JBF Investment, Inc. v. Commissioner of Internal Revenue

EIGHTH DIVISION [CA-G.R. SP No. 26935. June 26, 1992.] JBF INVESTMENT, INC. , petitioner , vs . THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS , respondents . D E C I S I O N LOMBOS-DE LA FUENTE , J p : Before this Court is a petition for review of the decision dated October 31, 1991, of the Court of Tax Appeals affirming the decision of the Commissioner of Internal Revenue dated January 9, 1985, ordering petitioner JBF Investment, Inc. "to pay to respondent Bureau of Internal Revenue the amount of P1,134,755.11 plus 20% interest per annum from April 16, 1983 up to April 16, 1986 and 10% surcharge on the basic tax of P716,979.00 pursuant to the provisions of Section 51(2) and (3) of the National Internal Revenue Code as amended by P.D. No. 1703". It appears from the record that the Commissioner of Internal Revenue (CIR) issued an assessment on JBF Investment, Inc., (JBF, for short) for personal holding company tax for the year 1979 in the abovesaid amount of P1,134,755.11. JBF protested this assessment. The CIR rendered his decision reiterating his previous assessment. Upon review by the Court of Tax Appeals (CTA), said court, as already stated, affirmed the CIR's decision. Petitioner is being taxed as a personal holding company. The term "personal holding company has been defined in section 64 of the National Internal Revenue Code (the Code, for brevity) as any corporation as defined in section 20 of the Code which meets the gross income requirement and the stock ownership requirement prescribed in section 64 thereof. Under the gross income requirement, it is necessary that at least eighty (80) per centum of the corporation's gross income for the taxable year is personal holding company income as defined in section 65 of the Code. And under the stock ownership requirement, it is necessary that more than fifty (50) per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five (5) individuals. As JBF does not dispute that it comes within the purview of the stock ownership requirement, the only issue presented for determination to the CIR and later to the CTA was on whether JBF falls within the ambit of the 80% gross income requirement. JBF claims that it does not. The CIR has taken the opposite view, i.e., that at least 80% of JBF's gross income is personal holding company income within the contemplation of section 64, supra. Relying on JBF's gross income statement for the year ending December 31, 1979, viz: "Interest on money market placement P409,817.68 Dividend income subject to final tax 1,369,336.50 Interest on savings deposits 32,768.01 Other income 56.00 P1,807.978.19" ========= (Emphasis supplied) the CIR ruled that JBF is a personal holding company, in view of the fact that at least 80% of its gross income, which consists of dividends which had been subjected to the 10% final tax (pls. see underscored portion of the above-quoted statement), is personal holding company income. In support of its above-stated view, the CIR cited the definition of "personal holding company" found in section 65(a) of the Code as amended by Presidential Decree No. 1457, which insofar as pertinent reads: "Sec. 65. Personal holding company income For the purposes of this Title, the term 'personal holding company income' means the portion of the gross income which consists of: (a) Dividends, interest [other than interest constituting rent as defined in subsection (g) hereof], royalties (other than mineral oil, or gas royalties), and annuities. The term royalties, as herein used, includes income from copyrights, patent, and other similar revenues." The CIR pointed out that before the amendment of the above-cited section 65(a) by PD 1457 which took effect on June 11, 1978, said provision defined the term "personal holding company income" as: "Sec. 65 that portion of the gross income which consists of: (a) Dividends (other than dividends subject to tax under Section 24(d) [should be Section 24(c) * ] of this Code) . . .". The CIR explained that as a result of the deletion from section 65(a), by virtue of the PD 1457 amendment, of the parenthetical phrase "i.e., (other than dividends subject to tax under section 24(c)" and inasmuch as section 24(c) refers to the 10% final tax on intercorporate dividends received by a domestic or resident foreign corporation from another domestic corporation, the effect of the amendment by PD 1457, is that beginning June 11, 1978, all dividends including dividends which had been previously subjected to the 10% final intercorporate dividend tax shall be treated as personal holding company income for the purpose of computing the gross income of an entity in order to determine whether such entity is to be considered a personal holding company under section 65(a) of the Code, supra . This is the rationale of the CIR's ruling, already stated, that JBF is a personal holding company because at least 80% of its gross income is personal holding company income. Taxpayer JBF, on the other hand, submits the view that as of the enactment of PD 1457 on June 11, 1978, dividends earned by JBF which had already been subjected to the final 10% tax under section 24(c), supra , should not be considered part of personal holding company income, considering that the above-cited section, already hereinabove reproduced insofar as pertinent, in fixing the rates of tax on dividends earned by domestic or resident foreign corporations in general expressly stipulates that such dividends "shall not be included in the determination of the gross income of the recipient corporation" [par. (2) of sec. 24(c), supra ] When the issue was elevated to the CTA on a petition for review, it sustained the CIR in its abovesaid ruling with the following ratiocination: "The development of the provisions on 'personal holding company income', from one which segregated intercorporate dividends subject to final tax in determining gross income for purposes of defining a corporation as 'personal holding company' to its present form, plainly manifest the intent to do away with the former disposition and to subsequently encompass all dividends, without regard to the provisions of Section 24(c). To be sure, Section 24(c) and Section 65(a) are distinct and separate provisions, the former within the title on Tax on Corporations and the latter within that on Personal Holding Companies. It cannot be denied that a 'personal holding company is no ordinary corporation as the NationalInternalRevenueCode has set aside determinate provisions defining it and the manner of its taxation different from an ordinary corporation. Thus, the consistency of gross income for ordinary corporations which was formulated to exclude intercorporate dividends subject to final tax for purposes of the corporate tax can be made different from the consistency of gross income of corporation susceptible of coming within the definition of personal holding company. Gross income then has one meaning when used for ordinary corporations in the phrase, to wit: dividends received . . . liable to tax under this Code . . . shall not be included in the determination of the gross income . . .'; and another meaning when used for personal holding companies as is clear from the phrase in Section 65(a) 'personal holding company income' means the portion of the gross income which consists of dividends . . .". We see no reasons for deviating from the foregoing views of the CIR and the CTA and very good reasons for sustaining the same. Firstly, after looking into the evolution of the law on the matter, We are more than ever convinced that the indubitable legislative intent is to consider personal holding companies as pertaining to a special form of juridical person, to be governed by a distinct and separate set of provisions insofar as the imposition of the income tax is concerned. We are able to arrive at this conclusion in view of the following considerations: In the old Code, as amended by PD 1158, there were no specific provisions at all covering/defining the imposition of income tax on personal holding companies. Thus, Title II of the Code entitled "Income Tax" then contained ten chapters namely: "Chapter 1. Definitions"; "Chapter 2. Tax On Individuals"; "Chapter 3. Tax on Corporations"; "Chapter 4. Computation of Taxable Income"; "Chapter 5. Accounting Periods and Methods Of Accounting"; "Chapter 6. Returns and Payment Of Tax"; "Chapter 7. Estates And Trusts"; "Chapter 8. Administrative Provision"; "Chapter 9. Quarterly Corporate Income Tax Payments"; and "Chapter 10. Withholding On Wages" but not one them dealt specifically with personal holding companies. However, in Title II of the present Code (i.e., incorporating amendments after P.D. 1158) also entitled "Income Tax", there has been inserted a new chapter dealing particularly with the income tax on personal holding companies, viz: "Chapter 9. Personal Holding Companies". This can only lead to the conclusion that it is the legislative intent that the matter of the imposition of income tax on personal holding companies shall thenceforth be dealt with in accordance with Chapter 9 of the Title II of the Code, separate and apart from the matter of the imposition of income tax on corporations in general which would continue to be dealt with in accordance with Chapter 3 of the same Title. And inasmuch as section 65(a) of Chapter 9 contains the definition of the term "personal holding company income" it is this definition which shall govern in the computation of an entity's gross income for the purpose of determining whether it has met the gross income requirement for a personal holding company within the contemplation of paragraph (1) of section 64 of the same Chapter. Now, then, under present law what is the concept/connotation of "personal holding company income" vis-a-vis dividends as a component? We sustain the concept espoused by the CIR and the CTA. Section 65(a) of the Code, as amended by PD 1457, simply states that "personal holding company income" means the portion of the gross income which consists, inter alia, of dividends , without any qualifications at all as to the term dividends. This, as distinguished from the provisions of the same section [sec. 65(a)] before its amendment by the abovesaid PD, in which the word dividends was qualified by the use of the parenthetical phrase "other than dividends subject to tax" under section 24(c). As aptly viewed by the CIR and the CTA, the deletion of the abovementioned qualifying phrase from section 65(a) by virtue of its amendment by PD 1457 can only be taken to convey the legislative intent of broadening the scope of personal holding company income so as to encompass all dividends earned by the company whether or not such dividends have already been subject to the 10% final tax. Finally, We cannot see Our way clear to agreeing with petitioner's submission that section 24(c) which provides that dividends received by a domestic or resident foreign corporation from a domestic corporation liable to tax under the Code shall not be included in the determination of the gross income of the recipient corporation should be reconciled with section 65(a) such that the dividends received by a personal holding company which have already been subjected to the 10% tax shall not be included in the computation of the gross income of said company. There can be no justification for the reconciliation suggested by petitioner because there is no room for the application of section 24(c) to the case at bar, consistently with Our discussion, supra , that the provisions of Chapter 9 are what should apply to the matter of the imposition of income tax on personal holding companies and not Chapter 3 which governs the imposition of income tax on corporations in general, and whereunder falls section 24(c). Besides there is that fundamental rule of statutory construction that whenever two provisions, one governing a subject in general [in the instant case, sec. 24(c)] and another governing a particular matter within the general subject matter [in the instant case, section 65(a)], are in conflict with each other, the latter shall prevail. (Vera vs. Cuevas, 90 SCRA 379; Empire Insurance vs. Rufino, 90 SCRA 437; People vs. Echavez, 95 SCRA 163) Applying this rule, it is section 65(a) and not section 24(c) which should apply to the present case. On the premises, We fail to see that the instant petition has shown prima facie that the CTA has committed any error whether of fact or of law in affirming the ruling of the CIR in the case at bar which would otherwise warrant a reversal or even a modification of the decision sought to be reviewed. WHEREFORE, the instant petition for review should be, as it is hereby, denied due course and is accordingly dismissed. Costs against petitioner. SO ORDERED. Bengzon and Abad-Santos, Jr., JJ., concur. Footnotes * Sec. 24(c) Rate of tax on certain dividends. Dividends received by a domestic or resident foreign corporation from a domestic corporation liable to tax under this Code. (1) Shall be subject to a final tax of 10% on the total amount thereof, which shall be collected and paid as provided in Section 53 and 54 of this Code: . . ." (2) Shall not be included in the determination of the gross income of the recipient corporation: . . ."