Commissioner of Internal Revenue v. Court of Tax Appeals

FIFTEENTH DIVISION [CA-G.R. SP No. 23980. January 20, 1993.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . COURT OF TAX APPEALS and MIGUEL J. OSSORIO PENSION FOUNDATION, INC. , respondents . D E C I S I O N CUI , J p : Petition for review on certiorari assailing the decision of public respondent ordering a refund to the private respondent of the sum of P1,092,958.68 representing withholding taxes on interest income from direct loans and final tax on yields from Treasury Bill placements imposed pursuant to Presidential Decree No. 1959. A summary of the undisputed facts is quoted from the public respondent's decision, to wit (Annex "A" of Petition, pp. 2-3): In or about 1968, Victorias Milling Co., Inc. established a retirement or pension plan for its employees and those of its subsidiary companies pursuant to a 22-page plan. Pursuant to said pension plan, Victorias Milling Co., Inc. makes a regular financial contributions to the employee trust for the purpose of distributing or paying to said employees, the earnings and principal of the funds accumulated by the trust in accordance with said plan. Under the plan, it is impassable, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be used for, or diverted to, purposes other than for the exclusive benefit of said employees. Moreover, upon termination of the plan, any remaining assets will be applied for the benefit of all employees and their beneficiaries entitled thereto in proportion to the amount allocated for their respective benefits as provided in said plan. The petitioner and Victorias Milling Co., Inc., on January 22, 1970, entered into a Memorandum of Understanding, whereby they agreed that petitioner would administer the pension plan funds and assets, as assigned and transferred to it in trust, as well as all amounts that may from time to time be set aside by Victorias Milling Co., Inc. "For the benefit of the Pension Plan, said administration is to be strictly adhered to pursuant to the rules and regulations of the Pension Plan and of the Articles of Incorporations and By Law" of petitioner. This pension plan was thereafter submitted to the Bureau of Internal Revenue for registration and for a ruling as to whether its income or earnings are exempt from income tax pursuant to Rep. Act 4917, in relation to Sec. 56(b), now Sec. 54(b), of the Tax Code. In a letter dated January 18, 1974 addressed to Victorias Milling Co., Inc., Bureau of Internal Revenue ruled that " the income of the trust fund of your retirement benefit plan is exempt from income tax, pursuant to Rep. Act 4917 in relation to Section 56(b) of the Tax Code ." In accordance with petitioner's Articles of Incorporation (Annex A), petitioner would " hold legal title to, control, invest and administer, in the manner provided, pursuant to applicable rules and conditions as established, and in the interest and for the benefit of its beneficiaries and/or participants, the private pension plan as established for certain pension plan as established for certain employees of Victorias Milling Co., Inc. and other pension plants of Victorias Milling Co. affiliates and/or subsidiaries , the pension funds and assets, as well as the accruals, additions and increments thereto, and such amounts as may be set aside or accumulated of said pension plans. Moreover, pursuant to the same Articles of Incorporations, petitioner is empowered to "settle, compromise or submit to arbitration, any claims, debts or damages due or owing to or from pension funds and assets and other funds and assets of the corporation, to commence or defend suit or legal proceedings and to represent said funds and assets in all suits or legal proceedings ." Petitioner, through its investment manager, the City Trust Banking Corporation, has invested the funds of the employee trust in treasury bills, Central Bank bills, direct lending, etc., so as to generated income or earnings for the benefit of the employees-beneficiaries of the pension plan. Prior to the effectivity of Presidential Decree No. 1959 on October 15, 1984, respondent did not subject said income or earnings of the employee trust to income tax because they were exempt from income tax pursuant to Sec. 56(b), now Sec. 54(b), of the Tax Code and the BIR Ruling dated January 18, 1984 (Annex D ) . ( Emphasis ours .) After Presidential Decree No. 1959 took effect on October 15, 1984, respondent and/or the Bureau of Internal Revenue began subjecting the income or earnings of the employee trust held by petitioner to income or final withholding tax and collecting from petitioner said final withholding taxes on the ground that Presidential Decree No. 1959 allegedly withdrew or repealed the tax exemptions of employee trust on their earnings. In view of the position taken by respondent, the said respondent collected from petitioner, through the latter's investment manager, final withholding taxes consisting of: (1) Taxes withheld and remitted to the Bureau of Internal Revenue on account of direct lending of the employee trust fund, to wit: Amount of Tax Date Tax Withheld Remitted to BIR April, 1986 P100,761.44 May, 1986 1,883.68 June, 1986 38,112.40 July, 1986 18,166.67 August, 1986 2,164.91 September, 1986 79,592.71 October, 1986 12,506.90 November, 1986 2,156.78 December, 1986 42,457.56 January, 1987 to June 30, 1987 14,830.35 Total P312,633.40 as shown by sworn certification of Rosario C. Capino of Citytrust Banking Corporation (Annex E). (2) Taxes withheld by the Central Bank on account of petitioner's employee trust fund investment in Treasury Bills and/or Central Bank Bills, from January, 1986 to June 30, 1987 in the total amount of P780,352.28, as shown by a sworn certification of Rosario C. Capino of Citytrust Banking Corporation (Annex F), which states in part that the "taxes were, and formed part of, the taxes withheld and remitted to the Bureau of Internal revenue by the Central Bank, as appearing in the attached certification of the Central Bank dated December 11, 1987". The Central Bank remitted said taxes to the Bureau of Internal Revenue by means of credit advice on November 5, 1986, January 8, 1987, and from March 5, 1987 to November 5, 1987 (Annexes G and G-1). Subsequently, the Miguel J. Ossorio Pension Foundation, Inc. filed with the Internal Revenue a claim for refund of taxes alleged to have been wrongfully collected from it. The Bureau of Internal Revenue failed to act on the claim despite several letters sent by the said Foundation which prompted the judicial claim for taxes paid up to June 30, 1987. The questioned decision of the public respondent decreed as follows ( id . pp. 31-32): WHEREFORE, we find and so hold that (1) petitioner is entitled to a refund of the amount of P312,633.40 representing withholding taxes paid on interest income from direct loans and made by the retirement funds of the pension plan being exempt from income tax pursuant to Sec. 65(b), now Sec. 54(b), of the Tax Code; and that (2) it is equally entitled to refund of the amount of P780,352.28 representing final tax on yields from T-Bill placements of the retirement fund on the pension plan paid to the BIR a in 1986 up to June 30, 1987, as well as final taxes paid after June 30, 1987, for being exempt pursuant to Sec. 56(b), now Sec. 54(b) of the Tax Code of the total refundable sum of P1,092,958.68. Without pronouncement as to costs. SO ORDERED. The issue raised in whether or not the income earned by private respondent's pension plan from money market placements and purchase of treasury bills is exempt from the final tax imposed pursuant to P.D. No. 1959. A similar issue on the same set of facts had been raised and decided by this Court in the affirmative in "Commissioner of Internal Revenue vs. GCL Retirement Plan, represented by its Trustee Directors and the Court of Tax Appeals" (CA-G.R. SP No. 20426, Aug. 27, 1990). This Court's judgment was later upheld by the Supreme Court on a petition for review on certiorari (Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 95022, March 23, 1992, 207 SCRA 487). The text of the Supreme Court decision on the issue under a similar set of facts is hereby reproduced for guidance: To begin with, it is significant to note that the GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with Rep. Act No. 4917 approved on 17 June 1967. This law specifically provided: "SEC. 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes and shall not be exempt from all taxes and shall not be liable to attachment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action. . . (Emphasis ours). In so far as employees' trusts are concerned, the foregoing provision should be taken in relation to then Section 56 (b) (now 53(b) of the Tax Code, as amended by Rep. Act No. 1983, supra, which took effect on 22 June 1957. This provision specifically exempted employees' trusts from income tax and is repeated hereunder for emphasis: SEC. 56. Imposition of Tax . (a) Application of tax . The taxes imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust. xxx xxx xxx "(b) Exception . The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus of profit-sharing plan of an employer for the benefit of some or all of his employees . . ." The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust, springs from the foregoing provision. It is unambiguous. Manifest therefrom is that the tax law has singled out employees' trusts for tax exemption. And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts. Employees' trusts or benefit plant normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to which member of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose. The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in order to encourage the formation and establishment of such private Plans for the benefit of laborers and employees outside of the Social Security Act. Enlightening is a portion of the explanatory note to H.P. No. 6503, now R.A. 1983, reading: "Considering that under Section 17 of the Social Security Act, all contributions collected and payments of sickness, unemployment, retirement, disability and death benefits made thereunder together with the income of the pension trust are exempt from any tax, assessment, fee, or charge, it is proposed that a similar system providing for retirement, etc., benefits for employees outside the Social Security Act be exempted from income taxes." (Congressional Record, House of Representatives, Vol. IV, Part. 2, No. 57, p. 1859, May 3, 1957; cited in Commissioner of Internal Revenue v. Visayan Electric Co., et al., G.R. No. L-22611, 27 May 1968, 23 SCRA 715); Italics supplied. It is evident that tax exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution of accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run a foul of the very intendment of the law. The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential tax rates under the old law, therefore, can not be deemed to extend to employees' trusts. Said Decree, being a general law, can not repeal by implication a specific provision, Section 56(b) (now 53(b) in relation to Rep. Act No. 4917 granting exemption from income tax to employees' trusts. Rep. Act 1983, which excepted employees' trusts in its Section 56(b) was effective on 22 June 1957 while rep. Act No. 4917 was enacted on 17 June 1967, long before the issuance of Pres. Decree No. 1959 on 15 October 1984. A subsequent statute, general in Charter as to its terms and application, is not to be construed as repealing a special or specific enactment, unless the legislative purpose to do so is manifested. This is so even if the provisions of the latter are sufficiently comprehensive to include what was set forth in the special act (Villegas v. Subido, G.R. No. L-31711, 30 September 1971, 41 SCRA 190). Notably, too, all the tax provisions herein treated of come under Title II of the Tax Code on "Income Tax." (Section 21(d) as amended by Rep. Act No. 1959, refers to the final tax on individuals and falls under Chapter II; Section 24(cc) to the final tax on corporation under Chapter III; Section 53 on withholdings of final tax to Returns and Payments of Tax under Chapter VI; and Section 56(b) to tax on Estates and Trusts covered by Chapter VII, Section 56(b), taken in conjunction with Section 56(a), supra, explicitly excepts employees' trusts from "the taxes imposed by this Title." Since the final tax and the withholding thereof are embraced within the title on "Income Tax," it follows that said trusts must be deemed exempt therefrom. Otherwise, the exception becomes meaningless. There can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt (Sec. 56[b], now 53[b], Tax Code). The application of the withholdings system to interest on bank deposits or yields from deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source. If an employee's trust like the GCL enjoys a tax-exempt status from income, we see no logic in withholdings a certain percentage of that income which it is not supposed to pay in the first place. Petitioner also relies on Revenue Memorandum Circular 31-84 dated October 1984, and Bureau of Internal Revenue Ruling No. 027-e-000-00-005-85, dated 14 January 1985, as authorities for the argument that Pres. Decree No. 1959 withdrew the exemption of employees' trusts from the withholding of the final tax on interest income. Said Circular and Ruling pronounced that the deletion of the exempting and preferential tax treatment provisions by Pres. Decree No. 1959 is clear manifestation that the single 15% tax rate is imposable on all interest income regardless of the tax status or character of the recipient thereof. But since we herein rule that Pres. Decree No. 1959 did not have the effect of revoking the tax exemption enjoyed by employees' trusts, reliance on those authorities is now misplaced. WHEREFORE, the petition is hereby DISMISSED, for lack of merit. No costs. SO ORDERED. Rasul and Caizares-Nye, JJ., concur.