 26-28, Rollo of SP 20070) cd PICOP appealed the assessment to the lower Court which rendered a decision, the dispositive portion of which reads: "WHEREFORE, the findings of respondent, Commissioner of Internal Revenue, is hereby modified. Petitioner is ordered to pay respondent the total amount of P20,133,762.33, itemized as follows: 35% transaction tax P 16,020,113.20 Documentary & Science Stamp tax 300,300.00 Deficiency Income Tax Due 3,813,34,9.33 TOTAL AMOUNT DUE AND PAYABLE P 20,133,762.53 ============ Cost against petitioner. SO ORDERED." (pp. 51-52, Rollo of SP No. 20070) Re : Petition of Commissioner of Internal Revenue SP No. 20070 1. While sustaining the imposition of the 35% transaction tax on interest payments on money market borrowings of PICOP, the Honorable respondent Court disallowed the 25% surcharge and the 14% and 20% interest levied on said tax for late payment thereof because it found Revenue Regulation No. 7-77 on which they were based to be illegal. Thus: "However, with respect to the validity of the penalty imposed in RevenueRegulationNo.7-77, implementing P.D.No.1154, three conditions must concur in order that rules and regulations promulgated by administrative agencies shall have toe force of penal law, to wit: (1) The delegating statute itself must specifically authorize the promulgation of penal regulations, [ U.S. vs Grimmand, 220 U.S. 506 (1911)] (2) The penalty must not be left to the administrative agency but must be provided by the statute itself, [U.S. vs. Barrias, 11 Phil. 327 (1908)] and, (3) The regulation must be published in the Official Gazette [People vs. Que Po Lay, 94 Phil. 640]. In the case at bar, only the third requirement was present. Revenue RegulationNo.7-77 (June 3, 1977) was published in the Official Gazette on July 4, 1977 in Vol. 73 No. 27, pages 6176 to 6178 and on July 11, 1977 in Vol. 73 No. 28 pages 6458 to 6460. No penalty was prescribed in P.D.No.1154 neither did the statute authorize the promulgation of penal regulation. Therefore, the provision of Sec. 10 of Revenue RegulationNo.7-77 imposing the 25% surcharge and 14% interest for late payment cannot have the force of a penal law." (pp. 33-34, Rollo of SP No. 20070) The Commissioner of Internal Revenue (Commissioner) has not refuted the above finding. Instead, he now points to Section 51 of the Tax Code for the justification of the imposition of the penalty and interests, the pertinent portion of which reads: "Section 51 (e)(2). Deficiency . Where a deficiency, or any interest assessed in connection therewith under paragraph (d) of this section, or any addition to the taxes provided for in Section seventy-two of this Code is not paid in full within thirty days from the date of notice and demand from the Commissioner of Internal Revenue, there shall be collected upon the unpaid amount as part of the tax, interest at the rate of twenty per centum per annum from the date of such notice and demand until it is paid: Provided , That the maximum amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years, the present provisions regarding prescription to the contrary notwithstanding." "3. Surcharge . If any amount of the tax shown on the return is not paid in full on or before the date prescribed for its payment under paragraph (a) of this section, or any amount of deficiency, and any interest assessed in connection therewith, is not paid in full within the period prescribed in the assessment notice and demand required under paragraph (b) of this section, there shall be collected in addition to the interest prescribed herein and in paragraph (d) above and as part of the tax a surcharge of ten per centum of the amount of tax unpaid." (p.15, Rollo of Sp-20070) This is but a desperate attempt to save the illegal imposition. The Commissioner's very own Exhibit 1 admits that, except for Revenue Regulation No. 7-77, the provision in the Tax Code on the transaction tax does not provide for a penalty for the late payment of said tax, and that the basis for the imposition was only Revenue Regulation No. 7-77 and no other provision of the Tax Code. The pertinent portion of the exhibit states: xxx xxx xxx "As regards the imposition of the penalties, although Section 210(b) of the TaxCode is silent on that issue, implementing RegulationsNo.7-77, so provides: "'Section 10. Penalties . Where the amount shown by the taxpayer to be due on its return or part of such payment is not paid on or before the date prescribed for its payment, the amount of the tax shall be increased by 25% per centum , the increment to be a part of the tax and the entire amount shall be subject to interest at the rate of 14 % (now 20%) per annum from the date prescribed for its payment.' "Hence, these penalties are now imposed in this investigation. (See computation of Tax due). Interests of 14 % per annum from January 20, 1978 to July 31, 1980 and at 10% per annum , from August 1, 1980 to November 20, 1982 are likewise, imposed. xxx xxx xxx Besides, Section 51(e) of the Tax Code now relied upon by the Commissioner could not have been the basis for the penalty and interests charged against PICOP. Firstly, the interest in the cited section is fixed at 20%, while that under Revenue Regulation No. 7-77 and charged against PICOP was 14% prior to August, 1980 and 20% thereafter. Secondly, the interest in the cited section is imposable only after the lapse of thirty (30) days from demand and is not to exceed the amount corresponding to a period of three (3) years, while PICOP was charged interest from the time the tax became due on 20 January 1978 up to 31 March 1983, or a period of more than five (5) years, and this interest will continue to run until the account is fully paid. Thirdly, the surcharge in the cited section is only 10%, while that imposed on PICOP is 25% as provided under Revenue Regulation No. 7-77. Hence, there being no legal basis for the penalty and interests charged against PICOP, they are null and void. 2. The Commissioner assails the restoration by the lower Court of deductions made by PICOP in the amount of P44,332,980.00 which he had disallowed. The background facts of these deductions and the lower Court's ratiocination for their allowance are: "On January 18, 1977, a merger agreement was entered into between PICOP, as the surviving corporation, and Rustan Pulp and Paper Mills, Inc. (RPPMI) and Rustan Manufacturing Corporation (RMC), as the absorbed corporations. The merger agreement provided for the transfer, assignment and conveyance of all the rights, privileges, powers and franchises as well as all the properties, real, personal and mixed, of the absorbed corporations in favor of PICOP. On June 7, 1977, PICOP transferred its 2,891,476 fully paid common shares and 148,848 preferred shares in exchange for the outstanding shares of RPPMI and RMC. PICOP also assumed the obligations of RPPMI in favor of the Development Bank of the Philippines (DBP) amounting to P68,240,340.00 by issuing 6,824,034 preferred shares in its favor. Later, in August of the same year, all the outstanding shares of stock in RMC were sold by PICOP to San Miguel Corporation for P38,900,000.00 with a gain of P9,249,849.00. On November 30, 1977 RPPMI was dissolved but the final approval of the merger agreement by the BOI came only on January 12, 1978. (Notes to Financial Statements, December 31, 1978 and 1977, p. 84, BIR rec.). PICOP by virtue of the letter ruling of the BOI dated February 21, 1977 (Exh. J-1) deducted in 1977 the previous losses of RPPMI as well as the balance of its 1975 net operating loss carry-over amounting to P44,196,106.00 and P136,874.00 respectively, or a total of P44,332,980.00 pursuant to Sec. 7 (c) of R.A.No.5186. Exh. E, p. 84 BIR rec.). The pertinent portion of said ruling reads as follows: xxx xxx xxx 2) PICOP will not be allowed to carry over the losses of Rustan prior to the legal dissolution of the latter because at that time the two (2) companies still had separate legal personalities ; 3) After BOI approval of the merger, PICOP can no longer apply for the registration of the registered capacity of Rustan because with the approved merger, such registered capacity of Rustan transferred to PICOP will have the same registration date as that of Rustan. In this case, the previous losses of Rustan may be carried over by PICOP, because with the merger, PICOP assumes all the rights and obligations of Rustan, subject, however, to the period prescribed for carrying over of such losses ." (Emphasis supplied). Respondent, on the other hand, maintains that the net operating loss sustained by a taxpayer can only be carried over and deducted in subsequent years by the same taxpayer, citing the cases of Standard PavingCo.,vs.Commissioner of Internal Revenue [190 F(2) 330] and Stanton Brewery Inc.vs.Commissioner of Internal Revenue [176 F(2d) 573]. In the case at bar, respondent alleged that the losses incurred by RPPMI cannot be carried over as a deduction to petitioner's gross income, for the simple reason that they are not the same taxpayer. While it is true that under the 1939 amendment to the U.S. InternalRevenueCode, a successor corporation was not entitled to a deduction on account of the net operating losses of its predecessor, the 1954 Code, however, made some inroads into this doctrine. It has set out definite statutory rules covering the carry-over of net operating loss where the assets of the predecessor corporation were acquired in a tax free transaction such as in connection to a statutory merger or consolidation. Nevertheless, the 1954 Code also provides special limitations on the net operating loss carry-overs in two situations: 1. Where the change in ownership of the "loss" corporation is due to a purchase of its stock or to a decrease in its outstanding stock, and there has been a change in its trade or business, the net operating loss may be disallowed in full; 2. Where the change in ownership is due to a reorganization, the net operating loss carry-over may be disallowed in part. By virtue of this change in the law, the succession to the net operating loss carry-overs has become mandatory and not elective where these statutory rules are met. (Vol. 5, Mertens, Law of Federal Income Taxation, Chap. 29.11, p. 101). In the instant case, the limitations mentioned above does not exist. Although there was an increase in ownership, the successor corporation continues to carry on its prior business activities substantially undiminished with no change in its trade or business. Neither was there a change of ownership due to a reorganization. Respondent further averred that the incentives granted under Section 7 of R.A.No.5186 shall be available only to the extent in which they are engaged in registered operations, citing Section 1 of Rule IX of the Basic RulesandRegulations to Implement the Intent and Provisions of the InvestmentIncentivesAct, R.A.No.5186. We disagree with respondent. The purpose of the merger was to rationalize the container board industry and not to take advantage of the net losses incurred by RPPMI prior to the stock swap. Thus, when stock of a corporation is purchased in order to take advantage of the corporation's net operating loss incurred in years prior to the purchase, the corporation thereafter entering into a trade or business different from that in which it was previously engaged, the net operating loss carry-over may be entirely lost. [IRC (1954), Sec. 382(a), Vol. 5, Mertens Law of Federal Income Taxation, Chap. 29.11a, p. 103]. Furthermore, once the BOI approved the merger agreement, the registered capacity of Rustan shall be transferred to PICOP, and the previous losses of Rustan may be carried over by PICOP by operation of law. [BOI ruling dated February 21, 1977 (Exh. J-1)] It is clear therefrom, that the deduction availed of under Section 7(c) of R.A.No.5186 was only proper." (pp. 38-43, Rollo of SP No. 20070) The Commissioner reiterates here the objections he raised below to counter PICOP's claim to the allowance of the deductions. The Commissioner first contends that PICOP cannot avail of the losses of RPPMI as deductions because these were not incurred relative to its registered operations, but were incurred by RPPMI from borrowing of funds. His basis for this is Section 1 of the Implementing Regulations of RA 5186, the Investments Incentive Act, to wit: "Sec. 1. The incentives granted under Section 7 of the Act shall be available to all registered enterprises, whether pioneer or non-pioneer, but only to the extent in which they are engaged in registered operations." The fact that the losses may have been incurred from borrowings does not necessarily remove them from under the mantle of the aforecited regulation. As long as the borrowings were applied to the registered operations of RPPMI the losses occasioned thereby fall within the exemption. There is no showing that the borrowings were not incurred in pursuance of the registered operations of RPPMI. If they were not, this could have been easily exposed by the Commissioner who had the burden of proving it. The Commissioner next avers that the losses were incurred by RPPMI in 1977 and prior years when RPPMI and PICOP still had separate legal personalities. They became merged into one personality only on 12 January 1978 when the BOI approved the merger agreement. This is erroneous. The merger of the personalities of the two corporations did not take effect upon the approval of the merger agreement by the BOI, but upon the dissolution of RPPMI, as advised by the BOI in its communication to PICOP dated 21 February 1977, 4 the pertinent portion of which states: xxx xxx xxx "2) PICOP will not be allowed to carry over the losses of Rustan prior to the legal dissolution of the latter because at that time the two (2) companies still had separate legal personalities; xxx xxx xxx RPPMI was dissolved on 30 November 1977. 5 Hence, the losses were appropriately carried over by PICOP in its income tax return because by that time RPPMI and Picop were no longer separate and different taxpayers. 3. The Commissioner avers that the lower Court erred in allowing interest on loans for purchase of machinery and equipment as deduction from PICOP's gross income. The said Court's findings are: "Petitioner borrowed loans from foreign creditors in 1969, 1972 and 1977 for the purpose of purchasing machinery and equipment needed in its operation. The interest payments made in 1977, covering these loans, were disallowed by respondent on the ground that the payment of interests should be capitalized, since it represented interest expense for loans incurred and obtained for the purpose of machinery and equipment for operations, thus, forming part of capital expenditure. On the other hand, petitioner maintains that the deduction was pursuant to Section 30 of the National InternalRevenueCode because the machinery and equipment obtained from loans acquired in 1969 and 1972 were already operating as of 1973; and those acquired from loans incurred in 1977 were used only after December 31, 1977. The general rule is that any amount of interest paid or accrued within the taxable year on indebtedness may be deducted from gross income. The requisites in order that interest may be deductible requires: (1) That there should be an indebtedness; (2) That the indebtedness must be a legal liability to pay the interest. In the case of Central Real EstateCo.vs.Commissioner of Internal Revenue, 47 F2d 1037, the Court said: ". . . The provision permitting proper adjustment to be made for any expenditure or item of loss properly chargeable to capital account clearly means such items as add to the value of the property. It would be impracticable for Congress to enumerate in detail what those items might be, but taxes and interest do not fall into that class and no difficulty presents itself in dealing with them specifically. All the revenue acts have specifically provided for the deduction of taxes and interest from gross income annually while dealing generally with other items of expense. If Congress had intended to give the taxpayer the privilege of adding taxes and interest to cost, it would have been very easy to have said so. As the Act does not so provide, the conclusion is inescapable that Congress did not so intend." The courts and the Board followed this view and frequently held under acts prior to the 1924Act, as well as those which followed, that so-called carrying charges were not capital items. It was held that taxes during the period of building operations were not carrying charges (for purposes of computing invested capital). Interest during the construction of a dam was not a part of the cost as basis for the deduction of a loss under the 1918 Revenue Act. Interest paid during the construction of a plant was not a capital expenditure. [Sec. 21, 225, Vol. 3A, Mertens, Law of Federal Income Taxation, Chap. 21, p. 621]. Respondent failed to mention in his citation of U.S. IncomeTaxRegulation 1.266-1(b) that the taxpayer has the option to treat the taxes and carrying charges as chargeable to the capital account (either as a component of original cost or other bases; or as an adjustment to basis), notwithstanding that they are expressly deductible. The examiners' findings that the machinery and equipment purchased from these loans were used for organizational and pre-operating purposes cannot be given weight because during the year in question, 1977, the corporation was no longer in its organizational or pre-operational stage. Clearly, there is no valid reason to compel petitioner to capitalize interest expense from funds used for acquisition of machinery and equipment. Thus, the disallowance of P42,840,131.00 was improper." (pp. 43-45, Rollo of SP 20070) The Commissioner, on the other hand, argues thus: "The Tax Court likewise erred in allowing as deduction from PICOP's gross income interest on loans from purchase of machinery and equipment. Section 79 of Revenue RegulationsNo.2 reads: Interest on Capital Interest calculated for cost-keeping or other purposes of capital or surplus invested in the business which does not represent a charge arising under interest-bearing obligation is not allowable deduction from gross income. And pertinent portions of Paragraph 1.266-1(b), entitled "Taxes and Carrying Charges Chargeableto Capital Account and Treated as Capital Items" of the U.S. IncomeTaxRegulations, after which the above-quoted Revenue RegulationsNo.2 (Sec. 79) is patterned, read: "(B) Taxes and Carrying Charges . The items thus chargeable to capital accounts are (11) In the case of real property, whether improved or unimproved and whether productive or nonproductive. (a) Interest on a loan (but not theoretical interest of a taxpayer using his own funds)." On the basis of the above, interest payment made in 1977 on loans from foreign creditors in 1969, 1972 and 1977, for the purchase of machinery and equipment needed in PICOP's operation, should be capitalized, since it represented interest expense for the acquisition, albeit through loans, of machinery and equipment for operations. Such interest expense without question forms part of capital expenditure." (pp. 20-21, Rollo of SP 20070) It is noted that in the Court below, the Commissioner justified the disallowance of the deduction under Section 30 of the NIRC, but in this petition his basis is Section 79 of Revenue Regulations No. 2. This is the second time he has changed the basis for his action. It would appear that he is engaging in shotgun tactics hoping that one of the pellets will find its mark. Likewise, we are not convinced of his arguments quoted above. There is no similarity between Section 79 of Revenue Regulation No. 2 and Paragraph 1.266-1(b) of the U.S. Income Tax Regulations. While the latter specifically states that interest on a loan is chargeable to capital accounts, the former does not. The meaning conveyed by a reading of the former is that interest on loan is deductible from gross income. This is deductible from the phrase, "Interest . . . which does not represent a charge arising under interest-bearing obligation . . ." In other words, when the interest is a charge arising under interest-bearing obligation, it is an allowable deduction from gross income. What is not allowable deduction is "interest calculated for cost-keeping or other purposes," which, to our mind, means a "theoretical interest" as against "actual interest". That such an interest cannot be allowed as a deduction from income is understandable. In any event, there is some vagueness to the cited regulation. Hence, it must be interpreted strictly against the party responsible for the vagueness which, in this case, is the Commissioner of Internal Revenue or the State. 4. The Commissioner, lastly, assails the ruling of the Honorable Court exempting PICOP from the payment of the 5% Development Tax. It was agreed in the Court below that the 5% corporate development tax is a tax imposed in addition the corporate income tax and is assessed against every corporation the net income of which for the taxable year exceeds 10% of its net worth (in the case of domestic corporation) or net assets in the Philippines (in case of a resident foreign corporation); or in the case of a closely-held corporation, regardless of the rate of return on its net worth. The Commissioner's assessment of the tax on PICOP was premised on the validity of his disallowed deductions which resulted in a net income to PICOP of P91,664,360.00. However, since the Honorable respondent Court sustained a substantial portion of the deductions and found PICOP's new adjusted net income to be only P4,491,249.00, or less than 10% of its net worth, it declared PICOP exempt from the payment of the 5% corporate development tax. In his petition for review, the Commissioner again poses a different task. He now asserts that Picop's liability for the tax arises from its being a "closely-held corporation", defined as a corporation, "(a) at least 50% in value of the outstanding stock or (b) at least 50% of the total combined voting power of all classes of tax entitled to vote, at any time during the taxable year, is owned directly or indirectly by or for not more than five persons, natural or juridical." This argument cannot be favorably considered because it was not raised in the court below and is raised only for the first time in this petition for review. Moreover, there is no evidence to show that the PICOP meets conditions for a "closely-held corporation." Re: Petition for Review of PICOP SP NO. 20095 1. PICOP claims that it is not subject to the 35% transaction tax because of the express exemption granted to it as a pioneer industry by Section 8 of RA 5186, to wit: "Sec. 8. Incentive to a pioneer enterprise . In addition to the incentives provided in the preceding section, pioneer enterprises shall be granted the following incentives benefits: "(a) Tax exemption . Exemption from all taxes under the National InternalRevenueCode (NIRC), except income tax, from the date the area of investment is included in the Investment Priorities Plan, to the following extent: "(1) One hundred per cent (100%) for the first five years; (2) Seventy-five per cent (75%) for the sixth through the eight year; (3) Fifty per cent (50%) for the ninth and tenth years; (4) Twenty per cent (20%) for the eleventh and twelfth years; (5) Ten per cent (10%) for the thirteenth through the fifteenth year." (pp. 12-13, Rollo of SP No. 20095) It will be noted from the above that PICOP is exempted from the payment of all taxes under the National Internal Revenue Code, except income tax . Hence, the question to be resolved is whether or not the 35% transaction tax is an income tax or not. This question has been squarely met and resolved in the affirmative in the case of Western Minolco Corporation versus Commissioner of Internal Revenue, 6 thus: "Petitioner submits that inasmuch as taxes in general constitute allowable deductions from gross income in the determination of taxable net income, the 35% transaction tax is a business tax and not an income tax because the RevenueCode itself classifies it as "Business Tax" under Title V, and that P.D.No.1154 expressly states that the transaction tax shall be allowed as a deductible item for purposes of determining the borrower's taxable income. The petitioner's contentions deserve scant consideration. The 35% transaction tax is imposed on interest income from commercial papers issued in the primary money market. Being a tax on interest, it is a tax on income. As correctly ruled by the respondent Court of Tax Appeals: "'Accordingly, we need not and do not think it necessary to discuss further the nature of the transaction tax more than to say that the incipient scheme in the issuance of Letter of Instructions No. 340 on November 24, 1975 (O.G. Dec. 15, 1975), i.e., to achieve operational simplicity and effective administration in capturing the interest-income 'windfall' from money market operations as a new source of revenue, has lost none of its animating principle in parturition of amendatory Presidential DecreeNo.1154, now Section 210(b) of the TaxCode. The tax thus imposed is actually a tax on interest earnings of the lenders or placers who are actually the taxpayers in whose income is imposed. Thus, 'the borrower withholds the tax of 35% from the interest he would have to pay the lender so that he (borrower) can pay the 35% of the interest to the Government.' (President Marcos, Times Journal, June 17, 1977 cited in Respondent's Memorandum, p. 6). . . . Suffice it to state that the broad consensus of fiscal and monetary authorities is that "even if nominally, the borrower is made to pay the tax, actually, the tax is on the interest earning of the immediate and all prior lenders/placers of the money. ". . . ." ( Rollo , pp. 36-37) The 35% transaction tax is an income tax on interest earnings to the lenders or placers. The latter are actually the taxpayers. Therefore, the tax cannot be a tax imposed upon the petitioner. In other words, the petitioner who borrowed funds from several financial institutions by issuing commercial papers merely withheld the 35% transaction tax before paying to the financial institutions the interests earned by them and later remitted the same to the respondent Commissioner of Internal Revenue. The tax could have been collected by a different procedure but the statute chose this method. Whatever collecting procedure is adopted does not change the nature of the tax." (124 SCRA, pp. 130-131) Hence, PICOP is not exempt from the payment of the tax. Its lamentation that this would defeat the purpose of the Incentives Act to give assistance by way of tax relief to pioneer/distressed industries such as itself is misplaced. The tax is levied on and paid from the interest earnings of the lender of PICOP. There is no cash outlay from PICOP's funds for its payment. All PICOP is required to do is deduct it from the interest earnings of the lender before turning over the interest earnings to the lender. PICOP, however, contends that even if the tax has to be paid, it should be imposed only for the interests earned after 20 September 1977 when PD 1154 creating the tax became effective. We find merit in this contention. It appears that the tax was levied on interest earnings from January to October, 1977. However, as found by the lower Court, PD 1154 was published in the Official Gazette only 5 September 1977, and became effective only fifteen (15) days after the publication, or on 20 September 1977, no other effectivity date having been provided by the PD. 7 Based on the worksheet prepared by the Commissioner's office, 8 the interests earned from 20 September to October 1977 was P10,224,410.03. Thirty-five (35%) per cent of this is P3,578,543.51 which is all PICOP should pay as transaction tax. 2. PICOP challenges the ruling of the lower Court sustaining the BIR's assessment against it of documentary and science stamp tax in the amount of P300,000.00 which it failed to affix on the P100 million worth of debenture bonds issued in 1977. PICOP again refers to Section B(a) of RA 5186 as the basis for its exemption. The lower Court rejected PICOP's argument holding that the "exemption privilege which includes exemption from documentary stamp tax, shall cover only the direct tax liabilities of the corporation as may be imposed in connection with the operation of the registered pioneer project and shall exclude such taxes as may be transferred or passed on to it either by business practice or mere contractual arrangement . . . (and) the issuance of convertible debenture bonds is not synonymous to the manufacture of an integrated pulp and paper mill." 9 PICOP, however, asserts that the two conditions invoked by the Commissioner for the applicability of the exemption are fulfilled in this instance because the documentary and science stamp taxes are its direct tax liability and the debenture bonds were issued precisely to finance its needs for the operations of its pulp and paper mill project. We are inclined to agree with PICOP. The Commissioner admits that documentary and science stamp taxes are among the taxes BOI registered industries are exempt from paying pursuant to Section 8(a) of RA 5186, provided, the issuance of the debenture bonds is related to PICOP's operation as an integrated pulp and paper mill. According to the Commissioner, it is not. He does not, however, explain how he came to this conclusion. On the other hand, PICOP's explanation that the debenture bonds were issued to finance its registered operation is logical and is unrebutted. We are aware that the tax exemptions must be applied strictly against the beneficiary in order to deter their abuse. It would indeed be altogether a different matter if there is a showing that the issuance of the debenture bonds had not bearing whatsoever on the registered operations of PICOP and that they were issued in connection with a totally different business undertaking of PICOP other than its registered operation. There is, however, a dearth of evidence in this regard. It cannot be denied that PICOP needed funds for its operations. One of the means it used to raise said funds was issue debenture bonds. Since the money raised thereby was to be used in its registered operation, PICOP should enjoy the incentives granted to it by RA 5186, one of which is the exemption from payment of all taxes under the National Internal Revenue Code, except income taxes, otherwise the purpose of the incentives would be defeated. Documentary and science stamp taxes on debenture bonds are certainly not income taxes. Since we find PICOP not liable for the documentary and science stamp taxes, the compromise penalty of P300.00 is, likewise, nullified. 3. PICOP questions the ruling of the lower Court sustaining the Commissioner's disallowance of deductions amounting to P1,237,421.00, representing financial, guarantee and interest expense for 1977, itemized as follows: Cash Date Voucher No. Amount Remarks Oct. 5, 1977 12714 P330,421.00 Register of Deeds Oct. 5, 1977 12716 7,000.00 Cash Oct. 6, 1977 12771 500,000.00 Cash Oct. 6, 1977 12772 400,000.00 Cash P1,237,421.00 =========== The lower Court reasoned that: "The basic principles governing deductions are: 1) The taxpayer seeking a deduction must point to some specific provisions of the statute in which that deduction is authorized; 2) He must be able to prove that he is entitled to the deduction which the law allows; and 3) Adequate records should be kept to support deductions. (1955, Ph. Fed. Tax Course, par. 1901). It is required that the claimed deduction be supported by adequate evidence or records, otherwise the same will be disallowed. Accordingly, the mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction. (Basilan Estate vs. Commissioner of Internal Revenue, L-22492, September 5, 1967). No records are available to support the abovementioned expenses. The vouchers merely showed that the amounts were paid to the Register of Deeds and simply Cash account. Without the supporting papers such as the invoices or official receipts of the Register of Deeds, these vouchers standing alone cannot prove that the payments made were for the accrued expenses in question. The best evidence of payment is the official receipts issued by the Register of Deeds. The testimony of petitioner's witness that the official receipts and cash vouchers were shown to the Bureau of Internal Revenue will not suffice if no records could be presented in court for proper marking and identification. As petitioner failed to substantiate the deduction of P1,237,421.00, respondent's disallowance of the said amount should be sustained." (pp. 45-46, Rollo of SP 20095) We are in agreement with the above ratiocination. The mere testimony of a witness for PICOP and the cash vouchers do not suffice to establish its claim that registration fees were paid to the Register of Deeds for the registration of real estate and chattel mortgages in favor of the Development Bank of the Philippines and the Philippine National Bank as guarantors of PICOP's loans. The witness could very well have been merely repeating what he was instructed to say regardless of the truth, while the cash vouchers, which we do not find on file, are not said to provide the necessary details regarding the nature and purpose of the expenses reflected therein. PICOP should have presented, through the guarantors, its owner's copy of the registered titles with the lien inscribed thereon as well as official receipt from the Register of Deeds evidencing payment of the registration fee. The other expenses claimed are less identifiable. 4. PICOP charges the lower Court with error in sustaining the Commissioner's finding that it had understated its sales by P2,391,644.00 and overstated its cost of sales by P604,018.00 in 1977. It explains that the differences in the amounts as appearing in its books and its income tax return is due to the fact that it has been its practice to record export sales in U.S. dollars on the basis of a pre-determined fixed dollar rate. At the end of the year, its auditors determine the actual proceeds of export sales, this time converted in to Philippine Pesos. The average of the recorded fixed exchange rate and the actual rate upon receipt of the proceeds from export sales is computed in order to arrive at the adjusted sales at year-end. This adjusted bases of sales was the basis used for income tax purposes. The lower court rejected the above explanation because PICOP did not carry the same adjustments in its books of accounts to properly show the true and correct amount of sales and cost of sales. PICOP assails the lower Court for having "placed a high probative value" on its books of account, despite the following pronouncement in Consolidated Mines, Inc. versus Court of Tax Appeals, et al., 10 to wit: "Books of account may therefore be admissible under the rule. In tax cases, however, this Court appears not to place too high a probative value on them, considering the statement in the case of Collector of Internal Revenue v. Reyes that "books of account do not prove per se that they may be more consistent than truthful." Indeed, books of account may be used to carry out a plan of tax evasion." (58 SCRA, p. 637) Books of account are admissible in evidence and courts have the discretion to accord them the probative value they deserve. In this case, the lower Court was correct in considering PICOP's books of account to demonstrate the discrepancy between their contents and those stated in PICOP's income tax return because the entries in the books of account are admissions against PICOP's interest. It would have been otherwise if the books were presented to favor PICOP. That would have been the occasion for the lower Court to have exercised great caution before accepting the entries therein. 5. Lastly, PICOP questions the lower Court's imposition of interest from 14 April 1978 to 31 March 1986, a period of almost six (6) years, as without legal basis inasmuch as the 1977 Tax Code, as amended, particularly Section 51(40(d) thereof, limits the imposition of interest to a maximum of three (3) years. Not only has the lower Court exceeded the maximum period for the imposition of interest, it has also imposed the erroneous rate of interest. The interest of 14% and 20% imposed on the deficiency income tax is taken from BIR Revenue Regulation No. 7-77 which the lower Court had declared to be invalid and, therefore, inoperative. The applicable provision of law is Section 51(e)(2) and (3) of the Tax Code earlier quoted herein which provides for the imposition of interest of 20% per annum on the deficiency from the thirtieth day of notice and demand until fully paid, but not to exceed three (3) years, and a surcharge of 10%. The demand for the payment of the deficiency tax was received by PICOP on 21 April 1983. Hence, it should have paid the deficiency on or before 21 May 1983. Since it did not, it became liable for the interest of 20% on the deficiency income tax from the date and for a period of three (3) years, or until 20 May 1986, together with a surcharge of 10%. WHEREFORE, the appeal of the Commissioner of Internal Revenue is denied for lack of merit. The judgment against PICOP is modified, as follows: 1. PICOP is declared liable for the 35% transaction tax in the amount of P3,578,543.51. 2. PICOP is absolved from the payment of documentary and science stamp tax of P300,000.00, and the compromise penalty of P300.00. 3. PICOP shall pay 20% interest per annum on the deficiency income tax of P1,481,579.15, for a period of three (3) years from 21 May 1983, or in the total amount of P888,947.49, and a surcharge of 10% on the latter amount, or P88,984.75. No pronouncement as to costs. SO ORDERED. Benipayo and Martin, Jr., JJ., concur. Footnotes 1. Rollo of SP 20070, pp. 7-77 and Rollo of SP 20095, p. 7-73. 2. Rollo of SP 20070, p. 78. 3. Rollo of SP 20095, p. 74. 4. Exhibit J-1. 5. Exhibit 4, p. 128, BIR Record. 6. G.R. No. L-61632, 16 August 1983, 121 SCRA, 121, 130-131. 7. Taada vs. Tuvera, 146 SCRA 446 (1986). 8. BIR Record, p. 35. 9. At pages 11-12 of Decision. 10. SCRA 618 (1974).