Commissioner of Internal Revenue v. Orient Pacific Capital Investment Corp.

TWELFTH DIVISION [CA-G.R. SP No. 25350. May 25, 1992.] (C.T.A. Case No. 3358) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . ORIENT PACIFIC CAPITAL INVESTMENT CORPORATION (Citicorp Investment Philippines) and THE COURT OF TAX APPEALS , respondents . D E C I S I O N LAPEA, JR. , J p : Petitioner elevated to this Court the decision of respondent Court of Tax Appeals (CTA) in C.T.A. Case No. 3358, which granted the tax credit to private respondent Orient Pacific Capital Investment Corporation in the reduced amount of P485,193.82 as overpaid income tax arising from alleged unapplied creditable tax withheld for the year 1979. The antecedent facts are summarized in the decision under review as follows: "This is a claim for tax credit in the amount of P487,336.00 in favor of petitioner for overpaid 1979 income tax arising from unapplied creditable tax withheld. This amount of tax credit claim is P487,336.00 representing income tax withheld on interest income of petitioner from time and savings deposit and from debenture bonds. For income tax purposes, petitioner's operations in 1979 resulted in a loss (Exhs. B and B-1, B-4, B-5 and B-6; testimony of Ms. Doris Mendoza, January 27, 1980, pp. 5-7, t.s.n.). Consequently, it had no income tax liability for said year against which the creditable withholding taxes could be applied. Petitioner, therefore, made an overpayment of Four Hundred Eighty Seven Thousand Three Hundred Thirty Six Pesos (P487,336.00) representing overpaid 15% withholding tax on interest on petitioner's time and savings deposits and debenture bonds (Exhs. B-2, B-3; pp. 5-7, t.s.n., Jan. 27, 1988)." Petitioner contends that private respondent is no longer entitled to a tax credit of P487,336.00 as alleged overpaid withholding tax because the same was already considered and deducted in the computation of its net income reflected in its returns filed with the BIR. This conclusion is reflected in the findings of BIR examiner Nora E. Tamayo after the latter's investigation of the private respondent's 1979 income tax return, wherein a deficiency income tax return assessment was ascertained to be still due and collectible from the latter for the year 1979 in the amount of P1,185,985.00 computed as follows: INCOME TAX Net income per return P2,538,885.00 Add: Unallowable deductions/ additional income interest expense P 5,635,329.15 Total adjustment 5,635,239.15 Net income per investigation P3,096,444.00 Less: Personal and additional exemptions Net income subject to tax P3,096,444.00 Income tax due thereon P1,229,577.60 Less: Income tax already withheld 487,336.00 Deficiency tax 741,241.00 Add: Surcharge Interest maximum 444,744.60 Compromise TOTAL AMOUNT DUE & COLLECTIBLE P1,185,585.60 ========== OTHER TAXES Documentary stamps: Sec. 223 P427,674.33 Sec. 225 338,210.00 TOTAL AMOUNT DUE & COLLECTIBLE P765,884.33" ========== Petitioner therefore contends that the granting by respondent CTA of private respondent's claim for tax credit amounted to a double refund/credit, not to mention the fact that it has outstanding tax liabilities in the amounts of P1,185,585.60 and P765,885.33, representing its deficiency income tax and documentary stamp taxes, respectively, for the year 1979: that instead of a net loss of P2,538,885.00 for 1979 per its tax return for said year, it has been established after investigation and after considering the unallowable deductions of interest expense, that it had a taxable income of P3,096,544.00 for 1979. The appeal is devoid of merit. We agree with respondent CTA that under the applicable law on withholding tax at source (Sec. 53, NIRC) which requires that interest income subjected to withholding tax be included in the gross income of the taxpayer in computing his income tax liability, any withholding tax paid by the taxpayer was subject to refund in the event the taxpayer suffered a loss instead of realizing taxable gain. Thus, having incurred a loss of P2,358,885.00, private respondent is therefore entitled to the refund of taxes paid amounting to P487,336.00. Moreover, respondent CTA arrived at the following correct conclusion on why the creditable income tax withheld should be credited in favor of private respondent after considering the pertinent laws and regulations on the matter: "It follows from the aforequoted provisions of law and regulations, therefore, that the withholding taxes on interest earned by petitioner on its savings and time deposits and on its debenture bonds in 1979 (i.e., prior to the amendment which subjected interest on deposits and yield on deposit substitutes to final withholding taxes), partook of the nature of creditable (not final) withholding taxes. Petitioner having incurred losses, a fact not disputed by respondent, such creditable income tax withheld should be credited in favor of petitioner." As regards petitioner's contention that, based on Examiner Nora E. Tamayo's report, there was still due and collectible from private respondent deficiency taxes of P1,185,985.60 and P65,884,32. We agree with respondent CTA that the same was not yet a final assessment but only a proposed or provisional assessment. The CTA observed: "We note that the report of Revenue Examiner Nora E. Tamayo (pp. 77, 78 & 79, CTA rec.) has not been approved by the Commissioner of Internal Revenue. Neither has she been presented to testify on her report. Hence, her report, can not be taken as concrete evidence in this case of her findings that the said P487,366.00 withholding tax was already considered and deducted in the computation of its net income reflected in its return filed in respondent's Bureau." This appears to be confirmed by the final assessment sent by petitioner to private respondent dated April 1, 1985 (Annex "A", Comment), showing the final computation of the latter's deficiency income for 1979 as follows: Deficiency Income Tax Net income (loss) per return (P2,538,885.00) Add: Unallowable deductions: Interest expense (corresponds to the allocable portion of investment in securities, the income from which are tax-exempt/ tax-free except that from CBCI's which are tax assumed) 5,635,329.15 Net income per investigation P3,096,444.15 ========== Income tax due thereon P1,228,578.00 Less: Income tax already paid Balance P1,228,578.00 Add: 14% int. fr. 4/6/80 to 7/31/80 50,125.98 20% int. fr. 8/1/80 to 4/15/83 665,520.70 TOTAL AMOUNT DUE AND COLLECTIBLE P1,944,244.68 ========== While the formal assessment is basically similar to the proposed assessment prepared by Examiner Tamayo, the creditable withholding taxes were not considered and deducted in the computation of private respondent's deficiency income tax liability. The said liability was finally settled in a compromise accepted by petitioner in his letter dated January 4, 1989 (Annex "B", Comment) and finally paid by private respondent on April 5, 1989 in the amount of P184,286.70 (Annex "C", Comment). WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed and the petition dismissed. SO ORDERED. Herrera and Austria, JJ ., concur.