De San Jose v. Commissioner of Internal Revenue

[CA-G.R. SP No. 33163. August 10, 1994.] (C.T.A. Case No. 4660) HOSPICIO DE SAN JOSE , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS , respondents . D E C I S I O N YNARES-SANTIAGO , J p : This is a petition for review of the decision of the Court of Tax Appeals dated December 24, 1993 in C.T.A. Case No. 4660, modifying the deficiency income tax assessments made by respondent Commissioner of Internal Revenue against petitioner Hospicio de San Jose for calendar years 1981, 1982 and 1983. The facts of the case are as follows: On October 23, 1991, petitioner Hospicio de San Jose filed a petition for review with the Court of Tax Appeals of the decision of respondent Commissioner of Internal Revenue, reassessing petitioner deficiency income taxes for 1981, 1982 and 1983 in the amount of P434,330.75, P282,928.14 and P365,233.63, respectively. Petitioner alleged that the respondent Commissioner of Internal Revenue's deficiency income tax assessments are manifestly erroneous because: (a) they disallow expenses that are clearly deductible , (b) they disallow operating losses that are clearly deductible under the Tax Code, (c) they retroactively revoke the ruling of respondent dated December 15, 1966 and (d) they inequitably impose interest and surcharges on petitioner, who had relied upon the ruling of the respondent. Respondent Commissioner of Internal Revenue filed its Answer to the petition, partly admitting, and partly denying the material allegations of the petition, and by way of special and affirmative defenses, alleged the following: (1) that as a non-stock, non-profit charitable organization, petitioner's tax exemption is governed by Section 27 (now section 26) of the National Internal Revenue Code, which provides that income received by corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of the veterans, no part of the net income of which inures to the benefit of any private stockholder or individual, shall not be taxable; (2) That in C.T.A. Case No. 4224 (Hospicio de San Jose vs. Commissioner of Internal Revenue) involving the same issue as the instant case, this Court has ruled that the legislative intent in amending the proviso in Section 27 by the insertion of the phrase "regardless of the disposition made of such income", is to tax the income from real and personal properties, or from any activity conducted for profit of exempt organization, even if used for religious, charitable or other exempt purpose. Hence, the loss suffered by petitioner from its fully exempt operation cannot be allowed as a deduction from its taxable income; (3) that the deduction from taxable income of the losses incurred by petitioner in its exempt operation is not in accordance with law; that the December 15, 1966 ruling issued to the petitioner by respondents predecessor is an erroneous interpretation of the law, and therefore, a nullity which could not give rise to a vested right that can be invoked by petitioner; that the government is not precluded from collecting such tax which is legally due it (Hilado vs. Collector of Internal Revenue , 100 Phil. 288 (1956); Zapata Marine Services, Ltd.; S.A. vs. Court of Tax Appeals, et al., G.R. No. 80046, April 18, 1988). In deciding against the petitioner, the Court of Tax Appeals held: ". . . . this court believes that Revenue Memorandum Order No. 38-83 dated November 14, 1983, entitled 'Guidelines for Allowance of Deductions for Certain Income Payments Under Section 30 (1) of the Tax Code', should apply to the final resolution of this issue. The pertinent provisions thereof are as follows: Guidelines for Applying Section 30 (1) An amount claimed as deduction on which a tax is supposed to have been withheld under Sections 54 and 93 shall be allowed if in the course of his audit and/or investigation, the examiner discovers that : 3.1/1 No withholding of creditable or final tax was made but payee reported the income and the withholding agent/taxpayer pays during the original audit and investigation the surcharges, interest and penalties incident to the failure to withhold the tax. 3.1/2 No withholding or creditable or final tax was made and the recipient/payee failed to report the income on due date thereof, but the withholding agent pays during the original audit and investigation the amount supposed to have been withheld, inclusive of surcharges, interest and penalties incident to his failure to withhold . 3.1/3 The withholding agent erroneously underwithheld the tax but pays during the original audit and investigation the difference in the amount supposed to have been withheld, inclusive of surcharges, interest and penalties incident to such error. (Emphasis supplied) Clearly under said regulation, if the proper withholding tax is paid during the period of original audit and investigation, the amount claimed as deduction shall be allowed. The records of the case will show that the deficiency expanded withholding tax in the amounts of P1,407.53 for 1981, P1,317.90 for 1982, and P1,229.14 for 1983, were paid by the petitioner on August 19, 1985 inclusive of interest, surcharge and compromise penalties under Confirmation Receipt (C.R.) Nos. 7280720, 7280781, 7280783 and 7280784 for 1981, C.R. Nos. 7280785, 7280787, 7280789 and 7280783 for 1982 and C. R. Nos. 7280793, 7280794, 7280795 and 7280796 for 1983. Said payments were made during the progress of the investigation. Accordingly, the foregoing assessments should be recomputed by excluding therefrom the expenses for professional fees and security guard services as well as the interest imposed on the basic income tax. Petitioner's tax liabilities for the years in question should therefore be recomputed as follows: Recomputation of Deficiency Income Tax 1981 1982 1983 Net income/(loss) per return 2,003,927.18 (829.792.33) (586,971.28) Add: Net loss on exempt operations 1,938,610.88 2,021,081.71 2,094,324.22 Net income per Court's computation 3,942,538.06 1,191,289,.38 1,507,352.94 Less: Income subject to final tax Dividend 138,509.76 325,140.24 486,649.18 Interest 2,961,466.80 286,733.10 290,294.22 Total 3,099,976.56 611,8730.34 776,943.40 Adjusted Net Income 842,561.50 579,416.04 730,409.54 Tax Due 284,896.52 192,795.61 245,643.34 Less: Taxes Withheld 18,227.80 20,753.52 21,922.32 Deficiency Income Tax 266,668.72 172,042.09 223,721.02 "WHEREFORE, in view of all the foregoing, petitioner is ordered to pay the amounts of P266,668.72, P172,042.09, and P223,721.02 as deficiency income tax for taxable years 1981, 1982 and 1983, respectively, or a total of P662,431.83." In this petition for review, petitioner formulated the following issues: "1. WHETHER OPERATING LOSSES OF PETITIONER AS A CHARITABLE INSTITUTION ARE DEDUCTIBLE FROM ITS NON-CHARITABLE INCOME (RENTS, INTEREST, DIVIDENDS). "2. ASSUMING FOR THE SAKE OF ARGUMENT THAT THE COURT OF TAX APPEALS WAS CORRECT IN DISALLOWING SUCH OPERATING LOSSES AS DEDUCTIONS FROM NON-CHARITABLE INCOME, WHETHER THE RULING TO THE CONTRARY ISSUED BY THE COMMISSIONER ON DECEMBER 15, 1966 TO HEREIN PETITIONER CAN BE REVOKED RETROACTIVELY AS IN THESE CASES, DESPITE SECTION 246 OF THE TAX CODE PROHIBITING RETROACTIVE APPLICATION OF REVOCATIONS, MODIFICATIONS AND REVERSALS OF RULINGS PROMULGATED BY THE COMMISSIONER." Petitioner claims "that the respondent court confused taxability of non-charitable income of charitable institutions with allowable deductions from gross income in arriving at net income. There is no question whatsoever that an exempt charitable institution is taxable on its non-charitable or business income; but this does not mean that the non-charitable or business income of charitable institution is to be subjected to a gross income tax instead of a net income tax." In support of its claim, petition argues: "If an individual who earns a salary as a business executive and earns profits from running a farm, poultry or piggery, may deduct from his total gross income the operating loss he may incur in operating his farm, poultry or piggery, the corporation is given an even greater leeway in deductions of losses, whether from business operations , or from transactions entered into for profit or from casualties; all that is required is that it be (b) charged off within the taxable year, and (c) not compensated for by insurance or otherwise. If petitioner Hospicio de San Jose were a purely business corporation operating lines of business; taking care of orphans, abandoned children and old indigent people and engage in leasing of real estate, there is no question that from its gross income in the business of leasing real estate, it may deduct whatever operating losses it may have incurred in the business of taking care of children and old people, for a fee. Similarly, whatever operating losses it may incur in the business of real estate may be deducted from its gross income in the business of taking care, for a fee, of children and old people. But is the situation any different in the case of herein petitioner, because instead of taking care of orphans and indigent children and old people as a business , i.e., for a fee, it takes care of them out of charity , i.e., without charging any fee?" (pp. 8-9, Petition for Review) The petition is impressed with merit. Respondents' contention that the taxable income of exempt organization should be treated as separate and distinct from the tax exempt income for purposes of taxation, thus, the deficit incurred in the tax exempt operation cannot be stop against the income for taxable operations, is devoid of merit. Section 29 of the National Internal Revenue Code enumerates the expenses and the losses that are deductible from gross income and the conditions for such deductions. in the case of corporation, subsection (d) provides that it can deduct from its taxable income all losses actually sustained and charged off within the taxable year and not compensated for by insurance or otherwise. The Supreme Court, in the case of Philippine British Assurance Co., Inc. vs. Intermediate Appellate Court. (150 SCRA 520), held that: It is well recognized that where the law does not distinguish, courts should not distinguish. Ubi lex non distinguit nec nos distinguere debemos (Colgate-Palmolive Phil., Inc. vs. Gimenez, 1 SCRA 267; Libudan vs. Gil, 45 SCRA 17; Dominador vs. Derahunan, 49 Phil 452; Guevarra vs. Inocentes, 16 SCRA 379; Alfato vs. Commission on Elections, 103 SCRA 741; Statutory Construction by Ruben E. Agpalo, 1986, pp. 143-144). The rule founded on logic, is a corollary of the principle that general words and phrases in a statute should ordinarily be accorded their natural and general significance (Loc Cham vs. Ocampo, 77 Phil 636). The rule requires that a general term or phrase should not be reduced into parts and one part distinguish from the other so as to justify its exclusion from the operation of the law (Social Security System vs. City of Bacolod, 115 SCRA 412; Director of Lands vs. Gonzales, January 28, 1983). in other words, there should be no distinction in application of a statute where none is indicated (Lo Cham vs. Ocampo, supra). For courts are not authorized to distinguish where the law makes no distinction. They should instead administer the law not as they think it ought to be but as they find it and without regard to consequences (Velasco vs. Lopez, 1 Phil 720)" It must be noted that the Tax Code does not make any distinction whether the losses were incurred in the tax-exempt activities or operations of the corporation, or in the taxable operation of the corporation. It simply states actual losses sustained by the corporation. There is no question that the losses sustained by petitioner were not compensated by insurance or otherwise, thus, petitioner can deduct its operating losses from its tax-exempt operations from its taxable income. Moreover, the Revenue Ruling of December 15, 1966, rendered by Commissioner Misael P. Vera, through Deputy Commissioner Ambrosio Lina, expressly allowed petitioner to deduct from its gross income from non-exempt operations its operating losses from its exempt or charitable operations. In the said Ruling, it was stated that in the reporting net income, any deficit in the exempt income of the petitioner incurred in its exempt operations as an educational and charitable institution may be deducted from its taxable income in the form of rents, dividends and interest. However, it is respondents' contention that such Ruling was revoked by the Ruling issued by then Commissioner Bienvenido Tan on October 20, 1987, which was given retroactive application. The question now is: whether or not the Revenue Ruling of October 20, 1987, which revoked Revenue Ruling dated December 15, 1966, should be given retroactive application. Contrary to the allegation of the respondents, Section 246 of the Tax Code, is applicable in the instant case. Said Section 246 reads: "Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayers acted in bad faith." The aforequoted provision of law provides that a revocation of a ruling will have no retroactive application if : (1) the revocation will be prejudicial to the taxpayer, and (2) the taxpayer does not fall in any of the enumerated exceptions. Applying the said condition, it is very clear that the October 20 ,1987 ruling cannot be applied retroactively to petitioner for the following reasons: First , the prejudice that would result to petitioner by retroactive application of the Ruling of October 20, 1987 is undeniable. The allowance of the retroactive application of the ruling of October 20, 1987 will be prejudicial to petitioner, considering that as a corporation, petitioner has a working budget allocated in running its activities and operations, which consists of its fixed income in the form of rents, dividends and interests and from the contributions of the public. Part of the said budget is the amount saved by petitioner by deducting its operating losses from its taxable income. If petitioner will be asked to pay the discrepancy assessment, such payment will be deducted from its budget and will affect its educational and charitable activities and operations. Is it not precisely the intention of the Tax Code to favor non-stock, non-profit charitable institution because of the nature of their activities and operations? The exemption found in Section 26 (e) of the Tax Code is a simple act of justice and fairness, it favors a charitable institution like herein petitioner, considering the fact that the nature of the petitioner's corporation is performing or carrying a burden which otherwise would fall upon the state, i.e., providing food, clothing, shelter, medical care, education and even burial to destitute orphans and abandoned aged people. The deficiency assessment arising from the retroactive application of the revocation of the ruling was unfair. Petitioner relied in good faith upon the ruling rendered by the Commissioner of the Internal Revenue on December 15, 1966, that it can deduct its losses incurred from its tax-exempt operations from its taxable income. Having relied on the commissioner's authoritative interpretation of the Tax Code, therefore, simple fairness dictates that the correction of his erroneous interpretation should not prejudice petitioner who relied upon it. While We agree with the respondents that the Government is never stopped from collecting taxes because of the mistakes and errors on the part of agents (Visayan Cebu Terminal Co., Inc. vs. Commissioner of Internal Revenue, 13 SCRA 357 (1965); Zamora vs. Court of Tax Appeals, 36 SCRA 77 (1970), Balmaceda vs. Corominas & Co., Inc., 66 SCRA 555 (1975), but, like other principles of law, this also admits of exceptions in the interest of justice and fair play (ABS-CBN Broadcasting Corp. vs. Court of Appeals, 108 SCRA 142). The Commissioner of Internal Revenue is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, or where there has been misrepresentation to the taxpayer (The National Internal Revenue Code, Annotated, 1991 ed. by Hector S. de Leon, p. 561). Second , Section 246 of the Tax Code enumerates the exceptions to the rule on non-retroactivity of ruling and in so far as these enumerated exceptions are concerned, petitioner does not fall under any of them. Respondent Court of Tax Appeals' only basis in giving retroactive application to the Ruling of October 20, 1987, is because the Ruling of December 15, 1966 is an erroneous interpretation of the law, which is clearly not one of the exceptions provided under Section 246 of the Tax Code. In other words, what is applicable in the instant case is Revenue Ruling dated December 15, 1966, considering that Revenue Ruling October 20, 1987 cannot be given retroactive application, in the light of Section 246 of the Tax Code. WHEREFORE, the petition is GIVEN DUE COURSE. The decision of respondent Court of Tax Appeals dated December 24, 1993 is hereby REVERSED and SET ASIDE. SO ORDERED. Herrera and Vidallon-Magtolis, JJ ., concur.