Cruz, Jr. v. Court of Tax Appeals

SPECIAL SIXTH DIVISION [CA-G.R. SP No. 25308. April 7, 1992.] (C.T.A. Case No. 3806) DELFIN MA. V. CRUZ, JR. , petitioner , vs . THE COURT OF TAX APPEALS AND THE COMMISSIONER OF INTERNAL REVENUE , respondents . D E C I S I O N CAMPOS , JR ., J p : This is an appeal by way of a petition for review on certiorari originally filed with the Supreme Court by Delfin Ma. V. Cruz, Jr., from the decision and resolution dated June 29, 1990 and October 1, 1990, respectively, of the Court of Tax Appeals in C.T.A. Case No. 3806, entitled "Delfin Ma. V. Cruz, Jr. vs. Commissioner of Internal Revenue", which sustained the deficiency income tax assessment of respondent Commissioner against the herein petitioner in the amount of P96,193.64 for taxable year 1974. The Supreme Court, pursuant to Section 9, paragraph 3 of Batas Pambansa Blg. 129, granting the Court of Appeals exclusive appellate jurisdiction over all final judgments, decisions, resolution, orders or awards of Regional Trial Courts, quasi-judicial agencies, instrumentalities, board or commissions, referred the instant petition to this Court on May 6, 1991 for its proper determination and disposition. Acting on the referral, this Court gave due course to the petition and consequently required both parties to submit their simultaneous memoranda. Both parties complied. Finding the statement of facts of respondent Court of Tax Appeals to be supported by the evidence on record, the same is hereby adopted in this discussion, as follows: "This case involved the deductibility of interest payments for income tax purposes. Petitioner declared for his 1974 income tax return the amount of P168,884.33 as deductible interest expenses which the respondent Commissioner disallowed. Accordingly, a deficiency income tax assessment was issued under Demand Letter and Assessment Notice No. 26-306105591-74 dated December 14, 1979 (Exhs. "4" and "4-a"). Subsequently, petitioner's deficiency assessment was revised with a reduced income tax liability of P96,193.64, inclusive of interest (Exhs. "5", "6" and "7"). consequence by the disallowance of an interest payment of P145,004.19 to a certain Pablo S. Cruz. A request for furthered consideration under January 22, 1980 lettered (Exh. "C") of the revised assessment proved to no avail as the respondent sustained the correctness thereof under letters dated December 16, 1981 and January 25, 1982 (p. 84 and p. 92, BIR rec., respectively) but receipt thereof was denied by the petitioner. On October 15, 1982, respondent filed a judicial action for collection in the Regional Trial Court of Quezon City, docketed as Civil Case No. 0-36492, entitled "Republic of the Philippines vs. Delfin Ma. V. Cruz, Jr. (Exh. "D"). Petitioner was duly serve with summons with a copy of the said complaint on June 5, 1984. Petitioner considered the filing of the judicial action a denial of his requested reconsideration of January 22, 1982, filed the instant petition for review on July 4, 1984." (Rollo, pp. 9-10). After evaluating the evidence submitted by the opposing parties, respondent Court dismissed the petition, thus: "WHEREFORE, petition is hereby dismissed at petitioner's costs." Rollo, pp. 16). Petitioner in this appeal presents a single issue, that is, "can an interest payments, where the obligation to pay the same is not evidenced in writing, be proven by collateral evidence and thus deductible for income tax purposes?". To which We have a negative answer. Section 30(b) of the Tax Code, as amended, provides: "Section 30(b). Interest: 1. In general . That amount of interest paid or accrued within a taxable year on indebtedness incurred in connection with the taxpayer's profession, trade or business, except on indebtedness incurred or continued to purchase or carry obligation the interest upon which is exempt from taxation as income under this Title. xxx xxx xxx." Pursuant to the above-cited provision of the Tax Code, the following requisites must concur to validly claim deductibility of interest payment, to wit: 1. There must be an indebtedness; 2. The indebtedness must be that of the taxpayer; 3. The indebtedness must be connected with the business, trade or profession of the taxpayer; 4. The interest must have been paid or accrued during the taxable year; and 5. The interest must have been stipulated in writing (Teodoro & De Leon, The Law on Income Taxation, 1987 Edition, p. 82). From the foregoing, it may be clearly inferred that for interest payment to be deductible, the same must be supported by a written agreement of the indebtedness the term of which stipulate for the payment of an interest. This is in consonance with Article 1956 of the Civil Code, providing that: "Article 1956. No interest shall be due unless it has been expressly stipulated in writing." In other words, the written agreement of the indebtedness is an indispensable requirement to support a claim of deductibility of interest payment. For how could a claimant prove concurrence of all the said requisites without showing the written agreement of the indebtedness. Mere certification of the alleged creditor as to the existence of the debt and/or as to the payment of the interest thereon cannot dispense with the requisite of written agreement of the indebtedness. Otherwise, the law could be easily circumvented. To escape compliance with the legal requirement of a written stipulation to pay interest which must necessarily reflect some kind of loan or indebtedness, petitioner was contented to submit a certification of a certain Pablo S. Cruz dated September 12, 1978, certifying that in 1974, he received from petitioner the amount of P145,004.19 as payment of interest (Exh. "F", BIR rec., p. 105), and a copy of the income tax return of said Pablo Cruz for the taxable year 1974 which declared receipt of interest income in 1974 in the amount of P145,004.19 from petitioner (Exh. "G"). Assuming that Cruz did really pay interest, there was no indication that it was owning or due to taxpayer Cruz. Said documents, however, do not suffice and cannot be made as substitute for a written contract the terms of which must stipulate the interest payable by petitioner to Pablo Cruz. To rule otherwise, as the respondent Court said, would sanction an expedient arrangement unsustainable either by operation of law or applicable settled principles. Besides, no credibility whatever can be derived from said exhibits. The reason being the failure/inability of petitioner to present Pablo Cruz,, the alleged author of Exhibited "F" and "G". in the witness stand. Absence of the said witness deprived respondent Commissioner of Internal Revenue of the right to cross-examined Mr. Cruz on the particulars of said alleged indebtedness. Tax assessment by tax examiner are presumed correct and made in good faith (Sy Po vs. Court of Tax Appeals, 164 SCRA 524). And the burden is on the taxpayer to prove the validity of the claimed deduction (Commissioner of Internal Revenue vs. Algue, 158 SCRA 9). which onus petitioner failed to discharge. WHEREFORE, the instant petition is hereby DISMISSED for lack of merit. SO ORDERED Marigomen and Abad Santos, * Jr., JJ., concur. Footnotes * Acting Third Member.